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assuming all other criteria for revenue recognition have been met , we recognize revenue for product sales at the date of shipment . product sales resulting from purchase orders involve a purchase order received by us from our dealers or our stocking distributor . this category includes product sales for standard products , as well as products which require some customization . these sales are recognized under the terms of the purchase order which generally are freight on board ( “fob” ) shipping point and do not include rights of return . accordingly , these sales are recognized at the time of shipment . allowance for doubtful accounts evaluation of the allowance for doubtful accounts involves management judgments and estimates . we evaluate the collectability of our trade accounts receivable based on a number of factors . in circumstances where management is aware of a customer 's inability to meet its financial obligations to us , or a project dispute makes it unlikely that all of the receivable owed by a customer will be collected , a specific reserve for bad debts is estimated and recorded to reduce the recognized receivable to the estimated amount we believe will ultimately be collected . in addition to specific customer identification of potential bad debts , a general reserve for bad debts is estimated and recorded based on our recent past loss history and an overall assessment of past due trade accounts receivable amounts outstanding . inventories the majority of inventories are valued at the lower of cost or market under the last-in , first-out ( “lifo” ) method . the lifo method allocates the most recent costs to cost of products sold , and , therefore , recognizes into operating results fluctuations in raw materials and other inventory costs more quickly than other methods . inventories at our international subsidiaries are measured on the first-in , first-out ( “fifo” ) method . pension benefits we sponsor pension plans covering all employees who met eligibility requirements as of april 30 , 2005. in february 2005 , our pension plans were amended as of april 30 , 2005. no further benefits have been , or will be , earned under the plans subsequent to the amendment date , and no additional participants have been , or will be , added to the plans . several statistical and other factors , which attempt to anticipate future events , are used in calculating the expense and liability related to the pension plans . these factors include assumptions about the discount rate used to calculate and determine benefit obligations and expected return on plan assets within certain guidelines . the actuarial assumptions used by us may differ materially from actual results due to changing market and economic conditions , higher or lower withdrawal rates , or longer or shorter life spans of participants . these differences may significantly affect the amount of pension income or expense recorded by us in future periods . story_separator_special_tag are paid by the owner . as discussed above , no further benefits have been , or will be , earned under our pension plans after april 30 , 2005 , and no additional participants have been , or will be , added to the plans . we made contributions to the plans in fiscal year 2011 in the amount of $ 719,000 , and we expect to make contributions to the plans in fiscal year 2012 in the amount of $ 402,000. we did not make any contributions to the plans in fiscal years 2010 and 2009. capital expenditures were $ 5.2 million , $ 4.2 million , and $ 1.5 million in fiscal years 2011 , 2010 , and 2009 , respectively . the increase in capital expenditures in fiscal year 2011 was primarily attributable to the completion of the expansion and remodeling of our statesville facilities . the increase in expenditures in fiscal year 2010 as compared to fiscal year 2009 was primarily attributable to the expansion of the company 's india operations and statesville facilities . capital expenditures in fiscal year 2011 were primarily funded by long-term bank financing . capital expenditures in fiscal years 2010 and 2009 were funded primarily from cash generated by operating activities . fiscal year 2012 capital expenditures are anticipated to be approximately $ 1.5 million , with the majority of these expenditures for manufacturing equipment . the fiscal year 2012 expenditures are expected to be funded primarily by operating activities , supplemented as needed by borrowings under our revolving credit facility . working capital increased to $ 22.1 million at april 30 , 2011 , from $ 20.1 million at april 30 , 2010 , and the ratio of current assets to current liabilities was 2.1-to-1.0 at april 30 , 2011 and 2010. the increase in working capital for fiscal year 2011 was primarily due to proceeds from long-term debt and cash flow from operations . we paid cash dividends of $ 0.40 , $ 0.38 , and $ 0.32 per share in fiscal years 2011 , 2010 , and 2009 , respectively . we expect to pay dividends in the future in line with our actual and anticipated future operating results . recent accounting standards new accounting standards in december 2008 , the financial accounting standards board ( “fasb” ) issued new guidance regarding disclosures about plan assets of defined benefit pension or other postretirement plans . story_separator_special_tag this guidance , which is now part of fasb accounting standards codification ( “asc” ) 715 , “compensation – retirement benefits , ” is effective for financial statements issued for fiscal years ending after december 15 , 2009 , and was adopted by the company effective april 30 , 2010. see note 8 , “retirement benefits” for the new disclosures required by this guidance . in april 2009 , the fasb issued new guidance related to the disclosure of the fair value of financial instruments . the new guidance , which is now part of fasb asc 825 , “financial instruments , ” requires disclosure of the fair value of financial instruments in all interim financial statements . the adoption of this standard did not have a significant impact on the company 's consolidated financial position or results of operations . in june 2009 , the fasb issued statement of financial accounting standards ( “sfas” ) 168 , “the fasb accounting standards codification™ and the hierarchy of generally accepted accounting principles – a replacement of fasb statement 162.” this statement modified the gaap hierarchy by establishing only two levels of gaap , authoritative and nonauthoritative . sfas 168 also established the fasb accounting standards codification™ as the source of authoritative accounting principles recognized by the fasb to be applied by nongovernmental entities in the preparation of financial statements in conformity with gaap in the united states . all guidance contained in the codification carries an equal level of authority . effective july 1 , 2009 , the codification superseded all then-existing non-sec accounting and reporting standards . all other nongrandfathered non-sec accounting literature not included in the codification is nonauthoritative . sfas 168 is effective for financial statements issued for interim and annual periods ending after september 15 , 2009. all accounting references in this annual report on form 10-k have been updated and , accordingly , references to prior accounting standards have been replaced with fasb asc references as appropriate . 12 in august 2009 , the fasb issued accounting standards update ( “asu” ) 2009-05 , “fair value measurements and disclosures ( topic 820 ) – measuring liabilities at fair value.” the revised guidance provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available , a reporting entity is required to measure fair value using one or more of the following techniques : ( i ) the quoted price of the identical liability when traded as an asset , ( ii ) quoted prices for similar liabilities or similar liabilities when traded as assets , or ( iii ) other valuation technique that is consistent with the principles of “topic 820.” asu 2009-05 was effective for reporting periods beginning after issuance . the adoption of this standard did not have a significant impact on the company 's consolidated financial position or results of operations . in october 2009 , the fasb issued asu 2009-13 , “revenue recognition ( topic 605 ) – multiple-deliverable revenue arrangements – a consensus of the fasb emerging issues task force.” it updates the existing multiple-element revenue arrangements guidance currently included under fasb asc 605-25 , “revenue recognition , multiple-element arrangements.” the revised guidance primarily provides two significant changes : ( i ) eliminates the need for objective and reliable evidence of fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting , and ( ii ) eliminates the residual method to allocate the arrangement consideration . in addition , the guidance expands the disclosure requirements for revenue recognition . asu 2009-13 is effective for fiscal years beginning on or after june 15 , 2010. the company adopted this standard effective may 1 , 2011. the company does not expect the adoption of this standard to have a significant impact on the company 's consolidated financial position or results of operations . in january 2010 , the fasb issued asu 2010-06 , “fair value measurements and disclosures ( topic 820 ) – improving disclosures about fair value measurements.” this update requires the following new disclosures : ( i ) the amounts of significant transfer in and out of level 1 and level 2 fair value measurements and a description of the reasons for the transfer ; and ( ii ) a reconciliation for fair value measurements using significant unobservable inputs ( level 3 ) , including separate information about purchases , sales , issuance , and settlements . the update also clarifies existing requirements about fair value measurement disclosures and disclosures about inputs and valuation techniques . the new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods , beginning after december 15 , 2009 , except for the reconciliation of level 3 activity , which is effective for fiscal years beginning after december 15 , 2010. the company adopted this guidance effective may 1 , 2010. the adoption of this standard did not have a significant impact on the company 's consolidated financial position or results of operations . in april 2010 , the fasb issued asu 2010-17 , “revenue recognition – milestone method ( topic 605 ) .” this update provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions . research or development arrangements frequently include payment provisions whereby a portion or all of the consideration is contingent upon milestone events such as successful completion of phases in a study or achieving a specific result from the research or development efforts . an entity often recognizes these milestone payments as revenue in their entirety upon achieving the related milestone , commonly referred to as the milestone method . the amendments in asu 2010-17 are effective on a prospective basis for milestones achieved in fiscal years , and interim periods within those years , beginning on or after june

results of operations sales for fiscal year 2011 were $ 100.0 million , an increase of 1 % from fiscal year 2010 sales of $ 99.1 million . domestic operations sales for fiscal year 2011 were $ 84.1 million , a decrease of 4 % from the prior year . sales in the domestic marketplace reflect lower sales of small and mid-sized projects due to the economic slowdown . international operations sales for fiscal year 2011 were $ 15.9 million , an increase of 38 % from the prior year , as the international marketplace continued to recover from the economic slowdown . sales for fiscal year 2010 were $ 99.1 million , a decrease of 4.7 % from fiscal year 2009 sales of $ 104.0 million . domestic operations sales for the year were $ 87.6 million , a decrease of 3.0 % from the prior year . the sales decline resulted from lower sales of small and mid-sized projects , as customers deferred placing these orders due to the recession , and lower sales from international operations . international operations sales for the year were $ 11.5 million , a decrease of 16.0 % from the prior year . the international laboratory furniture marketplace was hit particularly hard by the economic slowdown , but appeared to show signs of recovery late in the year as quotation activity increased . our order backlog was $ 65.7 million at april 30 , 2011 , as compared to $ 68.9 million at april 30 , 2010 , and $ 62.7 million at april 30 , 2009. gross profit represented 19.3 % , 21.6 % , and 20.6 % of sales in fiscal years 2011 , 2010 , and 2009 , respectively . the decrease in gross profit margin for fiscal year 2011 was primarily due to increased competitive pricing in the marketplace and higher costs for 10 steel and epoxy resin raw materials .

effective january 1 , 2014 , we realigned our operating segments due to changes in our internal financial reporting structure . the north american vascular , anesthesia/respiratory and surgical businesses , which previously comprised much of the americas operating segment , are now separate reportable segments . as a result , we now conduct our operations through six reportable segments : vascular north america , anesthesia/respiratory north america , surgical north america , emea , asia and oem . certain operating segments are not material and are therefore included in the `` all other '' line item in tabular presentations of segment information . additionally , we made changes to the allocation methodology for certain costs , including manufacturing variances and research and development costs , among the businesses to improve accountability , which resulted in changes to the previously reported segment profitability . all prior comparative periods have been restated to reflect these changes . since we became exclusively a medical device company in 2011 , we have continued to expand our presence in the medical technology industry through strategic acquisitions . the following is a listing of the more significant acquisitions we completed in 2014 and 2013. during 2014 , we acquired : l mayo healthcare pty limited , ( `` mayo healthcare '' ) , a distributor of medical devices and supplies primarily for the australian market ; and l the assets of mini-lap technologies , inc. ( `` mini-lap '' ) , a developer of micro-laparoscopic instrumentation , which complements our surgical product portfolio . during 2013 , we acquired : l vidacare corporation ( “ vidacare ” ) , a provider of intraosseous , or inside the bone , access devices , which complements the vascular access and specialty product portfolios ; l the assets of ultimate medical pty . ltd. and its affiliates ( “ ultimate ” ) , a supplier of airway management devices with a variety of laryngeal mask airways and other related products , which complement our anesthesia product portfolio ; and l eon surgical , ltd. , a developer of a minimally invasive microlaparoscopy surgical platform technology designed to enhance a surgeon 's ability to perform scarless surgery while producing better patient outcomes , which complements our surgical product portfolio . we may be required to pay contingent consideration in connection with some of the acquisitions listed above . the amount of contingent consideration we ultimately will pay will be based upon the achievement of specified objectives , including regulatory approvals , sales targets and the passage of time . for additional information on these acquisitions and the related contingent consideration arrangements , see note 3 to the consolidated financial statements included in this annual report on form 10-k. 35 health care reform on march 23 , 2010 the patient protection and affordable care act ( as amended , the `` affordable care act '' ) was signed into law . this legislation significantly impacts our business . for medical device companies such as teleflex , the expansion of medical insurance coverage should lead to greater utilization of the products we manufacture , but this legislation also contains provisions designed to contain the cost of healthcare , which could negatively affect pricing of our products . the overall impact of the affordable care act on our business is yet to be determined , mainly due to uncertainties around future customer behaviors , which we believe will be affected by reimbursement factors such as insurance coverage statistics , patient outcomes and patient satisfaction . in addition , the affordable care act imposed a 2.3 % excise tax on sales of medical devices , beginning in 2013. for the years ended december 31 , 2014 and 2013 , we paid medical device excise taxes of $ 12.7 million and $ 11.5 million , respectively , which is included in selling , general and administrative expenses . global economic conditions global economic conditions in recent years have had adverse impacts on market activities including , among other things , failure of financial institutions , falling asset values , diminished liquidity , reduced demand for products and services and significant fluctuations in foreign currency exchange rates . in response , we adjusted production levels and engaged in new restructuring activities . we continue to review and evaluate our manufacturing , warehousing and distribution processes to maximize efficiencies through the elimination of redundancies in our operations and the consolidation of facilities . although , on a consolidated basis , the economic conditions did not have a significant adverse impact on our financial position , results of operations or liquidity , healthcare policies and practice trends vary by country , and the impact of the global economic downturn was felt to varying degrees in each of our regional markets over the last several years . the continuation of the present broad economic trends of weak economic growth , constricted credit , public sector austerity measures in response to public budget deficits and foreign currency volatility , particularly the euro , could have a material adverse effect on our results of operations and our liquidity . hospitals in some regions of the united states experienced a decline in admissions , a weaker payor mix , and a reduction in elective procedures . consequently , hospitals took actions to reduce their costs , including limiting their capital spending . more recently , the economic environment has improved somewhat , but has not returned to pre-recession levels , and challenges persist , particularly in some european countries , as discussed below . approximately 94 % of our net revenues come from single-use products primarily used in critical care and surgical applications , and our sales volume could be negatively impacted if hospital admission rates or payor mix change as a result of continuing higher than normal unemployment rates ( and subsequent loss of insurance coverage by consumers ) . story_separator_special_tag the increase is principally due to the inclusion of higher margin sales from the lma and vidacare businesses , price increases in surgical north america , vascular north america , emea and asia , new products in vascular north america , anesthesia/respiratory north america , surgical north america , emea and oem , manufacturing efficiencies in emea and oem and the favorable impact of foreign currency exchange rates . these benefits were partly offset by higher warehousing and freight costs in vascular north america , emea and asia and lower sales volumes in anesthesia/respiratory north america , surgical north america , vascular north america and oem . in addition , gross profit in the 2012 period was adversely affected by inventory write-offs for excess , slow moving and damaged product in asia . selling , general and administrative replace_table_token_8_th comparison of 2014 and 2013 selling , general and administrative expenses increased $ 76.5 million during the twelve months ended december 31 , 2014 compared to the twelve months ended december 31 , 2013. the increase is primarily due to $ 35.4 million of expenses associated with acquired businesses , primarily vidacare , mayo healthcare and ultimate , $ 13.8 million of higher sales expense , primarily related to an increase in sales commissions , higher amortization expense of $ 10.5 million , the majority of which relates to the amortization of vidacare intangibles , $ 5.4 million of higher general and administrative costs primarily due to increases in employee related expenses , higher depreciation expense of $ 2.2 million , resulting from a reduction in the estimated useful life of an administrative building and certain related assets , $ 1.7 million of higher it related costs primarily associated with the ongoing maintenance of enterprise resource planning software systems , partially offset by the $ 3.2 million favorable impact of foreign currency exchange rates which caused a reduction of expenses . in addition , the benefit from contingent consideration reserve reductions for the twelve months ended december 31 , 2014 was $ 4.9 million lower than the benefit realized in the twelve months ended december 31 , 2013. comparison of 2013 and 2012 selling , general and administrative expenses increased $ 47.7 million during the twelve months ended december 31 , 2013 compared to the twelve months ended december 31 , 2012. the increase is largely due to $ 36.4 million of expenses associated with acquired businesses , including $ 29.6 million in expenses associated with the lma business , $ 11.5 million in excise taxes on the sale of medical devices imposed by the affordable care act , higher employee related expenses , $ 4.2 million in increased costs associated with the conversion of several of our locations to a new erp system , acquisition costs of $ 3.2 million primarily related to the acquisition of vidacare , $ 5.8 million of higher legal costs due to the accrual for loss contingencies to reflect litigation developments , including a verdict against us with respect to a non-operating joint venture , and professional fees and a $ 1.1 million unfavorable impact of foreign currency exchange rates . the increases were partly offset by an aggregate of $ 12.3 million in reversals of contingent consideration related to the acquisitions of hotspur technologies inc. ( `` hotspur '' ) ( $ 8.5 million ) , semprus biosciences corp. ( “ semprus ” ) ( $ 2.4 million ) and the assets of axiom technology partners llp ( “ axiom ” ) ( $ 1.4 million ) after determining that conditions for the payment of certain contingent consideration would not be satisfied . selling , general and administrative expenses in 2012 also reflected the loss of $ 7.6 million from foreign currency forward exchange contracts entered into in connection with the acquisition of the lma business . 38 research and development replace_table_token_9_th comparison of 2014 and 2013 for the twelve months ended december 31 , 2014 , research and development expenses decreased 6.2 % compared to the corresponding prior year period . the decrease is primarily due to higher research and development expenses for the year ended december 31 , 2013 resulting from new activity with respect to businesses acquired in 2012 as well as efficiencies obtained through integrating certain projects into our existing structure . comparison of 2013 and 2012 the increase in research and development expenses for the twelve months ended december 31 , 2013 as compared to the corresponding prior year period is primarily due to the new activity with respect to businesses acquired in 2012. goodwill impairment in the first quarter of 2012 , we changed our former north america reporting unit structure from a single reporting unit to five reporting units comprised of vascular , anesthesia/respiratory , cardiac , surgical and specialty . we allocated the assets and liabilities of our former north america segment among the new reporting units based on their respective operating activities , and then allocated goodwill among the reporting units using a relative fair value approach , as required by fasb accounting standards codification ( “ asc ” ) topic 350. following this allocation , we performed goodwill impairment tests on these new reporting units . as a result of these tests , we determined that three of the reporting units in our former north america segment were impaired , and , in the first quarter of 2012 , we recorded aggregate goodwill impairment charges of $ 332 million , consisting of $ 220 million in our vascular reporting unit , $ 107 million in our anesthesia/respiratory reporting unit and $ 5 million in our cardiac reporting unit in the first quarter of 2012. we did not record any goodwill impairment charges for the years ended december 31 , 2014 and 2013. restructuring and other impairment charges replace_table_token_10_th 39 2014 manufacturing footprint realignment plan in april 2014 , our board of directors approved a restructuring plan ( the `` 2014 manufacturing footprint realignment plan '' ) that involves the consolidation of operations and a related reduction in workforce at certain facilities , and the relocation of manufacturing

segment results segment net revenues replace_table_token_14_th segment operating profit replace_table_token_15_th ( 1 ) see note 16 to the consolidated financial statements included in this annual report on form 10-k for a reconciliation of segment operating profit to our consolidated income/ ( loss ) from continuing operations before interest , loss on extinguishments of debt and taxes . comparison of 2014 and 2013 vascular north america vascular north america net revenues for the twelve months ended december 31 , 2014 increased $ 28.1 million compared to the corresponding period in 2013 , an increase of 12.2 % . the increase is primarily due to vidacare product sales of $ 23.5 million , increases in sales volumes of existing products of $ 2.8 million and new product sales of $ 2.5 million , which were partially offset by the unfavorable impact of foreign currency exchange rates of $ 0.8 million . vascular north america operating profit for the twelve months ended december 31 , 2014 increased $ 17.3 million compared to the corresponding period in 2013 , an increase of 72.6 % . the increase was primarily due to operating profit generated by vidacare product sales , higher sales volume of existing products , increases in sales of higher margin existing and new products and lower research and development expenses . these increases were partially offset by higher sales commissions and administrative expenses . 43 anesthesia/respiratory north america anesthesia/respiratory north america net revenues for the twelve months ended december 31 , 2014 decreased $ 5.9 million compared to the corresponding period in 2013 , a decrease of 2.6 % . the decrease is primarily attributable to declines in sales volumes of existing products of $ 9.7 million and the unfavorable impact of foreign currency exchange rates of $ 0.6 million , which were partially offset by new product sales of $ 3.5 million and price increases of $ 0.9 million .

both investment income and realized capital gains on these investments can be significantly affected by changes in interest rates . interest rate volatility can increase or reduce unrealized gains or losses in our investment portfolios . interest rates are highly sensitive to many factors , including governmental monetary policies , domestic and international economic and political conditions and other factors beyond our control . fluctuations in interest rates affect our returns on , and the market value of , fixed maturity and short-term investments . the fair market value of the fixed maturity securities in our investment portfolio and the investment income from these securities fluctuate depending on general economic and market conditions . the fair market value generally increases or decreases in an inverse relationship with fluctuations in interest rates , while net investment income realized by us from future investments in fixed maturity securities will generally increase or decrease with interest rates . we also have investments that are subject to pre-payment risk , such as mortgage-backed and asset-backed securities . interest rate fluctuations may cause actual net investment income and or cash flows from such investments to differ from estimates made at the time of investment . in periods of declining interest rates , mortgage prepayments generally increase and mortgage-backed securities , commercial mortgage obligations and bonds are more likely to be prepaid or redeemed as borrowers seek to borrow at lower interest rates . therefore , in these circumstances we may be required to reinvest those funds in lower-interest earning investments . expenses our expenses are primarily policyholder benefits , underwriting , general and administrative expenses and interest expense . policyholder benefits are affected by our claims management programs , reinsurance coverage , contractual terms and conditions , regulatory requirements , economic conditions , and numerous other factors . benefits paid or reserves required for future benefits could substantially exceed our expectations , causing a material adverse effect on our business , results of operations and financial condition . underwriting , general and administrative expenses consist primarily of commissions , premium taxes , licenses , fees , amortization of deferred costs , general operating expenses and income taxes . in connection with our transformation , we are undertaking various expense savings initiatives while also making investments in information technology , among other things , which will impact our expenses . we also incur interest expense related to our debt . critical accounting estimates certain items in our consolidated financial statements are based on estimates and judgment . differences between actual results and these estimates could in some cases have material impacts on our consolidated financial statements . the following critical accounting policies require significant estimates . the actual amounts realized in these areas could ultimately be materially different from the amounts currently provided for in our consolidated financial statements . reserves reserves are established using generally accepted actuarial methods and reflect judgments about expected future claim payments . factors used in their calculation include experience derived from historical claim payments and actuarial assumptions . calculations incorporate assumptions about the incidence of incurred claims , the extent to which all claims have been reported , reporting lags , expenses , inflation rates , future investment earnings , internal claims processing costs and other relevant factors . while the methods of making such estimates and establishing the related liabilities are periodically reviewed and updated , the estimation of reserves includes an element of uncertainty given that management is using historical information and methods to project future events and reserve outcomes . 42 the recorded reserves represent our best estimate at a point in time of the ultimate costs of settlement and administration of a claim or group of claims , based upon actuarial assumptions and projections using facts and circumstances known at the time of calculation . the adequacy of reserves may be impacted by future trends in claims severity , frequency , judicial theories of liability and other factors . these variables are affected by both external and internal events , including , but not limited to : changes in the economic cycle , inflation , changes in repair costs , natural or human-made catastrophes , judicial trends , legislative changes and claims handling procedures . many of these items are not directly quantifiable and not all future events can be anticipated when reserves are established . reserve estimates are refined as experience develops . adjustments to reserves , both positive and negative , are reflected in the consolidated statement of operations in the period in which such estimates are updated . because establishment of reserves is an inherently complex process involving significant judgment and estimates , there can be no certainty that future settlement amounts for claims incurred through the financial reporting date will not vary from reported claims reserves . future loss development could require reserves to be increased or decreased , which could have a material effect on our earnings in the periods in which such increases or decreases are made . however , based on information currently available , we believe our reserve estimates are adequate . see “ item 1a – risk factors – financial risks – our actual claims losses may exceed our reserves for claims , requiring us to establish additional reserves or to incur additional expense for settling unreserved liabilities , which could have a material adverse effect on our results of operations , profitability and capital ” for more detail on this risk . for additional information regarding our reserves , see notes 2 and 17 to the consolidated financial statements included elsewhere in this report . story_separator_special_tag based on information currently available , and after consideration of the reserves reflected in the consolidated financial statements , we do not believe or expect that changes in reserve estimates for these claims are likely to be material . long duration contracts reserves for future policy benefits represent the present value of future benefits to policyholders and related expenses less the present value of future net premiums . reserve assumptions reflect best estimates for expected investment yield , inflation , mortality , morbidity , expenses and withdrawal rates . these assumptions are based on our experience to the extent it is credible , modified where appropriate to reflect current trends , industry experience and provisions for possible unfavorable deviation . we also record an unearned revenue reserve which represents premiums received which have not yet been recognized in our consolidated statements of operations . historically , premium deficiency testing on continuing lines of business has not resulted in material adjustments to deferred acquisition costs or reserves . such adjustments could occur , however , if economic or mortality conditions significantly deteriorated . global preneed 44 global preneed includes pre-funded funeral ( “ preneed ” ) life insurance and annuity contracts and legacy traditional life insurance ( no longer offered ) . the reserve assumptions for future policy benefits and expenses are determined based upon pricing , which approximates actual experience . for preneed life insurance issued after 2008 with discretionary death benefit growth , the universal life-type accounting model is applied whereby reserve assumptions are made without provision for adverse deviation . interest and discount rates are based upon investment returns of the assets acquired to support the business . expected mortality rates , lapse rates , and future death benefit increases are based upon pricing assumptions . for preneed life insurance issued after 2008 with either no death benefit growth or death benefit growth linked to an inflation index , the long-duration accounting model is applied whereby reserve assumptions are made with provision for adverse deviation . interest and discount rates are based upon investment returns of the assets acquired to support the business . expected mortality rates and lapse rates are based upon pricing assumptions . for contracts with minimum benefit increases associated with an inflation index , the reserves assume expected benefit increases equal to a selected discount rate less a spread . for preneed life insurance issued prior to 2009 , the long-duration accounting model is applied whereby reserve assumptions are made with provision for adverse deviation . interest and discount rates are based upon investment returns of the assets acquired to support the business . expected mortality rates , lapse rates and future death benefit increases are based upon pricing assumptions . annuity contracts have reserve assumptions made without provision for adverse deviation . assumed discount rates and interest rates credited on deferred annuities vary by year of issue . withdrawal charge assumptions are based upon contract provisions . nearly all of the deferred annuity contracts have a minimum guaranteed interest rate . for life insurance and annuity contracts acquired in 2000 and prior , interest and discount rates as well as mortality assumptions are based on statutory valuation requirements , which approximate the gaap valuation requirements , with no explicit provision for lapses . disposed and runoff long duration lines risks related to the reserves recorded for certain discontinued individual life , annuity and long-term care insurance policies have been fully ceded via reinsurance . while we have not been released from our contractual obligation to the policyholders , changes in and deviations from economic , mortality , morbidity , and withdrawal assumptions used in the calculation of these reserves will not directly affect our results of operations unless there is a default by the assuming reinsurer . deferred acquisition costs ( “ dac ” ) and value of business acquired ( “ voba ” ) only direct incremental costs associated with the successful acquisition of new or renewal insurance contracts are deferred to the extent that such costs are deemed recoverable from future premiums or gross profits . acquisition costs primarily consist of commissions and premium taxes . certain direct response advertising expenses are deferred when the primary purpose of the advertising is to elicit sales to customers who can be shown to have specifically responded to the advertising and the direct response advertising results in probable future benefits . premium deficiency testing is performed annually and generally reviewed quarterly . such testing involves the use of best estimate assumptions including the anticipation of investment income to determine if anticipated future policy premiums are adequate to recover all dac and related claims , benefits and expenses . to the extent a premium deficiency exists , it is recognized immediately by a charge to the consolidated statement of operations and a corresponding reduction in dac . if the premium deficiency is greater than unamortized dac , a loss ( and related liability ) is recorded for the excess deficiency . long duration contracts acquisition costs for pre-funded funeral life insurance policies issued prior to 2009 and certain life insurance policies no longer offered are deferred and amortized in proportion to anticipated premiums over the premium-paying period . these acquisition costs consist primarily of first year commissions paid to agents . for preneed investment-type annuities , preneed life insurance policies with discretionary death benefit growth issued after january 1 , 2009 , universal life insurance policies and investment-type annuities no longer offered , dac is amortized in proportion to the present value of estimated gross profits from investment , mortality , expense margins and surrender charges over the estimated life of the policy or contract . estimated gross profits include the impact of unrealized gains or losses on investments as if these gains or losses had been realized , with corresponding credits or charges included in accumulated other comprehensive income ( “ aoci ” ) . the assumptions used for the estimates are consistent with

executive summary overview : we have undertaken several acquisitions and dispositions , which are reflected in our results . on may 31 , 2018 , we acquired twg holdings limited and its subsidiaries ( as subsequently reorganized , “ twg ” ) for total consideration of $ 2.47 billion . on august 1 , 2018 , we sold our mortgage solutions business to xome , an indirect wholly owned subsidiary of wmih corp. on december 3 , 2018 , we sold time insurance company , a subsidiary of the runoff assurant health business , to haven holdings , inc. in october 2019 , we acquired the remaining 60 % interest in mmi-cpr , llc ( dba cell phone repair ) , a global franchisor of electronic device repair stores focusing on mobile device repair . in 2019 , we also undertook a strategic review of our investment in iké . as part of our initial investment in 2014 , we entered into a put/call with the majority shareholders . in the third quarter of 2019 , we decided to pursue the sale of our interests in iké and recorded a partial impairment in our investment and an increase in our put obligation related to the decline in fair value of the business in connection with our decision to sell . on january 29 , 2020 , we entered into agreements to sell our interests in iké to certain management shareholders of iké . we expect closing to occur in the second quarter of 2020 resulting in an expected net cash outflow of $ 54 million , which could increase by up to an additional $ 40 million in the event we provide seller financing to the management shareholders at closing , plus transaction costs . in connection with this agreement , we recorded an incremental loss related to the agreed sale price . the sale is subject to customary closing conditions , including regulatory approvals .

overview we are a leading global provider of solutions that advance the drug discovery and development process , including research models and associated services and outsourced preclinical services . we provide our products and services to global pharmaceutical companies and biotechnology companies , as well as government agencies , leading hospitals and academic institutions throughout the world in order to bring drugs to market faster and more efficiently . we have built upon our core competency of in vivo biology , including laboratory animal medicine and science ( research model technologies ) to develop a diverse portfolio of preclinical services - both glp ( good laboratory practice ) and non-glp - which address drug discovery and development . utilizing our broad portfolio of products and services enables our clients to create a more flexible drug development model which reduces their costs , enhances their productivity and effectiveness , and increases speed to market . we have been in business for 65 years and currently operate approximately 64 facilities in 15 countries worldwide . large pharmaceutical and biotechnology companies have been undergoing significant changes over the last few years as they endeavor to improve the productivity of their drug development pipelines , and at the same time , streamline their infrastructures in order to improve efficiency and reduce operating costs . our clients ' efforts have had an unfavorable impact on our operations as a result of : measured research and development spending by major pharmaceutical and biotechnology companies ; delays in client decisions and commitments ; tight cost constraints and the resultant pricing pressure , particularly in view of excess capacity in the contract research industry ; a focus on late-stage clinical testing as clients accelerate their efforts to bring drugs to market in the face of expiration of patents on branded drugs ; decreased funding for biopharmaceutical companies and the impact of healthcare reform initiatives . in addition , consolidation in the pharmaceutical and biotechnology industry has also affected demand for our products and services . all of these ongoing factors continue to contribute to demand uncertainty . the market for our goods and services appears to be stabilizing but we remain uncertain as to when the unfavorable market factors will abate . as part of clients efforts to improve pipeline productivity , pharmaceutical and biotechnology companies are emphasizing efficacy testing in order to eliminate therapies from the pipeline earlier in the drug development process . this trend is visible in increasing demand for our non-glp in vivo pharmacology and drug metabolism and pharmacokinetics ( dmpk ) services . we continue to anticipate that our clients will reduce their internal capacity through closure of underutilized facilities and increase their use of these outsourced services in the future , because utilizing outsourced services enables them to create a flexible drug development model which improves operating efficiency and reduces costs . we believe that increased focus on strategic outsourcing by our clients should result in the expansion of strategic relationships with a reduced and limited number of partners , which will drive demand for our services . we believe that the long-term drivers for our business as a whole will primarily emerge from our clients ' continued demand for research models and services and both glp and non-glp in vivo biology services , which are essential to the drug development process . however , presently it is challenging to predict the timing associated with these drivers . we continue to focus on our four key initiatives designed to allow us to drive profitable growth and to maximize value for shareholders , and thus better position ourselves to operate successfully in the current and future business environment . these four initiatives are : improving the consolidated operating margin . we continue to aggressively manage our cost structure and drive operating efficiencies which are expected to generate improving operating margins . we have already implemented significant actions to reduce costs during the last two years to manage challenging industry-wide preclinical market conditions . these actions have favorably impacted our margins in 2011. in the fourth quarter of 2011 , we implemented a headcount reduction of approximately 2 % , primarily in the preclinical services ( pcs ) business . this action is expected to generate annual savings of approximately $ 7.5 million beginning in 2012. improving free cash flow generation . we believe we have adequate capacity to support revenue growth in both business segments without significant additional investment for expansion . improved operating margins , elimination of operating losses with the sale of our phase i clinical business in 2011 and the closure of our pcs china facility in 2011 , and minimal requirements for capital expansion , should contribute to strong cash flow generation . we expect capital expenditures to be approximately $ 50 million in 2012 . 29 disciplined investment in growth businesses . we continue to maintain a disciplined focus on deployment of capital , investing in those areas of our existing business which will generate the greatest sales growth and profitability , such as genetically engineered models and services ( gems ) , discovery services ( ds ) , in vitro products and biopharmaceutical services . returning value to shareholders . we are repurchasing our stock with the intent to drive immediate shareholder value and earnings per share accretion . during 2011 , we repurchased 8.4 million shares . our weighted average shares outstanding for 2011 has decreased to 51.3 million shares from 62.6 million shares for 2010. as of december 31 , 2011 , we had $ 116.3 million remaining on our $ 750.0 million stock repurchase authorization . total net sales in 2011 were $ 1,142.6 million , an increase of 0.8 % from $ 1,133.4 million in 2010. the sales increase was due primarily to increased sales for rms partially offset by lower pcs sales . the effect of foreign currency translation had a positive impact on sales of 2.2 % . story_separator_special_tag the first step is used to identify potential impairment and involves comparing each reporting unit 's estimated fair value to its carrying value , including goodwill . fair value is determined by using a weighted combination of a market-based approach and an income approach , as this combination is deemed to be the most indicative of our fair value in an orderly transaction between market participants . under the market-based approach , we utilize information about our company as well as publicly available industry information to determine earnings multiples and sales multiples that are used to value our reporting units . under the income approach , we determine fair value based on the estimated future cash flows of each reporting unit , discounted by an estimated weighted-average cost of capital which reflects the overall level of inherent risk of the reporting unit and the rate of return an outside investor would expect to earn . determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions , including revenue growth rates , profit margin percentages , discount rates , perpetuity growth rates , future capital expenditures and future market conditions , among others . our projections are based on our internal plans . key assumptions , strategies , opportunities and risks from this strategic review along with a market evaluation are the basis for our assessment . if the estimated fair value of a reporting unit exceeds its carrying value , goodwill is not considered to be impaired . however , if the carrying value exceeds estimated fair value , there is an indication of potential impairment and the second step is performed to measure the amount of impairment . the second step of the goodwill impairment process is to determine the impairment which involves the calculation of an implied fair value of goodwill for each reporting unit for which step one indicated impairment . the implied fair value of goodwill is determined similar to the manner in which goodwill is calculated in a business combination , by measuring the excess of the estimated fair value of the reporting unit as calculated in step one , over the estimated fair values of the individual assets , liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination . if the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill , an impairment charge is recorded for the excess . in determining the fair value of assets , we utilize appraisals for the fair value of property and equipment and valuations of certain intangible assets , including client relationships . our annual goodwill impairment assessment has historically been completed at the beginning of the fourth quarter . based on our assessment ( step one ) for 2011 , the fair value of our businesses units exceeded their carrying value therefore our goodwill was not impaired . additionally , we performed an annual assessment of the fair value of our in-process research and development acquired in the acquisition of spc . the fair value of the in-process research and development was less than the carrying value recorded as the time of the acquisition . based on the evaluation , we recorded an impairment in 2011 of $ 6.8 million . goodwill and other indefinite-lived assets will not be amortized , but will be reviewed for impairment at least annually . the results of this year 's impairment test are as of a point in time . if the future growth and operating results of our business are not as strong as anticipated and or our market capitalization declines , this could impact the assumptions used in calculating the fair value in subsequent years . to the extent goodwill is impaired , its carrying value will be written down to its implied fair value and a charge will be made to our earnings . such an impairment charge could materially and adversely affect our operating results and financial condition . as of december 31 , 2011 , we had recorded goodwill and other intangibles of $ 291.0 million in the consolidated balance sheet . for intangible assets , goodwill and property , plant and equipment , we assess the carrying value of these assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable . factors we consider 31 important which could trigger an impairment review include , but are not limited to , the following : significant underperformance relative to expected historical or projected future operating results ; significant negative industry or economic trends ; or significant changes or developments in strategy or operations that negatively affect the utilization of our long-lived assets . should we determine that the carrying value of long-lived tangible assets may not be recoverable , we will measure any impairment based on a projected discounted cash flow method using a discount rate determined by management to be commensurate with the risk inherent in our current business model . we may also estimate fair value based on market prices for similar assets , as appropriate . significant judgments are required to estimate future cash flows , including the selection of appropriate discount rates and other assumptions . changes in these estimates and assumptions could materially affect the determination of fair value for these assets . revenue recognition we recognize revenue related to our products , which include research models , in vitro technology and vaccine support products , when persuasive evidence of an arrangement exists , generally in the form of client purchase orders , title and risk of loss have transferred , which occurs upon delivery of the products , the sales price is fixed and determinable and collectability is reasonably assured . these recognition criteria are met at the time the product is delivered to the client 's site . product sales are recorded net of returns upon delivery . for large models in some cases clients pay in advance of delivery of the product .

results of operations the following table summarizes historical results of operations as a percentage of net sales for the periods shown : replace_table_token_5_th 34 segment operations the following tables show the net sales and the percentage contribution of each of our reportable segments for the past three years . they also show cost of products sold and services provided , selling , general and administrative expenses , amortization of goodwill and intangibles and operating income by segment and as percentages of their respective segment net sales . replace_table_token_6_th 35 replace_table_token_7_th in our consolidated statements of income , we provide a breakdown of net sales and cost of sales between net products and services . such information is reported irrespective of the business segment from which the sales were generated . fiscal 2011 compared to fiscal 2010 net sales . net sales for the year ending december 31 , 2011 were $ 1,142.6 million , an increase of $ 9.2 million , or 0.8 % , from $ 1,133 million for the year ending december 25 , 2010 , due primarily to increased sales for rms and favorable foreign currency translation of 2.2 % partially offset by lower pcs sales . research models and services . for the year ending december 31 , 2011 , net sales for our rms segment were $ 705.4 million , an increase of $ 38.4 million , or 5.8 % , from $ 667.0 million for the year ending december 25 , 2010 , due primarily to higher other product sales , which include our avian and in vitro businesses , as well as research model services . the effect of favorable foreign currency translation increased sales by 2.7 % . preclinical services .

overview commvault is a leading provider of data and information management software applications and related services . commvault was incorporated in 1996 as a delaware corporation . the commvault software platform is an enterprise level , integrated data and information management solution , built from the ground up on a single platform and unified code base . all software functionality share the same back-end technologies to deliver the benefits of a holistic approach to protecting , managing , and accessing data . the software addresses many aspects of data management in the enterprise , while providing scalability and control of data and information . key features of our software platform include : data protection solutions supporting all major operating systems , applications , and databases on virtual and physical servers , network-attached storage , cloud-based infrastructures , and mobile devices ; management through a single console ; view , manage , and access all functions and all data and information across the enterprise ; multiple protection methods including backup and archive , snapshot management , replication , and content indexing for ediscovery ; efficient storage management using deduplication for disk , tape and cloud ; integration with the industry 's top storage arrays to automate the creation of indexed , application-aware hardware snapshot copies across multi-vendor storage environments ; complete virtual infrastructure management supporting multiple hypervisors , including vmware and hyper-v ; security capabilities to limit access to critical data , provide granular management capabilities , and provide single sign on access for active directory users ; policy based data management , allowing users to manage data based on business needs and not physical location ; and an end-user experience that allows them to protect , find and recover their own data using common tools such as web browsers , microsoft outlook and file explorer . commvault software enables our customers to simply and cost effectively protect and manage their enterprise data throughout its lifecycle , from the mobile worker to the remote office , to the data center , covering the leading operating systems , relational databases , virtualized environments and applications . in addition to addressing today 's data and information management challenges , our customers can realize lower capital costs through more efficient use of their enterprise-wide storage infrastructure assets . this includes the automated movement of data from higher cost to lower cost storage devices throughout its lifecycle , and through sharing and better utilization of storage resources across the enterprise . we can also provide our customers with reduced operating costs through a variety of methods , including fast application deployment , reduced training time , lower cost of storage media consumables , proactive monitoring and analysis , and lower administrative overhead . we also provide our customers with a broad range of professional services that are delivered by our worldwide support and field operations . as of march 31 , 2017 we had licensed our software applications to approximately 25,000 registered customers . history and background in early 2000 , we launched commvault galaxy for backup and recovery , a storage industry award winner . in the years since , commvault has forged numerous alliances with top software application and hardware vendors , such as hitachi data systems , microsoft , network appliance , fujitsu , novell and oracle , to enhance capabilities and to create a premiere suite of data and information management solutions . in 2002 , we launched our single-platform technology that provides the foundation of our information management approach to storing , managing , and accessing data . in addition to data protection - backup & recovery , the subsequent release of our other software application technologies has increased our addressable market . each software technology can be used individually or in combination with other technologies from our single platform suite . 34 our software licenses typically provide for a perpetual right to use our software and are sold on a per terabyte capacity basis , on a per-copy basis , as site licenses or as a solution set . during the fiscal year ended march 31 , 2017 , approximately 69 % of software license revenue was sold on a capacity basis . capacity based software licenses provide our customers with unlimited licenses of specified software products based on a defined level of terabytes of data under management . as a result , when we sell our platform through a capacity license , certain of the various commvault functionalities are bundled into one capacity based price . we anticipate that capacity based licenses will continue to account for the majority of our software license revenue for the near future . site licenses give the customer the additional right to deploy the software on a limited basis during a specified term . our primary solution sets in our software suite include virtual machine backup , recovery and cloud management ; endpoint data protection ; and email archive . these solution sets can be individually deployed or combined as part of a comprehensive data protection and information management solution . our solution sets are generally sold on a per unit basis such as per virtual machine for our virtual machine backup , recovery and cloud management solution set ; per mailbox for our email archive solution set and per user for our endpoint data protection solution set . historically , an insignificant amount of our revenue has been sold under subscription , or term based , license arrangements . in these arrangements , the customer generally has the right to use the software on either a capacity basis or per-copy or per-unit basis over a designated period of time . we expect revenue from these types of arrangements to become a more significant portion of our total revenue . the industry in which we currently operate continues to go through accelerating changes as the result of compounding data growth and the introduction of new technologies . we are continuing to pursue an aggressive product development program in both data and information management solutions . story_separator_special_tag we generated approximately 36 % of our total revenues through arrow in fiscal 2017 , approximately 38 % of our total revenues in fiscal 2016 and approximately 36 % of our total revenues in fiscal 2015 . we generated approximately 10 % of our total revenues through avnet in fiscal 2017 . if arrow or avnet were to discontinue or reduce the sales of our products or if our agreement with arrow or avnet was terminated , and if we were unable to take back the management of our reseller channel or find another north american distributor to replace arrow or avnet , then it could have a material adverse effect on our future business . our services revenue was 54 % of our total revenues for fiscal 2017 , 57 % for fiscal 2016 and 53 % for fiscal 2015 . our services revenue is made up of fees from the delivery of customer support and other professional services , which are typically sold in connection with the sale of our software applications . customer support agreements provide technical support and unspecified software updates on a when-and-if-available basis for an annual fee based on licenses purchased and the level of service subscribed . other professional services include consulting , assessment and design services , implementation and post-deployment services and training , all of which to date have predominantly been sold in connection with the sale of software applications . most of our customer support agreements are for a one year term . as the end of the annual period approaches , we pursue the renewal of the agreement with the customer . historically , maintenance renewals have represented a significant portion of our total revenue . because of this characteristic of our business , if our customers choose not to renew their maintenance and support agreements with us on beneficial terms , or at all , our business , operating results and financial condition could be harmed . the gross margin of our services revenue was 77 % for fiscal 2017 , and 76 % for fiscal 2016 and 75 % for fiscal 2015 . overall , our services revenue has lower gross margins than our software revenue . the gross margin of our software revenue was 99 % for fiscal 2017 , fiscal 2016 and fiscal 2015 . an increase in the percentage of total revenues represented by services revenue may adversely affect our overall gross margins . 36 description of costs and expenses our cost of revenues is as follows : cost of software revenue , consists primarily of third-party royalties and other costs such as media , manuals , translation and distribution costs ; and cost of services revenue , consists primarily of salary and employee benefit costs in providing customer support and other professional services . our operating expenses are as follows sales and marketing , consists primarily of salaries , commissions , employee benefits , stock-based compensation and other direct and indirect business expenses , including travel and related expenses , sales promotion expenses , public relations expenses and costs for marketing materials and other marketing events ( such as trade shows and advertising ) ; research and development , which is primarily the expense of developing new software applications and modifying existing software applications , consists principally of salaries , stock-based compensation and benefits for research and development personnel and related expenses ; contract labor expense and consulting fees as well as other expenses associated with the design , certification and testing of our software applications ; and legal costs associated with the patent registration of such software applications ; general and administrative , consists primarily of salaries , stock-based compensation and benefits for our executive , accounting , human resources , legal , information systems and other administrative personnel . also included in this category are other general corporate expenses , such as outside legal and accounting services , compliance costs and insurance ; and depreciation and amortization , consists of depreciation expense primarily for our owned corporate campus headquarters location and computer equipment we use for information services and in our development and test labs . foreign currency exchange rates ' impact on results of operations sales outside the united states were approximately 44 % of our total revenue for fiscal 2017 , 42 % for fiscal 2016 and 43 % for fiscal 2015 . the income statements of our non-u.s. operations are translated into u.s. dollars at the average exchange rates for each applicable month in a period . to the extent the u.s. dollar weakens against foreign currencies , the translation of these foreign currency denominated transactions generally results in increased revenue , operating expenses and income from operations for our non-u.s. operations . similarly , our revenue , operating expenses and net income will generally decrease for our non-u.s. operations if the u.s. dollar strengthens against foreign currencies . using the average foreign currency exchange rates from fiscal 2016 , our software revenue would have been higher by $ 5.4 million , our services revenue would have been higher by $ 4.1 million , our cost of sales would have been higher by $ 0.3 million and our operating expenses would have been higher by $ 10.7 million from non-u.s. operations for fiscal 2017 . using the average foreign currency exchange rates from fiscal 2015 , our software revenue would have been higher by $ 12.4 million , our services revenue would have been higher by $ 16.3 million , our cost of sales would have been higher by $ 4.2 million and our operating expenses would have been higher by $ 17.3 million from non-u.s. operations for fiscal 2016 . in addition , we are exposed to risks of foreign currency fluctuation primarily from cash balances , accounts receivables and intercompany accounts denominated in foreign currencies and are subject to the resulting transaction gains and losses , which are recorded as a component of general and administrative expenses . we recognized net foreign currency transaction gains of $ 0.6 million in fiscal 2017 , $ 0.2

results of operations the following table sets forth each of our sources of revenues and costs of revenues for the specified periods as a percentage of our total revenues for those periods ( due to rounding numbers in column may not sum to totals ) : replace_table_token_5_th fiscal year ended march 31 , 2017 compared to fiscal year ended march 31 , 2016 revenues total revenues increased $ 55.4 million , or 9 % , from $ 595.1 million in fiscal 2016 to $ 650.5 million in fiscal 2017 . software revenue . software revenue increased $ 37.6 million , or 15 % , from $ 258.8 million in fiscal 2016 to $ 296.4 million in fiscal 2017 . software revenue represented 46 % of our total revenues in fiscal 2017 compared to 43 % in fiscal 2016 . the overall increase in software revenue was primarily driven by an increase in the number of enterprise software transactions ( transactions greater than $ 0.1 million ) , which increased by $ 29.3 million , or 21 % in fiscal 2017 compared to fiscal 2016 . enterprise software transactions represented approximately 56 % and 53 % of our software revenue in fiscal 2017 and fiscal 2016 , respectively . the increase in enterprise software transactions is due to a 23 % increase in the number of transactions of this type which was partially offset by a 2 % decrease in the average dollar amount of such transactions . the average dollar amount of enterprise transactions was approximately $ 264,000 in fiscal 2017 and approximately $ 268,000 in fiscal 2016 . software revenue derived from transactions less than $ 0.1 million increased $ 8.3 million , or 7 % , in fiscal 2017 compared to fiscal 2016 . we track software revenue on a geographic basis .

overview we are a commercial-stage biopharmaceutical company focused on developing and commercializing innovative molecularly targeted and immuno-oncology drugs for the treatment of cancer . we have three internally-developed late-stage clinical drug candidates : ( 1 ) zanubrutinib ( bgb-3111 ) , an investigational small molecule inhibitor of bruton 's tyrosine kinase , or btk , ( 2 ) tislelizumab ( bgb-a317 ) , an investigational humanized monoclonal antibody against the immune checkpoint receptor pd-1 , and ( 3 ) pamiparib ( bgb-290 ) , an investigational small molecule inhibitor of parp1 and parp2 . all three of these drug candidates are currently in phase 2 or 3 pivotal trials globally and or in china , and we expect to file for regulatory approvals in china in 2018 for zanubrutinib and tislelizumab . in addition , we have two internally-developed drug candidates in phase 1 clinical development : lifirafenib ( bgb-283 ) , an investigational raf dimer protein complex inhibitor , and bgb-a333 , an investigational humanized monoclonal antibody against the immune checkpoint receptor ligand pd-l1 . in 2017 , we entered into a strategic collaboration with celgene corporation , or celgene , in which we granted celgene exclusive rights to develop and commercialize tislelizumab for solid tumors in the united states , europe , japan , and the rest of the world outside of asia . we retained rights to tislelizumab for solid tumors in asia ( ex-japan ) and for hematological malignancies and internal combinations globally . in connection with the celgene collaboration , we obtained an exclusive license to market celgene 's approved cancer therapies abraxane® , revlimid® , and vidaza® in china , excluding hong kong , macau and taiwan , which has allowed us to generate product revenue in china since september 2017. we also obtained celgene 's commercial operations and personnel in china , which we expect to expand in preparation for the potential launch of our own internally-developed drug candidates and our other in-licensed drug candidates in china . we initially started as a research and development company in beijing in 2010 , and have since become a fully-integrated global biopharmaceutical company with operations in china in beijing , guangzhou , shanghai and suzhou and operations in the united states in cambridge , ma ; fort lee , nj ; and emeryville and san mateo , ca . as of january 1 , 2018 , we had a global team of over 900 employees , including a research team of over 150 employees in beijing , a clinical team of over 300 employees in the united states , china and australia , and a growing commercial team of over 200 employees in china . in addition , we have a facility in suzhou for the manufacturing of commercial-scale small molecule and pilot-scale biologics , and another facility under construction in guangzhou for the manufacturing of commercial-scale biologics . recent developments in january 2018 , we raised approximately $ 758.0 million in net proceeds in an underwritten public offering of 7,920,800 of our american depositary shares , or adss , at a price to the public of $ 101.00 per ads . each ads represents 13 ordinary shares , par value $ 0.0001 per share . this amount is not included in our cash , cash equivalents and short-term investments as of december 31 , 2017. in january 2018 , we entered into a commercial supply agreement for tislelizumab , our investigational anti-pd-1 antibody , with boehringer ingelheim biopharmaceuticals ( china ) ltd. , as further described in “ part i—item 1—business—manufacturing and supply ” of this annual report . 97 in january 2018 , we entered into an exclusive license agreement with mirati therapeutics , inc. , or mirati , for the development , manufacturing and commercialization of mirati 's sitravatinib in asia ( excluding japan ) , australia and new zealand , as further described in “ part i—item1—business—our pipeline and commercial products— sitravatinib ( mgcd-0516 ) , a multi-kinase inhibitor ” of this annual report . components of operating results revenue to date , our revenue has consisted of product sales revenue since september 2017 and upfront license fees , reimbursed research and development expenses and milestone payments from our strategic collaboration with celgene for tislelizumab entered in 2017 and our collaboration agreements with merck kgaa , darmstadt germany for pamiparib and lifirafenib entered in 2013. we do not expect to generate significant revenue from internally-developed drug candidates unless and until we successfully complete development and obtain regulatory approval for one or more of our drug candidates , which is subject to significant uncertainty . revenues from product sales are recognized when persuasive evidence of an arrangement exists , delivery has occurred and title of the product and associated risk of loss has transferred to the customer , the price is fixed or determinable , collection from the customer has been reasonably assured , and returns and allowances can be reasonably estimated . product sales are recorded net of estimated rebates , estimated product returns and other deductions . provisions for estimated reductions to revenue are provided for in the same period the related sales are recorded and are based on the sales terms , historical experience and trend analysis . we expect revenue from product sales to increase in 2018 as we expand our efforts to promote and obtain reimbursement for abraxane ® and revlimid ® and launch vidaza ® in china . we also record revenue from our collaboration and license agreements with celgene and merck kgaa , darmstadt germany . under each agreement , we have received upfront payments related to the license fee which was recognized upon the delivery of the license right . additionally , the reimbursement of remaining undelivered research and development services is recognized over the performance periods of the respective collaboration arrangements . in the case of the celgene arrangement , we will also receive research and development reimbursement revenue for the basket study trials that celgene opts into . story_separator_special_tag interest income ( expense ) , net interest income interest income consists primarily of interest generated from our cash and short‑term investments in money market funds , time deposits , u.s. treasury securities and u.s. agency securities . interest expense interest expense consists primarily of interest on our long‑term bank loan and shareholder loan . other income ( expense ) , net other income consists primarily of government grants and subsidies received that involve no conditions or continuing performance obligations by us . other expense consists primarily of loss from property and equipment disposals and donations made to sponsor certain events . other income ( expense ) also consists of unrealized gains and losses related to changes in foreign currency exchange rates and realized gains and losses on the sale of investments . 100 story_separator_special_tag lity , travel expenses , rental fees and other administrative expenses , primarily attributable to the global expansion of our business , including the post-combination operating costs of our commercial operations in china . interest income ( expense ) , net interest expense ( net ) increased by $ 4.5 million to $ 4.1 million of expense for the year ended december 31 , 2017 , from $ 0.4 million of income for the year ended december 31 , 2016. the increase in interest expense was primarily attributable to interest accrued for our long-term bank loan and shareholder loan , partially offset by increased interest income from higher returns on short-term investments . gain on sale of available-for-sale securities the gain on sale of available-for-sale securities was less than $ 0.1 million for the year ended december 31 , 2017 , compared to a loss of $ 1.4 million for the year ended december 31 , 2016. other income ( expense ) , net other income ( expense ) , net increased by $ 11.1 million to $ 11.5 million for the year ended december 31 , 2017 , from $ 0.4 million for the year ended december 31 , 2016. the increase was mainly attributable to government grants and subsidies received and recognized . income tax expense income tax expense was $ 2.2 million for the year ended december 31 , 2017 compared with $ 0.1 million for the year ended december 31 , 2016. in the year ended december 31 , 2017 , the income tax expense was mainly attributable to income tax expense of beigene biologics 's government grant received and recognized as well as our commercial operations in china , partially offset by income tax benefit due to the effect of estimated realized research and development tax credits and the u.s. orphan drug credit for our u.s. operating subsidiary . 103 comparison of the years ended december 31 , 2016 and 2015 the following table summarizes the results of our operations for the years ended december 31 , 2016 and 2015 : replace_table_token_8_th revenue revenue from our collaboration with merck kgaa , darmstadt germany decreased by $ 7.7 million to $ 1.1 million for the year ended december 31 , 2016 from $ 8.8 million for the year ended december 31 , 2015. the decrease was primarily attributable to decrease of revenue recognized for lifirafenib and revenue that was no longer being recognized for pamiparib in 2016 after we repurchased the ex-china rights from merck kgaa , darmstadt germany in october 2015. research and development expense research and development expense increased by $ 39.7 million to $ 98.0 million for the year ended december 31 , 2016 from $ 58.3 million for the year ended december 31 , 2015. the following table summarizes our external clinical , external preclinical and internal research and development expense for the years ended december 31 , 2016 and 2015 : replace_table_token_9_th the increase in external research and development expense was primarily attributable to the advancement of our clinical and preclinical pipeline , and included the following : increases of approximately $ 16.3 million , $ 10.5 million , $ 1.2 million , respectively , for zanubrutinib , tislelizumab and lifirafenib , offset by decrease of approximately $ 4.4 million for pamiparib . the increase in internal research and development expense was primarily attributable to the expansion of our development organization and our pipeline , and included the following : · $ 8.9 million increase of employee salary and benefits , which was primarily attributable to hiring of more development personnel during the years ended december 31 , 2016 ; 104 · $ 3.3 million increase of materials and reagent expenses , mainly in connection with the in-house manufacture of drug candidates used for clinical purposes , that were previously outsourced and recorded as external cost ; · $ 1.2 million increase of consulting fees , which was mainly attributable to increased scientific , regulatory and development consulting activities , in connection with the advancement of our pipeline ; · $ 1.8 million increase of facilities , office expense , rental fee and other expenses ; and offset by a $ 1.5 million decrease of share-based compensation expense ( $ 8.1 million in 2016 compared to $ 9.6 million in 2015 ) . general and administrative expense general and administrative expense increased by $ 12.8 million to $ 20.1 million for the year ended december 31 , 2016 from $ 7.3 million for the year ended december 31 , 2015. the increase was primarily attributable to the following : · $ 4.4 million increase of employee salary and benefits , which was primarily attributable to hiring of more personnel during the year ended december 31 , 2016 ; · $ 4.8 million increase of professional fees for audit , consulting , recruiting and legal services , mainly in connection with the preparation of our periodic reports , consulting activities , recruiting services and patent prosecution activities ; · $ 1.9 million increase of share-based compensation expense ( $ 2.5 million in 2016 compared to $ 0.6 million in 2015 ) ; and · $ 1.7 million increase of travel , office , leasing and other administrative expenses , mainly in connection with the global expansion of our company .

results of operations comparison of the years ended december 31 , 2017 and 2016 the following table summarizes our results of operations for the years ended december 31 , 2017 and 2016 : replace_table_token_5_th revenue total revenue increased by $ 237.3 million to $ 238.4 million for the year ended december 31 , 2017 , from $ 1.1 million for the year ended december 31 , 2016. the following table summarizes our components of revenue for the year ended december 31 , 2017 and 2016 , respectively : replace_table_token_6_th net product revenue was $ 24.4 million for the year ended december 31 , 2017 , which related to sales of abraxane® and revlimid® in china . we began recognizing product revenue with sales to our distributors in china , beginning in september 2017 following the closing of our strategic collaboration with celgene . vidaza ® was not launched in china until early 2018. we had no product revenue for the year ended december 31 , 2016. collaboration revenue was $ 214.0 million for the year ended december 31 , 2017 , of which $ 213.0 million was due to revenue recognition related to the celgene collaboration , including recognition of the value allocated to the upfront license fees and recognition of deferred revenue for upfront fees allocated to the undelivered research and development 101 services . collaboration revenue was $ 1.1 million for the year ended december 31 , 2016 , which was due to research and development revenue recognition related to collaboration agreement with merck kgaa , darmstadt germany .

if the arrangement does not contain a software license , customers should account for the arrangement story_separator_special_tag this annual report on form 10-k includes `` forward-looking statements '' within the meaning of the safe harbor provisions of the private securities litigation reform act of 1995. these forward-looking statements include , but are not limited to , statements about our plans , objectives , representations and contentions , and are not historical facts and typically are identified by use of terms such as “ may , ” “ will , ” “ should , ” “ could , ” “ expect , ” “ plan , ” “ anticipate , ” “ believe , ” “ estimate , ” “ predict , ” “ potential , ” “ continue ” and similar words , although some forward-looking statements are expressed differently . you should be aware that the forward-looking statements included herein represent management 's current judgment and expectations , but our actual results , events and performance could differ materially from those expressed or implied by forward-looking statements . we do not intend to update any of these forward-looking statements or publicly announce the results of any revisions to these forward-looking statements , other than as is required under u.s. federal securities laws . our business is subject to numerous risks and uncertainties , including those relating to fluctuations in our operating results , our dependence on a few large customers for a substantial portion of our revenue , a loss of revenue if contracts with the u.s. government or defense and aerospace contractors are canceled or delayed , our ability to implement innovative technologies , our ability to bring new products to market and achieve design wins , the efficient and successful operation of our wafer fabrication and other facilities , our ability to adjust production capacity in a timely fashion in response to changes in demand for our products , variability in manufacturing yields , industry overcapacity , inaccurate product forecasts and corresponding inventory and manufacturing costs , dependence on third parties , our dependence on international sales and operations , our ability to attract and retain skilled personnel and develop leaders , the possibility that future acquisitions may dilute our stockholders ' ownership and cause us to incur debt and assume contingent liabilities , fluctuations in the price of our common stock , our ability to protect our intellectual property , claims of intellectual property infringement and other lawsuits , security breaches and other similar disruptions compromising our information , and the impact of government and stringent environmental regulations . these and other risks and uncertainties , which are described in more detail under item 1a , “ risk factors ” in this annual report on form 10-k and in other reports and statements that we file with the sec , could cause actual results and developments to be materially different from those expressed or implied by any of these forward-looking statements . 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 company on february 22 , 2014 , rfmd and triquint entered into the merger agreement , which provided for the combination of rfmd and triquint in a merger of equals and resulted in the business combination under a new holding company named qorvo , inc. the transactions contemplated by the merger agreement were consummated on january 1 , 2015 , and as a result , triquint 's results of operations are included in qorvo 's fiscal 2015 consolidated statements of operations for the period of january 1 , 2015 through march 28 , 2015 ( the `` post-combination period '' ) and for the full fiscal years of 2017 and 2016. for financial reporting and accounting purposes , rfmd was the acquirer of triquint in the business combination . unless otherwise noted , “ we , ” “ our ” or `` us ” in this report refers to rfmd and its subsidiaries prior to the closing of the business combination and to qorvo and its subsidiaries after the closing of the business combination . qorvo® is a product and technology leader at the forefront of the growing global demand for always-on broadband connectivity . we combine a broad portfolio of rf solutions , highly differentiated semiconductor technologies , deep systems-level expertise and scale manufacturing to supply a diverse group of customers in expanding markets , including smartphones and other mobile devices , defense and aerospace , wifi customer premises equipment , cellular base stations , optical networks , automotive connectivity , and smart home applications . within these markets , our products enable a broad range of leading-edge applications - from very-high-power wired and wireless infrastructure solutions to ultra-low-power smart home solutions . our products and technologies help transform how people around the world access their data , transact commerce , and interact with their communities . 33 qorvo employs more than 8,600 people . we have world-class manufacturing facilities , and our fabrication facility in richardson , texas , is a u.s. dod-accredited ‘ trusted source ' ( category 1a ) for gaas , gan and baw technologies . our design and manufacturing expertise covers many semiconductor process technologies , which we source both internally and through external suppliers . our primary wafer fabrication facilities are in texas , florida , north carolina and oregon , and our primary assembly and test facilities are in china , costa rica , germany and texas . we also operate design , sales and manufacturing facilities throughout asia , europe and north america . business segments we design , develop , manufacture and market our products to leading u.s. and international oems and odms in the following operating segments : mobile products ( mp ) - mp supplies cellular rf and wifi solutions into a variety of mobile devices , including smartphones , notebook computers , wearables , tablets , and cellular-based applications for the iot . story_separator_special_tag in fiscal 2016 , we recorded integration costs of $ 26.5 million , and restructuring costs of $ 10.1 million ( including stock-based compensation ) associated with the business combination , as well as $ 14.1 million of start-up costs related to new processes and operations in both existing and new facilities . in fiscal 2015 , other operating expense was $ 59.5 million , including acquisition costs of $ 12.2 million , integration costs of $ 31.3 million and restructuring costs of $ 10.9 million associated with the business combination . operating income our overall operating income was $ 88.1 million for fiscal 2017 as compared to $ 12.0 million for fiscal 2016 . this increase was primarily due to higher gross profit from higher revenue and lower intangible amortization , stock-based compensation and other costs related to the business combination , partially offset by lower gross margin . gross margin was adversely impacted primarily due to an unfavorable change in product mix towards lower margin low-band pad modules , product cost reductions lagging normal average selling price erosion , lower factory utilization and unfavorable inventory adjustments primarily due to lower than expected manufacturing and assembly yields on the low-band pad modules in the second quarter of fiscal 2017. our overall operating income was $ 12.0 million for fiscal 2016 as compared to $ 122.5 million for fiscal 2015 . this decrease was primarily due to higher intangible amortization , stock-based compensation and other costs related to the business combination and average selling price erosion , partially offset by increased revenue and profitability resulting from the addition of triquint 's operations as well as the synergies created from the business combination , a favorable change in product mix towards higher margin products and manufacturing- and sourcing-related cost reductions . segment product revenue , operating income and operating income as a percentage of revenue mobile products replace_table_token_6_th mp revenue increased $ 300.7 million , or 14.4 % , in fiscal 2017 as compared to fiscal 2016 primarily due to higher demand for our cellular rf solutions in support of marquee smartphones and customers based in china . the decrease in mp operating income as a percentage of revenue in fiscal 2017 as compared to fiscal 2016 was primarily due to lower gross margin . gross margin was adversely impacted in fiscal 2017 by an unfavorable change in product mix towards lower margin low-band pad modules , product cost reductions lagging normal average selling price erosion , lower factory utilization , and unfavorable inventory adjustments primarily due to lower than expected manufacturing assembly yields on the low-band pad modules in the second quarter of fiscal 2017 . the lower yield was associated with the device packaging , not device functionality ; however the impact was significant because the issue was identified late in the production process . mp revenue increased $ 688.3 million , or 49.3 % , in fiscal 2016 as compared to fiscal 2015 ( primarily because fiscal 2015 included only three months of triquint revenue ) . the decrease in mp operating income as a percentage of revenue in fiscal 2016 as compared to fiscal 2015 was primarily due to increased expenses related to the development of new mobile products , partially offset by higher 37 gross margins ( resulting from a favorable change in product mix towards higher margin products and manufacturing and sourcing-related cost reductions , which were partially offset by average selling price erosion ) . infrastructure and defense products replace_table_token_7_th idp revenue increased $ 121.1 million , or 23.1 % , in fiscal 2017 as compared to fiscal 2016 primarily due to higher sales of our wireless infrastructure , defense and aerospace and wifi products . idp operating income increased $ 44.2 million , or 40.8 % , in fiscal 2017 as compared to fiscal 2016 driven by higher gross profit from increased revenue , favorable factory utilization and lower unfavorable inventory adjustments . this increase in gross profit was partially offset by higher personnel-related expenses . idp revenue increased $ 210.2 million , or 67.1 % , in fiscal 2016 as compared to fiscal 2015 , primarily because fiscal 2015 included only three months of triquint revenue . the decrease in idp operating income as a percentage of revenue in fiscal 2016 as compared to fiscal 2015 was primarily due to lower gross margins resulting from decreased demand for wireless infrastructure products during the first half of fiscal 2016. the demand for wireless infrastructure products began to show signs of recovery in the third quarter of fiscal 2016 and continued to improve in the fourth quarter of fiscal 2016. see note 16 of the notes to the consolidated financial statements in part ii , item 8 of this report for a reconciliation of segment operating income to the consolidated operating income for fiscal years 2017 , 2016 and 2015 . other ( expense ) income and income taxes replace_table_token_8_th interest expense we recognized $ 69.9 million and $ 25.8 million of interest expense in fiscal years 2017 and 2016 , respectively , related to the $ 1.0 billion of senior notes that were issued in the third quarter of fiscal 2016. interest expense in the preceding table for fiscal years 2017 and 2016 is net of capitalized interest of $ 13.6 million and $ 5.2 million , respectively . other ( expense ) income other expense in fiscal 2017 of approximately $ 3.1 million was related primarily to a net loss from foreign currency . the foreign currency loss was driven primarily by the appreciation of the u.s. dollar against the renminbi as well as by the changes in the local currency denominated balance sheet accounts . in fiscal 2016 we recognized net income primarily due to a gain from the sale of equity securities .

results of operations consolidated the following table presents a summary of our results of operations for fiscal years 2017 , 2016 and 2015 : replace_table_token_5_th revenue our overall revenue increased $ 421.8 million , or 16.2 % , in fiscal 2017 as compared to fiscal 2016 , primarily due to higher demand for our cellular rf solutions in support of marquee smartphones and customers based in china and higher sales of our wireless infrastructure , defense and aerospace and wifi products . our overall revenue increased $ 899.8 million , or 52.6 % , in fiscal 2016 as compared to fiscal 2015 , primarily because fiscal 2015 included only three months of triquint revenue . 35 we provided our products to our largest end customer , apple , through sales to multiple contract manufacturers , which in the aggregate accounted for 34 % , 37 % and 32 % of total revenue in fiscal years 2017 , 2016 and 2015 , respectively . huawei accounted for approximately 11 % , 12 % and 7 % of our total revenue in fiscal years 2017 , 2016 and 2015 , respectively . samsung , accounted for approximately 7 % , 7 % and 14 % of our total revenue in fiscal years 2017 , 2016 and 2015 , respectively . these customers primarily purchase cellular rf and wifi solutions offered by our mp segment for a variety of mobile devices , including smartphones , notebook computers , wearables , tablets and cellular-based applications for the iot . in fiscal 2017 , huawei was the largest customer for our idp segment , primarily purchasing solutions for base stations , telecom transport and wifi-enabled customer premise equipment applications . international shipments amounted to $ 2,565.5 million in fiscal 2017 ( approximately 85 % of revenue ) compared to $ 2,304.4 million in fiscal 2016 ( approximately 88 % of revenue ) and $ 1,395.2 million in fiscal 2015 ( approximately 82 % of revenue ) .

from the perspective of management on our businesses , current developments , financial condition , results of operations and liquidity . significant sections of md & a are as follows : overview . this section , beginning on page 24 , provides a description of recent developments we believe are important in understanding our results of operations and financial condition as well as understanding anticipated future trends . it also provides a brief description of significant transactions and events that affect the comparability of financial results and a discussion of the progress being made on our growth initiatives . consolidated results of operations . this section , beginning on page 27 , provides an analysis of our consolidated results of operations for the three years ended december 31 , 2013. segment results of operations . this section , beginning on page 29 , provides an analysis of each business segment for the three years ended december 31 , 2013 as well as corporate items and eliminations . in addition , we discuss significant transactions , events and trends that may affect the comparability of the results being analyzed . liquidity and capital resources . this section , beginning on page 37 , provides an analysis of our cash flows for the three years ended december 31 , 2013. we also discuss restrictions on cash movements , future commitments and capital resources . critical accounting policies . this section , beginning on page 40 , identifies those accounting principles we believe are most important to our financial results and that require significant judgment and estimates on the part of management in application . we provide all of our significant accounting policies in note 2 to the accompanying consolidated financial statements . other matters . this section , beginning on page 43 , provides a discussion of off-balance sheet arrangements to the extent they exist . in addition , we provide a tabular discussion of contractual obligations and discuss any significant commitments or contingencies . 23 overview our business we , through our subsidiaries , are a premier marketplace and transaction solutions provider for the real estate , mortgage and consumer debt industries offering both distribution and content . we leverage proprietary business process , vendor and electronic payment management software and behavioral science based analytics to improve outcomes for marketplace participants . our business segments are based upon our organizational structure , which focuses primarily on the services offered , and are consistent with the internal reporting used by our chief executive officer to evaluate operating performance and to assess the allocation of our resources . we classify our business into three reportable segments . the mortgage services segment provides services that span the mortgage and real estate lifecycle and are typically outsourced by loan servicers , loan originators and investors in single family homes . the financial services segment provides collection and customer relationship management services primarily to debt originators and servicers ( e.g. , credit card , auto lending , retail credit and mortgage ) and the utility and insurance industries . the technology services segment principally consists of our realsuite software applications , equator 's software applications as well as our it infrastructure services . the realsuite platform provides a fully integrated set of software applications and technologies that manage the end-to-end lifecycle for residential and commercial mortgage loan servicing including the automated management and payment of a distributed network of vendors . equator 's software applications provide comprehensive , end-to-end workflow and transaction services to manage real estate related activities and purchase related services from vendors . in addition , corporate items and eliminations include eliminations of transactions between the reporting segments and costs related to corporate support functions including executive , finance , legal , human resources , vendor management , risk and operational effectiveness . we classify revenue in three categories : service revenue , revenue from reimbursable expenses and non-controlling interests . in evaluating our performance , we focus on service revenue . service revenue consists of amounts attributable to our fee-based services . reimbursable expenses and non-controlling interests are pass-through items for which we earn no margin . reimbursable expenses consist of amounts we incur on behalf of our customers in performing our fee-based services , but we pass such costs directly on to our customers without any additional markup . non-controlling interests represent the earnings of lenders one , a consolidated entity not owned by altisource and are included in revenue and reduced from net income to arrive at net income attributable to altisource . we have prepared our consolidated financial statements in accordance with accounting principles generally accepted in the united states of america ( “gaap” ) . altisource 's vision and growth initiatives since our separation from ocwen , altisource has become a company providing a full suite of mortgage , real estate and consumer debt services , leveraging our technology and global operations . our relationship with ocwen provided a foundation on which we built our business and remains an important priority for us . altisource 's vision has evolved to become the premier provider of real estate and mortgage marketplaces offering both distribution and content . within these industries , we are facilitating transactions related to home sales , home rentals , home maintenance , mortgage origination and mortgage servicing . the equator acquisition , with its marketplace , real estate and servicing transaction solutions , is in line with this vision and accelerates our evolution and growth . we believe there are significant growth opportunities for altisource in the real estate and mortgage markets , leveraging our distribution and transaction solutions . story_separator_special_tag interest expense totaled $ 20.3 million for the year ended december 31 , 2013 compared to $ 1.2 million for the year ended december 31 , 2012 ( no comparative amount in 2011 ) ; · we repurchased 1.2 million shares of our common stock under our stock repurchase program during the year ended december 31 , 2013 compared to 0.3 million shares and 1.6 million shares during the years ended december 31 , 2012 and 2011 , respectively ; · in april 2011 , we acquired springhouse , llc , an appraisal management company that utilizes a nationwide panel of appraisers to provide real estate appraisals principally to mortgage originators , including the members of lenders one , and real estate asset managers and · in july 2011 , we acquired the assembled workforce of tracmail , a sub-contractor in india that performs asset recovery services . 26 consolidated results of operations summary consolidated results following is a discussion of our consolidated results of operations for the years ended december 31 , 2013 , 2012 and 2011. for a more detailed discussion of the factors that affected the results of our business segments in these periods , see “ segment results of operations ” below . the following table sets forth information on our results of operations for the years ended december 31 : replace_table_token_9_th n/m — not meaningful . revenue we recognized service revenue of $ 662.1 million , $ 466.9 million and $ 334.8 million for the years ended december 31 , 2013 , 2012 and 2011 , respectively . the growth in service revenue over the three year period was primarily driven by ocwen 's continued growth , expansion of services we provide to the loans in ocwen 's servicing portfolio and growth in our financial services business from new customer relationship management customers and , in 2013 , expansion of our charge-off mortgage collection services . 27 the increase in revenue from reimbursable expenses during the three year period is due primarily to the growth of ocwen 's loan servicing portfolio , although reimbursable expenses can vary significantly from year to year based on the mix of services ordered . cost of revenue and gross profit cost of revenue principally includes payroll and employee benefits associated with personnel employed in customer service and operations roles , fees paid to external providers related to the provision of services , reimbursable expenses , technology and telecommunications expenses as well as depreciation and amortization of operating assets . we recognized cost of revenue of $ 492.5 million , $ 366.2 million and $ 275.8 million for the years ended december 31 , 2013 , 2012 and 2011 , respectively . the increase in cost of revenue during the three year period is primarily attributable to the growth in ocwen 's loan servicing portfolio and higher costs in our technology services segment as we continue to invest in the development of our next generation technology and infrastructure to support our growth . additionally , we have been carrying excess staff in the mortgage services segment since late 2012 in anticipation of the rescap and homeward non-gse loans , the majority of which were boarded in 2013. gross profit as a percentage of service revenue was 42 % , 43 % and 44 % for the years ended december 31 , 2013 , 2012 and 2011 , respectively . the decreases in gross margin percentages during this period are primarily attributable to the mix of service revenue , the timing of investments in new services and technology and the timing of boarding new loans . in 2013 , we experienced higher growth in the lower margin property inspection and preservation services from the initial referrals from the homeward and rescap portfolios and higher costs in our technology services segment as we continue to invest in the development of our next generation technology to support our growth initiatives , partially offset by improved performance in our financial services segment from the growth of higher margin mortgage charge-off and customer relationship management services . in 2012 , we reported higher costs in our technology services segment from investments in the development of our next generation technology , costs incurred to develop the rental property management business and the growth of the lower margin origination services business . selling , general and administrative expenses and income from operations selling , general and administrative expenses ( “sg & a” ) includes payroll for personnel employed in executive , finance , legal , human resources , vendor management , risk and operational effectiveness roles . this category also includes occupancy costs , professional fees , depreciation on non-operating assets and amortization of intangible assets . we recognized sg & a of $ 113.8 million , $ 74.7 million and $ 62.1 million for the years ended december 31 , 2013 , 2012 and 2011 , respectively . the increase in sg & a during the three year period includes expansion of some of our corporate functions , including occupancy costs , to support altisource 's growth , and higher marketing costs related to hubzu . in 2013 , amortization expense was $ 23.1 million higher than 2012 from the 2013 homeward , rescap and equator transactions . in 2012 , we reported higher professional services primarily from expenses incurred in connection with the separation of the residential asset businesses . income from operations as a percentage of service revenue was 24 % , 27 % and 26 % for the years ended december 31 , 2013 , 2012 and 2011 , respectively . income from operations as a percentage of service revenue declined in 2013 compared to 2012 as a result of the mix of service revenue , the timing of investments in new services and technology , the timing of boarding new loans and increases in amortization expense from the homeward and rescap fee-based business acquisitions and the equator acquisition .

segment results of operations the following section provides a discussion of pre-tax results of operations of our business segments for the years ended december 31 , 2013 , 2012 and 2011. transactions between segments are accounted for as third party arrangements for purposes of presenting segment results of operations . intercompany transactions primarily consist of it infrastructure services and charges for the use of certain realsuite applications from our technology services segment to our other two segments . generally , we reflect these as service revenue in the technology services segment and technology and telecommunications expense within cost of revenue and sg & a in the segment receiving the services . consulting services are reflected in outside fees and services within cost of revenue . certain prior year amounts have been reclassified to conform to the current period presentation . financial information for our segments is as follows : replace_table_token_10_th n/m — not meaningful . 29 replace_table_token_11_th n/m — not meaningful . replace_table_token_12_th n/m — not meaningful . 30 mortgage services revenue revenue by service line was as follows for the years ended december 31 : replace_table_token_13_th n/m — not meaningful . we recognized service revenue of $ 490.3 million for the year ended december 31 , 2013 , a 39 % increase compared to the year ended december 31 , 2012. the growth in all business lines , except default management services and origination management services , is primarily driven by ocwen 's growth as loans from its servicing platform acquisitions are boarded on realservicing . during 2013 , we assisted ocwen with the boarding of 1.1 million loans onto realservicing from ocwen 's acquisitions of homeward , rescap and onewest bank fsb servicing rights . typically , the initial services ordered immediately following loan boardings are lower margin property inspection and preservation services , which is a significant driver of the 84 % growth of asset management service revenue .

we continue to enhance our products and add new functionality to our products . we will provide updates to new and existing customers as they are released to the general public . over 80 28 small and medium businesses have installed our gabriel secure communication platform and gabriel collaboration suite products in their corporate networks . we continue to rapidly expand our customer base with targeted promotions and direct sales initiatives . we also intend to establish the exclusive secure domain name registry in the united states and other key markets around the world . our portfolio of intellectual property is the foundation of our business model . we currently own over 100 u.s. and international patents with over 50 pending applications . our patent portfolio is primarily focused on securing real-time communications over the internet , as well as related services such as the establishment and maintenance of a secure domain name registry . our patented methods also have additional applications in the key areas of device operating systems and network security for cloud services , m2m communications in areas of smart city , connected car and connected home . we have submitted a declaration with the 3rd generation partnership project , or 3gpp , identifying a group of our patents and patent applications that we believe are or may become essential to certain developing specifications in the 3gpp lte , sae project . we have agreed to make available a non-exclusive patent license under fair , reasonable and non-discriminatory terms and conditions , with compensation , or frand , to 3gpp members desiring to implement the technical specifications identified by us . we believe that we are positioned to license our essential security patents to 3gpp members as they move into 4g . we believe that the market opportunity for our software and technology solutions is large and expanding as secure domain names are now an integral part of securing the next generation 4g/lte advanced wireless networks and m2m communications in areas including smart city , connected car and connected home . we also believe that all 4g/lte advanced mobile devices will require unique secure domain names and become part of a secure domain name registry . we intend to license our patent portfolio , technology and software , including our secure domain name registry service , to domain infrastructure providers , communication service providers as well as to system integrators . we intend to seek further license of our technology , including our gabriel connection technology to enterprise customers , developers and original equipment manufacturers , or oems , of chips , servers , smart phones , tablets , e-readers , laptops , net books and other devices , within the ip-telephony , mobility , fixed-mobile convergence and unified communications markets including 4g/lte . we have published our royalty rates and guidelines on our website . all forward moving licenses have adhered to these guidelines and have met or exceeded these rates and we will use these rates and guidelines in all future license negotiations . our software and technology solutions , including our secure domain name registry and gabriel connection technology , are designed to facilitate secure communications and provide the security platform required by next-generation internet-based applications such as instant messaging , or im , voice over internet protocol , or voip , mobile services , streaming video , file transfer , remote desktop and , or m2m communications . our technology generates secure connections on a “zero-click” or “single-click” basis , significantly simplifying the deployment of secure real-time communication solutions by eliminating the need for end-users to enter any encryption information . our product gabriel secure communication platform , unlike other collaboration and communication products and services on the market today , does not require access to user 's confidential data and minimizes the threat of hacking and data mining . it enables individuals and organizations to maintain complete ownership and control over their personal and confidential data , secured within their own private network , while enabling authorized secure encrypted access from anywhere at any time . our gabriel collaboration suite is a set of applications that run on top of our gabriel secure communication platform . it enables seamless and secure cross-platform communications between user 's devices that have our software installed . our gabriel collaboration suite is available for download and free trial , for android , ios , windows , linux and mac os x platforms , at http : //www.gabrielsecure.com/ . we continue to enhance our products and add new functionality to our products . we will provide updates to new and existing customers as they are released to the general public . we have signed patent license agreements with avaya inc. , aastra usa , inc. , microsoft , mitel networks corporation , nec corporation and nec corporation of america , siemens enterprise communications gmbh & co. kg , and siemens enterprise communications inc. to license certain of our patents , for a one-time payment and or an ongoing royalty for all future sales through the expiration of the licensed patents with respect to certain current 29 and future ip-encrypted products . we have engaged ipvalue management inc. to assist us in commercializing our portfolio of patents on securing real-time communications over the internet . under the multi-year agreement , ipvalue will originate and assist us with negotiating transactions related to patent licensing worldwide with respect to certain third parties . our employees include the core development team behind our patent portfolio , technology and software . this team has worked together for over ten years and is the same team that invented and developed this technology while working at leidos , is a fortune 500® scientific , engineering and technology applications company that uses its deep domain knowledge to solve problems of vital importance to the nation and the world , in national security , energy and the environment , critical infrastructure and health . story_separator_special_tag the court ordered that apple pay $ 34 in daily interest up to final judgment and $ 330 in daily damages for infringement up to final judgment for certain apple devices included in the verdict . the court denied our request for a permanent injunction and severed the future infringement portion into its own separate proceedings under case 6:13-cv-00211-led . on july 3 , 2013 , apple filed an appeal of the judgment dated february 27 , 2013 and order dated june 4 , 2013 denying apple 's motion to alter or amend the judgment to the uscafc . on september 16 , 2014 , uscafc issued their opinion , affirming the jury 's finding that all 4 of our patents are valid , confirming the jury 's finding of infringement of vpn on demand under many of the asserted claims of our ‘ 135 and ‘ 151 patents , and confirming the district 's court 's decision to allow evidence concerning our licenses and royalty rates in connection with the determination of damages . in its opinion , the uscafc also vacated the jury 's damages award and the district court 's claim construction with respect to parts of our ‘ 504 and ‘ 211 patents and remanded the damages award and determination of infringement with respect to facetime –for further proceedings consistent with its opinion . on october 16 , 2014 , we filed a petition with the uscafc , requesting a rehearing and rehearing en banc of the federal circuit 's september 14 , 2014 , decision concerning virnetx 's litigation against apple inc. on december 16 , 2014 , uscafc denied our petition requesting a rehearing and rehearing en banc of the federal circuit 's september 14 , 2014 , decision and remanded the case back to the eastern district of texas , tyler division , for further proceedings consistent with its opinion . on february 25 , 2015 , uscafc granted apple 's motions to lift stay of proceedings and vacate case 6:13-cv-00211-led . on march 30 , 2015 , the court issued an order finding substantial overlap between the remanded portions of this case and the ongoing civil action case 6:12-cv-00855-led ( virnetx inc. v. apple , inc. ) . the court consolidated the two civil actions under civil action case 6:12-cv-00855-led ( virnetx inc. v. apple , inc. ) and designated it as the lead case . on july 29 , 2016 , the court issued a new order , vacating its previous orders consolidating the cases apple i case and apple ii case , ordering that the two cases be retried separately , and setting the retrial date for apple i case with jury selection to begin on september 26 , 2016. the court also ordered that the issue of willfulness in both cases is bifurcated and that the apple ii will be retried after apple i case . the jury trial in this case was held on september 26 , 2016. on september 30 , 2016 , a jury in the united states court for the eastern district of texas , tyler division , in the case virnetx inc. , et al . v. apple inc. , no . apple i , has awarded virnetx $ 302.4 million in a verdict against apple corporation for infringing four virnetx patents , marking the third time a federal jury has found apple liable for infringing virnetx 's patented technology . the verdict includes royalties awarded to virnetx , for unresolved issues in the apple i case , remanded back from the uscafc , related to ( 1 ) damages owed to virnetx for infringement by apple 's original vpn-on-demand ( vod ) and ( 2 ) the alleged infringement by apple 's original facetime product , under the new claim construction of “secure communication link” pertaining to the '504 and '211 patents by the uscafc , and the damages associated with that infringement . the hearing on all the post-trial motions was held on november 22 , 2016. we are currently awaiting the court ruling and final judgement in this case . virnetx inc. v. apple , inc. ( case 6:12-cv-00855-led ) ( “apple ii” ) on november 6 , 2012 , we filed a new complaint against apple in the united states district court for the eastern district of texas , tyler division for willfully infringing four of our patents , u.s. patent nos . 6,502,135 , 7,418,504 , 7,921,211 and 7,490,151 , and seeking both an unspecified amount of damages and injunctive relief . the accused products include the iphone 5 , ipod touch 5th generation , ipad 4th generation , ipad mini , and the latest macintosh computers . due to their release dates , these products were not included in the previous lawsuit that concluded with a jury verdict on november 6 , 2012 that was subsequently upheld by the united states district court for the eastern 31 district of texas , tyler division , on february 26 , 2013. on july 1 , 2013 , we filed a consolidated and amended complaint to include u.s. patent no . 8,051,181 and consolidate civil action no . 6:11-cv-00563-led . on august 27 , 2013 , we filed an amended complaint including allegations of willful infringement related to u.s. patent no . 8,504,697 seeking both damages and injunctive relief . the markman hearing in this case was held on may 20 , 2014 and on august 8 , 2014 , issued its markman order , denying apple 's motion for summary judgment of indefiniteness , in which apple alleged that some of the disputed claims terms in the patents asserted by us were invalid for indefiniteness . in a separate order , the court granted in part and denied in part our motion for partial summary judgment on apple 's invalidity counterclaims , precluding apple from asserting invalidity as a defense against infringement of the claims that were tried before a jury in our prior litigation against apple ( virnetx vs. cisco et . al. , case 6:10-cv-00417-led ) .

results of operations ( all amounts in this section are expressed in thousands ) revenue 2016 2015 2014 revenue $ 1,550 $ 1,555 $ 1,249 revenue generated for the year ended december 31 , 2016 was $ 1,550 compared to december 31 , 2015 of $ 1,555 , and december 31 , 2014 revenue of approximately $ 1,249. revenue for the year ended december 31 , 2016 of $ 1,550 , was largely attributable to the 2013 contract settlement described under the heading “deferred revenue” above . under the terms of the 2013 contract settlement we were paid annual payments of $ 2,500 over the contract period for a total of $ 10,000. during the year ended december 31 , 2016 we recognized $ 1,500 of revenue for royalties from the 2013 contract settlement and $ 50 of revenue for royalties from other licensees . in addition to the settlement discussed above , during 2016 , 2015 and 2014 we recognized royalty revenue as part of license agreements entered into with customers during the patent infringement actions ( see note 14 “litigation” ) . these revenues relate to payment for use of our patented technology prior to the signing of a license agreement , and royalty payments after the execution of the license agreements . no amounts were allocable to settlement fees , expense reimbursement , damages or any other amounts other than historical and future sales as no such amounts were requested or received . 38 research and development expenses 2016 2015 2014 research and development $ 2,499 $ 2,277 $ 2,004 research and development costs include expenses paid to outside development consultants and compensation-related expenses for our engineering staff . research and development costs are expensed as incurred .

forward-looking statements are identified by words such as “ believe , ” “ will , ” “ may , ” “ estimate , ” “ continue , ” “ anticipate , ” “ intend , ” “ should , ” “ plan , ” “ expect , ” “ predict , ” “ could , ” “ potentially ” or the negative of these terms or similar expressions . you should read these statements carefully because they discuss future expectations , contain projections of future results of operations or financial condition , or state other “ forward-looking ” information . these statements relate to our future plans , objectives , expectations , intentions and financial performance and the assumptions that underlie these statements . these forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements . factors that might cause such a difference include , but are not limited to , those discussed in this report in part i , item 1a — “ risk factors , ” and elsewhere in this report . forward-looking statements are based on our management 's beliefs and assumptions and on information currently available to our management . these statements , like all statements in this report , speak only as of their date , and we undertake no obligation to update or revise these statements in light of future developments . we caution investors that our business and financial performance are subject to substantial risks and uncertainties . overview we are a commercial-stage medical device company focused on developing products to treat and transform the lives of patients suffering from venous diseases . our initial product offering consists of two minimally-invasive , novel catheter-based mechanical thrombectomy devices . we purpose-built our products for the specific characteristics of the venous system and the treatment of the two distinct manifestations of venous thromboembolism , or vte – deep vein thrombosis and pulmonary embolism . our clottriever product is fda-cleared for the treatment of dvt . our flowtriever product is the first thrombectomy system fda-cleared for the treatment of pulmonary embolism , or pe , and is also fda-cleared for clot in transit in the right atrium . we believe the best way to treat vte and improve the quality of life of patients suffering from this disease is to safely and effectively remove the blood clot . with that in mind , we designed and purpose-built our clottriever and flowtriever products to remove large clots from large vessels and eliminate the need for thrombolytic drugs . we believe our products are transformational and could be the catalyst to drive an evolution of treatment for venous diseases , establishing our products as the standard of care for dvt and pe . we believe our venous-focused commercial organization provides a significant competitive advantage . our most important relationships are between our sales representatives and our treating physicians , which include interventional cardiologists , interventional radiologists and vascular surgeons . we have developed systems and processes to harness the information gained from these relationships and we leverage this information to rapidly iterate products , introduce and execute physician education and training programs and scale our sales organization . we market and sell our products to hospitals , which are reimbursed by various third-party payors . we have dedicated meaningful resources to building a direct sales force in the united states , and we continue to expand our sales organization through additional sales representatives and territories . on may 27 , 2020 , we completed our ipo , which resulted in the issuance and sale of 9,432,949 shares of common stock , including 1,230,384 shares sold pursuant to the exercise of the underwriters ' over-allotment option , at the ipo price of $ 19.00 per share . we received net proceeds of approximately $ 163.0 million from the ipo , after deducting underwriters ' discounts and commissions of $ 12.6 million and offering costs of $ 3.7 million . prior to our ipo , our primary sources of capital were private placements of preferred stock , debt financing arrangements and revenue from sales of our products . since inception , we had raised a total of approximately $ 54.2 million in net proceeds from private placements of preferred stock . as of december 31 , 2020 , we had cash and cash 97 equivalents and short-term investments of $ 16 4.2 million , no long-term debt outstanding and an accumulated deficit of $ 2 7.4 million . for the year ended december 31 , 2020 , we generated revenue of $ 139.7 million , with a gross margin of 90.6 % and net income of $ 13.8 million , compared to revenue of $ 51.1 million , with a gross margin of 88.4 % and net loss of $ 1.2 million for the year ended december 31 , 2019. covid-19 in december 2019 , a novel strain of coronavirus , sars-cov-2 , was identified in wuhan , china . since then , sars-cov-2 , and the resulting disease , covid-19 , has spread to most countries , including all 50 states in the united states . in response to the pandemic , numerous state and local jurisdictions imposed and may continue to impose from time to time “ shelter-in-place ” orders , quarantines , executive orders and similar government orders and restrictions for their residents to control the spread of covid-19 . for example , in the united states , governmental authorities recommended , and in certain cases required , that elective , specialty and other procedures and appointments be suspended or canceled to avoid non-essential patient exposure to medical environments and potential infection with covid-19 and to focus limited resources and personnel capacity toward the treatment of covid-19 patients . similarly , in march 2020 , the governor of california , where our headquarters are located , issued a “ stay at home ” order limiting non-essential activities , travel and business operations . story_separator_special_tag revenue for clottriever and flowtriever products as a percentage of total revenue is as follows : replace_table_token_7_th 99 for the year ended december 31 , 2020 , our blended revenue per procedure was over $ 9,100. blended revenue per procedure represents the average of the average selling price per clottriever and the average price per flowtriever procedure . cost of goods sold and gross margin we manufacture and or assemble all our products at our facility in irvine , california . cost of goods sold consists primarily of the cost of raw materials , components , direct labor and manufacturing overhead . overhead costs include the cost of quality assurance , material procurement , inventory control , facilities , equipment and operations supervision and management , including stock-based compensation . cost of goods sold also includes depreciation expense for production equipment and certain direct costs such as shipping costs and royalty expense . shipping costs billed to customers are reported as a reduction of cost of goods sold . we expect cost of goods sold to increase in absolute dollars as our revenue grows and more of our products are sold , however , we also expect to realize opportunities to increase operating leverage in our manufacturing operations . we calculate gross margin as gross profit divided by revenue . our gross margin has been and will continue to be affected by a variety of factors , including average selling prices , product sales mix , production and ordering volumes , manufacturing costs , product yields , headcount and cost-reduction strategies . our gross margin could fluctuate from quarter to quarter as we introduce new products , adopt new manufacturing processes and technologies , and as we expand internationally . treatments using the flowtriever may involve one or more triever aspiration catheters and one or more flowtriever catheters . we charge customers the same price for each flowtriever procedure , regardless of the number of components used . as a result , changes in the number of components used , the cost of these components and the introduction of additional components can impact our gross margin . research and development expenses research and development , or r & d , expenses consist primarily of engineering , product development , clinical studies to develop and support our products , regulatory expenses , and other costs associated with products that are in development . these expenses include employee compensation , including stock-based compensation , supplies , consulting , prototyping , testing , materials , travel expenses , depreciation and an allocation of facility overhead expenses . additionally , r & d expenses include costs associated with our clinical trials and registries , including clinical study design , clinical study site initiation and study costs , data management , and internal and external costs associated with our regulatory compliance , including the costs of outside consultants and contractors that assist in the process of submitting and maintaining regulatory filings . we expense r & d costs as incurred . we expect r & d expenses as a percentage of revenue to vary over time depending on the level and timing of our new product development efforts , as well as our clinical development , clinical trials and registries and other related activities . selling , general and administrative expenses selling , general and administrative , or sg & a , e xpenses consist primarily of compensation for personnel , including stock-based compensation , related to selling and marketing functions , physician education programs , commercial operations and analytics , finance , information technology and human resource functions . other sg & a expenses include sales commissions , travel expenses , promotional activities , marketing initiatives , market research and analysis , conferences and trade shows , physician training , professional services fees ( including legal , audit and tax fees ) , insurance costs , general corporate expenses and facilities-related expenses . we expect sg & a expenses to continue to increase in absolute dollars as we expand our sales and marketing organization and infrastructure to both drive and support the anticipated growth in revenue and due to additional legal , accounting , insurance and other expenses associated with being a public company . interest income interest income consists primarily of interest income earned on our cash and cash equivalents . 100 interest expense interest expense consists primarily of interest incurred on our outstanding indebtedness and non-cash interest related to the amortization of debt discount and issuance costs associated with our indebtedness . change in fair value of warrant liabilities change in fair value of warrant liabilities consists of gains and losses resulting from the remeasurement of the fair value of our preferred stock warrant liabilities at each balance sheet date . upon the closing of our ipo , our outstanding preferred stock warrants automatically converted into warrants to purchase shares of our common stock . at such time , the final fair value of the warrant liability was reclassified to stockholders ' equity ( deficit ) . we will no longer record any related periodic fair value adjustments . story_separator_special_tag for the year ended december 31 , 2019 increased to 88.4 % , compared to 81.2 % in the year ended december 31 , 2018 due to an increase in the average selling prices of our products and improved operating leverage . research and development expenses . r & d expenses increased $ 3.2 million , or 80.9 % , to $ 7.2 million during the year ended december 31 , 2019 , compared to $ 4.0 million during the year ended december 31 , 2018. the increase in r & d expenses was primarily due to an increase of $ 1.3 million of personnel-related expenses , $ 1.1 million of clinical study and registry expenses and $ 0.5 million in materials and supplies . selling , general and administrative expenses .

results of operations comparison of the years ended december 30 , 2020 and 2019 the following table sets forth the components of our unaudited statements of operations in dollars and as percentage of revenue for the periods presented ( dollars in thousands ) : replace_table_token_8_th revenue . revenue increased $ 88.6 million , or 173 % , to $ 139.7 million during the year ended december 31 , 2020 , compared to $ 51.1 million during the year ended december 31 , 2019. the increase in revenue was due primarily to an increase in the number of products sold . the increase in revenue was offset in part by the negative impact of the covid-19 pandemic on procedure volume and new orders during the year ended december 31 , 2020. cost of goods sold and gross margin . cost of goods sold increased $ 7.2 million , or 122 % , to $ 13.1 million during the year ended december 31 , 2020 , compared to $ 5.9 million during the year ended december 31 , 2019. this increase was due to the increase in the number of products sold and additional manufacturing overhead costs incurred as we invested significantly in our operational infrastructure to support anticipated future growth . cost of goods sold for the year ended december 31 , 2020 was also impacted by $ 1.1 million in idle production capacity costs associated with the covid-19 pandemic . gross margin for the year ended december 31 , 2020 increased to 90.6 % , compared to 88.4 % for the year ended december 31 , 2019 due to an increase in the average selling prices of our products and improved operating leverage . research and development expenses .

our actual results may differ materially from those we currently anticipate as a result of many factors , including the factors we describe under “ item 1a—risk factors , ” and elsewhere in this annual report on form 10-k. overview we are a leading provider of communications services connecting people through cloud-connected devices worldwide . we rely heavily on our network , which is a flexible , scalable session initiation protocol ( sip ) based voice over internet protocol , or voip , network . this platform enables a user via a single “ identity , ” either a number or user name , to access and utilize services and features regardless of how they are connected to the internet , including over 3g , 4g , wi-fi , cable , or dsl broadband networks . this technology enables delivery of voice , messaging and video services globally on a variety of devices . since its inception , vonage has used ip technology to disrupt large existing markets by offering high-value , low cost communications services . from its start-up roots , the company has evolved into a leader in the voip services market , with 2.5 million customer lines serving residential and small and medium business customers . customers using our core vonage landline replacement service are located in the united states ( 94 % of lines ) , canada and the uk . our mobile applications serve customers around the world . key to the company 's evolution was its strategic , operational and financial transformation , which was largely completed in 2012. this transformation resulted in a dramatic swing to profitability enabled by significant cost reductions , a meaningful lowering of customer defections , and the successful restructuring our balance sheet . this transformation positioned the company to pursue our current growth strategy . strategically , we shifted our primary focus in our domestic markets to serving the rapidly growing but under-served ethnic segments in the united states with international calling needs . we improved the customer value proposition by being the first to deliver flat-rate , unlimited calling to over 60 countries with the launch of our vonage world service , and we differentiated our service by providing enhanced features , including our mobile extensions service , at no extra cost . these strategic shifts have resulted in new customers with a higher average lifetime value and a better churn profile than those in the past . operationally , we lowered customer churn from highs of 3.6 % in july 2009 to 2.6 % in 2012 ; we further lowered churn in 2013 to 2.5 % . through three debt refinancings in december 2010 , july 2011 , and february 2013 , we lowered our interest rate from 20 % to less than 4 % , saving over $ 40 million in annual interest expense . our disciplined approach to cash management was fundamental in enabling us to establish our share repurchase program which was first instituted in august of 2012. we currently have a $ 100,000 repurchase authorization in place to be completed by december 31 , 2014. as of december 31 , 2013 , we have repurchased $ 50,653 or 16,954 shares of vonage common stock . since beginning the first repurchase program , we have repurchased $ 83,971 or 31,390 shares of vonage stock . we believe our repurchase program reflects our balanced approach to capital allocation as we invest for growth , both organically and inorganically through acquisitions , and deliver value to shareholders without compromising our ongoing operational needs . in 2013 we made important progress against each of our growth priorities . we launched the basictalk brand nationally , offering compelling value to domestic callers . in the core vonage branded business , we continued to allocate marketing investments from mass-reach vehicles like television to more ethnically-targeted and cost-efficient , in-person selling channels . these initiatives combined to offset the existing weakening in our premium domestic service , which reflects broad market trends . as a result , for 2013 , we delivered positive net line additions for the first time since 2008. we grew the penetration rate of our mobile extension service , which extends our home phone product to mobile phones , and we improved our standalone mobile app with quality and feature enhancements , including video calling and video voicemail . early in 2013 we announced a joint venture to launch service in brazil and we expect to enter this market with a phased launch in the second quarter of 2014. in late 2013 we acquired vocalocity , a leading provider of hosted voip services to small and medium businesses . recent developments acquisition of vocalocity . pursuant to the agreement and plan of merger ( the “ merger agreement ” ) dated october 9 , 2013 , by and among vocalocity inc. ( `` vocalocity '' ) , vista merger corp. , a delaware corporation and newly formed wholly-owned subsidiary of vonage ( “ merger sub ” ) , vonage and shareholder representative services , llc ( acting solely in its capacity as the representative , the “ representative ” ) . pursuant to the merger agreement , on november 15 , 2013 , merger sub merged with and into vocalocity , and vocalocity became a wholly-owned subsidiary of vonage ( the “ merger ” ) . vocalocity was acquired for $ 130,000 adjusted for $ 2,869 of excess cash as of the closing date and the increase in value of the 7,983 shares of vonage common stock from the signing date to the closing date of $ 1,298 , resulting in a total acquisition cost was $ 134,167 . we financed the transaction through $ 32,981 of cash and $ 75,000 from our credit facility . the acquisition of vocalocity immediately positions vonage as a leader in the smb hosted voip market . smb and soho services will be offered under the vonage business solutions brand . joint venture in brazil . story_separator_special_tag the termination charges for all traffic , including voip originated traffic , will transition over several years to a bill and keep arrangement ( i.e. , no termination charges ) . numerous parties filed appeals of the fcc 's icc order . we believe that the order , if effected , will positively impact our costs over time . see also the discussion under `` regulation '' in note 10 to our financial statements for a discussion of regulatory issues that impact us . the table below includes key operating data that our management uses to measure the growth and operating performance of our business : replace_table_token_6_th gross subscriber line additions . gross subscriber line additions for a particular period are calculated by taking the net subscriber line additions during that particular period and adding to that the number of subscriber lines that terminated during that period . this number does not include subscriber lines both added and terminated during the period , where termination occurred within the first 30 days after activation . the number does include , however , subscriber lines added during the period that are terminated within 30 days of activation but after the end of the period . change in net subscriber lines . change in net subscriber lines for a particular period reflects the number of subscriber lines at the end of the period , less the number of subscriber lines at the beginning of the period . subscriber lines . our subscriber lines include , as of a particular date , all paid subscriber lines from which a customer can make an outbound telephone call on that date . our subscriber lines include fax lines and soft phones but do not include our virtual phone numbers or toll free numbers , which only allow inbound telephone calls to customers . subscriber lines increased by 9,392 , excluding subscriber lines from vocalocity prior to acquisition , from 2,359,816 as of december 31 , 2012 to 2,542,926 , as of december 31 , 2013 . average monthly customer churn . average monthly customer churn for a particular period is calculated by dividing the number of customers that terminated during that period by the simple average number of customers during the period , and dividing the result by the number of months in the period . the simple average number of customers during the period is the number of customers on the first day of the period , plus the number of customers on the last day of the period , divided by two . terminations , as used in the calculation of churn statistics , do not include customers terminated during the period if termination occurred within the first 30 days after activation . our average monthly customer churn decreased to 2.5 % for 2013 compared to 2.6 % for 2012 . the decline in churn was a result of reintroduction of a service 28 vonage annual report 2013 period requirement in certain instances , sustained improvements in customer satisfaction and more effective retention processes . our average monthly customer churn also decreased sequentially from 2.6 % for the three months ended september 30 , 2013 to 2.5 % for the three months ended december 31 , 2013 and was flat compared to the three months ended december 31 , 2012. we monitor churn on a daily basis and use it as an indicator of the level of customer satisfaction . other companies may calculate churn differently , and their churn data may not be directly comparable to ours . customers who have been with us for a year or more tend to have a lower churn rate than customers who have not . in addition , our customers who are residential international callers generally churn at a lower rate than residential customers who are domestic callers . customers with service period requirements tend to have a lower churn rate than customers without service period requirements . similar trends are seen between customers obtained through retail sales , which generally do not include service period requirements , and those obtained through non-retail channels , which generally do include such service period requirements . in addition , business customers generally churn at a lower rate than residential customers . our churn will fluctuate over time due to economic conditions , competitive pressures , marketplace perception of our services , and our ability to provide high quality customer care and network quality and add future innovative products and services . average monthly operating revenues per line . average monthly revenue per line for a particular period is calculated by dividing our total revenue for that period by the simple average number of subscriber lines for the period , and dividing the result by the number of months in the period . the simple average number of subscriber lines for the period is the number of subscriber lines on the first day of the period , plus the number of subscriber lines on the last day of the period , divided by two . our average monthly revenue per line decreased to $ 28.18 for 2013 compared to $ 29.89 for 2012 . this decrease was due primarily to rate plan mix and lower usf fees . the continued expansion of lower priced plan offerings including basictalk to meet customer segment needs may cause downward pressure on average monthly revenues per line , offset by any selected pricing actions . average monthly direct cost of telephony services per line . average monthly direct cost of telephony services per line for a particular period is calculated by dividing our direct cost of telephony services for that period by the simple average number of subscriber lines for the period , and dividing the result by the number of months in the period . we use the average monthly direct cost of telephony services per line to evaluate how effective we are at managing our costs of providing service .

quarterly results of operations the following table sets forth quarterly statement of operations data . we derived this data from our unaudited consolidated financial statements , which we believe have been prepared on substantially the same basis as our audited consolidated financial statements . the operating results in any quarter are not necessarily indicative of the results that may be expected for any future period . replace_table_token_18_th ( 1 ) excludes depreciation and amortization of $ 3,930 , $ 3,929 , $ 3,722 , and $ 3,534 for the quarters ended march 31 , june 30 , september 30 and december 31 , 2012 , respectively , and $ 3,452 , $ 3,510 , $ 3,522 , and $ 4,408 for the quarters ended march 31 , june 30 , september 30 and december 31 , 2013 , respectively . 36 vonage annual report 2013 . liquidity and capital resources overview the following table sets forth a summary of our cash flows for the periods indicated : replace_table_token_19_th for the three years ended december 31 , 2013 , 2012 , and 2011 we generated income from operations . we expect to continue to balance efforts to grow our customer base while consistently achieving profitability . to grow our customer base , we continue to make investments in marketing and application development as we seek to launch new services , network quality and expansion , and customer care . although we believe we will maintain consistent profitability in the future , we ultimately may not be successful and we may not achieve consistent profitability . we believe that cash flow from operations and cash on hand will fund our operations for at least the next twelve months .

this discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties , as well as assumptions that may never materialize or that may be proven incorrect . our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors , including those discussed in the sections titled “ special note regarding forward-looking statements ” and “ risk factors ” and in other parts of this annual report . overview business independent talent is an increasingly sought-after , critical , and expanding segment of the global workforce . we operate the world 's largest work marketplace that connects businesses with independent talent , as measured by gsv . gsv represents the total amount that clients spend on both our marketplace offerings and our managed services offering as well as additional fees we charge to both clients and freelancers for other services . we define freelancers as users that advertise and provide services to clients through our work marketplace , and we define clients as users that work with freelancers through our work marketplace . freelancers on our work marketplace include independent professionals and agencies of varying sizes . the clients on our work marketplace range in size from small businesses to fortune 100 companies . with users in over 180 countries , our work marketplace enabled $ 2.5 billion of gsv for the year ended december 31 , 2020. for purposes of determining countries where we enable gsv , we include both the countries in which the clients that paid for the applicable services are located , as well as the countries in which the freelancers that provided those services are located . as a global work marketplace that connects freelancers and clients regardless of their location , our gsv originates from around the world . of the $ 2.5 billion of gsv enabled on our work marketplace in 2020 , approximately 25 % was generated from u.s. freelancers , our largest freelancer geography , as measured by gsv , in each of 2020 , 2019 , and 2018 , while freelancers in india and the philippines remained our next largest freelancer geographies in all three years . of the $ 2.1 billion and $ 1.8 billion of gsv enabled on our work marketplace in 2019 and 2018 , respectively , approximately 27 % and 23 % , respectively , was generated from freelancers in the united states . approximately 67 % of our gsv in 2020 was generated from u.s. clients , compared to approximately 68 % and 66 % of gsv in 2019 and 2018 , respectively , with clients in no other country representing more than 10 % of our gsv in any year . we generate revenue from both freelancers and clients , with a majority of our revenue generated from service fees charged to freelancers . we also generate revenue from fees charged to both clients and freelancers for other services , such as for transacting payments through our work marketplace , premium offerings , purchases of connects , foreign currency exchange , and our upwork payroll offering . in addition , we provide a managed services offering where we engage freelancers to complete projects , directly invoice the client , and assume responsibility for work performed . on december 31 , 2019 , we adopted topic 606 effective as of january 1 , 2019 using the modified retrospective method . as a result , revenue results for the years ended december 31 , 2020 and 2019 are presented in accordance with this new revenue recognition standard while historical revenue results for reporting periods prior to 2019 are presented in conformity with amounts previously disclosed under the prior revenue recognition standard , topic 605. financial highlights for 2020 in march 2020 , the world health organization declared the outbreak of covid-19 to be a pandemic , which continues to spread throughout the united states and the world , and has resulted in governmental authorities implementing numerous measures to contain the virus , including travel bans and restrictions , shelter-in-place orders , and business limitations and shutdowns . the covid-19 pandemic and the resulting restrictions intended to prevent its spread have accelerated the secular shift toward remote and independent work , and , with our unique , remote-based business model , the covid-19 pandemic has not impacted our clients ' access to highly-skilled freelancers to complete short- and long-term projects on our work marketplace . in 2020 , we continued to identify opportunities to prioritize our advertising and marketing efforts in order to reach those new and existing clients seeking to engage with independent talent due to the covid-19 pandemic , as well as companies that have already embraced a remote work model . as a result of these efforts , our 2020 results were fueled by both existing and new clients , who used our work marketplace to address their changing business needs . we began to see the impact of the pandemic on our results at the end of the first quarter , when we experienced a temporary reduction in the growth rates of gsv and revenue . this trend continued into the beginning of the second quarter , driven by spend contraction by many of our clients , as the covid-19 pandemic continued to disrupt their businesses . these trends stabilized in the second half of the second quarter , and improved thereafter , contributing to an overall increase in the growth 55 rates of gsv and revenue in 2020. also , beginning in the second half of the second quarter of 2020 , we began to see an increase in client acquisition driven by the acceleration in the shift toward remote work , due in part to the covid-19 pandemic and the execution of our strategic initiatives . this increase in client acquisition continued to accelerate in the second half of 2020 and drove an increase in freelancer billings , which , in turn , drove an increase in marketplace revenue . story_separator_special_tag gross services volume ( gsv ) gsv includes both client spend and additional fees charged for other services . client spend , which we define as the total amount that clients spend on both our marketplace offerings and our managed services offering , is the primary component of gsv . gsv also includes additional fees charged to both clients and freelancers for other services and offerings , such as for transacting payments through our work marketplace , user memberships , purchases of connects , and foreign currency exchange . gsv is an important metric because it represents the amount of business transacted through our work marketplace . our marketplace revenue is primarily comprised of the service fees paid by freelancers as a percentage of the total amount freelancers charge clients for services accessed through our work marketplace . therefore , marketplace revenue is correlated to gsv , and we believe that our marketplace revenue will grow as gsv grows , although they could grow at different rates . for a discussion of how we measure and evaluate the correlation between marketplace revenue and gsv , see “ —marketplace take rate ” below . growth in the number of core clients and increased client spend retention are the primary drivers of gsv growth , and we expect the client spend retention trends discussed in “ —client spend retention , ” below , to affect the rate at which gsv grows . we derive a substantial portion of our gsv and revenue from small- and medium-sized businesses . in 2020 , we continued to identify opportunities to prioritize our advertising and marketing efforts in order to reach those new and existing clients seeking to engage with independent talent . as a result , of these efforts , coupled with the secular shift towards remote work caused by the covid-19 pandemic and the resulting restrictions intended to prevent its spread , our work marketplace enabled $ 2.5 billion of gsv in 2020 , representing a year-over-year increase of 21 % . we expect our gsv to fluctuate between periods due to a number of factors , including the current covid-19 pandemic and its impact on our clients ' businesses ; the number of sundays ( i.e. , the day we bill and recognize revenue for the majority of our freelancer service fees each week ) or the number of mondays ( i.e. , the day we bill and recognize revenue for a substantial portion of our client fees each week ) in any given quarter ; and the volume of projects that are posted by clients on our work marketplace , the characteristics of those projects , such as size , duration , and pricing , and the availability and qualifications of freelancers to complete those projects . marketplace revenue marketplace revenue , which represents the majority of our revenue , consists of revenue derived from our upwork basic , plus , and enterprise and other premium offerings . we generate marketplace revenue from both freelancers and clients . our marketplace revenue is primarily comprised of service fees paid by freelancers as a percentage of the total amount freelancers charge clients for services accessed through our work marketplace , and to a lesser extent , payment processing and administration fees charged to clients . we also generate marketplace revenue from fees for premium offerings , freelancer memberships , purchases of connects , and other services , such as foreign currency exchange and our upwork payroll offering . marketplace revenue is an important metric because it is the primary driver of our business , and we believe it provides greater comparability to other online marketplaces . the growth rate of marketplace revenue fluctuates in relation to the growth rate of gsv . therefore , marketplace revenue is correlated to gsv , and we believe that our marketplace revenue will grow as gsv grows , although they could grow at different rates . the covid-19 pandemic and execution of our strategic initiatives resulted in an increase in client acquisition in the second half of 2020. this increase in client acquisitions drove an increase in freelancer billings , and , in turn , drove an increase in marketplace revenue . we expect our marketplace revenue growth rates to continue to vary from period to period due to a variety of other factors such as the impact of the covid-19 pandemic and any resulting macroeconomic impact on the businesses and spending behavior of our current and prospective clients ; the number of sundays ( i.e. , the day we bill and recognize revenue for the majority of our freelancer service fees each week ) or the number of mondays ( i.e. , the day we bill and recognize revenue for a substantial portion of our client fees each week ) in any given quarter ; the lapping of significant launches of new products , pricing changes , and other monetization efforts ; the performance of client spend retention ; and the ability of the recent and continued investment in our enterprise sales team to accelerate the acquisition of , and achieve increased spend from , upwork enterprise clients , and the timing of those results . 57 marketplace take rate marketplace take rate measures the correlation between marketplace revenue and gsv and is calculated by dividing marketplace revenue by marketplace gsv . marketplace take rate is an important metric because it is the key indicator of how well we monetize spend on our work marketplace from our upwork basic , plus , and enterprise and other premium offerings . during the year ended december 31 , 2020 , our marketplace take rate increased primarily as a result of an acceleration in the shift toward remote work , due in part to the covid-19 pandemic and the execution of our strategic initiatives that resulted in an influx of new clients , which caused freelancers to bill at higher rates of our tiered service fee structure , as well as increased client payment processing fees , and other monetization efforts .

results of operations the following table sets forth our consolidated results of operations for the years ended december 31 , 2020 , 2019 , and 2018 ( in thousands ) : replace_table_token_5_th comparison of the years ended december 31 , 2020 and 2019 revenue replace_table_token_6_th for the year ended december 31 , 2020 , total revenue was $ 373.6 million , an increase of $ 73.1 million , or 24 % , as compared to 2019. marketplace revenue represented 91 % of total revenue and increased by $ 69.9 million , or 26 % , compared to 2019. marketplace revenue increased primarily due to an increase in gsv , which grew by 21 % in 2020 as compared to 2019 , and a 17 % increase in the number of core clients as of december 31 , 2020 compared to december 31 , 2019. we believe these increases in marketplace revenue , gsv , and core clients were primarily due to investments in sales and marketing to accelerate the 63 acquisition of new clients and drive brand awareness , the launch of new offerings such as upwork plus , the recent changes made in the pricing and packaging of connects purchases in 2019 , and investments in research and development to build new product features . additionally , marketplace revenue also increased as a result of an increase in client acquisition that was driven by an acceleration in the shift toward remote work , due in part to the covid-19 pandemic and execution of our strategic initiatives . this increase in client acquisition , which began in the second quarter of 2020 and accelerated throughout the remainder of the year , continued to drive an increase in freelancer billings , which , in turn , drove an increase in marketplace revenue . freelancer service fees generated $ 199.3 million and $ 168.8 million of marketplace revenue during the years ended december 31 , 2020 and 2019 , respectively .

the demand for our products and services is seasonal and significantly impacted by the weather . warmer than normal summer temperatures generate demand for replacement air conditioning and refrigeration products and services , and colder than normal winter temperatures have a similar effect on heating products and services . conversely , cooler than normal summers and warmer than normal winters depress the demand for hvacr products and services . in addition to weather , demand for our products and services is influenced by national and regional economic and demographic factors , such as interest rates , the availability of financing , regional population and employment trends , new construction , general economic conditions and consumer spending habits and confidence . a substantial portion of the sales in each of our business segments is attributable to replacement business , with the balance comprised of new construction business . the principal elements of cost of goods sold are components , raw materials , factory overhead , labor , estimated costs of warranty expense and freight and distribution costs . the principal raw materials used in our manufacturing processes are steel , copper and aluminum . in recent years , pricing volatility for these commodities and related components has impacted us and the hvacr industry in general . we seek to mitigate the impact of commodity price volatility through a combination of pricing actions , vendor contracts , improved production efficiency and cost reduction initiatives . we also partially mitigate volatility in the prices of these commodities by entering into futures contracts and fixed forward contracts . impact of covid-19 pandemic and the resulting changes to our 2020 financial performance a novel strain of coronavirus or , covid-19 , surfaced in late 2019 and has spread around the world . in 2020 , the spread of covid-19 and the developments surrounding the global pandemic disrupted our business operations and affected our results of operations . for example , in response to the covid-19 pandemic , various national , state , and local governments where we , our suppliers , and our customers operate issued decrees prohibiting certain businesses from continuing to operate and certain classes of workers from reporting to work . those decrees resulted in supply chain disruption , higher absenteeism in our factories , and negatively impacted net sales for our commercial and refrigeration segments . additionally , certain of our manufacturing facilities experienced short-term suspensions of operations for covid-19 employee health concerns . we implemented several cost reduction actions in the second quarter of 2020 , including employee terminations , temporary facility closures and cancellations of certain sales and marketing activities , and revised our financial outlook downward to account for covid-19 's expected economic impact on our company and future uncertainty . as the covid-19 pandemic continues , health concern risks remain , and we can not predict whether any of our manufacturing , operational or distribution facilities will experience disruptions , or how long such disruptions would last . it also remains unclear how various national , state , and local governments will react if the distribution of vaccines is slower than expected . if the covid-19 pandemic worsens or the pandemic continues longer than presently expected , covid 19 would continue to impact our results of operations , financial position and cash flows . story_separator_special_tag style= '' margin-bottom:6pt ; text-align : center '' > replace_table_token_5_th residential heating & cooling net sales increased 3 % in 2020 compared to 2019. sales volume increased 2 % and price and mix combined increased 1 % . segment profit in 2020 declined $ 36 million compared to 2019 due to $ 99 million of non-recurring insurance proceeds for lost profits related to the marshalltown tornado , $ 10 million of higher warranty and other product costs , $ 5 million of higher tariffs on chinese imports , $ 3 million of combined price and mix , and $ 1 million of factory inefficiency . partially offsetting these declines was $ 25 million of lower sg & a , $ 25 million of engineering and sourcing led cost reductions , $ 17 million from lower commodity costs , $ 8 million of lower freight and distribution expense , $ 5 million of higher sales volume , and $ 2 million of higher income from equity method investments . 21 commercial heating & cooling the following table presents our commercial heating & cooling segment 's net sales and profit for 2020 and 2019 ( dollars in millions ) : replace_table_token_6_th commercial heating & cooling net sales decreased 15 % in 2020 compared to 2019. sales volume was 14 % lower and price and mix combined decreased 1 % . segment profit in 2020 decreased $ 29 million compared to 2019 due to $ 47 million of lower sales volume and $ 10 million of unfavorable mix . partially offsetting these declines was $ 9 million of lower sg & a , $ 7 million of engineering and sourcing led cost reductions , $ 6 million from lower commodity costs , $ 2 million of factory productivity , $ 2 million of other product costs , $ 1 million of lower tariffs on chinese imports , and $ 1 million of favorable foreign currency exchange rates . refrigeration the following table presents our refrigeration segment 's net sales and profit for 2020 and 2019 ( dollars in millions ) : replace_table_token_7_th net sales decreased 17 % in 2020 compared to 2019. sales volume was 13 % lower and the loss of sales from our divested kysor warren business contributed 6 % which was partially offset by 1 % of favorable combined price and mix and 1 % from favorable foreign currency exchange rates . story_separator_special_tag income taxes the income tax provision was $ 99 million in 2019 compared to $ 108 million in 2018 , and the effective tax rate was 19.5 % in 2019 compared to 23.0 % in 2018. the 2019 and 2018 effective tax rates differ from the statutory rate of 21 % primarily due to state and foreign taxes . refer to note 13 in the notes to the consolidated financial statements for more information on pensions and employee benefit plans . we expect our effective tax rate will be between 21 % and 22 % in future years , excluding the impact of excess tax benefits . refer to note 13 in the notes to the consolidated financial statements for more information on the impact of recent changes in tax legislation . loss from discontinued operations there were no significant losses from discontinued operations in 2019. the $ 1 million of pre-tax income in 2018 primarily related to changes in retained product liabilities and general liabilities for the service experts business sold in 2013 and the hearth business sold in 2012. year ended december 31 , 2019 compared to year ended december 31 , 2018 - results by segment residential heating & cooling the following table presents our residential heating & cooling segment 's net sales and profit for 2019 and 2018 ( dollars in millions ) : replace_table_token_9_th residential heating & cooling net sales increased 3 % in 2019 compared to 2018. sales volume increased 1 % and price and mix combined increased 2 % . 24 segment profit in 2019 increased $ 65 million compared to 2018 due to an incremental $ 72 million of insurance proceeds for lost profits related to the marshalltown tornado , $ 53 million of favorable price , $ 14 million of sourcing and engineer-led cost reductions , $ 8 million of lower warranty costs , and $ 2 million of higher sales volume . partially offsetting these increases is $ 28 million of higher freight and distribution expense , $ 16 million from lower factory efficiency , $ 12 million of higher sg & a , $ 11 million of unfavorable mix , $ 10 million of higher other product costs , $ 6 million of higher commodities , and $ 1 million of unfavorable foreign exchange rates . commercial heating & cooling the following table presents our commercial heating & cooling segment 's net sales and profit for 2019 and 2018 ( dollars in millions ) : replace_table_token_10_th commercial heating & cooling net sales increased 5 % in 2019 compared to 2018. sales volume increased 2 % and price and mix combined increased 3 % . segment profit in 2019 increased $ 8 million compared to 2018 due to $ 23 million of higher price and mix combined , $ 7 million of higher sales volume , and $ 6 million from sourcing and engineering-led cost reductions . partially offsetting these increases was $ 7 million of lower factory efficiency , $ 6 million of higher warranty and other product costs , $ 5 million of higher commodities , $ 4 million of higher freight and distribution expense , $ 3 million of higher sg & a expense , and $ 3 million of higher tariffs on chinese imports . refrigeration the following table presents our refrigeration segment 's net sales and profit for 2019 and 2018 ( dollars in millions ) : replace_table_token_11_th net sales decreased 25 % in 2019 compared to 2018. the loss of sales from the divested australia , asia , south america and kysor warren businesses contributed 24 % and unfavorable foreign currency exchange rates contributed 2 % , partially offset by 1 % favorable price and mix combined . segment profit in 2019 decreased $ 7 million compared to 2018 due to $ 5 million of lower factory efficiency , $ 2 million of higher commodities , $ 3 million of lower sales of refrigerant allocations in europe , $ 3 million of higher warranty and other product costs , $ 3 million of higher sg & a expenses , $ 1 million unfavorable foreign currency exchange rates , and $ 1 million of higher tariffs on chinese imports . partially offsetting these decreases was $ 4 million from higher price and mix combined , $ 5 million of sourcing and engineering-led cost reductions , and $ 2 million of higher profit due to the divestiture of kysor warren . corporate and other corporate and other expenses decreased by $ 2 million in 2019 compared to 2018 primarily due to lower short-term and long-term incentive compensation . 25 accounting for futures contracts realized gains and losses on settled futures contracts are a component of segment profit ( loss ) . unrealized gains and losses on unsettled futures contracts are excluded from segment profit ( loss ) as they are subject to changes in fair value until their settlement date . both realized and unrealized gains and losses on futures contracts are a component of losses ( gains ) and other expenses , net in the accompanying consolidated statements of operations . see note 10 of the notes to consolidated financial statements for more information on our derivatives and note 3 of the notes to the consolidated financial statements for more information on our segments and for a reconciliation of segment profit to operating income . liquidity and capital resources our working capital and capital expenditure requirements are generally met through internally generated funds , bank lines of credit and an asset securitization arrangement . working capital needs are generally greater in the first and second quarters due to the seasonal nature of our business cycle .

financial highlights net sales decreased $ 173 million , or 5 % , to $ 3,634 million in 2020 from $ 3,807 million in 2019. operating income in 2020 was $ 479 million compared to $ 657 million in 2019 , which included $ 179 million net gain from insurance recoveries . net income in 2020 decreased to $ 356 million from $ 409 million in 2019. diluted earnings per share from continuing operations were $ 9.26 per share in 2020 compared to $ 10.38 per share in 2019. we generated $ 612 million of cash flow from operating activities in 2020 compared to $ 396 million in 2019. the 18 increase was primarily due to a decrease in working capital . in 2020 , we returned $ 118 million to shareholders through dividend payments and we used $ 100 million to purchase 0.4 million shares of stock under our share repurchase plans . overview of results results for the year were mixed and adversely impacted by the economic downturn caused by the covid-19 pandemic . the residential heating & cooling segment performed well in 2020 , with a 3 % increase in net sales and a $ 36 million decrease in segment profit compared to 2019 primarily due to the insurance proceeds received for lost profits in 2019. our commercial heating & cooling segment saw a decrease in net sales of 15 % and a $ 29 million decrease in segment profit compared to 2019 primarily due to lower sales volumes . sales in our refrigeration segment decreased 17 % and segment profit decreased $ 29 million compared to 2019 primarily due to lower sales volume and the loss of sales volume from our divested kysor warren business .

overview denny 's restaurants are operated in 49 states , the district of columbia , two u.s. territories and 11 foreign countries with principal concentrations in california ( 23 % of total restaurants ) , texas ( 12 % ) and florida ( 8 % ) . at december 30 , 2020 , the denny 's brand consisted of 1,650 franchised , licensed and company restaurants . of this amount , 1,585 of our restaurants were franchised or licensed , representing 96 % of the total restaurants , and 65 were company restaurants . our revenues are derived primarily from two sales channels , which we operate as one segment : company restaurants and franchised and licensed restaurants . the primary sources of revenues are the sale of food and beverages at our company restaurants and the collection of royalties , advertising revenue , initial and other fees and occupancy revenue from restaurants operated by our franchisees under the denny 's name . sales and customer traffic at both company and franchised restaurants are affected by the success of our marketing campaigns , new product introductions , product quality enhancements , customer service , availability of off-premise dining options , and menu pricing , as well as external factors including competition , economic conditions affecting consumer spending and changes in guests ' tastes and preferences . sales at company restaurants and royalty , advertising and fee income from franchised restaurants are also impacted by the opening of new restaurants , the closing of existing restaurants , the sale of company restaurants to franchisees and the acquisition of restaurants from franchisees . costs of company restaurant sales are exposed to volatility in two main areas : payroll and benefit costs and product costs . the volatility of payroll and benefit costs results primarily from changes in wage rates and increases in labor related expenses , such as medical benefit costs and workers ' compensation costs . additionally , changes in guest counts and investments in store-level labor impact payroll and benefit costs as a percentage of sales . many of the products sold in our restaurants are affected by commodity pricing and are , therefore , subject to price volatility . this volatility is caused by factors that are fundamentally outside of our control and are often unpredictable . in general , we purchase food products based on market prices or we set firm prices in purchase agreements with our vendors . in an inflationary commodity environment , our ability to lock in prices on certain key commodities is imperative to controlling food costs . in addition , our continued success with menu management helps us offer menu items that provide a compelling value to our customers while maintaining attractive product costs and profitability . packaging costs also fluctuate with changes in delivery and off-premise sales . our fiscal year ends on the last wednesday in december . as a result , a fifty-third week is added to a fiscal year every five or six years . fiscal 2020 included 53 weeks of operations , whereas 2019 and 2018 each included 52 weeks of operations . we estimate that the additional operating week added approximately $ 6.3 million of operating revenue in 2020. impact of the covid-19 pandemic sales trends the covid-19 pandemic significantly impacted our sales during 2020. in 2019 , prior to the impacts of the covid-19 pandemic , our average annual restaurant sales were $ 2.5 million for company restaurants and $ 1.7 million for domestic franchised restaurants . in 2020 , as a result of the covid-19 pandemic , our average annual restaurant sales declined to $ 1.8 million for company restaurants and $ 1.2 million for domestic franchised restaurants . additionally , average unit volumes of off-premise sales have more than doubled since the beginning of the covid-19 pandemic , supported by temporarily waived delivery fees , curbside service programs and shareable family meal packs . 24 the following table presents monthly sales results compared to the equivalent fiscal periods in 2019 : domestic system-wide same-store sales ( 1 ) compared to 2019 fiscal periods : replace_table_token_7_th the following table presents domestic capacity restrictions : domestic capacity restrictions as of december 30 , 2020 : % of domestic system 75 % capacity or social distancing 29 % 50 % - 66 % capacity 23 % 25 % - 33 % capacity 5 % off-premise only 39 % no restrictions 1 % temporarily closed 3 % total 100 % franchise and license revenue reductions in addition to the impacts that reduced sales had on franchise and licenses revenues , certain forms of franchise support resulted in reductions to these revenues throughout 2020 including : abatement of $ 6.0 million of royalties including $ 1.9 million in the first quarter , $ 3.1 million in the second quarter and $ 1.0 in the fourth quarter ; abatement of $ 1.3 million of advertising fees in the first quarter . cost savings initiatives in response to the covid-19 pandemic , we also implemented the following cost savings initiatives : suspended travel and canceled in-person field meetings ; placed holds on all open corporate and field positions ; significantly reduced restaurant level staffing across the company restaurant portfolio ; meaningfully reduced compensation for our board of directors and multiple levels of management ; and furloughed over 25 % of the employees at our corporate office , approximately half of which were subsequently separated from the company . we subsequently eased certain of these cost savings measures . for example , we have resumed recruiting for certain corporate and field positions , and the compensation reductions expired on june 25 , 2020. we also secured $ 2.6 million of federal tax credits in connection with wages paid to retained employees during the crisis under the coronavirus aid , relief , and economic security ( cares ) act . story_separator_special_tag while we do not record franchise and licensed sales as revenue in our consolidated financial statements , we believe system-wide same-store sales information is useful to investors in understanding our financial performance , as our royalty revenues are calculated based on a percentage of franchise sales . accordingly , system-wide same-store sales should be considered as a supplement to , not a substitute for , our results as reported under gaap . 27 statements of operations replace_table_token_8_th ( a ) costs of company restaurant sales percentages are as a percentage of company restaurant sales . costs of franchise and license revenue percentages are as a percentage of franchise and license revenue . all other percentages are as a percentage of total operating revenue . ( b ) equivalent units are calculated as the weighted average number of units outstanding during a defined time period . ( c ) same-store sales include sales from company restaurants or non-consolidated franchised and licensed restaurants that were open the same period in the prior year . while we do not record franchise and licensed sales as revenue in our consolidated financial statements , we believe domestic franchised same-store sales information is useful to investors in understanding our financial performance , as our royalty revenues are calculated based on a percentage of franchise sales . accordingly , domestic franchised same-store sales should be considered as a supplement to , not a substitute for , our results as reported under gaap . ( d ) prior year amounts have not been restated for 2020 comparable restaurants . 28 unit activity replace_table_token_9_th company restaurant operations company same-store sales decreased 36.7 % in 2020 and increased 1.9 % in 2019 compared with the respective prior year . company restaurant sales for 2020 decreased $ 188.2 million , or 61.4 % , primarily resulting from a 59 equivalent unit decrease in company restaurants and a 36.7 % decrease in company same-store sales caused primarily by dine-in restrictions and temporary closures related to the covid-19 pandemic . company restaurant sales for 2019 decreased $ 105.6 million , or 25.6 % , primarily resulting from a 55 equivalent unit decrease in company restaurants , partially offset by the increase in same-store sales . total costs of company restaurant sales as a percentage of company restaurant sales were 97.0 % in 2020 , 84.3 % in 2019 and 84.7 % in 2018 consisting of the following : product costs were 25.2 % in 2020 and 24.4 % in 2019 and 2018. for 2020 , the increase was due to increases in paper products due to the increase in delivery and to-go orders related to the covid-19 pandemic . for 2019 , leverage gained from increased pricing offset the impacts of commodity price increases . payroll and benefits were 43.7 % in 2020 , 38.8 % in 2019 and 39.9 % in 2018. the 2020 increase as a percentage of sales was primarily the result of sales deleveraging caused by lower sales resulting from the covid-19 pandemic . the 2020 increase included a 3.2 percentage point increase in management labor , 0.8 percentage point increase in team labor , and 0.3 percentage point increase in fringe benefits . the 2019 decrease was primarily due to a 0.4 percentage point decrease in payroll taxes and fringe benefits , a 0.5 percentage point decrease in labor resulting from the impact of refranchising restaurants and a 0.1 percentage point decrease in workers ' compensation costs related to claims development . occupancy costs were 9.5 % in 2020 , 6.1 % in 2019 and 5.6 % in 2018. for 2020 , the increase as a percentage of sales was primarily due to the sales deleveraging effect caused by the covid-19 pandemic . additionally , the impact of refranchising of restaurants during 2019 where we owned the real estate contributed to the rate increase . the 2019 increase was related to a 0.3 percentage point increase in rental costs primarily due to the impact of refranchising restaurants and a 0.2 percentage point increase in general liability costs primarily due to higher property insurance costs . other operating expenses consisted of the following amounts and percentages of company restaurant sales : 29 replace_table_token_10_th other direct costs were higher as a percentage of sales for 2020 due to the deleveraging effect of lower sales as well as higher delivery costs due to the increase in delivery sales during the covid-19 pandemic . for 2019 , the increases in repairs and maintenance as a percentage of company restaurant sales were primarily due to additional costs related to the sale of company restaurants sold to franchisees as part of our refranchising and development strategy . franchise operations franchise and license revenue and costs of franchise and license revenue consisted of the following amounts and percentages of franchise and license revenue for the periods indicated : replace_table_token_11_th royalties decreased by $ 41.3 million , or 38.0 % , in 2020 primarily resulting from a 30.9 % decrease in domestic same-store sales . additionally , we abated $ 6.0 million of royalties during the year to help our franchisees weather the impact of the covid-19 pandemic . partially offsetting these decreases was an increase of 36 equivalent units resulting from our refranchising and development strategy in 2019. royalties increased by $ 7.3 million , or 7.1 % , in 2019 primarily resulting from a 40 equivalent unit increase from the impact of our refranchising and development strategy and a 2.0 % increase in domestic same-store sales . the average domestic royalty rate , including the impact of abatements , was 3.86 % , 4.22 % and 4.17 % for 2020 , 2019 and 2018 , respectively . advertising revenue decreased $ 27.4 million , or 33.8 % , in 2020 resulting from the decrease in same-store sales . additionally , we abated $ 1.3 million of advertising fees during the year .

summary of cash flows our primary sources of liquidity and capital resources are cash generated from operations and borrowings under our credit facility ( as described below ) . principal uses of cash are operating expenses , capital expenditures and , prior to the second quarter of 2020 , the repurchase of shares of our common stock . the following table presents a summary of our sources and uses of cash and cash equivalents for the periods indicated : replace_table_token_17_th net cash flows used in operating activities were $ 3.1 million for the year ended december 30 , 2020 compared to net cash flows provided by operating activities of $ 43.3 million for the year ended december 25 , 2019. the decrease in cash flows provided by ( used in ) operating activities was primarily due to the impacts of the covid-19 pandemic and the timing of prior year accrual payments . net cash flows provided by operating activities were $ 43.3 million for the year ended december 25 , 2019 compared to $ 73.7 million for the year ended december 26 , 2018. the decrease in cash flows provided by operating activities was primarily due to the reduction in equivalent units and the related runoff of liabilities resulting from the sale of company restaurants . we believe that our estimated cash flows from operations for 2021 , combined with our capacity for additional borrowings under our credit facility , will enable us to meet our anticipated cash requirements and fund capital expenditures over the next twelve months .

” the following discussion of our financial condition and results of operations should also be read in conjunction with our financial statements and notes to financial statements contained in “ item 8. financial statements and su p plem e ntary data ” of this report . 10 financial condition our 2020 fiscal year provided never before seen challenges as the world battled an ongoing pandemic and businesses everywhere suffered . we began the year with a strong first quarter in our agricultural products segment with our sales up 13 % for the quarter compared to the prior year . in mid-march businesses began going into lockdown to try and slow the spread of covid-19 . our sales suffered and we ended the second quarter with sales down approximately 4 % year to date compared to the prior year . we were not able to recover and ultimately ended the year with our sales down 3 % in our agricultural products segment compared to the prior year . despite these dire market conditions , we did continue to improve operational efficiency as evidenced by improved labor efficiency rates . when measuring gross profit in our agricultural products segment , absent aged inventory scrap , we showed improvement of approximately 7 % from fiscal 2019. troubling market conditions over the last decade have forced us to adapt and improve our operations which gives us optimism about our ability to perform in times of economic boom . our modular buildings segment struggled in fiscal 2020 mainly due to unexpected losses on a large construction contract . this segment also struggled to get new projects under contract as covid-19 caused business disruption throughout the world . our tools segment suffered in the pandemic as oil and gas prices plummeted . the addition of an oem customer in 2019 helped supplant the lost business from oil and gas customers in 2020. our consolidated balance sheet indicates a stable financial position as of november 30 , 2020 despite continued net losses . while fiscal 2020 brought a net loss of $ 2,103,000 , we had approximately $ 1,000,000 of expense from non-cash inventory scrap as we continued to purge inventory from previous acquisitions . we also spent approximately $ 216,000 on pandemic expenses and $ 286,000 for the recruitment and training of key management positions . our bottom lines have suffered in recent years as we have tried to streamline our operations by addressing prior year acquisitions that have not served us well in poor market conditions . we expect to have access to capital as needed throughout fiscal 2021 through the sale of inventory and from the use our line of credit . on november 30 , 2020 we had $ 2,640,470 available on our line of credit . in 2020 , we were able to obtain $ 1,242,900 of funding from the small business administration 's paycheck protection program . these funds were fully forgiven in november 2020 and helped offset losses during the pandemic as we continued to employ our workforce in full . we also received three economic injury disaster loans for a total of $ 450,000. these loans have a 30 year payback period . despite the continued losses , our banking relationship has remained positive through transparency and continued communication . our ability to not overuse our line of credit in times of losses has provided us with the confidence that we can manage our cash use until market conditions improve and our product offering and dealer network grow . our working capital remained strong at approximately $ 4,137,000 in fiscal 2020 with a current ratio of 1.67. we also continue to maintain a debt to equity ratio below 1. we continue to put emphasis on reducing our inventory to more manageable levels to decrease carrying costs , implementing lean manufacturing practices , improving our inventory turnover , focusing our product offering , increasing our dealer network reach , and improving customer service . we do not foresee liquidity issues within the next twelve months . impact of covid-19 while the covid-19 pandemic had very little impact on our results of operations for the first quarter of fiscal 2020 , it did impact our results of operations for the rest of fiscal 2020 and we believe that it may continue to do so for the foreseeable future . from march 23 , 2020 until may 18 , 2020 the majority of our office staff in all three segments worked remotely with the exception of key operations support . at the height of the initial outbreak our workforce was down approximately 17 % due to self-quarantine . by the end of may 2020 our entire workforce had returned and operations have continued as normal with additional safety precautions in place . as covid-19 cases began to rise in november 2020 , we allowed employees that could perform their job functions remotely do so at their discretion . at this time approximately 75 % of our office staff is working remote at least part-time and this has had minimal effect on how we operate as a business . we expect that by the end of february 2021 remote employees will return full time to the office . future outbreaks could have a material effect on our operations and we are taking precautions to mitigate the spread of covid-19 . in our agricultural products segment , we did not experience any order cancellations ; however , calls for new whole goods slowed significantly in the second quarter of fiscal 2020 and many dealers held off on the shipping or pickup of their completed units . our sales levels were comparatively steady to the last few years in the third and fourth quarters of fiscal 2020 and we ultimately ended the year down 3.1 % on sales . prior to the initial lockdowns in march 2020 , we were anticipating an uptick in sales from recent years . story_separator_special_tag any changes in our terms are documented in the most recently published price lists . pricing is fixed and determinable according to our published equipment and parts price lists . title to all equipment and parts sold pass to the customer upon delivery to the carrier and is not subject to a customer acceptance provision . proof of the passing of title is documented by the signing of the delivery receipt by a representative of the carrier . post shipment obligations are limited to any claim with respect to the condition of the equipment or parts . the agricultural products and tools segments each typically require payment in full 30 days after the ship date . to take advantage of program discounts , some customers pay deposits up front . any deposits received are considered unearned revenue and increase contract liabilities . in certain circumstances , upon the customer 's written request , we may recognize revenue when production is complete , and the goods are ready for shipment . at the customer 's request , we will bill the customer upon completing all performance obligations , but before shipment . the customer dictates that we ship the goods per their direction from our manufacturing facility , as is customary with this type of agreement , in order to minimize shipping costs . the written agreement with the customer specifies that the goods will be delivered on a schedule to be determined by the customer , with a final specified delivery date , and that we will segregate the goods from our inventory , such that they are not available to fill other orders . this agreement also specifies that the customer is required to purchase all goods manufactured under this agreement . title of the goods will pass to the customer when the goods are complete and ready for shipment , per the customer agreement . at the transfer of title , all risks of ownership have passed to the customer , and the customer agrees to maintain insurance on the manufactured items that have not yet been shipped . we have operated using bill and hold agreements with certain customers for many years , with consistent satisfactory results for both the customers and us . the credit terms on this agreement are consistent with the credit terms on all other sales . all risks of loss are shouldered by the customer , and there are no exceptions to the customer 's commitment to accept and pay for these manufactured goods . revenues recognized at the completion of production in fiscal 2020 and 2019 were approximately $ 0 and $ 16,000 , respectively . the modular buildings segment is in the construction industry with its major source of revenue arising from modular building sales . sales of modular buildings are generally recognized using input methods to measure progress towards the satisfaction of a performance obligation using the percentage of completion method . revenue and gross profit are recognized as work is performed based on the relationship between actual costs incurred and total estimated costs at completion . contract costs consist of direct costs on contracts , including labor , materials , and amounts payable to subcontractors and those indirect costs related to contract performance , such as equipment costs , insurance and employee benefits . contract cost is recorded as incurred , and revisions in contract revenues and cost estimates are reflected in the accounting period when known . provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined . contract losses are recognized when current estimates of total contract revenue and contract cost indicate a loss . estimated contract costs include any and all costs appropriately allocable to the contract . the provision for these contract losses will be the excess of estimated contract costs over estimated contract revenues . changes in job performance , job conditions and estimated profitability , including those changes arising from contract change orders , penalty provisions and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined . we use significant judgements in determining estimated contract costs and completion percentages throughout the life of the project . stock modular building sales also occur and are recognized at a point in time when the performance obligation is fulfilled through substantial completion . substantial completion is achieved through customer acceptance of the completed building . the modular buildings segment executes contracts with customers that can be short- or long-term in nature . these contracts can have multiple performance obligations and revenue from these can be recognized over time or at a point in time depending on the nature of the contracts . payment terms for the modular buildings segment vary by contract , but typically utilize money down and progress payments throughout the life of the contract . the payment terms of the modular buildings segment have the most impact on our contract receivables , contract assets and contract liabilities . project invoicing from the modular buildings segment increases contract receivables and has an effect on contract liabilities through billings in excess of costs and estimated gross profit and advanced payments . the balance of contract assets is typically made up of the balance of costs and estimated gross profit in excess of billings . costs and profit in excess of amounts billed are classified as current assets and billings in excess of cost and profit are classified as current liabilities . 13 we also lease modular buildings to certain customers and account for these transactions as operating or sales-type leases . these leases have terms of up to 36 months and are collateralized by a security interest in the related modular building . on sales-type leases , the lessee has a bargain purchase option available at the end of the lease term . a minimum lease receivable is recorded net of unearned interest income and profit on sale at the time the building is substantially complete .

results of operations fiscal year ended november 30 , 20 20 compared to fiscal year ended november 30 , 20 19 our consolidated net sales totaled $ 22,409,000 for the 2020 fiscal year , which represents a 2.1 % decrease from our consolidated net sales of $ 22,889,000 for the 2019 fiscal year . the decrease in revenue is due to decreases in sales in our modular building and agricultural products segments . our tools segment reported a 9.9 % increase in sales compared to the 2019 fiscal year . our consolidated gross profit as a percentage of net sales decreased to 10.7 % in the 2020 fiscal year when compared to 17.2 % of net sales in the 2019 fiscal year . we saw decreased gross profit percentage in all three segments in fiscal 2020 due to varying circumstances discussed below . our consolidated operating expenses increased by 16.3 % , from $ 5,424,000 in the 2019 fiscal year to $ 6,309,000 in the 2020 fiscal year . because the majority of our corporate general and administrative expenses are borne by our agricultural products segment , that segment represented $ 4,483,000 of our total consolidated operating expenses , while our modular buildings segment represented $ 1,034,000 and our tools segment represented $ 792,000. our consolidated operating loss for the 2020 fiscal year was $ ( 3,910,000 ) compared to $ ( 1,497,000 ) for the 2019 fiscal year . our agricultural products segment had an operating loss of $ ( 2,318,000 ) , our modular buildings segment had operating loss of $ ( 1,295,000 ) and our tools segment had an operating loss of $ ( 297,000 ) .

in other words , an “ emerging growth company ” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies . we are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements provided by the jobs act . subject to certain conditions set forth in the jobs act , as an “ emerging growth company , ” we intend to rely on certain of these exemptions from , without limitation , ( i ) providing an auditor 's attestation report on our system of internal controls over financial reporting pursuant to section 404 ( b ) of the sarbanes-oxley act and ( ii ) complying with any requirement that may be adopted by the public company accounting oversight board ( pcaob ) regarding mandatory audit firm rotation or a supplement to the auditor 's report providing additional information about the audit and the financial statements , known as the auditor discussion and analysis . we will remain an “ emerging growth company ” until the earliest of ( a ) the last day of our fiscal year following the fifth anniversary of the ipo , ( b ) the last day of the first fiscal year in which our annual gross revenues exceed $ 1.07 billion , ( c ) the last day of our fiscal year in which we are deemed to be a “ large accelerated filer ” as defined in rule 12b-2 under the securities exchange act of 1934 , or exchange act ( which would occur if the market value of our equity securities that is held by non-affiliates exceeds $ 700 million as of the last business day of our most recently completed second fiscal quarter ) , or ( d ) the date on which we have issued more than $ 1 billion in nonconvertible debt during the preceding three-year period . 16 for the year ended december 31 , 2019 for the year ended december 31 , 2019 compared to the year ended december 31 , 2018 revenues revenues , net of allowances , for the years ended december 31 , 2019 and 2018 were $ 19,090,071 and $ 15,289,400 , respectively , consisted of metal goods and soft goods sold to customers . revenues increased in 2019 over 2018 by $ 3,800,671 , or 24.9 % , primarily due to wide acceptance of our products in the tools industry and receipt of recurring sales orders for metal goods and soft goods from our existing customers and new customers , and introduction and sale of new soft goods products to our customers . cost of goods sold cost of goods sold for the years ended december 31 , 2019 and 2018 was $ 13,475,947 and $ 11,794,206 , respectively . cost of goods sold increased in 2019 over 2018 by $ 1,681,741 or 14.3 % , primarily due to the increase in materials cost of steel and plastics polyester to manufacture metal goods and soft goods and increase in labor cost in china . cost of goods sold as a percentage of revenues in 2019 was 70.6 % as compared to cost of goods sold as a percentage of revenues in 2018 of 77.1 % . we expect to reverse the trend and reduce our cost of goods sold as a percentage of revenue as we achieve operational efficiencies in production and work with automated state of the art factories to manufacture our product lines . operating expenses operating expenses consist of selling , general and administrative expenses , litigation expense , and research and development costs . selling , general and administrative expenses ( the “ sg & a expenses ” ) for the years ended december 31 , 2019 and 2018 were $ 12,078,762 and $ 6,937,704 , respectively . sg & a expenses increased in 2019 over 2018 by $ 5,141,058 or 74.1 % , primarily due to hiring additional employees , independent contractors and consultants to grow the company . sg & a expense in 2019 as a percentage of revenues was 63.3 % as compared to sg & a expense in 2018 as a percentage of revenues was 45.4 % . we expect our sg & a expense will continue to increase as the company plans to bring professional management team and staff on board , expend cash to raise capital for new products development , and acquire a new warehouse/storage facility to expand its operations and maintain finished products inventory on hand . research and development costs ( the “ r & d ” ) for the years ended december 31 , 2019 and 2018 were $ 2,116,108 and $ 1,816,389 , respectively . r & d costs increased in 2019 over 2018 by $ 299,629 or 16.5 % , primarily due to the costs incurred in developing new tools , a ruggedized mobile device , software applications to run on the mobile device related to construction industry , and stock-based compensation expense and bonuses to r & d management team . we expect r & d costs to continue to increase as the company embarks on developing new tools for the construction industry , and the attachments for the ruggedized mobile device with new software applications . 17 net loss due to factors set forth above , and the lack of a warrant derivative at the end of 2019 , with a change of $ 19,588,277 from 2019 over 2018 , we recorded a net loss of $ 4,300,968 for the year ended december 31 , 2019 as compared to a net loss of $ 27,651,412 for the year ended december 31 , 2018. liquidity and capital resources although our sales increased by approximately 25 % during the year ended december 31 , 2019 compared to the same period in 2018 , we are continuing to focus our efforts on increased marketing campaigns , and distribution programs to strengthen the demand for our products globally . story_separator_special_tag the company sold 162,000 units at a price of $ 5.00 per unit for gross proceeds of $ 810,000 , and received on march 14 , 2018 , cash proceeds of $ 613,200 , net of commissions of $ 64,800 earned by the placement agent on capital raise , $ 128,000 in legal fees , and $ 4,000 in escrow fees . each of the units contained one half of a share of class b convertible preferred stock and one half of a class b warrant to purchase a share of our common stock for an aggregate of 81,000 shares of class b convertible preferred stock and 81,000 class b warrants . the placement agent received warrants to purchase up to 4,050 shares of our common stock at an exercise price of $ 12.00 per share . may 2018 private placement on may 2 , 2018 , the company conducted a confidential private placement of its securities in which the company offered to sell a maximum 140,000 units to certain accredited investors , with each such unit consisting of ( i ) one half of a share of the company 's class b convertible preferred stock , par value of $ 0.0001 per share , and ( ii ) one half of a warrant to purchase one half of a share of the company 's common stock , par value $ 0.0001 per share . each unit will be sold at a price of $ 5.00 per unit . each warrant has an initial exercise price of $ 12.00 per share , subject to adjustment , and is exercisable for a period of five years from the date of issuance . the company sold all 140,000 units for gross proceeds of $ 700,000 , and received cash proceeds of $ 587,957 on may 15 , 2018 , net of commissions and fees of $ 74,574 earned by the placement agent on capital raise , $ 33,469 in legal fees , and $ 4,000 in escrow fees . the company issued to the underwriter 3,500 placement agent warrants at their fair value of $ 12,527 . 19 august 2018 financing pursuant to the terms of august 2018 financing , the company executed six ( 6 ) promissory notes , unsecured , with original issuance debt discount of 15 % , for a cumulative principal sum of $ 862,500 on september 4 , 2018. the company promised to pay the note holders the principal sum of $ 862,500 on earlier of ( i ) the third trading day after the closing of the company 's initial public offering , and ( ii ) november 30 , 2018 or such earlier date as these promissory notes are required or permitted to be repaid . on closing of this offering , on september 5 , 2018 , the company received cash proceeds of $ 652,579 , net of commission and fees of $ 62,850 earned by the placement agent on capital raise , $ 30,571 in legal fees , and $ 4,000 in escrow fees . in addition , the company issued to the six note holders 18,750 shares of class b convertible preferred stock valued at $ 120,394 , and 7,500 warrants to the placement agent , valued at their fair value of $ 26,843. on october 19 , 2018 , the holders of these notes agreed to convert all amounts due to them into unregistered class a units at a per unit conversion price equal to 80 % of the per unit purchase price of a class a unit in the company 's initial public offering . initial public offering on november 14 , 2018 , the company consummated its ipo whereby it sold a total of 2,670,000 class a units , each unit consisting of one share of common stock , par value $ 0.0001 per share , and a series a warrant to purchase one share of common stock and a series b warrant to purchase one share of common stock , on an offer price of $ 5.00 for each unit of a share and a series a warrant and a series b warrant ( “ class a unit ” ) . the company received net proceeds from the ipo of $ 12,415,500 after deducting underwriting discounts and commission of $ 934,500. the company incurred $ 743,765 in expenses related to the ipo . $ 3,657,507 of the proceeds were allocated to warrant derivative on our balance sheet as a result of our series b warrant issuance which were deemed to be a derivative liability . november 2018 private transactions concurrent with the closing of the ipo on november 14 , 2018 , the following private transactions were consummated in accordance with the related agreements ( see notes 6 , 7 , 8 and 9 of the financial statements ) , all in transactions exempt from registration under section 4 ( a ) ( 2 ) of the securities act of 1933 , as amended : ( a ) 1,366,768 unregistered class a units were issued upon the conversion of outstanding shares of class b convertible preferred stock at a conversion price of $ 3.50 per class a unit . ( b ) 42,105 unregistered shares of common stock were issued upon conversion of the $ 200,000 principal amount of a promissory note due to an officer at a conversion price of $ 4.75 per share . ( c ) 1,726,678 unregistered class a units were issued upon conversion of outstanding convertible debt instruments ( consisting of all principal amounts and accrued and unpaid interest through the date of the ipo ) at a conversion price of $ 5.00 per unit . ( d ) 136,863 unregistered shares of common stock were issued upon conversion of $ 650,100 of accrued and unpaid salaries to officers and directors at a conversion price of $ 4.75 per share . ( e ) 215,625 unregistered class a units issued upon the conversion of outstanding principal amount of unsecured promissory notes at a conversion price of $ 4.00 per unit .

financial condition and results of operations prospective investors should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes and other financial information included elsewhere in this annual report . some of the information contained in this discussion and analysis or set forth elsewhere in this annual report , including information with respect to our plans and strategy for our business , includes forward-looking statements that involve risks and uncertainties . see “ cautionary note regarding forward-looking statements. ” you should review the “ risk factors ” section of this prospectus 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 . all share and per share numbers have been retroactively adjusted to reflect the 1-for-2 reverse stock split effected on september 13 , 2018. forward looking statements this annual report on form 10-k contains “ forward-looking statements , ” which include information relating to future events , future financial performance , financial projections , strategies , expectations , competitive environment and regulation . words such as “ may ” , “ should ” , “ could ” , “ would ” , “ predicts ” , “ potential ” , “ continue ” , “ expects ” , “ anticipates ” , “ future ” , “ intends ” , “ plans ” , “ believes ” , “ estimates ” , and similar expressions , as well as statements in future tense , identify forward-looking statements . forward-looking statements should not be read as a guarantee of future performance or results and may not be accurate indications of when such performance or results will be achieved .

the fair value of story_separator_special_tag the following management 's discussion and analysis ( “ md & a ” ) provides information that management believes is relevant to an assessment and understanding of the consolidated financial condition and results of operations of coeur mining , inc. and its subsidiaries ( collectively the “ company ” , “ our ” , or “ we ” ) . we use certain non-gaap financial performance measures in our md & a . for a detailed description of these measures , please see “ non-gaap financial performance measures ” at the end of this item . we provide costs applicable to sales ( “ cas ” ) split , referred to as the co-product method , based on revenue contribution for palmarejo , rochester and silvertip and based on the primary metal , referred to as the by-product method , for wharf . revenue from secondary metal , such as silver at wharf , is treated as a cost credit . overview we are primarily a gold and silver producer with five operating mines located in the united states , canada and mexico and several exploration projects in north america . 2019 highlights for the full year , coeur reported revenue of $ 711.5 million and cash flow from operating activities of $ 91.9 million . including non-cash write downs totaling $ 320.0 million , the company reported gaap net loss from continuing operations of $ 346.9 million , or $ 1.59 per share . on an adjusted basis 1 , the company reported ebitda of $ 173.9 million and net loss from continuing operations of $ 54.6 million , or $ 0.25 per share . solid improvement in annual financial results - revenue , operating cash flow and adjusted ebitda 1 increased 14 % , 357 % and 11 % , respectively , in 2019. the year-over-year improvement in financial results reflects solid performance from the company 's primary gold operations as well as higher precious metals prices in 2019 three consecutive quarters of increasing , positive free cash flow 1 - coeur generated $ 39.3 million of operating cash flow and $ 18.4 million of free cash flow 1 during the fourth quarter , representing a 63 % increase in free cash flow 1 compared to the prior period and a $ 36.1 million improvement in free cash flow 1 compared to the fourth quarter of 2018. the third consecutive quarter of increasing , positive free cash flow 1 was primarily driven by strong performance from palmarejo , kensington and wharf operations positive results from high-pressure grinding roll ( “ hpgr ” ) unit at rochester - 60-day silver recovery rates from hpgr-crushed ore are in-line with prior test work and appear significantly better than recoveries from traditionally-crushed material . permitting and planning for plan of operations amendment 11 ( “ poa 11 ” ) expansion advancing on-schedule $ 250.8 million impairment and temporarily suspending commercial activities at silvertip - reduction in carrying value of long-lived assets to approximately $ 150 million and temporary suspension of mining and processing activities driven by further deterioration in zinc and lead market conditions as well as processing facility-related challenges . the company plans to ( i ) double its exploration investment in 2020 to potentially further expand the mineralized material and extend the mine life , and ( ii ) pursue a mill expansion to improve the asset 's cost structure and its ability to deliver sustainable cash flow success from 2019 exploration campaign delivers mineralization growth - the company focused its exploration efforts primarily on expansion drilling in 2019. measured and indicated mineralized material increased across all metals were higher year-over-year . proven and probable silver reserves also increased , while zinc and lead reserves were consistent year-over-year over $ 160.0 million reduction in total debt - the company ended the year with $ 295.5 million in total debt , compared to $ 458.8 million at the end of 2018. the 36 % reduction in total debt 2 reflects the results of coeur 's deleveraging initiatives and improved financial performance during 2019 36 selected financial and operating results replace_table_token_20_th ( 1 ) see “ non-gaap financial performance measures. ” ( 2 ) includes capital leases . net of debt issuance costs and premium received . ( 3 ) reported production and financial results include operations through february 28 , 2018 . 37 consolidated financial results year ended december 31 , 2019 compared to year ended december 31 , 2018 revenue revenue increased by $ 85.6 million as a result of a 5 % increase in gold ounces sold combined with a 10 % increase in average realized gold prices and the inclusion of full-year sales from the jualin deposit at kensington and silvertip partially offset by 4 % fewer silver ounces sold . the company sold 367,650 gold ounces , 11.9 million silver ounces , 18.2 million zinc pounds and 16.5 million lead pounds compared to 350,508 gold ounces , 12.4 million silver ounces , 4.4 million zinc lead pounds and 2.6 million lead pounds in the prior year . gold contributed 69 % of sales , silver contributed 27 % , zinc contributed 2 % and lead contributed 2 % , compared to 68 % of sales from gold , 31 % from silver , 1 % from zinc and less than 1 % from lead . the following table summarizes consolidated metal sales : replace_table_token_21_th costs applicable to sales costs applicable to sales increased primarily due to higher sales volume at kensington , the inclusion of full-year sales from the jualin deposit at kensington and silvertip , a $ 64.6 million write-down of inventory at silvertip and higher unit costs at palmarejo , rochester and wharf , primarily due to lower production . for a complete discussion of costs applicable to sales , see results of operations below . amortization amortization increased $ 50.4 million , or 39 % , resulting from the inclusion of full-year sales at silvertip and higher sales at kensington . story_separator_special_tag in february 2019 , the company recorded an adjustment to the gain from the manquiri divestiture following the release of a liability associated with the company 's post-closing indemnification obligations which were extinguished at that time . year ended december 31 , 2018 compared to year ended december 31 , 2017 revenue revenue decreased by $ 83.7 million as a result of fewer gold ( 15 % ) and silver ( 3 % ) ounces sold and an 8 % decrease in average realized silver prices , partially offset by an increase in average realized gold prices ( 1 % ) and sales from silvertip , which commenced commercial production in september 2018. the company sold 12.4 million silver ounces , 350,508 gold ounces , 4.4 million zinc pounds and 2.6 million lead pounds compared to 12.7 million silver ounces and 410,604 gold ounces in the prior year . gold contributed 68 % of sales , silver contributed 31 % , zinc contributed 1 % and lead contributed less than 1 % , compared to 70 % of sales from gold and 30 % from silver . costs applicable to sales costs applicable to sales remained comparable despite lower ounces sold due to a $ 26.7 million write-down of inventory at silvertip , higher costs applicable to sales per gold ounce at wharf and kensington , partially offset by lower costs applicable to sales per silver ounce at palmarejo . for a complete discussion of costs applicable to sales , see results of operations below . amortization amortization decreased $ 18.1 million , or 12 % , due to fewer ounces sold at all operating sites . expenses general and administrative expenses decreased $ 2.3 million , or 7 % , primarily due to lower compensation costs . exploration expense decreased $ 4.9 million , or 16 % , as a result of lower exploration costs at palmarejo , rochester , kensington and la preciosa as the company focused its exploration efforts on capitalized infill conversion drilling in 2018. pre-development , reclamation , and other expenses increased $ 1.1 million , or 6 % , of which $ 3.4 million is attributable to the write-down of property , plant and equipment at rochester . other income and expenses fair value adjustments , net , were a gain of $ 3.6 million due to a a net gain on equity securities of $ 3.0 million coupled with favorable fair value adjustment of zinc options . effective january 1 , 2018 , as a result of asu 2016-01 , changes in the fair value of equity investments are recognized as fair value adjustments instead of other comprehensive income ( loss ) in the consolidated statements of comprehensive income ( loss ) . interest expense ( net of capitalized interest of $ 1.2 million ) increased to $ 24.4 million from $ 16.4 million , due to higher average debt levels related to the 2024 senior notes and the facility ( each , as defined below ) . other , net was an expense of $ 24.7 million , as a result of the $ 18.6 million write-down of the receivable consideration from the manquiri divestiture , unfavorable foreign exchange rate movements , a write-down of $ 6.5 million related to the rmc receivable , partially offset by gains on the sale of non-core assets and investments in 2017 . 40 income and mining taxes the company 's income and mining tax ( expense ) benefit consisted of : replace_table_token_24_th income and mining tax benefit of approximately $ 16.8 million results in an effective tax rate of 26 % for 2018. this compares to income tax expense of $ 29.0 million or effective tax rate of 73 % for 2017. the company 's effective tax rate is impacted by multiple factors as illustrated above . the comparability of the company 's income and mining tax ( expense ) benefit for the reported periods was primarily impacted by ( i ) variations in our income before income taxes ; ( ii ) geographic distribution of that income ; ( iii ) foreign exchange rates ; ( iv ) mining taxes ; ( v ) the non-recognition of tax assets and ( vi ) the impact of specific transactions . therefore , the effective tax rate will fluctuate , sometimes significantly , year to year . the following table summarizes the components of the company 's income ( loss ) before tax and income and mining tax ( expense ) benefit : replace_table_token_25_th a valuation allowance is provided for deferred tax assets for which it is more likely than not that the related benefits will not be realized . the company analyzes its deferred tax assets and if it is determined that the company will not realize all or a portion of its deferred tax assets , it will record or increase a valuation allowance . conversely , if it is determined that the company will ultimately be able to realize all or a portion of the related benefits for which a valuation allowance has been provided , all or a portion of the related valuation allowance will be reduced . there are a number of risk factors that could impact the company 's ability to realize its deferred tax assets . the utilization of u.s. net operating loss carryforwards , tax credit carryforwards , and recognized built-in losses may be subject to limitation under the rules regarding a change in stock ownership as determined by the internal revenue code and state tax laws . section 382 of the internal revenue code of 1986 , as amended , imposes annual limitations on the utilization of net operating loss carryforwards , tax credit carryforwards , and certain built-in losses upon an ownership change as defined under that section . generally , an ownership change may result from transactions that increase the aggregate ownership of certain shareholders in the company 's stock by more than 50 percentage points over a three-year testing period .

results of continuing operations palmarejo replace_table_token_27_th ( 1 ) see non-gaap financial performance measures . year ended december 31 , 2019 compared to year ended december 31 , 2018 gold and silver production decreased 9 % and 10 % in line with company guidance , respectively , resulting from lower gold and silver grades and lower gold and silver recoveries , partially offset by higher mined tons from guadalupe , independencia and the new la nación underground mine , which began production in the third quarter of 2019. metal sales were $ 252.7 million , or 36 % of coeur 's metal sales , compared with $ 245.8 million , or 40 % of coeur 's metal sales . lower production and higher consumable costs resulted in a 22 % and 20 % increase in costs applicable to sales per gold and silver ounce , respectively . amortization decreased to $ 59.4 million due to lower ounces sold . capital expenditures increased to $ 32.7 million from $ 29.4 million due to higher infrastructure expenditures at la nacion . year ended december 31 , 2018 compared to year ended december 31 , 2017 gold and silver production increased 1 % and 4 % , respectively , resulting from higher silver and gold grades , which in turn , contributed to a 5 % and 16 % decrease in costs applicable to sales per gold and silver ounce , respectively . metal sales were $ 245.8 million , or 40 % of coeur 's metal sales , compared with $ 274.8 million , or 38 % of coeur 's metal sales . amortization decreased to $ 60.7 million primarily due to lower ounces sold . capital expenditures remained comparable at $ 29.4 million . capital expenditures focused on underground development at guadalupe , independencia and la nacion , conversion drilling and the implementation of the new on-site absorption , desorption , and recovery plant . 44 rochester replace_table_token_28_th ( 1 ) see non-gaap financial performance measures .

fair value is determined primarily using future anticipated cash flows that are directly associated with , and that are expected to arise as story_separator_special_tag overview and outlook lydall , inc. and its subsidiaries ( collectively , the “ company ” or “ lydall ” ) designs and manufactures specialty engineered nonwoven filtration media , industrial thermal insulating solutions , and thermal and acoustical barriers for filtration/separation and heat abatement and sound dampening applications . lydall principally conducts its business through three reportable segments : performance materials , technical nonwovens , and thermal acoustical solutions , with sales globally . the performance materials segment includes filtration media solutions primarily for air , fluid power , life science and industrial applications ( “ filtration ” ) , and sealing and gasket solutions , thermal insulation , energy storage , and other engineered products ( “ sealing and advanced solutions ” ) . on august 31 , 2018 , the company acquired an engineered sealing materials business operating under interface performance materials ( `` interface '' ) , based in lancaster , pennsylvania for $ 268.4 million , net of cash acquired of $ 5.2 million , subject to a post-closing purchase price adjustment . a globally-recognized leader in the delivery of engineered sealing solutions , the interface operations manufacture wet-laid gasket and specialty materials primarily serving oem and tier i manufacturers in the agriculture , construction , earthmoving , industrial , and automotive segments . the acquired business has been included in the company 's performance materials operating segment since the date of acquisition . the technical nonwovens segment primarily produces needle punch nonwoven rolled-good felt media and filter bags used primarily in industrial air and liquid filtration applications ( `` industrial filtration '' ) to satisfy increasing emission control regulations in a wide range of industries , including power , cement , steel , asphalt , incineration , mining , food , and pharmaceutical . products also include nonwoven rolled-good media used in commercial applications and predominantly serves the geosynthetics , automotive , industrial , medical , and safety apparel markets . automotive media is provided to tier i/ii suppliers as well as the company 's thermal acoustical solutions segment ( `` advanced materials '' ) . effective january 1 , 2018 , the company 's former thermal/acoustical metals and thermal/acoustical fibers operating segments were combined into a single operating segment named thermal acoustical solutions . the thermal acoustical solutions segment offers a full range of engineered products tailored for the transportation and industrial sectors to thermally shield sensitive components from high heat , improve exhaust gas treatment and lower harmful emissions as well as assist in the reduction of noise , vibration and harshness ( nvh ) . within the transportation sector , lydall 's products are found in the interior ( dash insulators , cabin flooring ) , underbody ( wheel well , aerodynamic belly pan , fuel tank , exhaust , tunnel , spare tire ) and under hood ( engine compartment , outer dash , powertrain , catalytic converter , turbo charger , manifolds ) of cars , trucks , suvs , heavy duty trucks and recreational vehicles . story_separator_special_tag style= '' line-height:120 % ; text-align : justify ; font-size:10pt ; '' > the decrease in gross margin by 110 basis points in 2017 compared to 2016 was primarily attributable to the thermal acoustical solutions which negatively impacted consolidated gross margin by approximately 80 basis points , primarily related to increased overhead expenses including operational inefficiencies , increased raw material commodity costs and reduced customer pricing in 2017 compared to 2016. the technical nonwovens segment negatively impacted consolidated gross margin by approximately 20 basis points , primarily related to lower customer pricing , unfavorable mix and restructuring expenses , partially offset by lower raw material commodity costs and decreased purchase accounting adjustments relating to inventory step-up in 2017 compared to 2016. additionally , the performance materials segment negatively impacted consolidated gross margin by approximately 10 basis points primarily related to unfavorable mix on higher margin termination buys in 2016 and lower customer pricing in 2017. selling , product development and administrative expenses replace_table_token_8_th selling , product development and administrative expenses in 2018 increased by $ 6.3 million , but decreased 70 basis points as a percentage of net sales , compared to 2017. this increase in expenses was primarily related to the acquisition of interface on august 31 , 2018 , which contributed $ 10.6 million of expense during 2018 , including $ 3.4 million of intangible assets amortization expense . this increase was partially offset by decreased legacy selling , product development and administrative expenses of $ 4.3 million in 2018 compared to 2017. included in this decrease was lower cash incentive and stock compensation expense of $ 5.2 million , based on the company 's lower achievement of financial targets under its incentive programs , the absence of $ 1.6 million of expenses associated with the combination of the company 's former t/a metals and t/a fibers segments in 2017 , reduced corporate consulting expenses of $ 1.1 million and the absence of a 2017 non-cash long-lived asset impairment charge of $ 0.8 million in the performance materials segment . partially offsetting those reduced 2018 expenses was greater strategic initiatives expenses of $ 2.9 million , primarily related to the acquisition of interface , higher intangibles amortization expense of $ 1.4 million from tnw segment acquisitions and increased salaries and benefits of $ 0.7 million in 2018 compared to 2017. selling , product development and administrative expenses in 2017 increased by $ 13.8 million , or 16.6 % , compared to 2016. this increase was primarily related to the technical nonwovens segment due to the acquisitions of texel on july 7 , 2016 and gutsche on december 31 , 2016 resulting in an additional $ 13.0 million of selling , product development and administrative expenses , which included $ 2.9 million of incremental intangible amortization expense from tnw segment acquisitions . story_separator_special_tag the company is no longer subject to u.s. federal examinations for years before 2015 , state and local examinations for years before 2013 , and non-u.s. income tax examinations for years before 2003. segment results replace_table_token_12_th replace_table_token_13_th ( 1 ) the performance materials segment reports the results of interface and pcc for the periods following the dates of acquisitions of august 31 , 2018 and july 12 , 2018 , respectively . ( 2 ) the technical nonwovens segment reports results of texel and gutsche for the periods following the date of acquisitions of july 7 , 2016 and december 31 , 2016 , respectively . ( 3 ) included in the technical nonwovens segment and eliminations and other is $ 22.2 million , $ 26.5 million and $ 18.2 million in intercompany sales to the thermal acoustical solutions segment for the years ended december 31 , 2018 , 2017 and 2016 , respectively . 22 performance materials segment segment net sales increased $ 52.5 million , or 45.0 % , in 2018 compared to 2017. the increase was primarily due to acquisitions in 2018 and contributed $ 48.9 million of net sales . additionally , all other performance materials net sales increased $ 3.6 million , primarily due to increased net sales of filtration products related to increased demand in the liquid filtration market and to a lesser extent , air filtration in north america . foreign currency translation positively impacted net sales by $ 2.0 million , or 1.7 % , in 2018 compared to 2017. the company 's adoption of asc 606 had a minimal impact on net sales in 2018. the performance materials segment reported operating income of 13.1 million , or 7.8 % of net sales , in 2018 , compared to operating income of $ 12.3 million , or 10.6 % of net sales , in 2017. the decrease in operating margin of 280 basis points was driven in part by the acquisition of interface , which negatively impacted operating margin by 220 basis points , primarily due to $ 3.4 million , or 200 basis points , of intangible asset amortization expense and a $ 2.0 million , or 110 basis points , purchase accounting adjustment to cost of sales related to inventory step-up . these decreases to operating margin were partially offset by improved product mix from the interface business by approximately 90 basis points . the remaining decrease in operating margin of 60 basis points from the legacy performance materials businesses was due to lower gross margin of 190 basis points , primarily related to increased overhead costs , higher labor costs and unfavorable product mix . this decrease to legacy performance materials gross margin was partially offset by a 130 basis point decrease in selling , product development and administrative expenses as a percentage of net sales , primarily due to the absence of a non-cash long-lived asset impairment charge of $ 0.8 million recorded in 2017 and lower accrued incentive compensation of $ 0.4 million in 2018 compared to 2017. segment net sales increased $ 5.5 million , or 5.0 % , in 2017 compared to 2016. filtration product net sales increased $ 3.8 million , or 4.6 % in 2017 compared to 2016. the increase in filtration product net sales was primarily due to higher overall demand and share gains for filtration products , particularly in north america and europe . sealing and advanced solutions sales increased $ 1.7 million , or 6.2 % , primarily due to an increase in thermal insulation product net sales from increased order activity in cryo liquid natural gas and energy related applications , and to a lesser extent , improved market demand in the insulation space in 2017 compared to 2016. foreign currency translation had a positive impact on segment net sales of $ 0.7 million , or 0.6 % , in 2017 compared to 2016. the performance materials segment reported operating income of $ 12.3 million , or 10.6 % of net sales in 2017 , compared to operating income of $ 12.6 million , or 11.3 % of net sales in 2016. the reduction in operating margin was primarily due to a decrease in gross margin of 70 basis points , primarily due to unfavorable mix on higher margin product termination buys in 2016 , lower customer pricing and unfavorable absorption of labor and overhead costs in 2017 compared to 2016. also contributing to the decrease in operating margin was higher selling , product development and administrative expenses of $ 1.0 million , or 10 basis points as a percentage of net sales , including $ 0.8 million from a non-cash long-lived asset impairment charge recorded in the first quarter of 2017. other increases included higher salaries and benefits of $ 0.4 million , partially offset by a decrease in other selling , product development and administrative expenses of $ 0.2 million in 2017 compared to 2016. technical nonwovens segment segment net sales increased $ 8.0 million , or 3.0 % , in 2018 compared to 2017 primarily due to increased pricing , favorable foreign currency translation and the adoption of asc 606. industrial filtration sales increased $ 10.5 million , or 7.2 % , from increased demand and pricing in europe and north america . this increase was partially offset by decreased net sales in advanced materials of $ 2.5 million , or 2.1 % , primarily driven by decreased sales of automotive rolled-good material for use in the thermal acoustical solutions segment manufacturing process .

financial highlights below are financial highlights comparing lydall 's 2018 results to its 2017 results : consolidated net sales were $ 785.9 million in 2018 , compared to $ 698.4 million in 2017 , an increase of $ 87.5 million , or 12.5 % , with the increase primarily attributable to the acquisition of interface on august 31 , 2018. the change in consolidated net sales is summarized in the following table : replace_table_token_3_th 17 gross margin decreased to 19.4 % in 2018 compared to 23.4 % in 2017 , primarily driven by the thermal acoustical solutions segment , and to a lesser extent the technical nonwovens segment . the thermal acoustical solutions segment negatively impacted consolidated gross margin by approximately 350 basis points due to higher labor and overhead costs , primarily associated with new product launch activity , commodity inflation and lower customer pricing . the technical nonwovens segment negatively impacted consolidated gross margin by approximately140 basis points , principally driven by commodity inflation and unfavorable product mix , partially offset by increased customer pricing , while the performance materials segment favorably impacted consolidated gross margin by approximately 90 basis points from improved segment mix , driven by higher margin sales from the acquired interface business since august 31 , 2018. operating income was $ 49.2 million , or 6.3 % of net sales in 2018 , compared to $ 66.2 million , or 9.5 % of net sales in 2017 ; operating margin declined due to the negative impact of lower gross margin of 400 basis points , partially offset by a 70 basis point reduction in selling , product development and administrative expenses .

our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of numerous factors , including the known material factors set forth in part i , item 1a , “risk factors.” you should read the following discussion and analysis together with our consolidated financial statements and the notes to those statements included elsewhere in this annual report on form 10-k. macroeconomic environment and outlook we provide a broad range of products and services to the oil and gas industry through our accommodations , offshore products , well site services and tubular services business segments . in our accommodations segment , we support both the oil and gas and mining industries . demand for our products and services is cyclical and substantially dependent upon activity levels in the oil and gas and mining industries , particularly our customers ' willingness to spend capital on the exploration for and development of oil , natural gas , coal and mineral reserves . our customers ' spending plans are generally based on their outlook for near-term and long-term commodity prices . as a result , demand for our products and services is highly sensitive to current and expected commodity prices , principally that of crude oil and , to a lesser extent , natural gas and coal . during 2011 and in early 2012 , crude oil prices exhibited volatility due to concerns about potential decreases in demand caused by the slowed momentum of the global economic recovery . however , in the fourth quarter of 2011 , the price of crude oil increased as positive economic news related to solid growth rates projected in china and other emerging markets , consumer spending , employment data and u.s. consumer confidence indicated that an economic recovery was underway . in addition , potential supply interruptions were feared as iran threatened to shut down the strait of hormuz as tensions mounted in the region between iran and other nations regarding proposed sanctions related to iran 's nuclear programs . the organization of petroleum exporting countries ( opec ) eased some of these concerns by announcing that member nation saudi arabia and others would be ready to provide additional supply in the event of a blockage of the distribution channel . despite signs of an improving economy in the united states , the world 's largest consumer of crude oil , global economic risks remain due to fiscal and financial uncertainty in various european countries , a prolonged level of relatively high unemployment in the u.s. and other advanced economies and inflation risks in certain emerging markets . the price of crude oil in january 2012 was trading at approximately $ 99 per barrel for west texas intermediates ( wti ) crude and around $ 111 per barrel for intercontinental exchange ( ice ) brent crude . prices for natural gas continue to be weak due to the rise in production of unconventional gas resources in north america , largely due to increases in onshore shale production resulting from technological advancements in horizontal drilling and hydraulic fracturing . natural gas prices have traded below $ 2.50 per mcf during january 2012. natural gas inventories in the u.s. continue to be over-stocked , particularly given an unseasonably 40 index to financial statements warm start to the winter season . prolonged increases in the supply of natural gas , whether the supply comes from conventional or unconventional production or associated gas production from oil wells , will likely constrain prices for natural gas . various oil and gas industry analysts have projected that 2012 global exploration and production expenditures are expected to increase over calendar year 2011 levels . north american capital spending plans are expected to be focused in onshore areas while international exploration and production budgets are expected to primarily be spent offshore . story_separator_special_tag gulf of mexico drilling following the lifting of the government imposed drilling moratorium . 42 index to financial statements drilling activity in the u.s. gulf of mexico remains well below historical levels as a result of unprecedented events in the u.s. gulf of mexico following the macondo well incident and resultant oil spill . a rescission of a moratorium on offshore drilling activity was effective in late 2010 ; however , increases in activity were delayed by adjustments in operating procedures , compliance certifications , and lead times for permits and inspections , as a result of changes in the regulatory environment . in addition , there have been a variety of proposals to change existing laws and regulations that could affect offshore development and production . uncertainties and delays caused by the new regulatory environment continued to have an overall negative effect on gulf of mexico drilling activity in 2011. recently , however , gulf of mexico drilling activity has shown signs of a slow but steady recovery as permitting levels have been steadily improving . new well permitting in the second half of 2011 showed significant improvement over the first half of 2011 as regulators and operators appear to be adapting to the new permitting process . we continue to monitor the global economy , the demand for crude oil , coal and natural gas and the resultant impact on the capital spending plans and operations of our customers in order to plan our business . our capital expenditures in 2011 totaled $ 487 million compared to 2010 capital expenditures of $ 182 million . our 2011 capital expenditures included funding to expand several of our canadian and australian accommodations facilities , and to increase our fleet of modular , mobile camp assets in canada and the u.s. and to complete projects in progress at december 31 , 2010 , including ( i ) the construction of the henday lodge accommodations facility in the canadian oil sands and ( ii ) continued expansion of our wapasu creek and athabasca lodge accommodations facilities in the canadian oil sands . story_separator_special_tag our consolidated cost of sales increased $ 725.0 million , or 39 % , in 2011 compared to 2010 as a result of increased cost of sales at our tubular services segment of $ 374.0 million , or 41 % , an increase at our accommodations segment of $ 142.0 million , or 45 % , an increase at our offshore products segment of $ 113.5 million , or 36 % , and an increase at our well site services segment of $ 95.5 million , or 29 % . these cost of sales increases were directly related to the increases in segmental revenues . our consolidated gross margin as a percentage of revenues increased from 22 % in 2010 to 25 % in 2011 primarily due to the increased proportion of relatively higher margin accommodations and well site services segment revenues in 2011 compared to 2010 and higher margins realized in our accommodations and well site services segments , partially offset by an increased proportion of relatively lower margin tubular services segment revenues in 2011 compared to 2010. our well site services segment cost of sales increased $ 95.5 million , or 29 % , in 2011 compared to 2010 primarily as a result of a $ 78.3 million , or 36 % , increase in rental tools and services cost of sales . our well site services segment gross margin as a percentage of revenues increased from 32 % in 2010 to 36 % in 2011. our rental tools and services gross margin as a percentage of revenues increased from 36 % in 2010 to 39 % in 2011 primarily due to a more favorable mix of higher value rentals and services and improved pricing along with higher fixed cost absorption as a result of increased rental tool utilization . our drilling services cost of sales increased $ 17.2 million , or 16 % , in 2011 compared to 2010. our drilling services gross margin as a percentage of revenues increased from 21 % in 2010 to 26 % in 2011 primarily due to an increase in day rates , rig utilization and improved cost absorption . our accommodations segment cost of sales increased $ 142.0 million , or 45 % , in 2011 compared to 2010 primarily as a result of operating costs associated with the acquisitions of the mac and mountain west and a $ 36.2 million , or 12 % , increase in the cost of sales of our canadian accommodations business primarily due to increased revenues and room capacity . our accommodations segment gross margin as a percentage of revenues increased from 42 % in 2010 to 47 % in 2011 primarily due to higher margins realized on our lodges and villages . 45 index to financial statements our offshore products cost of sales increased $ 113.5 million , or 36 % , in 2011 compared to 2010 primarily due to increased revenues . our offshore products segment gross margin as a percentage of revenues increased modestly , 26 % in 2010 compared to 27 % in 2011. tubular services segment cost of sales increased by $ 374.0 million , or 41 % , in 2011 compared to 2010 primarily as a result of an increase in tons shipped . our tubular services segment gross margin as a percentage of revenues increased from 5 % in 2010 to 6 % in 2011 due primarily to a 2 % increase in revenue per ton . selling , general and administrative expenses . selling , general and administrative ( sg & a ) expense increased $ 31.6 million , or 21 % , in 2011 compared to 2010 due primarily to the acquisition of the mac , increased employee-related costs , higher sg & a costs in our canadian accommodations business due to the strengthening of the canadian dollar , increased third-party professional fees and increased commissions expense . sg & a was 5.2 % of revenues in 2011 compared to 6.3 % of revenues in 2010. depreciation and amortization . depreciation and amortization expense increased $ 63.9 million , or 51 % , in 2011 compared to 2010 due primarily to $ 50.6 million in depreciation and amortization expense associated with acquisitions made in the fourth quarter of 2010 and capital expenditures made in 2010 and 2011 , largely related to investments made in our canadian accommodations business . operating income . consolidated operating income doubled to $ 251.9 million in 2011 compared to 2010 primarily as a result of an increase in operating income from our well site services segment of $ 93.3 million , or 195 % , largely due to a more favorable mix , improved pricing and increased activity in our rental tools and services business coupled with an increase in operating income as a result of the addition of the mac . in addition , operating income from our offshore products segment increased $ 34.0 million , or 56 % , in 2011 compared to 2010 and operating income from our tubular services segment increased $ 28.5 million , or 79 % , primarily as a result of the increase in tons shipped . operating income in 2011 and 2010 included $ 2.2 million and $ 7.0 million , respectively , in acquisition related expenses . interest expense and interest income . net interest expense increased by $ 40.3 million , or 260 % , in 2011 compared to 2010 due to increased debt levels , interest expense on the newly issued 6 1/2 % senior unsecured notes due in 2019 ( 6 1/2 % notes ) , and an increase in non-cash interest expense as a result of the amortization of debt issuance costs on our revolving credit , term loan facilities and the 6 1/2 % notes . the weighted average interest rate on borrowings outstanding under the company 's revolving credit and term loan facilities was 3.1 % in 2011 compared to 3.6 % in 2010. interest income increased as a result of increased cash balances in interest bearing accounts . income tax expense .

overview activity for our accommodations and offshore products segments is primarily tied to the long-term outlook for commodity prices . in contrast , activity for our well site services and tubular services segments responds to shorter-term movements in oil and natural gas prices and , specifically , changes in north american drilling and completion activity . other factors that can affect our business and financial results include the general global economic environment and regulatory changes in the united states and internationally . generally , our oil sands and mining accommodations customers are making multi-billion dollar investments to develop their prospects , which have estimated reserve lives of 10 to in excess of 30 years and , consequently , these investments are dependent on those customers ' longer-term view of commodity demand and prices . oil sands development activity has increased in the past year and has had a positive impact on our accommodations segment . recent announcements of new and expanded oil sands projects will create the opportunity for extensions of existing accommodations contracts and incremental accommodations contracts for us in canada . in addition , several major oil companies and national oil companies have announced joint ventures to develop oil sands leases that should bode well for future oil sands investment and , as a result , demand for oil sands accommodations . our australian accommodations business is significantly influenced by increased metallurgical coal demand , especially from japan , china and india . metallurgical coal prices in china have strengthened recently and chinese metallurgical coal demand is expected to increase in 2012 compared to 2011 and could result in another annual metallurgical coal import record . we are expanding our australian accommodations capacity to meet this increasing demand . accommodations deployed to support onshore u.s. drilling activity in several of the active shale play regions have also favorably contributed to our results .

in the event the story_separator_special_tag you should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing elsewhere in this annual report . 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 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 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 san diego-based commercial-stage biopharmaceutical company committed to developing and commercializing innovative products to address unmet needs in women 's sexual and reproductive health . our first commercial product , phexxi vaginal gel ( phexxi ) , was approved by the u.s. food and drug administration ( fda ) on may 22 , 2020 and commercially launched in the united states in september 2020. phexxi is the first and only fda approved hormone-free , woman-controlled , on-demand prescription contraceptive gel for women . in addition , we are advancing our lead product candidate evo100 vaginal gel ( evo100 ) through a pivotal phase 3 clinical trial for the prevention of urogenital transmission of both chlamydia trachomatis infection ( chlamydia ) and neisseria gonorrhoeae infection ( gonorrhea ) in women ( we refer to this trial as evoguard ) . phexxi as a contraceptive and commercial strategies our comprehensive commercial strategy for phexxi vaginal gel includes marketing and public relations awareness campaigns targeting the approximately 21 million females in the united states of reproductive potential who are not using hormonal contraception , as well as certain identified target health care provider segments ; payer outreach ; and execution of our consumer digital and media strategy . with the phexxi concierge experience , our comprehensive telehealth support system women can , through our independent third-party telehealth service providers , secure a prescription , determine their insurance coverage and or out-of-pocket costs , receive counseling support and refill reminders , and fill their prescription through their local neighborhood pharmacy or an online pharmacy . we commercially launched phexxi in september 2020 with a hybrid sales force promoting phexxi directly to obstetricians , obstetrician/gynecologists and allied health care providers ( hcps ) , who collectively write the majority of prescriptions for contraceptive products . our sales force comprises 59 regional business representatives , 11 regional business managers , a strategically focused tele-sales team through our partnership with archer , a tele-sales communication platform , and a self-guided virtual health care provider learning platform . we currently offer a co-pay program to commercially insured patients whose insurance requires a co-pay to be made when filling their phexxi prescription . this is a voluntary program that is intended to provide financial assistance to patients meeting certain eligibility requirements . at commercial launch we intentionally prioritized demand and increasing access to phexxi for all women , and anticipated our co-pay programs would be our primary mechanism to achieve this near-term goal . with our strategic approach to maximize access and profitability , we will continue to assess the future utilization of the various components of our co-pay programs . the patient protection and affordable care act , as amended by the health care and education reconciliation act of 2010 ( collectively , the aca ) mandates that women must receive their contraception for no out-of-pocket cost , with at least one product covered in each of the 18 categories that are defined by the aca . these categories are listed on the fda 's “ methods of contraception ” chart . this chart provides guidance to hcps and patients as to which options exist , and to payers ( including pharmacy benefit managers ) as to which methods they need to cover . in june 2020 , medi-span and first databank , two major drug information databases that payers consult for pricing and product information , granted phexxi a new classification in their databases and pricing compendia as the first and only “ vaginal ph modulator. ” we believe that a new category of contraception should be established for vaginal ph modulators such as phexxi to reflect this unique mechanism of action , and are working with the office of women 's health under the health resources and services administration to have the birth control chart updated accordingly . phexxi 's listing with medi-span and first databank , coupled with our timely response to payer clinical requests and our clinical presentation , enabled us to achieve coverage for 55 % of commercial lives at launch in september 2020. as of february 2021 , we have coverage for approximately 55.1 % of u.s. commercial lives , including approximately 8 million lives covered at no out-of-pocket cost and approximately 13.7 million lives covered under our december 2020 contract award from the u.s. department of veterans affairs . we continue to work to increase the number of lives covered . 74 additionally , on january 1 , 2021 , the u.s. medicaid population gained access to phexxi through evofem 's participation in the centers for disease control and prevention 's ( cdc ) medicaid national drug rebate program . medicaid provides health coverage to approximately 68 million members . we continue to monitor various non-financial metrics that we believe may be relevant in assessing our commercialization strategies for phexxi . these metrics include unit shipments from our warehouse to wholesale distributors , our wholesale distributors ' shipments to retail pharmacies , the number of hcps prescribing phexxi , the number of phexxi prescriptions and an increase in overall awareness of phexxi measured by monthly surveys conducted by an independent third-party research group among women at risk for pregnancy . story_separator_special_tag in light of recent developments relating to the covid-19 pandemic , and consistent with the fda 's updated industry guidance for conducting clinical trials , clinical trials may be deprioritized in favor of treating patients who have contracted the virus or to prevent the spread of the virus . this may lead to clinical trial protocol deviations or to discontinuation of treatment for patients who are then enrolled in our trials . any disruptions in the commercialization of phexxi and or the initiation or completion of our clinical trials , data analysis or readouts and or any disruption in our supply chain could have a material adverse effect on our business , results of operations and financial condition . the full extent to which the covid-19 pandemic will directly or indirectly impact our business , results of operations and financial condition will depend on future developments that are highly uncertain , including as a result of new information that may emerge concerning covid-19 , the success of ongoing covid-19 vaccination efforts and the actions taken to contain or treat the disease , as well as the economic impact on local , regional , national and international markets . merger on january 17 , 2018 , neothetics , inc. , now known as evofem biosciences , inc. , completed its merger with private evofem in accordance with the terms of an agreement and plan of merger and reorganization , dated october 17 , 2017. financial operations overview net product sales our revenue recognition is based on unit shipments from our warehouse to our wholesalers . we have recognized net product sales in the united states since the commercial launch of phexxi in september 2020 and the fourth quarter of 2020 was our first full quarter of product sales . in the third quarter of 2020 , those shipments were comprised primarily of the initial stocking orders for the phexxi commercial launch . shipments for the fourth quarter of 2020 were lower , with reorders primarily occurring toward the end of the quarter to replenish inventory that was depleted by increasing shipments from wholesalers to retail pharmacies filling phexxi prescriptions . for the quarter and year ended december 31 , 2020 , gross phexxi units sold to wholesalers totaled approximately 3,300 and 8,580 units , respectively . gross phexxi units sold to wholesalers in the first two months of 2021 totaled approximately 5,900 units . for the year ended december 31 , 2020 , gross revenues on the units shipped to our wholesalers were reduced by robust utilization of the phexxi co-pay program , as well as fixed costs primarily associated with distributor fees . if phexxi is approved for commercial sale outside of the united states , we expect to out-license commercialization rights for phexxi to one or more pharmaceutical companies or other qualified potential partners , or enter into collaborations for the commercialization and distribution of phexxi , we believe we would recognize revenue as a result of these arrangements , but we can not forecast when these arrangements will be secured , if at all , and to what degree these arrangements would affect our development plans and overall capital requirements . cost of goods sold the company began to capitalize the inventory costs associated with phexxi in april 2020 when it was determined that this inventory had a probable future economic benefit . these inventory costs include all purchased materials , direct labor 76 and manufacturing overhead . prior to april 2020 , costs incurred for the manufacture of phexxi were recorded as research and development expenses . in addition , we are obligated to pay quarterly royalty payments pursuant to our license agreement with rush university medical center ( the rush license agreement ) , in amounts equal to a single-digit percentage of the gross amounts we receive on a quarterly basis less certain deductions incurred in the quarter based on a sliding scale . we are also obligated to pay a minimum annual royalty amount of $ 100,000 to the extent these earned royalties do not equal or exceed $ 100,000 in a given year . a minimum annual royalty amount of $ 100,000 was first required on january 1 , 2021. this royalty payment was immaterial for the year ended december 31 , 2020 , and was included in the costs of goods sold in the consolidated financial statements . operating expenses research and development expenses our research and development expenses primarily consist of costs associated with the clinical development of evo100 and costs associated with the continuous improvements related to phexxi commercialization efforts . these expenses include : external development expenses incurred under arrangements with third parties , such as fees paid to clinical research organizations ( cros ) relating to our clinical trials , costs of acquiring and evaluating clinical trial data such as investigator grants , patient screening fees , laboratory work and statistical compilation and analysis , and fees paid to consultants ; costs to acquire , develop and manufacture clinical trial materials , including fees paid to contract manufacturers ; costs related to compliance with drug development regulatory requirements ; continuous improvements of manufacturing and analytical efficiency ; on-going product characterization and process optimization ; back-up contract manufacturing organization 's evaluation to support future commercial forecast and reduce cost of goods sold ; alternative raw material evaluation to secure an uninterrupted supply chain and reduce cost of goods sold ; employee-related expenses , including salaries , benefits , travel and noncash stock-based compensation expense ; and facilities , depreciation and other allocated expenses , which include direct and allocated expenses for rent and maintenance of facilities , depreciation of leasehold improvements and equipment , and research and other supplies . we expense internal and third-party research and development expenses as incurred . the following table summarizes research and development expenses by product candidate ( in thousands ) : replace_table_token_1_th completion dates and costs for our clinical development programs may vary significantly for evo100 and any future product candidate we may seek to develop and are difficult to predict .

results of operations year ended december 31 , 2020 compared to year ended december 31 , 2019 ( in thousands ) : net product sales replace_table_token_2_th phexxi was approved in may 2020 , and commercially launched in september 2020. net product sales were $ 0.4 million for the year ended december 31 , 2020 . 80 cost of goods sold replace_table_token_3_th cost of goods sold was $ 0.5 million for the year ended december 31 , 2020 , which includes a $ 0.1 million one-time charge related to product labelling rework recorded as scrap costs . research and development expenses replace_table_token_4_th the overall decrease in research and development expenses was due to a $ 3.7 million reduction in outside services associated with the phexxi new drug application for the prevention of pregnancy that was resubmitted to the fda in the fourth quarter of 2019 and a $ 3.5 million reduction in clinical trial costs associated with the completion of the clinical phases of ampower and amprevence in december 2018 and 2019 , respectively . these aggregated decreases are partially offset by a $ 0.8 million increase in payroll related expenses and $ 0.8 million increase in noncash stock-based compensation , both of which are attributable to increased headcount , and a $ 0.5 million increase in facilities costs .

observable inputs are inputs that market participants would use in pricing the financial instrument based on market data obtained from sources independent of the company . unobservable inputs are inputs that reflect the company 's assumptions about the inputs that market participants would use in pricing the financial instrument and are developed based on the best information available under the circumstances . the fair value hierarchy applies only to the valuation inputs used in determining the reported or disclosed fair value of the financial instruments and is not a measure of the investment credit quality . fair value measurements are classified and disclosed in one of the following three categories : level 1—valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the company has the ability to access at the measurement date . level 2—valuations based on quoted prices for similar assets or liabilities in markets that are not active or for which all significant inputs are observable , either directly or indirectly . level 3—valuations that require inputs that reflect the company 's own assumptions that are both significant to the fair value measurement and unobservable . to the extent that valuation is based on models or inputs that are less observable or unobservable in the market , the determination of fair value requires more judgment . accordingly , the degree of judgment exercised by the company in determining fair value is greatest for instruments categorized in level 3. a financial instrument 's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement . financial instruments measured at fair value on a recurring basis include cash equivalents and available-for-sale investments ( see note 3 ) . there have been no changes to the valuation methods utilized by the company during the years ended december 31 , 2019 and 2018. the company evaluates transfers between levels at the end of each reporting period . there were no transfers of financial instruments between levels during the years ended december 31 , 2019 and 2018. recent accounting pronouncements in may 2014 , the fasb issued asu 2014-09 , revenue from contracts with customers ( “ asu 2014-09 ” ) , a new standard on revenue recognition providing a single , comprehensive revenue recognition model for all contracts with customers . the new revenue standard is based on the principle that revenue should be recognized 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 new standard was effective beginning january 1 , 2018 , with early adoption permitted . the company adopted asu 2014-09 during the quarter ended march 31 , 2018. the adoption did not have a material impact on the consolidated financial statements . in february 2016 , the fasb issued asu 2016-02 , leases ( topic 842 ) : amendments to fasb codification ( “ asu 2016-02 ” ) , which increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements . at the lease commencement date , the lessee must recognize a lease liability and right-of-use asset , which is initially measured at the present value of future lease payments . the company adopted asu 2016-01 at january 1 , 2019 using the optional transition method that allows for a cumulative-effect adjustment in the period of adoption and will not restate prior periods . it has have also elected to adopt the package of practical expedients permitted in accounting standards codification topic 842 , or asc 842. accordingly , it is continuing to account for its existing operating lease as an operating lease under the new guidance , without reassessing whether the contract contains a lease under asc 842 or whether classification of the operating leases would be different under asc topic 842 , and to treat lease and non-lease components as a single lease component . the company has also elected the short-term lease accounting policy under which the company would not recognize a lease liability or rou asset for any lease that at the commencement date has story_separator_special_tag you should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing elsewhere in this report . 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 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 document , 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 . recent developments on january 9 , 2020 , artara therapeutics , inc. , formerly proteon therapeutics , inc. ( the “ company ” ) , completed its previously announced merger transaction with artara subsidiary , inc. ( formerly artara therapeutics , inc. , “ private artara ” ) in accordance with the terms of the agreement and plan of merger and reorganization , dated as of september 23 , 2019 , by and among the company , rem 1 acquisition , inc. ( “ merger sub ” ) , and private artara ( as amended on november , 19 , 2019 , the “ merger agreement ” ) , pursuant to which merger sub merged with and into private artara , with private artara surviving as a whollyowned subsidiary of the company ( the “ merger ” ) . story_separator_special_tag based on the top-line results of the patency-2 clinical trial , proteon is no longer planning to submit a biologics license application , or bla , to the u.s. food and drug administration , or fda , or a marketing authorization application , or maa , to the european medicines agency , or ema , for investigational vonapanitase . due to the results of the patency-2 clinical trial , proteon started taking steps beginning in april 2019 to reduce operating expenses while it evaluates its strategic alternatives with a goal to enhance stockholder value . to assist with this process , the proteon board engaged h.c. wainwright & co. , llc , to assist the proteon board to explore its strategic alternatives , including a possible merger or sale of proteon , a sale of part or all of its assets , and collaboration and licensing arrangements as further discussed in the section titled “ the merger—background of the merger. ” on september 23 , 2019 , proteon and artara announced the signing of the merger agreement . as of december 31 , 2019 , proteon had discontinued substantially all of our research and development activities , including a reduction in workforce . as of december 31 , 2019 , we had terminated all of our employees . we have recorded severance costs of $ 2.9 million . proteon commenced business operations in june 2001 and incorporated in march 2006. proteon 's operations to date , prior to the merger , were limited to organizing and staffing the company , business planning , raising capital , undertaking preclinical studies and clinical trials of vonapanitase , protecting proteon 's intellectual property and providing general and administrative support for these operations . prior to the merger , proteon did not generated any product revenue and has primarily financed its operations through the private placement of its equity securities , business development activities , convertible note financings , and its initial public offering , or ipo , completed in october 2014. prior to the merger , proteon had received an aggregate of $ 200.1 million in net proceeds comprised of $ 115.5 million from the issuance of private equity securities , $ 7.7 million from the issuance of convertible notes , $ 10.0 million from business development activities , $ 0.2 million from government grants , $ 62.5 million from its ipo and $ 4.2 million from the sale of proteon 's common stock under its now-terminated at-the-market offering , or atm , program with cowen and company , llc . proteon has never been profitable and has incurred net losses in each year since inception . prior to the merger , proteon had an accumulated deficit of $ 225.5 million and proteon 's net loss for the year ended december 31 , 2019 was $ 15.0 million . as of december 31 , 2019 , proteon had approximately $ 6.2 million in existing cash and cash equivalents . prior to the merger , proteon did not expect to generate revenue from product sales . proteon had no manufacturing facilities and all of proteon 's manufacturing activities were contracted out to third parties . additionally , proteon has used third-party clinical research organizations , or cros , to carry out its clinical development activities and proteon does not yet have a sales organization . 59 financial overview research and development expenses prior to the merger , research and development expenses consisted primarily of costs incurred for the development of vonapanitase and costs associated with the discontinuation of proteon 's research and development activities , which include : · employee-related expenses , including salaries , benefits , travel , stock-based compensation expense and severance payments ; · expenses incurred under agreements with clinical research organizations , or cros and investigative sites that conducted proteon 's clinical trials ; · the cost of acquiring , developing and manufacturing clinical trial materials ; · costs associated with regulatory operations ; and · facilities , depreciation and other expenses , which include direct and allocated expenses for rent and maintenance of facilities , insurance and other supplies . in april 2019 , proteon initiated plans to discontinue research and development activities to reduce operating expenses . proteon will continue to expense the remaining research and development costs to operations as incurred . proteon recognizes 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 patient enrollment , clinical site activations or information provided to proteon by proteon 's vendors . proteon 's efforts to discontinue development activities included the following : · proteon closed the 39 clinical sites that participated in proteon 's second phase 3 trial , patency-2 , and terminated the long-term follow-up patient registry ; · proteon had planned to enroll up to an additional 16 patients in a phase 1 clinical trial of vonapanitase in patients with pad before the end of 2019 and to follow each of these patients for period of up to seven months . however , based on proteon 's current operating plan , proteon decided not to continue patient enrollment in the phase 1 trial evaluating vonapanitase in pad ; and · proteon discontinued all activities relating to the manufacture of clinical trial materials in support of proteon 's clinical trials and process validation activities that were undertaken in anticipation of a potential bla submission . general and administrative expenses general and administrative expenses consist principally of salaries and related costs for personnel , including stock-based compensation and travel expenses , in executive and other administrative functions .

results of operations comparison of the years ended december 31 , 2019 and 2018 the following table summarizes proteon 's results of operations for the years ended december 31 , 2019 and 2018 ( in thousands ) : replace_table_token_0_th research and development expenses . the following table identifies research and development expenses on both an external and internal basis for the years ended december 31 , 2019 and 2018 ( in thousands ) : replace_table_token_1_th during the year ended december 31 , 2019 , our total research and development expense decreased by $ 5.4 million compared to the year ended december 31 , 2018 primarily due to $ 3.6 million in decreased external expenses . the decrease of $ 3.6 million in external expenses was primarily driven by $ 2.5 million in decreased expenses for our completed clinical trials and $ 1.1 million in decreased expenses for our manufacturing expenses . our internal research and development expenses decreased by $ 1.8 million in the year ended december 31 , 2019 as compared to the year ended december 31 , 2018 was primarily due to our reduction in force . general and administrative expenses . during the year ended december 31 , 2019 , our total general and administrative expenses decreased by $ 0.7 million as compared to the year ended december 31 , 2018 primarily due to the decrease of $ 1.1 million in personnel related costs due to our reduction in force and offset by an increase of $ 0.4 million related to general corporate efforts . investment income . during the year ended december 31 , 2019 , investment income decreased by $ 0.2 million primarily due to an increase in interest income on our cash , cash equivalents , and marketable securities . other income ( expense ) , net .

in general , the parties that make the most significant decisions affecting the vie or have the right to unilaterally remove those decision makers are deemed to have the power to direct the activities of a vie . effective january 1 , 2016 , we implemented accounting standards update ( “ asu ” ) 2015-02 , consolidation ( topic 810 ) – amendments to the consolidation analysis story_separator_special_tag see part i , `` forward-looking statements '' for our cautionary statement regarding forward-looking information . this discussion and analysis is based on , should be read together with , and is qualified in its entirety by , the consolidated financial statements and notes thereto included in item 15 ( a ) 1 of this form 10-k , beginning at page f-1 . it also should be read in conjunction with the disclosure under “ forward-looking statements ” in part 1 of this form 10-k. when this report uses the words “ we , ” “ us , ” “ our , ” “ tejon , ” “ trc , ” and the “ company , ” they refer to tejon ranch co. and its subsidiaries , unless the context otherwise requires . references herein to fiscal year refer to our fiscal years ended or ending december 31. overview our business we are a diversified real estate development and agribusiness company committed to responsibly using our land and resources to meet the housing , employment , and lifestyle needs of californians and to create value for our shareholders . in support of these objectives , we have been investing in land planning and entitlement activities for new industrial and residential land developments and in infrastructure improvements within our active industrial development . our prime asset is approximately 270,000 acres of contiguous , largely undeveloped land that , at its most southerly border , is 60 miles north of los angeles and , at its most northerly border , is 15 miles east of bakersfield . our business model is designed to create value through the entitlement and development of land for commercial/industrial and resort/residential uses while at the same time protecting significant portions of our land for conservation purposes . we operate our business near one of the country 's largest population centers , which is expected to continue to grow well into the future . we currently operate in five reporting segments : commercial/industrial real estate development ; resort/residential real estate development ; mineral resources ; farming ; and ranch operations . our commercial/industrial real estate development segment generates revenues from building , land lease activities , and land and building sales . the primary commercial/industrial development is trcc . the resort/residential real estate development segment is actively involved in the land entitlement and development process internally and through a joint venture . within our resort/residential segment , the three active mixed use master plan developments are mv , centennial , and grapevine . our mineral resources segment generates revenues from oil and gas royalty leases , rock and aggregate mining leases , a lease with national cement and sales of water . the farming segment produces revenues from the sale of wine grapes , almonds , and pistachios . lastly , the ranch operation segment consists of game management revenues and ancillary land uses such as grazing leases and filming . financial highlights for 2018 , net income attributable to common stockholders was $ 4,255,000 compared to net loss attributed to common stockholders of $ 1,797,000 in 2017 . factors driving the change include an increase in mineral resource revenues of $ 8,412,000 resulting from more sales opportunities for water in 2018 when compared to 2017 , and an increase in farming revenues of $ 2,129,000 resulting from improved pistachio sales . from an expense perspective , expenses increased $ 2,410,000 mainly as a result of an increase in costs of $ 3,100,000 stemming from increased water sales . for 2017 , net loss attributable to common stockholders was $ 1,797,000 compared to net income attributed to common stockholders of $ 800,000 in 2016. factors driving the change include : a decline in farming revenues of $ 2,214,000 resulting from a decline in pistachio production in excess of 2,200,000 pounds , a decline in mineral resource revenues of $ 8,170,000 resulting from decreased sales opportunities for water in 2017 when compared to 2016 , and a decrease in income from unconsolidated joint ventures of $ 2,871,000. in addition , 2016 included a land sale to a third party of $ 1,039,000 , whereas 2017 did not have any land sales . from an expense perspective , expenses decreased $ 10,282,000 as a result of reduced water sales and our staff rightsizing initiatives . for the year ended december 31 , 2018 , we had no material lease renewals . 34 during 2019 , we will continue to invest funds toward the achievement of entitlements , permits , and maps for our land and for master project infrastructure and vertical development within our active commercial and industrial development . securing entitlements for our land is a long , arduous process that can take several years and often involves litigation . during the next few years , our net income will fluctuate from year-to-year based upon , among other factors , commodity prices , production within our farming segment , the timing of land sales and the leasing of land and or industrial space within our industrial developments , and equity in earnings realized from our unconsolidated joint ventures . this management 's discussion and analysis of financial condition and results of operations provides a narrative discussion of our results of operations . it contains the results of operations for each operating segment of the business and is followed by a discussion of our financial position . it is useful to read the business segment information in conjunction with note 16 ( reporting segments and related information ) of the notes to consolidated financial statements . story_separator_special_tag estimated prices for orchard crops are based upon the quoted estimate of what the final market price will be by marketers and handlers of the orchard crops . these market price estimates are updated through the crop payment cycle as new information is received as to the final settlement price for the crop sold . these estimates are adjusted to actual upon receipt of final payment for the crop . this method of recognizing revenues on the sale of orchard crops is a standard practice within the agribusiness community . actual final crop selling prices are not determined for several months following the close of our fiscal year due to supply and demand fluctuations within the orchard crop markets . adjustments for differences between original estimates and actual revenues received are recorded during the period in which such amounts become known . capitalization of costs - the company capitalizes direct construction and development costs , including predevelopment costs , interest , property taxes , insurance , and indirect project costs that are clearly associated with the acquisition , development , or construction of a project . costs currently capitalized that in the future would be related to any abandoned development opportunities will be written off if we determine such costs do not provide any future benefits . should development activity decrease , a portion of interest , property taxes , and insurance costs would no longer be eligible for capitalization , and would be expensed as incurred . allocation of costs related to land sales and leases – when we sell or lease land within one of our real estate developments , as we are currently doing within trcc , and we have not completed all infrastructure development related to the total project , we determine the appropriate costs of sales for the sold land and the timing of recognition of the sale . in the calculation of cost of sales or allocations to leased land , we use estimates and forecasts to determine total costs at completion of the development project . these estimates of final development costs can change as conditions in the market and costs of construction change . in preparing these estimates , we use internal budgets , forecasts , and engineering reports to help us estimate future costs related to infrastructure that has not been completed . these estimates become more accurate as the development proceeds forward , due to historical cost numbers and to the continued refinement of the development plan . these estimates are updated periodically throughout the year so that , at the ultimate completion of development , all costs have been allocated . any increases to our estimates in future years will negatively impact net profits and liquidity due to an increased need for funds to complete development . if , however , this estimate decreases , net profits as well as liquidity will improve . we believe that the estimates used related to cost of sales and allocations to leased land are critical accounting estimates and will become even more significant as we continue to move forward as a real estate development company . the estimates used are very susceptible to change from period to period , due to the fact that they require management to make assumptions about costs of construction , absorption of product , and timing of project completion , and changes to these estimates could have a material impact on the recognition of profits from the sale of land within our developments . impairment of long-lived assets – we evaluate our property and equipment and development projects for impairment when events or changes in circumstances indicate that the carrying value of assets contained in our financial statements may not be recoverable . the impairment calculation compares the carrying value of the asset to the asset 's estimated future cash flows ( undiscounted ) . if the estimated future cash flows are less than the carrying value of the asset , we calculate an impairment loss . the impairment loss calculation compares the carrying value of the asset to the asset 's estimated fair value , which may be based on estimated future cash flows ( discounted ) . we recognize an impairment loss equal to the amount by which the asset 's carrying value exceeds the asset 's estimated fair value . if we recognize an impairment loss , the adjusted carrying amount of the asset will be its new cost basis . for a depreciable long-lived asset , the new cost basis will be depreciated ( amortized ) over the remaining useful life of that asset . restoration of a previously recognized impairment loss is prohibited . we currently operate in five reporting segments : commercial/industrial real estate development , resort/residential real estate development , mineral resources , farming , and ranch operations . at this time , there are no assets within any of our reporting segments that we believe are at risk of being impaired due to market conditions nor have we identified any impairment indicators . 36 we believe that the accounting estimate related to asset impairment is a critical accounting estimate because it is very susceptible to change from period to period ; it requires management to make assumptions about future prices , production , and costs , and the potential impact of a loss from impairment could be material to our earnings . management 's assumptions regarding future cash flows from real estate developments and farming operations have fluctuated in the past due to changes in prices , absorption , production and costs and are expected to continue to do so in the future as market conditions change . in estimating future prices , absorption , production , and costs , we use our internal forecasts and business plans . we develop our forecasts based on recent sales data , historical absorption and production data , input from marketing consultants , as well as discussions with commercial real estate brokers and potential purchasers of our farming products .

results of operations by segment we evaluate the performance of our reporting segments separately to monitor the different factors affecting financial results . each reporting segment is subject to review and evaluation as we monitor current market conditions , market opportunities , and available resources . the performance of each reporting segment is discussed below : real estate – commercial/industrial during 2018 , commercial/industrial segment revenues decreased $ 31,000 , or 0.3 % , from $ 9,001,000 in 2017 to $ 8,970,000 . the reduction was primarily attributable to land sale revenues of $ 73,000 in 2017 , whereas we did not have any land sales in 2018. commercial/industrial real estate segment expenses decreased $ 283,000 , or 4.3 % , from $ 6,529,000 in 2017 to $ 6,246,000 in 2018 . during 2018 , payroll , overhead , stock compensation and bonuses decreased $ 887,000 , due to reassignment of resources within the company , while professional services also decreased $ 194,000. the above reductions were partially offset by increases in tcwd fixed water assessments of $ 727,000 and fees of $ 107,000. tcwd 's higher water assessment taxes were a result of declining tcwd water sales to third parties outside of the district . during 2017 , commercial/industrial segment revenues decreased $ 839,000 , or 9 % , from $ 9,840,000 in 2016 to $ 9,001,000 in 2017. the decrease was driven by a land sale in 2016 of $ 1,039,000 versus land sales of $ 73,000 in 2017. the decline was offset by a $ 242,000 increase in lease revenues from the pastoria energy facility .

established in 2014 , following the merger of international paper 's xpedx division ( `` xpedx '' ) and uww holdings , inc. ( `` uwwh '' ) , the company operates from more than 180 distribution centers primarily throughout the u.s. , canada and mexico . xpedx was a business-to-business distributor of paper , publishing , packaging and facility supplies products in north america that operated in the u.s. and mexico . xpedx distributed products and services to various customer markets , including printers , publishers , data centers , manufacturers , higher education institutions , healthcare facilities , sporting and performance arenas , retail stores , government agencies , property managers and building service contractors . uwwh , operating through unisource worldwide , inc. and its other consolidated subsidiaries ( collectively , `` unisource '' ) , was a distributor of printing and business paper , publishing solutions , packaging supplies and equipment , facility supplies and equipment and logistics services that operated primarily in the u.s. and canada . unisource sold its products to a diverse customer base that included the commercial printing , retail , hospitality , healthcare , governmental , distribution and manufacturing sectors . veritiv 's business is organized under four reportable segments : print , publishing , packaging and facility solutions . during 2014 , the company realigned and expanded its reportable segments to include a new publishing segment . this realignment followed the company 's merger with unisource in the third quarter of 2014. this new segment structure is consistent with the way the chief operating decision maker now makes operating decisions and manages the growth and profitability of the company 's business . as a result of the change in segment reporting , all historical financial information has been revised to conform to the new presentation . the following summary describes the products and services offered in each of the segments : print – the print segment sells and distributes commercial printing , writing , copying , digital , wide format and specialty paper products , graphics consumables and graphics equipment primarily in the u.s. , canada and mexico . this segment also includes customized paper conversion services of commercial printing paper for distribution to document centers and form printers . our broad geographic platform of operations coupled with the breadth of paper and graphics products , including our exclusive private brand offerings , provides a foundation to service national , regional and local customers across north america . publishing – the publishing segment sells and distributes coated and uncoated commercial printing papers to publishers , retailers , converters , printers and specialty businesses for use in magazines , catalogs , books , directories , gaming , couponing , retail inserts and direct mail . this segment also provides print management , procurement and supply chain management solutions to simplify paper and print procurement processes for its customers . packaging – the packaging segment provides standard as well as custom and comprehensive packaging solutions for customers based in north america and in key global markets . the business is strategically focused on higher growth industries including light industrial/general manufacturing , food processing and manufacturing , fulfillment and internet retail , as well as niche verticals based on geographical and functional expertise . veritiv 's packaging 26 professionals create customer value through supply chain solutions , structural and graphic packaging design and engineering , automation , workflow and equipment services , contract packaging , and kitting and fulfillment . facility solutions – the facility solutions segment sources and sells cleaning , break-room and other supplies such as towels , tissues , wipers and dispensers , can liners , commercial cleaning chemicals , soaps and sanitizers , sanitary maintenance supplies and equipment , safety and hazard supplies , and shampoos and amenities primarily in the u.s. , canada and mexico . veritiv is a leading distributor in the facility solutions segment . we offer a world class network of leading suppliers in all categories ; total cost of ownership solutions with re-merchandising , budgeting and compliance , inventory management , and consistent multi-local supply solutions ; and a sales-force trained to bring leading vertical expertise to all of the major north american geographies . the company also has a corporate & other category which includes certain assets and costs not primarily attributable to any of the reportable segments , as well as our veritiv logistics solutions business which provides transportation and warehousing solutions . the spin-off and merger on july 1 , 2014 ( the `` distribution date '' ) , international paper completed the previously announced spin-off of xpedx to the international paper shareholders ( the `` spin-off '' ) , forming a new public company called veritiv . immediately following the spin-off , uwwh merged with and into veritiv ( the `` merger '' ) . prior to the distribution date , veritiv 's financial position , results of operations and cash flows consisted of only the xpedx business of international paper and have been derived from international paper 's historical accounting records . the financial results of xpedx have been presented on a carve-out basis through the distribution date , while the financial results for veritiv , post spin-off , are prepared on a stand-alone basis . as such , the consolidated and combined statements of operations , consolidated and combined statements of comprehensive income ( loss ) and consolidated and combined statements of cash flows for the year ended december 31 , 2014 consist of : the combined results of operations of xpedx for the six months ended june 30 , 2014 on a carve-out basis , and the consolidated results of veritiv on a stand-alone basis for the six months ended december 31 , 2014 . the combined financial statements as of december 31 , 2013 and for the years ended december 31 , 2013 and 2012 consist entirely of the combined results of xpedx on a carve-out basis . for periods prior to the spin-off , the combined financial statements include expense allocations for certain functions previously provided by international paper . story_separator_special_tag the decline in legacy xpedx distribution expenses was driven by ( i ) an $ 11.3 million decrease in vehicle operation expenses due primarily to a reduction in third-party freight expense , ( ii ) a $ 4.1 million decrease in wages and benefits driven by a reduction in headcount and ( iii ) a $ 3.3 million one-time benefit related to a change in veritiv 's vacation policy . selling and administrative expenses selling and administrative expenses increased due primarily to incremental expenses of $ 191.9 million , or 35.0 % , from the merger . this increase was partially offset by a $ 51.0 million decrease in legacy xpedx selling and administrative expenses . the decrease in legacy xpedx selling and administrative expenses is primarily attributed to : ( i ) a $ 29.9 million reduction in allocated expenses from international paper , ( ii ) a $ 9.6 million one-time benefit related to the change in the vacation policy previously noted , ( iii ) a $ 4.0 million decrease in personnel costs due to a reduction in headcount , ( iv ) a $ 4.0 million decrease in sales professional training , ( v ) a $ 2.4 million reduction in it project spending and ( vi ) a $ 1.1 million decline in miscellaneous other expenses . depreciation and amortization expenses depreciation and amortization expenses increased due primarily to incremental expenses of $ 19.0 million , or 111.1 % , attributable to the merger . legacy xpedx depreciation and amortization expenses increased an additional 8.8 % due primarily to an increase in capital leases for tractor-trailer power units . merger and integration expenses merger and integration expenses incurred during the year included advisory , legal and other professional fees directly associated with the merger ; integration-related professional services and project management fees ; retention compensation ; termination benefits ( including change-in-control bonuses ) ; rebranding and other redundant costs to integrate the combined businesses of xpedx and unisource . see note 2 of the notes to consolidated and combined financial statements for a breakdown of the major components of these costs . restructuring charges for the year ended december 31 , 2014 , restructuring charges related primarily to veritiv 's restructuring program of its north american operations intended to integrate the legacy xpedx and unisource operations , generate cost savings and capture synergies across the combined company . during the fourth quarter of 2014 , the company initiated the process of consolidating warehouse and customer service locations of the legacy organizations as well as realigning its field and sales management function . as a result , the company incurred restructuring charges for employee termination benefits and other direct costs . see note 3 of the notes to the consolidated and combined financial statements for additional details . the company may continue to record restructuring charges in the future as integration activities progress . restructuring charges for the year ended december 31 , 2013 related to xpedx 's multi-year restructuring plan as further described below . interest expense , net interest expense , net primarily consists of ( i ) $ 9.2 million of interest expense on the abl facility , ( ii ) $ 2.2 million for amortization of deferred financing costs related to the abl facility , ( iii ) $ 1.1 million attributable to financing obligations to related party and ( iv ) $ 1.5 million in miscellaneous other interest expense . effective tax rate veritiv 's effective tax rate was 9.7 % and 100.0 % for the years ended december 31 , 2014 and 2013 , respectively . the difference between the company 's effective tax rate for the year ended december 31 , 2014 and the u.s. statutory tax rate of 35 % is principally related to non-deductible transaction-related costs and other expenses and changes in the valuation allowance . over time , the company estimates its effective tax rate will be approximately 38-40 % . however , it may vary significantly due to potential changes in the amount and mix of pre-tax book income and changes in amounts of non-deductible expenses and other items impacting the effective tax rate . see note 7 of the notes to the consolidated and combined financial statements for additional details . 30 comparison of the years ended december 31 , 2013 and december 31 , 2012 replace_table_token_6_th * - not meaningful net sales net sales decreased due primarily to lower net sales of $ 251.6 million and $ 99.6 million in our print and facility solutions segments , respectively , which are further discussed in the section `` segment results '' below . cost of products sold cost of products sold decreased in line with the net sales decrease . distribution expenses distribution expenses decreased due primarily to ( i ) a $ 4.0 million decrease in salaries , wages and employee benefits as a result of a management initiative to restructure the organization to reduce headcount , ( ii ) a $ 3.9 million decrease in temporary labor costs attributable to the decline in net sales , ( iii ) a $ 1.2 million decrease in freight and fuel costs primarily attributable to the decrease in net sales and ( iv ) a $ 0.6 million decrease in repairs and maintenance costs . as a percentage of net sales , distribution expenses increased due primarily to sales volumes declining more rapidly than costs . selling and administrative expenses selling and administrative expenses decreased due primarily to ( i ) a $ 14.7 million decline in incentive compensation , ( ii ) a $ 7.4 million decline in commissions associated with the decreased volume , ( iii ) a $ 4.3 million decrease in overhead allocations from international paper , ( iv ) a $ 3.1 million decrease in travel and entertainment expenses and ( v ) a $ 2.7 million decrease in salaries , wages and benefits as a result of a management initiative to restructure the organization .

segment results as discussed above , during 2014 , the company realigned and expanded its reportable segments to include a new publishing segment . this new segment structure is consistent with the way the chief operating decision maker ( `` codm '' ) , identified as the chief executive officer , manages and evaluates the business . in addition , as a result of the change in how the codm manages and evaluates the business , certain costs such as executive costs , corporate affairs , finance , human resources , it and legal that were previously allocated to the reportable segments are no longer allocated . the company 's consolidated financial results now include a `` corporate & other '' category which includes certain assets and costs not primarily attributable to any of the reportable segments . corporate & other also includes the veritiv logistics solutions business unit which provides transportation and warehousing solutions . as a result of these changes in segment reporting , all historical financial information has been revised to conform to the new presentation , with no resulting impact on the consolidated and combined results of operations . due to the shared nature of the distribution network , distribution charges are not a direct charge to each segment , but are allocated to each segment based primarily on operational metrics that correlate with changes in volume . accordingly , distribution expenses allocated to each segment are highly interdependent on the results of other segments . lower volume in any segment that is not offset by a reduction in distribution expenses can result in the other segments absorbing a larger share of distribution expenses . conversely , higher volume in any segment can result in the other segments absorbing a smaller share of distribution expenses . the impact of this at the segment level is that the changes in distribution expense trends may not correspond with volume trends within a particular segment .

our business model was built and continues to evolve around our clients . while our networks and agencies operate under different names and frame their ideas in different disciplines , we organize our services around our clients . the fundamental premise of our business is that our clients ' specific requirements should be the central focus in how we deliver our services and allocate our resources . this client-centric business model requires that multiple agencies collaborate in formal and informal virtual networks that cut across internal organizational structures to deliver consistent brand messages for a specific client and execute against each of our clients ' specific marketing requirements . we continually seek to grow our business with our existing clients by maintaining our client-centric approach , as well as expanding our existing business relationships into new markets and with new clients . in addition , we pursue selective acquisitions of complementary companies with strong entrepreneurial management teams that typically currently serve or have the ability to serve our existing client base . as a leading global advertising , marketing and corporate communications company , we operate in all major markets and have a large and diverse client base . in 2016 , our largest client represented 3.0 % of revenue and our 100 largest clients , which represent many of the world 's major marketers , comprised approximately 52 % of revenue . our business is spread across a number of industry sectors with no one industry comprising more than 14 % of our revenue in 2016 . although our revenue is generally balanced between the united states and international markets and we have a large and diverse client base , we are not immune to general economic downturns . as described in more detail below , in 2016 our revenue increased $ 282.5 million , or 1.9 % , compared to 2015 . beginning in the fourth quarter of 2014 and continuing throughout 2015 , substantially all foreign currencies weakened against the u.s. dollar . in 2016 , while the strength of the u.s. dollar moderated against a number of currencies , the british pound weakened substantially against the u.s. dollar . in 2016 , changes in foreign exchange rates reduced revenue by $ 283.8 million , or 1.9 % , acquisitions , net of dispositions , increased revenue $ 38.2 million , or 0.3 % , and organic growth increased revenue $ 528.1 million , or 3.5 % . global economic conditions have a direct impact on our business and financial performance . adverse global or regional economic conditions pose a risk that our clients may reduce , postpone or cancel spending on advertising , marketing and corporate communications services , which would reduce the demand for our services . in 2016 , the united states continued its modest economic growth . uncertain economic and political conditions in the euro zone have resulted in uneven growth across the region and have been further complicated by the vote in 2016 in the united kingdom , or u.k. , to exit the european union . in brazil , unstable economic and political conditions contributed to the continuing downward economic trend that began in the second quarter of 2015 . the major economies of asia had modest economic growth consistent with recent periods . the economic and fiscal issues facing countries in europe and latin america continue to cause economic uncertainty in those regions ; however , the impact on our business varies by country . we will continue to monitor economic conditions closely , as well as client revenue levels and other factors and , in response to reductions in our client revenue , if necessary , we will take actions available to us to align our cost structure and manage our working capital . there can be no assurance whether , or to what extent , our efforts to mitigate any impact of future adverse economic conditions , reductions in client revenue , changes in client creditworthiness and other developments will be effective . certain business trends have had a positive impact on our business and industry . these trends include clients increasingly expanding the focus of their brand strategies from national markets to pan-regional and global markets and integrating traditional and non-traditional marketing channels , as well as utilizing new communications technologies and emerging digital platforms . additionally , in an effort to gain greater efficiency and effectiveness from their total marketing expenditures , clients continue to require greater coordination of marketing activities . we believe these trends have benefited our business in the past and over the medium and long term will continue to provide a competitive advantage to us . in the near term , barring unforeseen events and excluding the impact of changes in foreign exchange rates , as a result of continued improvement in operating performance by many of our agencies and new business activities , we expect our 2017 revenue to increase modestly in excess of the weighted average nominal gdp growth in our major markets . we expect to continue to identify acquisition opportunities intended to build upon the core capabilities of our strategic business platforms , expand our operations in the high-growth and emerging markets and enhance our capabilities to leverage new technologies that are being used by marketers today . in addition , we continually evaluate our portfolio of businesses to identify non-strategic or under performing business for disposition . 9 given our size and breadth , we manage our business by monitoring several financial indicators . the key indicators that we focus on are revenue and operating expenses . we analyze revenue growth by reviewing the components and mix of the growth , including growth by principal regional market and marketing discipline , the impact from foreign currency fluctuations , growth from acquisitions and growth from our largest clients . story_separator_special_tag 10 critical accounting policies the following summary of our critical accounting policies provides a better understanding of our financial statements and the related discussion in this md & a . we believe that the following policies may involve a higher degree of judgment and complexity in their application than most of our accounting policies and represent the critical accounting policies used in the preparation of our financial statements . readers are encouraged to consider this summary together with our financial statements and the related notes , including note 2 , significant accounting policies , for a more complete understanding of the critical accounting policies discussed below . estimates our financial statements are prepared in conformity with u.s. gaap and require us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes . we use a fair value approach in testing goodwill for impairment and when evaluating our equity method and cost method investments to determine if an other-than-temporary impairment has occurred . actual results could differ from those estimates and assumptions . acquisitions and goodwill we have made and expect to continue to make selective acquisitions . the evaluation of potential acquisitions is based on various factors , including specialized know-how , reputation , geographic coverage , competitive position and service offerings of the target businesses , as well as our experience and judgment . business combinations are accounted for using the acquisition method . the assets acquired , including identified intangible assets , liabilities assumed and any noncontrolling interest in the acquired business are recorded at their acquisition date fair values . in circumstances where control is obtained and less than 100 % of a business is acquired , goodwill is recorded as if 100 % were acquired . acquisition-related costs , including advisory , legal , accounting , valuation and other costs are expensed as incurred . certain acquisitions include an initial payment at closing and provide for future additional contingent purchase price payments ( earn-outs ) , which are recorded as a liability at the acquisition date fair value . subsequent changes in the fair value of the liability are recorded in results of operations . the results of operations of acquired businesses are included in results of operations from the acquisition date . in 2016 , we completed 5 acquisitions of new subsidiaries . our acquisition strategy is focused on acquiring the expertise of an assembled workforce in order to continue to build upon the core capabilities of our various strategic business platforms and agency brands through the expansion of their geographic reach or their service capabilities to better serve our clients . additional key factors we consider include the competitive position and specialized know-how of the acquisition targets . accordingly , as is typical in most service businesses , a substantial portion of the assets we acquire are intangible assets primarily consisting of the know-how of the personnel , which is treated as part of goodwill and under u.s. gaap is not required to be valued separately . for each acquisition , we undertake a detailed review to identify other intangible assets that are required to be valued separately . a significant portion of the identifiable intangible assets acquired is derived from customer relationships , including the related customer contracts , as well as trade names . in valuing these identified intangible assets , we typically use an income approach and consider comparable market participant measurements . we evaluate goodwill for impairment at least annually at the end of the second quarter of the year and whenever events or circumstances indicate the carrying value may not be recoverable . under fasb asc topic 350 , intangibles - goodwill and other , we have the option of either assessing qualitative factors to determine whether it is more-likely-than-not that the carrying value of our reporting units exceeds their respective fair value or proceeding directly to step 1 of the goodwill impairment test . although not required , we performed step 1 of the annual impairment test and compared the fair value of each of our reporting units to its respective carrying value , including goodwill . we identified our regional reporting units as components of our operating segments , which are our five agency networks . the regional reporting units of each agency network are responsible for the agencies in their region . they report to the segment managers and facilitate the administrative and logistical requirements of our client-centric strategy for delivering services to clients in their regions . we have concluded that for each of our operating segments , their regional reporting units have similar economic characteristics and should be aggregated for purposes of testing goodwill for impairment at the operating segment level . our conclusion was based on a detailed analysis of the aggregation criteria set forth in fasb asc topic 280 , segment reporting , and the guidance set forth in fasb asc topic 350. consistent with our fundamental business strategy , the agencies within our regional reporting units serve similar clients in 11 similar industries , and in many cases the same clients . in addition , the agencies within our regional reporting units have similar economic characteristics . the main economic components of each agency are employee compensation and related costs and direct service costs and occupancy and other costs , which include rent and occupancy costs , technology costs that are generally limited to personal computers , servers and off-the-shelf software and other overhead expenses . finally , the expected benefits of our acquisitions are typically shared by multiple agencies in various regions as they work together to integrate the acquired agency into our client service strategy .

results of operations - 2015 compared to 2014 ( in millions ) : replace_table_token_11_th ebita , which we define as earnings before interest , taxes and amortization of intangible assets , and ebita margin , which we define as ebita divided by revenue , are non-gaap financial measures . we use ebita and ebita margin as additional operating performance measures , which exclude the non-cash amortization expense of intangible assets , primarily consisting of intangible assets related to acquired businesses . the table above reconciles ebita and ebita margin to the u.s. gaap financial measures for the periods presented . we believe that ebita and ebita margin are useful measures for investors to evaluate the performance of our businesses . non-gaap financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with u.s. gaap . non-gaap financial measures reported by us may not be comparable to similarly titled amounts reported by other companies . revenue in 2015 , revenue decreased $ 183.4 million to $ 15,134.4 million from $ 15,317.8 million in 2014 . changes in foreign exchange rates reduced revenue $ 1.0 billion , acquisitions net of dispositions , increased revenue by $ 14.6 million and organic growth increased revenue $ 810.8 million . the components of revenue change in the united states ( “ domestic ” ) and the remainder of the world ( “ international ” ) were ( in millions ) : replace_table_token_12_th 19 the components and percentages are calculated as follows : the foreign exchange impact is calculated by translating the current period 's local currency revenue using the prior period average exchange rates to derive current period constant currency revenue ( in this case $ 16,143.2 million for the total column ) .

as a result of many factors , such as those set forth under the section entitled “risk factors” in item 1a and elsewhere in this report , our actual results may differ materially from those anticipated in these forward-looking statements . we are one of the largest online providers of aftermarket auto parts , including body parts , engine parts , and performance parts and accessories . our user-friendly websites provide customers with a broad selection of skus , with detailed product descriptions and photographs . our proprietary product database maps our skus to product applications based on vehicle makes , models and years . we principally sell our products to individual consumers through our network of websites and online marketplaces . our flagship websites are located at www.autopartswarehouse.com , www.partstrain.com , www.jcwhitney.com , www.stylintrucks.com , www.automd.com and our corporate website is located at www.usautoparts.net . we believe our strategy of disintermediating the traditional auto parts supply chain and selling products directly to customers over the internet allows us to more efficiently deliver products to our customers while generating higher margins . our history . we were formed in delaware in 1995 as a distributor of aftermarket auto parts and launched our first website in 2000. we rapidly expanded our online operations , increasing the number of skus sold through our e-commerce network , adding additional websites , improving our internet marketing proficiency and commencing sales in online marketplaces . additionally , in august 2010 , through our acquisition of wag , we expanded our product-lines and increased our customer reach in the diy automobile and off-road accessories market . as a result , our business has grown since 2000 , generating net sales of $ 327.1 million for fiscal 2011. international operations . in april 2007 , we established offshore operations in the philippines . our offshore operations allow us to access a workforce with the necessary technical skills at a significantly lower cost than comparably experienced u.s.-based professionals . our offshore operations are responsible for a majority of our website development , catalog management , and back office support . our offshore operations also house our main call center . we had 1,005 employees in the philippines as of december 31 , 2011. in addition to our operations in the philippines , we have a canadian subsidiary to facilitate sales of our products in canada ; the subsidiary has no distribution center or employees . we also ship parts directly to canada and through a freight forwarding partner throughout the world . in 2011 , we shipped auto parts to over 160 different countries . we believe that the cost advantages of our offshore operations provide us with the ability to grow our business in a cost-effective manner , and we expect to continue to add headcount and infrastructure to our offshore operations . acquisitions . from time to time , we may acquire certain businesses , websites , domain names , or other assets . in the third quarter of fiscal 2009 , we completed the acquisition of the assets of a small website and the related domain names which further expanded and enhanced our product offering and our ability to reach more customers . in the first quarter of fiscal 2010 , we completed two additional website and domain name asset acquisitions , which increased our net sales and internet traffic . in august 2010 , go fido , inc. , a wholly-owned subsidiary of ours , completed the purchase of all of the outstanding capital stock of automotive specialty accessories and parts , inc. and its wholly-owned subsidiary whitney automotive group , inc. ( referred to herein as “wag” ) . wag 's midwest 22 facility expanded our distribution network and the merchandise wag offers extended our go-to market product-lines into all terrain vehicles , recreational vehicles and motorcycles , as well as provides us with deep product knowledge into niche segments like jeep , volkswagen and trucks . this expansion of our product line increases our customer reach in the diy automobile and off-road accessories market . the company believes that the combination of wag 's established brands and focus on the customer experience , coupled with the company 's capacity to compete online , creates opportunity for growth . related to the wag acquisition , the company has incurred acquisition and integration related costs of $ 3.1 million and $ 7.4 million for the fiscal year ended january 1 , 2011and december 31 , 2011 , respectively . these costs included one-time contract cancellation costs of $ 1.5 million that the company recorded in september 2011 , for terminating wag 's sublease agreement related to its former corporate offices located in chicago , illinois . no significant integration costs are anticipated in the future , as such the majority of the acquisition and integration related costs have been paid as of december 31 , 2011. since the wag acquisition , certain residual wag operations have been separately accounted for during the integration process . these operations relate to certain wag product revenues , the related operating costs and integration costs . we have presented such residual wag operations for purposes of providing comparable financial information for the impacted fiscal years ended 2010 and 2011. we will not provide this information going forward into 2012 , since 2011 represented a full year with these residual wag operations and will thus be more comparable to 2012. we expect such revenues and expenses that directly relate to wag products will gradually decrease over fiscal 2012. for additional information , see “note 5 – business combination” of the notes to consolidated financial statements , included in part iv , item 15 of this report . we may pursue additional acquisition opportunities in the future to increase our share of the aftermarket auto parts market or expand our product offering . executive summary for the fiscal year 2011 , the company generated net sales of $ 327.1 million , compared with $ 262.3 million for fiscal 2010 , representing an increase of 25 % . excluding $ 83.4 story_separator_special_tag 24 general and administrative expense . general and administrative expense consists primarily of administrative payroll and related expenses , payment processing fees , legal and professional fees , amortization of software and other administrative costs . general and administrative expense also includes depreciation and amortization expense and share-based compensation expense . marketing expense . marketing expense consists of online advertising spend , internet commerce facilitator fees and other advertising costs , as well as payroll and related expenses associated with our marketing catalog , customer service , and sales personnel . these costs are generally variable and are typically a function of net sales . marketing expense also includes depreciation and amortization expense and share-based compensation expense . fulfillment expense . fulfillment expense consists primarily of payroll and related costs associated with our warehouse employees and our purchasing group , facility rent , building maintenance , depreciation and other costs associated with inventory management and our wholesale operations . fulfillment expense also includes depreciation and amortization expense and share-based compensation expense . technology expense . technology expense consists primarily of payroll and related expenses of our information technology personnel , the cost of hosting our servers , communications expenses and internet connectivity costs , computer support and software development . technology expense also includes share-based compensation expense . amortization of intangibles . amortization of intangibles consists of the amortization expense associated with our intangible assets , which primarily consist of the intangibles recorded as a result of the wag acquisition . impairment loss on intangibles . impairment loss on intangibles consists of a fiscal 2011 non-cash impairment charge related to certain wag trade name intangible assets . interest income ( expense ) . interest income consists primarily of interest income on investments . interest expense consists primarily of interest expense on our outstanding loan balances and capital leases . other income . other income consists of miscellaneous income such as gain from disposition of assets . critical accounting policies and estimates our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the united states . the preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets , liabilities , net sales , costs and expenses , as well as the disclosure of contingent assets and liabilities and other related disclosures . on an ongoing basis , we evaluate our estimates , including , but not limited to , those related to revenue recognition , uncollectible receivables , intangible and other long-lived assets and contingencies . we base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances , the results of which form the basis for making judgments about carrying values of our assets and liabilities that are not readily apparent from other sources . actual results could differ from those estimates , and we include any revisions to our estimates in our results for the period in which the actual amounts become known . we believe the critical accounting policies described below affect the more significant judgments and estimates used in the preparation of our consolidated financial statements . accordingly , these are the policies we believe are the most critical to aid in fully understanding and evaluating our historical consolidated financial condition and results of operations : revenue recognition . from the company 's inception of business through the first quarter of fiscal 2010 , the company recognized revenue from product sales when the following four revenue recognition criteria were met : persuasive evidence of an arrangement exists , delivery has occurred ( to the common carrier ) , the selling price is fixed or determinable , and collectability is reasonably assured . these criteria followed the company 's general policy to recognize revenue according to its shipping terms , which were f.o.b . shipping point . under this policy , title and risk of loss were transferred to the customer upon delivery to the common carrier , at which time , revenue was recognized . although the company had no legal obligation to compensate the customer , the company generally replaces the product or reimburses the customer for goods that were lost or damaged in transit and filed a claim to the common carrier for reimbursement for such loss . the company executed a new pricing agreement with its primary carrier which offered a lower price per delivery and eliminated the company 's option to file reimbursement claims for product lost or damaged in transit . as a result of this agreement , the company determined that the risk of loss or damage during transit would be retained by the company . therefore , the company determined that revenue from product sales should be recognized at the delivery date , not the ship date . 25 this change in the second quarter of fiscal 2010 resulted in a deferral of $ 2.0 million of sales revenue and a decrease in cost of goods sold of $ 1.5 million , which reduced gross profit by $ 411,000. the company has recognized revenue upon delivery to the customer starting the second quarter of fiscal 2010. revenue from sales of advertising is recorded when performance requirements of the related advertising program agreement are met . for fiscal 2011 , the advertising revenue represented approximately 2 % of our total revenue . we evaluated the criteria of accounting standards codification ( “asc” ) topic 605-45 - revenue recognition - principal agent considerations ( “asc 605-45” ) , in determining whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned as commissions . when we are the primary party obligated in a transaction , are subject to inventory risk , have latitude in establishing prices and selecting suppliers or have several but not all of these indicators , revenue is recorded at gross .

results of operations the following table sets forth selected statement of operations data for the periods indicated , expressed as a percentage of net sales : replace_table_token_7_th 29 replace_table_token_8_th the impact of foreign currency is related to our offshore operations in the philippines and sales of our products in canada and was not material to our operations . fifty-two weeks ended january 1 , 2011 compared to the fifty-two weeks ended december 31 , 2011 net sales and gross margin replace_table_token_9_th consolidated net sales increased $ 64.8 million , or 24.7 % , for fiscal 2011 compared to fiscal 2010. excluding $ 83.4 million of sales from wag , the usap net sales for fiscal 2011 were $ 243.7 million , an increase of 9.2 % over fiscal 2010 net sales , due to increases of $ 19.5 million , or 9.4 % , in online sales and $ 1.0 million , or 6.2 % , in offline sales , which consist of our kool-vue™ and wholesale operations . our online sales consist of our e-commerce , online marketplace sales channels and online advertising . our e-commerce channel includes our e-commerce websites supported by our call-center sales agents who generate cross-sell and up-sell opportunities . our online marketplaces consist primarily of auction and other third-party websites . online advertising is sold on our e-commerce websites . the usap increase in online sales is primarily due to a $ 15.6 million , or 9.0 % , increase in e-commerce sales , which resulted from an increase of 211,007 , or 11.8 % , in total placed orders , an increase of 10.2 million , or 8.9 % , in unique visitors , partially offset by a decrease of $ 2.49 , or 2.1 % , in average order value from fiscal 2010 to fiscal 2011. the increases in total placed orders and the unique visitors resulted from increased marketing spend driving higher paid traffic and better content on our websites driving more organic traffic .

. dated february 28 , 2012 . [ form 10-q for the fiscal quarter ended february 29 , 2012 , exhibit 10.1 ] * 14.1 code of ethics and business conduct . [ form 10-k for the fiscal year ended may 31 , 2004 , exhibit 14.1 ] 21.1 subsidiaries of schmitt industries , inc. as of may 31 , 2011 . 23.1 consent of independent registered public accounting firm . 31.1 certification of principal executive officer pursuant to 18 u.s.c . section 1350 , as adopted pursuant to section 302 of the sarbanes-oxley act of 2002 . 31.2 certification of principal financial officer pursuant to 18 u.s.c . section 1350 , as adopted pursuant to section 302 of the sarbanes-oxley act of 2002 . 32.1 certification of principal executive officer and principal financial officer pursuant to 18 u.s.c . section 1350 , as adopted pursuant to section 906 of the sarbanes-oxley act of 2002 . † management contract or compensatory plan or arrangement required to be filed as an exhibit to this form 10-k. page 44 story_separator_special_tag results of operations overview schmitt industries , inc. designs , manufactures and markets computer-controlled vibration detection and balancing equipment ( the balancer segment ) to the worldwide machine tool industry and , through its wholly owned subsidiary , schmitt measurement systems , inc. , precision laser-based surface roughness measurement products , laser-based distance measurement products and ultrasonic measurement systems ( the measurement segment ) for a variety of industrial applications worldwide . the company sells and markets its products in europe through its wholly owned subsidiary , schmitt europe ltd. ( sel ) located in the united kingdom . the company is organized into two operating segments : the balancer segment and the measurement segment . for the year ended may 31 , 2012 ( fiscal 2012 ) , total sales increased $ 2.9 million , or 25.6 % , to $ 14.4 million from $ 11.5 million in the year ended may 31 , 2011 ( fiscal 2011 ) . balancer segment sales focus throughout the world on end-users , rebuilders and original equipment manufacturers of grinding machines with the target geographic markets in north america , south america , asia and europe . balancer sales increased $ 1.3 million , or 15.7 % , to $ 9.3 million in fiscal 2012 compared to $ 8.0 million in fiscal 2011. the fiscal 2012 increase in balancer sales is due to higher volumes of shipments as the worldwide automotive and manufacturing industries continue to recover from the global economic downturn , particularly in north america . the measurement segment product line consists of laser-based light-scatter , distance measurement and dimensional sizing products and remote tank monitoring products . total measurement sales increased $ 1.7 million , or 48.5 % , to $ 5.2 million in fiscal 2012 compared to $ 3.5 million in fiscal 2011. the increase is primarily due to higher volumes of shipments across all of the measurement segment product lines . operating expenses have increased $ 484,000 , or 8.3 % , to $ 6.3 million in fiscal 2012 from $ 5.8 million in fiscal 2011. general , administrative and sales expenses increased $ 670,000 , or 12.7 % , in fiscal 2012 to $ 6.0 million as compared to $ 5.3 million in the prior fiscal year . research and development expenses decreased $ 186,000 , or 36.9 % , to $ 318,000 in fiscal 2012 from $ 504,000 in fiscal 2011. net income was $ 77,000 , or $ 0.03 per fully diluted share , for the year ended may 31 , 2012 as compared to a net loss of $ 205,000 , or $ 0.07 per fully diluted share , for the year ended may 31 , 2011. critical accounting policies revenue recognition – the company recognizes revenue for sales and billing for freight charges upon delivery of the product to the customer at a fixed or determinable price with a reasonable assurance of collection , passage of title to the customer as indicated by shipping terms and fulfillment of all significant obligations , pursuant to page 17 the guidance provided by accounting standards codification topic 605. for sales to all customers , including manufacturer representatives , distributors or their third-party customers , these criteria are met at the time product is shipped . when other significant obligations remain after products are delivered , revenue is recognized only after such obligations are fulfilled . in addition , judgments are required in evaluating the credit worthiness of our customers . credit is not extended to customers and revenue is not recognized until we have determined that collectability is reasonably assured . allowance for doubtful accounts – our policy is to maintain allowances for estimated losses resulting from the inability of our customers to make required payments . credit limits for all customers are established based upon several factors , including but not limited to financial condition and stability , payment history , published credit reports and use of credit references . on a monthly basis , management performs various analyses to evaluate accounts receivable balances to ensure recorded amounts reflect estimated net realizable value . this review includes accounts receivable agings , other operating trends and relevant business conditions , including general economic factors , as they relate to the company 's domestic and international customers . when a customer 's account balance becomes past due , we initiate dialogue with the customer to determine the cause . story_separator_special_tag if it is determined that the customer will be unable to meet its financial obligation to us , such as in the case of a bankruptcy filing , we record a specific allowance to reduce the related receivable to the amount we expect to recover given all of the information presently available . inventories – as a designer and manufacturer of high technology systems , we are exposed to a number of economic and industry factors that could result in portions of our inventories becoming either obsolete or in excess of anticipated usage . these factors include , but are not limited to , technological changes in our markets , our ability to meet changing customer requirements , competitive pressures in products and prices , and the availability of key components from our suppliers . our policy is to record inventory write-downs when conditions exist that suggest our inventories may be in excess of anticipated demand for our products and market conditions . we regularly evaluate the ability to realize the value of our inventories based upon a combination of factors including the following : historical usage rates , forecasted sales or usage , product end of life dates , estimated current and future market values and new product introductions . purchasing requirements and alternative usage avenues are explored within these processes to mitigate inventory exposure . when recorded , our write-downs are intended to reduce the carrying value of our inventories to their net realizable value and establish a new cost basis . deferred taxes– the company applies the asset and liability method in recording income taxes , under which deferred income tax assets and liabilities are determined , based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using currently enacted tax rates and laws . additionally , deferred tax assets are evaluated and 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 . management continues to review the level of the valuation allowance on a quarterly basis . there can be no assurance that the company 's future operations will produce sufficient earnings so that the deferred tax assets can be fully utilized . intangible assets – there is a periodic review of intangible and other long-lived assets for impairment . this review consists of the analysis of events or changes in circumstances that would indicate the carrying amount of the assets may not be recoverable . recoverability is determined by comparing the forecasted future undiscounted net cash flows from the operations to which the assets relate , based on management 's best estimates using the appropriate assumptions and projections at the time , to the carrying amount of the assets . if the carrying value is determined to be in excess of future operating cash flows , the asset is considered impaired and a loss is recognized equal to the amount by which the carrying amount exceeds the estimated fair value of the assets . recently issued accounting pronouncements refer to note 1 of the notes to consolidated financial statements for a discussion of recently issued accounting pronouncements . page 18 story_separator_special_tag fiscal 2011. net income increased due primarily to higher sales and related gross profit and lower research and development expenses , offset by higher general , administrative and selling expenses and a lower gross margin percentage during fiscal 2012. net loss decreased $ 1.5 million to a net loss of $ 205,000 , or $ 0.07 per diluted share , for fiscal 2011 compared to a net loss of $ 1.7 million , or $ 0.59 per diluted share , for fiscal 2010. the net loss decreased due primarily to higher sales and related gross profit offset by higher general , administrative and sales expenses during fiscal 2011. liquidity and capital resources the company 's working capital increased $ 432,000 to $ 7.9 million as of may 31 , 2012 compared to $ 7.5 million as of may 31 , 2011. cash and cash equivalents increased $ 16,000 from may 31 , 2011 to $ 2.8 million as of may 31 , 2012. cash provided by operating activities was $ 163,000 in fiscal 2012 as compared to cash used in operations of $ 559,000 in fiscal 2011. the increase is primarily due to increases in net income , decrease in inventory and an increase in accrued liabilities , offset by increases in accounts receivable and prepaid expenses and decreases in accounts payable . at may 31 , 2012 , accounts receivable increased $ 662,000 to $ 2.5 million compared to $ 1.8 million as of may 31 , 2011. the increase in accounts receivable is due to the increase in sales during fiscal 2012. inventories decreased $ 171,000 to $ 4.0 million as of may 31 , 2012 compared to $ 4.1 million at may 31 , 2011 due to increased inventory reserves related to an end-of-life sbs product . at may 31 , 2012 , total current liabilities increased $ 103,000 to $ 1.5 million as compared to $ 1.4 million at may 31 , 2011. the increase is primarily due to an increase in other accrued liabilities associated with a customer deposit on a future order offset by lower accounts payables as compared to the prior year . during the year ended may 31 , 2012 , net cash used in investing activities was $ 228,000 , which primarily consisted of additions to property and equipment for new manufacturing and computer equipment and vehicles offset by the cash proceeds received from the sale of property and equipment . the company has a $ 2.0 million bank line of credit agreement secured by u.s. accounts receivable , inventories and general intangibles . interest is payable at the bank 's prime rate ( 3.25 % as of may 31 , 2012 ) , or libor plus 2.0 % ,

discussion of operating results replace_table_token_3_th sales – sales in the balancer segment increased $ 1.3 million , or 15.7 % , to $ 9.3 million for fiscal 2012 compared to $ 8.0 million for fiscal 2011. this increase is primarily due to higher unit sales volumes in north america offset by decreases in unit sales volumes in asia and europe during the year . north american sales increased $ 1.5 million , or 45.9 % , in fiscal 2012 compared to fiscal 2011. sales into asia decreased $ 370,000 , or 9.7 % , in fiscal 2012 compared to the prior year . sales into europe decreased $ 14,000 , or 1.6 % , in fiscal 2012 compared to fiscal 2011. sales on other regions of the world increased $ 187,000 , or 162.3 % , during fiscal 2012 as compared to the prior year . the increases in north america and other regions of the world are primarily due to higher volumes of shipments as the worldwide automotive and industrial markets in these regions continue to recover from the global economic downturn . the decreases in asia and europe are due to a reduction in orders as economic growth in china is slowing and the uncertainty regarding the european economy continues to have a negative impact on manufacturing . the levels of demand for our balancer products in any of these geographic markets can not be forecasted with any certainty given current economic trends and the historical volatility experienced in this market .

unless otherwise specified , any reference to a “ year ” is to a fiscal year ended june 30. additionally , when used in this annual report on form 10-k , unless the context requires otherwise , the terms “ we , ” “ our ” and “ us ” refer to kennametal inc. and its subsidiaries . overview as a global industrial leader , kennametal inc. delivers productivity solutions to customers seeking peak performance in demanding environments . we provide innovative wear-resistant products , application engineering and services backed by advanced material science serving customers across diverse sectors of industrial production , transportation , earthworks , energy , construction , process industries and aerospace . our solutions are built around industry-essential technology platforms , including precision-engineered metalworking tools and components , surface technologies and earth cutting tools that are mission-critical to customer operations battling extreme conditions associated with wear fatigue , corrosion and high temperatures . the company 's reputation for material and industrial technology excellence , as well as expertise and innovation in development of custom solutions and services , contributes to our leading position in our primary industrial and infrastructure markets . end users of our products include manufacturers , metalworking suppliers , machinery operators and processors engaged in a diverse array of industries , including the manufacture of transportation vehicles and components ; machine tool , light machinery and heavy machinery industries ; airframe and aerospace components ; defense ; as well as producers and suppliers in equipment-intensive operations such as coal mining , road construction , quarrying , oil and gas exploration , refining , production and supply . we believe we are one of the largest global providers of consumable metal cutting tools and tooling supplies . for 2016 , sales were $ 2,098.4 million , a decrease of 21 percent compared to prior year sales of $ 2,647.2 million , driven by organic sales decline , impact of divestiture and unfavorable currency exchange . operating loss was $ 174.9 million compared to operating loss of $ 357.8 million in the prior year . the decrease in operating loss was driven primarily by higher non-cash goodwill and other intangible asset impairment charges in the prior year . other drivers include current year lower material costs , incremental restructuring benefits , manufacturing productivity improvements and lower restructuring and related charges , offset partially by the current year loss on divestiture , organic sales decline , unfavorable product mix , lower fixed cost absorption and unfavorable currency exchange . the company reported loss per diluted share of $ 2.83 in 2016 . our operating flexibility was enhanced with an amendment to our revolving credit facility that extends maturity from april 2018 to april 2021. similar to the prior agreement , the amendment permits revolving loans of up to $ 600 million for working capital , capital expenditures and general corporate purposes . the definition of the maximum leverage ratio was temporarily increased under the 2016 amendment as defined in the agreement in order to increase operating flexibility . further , the earnings before interest , taxes , depreciation and amortization ( ebitda ) definition in the 2016 amendment now allows for up to $ 120 million of aggregate cash restructuring payment add-backs through december 31 , 2017. other material provisions , including the minimum consolidated interest coverage ratio , remain unchanged . during the year the company completed the sale of several non-core businesses related to certain castings , steel-plate fabrication and deburring for an aggregate price of $ 56.1 million , net of cash acquired . annual sales for these non-core businesses were approximately $ 220 million . a portion of the transaction proceeds were used to pay down revolver debt with the remaining balance being held as cash on hand . the transaction resulted in a pre-tax loss on the sale of $ 131.5 million . we generated cash flow from operating activities of $ 219.3 million in the current year , driven by improved working capital management . we have actively managed our capital structure by decreasing our debt by $ 50.1 million and by returning $ 63.7 million to shareholders through dividends . in addition , we made capital expenditures of $ 110.7 million during the year . we invested further in technology and innovation to continue delivering a high level of new products to our customers . research and development expenses included in operating expense totaled $ 39.4 million for 2016 . the permanent savings that we are realizing from restructuring are the result of programs that we have undertaken over the past 33 months . pre-tax benefits from these restructuring actions were approximately $ 79 million in 2016 , of which approximately $ 44 million were incremental to prior year . we substantially completed phase 1 of our restructuring programs . we also have identified additional actions to adjust the company 's cost structure . refer to the results of continuing operations section of item 7 for further discussion and analysis of our restructuring programs . new operating structure implemented in fiscal 2017 in order to take advantage of the growth opportunities of our widia brand , we implemented a new operating structure . 16 a key attribute of the new structure is the establishment of the widia operating segment . in order to better lever the opportunities that lie in this business , in addition to being more agile and competitive in the marketplace , we are placing higher levels of focus , determination and leadership in the business . industrial and widia in 2017 will be formed from the 2016 industrial segment . we will have three reportable operating segments going forward : industrial , widia and infrastructure . story_separator_special_tag million from 2015 to 2016 is driven primarily by the impact of divestiture . interest expense interest expense decreased $ 3.7 million to $ 27.8 million in 2016 , compared with $ 31.5 million in 2015 due to lower average borrowings throughout the current period . story_separator_special_tag the primary drivers of the decrease in operating income were organic sales decline , unfavorable currency exchange of $ 11.9 million , lower fixed cost absorption , unfavorable mix , loss on divestiture of $ 3.6 million , fixed asset disposal charges of $ 3.4 million and intangible asset impairment of $ 2.3 million , offset partially by incremental restructuring program benefits of $ 26.7 million , lower raw material costs and $ 3.0 million less restructuring and related charges . industrial operating margin was 6.4 percent compared with 11.0 percent in the prior year . 19 external sales of $ 1,461.7 million in 2015 decreased by $ 62.3 million , or 4 percent , from 2014 . the decrease in sales is attributable to unfavorable currency exchange impact of 5 percent , offset partially by an increase of 1 percent due to prior year net acquisition and divestiture activity . excluding the impact of currency exchange , sales increased in both general engineering and transportation by approximately 2 percent while the aerospace and defense served markets decreased approximately 4 percent and energy decreased approximately 6 percent . in general engineering , sales growth in the indirect channel was partially offset by weak demand in the energy market due to the downturn in the oil and gas markets . transportation end market sales increased due to strong growth in asia from our component solutions focus , partially offset by fewer new tooling programs sales in the americas and slower market conditions in europe . sales in aerospace and defense declined due to our decision to exit certain low margin business . on a regional basis , excluding impacts of acquisition and divestiture , sales increased by approximately 8 percent in asia and remained flat in the americas , while sales decreased 2 percent in europe . the sales increase in asia was driven primarily by transportation and to a lesser extent aerospace and defense and general engineering . the americas sales benefited from increases in general engineering , offset by decreases in aerospace and defense and transportation . the sales decrease in europe was driven primarily by aerospace and defense and to a lesser extent transportation . in 2015 , industrial operating income was $ 160.9 million and decreased by $ 16.1 million from 2014 . the primary drivers of the decrease in operating income were driven by increased restructuring and related charges of $ 16.6 million and lower absorption of manufacturing cost sue to an inventory reduction initiative , offset partially by the impact of acquisition , restructuring benefits and decreased operating expense as a result of cost reduction efforts . industrial operating margin was 11.0 percent compared with 11.6 percent in 2014. infrastructure replace_table_token_6_th external sales of $ 829.3 million in 2016 decreased by $ 356.2 million , or 30 percent , from 2015 . the decrease in sales was attributed to organic sales decline of 16 percent , divestiture impact of 11 percent and unfavorable currency exchange impact of 3 percent . excluding the impact of divestiture and currency exchange , sales decreased approximately 28 percent in energy , 21 percent in general engineering and 15 percent in earthworks . sales were lower year-over-year due to persistent weak demand in oil and gas , mining , industrial applications and processing end markets . on a segment regional basis excluding the impact of divestiture and currency exchange , sales decreased 25 percent in the americas , 10 percent in asia , and 1 percent in europe . the sales decrease in the americas was driven by energy , earthworks and general engineering . the sales decrease in asia was driven by earthworks and general engineering , offset partially by an increase in energy . the sales decrease in europe was driven primarily by energy , while general engineering remained flat and earthworks increased . in 2016 , infrastructure operating loss in 2016 was $ 246.3 million , a decrease of $ 263.1 million from 2015 operating loss of $ 509.4 million . the decrease in operating loss was primarily driven by lower impairment charges in the current verses prior year period . see notes 2 and see note 8 in our consolidated financial statements set forth in item 8 ( note 8 ) . the current year also includes a loss on divestiture for the sale of non-core businesses of $ 127.9 million , see note 4. in addition to the aforementioned impairment charge and loss on divestiture , operating results for the current period were negatively impacted by lower organic sales , lower fixed cost absorption and unfavorable mix , offset partially by an increase in lower raw material costs and incremental restructuring program benefits of $ 18.1 million . we are currently exploring strategic alternatives for a remaining non-core infrastructure business . the estimated net book value of the business is approximately $ 30 million as of june 30 , 2016 . as the strategic direction has not yet been determined for this business , the company can not determine if additional impairment charges will be incurred . external sales of $ 1,185.5 million in 2015 decreased by $ 127.7 million , or 10 percent , from 2014. the decrease in sales was attributed to organic sales decline of 11 percent and unfavorable currency exchange impact of 4 percent , offset partially by the impact of acquisition of 5 percent . excluding the impact of currency exchange , sales decreased approximately 11 percent in the energy market and approximately 10 percent in the earthworks markets . the energy market was impacted by the severe downturn in oil and gas markets . in the earthworks markets , underground mining remained weak throughout 2015 , while construction sales were down in all regions , particularly in europe and asia due to lower infrastructure project work year over year . general industrial sales decreased , tied largely to the impacts of the downturn in oil and gas markets , while weakness in machine demand resulted in lower surface finishing sales .

results of continuing operations sales sales of $ 2,098.4 million in 2016 decreased 21 percent from $ 2,647.2 million in 2015 reflecting an 11 percent organic sales decline , a 5 percent divestiture impact , and a 5 percent unfavorable currency exchange impact . sales decreased by 30 percent in the infrastructure segment and 13 percent in the industrial segment . drivers of the organic sales decrease were 28 percent in energy , 15 percent in earthworks , 11 percent in general engineering and 4 percent in transportation , while aerospace and defense remained flat . sales of $ 2,647.2 million in 2015 decreased 7 percent from $ 2,837.2 million in 2014 reflecting an 5 percent organic sales decline and a 4 percent unfavorable currency exchange impact , offset by 2 percent increase from prior year acquisition and divestiture activity . sales decreased by 10 percent in the infrastructure segment and 4 percent in the industrial segment . drivers of the organic sales decrease , were earthworks of 10 percent , energy markets of 10 percent , aerospace and defense of 6 percent , transportation of 1 percent and general engineering of 1 percent . gross profit gross profit decreased $ 189.9 million to $ 616.1 million in 2016 from $ 806.0 million in 2015 . this decrease was primarily due to organic sales decline , unfavorable business mix in both segments , lower fixed cost absorption , unfavorable currency exchange and divestiture impact , offset partially by lower raw material costs and restructuring benefits . the gross profit margin for 2016 was 29.4 percent compared to 30.4 percent in 2015 . gross profit decreased $ 91.0 million to $ 806.0 million in 2015 from $ 897.0 million in 2014 .

in addition , we engage in the sale of parts , service and repair , equipment rentals and training as part of a comprehensive aftermarket offering to our customer base . we operate 15 manufacturing facilities in five countries and provide products and integrated solutions to municipal , governmental , industrial and commercial customers in all regions of the world . as described in note 17 – segment information to the accompanying consolidated financial statements , the company 's business units are organized in two reportable segments : the environmental solutions group and the safety and security systems group . during 2019 , the company continued to focus on executing against its key long-term objectives , including the following : creating disciplined growth ; improving manufacturing efficiencies and costs ; leveraging invested capital ; and diversifying our customer base . highlights of the company 's achievement against these objectives in 2019 include the following : on july 1 , 2019 , we completed the acquisition of mrl , a leading u.s. manufacturer of truck-mounted and ride-on road-marking and line-removal equipment . the combination of mrl with the businesses in our environmental solutions group , extends our platform providing municipal and industrial customers with a complete suite of maintenance and infrastructure equipment and supporting solutions . on a consolidated basis , we reported a 110 -basis point year-over-year improvement in our adjusted ebitda * margin , delivering returns towards the high end of our target range . both our environmental solutions group and our safety and security systems group reported improvement in net sales and earnings , delivering adjusted ebitda margins * at or above the high end of our target ranges . we have continued to focus on new product development and are encouraged that these efforts will provide additional opportunities to further diversify our customer base , penetrate new end-markets or gain access to new geographic regions . our eighty-twenty improvement ( “ eti ” ) initiatives remain a critical part of our culture and we continue to focus on reducing product costs and improving manufacturing efficiencies across all our businesses . on july 30 , 2019 , we refinanced our credit agreement , increasing our revolving credit facility to $ 500 million , with the potential to increase the facility by an additional $ 250 million for acquisitions . the new five -year facility also includes improved pricing and more favorable terms compared to the prior agreement . with our strong balance sheet , positive operating cash flow and increased capacity under our new revolving credit facility , we are well positioned to continue to invest in internal growth initiatives , pursue strategic acquisitions and consider ways to return value to stockholders . during the year , we announced the expansion of our vactor production facility in streator , illinois . we are making good progress on the building construction and our efforts to hire up to 90 new employees at the facility . during the year , we demonstrated our commitment to returning value to stockholders by paying cash dividends of $ 19.3 million in 2019 , increased from $ 18.7 million in 2018 , and spending $ 1.0 million repurchasing shares under our authorized repurchase program . 15 our consolidated financial results in 2019 reflected year-over-year improvement in many areas , driven by both organic growth initiatives and benefits from our recent acquisitions : net sales for the year ended december 31 , 2019 increased by $ 131.8 million , or 12 % , to $ 1,221.3 million , with organic sales growth of approximately 8 % . operating income for the year ended december 31 , 2019 increased by $ 25.6 million , or 21 % , to $ 147.1 million . adjusted ebitda * for the year ended december 31 , 2019 was $ 191.3 million , up $ 32.7 million , or 21 % , and our adjusted ebitda margin * for the year ended december 31 , 2019 was 15.7 % , up from 14.6 % in 2018 . income from continuing operations for the year ended december 31 , 2019 was $ 108.4 million , up $ 14.7 million , or 16 % , from $ 93.7 million in the prior year . this equated to diluted earnings per share of $ 1.76 , up 15 % from $ 1.53 per share last year . cash flow from continuing operating activities for the year ended december 31 , 2019 was $ 103.4 million , an increase of $ 10.6 million , or 11 % . total orders for the year ended december 31 , 2019 were $ 1,269.0 million , an increase of $ 95.8 million , or 8 % . our consolidated backlog at december 31 , 2019 was $ 386.9 million , up $ 49.2 million , or 15 % , from $ 337.7 million at december 31 , 2018 . * the company uses adjusted ebitda and adjusted ebitda margin as additional measures which are representative of its underlying performance and to improve the comparability of results across reporting periods . refer to item 6. selected financial data for further discussion regarding these non-gaap metrics and a reconciliation of each to the most comparable gaap measure for each of the periods presented . 16 story_separator_special_tag 16 % , compared to the prior year , largely due to the improved operating income and the $ 1.4 million reduction in interest expense , partially offset by the $ 12.3 million increase in income tax expense . 18 year ended december 31 , 2018 vs. year ended december 31 , 2017 net sales net sales for the year ended december 31 , 2018 increased by $ 191.0 million , or 21 % , compared to the year ended december 31 , 2017 . within the environmental solutions group , net sales increased by $ 170.9 million , or 25 % , largely due to $ 98.1 million of incremental net sales resulting from the 2017 acquisition of tbei and organic sales growth of $ 72.8 million , or 12 % . story_separator_special_tag income tax expense the company recognized income tax expense of $ 17.9 million for the year ended december 31 , 2018 , compared to $ 0.5 million for the year ended december 31 , 2017. the increase in income tax expense was primarily due to higher earnings , and the impact of certain special tax items in the year ended december 31 , 2017 , which did not repeat in 2018. in addition , during the year ended december 31 , 2018 , the company recognized a tax benefit of $ 8.6 million associated with the completion of a tax planning strategy in spain , which is expected to reduce cash tax payments in that jurisdiction over the next several years . tax expense for the year ended december 31 , 2017 was lower than in 2018 , largely due to the recognition of a $ 23.0 million net tax benefit associated with the revaluation of the company 's net deferred tax liabilities in the u.s. following the reduction of the federal corporate tax rate included in the 2017 tax act . this benefit was partially offset by a $ 2.2 million net increase in valuation allowance , inclusive of a $ 3.0 million valuation allowance recorded against the company 's foreign tax credits as a result of the enactment of the 2017 tax act , the recognition of $ 0.6 million of additional tax expense associated with a change in the state tax rate in illinois , and additional taxes resulting from higher pre-tax earnings . the company 's effective tax rate for the year ended december 31 , 2018 was 16.0 % , compared to 0.8 % in 2017. the 2018 effective tax rate included the effects of the benefit from the tax planning strategy , whereas the 2017 effective tax rate included the aforementioned impacts resulting from the 2017 tax act . income from continuing operations income from continuing operations was $ 93.7 million for the year ended december 31 , 2018 , compared with $ 60.5 million in the year ended december 31 , 2017 , largely due to the improved operating income and the absence of $ 6.1 million in pension settlement charges incurred in the year ended december 31 , 2017 , partially offset by the $ 17.4 million increase in income tax expense , the $ 2.0 million increase in interest expense and the $ 1.4 million reduction in other income . gain from discontinued operations and disposal , net of tax in the year ended december 31 , 2018 , the company recorded a net gain from discontinued operations and disposal of $ 0.3 million , primarily due to adjustments of estimated product liability obligations of previously discontinued businesses , resulting from updated actuarial valuations . in the year ended december 31 , 2017 , the company recorded a net gain from discontinued operations and disposal of $ 1.1 million , primarily due to an adjustment of foreign tax credits associated with the sale of the fire rescue group and adjustments of estimated product liability obligations of previously discontinued businesses , resulting from updated actuarial valuations . orders & backlog replace_table_token_4_th on the date of acquisition , mrl had a backlog of orders from its customers of $ 26.7 million . these acquired orders were included in total orders reported for the year ended december 31 , 2019 . on the date of acquisition , tbei had a backlog of orders from its customers of $ 44.8 million . these acquired orders were included in total orders reported for the year ended december 31 , 2017 . 20 year ended december 31 , 2019 vs. year ended december 31 , 2018 total orders for the year ended december 31 , 2019 were $ 1,269.0 million , an increase of $ 95.8 million , or 8 % , compared to the prior year . the environmental solutions group reported total orders of $ 1,038.0 million in 2019 , an increase of $ 92.2 million , or 10 % , compared to the prior year . the improvement was driven by incremental orders of $ 56.8 million related to the acquisition of mrl and organic growth of $ 35.4 million , or 4 % , which was largely the result of improved orders for safe-digging trucks , refuse trucks , and dump truck bodies , as well as higher aftermarket demand , partially offset by reductions in orders for industrial vacuum loaders and trailers . within the safety and security systems group , orders increased by $ 3.6 million , or 2 % , compared to the prior year , primarily driven by improvements in orders for industrial signaling equipment . u.s. municipal and governmental orders increased by $ 6.0 million , or 1 % , due to a $ 8.1 million improvement within the environmental solutions group , primarily due to the acquisition of mrl , which contributed $ 15.9 million of orders , a $ 4.6 million improvement in orders for dump truck bodies , and a $ 2.0 million increase in aftermarket demand . these improvements were partially offset by decreases in orders for sewer cleaners and street sweepers of $ 7.6 million and $ 7.1 million , respectively . within the safety and security systems group , there was a $ 2.1 million order reduction , mainly due to a $ 4.9 million decrease in orders for public safety products , partially offset by a $ 2.8 million improvement in orders for warning systems . u.s. industrial and commercial orders increased by $ 54.7 million , or 11 % , largely driven by a $ 52.5 million increase within the environmental solutions group , primarily related to the acquisition of mrl , which contributed $ 39.0 million of orders . in addition , aftermarket demand increased by $ 8.1 million , and orders for safe-digging trucks and sewer cleaners improved by $ 17.7 million and $ 7.4 million , respectively .

results of operations the following table summarizes our consolidated statements of operations as of , and for the years ended , december 31 , 2019 , 2018 and 2017 , and illustrates the key financial indicators used to assess our consolidated financial results : replace_table_token_3_th ( a ) the company uses adjusted ebitda and adjusted ebitda margin as additional measures which are representative of its underlying performance and to improve the comparability of results across reporting periods . refer to item 6. selected financial data for further discussion regarding these non-gaap metrics and a reconciliation of each to the most comparable gaap measure for each of the periods presented . year ended december 31 , 2019 vs. year ended december 31 , 2018 net sales net sales increased by $ 131.8 million , or 12 % , for the year ended december 31 , 2019 , compared to the prior year . within the environmental solutions group , net sales increased by $ 129.4 million , or 15 % , primarily due to a $ 39.7 million contribution from mrl , and increases in shipments of safe-digging trucks , street sweepers , and dump truck bodies of $ 38.1 million , $ 18.0 million , and $ 11.9 million , respectively . in addition , aftermarket revenues increased by $ 15.9 million , represented by higher rental income and improved parts and service sales . within the safety and security systems group , net sales increased by $ 2.4 million , or 1 % , primarily due to improvements in industrial signaling equipment and public safety products of $ 6.6 million and $ 1.4 million , respectively , partially offset by a $ 2.7 million reduction in sales of warning systems and an unfavorable foreign currency translation impact of $ 2.9 million .

our effective tax rates differed from the u.s. corporate statutory tax rate of 35.0 % , primarily due to the mix of pre-tax income or loss earned in certain jurisdictions and the change in our valuation allowance . we record a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized . as of december 31 , 2014 and december 31 , 2013 , a valuation allowance of $ 90.4 million and $ 90.0 million , respectively , has been provided for net operating loss carryforwards and other deferred tax assets . we increased our valuation allowance by $ 0.4 million in 2014 , which includes a $ 9.8 million increase related to changes in other comprehensive income ( loss ) , partially offset by a $ 9.4 million decrease to the income tax provision . the $ 9.4 million is comprised of $ 7.6 million related to current year operating income and $ 1.8 million related to the assessment of our ability to utilize net operating loss carryforwards in future periods . we decreased our valuation allowance by $ 0.4 million in 2013 , which includes a $ 0.5 million decrease due to changes in other comprehensive income ( loss ) , partially offset by a $ 0.1 million increase to the income tax provision . the $ 0.1 million is comprised of $ 10.2 million related to current year operating losses , offset by a $ 10.1 million benefit related to the tax effect of unrealized pension gains . we consider the reversal of deferred tax liabilities within the net operating loss carryforward period , projected future taxable income and tax planning strategies in making this assessment . excluding the change in our valuation allowance , our effective tax rates would have been a 229.0 % expense and an 81.4 % benefit for the years ended december 31 , 2014 and 2013 , respectively . net income ( loss ) attributable to kraton net income attributable to kraton was $ 2.4 million or $ 0.07 per diluted share for the year ended december 31 , 2014 , an increase in net income of $ 3.0 million , compared to a net loss of $ 0.6 million or $ 0.02 per diluted share for the year ended december 31 , 2013 . 38 net income for the year ended december 31 , 2014 was negatively impacted by the following items , net of tax : restructuring and other charges of $ 2.7 million or $ 0.08 per diluted share fees related to the terminated combination agreement with lcy of $ 9.4 million or $ 0.29 per diluted share production downtime at our belpre , ohio , and berre , france , facilities of $ 10.2 million , or $ 0.31 per diluted share a charge for impairment of long-lived assets of $ 4.6 million or $ 0.14 per diluted share start-up charges related to the joint venture with fpcc of $ 0.8 million or $ 0.02 per diluted share impairment of spare parts inventory associated with the coal-burning boilers of $ 0.4 million or $ 0.01 per diluted share charges associated with the termination of the defined benefit restoration pension plan of $ 0.4 million or $ 0.01 per diluted share negative spread between fifo and ecrc of $ 9.2 million or $ 0.28 per diluted share net income for the year ended december 31 , 2014 was positively impacted by the following item : a reduction in our income tax valuation allowance of $ 1.8 million or $ 0.05 per diluted share related to the assessment of our ability to utilize net operating losses in future periods net loss for the year ended december 31 , 2013 was negatively impacted by the following items , net of tax : restructuring and other charges of $ 0.7 million or $ 0.02 per diluted share fees related to the terminated combination agreement with lcy of $ 9.2 million or $ 0.28 per diluted share charges associated with the credit facility refinancing of $ 5.8 million or $ 0.18 per diluted share production downtime related to mact legislation of $ 3.5 million or $ 0.11 per diluted share negative spread between fifo and ecrc of $ 30.7 million or $ 0.94 per diluted share . net loss for the year ended december 31 , 2013 was positively impacted by the following item : income tax benefit related to a portion of the change in our valuation allowance for deferred tax assets of $ 10.1 million or $ 0.31 benefit per diluted share year ended december 31 , 2013 compared to year ended december 31 , 2012 revenue revenue amounted to $ 1,292.1 million on sales volumes of 313.5 kilotons for the year ended december 31 , 2013 compared to $ 1,423.1 million on sales volumes of 313.4 kilotons for the year ended december 31 , 2012 . the $ 131.0 million or 9.2 % revenue decline ( a decline of $ 121.7 million or 8.6 % excluding a $ 9.3 million negative effect from currency fluctuations ) was largely due to a reduction in global product sales prices associated with lower average raw material costs of $ 110.4 million and a $ 10.3 million negative effect associated with revenue mix . with respect to revenue for each of our product groups : cariflex revenue was $ 116.0 million for the year ended december 31 , 2013 compared to $ 105.9 million for the year ended december 31 , 2012 . the $ 10.1 million or 9.5 % revenue increase ( an increase of $ 14.8 million or 14.0 % excluding a $ 4.7 million negative effect from currency fluctuations ) reflects a 13.5 % increase in sales volumes , mainly in the surgical glove market and other medical applications . story_separator_special_tag specialty polymers revenue was $ 412.0 million for the year ended december 31 , 2013 compared to $ 464.3 million for the year ended december 31 , 2012 . the $ 52.3 million or 11.3 % revenue decline ( a decline of $ 51.3 million or 11.0 % excluding a $ 1.0 million negative effect from currency fluctuations ) was due to lower sales volumes and lower average selling prices , reflective of lower average raw materials costs . the decline in sales volume was primarily due to lower sales in personal care , cable gels , polymer modification and industrial applications . performance products revenue was $ 762.9 million for the year ended december 31 , 2013 compared to $ 850.8 million for the year ended december 31 , 2012 . the $ 87.8 million or 10.3 % revenue decline ( a decline 39 of $ 84.2 million or 9.9 % excluding a $ 3.6 million negative effect from currency fluctuations ) was due to lower average selling prices indicative of lower average raw material costs , primarily butadiene , partially offset by increased sales volume . the increase in sales volume was primarily due to increased sales into paving and roofing , personal care , and packaging & industrial adhesives applications . with respect to paving and roofing volumes , although first half 2013 sales volumes were down 15.1 % compared to the first half of 2012 , primarily due to the effect of poor weather conditions in north america and europe , second half 2013 sales volumes were up 14.7 % due to improved demand compared to the second half of 2012. as a result , overall sales volume for paving and roofing applications increased 1.0 % year on year . with respect to innovation sales , we experienced growth in personal care applications and improved demand for our hima paving applications . cost of goods sold cost of goods sold was $ 1,066.3 million for the year ended december 31 , 2013 compared to $ 1,191.7 million for the year ended december 31 , 2012 . the $ 125.4 million or 10.5 % decrease was driven largely by an $ 119.6 million reduction in raw material costs , a $ 5.4 million reduction due to changes in foreign currency exchange rates , a $ 4.6 million reduction due to sales mix , and the absence of net charges amounting to $ 2.3 million recorded in 2012 , which related to a property tax dispute in france , storm-related charges , restructuring and other charges and the lbi settlement . partially offsetting these decreases in cost of goods sold were increased costs from the production downtime related to the mact legislation of $ 3.5 million , increased turnaround costs of $ 2.5 million , and other increases in cost of goods sold . gross profit gross profit was $ 225.8 million for the year ended december 31 , 2013 compared to $ 231.4 million for the year ended december 31 , 2012 , a decrease of $ 5.6 million or 2.4 % . gross profit as a percentage of revenue was 17.5 % and 16.3 % for the years ended december 31 , 2013 and 2012 , respectively . operating expenses research and development expenses were $ 32.0 million for the year ended december 31 , 2013 compared to $ 31.0 million for the year ended december 31 , 2012 , an increase of $ 1.0 million or 3.2 % primarily due to an increase in employee related costs partially offset by decreased lease expense for our research and development facilities . research and development expenses were 2.5 % and 2.2 % of revenue for the years ended december 31 , 2013 and 2012 , respectively . selling , general and administrative expenses were $ 105.6 million for the year ended december 31 , 2013 compared to $ 98.6 million for the year ended december 31 , 2012 , an increase of $ 7.0 million or 7.1 % . the increase was primarily due to $ 9.2 million of professional fees related to the terminated combination agreement with lcy , a $ 1.1 million increase in costs associated with the joint venture with fpcc and a $ 1.0 million increase in other professional fees , partially offset by a $ 1.0 million decrease in employee related costs , lower legal expenses of $ 1.1 million , and the absence of a 2012 retirement plan settlement charge of $ 1.1 million and a $ 0.6 million charge associated with the resolution of a property tax dispute in france during 2012. selling , general and administrative expenses were 8.2 % and 6.9 % of revenue for the years ended december 31 , 2013 and 2012 , respectively . depreciation and amortization was $ 63.2 million for the year ended december 31 , 2013 compared to $ 64.6 million for the year ended december 31 , 2012 , a decrease of $ 1.4 million or 2.1 % . we did not incur any impairment charges of long-lived assets for the year ended december 31 , 2013 compared to a $ 5.4 million charge for the year ended december 31 , 2012 . interest expense , net interest expense , net was $ 30.5 million for the year ended december 31 , 2013 compared to $ 29.3 million for the year ended december 31 , 2012 , an increase of $ 1.2 million or 4.0 % . the reduction in interest expense associated with lower outstanding indebtedness was more than offset by charges aggregating $ 5.8 million incurred in connection with our 2013 refinancing . income tax expense ( benefit ) our income tax provision was a $ 3.9 million benefit and a $ 19.3 million expense for the years ended december 31 , 2013 and 2012 , respectively . our effective tax rate was 79.9 % and 619.8 % for the years ended december 31 , 2013 and 2012 ,

results of operations factors affecting our results of operations raw materials . we use butadiene , styrene , and isoprene as our primary raw materials in manufacturing our products , and our results of operations are directly affected by the cost of these raw materials . on a fifo basis , these monomers together represented approximately $ 512.8 million , $ 609.5 million and $ 732.9 million or 51.6 % , 57.2 % and 61.5 % of our total cost of goods sold for the years ended december 31 , 2014 , 2013 and 2012 , respectively . since the cost of our three primary raw materials comprise a significant amount of our total cost of goods sold , our selling prices for our products and therefore our total revenue is impacted by movements in our raw material costs , as well as the cost of other inputs . the cost of these monomers has generally correlated with changes in energy prices and is generally influenced by supply and demand factors and prices for natural and synthetic rubber . in aggregate , average purchase prices were lower for butadiene , isoprene and styrene during 2014 compared to 2013 . average butadiene and isoprene purchase prices were lower during 2013 compared to 2012 while average styrene purchase prices were higher in 2013 compared to 2012 . we use the fifo basis of accounting for inventory and cost of goods sold , and therefore gross profit . in periods of raw material price volatility , reported results under fifo will differ from what the results would have been if cost of goods sold were based on ecrc . specifically , in periods of rising raw material costs , reported gross profit will be higher under fifo than under ecrc . conversely , in periods of declining raw material costs , reported gross profit will be lower under fifo than under ecrc .

the fair value of the common stock at each award grant date was based upon a variety of factors , including the results obtained from an independent third-party valuation , the company 's financial position and historical financial performance , the status of technological developments within the company 's proposed products , an evaluation or benchmark of the company 's competition , the current business climate in the marketplace , the illiquid nature of the common stock , arm story_separator_special_tag the following discussion and analysis of financial condition and results of operations is provided to enhance the understanding of , and should be read in conjunction with part i , item i , “ business ” and item 8 , ‘ financial statements and supplementary data. ” for information on risks and uncertainties related to our business that may make past performance not indicative of future results or cause actual results to differ materially from any forward looking statements , see “ special note regarding forward-looking statements , ” and part i , item 1a , ‘ risk factors. ” overview we are a clinical-stage biopharmaceutical company focused on developing and commercializing novel cancer therapeutics that reactivate the mutant p53 tumor suppressor protein . p53 is the protein expressed from the tp53 gene , the most commonly mutated gene in cancer . we believe that mutant p53 is an attractive therapeutic target due to the high incidence of p53 mutations across a range of cancer types and its involvement in key cellular activities such as apoptosis . cancer patients with mutant p53 face a significantly inferior prognosis even when treated with the current standard of care , and a large unmet need for these patients remains . our lead product candidate , apr-246 , or eprenetapopt , is a small molecule p53 reactivator that is in clinical development for hematologic malignancies , including myelodysplastic syndromes , or mds , and acute myeloid leukemia , or aml . eprenetapopt has received orphan drug , fast track and breakthrough therapy designations from the fda for mds , fast track designation from the fda for aml and orphan drug designation from the european commission for mds and aml , and we believe eprenetapopt will be a first-in-class therapy if approved by applicable regulators . in june 2020 , we completed full enrollment of 154 patients in a pivotal phase 3 trial of eprenetapopt with azacitidine for frontline treatment of tp53 mutant mds . the pivotal phase 3 trial is supported by data from two phase 1b/2 investigator initiated trials , one in the u.s. and one in france , testing eprenetapopt with azacitidine as frontline treatment in tp53 mutant mds and aml patients . the complete data sets from the u.s. and french phase 1b/2 trials were published in the journal of clinical oncology in january 2021 and february 2021 , respectively . in december 2020 , we announced that our pivotal phase 3 trial failed to meet its predefined primary endpoint of complete remission ( cr ) rate . analysis of the primary endpoint at this data cut demonstrated a higher cr rate in the experimental arm receiving eprenetapopt with azacitidine versus the control arm receiving azacitidine alone , but did not reach statistical significance . we are conducting , supporting and planning multiple clinical trials of eprenetapopt : ● phase 2 mds/aml post-transplant trial -- we have completed enrollment of 33 patients in a single-arm , open-label phase 2 trial evaluating eprenetapopt with azacitidine as post-transplant maintenance therapy in tp53 mutant mds and aml patients who have received an allogeneic stem cell transplant . we anticipate initial results from the primary endpoint of relapse-free survival at 12 months in the second quarter of 2021 . ● phase 1/2 aml trial -- we are currently enrolling a phase 1/2 clinical trial evaluating the safety , tolerability , and preliminary efficacy of eprenetapopt therapy in tp53 mutant aml patients . the lead-in portion of the trial evaluated the tolerability of eprenetapopt with venetoclax , with or without azacitidine , and no dose-limiting toxicities were observed in 12 patients receiving either regimen . based on these results , we have expanded the trial to treat 33 additional frontline tp53 mutant aml patients with the combination of eprenetapopt , venetoclax and azacitidine . in the 19 frontline aml patients who are evaluable for efficacy with the triplet regimen , we have observed a 63 % cr + cri composite response rate and a 31 % cr rate . we anticipate completion of enrollment in the triplet regimen expansion cohort during the second quarter of 2021 and availability of preliminary response rate data from the cohort also in the second quarter of 2021 . ● phase 1 nhl trial -- we are currently enrolling a phase 1 clinical trial in relapsed/refractory tp53 mutant chronic lymphoid leukemia ( cll ) assessing eprenetapopt with venetoclax and rituximab and eprenetapopt with ibrutinib in order to further assess eprenetapopt in hematological malignancies . the first patient was enrolled in the first quarter of 2021. we are also planning to evaluate the combination of eprenetapopt with venetoclax in relapsed/refractory mantle cell lymphoma . 118 ● phase 1/2 solid tumor trial – we are currently enrolling a phase 1/2 clinical trial in relapsed/refractory gastric , bladder and non-small cell lung cancers assessing eprenetapopt with anti-pd-1 therapy . the dose-escalation phase of the trial enrolled 6 patients with advanced solid tumors and no dose-limiting toxicities were observed . based on these results , we are enrolling expansion cohorts for patients with advanced gastric , bladder and non-small cell lung cancers and have currently enrolled 8 patients across these expansion arms . our second product candidate , apr-548 , is a next generation p53 reactivator that is being developed in an oral dosage form . we have planned a phase 1 dose-escalation clinical trial evaluating safety , tolerability and preliminary efficacy of apr-548 with azacitidine in frontline and relapsed/refractory mds patients . we anticipate the first patient to be enrolled early in the second quarter of 2021 . story_separator_special_tag we will continue to actively monitor the situation and may take further actions that could alter our business operations as may be required by national , state , or local authorities , or that we determine are in the best interests of our employees and stockholders . ​ as a result of the covid 19 pandemic and policy responses to it , in april and may 2020 we did initially observe a decrease in both patient screening and patient enrollment in certain of our ongoing clinical trials . patient screening and the number of patients eligible for enrollment in our clinical trials has returned to expected levels . together with our investigators and clinical sites , we continue to assess the impact of the coronavirus pandemic on enrollment and the ability to maintain patients enrolled in our clinical trials and the corresponding impact on the timing of the completion of our ongoing clinical trials . ​ we have assessed both capacity and the current clinical supply chain associated with the production of eprenetapopt and have observed no disruptions to date in our clinical supply chain and our ability to provide supply for our on-going clinical trials . we will continue to monitor and assess the potential impact of the covid-19 pandemic on our clinical trial supply chain . ​ there are many uncertainties regarding the covid-19 pandemic , and we are closely monitoring the impact of the pandemic on all aspects of our business , including how it will impact our clinical trials , employees , suppliers , vendors and business partners . while the pandemic did not materially affect our financial results and business operations for the year ended december 31 , 2020 , we are unable to predict the impact that covid-19 will have on our financial position 120 and operating results at this time due to numerous uncertainties such as the duration and spread of the outbreak . we will continue to assess the evolving impact of the covid-19 pandemic and will make adjustments to our operations if necessary . ​ components of our results of operations ​ revenue we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products in the near future . if our development efforts for eprenetapopt 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 collaboration or license agreements that we may enter into with third parties . operating expenses our expenses since inception have consisted solely of research and development costs and general and administrative costs . research and development expenses research and development expenses consist primarily of costs incurred for our research activities , including our discovery efforts , and the development of our product candidates , and include : ● expenses incurred under agreements with third parties , including contract research organizations , or cros , that conduct research , preclinical activities and clinical trials on our behalf as well as contract manufacturing organizations , or cmos , that manufacture our product candidates for use in our preclinical and clinical trials ; ● salaries , benefits and other related costs , including stock-based compensation expense , for personnel engaged in research and development functions ; ● costs of outside consultants , including their fees , stock-based compensation and related travel expenses ; ● costs of laboratory supplies and acquiring , developing and manufacturing preclinical study and clinical trial materials ; ● expenses related to compliance with regulatory requirements ; and ● facility-related expenses , which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs . 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 patient enrollment , clinical site activations , 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 are reflected in our financial statements as prepaid or accrued research and development expenses . we typically use our employee and infrastructure resources across our development programs . we track outsourced development costs and payments made to our research partners by product candidate or development program , but we do not allocate personnel costs or other internal costs to specific development programs or product candidates . 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 that our research and development expenses 121 will continue to increase for the foreseeable future as we initiate additional clinical trials of eprenetapopt , pursue later stages of clinical development of eprenetapopt , initiate clinical trials for product candidates other than eprenetapopt and continue to discover and develop additional product candidates . we can not determine with certainty the duration and costs of the current or future clinical trials of our product candidates or if , when , or to what extent we will generate revenue from the commercialization and sale of any our product candidates for which we obtain marketing approval . we may never succeed in obtaining marketing approval for any of our product candidates .

results of operations comparison of the years ended december 31 , 2020 and 2019 ​ replace_table_token_2_th ​ research and development expenses ​ replace_table_token_3_th ​ research and development expenses for the year ended december 31 , 2020 were $ 37.9 million , compared to $ 21.0 million for the year ended december 31 , 2019. the increase of $ 16.9 million was primarily due to the continued development of our lead product candidate eprenetapopt as follows : ● an increase of $ 6.1 million related to our pivotal phase 3 clinical trial of eprenetapopt with azacitidine for frontline treatment of tp53 mutant mds which completed enrollment in q2 2020. the $ 6.1 million increase included $ 3.5 million related to the development of an in vitro companion diagnostic test for eprenetapopt . the agreement for the development of an in vitro diagnostic test was terminated in december 2020 ; 126 ● an increase of $ 1.6 million related to our phase 1/2 clinical trial evaluating the safety , tolerability , and preliminary efficacy of eprenetapopt therapy in tp53 mutant aml patients . ● an increase of $ 1.6 million related to our phase 2 post-transplant mds/aml clinical trial ; ● an increase of $ 1.6 million related to our phase 1/2 clinical trial in relapsed/refractory gastric , bladder and non-small cell lung cancers assessing eprenetapopt with anti-pd-1 therapy which enrolled its first patient in q3 2020 ; ● an increase of $ 1.0 million related to the development of a phase 1/2 clinical trial in relapsed/refractory tp53 mutant chronic lymphoid leukemia ( cll ) assessing eprenetapopt with venetoclax and rituximab and eprenetapopt with ibrutinib in order to further assess eprenetapopt in hematological malignancies ; ● an increase of $ 1.0 million in manufacturing expenses related to the scale-up for the anticipated commercial production of eprenetapopt .

we deliver optimized solutions to our customers through our unique product realization value stream . our customer-focused solutions model seamlessly integrates innovative product conceptualization , design , commercialization , manufacturing , fulfillment and sustaining solutions . plexus delivers comprehensive end-to-end solutions for customers in the americas ( “ amer ” ) , europe , middle east , and africa ( “ emea ” ) and asia-pacific ( “ apac ” ) regions . we provide award-winning customer service to more than 140 branded product companies in the healthcare/life sciences , industrial/commercial , networking/communications and defense/security/aerospace market sectors . our customers have stringent quality , reliability and regulatory requirements , requiring exceptional production and supply chain agility . their products require complex configuration management , direct order fulfillment ( to end customers ) and global logistics management and aftermarket services . to service the complexities that our customers ' products demand , we utilize our product realization value stream , addressing our customers ' products from concept to end of life . the following information should be read in conjunction with our consolidated financial statements included herein and “ risk factors ” included in part i , item 1a herein . story_separator_special_tag style= '' font-family : inherit ; font-size:10pt ; '' > our net sales by market sector for fiscal 2016 , 2015 and 2014 were as follows ( in millions ) : replace_table_token_5_th healthcare/life sciences . net sales for fiscal 2016 in the healthcare/life sciences sector increased $ 30.1 million , or 4.0 % , as compared to fiscal 2015 . the increase was primarily due to a $ 41.9 million increase in net sales due to the ramp of various new programs for several existing customers , $ 26.4 million from the ramp of production for three new customers and a net increase in end-market demand . partially offsetting the increases were decreases in net sales of $ 20.3 million due to three customers bringing the manufacturing process for four programs in house , $ 7.0 million due to two customer disengagements and $ 5.5 million due to a product disengagement with a customer . net sales for fiscal 2015 in the healthcare/life sciences sector increased $ 52.9 million , or 7.6 % , as compared to fiscal 2014. the increase was primarily due to $ 39.6 million of new program ramps for one customer , increased end-market demand and new program ramps across several other customers in this sector . the increase was partially offset by a program loss for one customer , which resulted in a decrease of $ 14.6 million , and decreased net sales to several other customers as a result of program ramp downs and decreased end-market demand . industrial/commercial . net sales for fiscal 2016 in the industrial/commercial sector increased $ 88.7 million , or 12.9 % , as compared to fiscal 2015 . the increase was primarily due to ramps of production for a major customer , which resulted in increased net sales of $ 221.2 million . partially offsetting the increase were decreases of $ 42.7 million related to the previously announced disengagement of a customer , $ 30.2 million that resulted from two customers revising their business models as a result of decreased end-market demand and $ 12.4 million due to pilot programs for three customers not transitioning into the production stage . the remaining decrease was due to decreased customer end-market demand , due in part to the downturn in the oil and gas markets . net sales for fiscal 2015 in the industrial/commercial sector increased $ 102.0 million , or 17.5 % , as compared to fiscal 2014. the increase was primarily due to a $ 45.6 million increase in net sales to a new customer in fiscal 2015 , a $ 36.8 million increase related to new programs with existing customers , a $ 24.4 million increase related to new customers secured in fiscal 2014 that ramped in fiscal 2015 , and several other customers with increased end-market demand . these increases were partially offset by a $ 22.1 million decrease due to the disengagement of a customer as a result of the inability to reach contractual terms , and several other customers with decreased end-market demand . networking/communications . net sales for fiscal 2016 in the networking/communications sector decreased $ 247.4 million , or 29.3 % , as compared to fiscal 2015 . the reduction in net sales was primarily driven by a $ 90.7 million decrease in net sales due to a previously announced program disengagement , a $ 75.8 million decrease in net sales to another customer that resulted from decreased end-market demand for one of its products and a $ 29.2 million decrease due to the disengagement of a customer . overall decreased end-market demand drove the remaining reduction in net sales during the year . partially offsetting the decreases was a $ 10.2 million increase in net sales due to the ramp of production of new programs for two existing customers . net sales for fiscal 2015 in the networking/communications sector increased $ 82.0 million , or 10.8 % , as compared to fiscal 2014. the change was primarily the result of a $ 50.1 million increase in net sales to a key customer as a result of increased end-market demand , a $ 36.1 million increase in net sales from one of our largest customers as a result of new product ramps and expansion of its end-market demand , and a $ 16.0 million increase related to a new customer . additionally , five customers ' net sales increased $ 37.5 million , in aggregate , primarily as a result of increased end-market demand as well as new program ramps . these increases were partially offset by a $ 19.8 million decrease due to a customer that experienced softening in its end-market demand , a $ 10.6 million decrease related to a customer disengagement and several other customers with decreased end-market demand . defense/security/aerospace . story_separator_special_tag the reduction in s & a resulted from a $ 6.4 million decrease in variable compensation expense , which was partially offset by a $ 5.4 million increase in stock-based compensation expense primarily due to $ 5.2 million of accelerated stock-based compensation expense related to modifications of awards held by the company 's former president and chief executive officer in connection with his retirement . operating margin decreased to 3.9 % in fiscal 2016 from 4.3 % in fiscal 2015 . 28 operating income for fiscal 2015 increased $ 14.8 million as compared to fiscal 2014 as a result of the increase in gross profit previously discussed and a $ 9.6 million decrease in restructuring and other charges , which were higher in fiscal 2014 because they largely related to the consolidation of manufacturing facilities in wisconsin , and the relocation of manufacturing operations from juarez , mexico to guadalajara . this was partially offset by an $ 8.7 million increase in s & a primarily due to increased variable compensation expense , higher compensation expense due to increased headcount and an increase in professional services expense . operating margin increased to 4.3 % for fiscal 2015 from 4.2 % for fiscal 2014. other income ( expense ) . other expense for fiscal 2016 increased $ 2.9 million as compared to fiscal 2015 . the increase in other expense for fiscal 2016 was primarily the result of a $ 3.0 million increase in foreign exchange losses that resulted from foreign exchange volatility . other expense for fiscal 2015 increased $ 1.9 million as compared to fiscal 2014. the increase in other expense for fiscal 2015 was primarily the result of a $ 1.7 million increase in interest expense due to higher average borrowings , a $ 0.8 million increase in miscellaneous expense due to fiscal 2014 having benefited from a favorable non-recurring accrual related to the termination of an agreement for additional land in hangzhou , china , and an additional $ 1.4 million increase in other miscellaneous expenses . this was partially offset by a $ 1.4 million increase in foreign exchange gains and a $ 0.6 million increase in interest income due to an increase of cash and cash equivalents . income taxes . income tax expense and effective annual income tax rates for fiscal 2016 , 2015 and 2014 were as follows ( dollars in millions ) : replace_table_token_6_th income tax expense for fiscal 2016 was $ 11.0 million compared to $ 12.0 million for fiscal 2015 and $ 6.1 million for fiscal 2014. the company 's annual effective tax rates vary from the u.s. statutory rate of 35.0 % primarily as a result of the mix of earnings from u.s. and foreign jurisdictions and a tax holiday granted to a subsidiary located in the apac region where the company derives a significant portion of its earnings . the effective tax rate for fiscal 2016 was higher than the effective tax rate for fiscal 2015 primarily as a result of the overall decrease in income before taxes in jurisdictions where the company does not pay taxes . the effective tax rate for fiscal 2015 was higher than the effective rate for fiscal 2014 primarily as a result of the geographic distribution of worldwide earnings and tax benefits of $ 3.8 million primarily due to the lapse of statute of limitations related to certain u.s. tax examinations during fiscal 2014. during fiscal 2016 , the company repatriated $ 100.0 million of current year foreign earnings from the apac region to the u.s. , which had no income statement impact due to u.s. net operating losses , the use of u.s. tax credits and the reversal of the related valuation allowance . the repatriation does not impact the permanently reinvested assertions made by the company regarding prior period foreign earnings as the remittance was distributed exclusively from current year foreign earnings . the company does not have a history of repatriating foreign earnings by way of a taxable dividend and considers the fiscal 2016 remittance to be an isolated occurrence . the company does not anticipate a similar repatriation in the foreseeable future . the company has been granted a tax holiday for a foreign subsidiary operating in the apac region . this tax holiday will expire on december 31 , 2024 , and is subject to certain conditions with which the company expects to comply . the company benefited from a second tax holiday within the apac region until december 31 , 2013 , when it expired under the terms of the company 's agreement with the local taxing authority . in fiscal 2016 , 2015 and 2014 , these holidays resulted in tax reductions of approximately $ 27.1 million ( $ 0.81 per basic share ) , $ 29.9 million ( $ 0.89 per basic share ) , and $ 24.1 million ( $ 0.71 per basic share ) , respectively . see also note 6 , `` income taxes , '' in notes to consolidated financial statements for additional information regarding the company 's tax rate . the annual effective tax rate for fiscal 2017 is expected to be approximately 9.0 % to 11.0 % . net income . net income for fiscal 2016 decreased $ 17.9 million , or 19.0 % , to $ 76.4 million from fiscal 2015 . net income decreased primarily as a result of decreased gross profit , increased restructuring and other charges and increased foreign exchange losses , partially offset by decreases in s & a and income tax expense , as discussed previously . net income for fiscal 2015 increased $ 7.1 million , or 8.2 % , to $ 94.3 million from fiscal 2014. net income increased primarily as a result of increased gross profit and lower restructuring and other charges , partially offset by increases in s & a , interest expense and income tax expense , as discussed previously . 29 diluted earnings per share .

results of operations consolidated performance summary . the following table presents selected consolidated financial data for fiscal 2016 , 2015 and 2014 ( dollars in millions , except per share data ) : 2016 2015 * 2014 net sales $ 2,556.0 $ 2,654.3 $ 2,378.2 cost of sales 2,328.6 2,414.7 2,152.7 gross profit 227.4 239.6 225.6 gross margin 8.9 % 9.0 % 9.5 % operating income 99.4 115.4 100.6 operating margin 3.9 % 4.3 % 4.2 % net income 76.4 94.3 87.2 diluted earnings per share $ 2.24 $ 2.74 $ 2.52 return on invested capital * * 13.8 % 14.0 % 15.2 % economic return * * 2.8 % 3.0 % 4.2 % * fiscal 2015 included 53 weeks , while all other periods presented included 52 weeks . * * non-gaap metric ; refer to `` return on invested capital ( `` roic '' ) and economic return '' below for more informationand exhibit 99.1 for a reconciliation .

important information about the bases for these plans and assumptions and factors that may cause our actual results to differ materially from these statements is contained below and in item 1a . “ risk factors ” of this annual report . information about our financial reporting we use certain operating measures , including our subscription measures , and non-gaap financial measures when discussing our business and results . we discuss these measures , how we use them and how they are calculated in “ subscription measures ” and “ non-gaap financial measures ” below . unless otherwise indicated , all references to a year reflect our fiscal year that ends on september 30. executive overview we executed well across our key strategic and operational objectives in 2017. bookings grew year over year , reflecting broad-based strength across our iot , cad and plm businesses and strength in europe , the americas and our global channel . our subscription transition initiative also progressed well throughout 2017 , with subscription bookings constituting 69 % of all software license bookings for the year and subscription revenue up 136 % over 2016. finally , we improved our operating margins over 2016 , despite a higher than expected subscription mix for the year . 16 replace_table_token_1_th the increase in total revenue and subscription revenue reflects our exit from the trough in revenue and eps growth that occurs when transitioning from a perpetual to subscription business model . as our mix of subscription sales relative to perpetual license sales has increased , perpetual license revenue and support revenue have declined . additionally , professional services revenue has declined in accordance with our strategy to migrate more services engagements to our partners and to deliver products that require less consulting and training services . license and subscription bookings grew 4 % in 2017 over 2016 , to $ 419 million , and grew 21 % over 2015. excluding a $ 20 million slm mega deal from the fourth quarter of 2016 , license and subscription bookings grew 10 % in 2017 over 2016 . 17 the increase in subscription revenue relative to perpetual license revenue has resulted in an increase in our recurring software revenue , with approximately 73 % of our total revenue in 2017 from recurring software revenue streams , compared to 68 % in 2016 and 59 % in 2015. annualized recurring revenue was approximat ely $ 905 m illion as of the fourth quarter of 2017 , an increase of 12 % compared to the fourth quarter of 2016. year ended september 30 , 2017 september 30 , 2016 earnings measures change operating margin 3.5 % ( 3.2 ) % 208 % earnings ( loss ) per share $ 0.05 $ ( 0.48 ) 111 % non-gaap operating margin ( 1 ) 16.1 % 15.1 % 7 % non-gaap eps ( 1 ) $ 1.17 $ 1.19 ( 2 ) % ( 1 ) non-gaap measures are reconciled to gaap results under results of operations - non-gaap measures below . gaap and non-gaap operating income in 2017 reflect an increase in gross margin associated with higher revenue and a lower mix of professional services revenue , which has lower margins than our software revenue , partially offset by higher costs associated with our cloud services revenue . additionally , operating margin improved due to lower restructuring charges in 2017 , which were $ 68.3 million lower in 2017 compared to 2016. our gaap and non-gaap earnings reflect an additional $ 12.5 million in interest expense due to our 2016 issuance of $ 500 million of 6.0 % senior , unsecured long-term notes and a higher gaap and non-gaap tax rate in 2017 compared to 2016. we ended 2017 with cash , cash equivalents and marketable securities of $ 330 million , up from $ 328 million at the end of 2016. we generated $ 135 million of cash from operations in 2017 , which included $ 37 million of restructuring payments and a $ 3 million legal settlement payment . we used cash from operations to repurchase $ 51 million of common stock and to repay $ 40 million of borrowings under our credit facility in 2017. at september 30 , 2017 , the balance outstanding under our credit facility was $ 218 million and total debt outstanding was $ 718 million . future expectations , strategies and risks our transition to a subscription model has been a headwind for revenue and earnings in 2017 , the effect of which is moderating as the subscription business matures and we exit the subscription trough . a 18 higher mix of subscription bookings is expected to benefit us over the long term , but results in lower revenue and lower earnings in the near term . our results have been impacted , and we expect will continue to be impacted , by our ability to close large transactions . the amount of bookings and revenue , particularly license and subscriptions , attributable to large transactions , and the number of such transactions , may vary significantly from quarter to quarter based on customer purchasing decisions and macroeconomic conditions . such transactions may have long lead times as they often follow a lengthy product selection and evaluation process and , for existing customers , are influenced by contract expiration cycles . this may cause volatility in our results . as we move into 2018 , our three overriding goals continue to be : sustainable growth our goals for overall growth are predicated on continuing to grow in the iot market and continuing to drive improvements in operational performance in our core cad , plm and slm solutions business . expand subscription through 2014 , the majority of our software licenses were sold as perpetual licenses , under which customers own the software license and revenue is recognized at the time of sale . story_separator_special_tag the average contract duration was approximately 2 years for new subscription contracts in 2017 and 2016. we expect that the amount of deferred revenue and unbilled deferred revenue will fluctuate from quarter to quarter due to the specific timing , duration and size of customer subscription and support agreements , varying billing cycles of such agreements , the specific timing of customer renewals , foreign currency fluctuations , the timing of when deferred revenue is recognized as revenue and the timing of our fiscal quarter ends . revenue revenue is reported below by line of business ( subscription , support , perpetual license and professional services ) , by product area ( solutions and iot groups ) and by geographic region ( americas , europe , asia pacific ) . results include combined revenue from direct sales and our channel . revenue by line of business revenue by group replace_table_token_4_th software revenue performance software revenue consists of subscription , support , and perpetual license revenue . subscription revenue is comprised of time-based licenses whereby customers use our software and receive related 23 support for a specified term , and for which revenue is recognized ratably over the term of the contract . support revenue is composed of contracts to maintain new and or previously purchased perpetual licenses , for which revenue is recognized ratably over the term of the contract . perpetual licenses include a perpetual right to use the software , for which revenue is generally recognized up front upon delivery to the customer . solutions group software revenue returned to growth in 2017 after a trough in 2016 , as the subscription model transition accelerated , customers purchased fewer perpetual licenses and associated support , and some existing support contracts converted to subscriptions . the strength in our solutions business was driven by our cad and core plm businesses . cad delivered 14 % bookings growth for the full year , well above estimated market growth rates . our cad business has now delivered two consecutive years of double-digit constant currency bookings growth . creo growth has benefited from our go-to-market improvement initiatives , evidenced by seven consecutive quarters of double-digit bookings growth in our reseller channel . in core plm , full-year bookings grew 6 % , which is in line with estimated market growth rates . plm continues to benefit from sales of thingworx navigate , for which we closed transactions across a variety of vertical markets , and which we believe presents an opportunity to drive continued plm growth . we also closed several major strategic plm deals in the americas and europe . growth in cad and plm was offset by a significant decline in slm bookings . our slm business is characterized by low volume , high dollar transactions and we have experienced volatility period to period in this business . the decline in software revenue in 2016 compared to 2015 was driven primarily by a higher mix of subscription bookings as well as foreign currency rate changes and macroeconomic conditions . iot group the iot group delivered revenue growth in 2017 and 2016. in 2017 , software revenue growth was driven by continued adoption of our iot solutions , with iot bookings growing above estimated market rates of 30 % to 40 % for the fiscal year , partially offset by higher subscription mix . iot bookings continue to come from a wide variety of vertical markets and use cases , led by the industrial factory operations . in 2017 , customer expansions comprised approximately 70 % of thingworx bookings . additionally , kepware , which we acquired on january 12 , 2016 , contributed to iot revenue growth from 2015 to 2016 ( with $ 16.1 million of revenue in 2016 ) and to a lesser extent in 2017 which included a full year of kepware revenue . professional services revenue consulting and training services engagements typically result from sales of new perpetual licenses and subscriptions , particularly of our plm and slm solutions . the decline in professional services revenue in 2017 and 2016 was due in part to strong growth in bookings by our service partners , which is in line with our strategy for professional services revenue to trend flat-to-down over time as we e xpand our service partner program under which service engagements are referred to third party service providers . additionally , over time , we anticipate offering solutions that require less service . as a result , we do not expect that professional services revenue will increase proportionately with software revenue . foreign currency exchange rates impacted services revenue positively by $ 0.5 million in 2017 and negatively by $ 5.9 million in 2016. revenue by geographic region replace_table_token_5_th 24 a significant percentage of our annual revenue comes from large customers in the broader manufacturing space . as a result , software revenue growth in our core cad and plm products historically has correlated to growth in broader measures of the global manufacturing economy , including gdp , industrial production and manufacturing pmi . the increase in revenue in 2017 compared to 2016 was driven by our exit from the subscription trough coupled with strong new bookings performance despite a 1300 basis point increase in our subscription mix to 69 % in 2017. europe and americas were strong , with full-year bookings growth of 29 % ( 28 % on a constant currency basis ) in europe and flat in the americas , up 15 % excluding the $ 20 million mega deal from the fourth quarter of 2016. asia pacific bookings were down 16 % in 2017 compared to 2016 ( 16 % decline on a constant currency basis ) , primarily due to japan , which was down 42 % . we believe that the decline in japan is due primarily to sales execution issues , which we are addressing .

results of operations revenue , operating margin , earnings per share and cash flow the following table shows the financial measures that we consider the most significant indicators of the performance of our business . in addition to providing operating income , operating margin , and diluted earnings per share as calculated under generally accepted accounting principles ( “ gaap ” ) , it shows non-gaap operating income , non-gaap operating margin , and non-gaap diluted earnings per share for the reported periods . these non-gaap financial measures exclude fair value adjustments related to acquired deferred revenue , acquired deferred costs , stock-based compensation expense , amortization of acquired intangible assets expense , acquisition-related and pension plan termination costs , restructuring charges , certain identified gains or charges included in non-operating other income ( expense ) and the related tax effects of the preceding items , as well as the tax items identified . these non-gaap financial measures provide investors another view of our operating results that is aligned with management budgets and with performance criteria in our incentive compensation plans . management uses , and investors should use , non-gaap financial measures in conjunction with our gaap results . replace_table_token_2_th ( 1 ) costs and expenses in 2017 included $ 7.9 million of restructuring charges . costs and expenses in 2016 included $ 76.3 million of restructuring charges , a $ 3.2 million legal accrual , and $ 3.5 million of acquisition-related costs . costs and expenses in 2015 included $ 73.2 million of pension plan termination-related costs , $ 43.4 million of restructuring charges , a $ 28.2 million legal accrual , and $ 8.9 million of acquisition-related costs . these restructuring , acquisition-related , pension plan termination and legal accrual costs have been excluded from non-gaap operating income , non-gaap operating margin and non-gaap diluted eps .

additionally , biotest has agreed to grant the company an exclusive license for marketing and sales in the united states and canada for biotest 's varicella zoster immune globulin ( “ vzig ” ) , the terms of which the company expects to finalize by the end of the first half of 2014. as such , the company expects to account for the value of this license as a charge to operations once the terms of story_separator_special_tag this discussion , which refers to the historical results of adma and its predecessor business , should be read in conjunction with the other sections of this annual report , including “ risk factors , ” “ business ” and the consolidated financial statements and other consolidated financial information included in this report . the various sections of this discussion contain a number of forward-looking statements , all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this report . see “ special note regarding forward-looking statements. ” our actual results may differ materially . financial operations overview revenues since inception , we have generated approximately $ 5 million of revenue . revenue for the year ended december 31 , 2013 is comprised of $ 3,023,503 from the product sale of normal source human plasma collected at our plasma collection center and plasma-derived medicinal products and $ 44,074 of license revenues attributed to the out-licensing of ri-002 to biotest ag to market and sell in europe and selected countries in north africa and the middle east . in exchange , biotest pharmaceuticals corporation , or biotest , a subsidiary of biotest ag , has provided us with certain services in accordance with the related license agreement and is obligated to pay us certain milestone payments in the future if such milestones are achieved . revenue is recognized at the time of transfer of title and risk of loss to the customer , which usually occurs at the time of shipment ; however , revenue is recognized at the time of delivery if we retain the risk of loss during shipment . our revenues are substantially attributed to one customer . revenue from license fees and research and development services rendered are recognized as revenue when we have completed the performance obligations under the terms of the license agreement with biotest . deferred revenue of $ 1.7 million was recorded in the second quarter of 2013 as a result of certain research and development services to be provided in accordance with a license agreement and is recognized over the term of the license . deferred revenue is amortized for a period of approximately 20 years , the term of the license agreement . 37 index research and development expense research and development , or r & d , expense consists of clinical research organization and clinical trial costs related to our clinical trial , consulting expenses relating to regulatory affairs , quality control and manufacturing , assay development and ongoing testing costs , drug product manufacturing including the cost of plasma , plasma storage and transportation costs , as well as wages and benefits for employees directly related to the research and development of ri-002 . all r & d is expensed as incurred . the process of conducting pre-clinical studies and clinical trials necessary to obtain fda approval is costly and time consuming . the probability of success for each product candidate and clinical trial may be affected by a variety of factors , including , among others , the quality of the product candidate 's early clinical data , investment in the program , competition , manufacturing capabilities and commercial viability . as a result of the uncertainties discussed above , the uncertainty associated with clinical trial enrollments and the risks inherent in the development process , we are unable to determine the duration and completion costs of current or future clinical stages of our product candidates or when , or to what extent , we will generate revenues from the commercialization and sale of any of our product candidates . development timelines , probability of success and development costs vary widely . r & d expense for the year ended december 31 , 2013 increased significantly compared to the year ended december 31 , 2012 , due to fully enrolling our pivotal phase iii clinical study by the end of 2013 and manufacturing services as provided by biotest under our license agreement with them . we expect that our r & d expense will increase throughout 2014 , primarily attributable to the further development of ri-002 and our related clinical phase iii program . general and administrative expense general and administrative , or g & a expense , consists of rent , maintenance and utilities , insurance , wages , stock-based compensation and benefits for senior management and staff unrelated to r & d , legal fees , accounting and auditing fees , information technology , travel and other expenses related to the general operations of the business . g & a expense for the current year also includes a write-off of deferred financing fees related to our financing . we expect that our g & a expense will continue to increase in 2014 as a result of operating as a publicly traded company as a result of increased listing fees of our common stock and the hiring of additional staff . interest income and interest expense interest income consists of interest earned on our cash and cash equivalents . interest expense consists of interest incurred on our notes payable and previous convertible notes up to their automatic conversion into our common stock upon the completion of our private placement in february 2012 , as well as the amortization and write-off of deferred financing costs and debt discounts and a charge for the beneficial conversion feature relating to our notes payable and previous convertible notes . story_separator_special_tag as of december 31 , 2013 , we had working capital of $ 27.4 million , consisting primarily of $ 26.1 million of cash and cash equivalents , $ 2.9 million of short term investments , $ 1.7 million of inventories and $ 0.3 million of prepaid expenses , offset by $ 3.7 million of current liabilities which are mainly comprised of accounts payable and accrued expenses . during january 2012 , we received $ 617,615 from the sale of our state of new jersey net operating losses through the new jersey economic development authority program . we can not make assurances that funding will be available for us in the future under this program . hercules loan and security agreement on december 21 , 2012 , we and our subsidiaries entered into a loan and security agreement , or the loan agreement , with hercules technology growth capital , inc. , or hercules . under the loan agreement , we borrowed $ 5.0 million consisting of $ 4.0 million on the closing date and an additional $ 1.0 million upon enrolling our first patient in our pivotal ( phase iii ) clinical study of our lead product candidate ri-002 . on february 24 , 2014 , we entered into the first amendment to the loan agreement , or loan amendment , under which we may borrow up to a maximum of $ 15.0 million . we borrowed $ 10.0 million on the closing date ( $ 5.0 million of which was used to refinance existing debt with hercules ) and an additional $ 5.0 million will be made available upon us successfully meeting the clinical endpoints of a phase iii clinical study of ri-002 as a treatment for primary immunodeficiency diseases in an manner that supports a biologic license application filing . the loan bears interest at a rate per annum equal to the greater of ( i ) 8.75 % and ( ii ) the sum of ( a ) 8.75 % plus ( b ) the prime rate ( as reported in the wall street journal ) minus ( c ) 5.75 % . payment-in-kind interest accrues on the outstanding principal balance of the loan compounded monthly at 1.95 % per annum and such accrued and unpaid interest is added to the principal balance of the loan on the first day of each month beginning on the month after the closing . the principal will be repaid over 27 months beginning no later than april 1 , 2015 ( unless extended to october 1 , 2015 upon us meeting certain eligibility criteria for the final tranche ) , unless accelerated as a result of certain events of default . a backend fee equal to $ 132,000 is due the earliest of april 1 , 2016 , the prepayment date and the date that the secured obligations become due and payable . in addition , a first amendment commitment fee and a facility fee in the amount of $ 15,000 and $ 135,000 , respectively , were paid at closing . in the event we elect to prepay the loan , we are obligated to pay a prepayment charge corresponding to a percentage of the principal amount of the loan , with such percentage being : 2.5 % if prepayment occurs in the first year , 1.5 % if prepayment occurs in the second year and 0.5 % if prepayment occurs after the second year but prior to the final day of the term . the loan matures no later than january 1 , 2018 . 42 index the loan is secured by our assets , except for our intellectual property ( which is subject to a negative pledge ) . interest is due and payable on the 1st of every month and at the termination date , unless accelerated as a result of an event of default . the loan agreement contains customary representations , warranties and covenants , including limitations on incurring indebtedness , engaging in mergers or acquisitions and making investments , distributions or transfers . the representations , warranties and covenants contained in the loan agreement were made only for purposes of such agreement and as of a specific date or specific dates , were solely for the benefit of the parties to such agreement , and may be subject to limitations agreed upon by the contracting parties , including being qualified by confidential disclosures exchanged between the parties in connection with the execution of the loan agreement . events of default under the agreement include , but are not limited to : ( i ) insolvency , liquidation , bankruptcy or similar events ; ( ii ) failure to pay any debts due under the loan agreement or other loan documents on a timely basis ; ( iii ) failure to observe any covenant or secured obligation under the loan agreement or other loan documents , which failure , in most cases , is not cured within 10 days of written notice by lender ; ( iv ) occurrence of any default under any other agreement between us and the lender , which is not cured within 10 days ; ( v ) occurrence of an event that could reasonably be expected to have a material adverse effect ; ( vi ) material misrepresentations ; ( vii ) occurrence of any default under any other agreement involving indebtedness in excess of $ 50,000 or the occurrence of a default under any agreement that could reasonably be expected to have a material adverse effect ; and ( viii ) certain money judgments are entered against us or a certain portion of our assets are attached or seized . remedies for events of default include acceleration of amounts owing under the loan agreement and taking immediate possession of , and selling , any collateral securing the loan .

results of operations year ended december 31 , 2013 compared to year ended december 31 , 2012 summary table the following table presents a summary of our results of operations for the year ended december 31 , 2013 compared to the year ended december 31 , 2012 . 38 index replace_table_token_1_th revenue we recorded revenue of $ 3,067,577 during the year ended december 31 , 2013 compared to $ 1,118,118 during the year ended december 31 , 2012. product revenue was $ 3,023,503 for the year ended december 31 , 2013 , from the sale of blood plasma collected in our fda-licensed , gha-certified georgia based blood plasma collection center compared to product revenue of $ 1,118,118 for the year ended december 31 , 2012. product revenue for the year ended december 31 , 2013 was primarily attributed to sales made pursuant to our plasma supply agreement with biotest during june 2012 , under which biotest purchases normal source plasma from our georgia facility to be used in their manufacturing . the increase in product revenue of $ 1,905,385 was attributed to increased advertising and promotions to attract more plasma donors as well as the expansion of additional plasma donor equipment . for the year ended december 31 , 2013 , license revenue was $ 44,074 , which relates to services provided by biotest in accordance with our license agreement with them . there was no license revenue for the same period in 2012. we have not generated any revenue from our therapeutics , research and development business . cost of product revenue cost of product revenue was $ 2,023,441 for the year ended december 31 , 2013 , an increase of $ 1,354,385 from $ 669,056 for the year ended december 31 , 2012. the increased cost of product revenues for the year ended december 31 , 2013 was related to the costs associated with the increased production and sale of normal source plasma .

f-13 property and equipment ( in thousands ) : replace_table_token_20_th 4. cash , cash equivalents and short-term investments the following is a summary of cash , cash equivalents and short-term investments , available-for-sale , by type of instrument ( in thousands ) : replace_table_token_21_th as of december 31 , 2018 and 2017 , the company had no investments with a contractual maturity of greater than one year . based on an evaluation of securities that have been in a loss position , the company did not story_separator_special_tag the following discussion and analysis of our financial condition and results of operations together with the section entitled “selected financial data , ” should be read in conjunction with our consolidated financial statements and the related notes to those statements included elsewhere in this annual report . in addition to historical financial information , the following discussion and analysis contains forward-looking statements within the meaning of section 21e of the securities exchange act of 1934 , as amended , or the exchange act . these forward-looking statements relate to future events or our future financial performance that involve risks , uncertainties and assumptions . our actual results and timing of events may differ materially from those anticipated in these forward-looking statements as a result of many factors , including those discussed under “risk factors” and elsewhere in this prospectus . please see “cautionary information regarding forward-looking statements” at the beginning of this form 10-k for additional information you should consider regarding forward-looking statements . we undertake no obligation to revise or update any forward-looking statements to reflect any event or circumstance that arises after the date of this report , or to conform such statements to actual results or changes in our expectations . overview we are a commercial drug delivery company committed to improving the quality of life for patients with ear , nose and throat conditions . our fda approved products are steroid releasing implants designed to treat adult patients suffering from chronic sinusitis , who are managed by ent physicians . these products include our propel ® family of products ( propel ® , propel ® mini and propel ® contour ) and the sinuva ® ( mometasone furoate ) sinus implant . the propel family of products are used in conjunction with sinus surgery primarily in hospitals and ambulatory surgery centers and sinuva is designed to be used in the physician 's office setting of care to treat adult patients who have had ethmoid sinus surgery yet suffer from recurrent sinus obstruction due to polyps . the propel family of products are devices approved under a premarket approval , or pma and sinuva is a drug that was approved under a new drug application , or nda . our propel family of steroid releasing implants are clinically proven to improve outcomes for chronic sinusitis patients following sinus surgery . propel implants mechanically prop open the sinuses and release mometasone furoate , an advanced corticosteroid with anti-inflammatory properties , directly into the sinus lining , and then dissolve . propel 's safety and effectiveness is supported by level 1-a clinical evidence from multiple clinical trials , which demonstrates that propel implants reduce inflammation and scarring after surgery , thereby reducing the need for postoperative oral steroids and repeat surgical interventions . more than 280,000 patients have been treated with propel products to-date . propel clinical outcomes have been reported in a meta-analysis of prospective , multicenter , randomized , controlled , double-blind clinical studies to improve surgical outcomes , demonstrating a 35 % relative reduction in the need for postoperative interventions compared to surgery alone . a physician may treat a patient with propel by inserting it into the ethmoid sinuses . propel is a self-expanding implant designed to conform to and hold open the surgically enlarged sinus while gradually releasing an anti-inflammatory steroid over a period of approximately 30 days and is absorbed into the body over a period of approximately six weeks . propel mini has also been shown by our clinical studies to reduce the need for postoperative interventions , including a 38 % relative reduction in the need for postoperative interventions in the frontal sinus , compared to surgery alone with standard postoperative care . propel mini is a smaller version of propel and is approved for use in both the ethmoid and frontal sinuses . propel mini is preferentially used by physicians compared with propel when treating smaller anatomies or following less extensive procedures . propel contour is designed to facilitate treatment of the frontal and maxillary sinus ostia , or openings , of the dependent sinuses in procedures performed in both the operating room and in the office setting of care . propel contour 's lower profile , hourglass shape and malleable delivery system are designed for use in the narrow and difficult to access sinus ostia . in propel contour 's pivotal 53 clinical study , the product demonstrated a 65 % relative reduction in the need for postoperative interventions in the frontal sinus ostia compared to surgery alone with standard postoperative care . sinuva , when placed during a routine physician office visit , expands into the sinus cavity and delivers an anti-inflammatory steroid directly to the site of polyp disease for 90 days . we have studied sinuva in 4 clinical trials in over 400 patients to-date . results from the pivotal resolve ii randomized clinical trial demonstrated a 74 % relative reduction in bilateral polyp grade ( a measurement of the extent of ethmoid polyp disease ) and a 30 % relative reduction in nasal obstruction and congestion for patients treated with sinuva compared to a control group treated with a sham procedure , receiving no implant . patients in both arms of the study were required to use an intranasal steroid spray daily . story_separator_special_tag we expect sg & a expenses to continue to increase in absolute dollars for the foreseeable future as we expand our commercial and administrative infrastructure to drive and support the anticipated growth in revenue and incur additional legal , accounting , insurance and other professional services fees . research and development expenses research and development , or r & d , expenses consist primarily of compensation for personnel , including stock-based compensation , related to product development , regulatory affairs , clinical and medical affairs , and allocated facilities and information technology expenses . r & d expenses also may include expenses for clinical studies related to clinical trial design , site reimbursement , data management , travel expenses and the cost of manufacturing products for clinical trials . finally , r & d expenses also include expenses related to the development of products and technologies such as consulting services and supplies . although r & d expenses have fluctuated , we expect r & d expenses to remain at a relatively consistent level in absolute dollars for the foreseeable future as we continue to seek to develop and commercialize new products and enhance our current products . 55 story_separator_special_tag > non-cash charges primarily consisted of stock-based compensation expense . the increase in net operating assets is primarily due to an increase in accounts receivable and inventory , partially offset by an increase in accounts payable . during the year ended december 31 , 2017 , net cash used in operating activities was $ 8.0 million , consisting primarily of a net loss of $ 16.4 million and an increase in net operating assets of $ 2.9 million , partially offset by non-cash charges of $ 11.3 million . the cash used in operations was due primarily to an increase in headcount to support the ongoing commercialization of our propel family of products and to prepare for the launch of sinuva . the non-cash charges consisted primarily of stock-based compensation expense . the increase in net operating assets is due primarily to an increase in inventory , accounts receivable and other assets , partially offset by an increase in accrued year-end bonuses and sales commissions . during the year ended december 31 , 2016 , net cash used in operating activities was $ 20.1 million , consisting primarily of a net loss of $ 25.2 million and an increase in net operating assets of $ 3.6 million , partially offset by non-cash charges of $ 8.7 million . the cash used in operations was due primarily to the ongoing commercialization of propel and propel mini . to support the ongoing commercialization of these products , we continued to expand our sales , marketing and reimbursement organizations . the increase in net operating assets was due primarily to an increase in accounts receivable and inventory , partially offset by an increase in accounts payable . the non-cash charges consisted primarily of stock-based compensation expense . net cash ( used in ) provided by investing activities during the year ended december 31 , 2018 , net cash used in investing activities was $ 10.0 million , consisting primarily of net purchases of short-term investments of $ 7.9 million and purchases of property and equipment of $ 2.1 million . during the year ended december 31 , 2017 , net cash provided by investing activities was $ 9.2 million , consisting primarily of net maturities of short-term investments of $ 11.5 million , partially offset by purchases of property and equipment of $ 2.3 million . during the year ended december 31 , 2016 , net cash used in investing activities was $ 6.9 million , consisting of net purchases of short-term investments of $ 4.8 million and purchases of property and equipment of $ 2.1 million . 58 net cash provided by financing activities during the year ended december 31 , 2018 , net cash provided by financing activities was $ 13.5 million , consisting of net proceeds from the issuance of common stock upon exercises of employee stock options and purchases under our employee stock purchase plan . during the year ended december 31 , 2017 , net cash provided by financing activities was $ 8.8 million , consisting of net proceeds from the issuance of common stock upon exercises of employee stock options and purchases under our employee stock purchase plan . during the year ended december 31 , 2016 , net cash provided by financing activities was $ 2.0 million , consisting of net proceeds from the issuance of common stock upon the exercises of employee stock options and purchases under our employee stock purchase plan . liquidity we currently believe that our existing cash , cash equivalents and short-term investments as of december 31 , 2018 , will be sufficient to meet our capital requirements and fund our operations for at least twelve months after the date these financial statements are issued . beyond that , if these sources are insufficient to satisfy our liquidity requirements , we may seek to sell additional equity or debt securities or obtain credit facilities . if we raise additional funds by issuing equity securities , our stockholders would experience dilution . debt financing , if available , may involve covenants restricting our operations or our ability to incur additional debt . any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders . additional financing may not be available at all , or in amounts or on terms unacceptable to us . if we are unable to obtain additional financing , we may be required to delay the development , commercialization and marketing of our products .

results of operations replace_table_token_5_th comparison of years ended december 31 , 2018 and 2017 revenue revenue increased $ 12.2 million , or 13 % , to $ 108.5 million during the year ended december 31 , 2018 , compared to $ 96.3 million during the year ended december 31 , 2017. the growth in revenue was attributable to an increase in unit sales and average selling price of our propel family of products and initial sales of sinuva , which contributed 3 % to revenue during the year ended december 31 , 2018. cost of sales and gross margin cost of sales increased $ 7.1 million , or 46 % , to $ 22.6 million during the year ended december 31 , 2018 , compared to $ 15.5 million during the year ended december 31 , 2017. the increase in cost of sales was primarily attributable to increased overhead associated with the expanded manufacturing and inefficiencies associated with ramping up production of sinuva and propel contour , the growth in the number of units sold and a charge related to our decision not to commercialize the initial sinuva production output . gross margin for the year ended december 31 , 2018 , decreased to 79 % , compared to 84 % for the year december 31 , 2017. the decrease in gross margin was primarily attributable to increased overhead associated with the expanded manufacturing and related inefficiencies associated with ramping up production of sinuva and propel contour , and a charge related to our decision not to commercialize the initial sinuva production output .

factors that could cause or contribute to these differences include those factors discussed below and elsewhere in this annual report on form 10-k , particularly in “ special note regarding forward-looking statements and information ” and “ risk factors ” included elsewhere in this annual report on form 10-k. overview siteone landscape supply , inc. ( collectively with all its subsidiaries referred to in this annual report on form 10-k as “ siteone , ” the “ company , ” “ we , ” “ us ” and “ our ” ) indirectly owns 100 % of the membership interest in siteone landscape supply holding , llc ( “ landscape holding ” ) . landscape holding is the parent and sole owner of siteone landscape supply , llc ( “ landscape ” ) . we are the largest and only national wholesale distributor of landscape supplies in the united states and have a growing presence in canada . our customers are primarily residential and commercial landscape professionals who specialize in the design , installation and maintenance of lawns , gardens , golf courses and other outdoor spaces . through our expansive north american network of 511 branch locations in 45 states and six provinces , we offer a comprehensive selection of more than 120,000 skus , including fertilizer and control products ( e.g . , herbicides ) , irrigation supplies , landscape accessories , nursery goods , hardscapes ( including paving , natural stone and blocks ) and outdoor lighting . we also provide complementary , value-added consultative services to support our product offerings and to help our customers operate and grow their businesses . cd & r acquisition holdings indirectly owns 100 % of the membership interest in landscape holding . landscape holding is the parent and sole owner of landscape . prior to the cd & r acquisition described below , deere was the sole owner of landscape holding . on december 23 , 2013 , the company acquired 100 % of the ownership interest in landscape holding from deere in exchange for common shares of the company initially representing 40 % of the outstanding capital stock ( on an as-converted basis ) plus cash consideration of approximately $ 314 million , net of pre-closing and post-closing adjustments . in order to facilitate the transaction , the company issued cumulative convertible participating redeemable preferred stock to cd & r for total consideration of $ 174 million initially representing 60 % of the outstanding capital stock ( on an as-converted basis ) . as part of the same transaction , landscape holding also acquired from lesco , an affiliate of deere . the company continues to be the sole owner of landscape holding . initial public offering on may 17 , 2016 , we completed the ipo at a price to the public of $ 21.00 per share . in connection with the ipo , the cd & r investor and deere together sold an aggregate of 11,500,000 shares of common stock . the cd & r investor and deere received all of the net proceeds and bore all commissions and discounts from the sale of our common stock . we did not receive any proceeds from the ipo . on the day prior to the closing of the ipo , all of our then-outstanding preferred stock converted into shares of common stock , resulting in the issuance by us of an additional 25,303,164 shares of our common stock . the conversion of preferred stock is accounted for from the date of conversion and is not retroactively adjusted in our financial statements and related notes included in this annual report on form 10-k. secondary public offerings on december 5 , 2016 , certain selling stockholders completed a public offering of 10,350,000 shares of our common stock at a price of $ 33.00 per share . we did not receive any of the proceeds from the shares of common stock sold by the selling stockholders . on may 1 , 2017 , certain selling stockholders completed a public offering of 11,500,000 shares of our common stock at a price of $ 47.50 per share . we did not receive any of the proceeds from the shares of common stock sold by the selling stockholders . on july 26 , 2017 , certain selling stockholders completed a public offering of 5,437,502 shares of our common stock at a price to the underwriter of $ 51.63 per share . we did not receive any proceeds from the shares of common stock sold by the selling stockholders . 33 following consummation of the secondary offering on july 26 , 2017 , cd & r and deere no longer have an ownership interest in the company . presentation our financial statements included in this report have been prepared in accordance with generally accepted accounting principles in the united states of america ( “ gaap ” ) . we use a 52/53 week fiscal year with the fiscal year ending on the sunday nearest to december 31 in each year . our fiscal quarters end on the sunday nearest to march 31 , june 30 and september 30 , respectively . this discussion of our financial condition is presented for the 2017 fiscal year , which ended on december 31 , 2017 and included 52 weeks and 252 selling days , the 2016 fiscal year , which ended on january 1 , 2017 and included 52 weeks and 253 selling days , and the 2015 fiscal year , which ended on january 3 , 2016 and included 53 weeks and 256 selling days . “ selling days ” are defined below within the key business and performance metrics section . we manage our business as a single reportable segment . within our organizational framework , the same operational resources support multiple geographic regions and performance is evaluated at a consolidated level . we also evaluate performance based on discrete financial information on a regional basis . since all of our regions have similar operations and share similar economic characteristics , we aggregate regions into a single operating and reportable segment . story_separator_special_tag the landscape distribution industry also includes a significant amount of landscape products such as fertilizer , herbicides and ice melt for use in maintaining existing landscapes or facilities . the use of these products is also tied to general economic activity , but levels of sales are not as closely correlated to construction markets . popular consumer trends preferences in housing , lifestyle and environmental awareness can also impact the overall level of demand and mix for the products we offer . examples of current trends we believe are important to our business include a heightened interest in professional landscape services inspired by the popularity of home and garden television shows and magazines ; the increasingly popular concept of “ outdoor living , ” which has been a key driver of sales growth for our hardscapes and outdoor lighting products ; and the social focus on eco-friendly products that promote water conservation , energy efficiency and the adoption of “ green ” standards . acquisitions in addition to our organic growth we continue to grow our business through acquisitions in an effort to better service our existing customers and to attract new customers . these acquisitions have allowed us to further broaden our product lines and extend our geographic reach and leadership positions in local markets . in accordance with gaap , the results of the acquisitions we have completed are reflected in our financial statements from the date of acquisition forward . we incur transaction costs in connection with identifying and completing acquisitions and ongoing integration costs as we integrate acquired companies and seek to achieve synergies . as of december 31 , 2017 , we have invested over $ 250 million in 18 acquisitions since the start of 2015 fiscal year , with the largest being the shemin nurseries investment of $ 57.7 million . the following is a summary of the acquisitions completed during the 2017 , 2016 and 2015 fiscal years : in october 2017 , we acquired the assets and assumed the liabilities of harmony gardens , inc. ( “ harmony gardens ” ) . with two locations in the metro denver and fort collins , colorado areas , harmony gardens is a leading wholesale nursery distributor in the state . 35 in september 2017 , we acquired the assets and assumed the liabilities of marshall stone , inc. and davis supply , llc ( collectively , “ marshall stone ” ) . with two locations in greensboro , north carolina and roanoke , virginia , marshall stone is a market leader in the distribution of natural stone and hardscape materials to landscape professionals . in august 2017 , we acquired the assets and assumed the liabilities of bondaze enterprises , inc. , a california corporation doing business as south coast supply ( “ south coast supply ” ) . with two locations in orange county , california , south coast supply is a market leader in the distribution of hardscape , natural stone and related products to landscape professionals . in may 2017 , we acquired the assets and assumed the liabilities of evergreen partners of raleigh , llc , evergreen partners of myrtle beach , llc , and evergreen logistics , llc ( collectively , “ evergreen ” ) . with two locations in raleigh , north carolina and myrtle beach , south carolina , evergreen is a market leader in the distribution of nursery supplies to landscape professionals . in march 2017 , we acquired all of the outstanding stock of american builders supply , inc. and masonryclub , inc. and subsidiary ( collectively , “ ab supply ” ) with 10 locations in the greater los angeles , california area and two locations in las vegas , nevada . ab supply is a market leader in the distribution of hardscape , natural stone and related products to landscape professionals . in march 2017 , we acquired the assets and assumed the liabilities of angelo 's supplies , inc. and angelo 's wholesale supplies , inc. ( collectively , “ angelo 's ” ) with two locations in wixom and farmington hills , michigan , both suburbs of detroit . angelo 's is a hardscape and landscape supply distributor , and has been a market leader since 1984. in february 2017 , we acquired the assets and assumed the liabilities of stone forest materials , llc ( “ stone forest ” ) with one location in kennesaw , georgia . stone forest is a market leader in the distribution of hardscape products to landscape professionals . in january 2017 , we acquired the assets and assumed the liabilities of aspen valley landscape supply , inc. ( “ aspen valley ” ) with three locations . headquartered in homer glen , illinois , aspen valley is a market leader in the distribution of hardscapes and landscape supplies in the chicago metropolitan area . in december 2016 , we acquired the assets and assumed the liabilities of east haven landscape products , headquartered in east haven , connecticut , adding a full-service landscape supply location along the southeastern connecticut coast and extending our network of existing full-service locations in greenwich , connecticut , bedford hills , new york and windsor , connecticut . the acquisition gives siteone a leading position for nursery , hardscapes and landscape supplies in the east haven area . in november 2016 , we acquired the assets and assumed the liabilities of the landscape distribution business of loma vista nursery , inc. , which includes two locations serving customers in missouri and kansas . the acquisition gives siteone a leading position for nursery products in the kansas city market and bolsters our position in hardscapes . in september 2016 , we acquired the assets and assumed the liabilities of glen allen nursery & garden center , inc. , which includes one branch location in richmond , virginia . the acquisition gives siteone a leading position for nursery products in the richmond area .

results of operations in the following discussion of our results of operations , we make comparisons among the 2017 fiscal year , the 2016 fiscal year and the 2015 fiscal year . replace_table_token_5_th comparison of the 2017 fiscal year to the 2016 fiscal year net sales net sales for the 2017 fiscal year increased 13 % to $ 1,861.7 million as compared to $ 1,648.2 million for the 2016 fiscal year . organic daily sales growth for 2017 fiscal year was 5 % . organic daily sales growth was driven by growth in the irrigation , nursery , landscape accessories , hardscapes and outdoor lighting categories , which together grew over 7 % as the company continued to benefit from strength in the construction and the repair and upgrade end markets . organic daily sales for agronomic products increased 2 % reflecting steady economic growth and strong sales to golf end market . acquisitions contributed 8 % or $ 135.0 million to net sales growth . costs of goods sold cost of goods sold for the 2017 fiscal year increased 12 % to $ 1,266.2 million from $ 1,132.5 million for the 2016 fiscal year . the increase in cost of goods sold was primarily driven by the increased net sales growth , including acquisitions , partially offset by lower material cost , including manufacturing incentives . gross profit and gross margin gross profit for the 2017 fiscal year increased 15 % to $ 595.5 million as compared to $ 515.7 million for the 2016 fiscal year . gross profit growth was driven by the net sales increase resulting from organic sales growth and acquisitions in addition to margin expansion resulting from our operational initiatives . gross margin increased 70 basis points to 32.0 % in the 2017 fiscal year as compared to 31.3 % in the 2016 fiscal year . operational improvement in category management was the primary contributor to the growth .

the company accounts for interest and penalties related to uncertain tax positions as part of its provision for income taxes . to date , the company has not incurred interest and penalties related to uncertain tax positions . warrants the company determines the accounting classification of warrants 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 consolidated financial data ” and our consolidated financial statements and related notes appearing elsewhere in this annual report on form 10-k. this discussion and other parts of this annual report on form 10-k contain forward-looking statements that involve risks and uncertainties , such as statements regarding our plans , objectives , expectations , intentions and projections . our actual results could differ materially from those discussed in these forward-looking statements . important factors that could cause or contribute to such differences include , but are not limited to , those discussed in item 1a “ risk factors. ” a discussion of the year ended december 31 , 2018 compared to the year ended december 31 , 2017 has been reported previously in our annual report on form 10-k for the year ended december 31 , 2018 , filed with the sec on march 15 , 2019 , under the heading “ management 's discussion and analysis of financial condition and results of operations. ” overview we are a clinical-stage biopharmaceutical company using our immtor platform with the goal to effectively and safely treat rare and serious diseases by enabling the development of novel biologic therapies that would otherwise be limited by their immunogenicity . many such diseases are treated with biologic therapies that are foreign to the patient 's immune system and therefore elicit an undesired immune response . our proprietary tolerogenic immtor platform encapsulates an immunomodulator in biodegradable nanoparticles and is designed to mitigate the formation of adas by inducing antigen-specific immune tolerance to biologic drugs . we believe immtor has potential to enhance the efficacy without compromising the safety of existing approved biologic drugs , improve product candidates under development and enable novel therapeutic modalities , such as re-administration of systemic gene therapy . our current programs chronic refractory gout our lead product candidate , sel-212 , is designed to be a monthly treatment for chronic refractory gout , a debilitating rare disease with an unmet medical need . sel-212 consists of a combination of our immtor platform co-administered with pegadricase . pegadricase is an investigational recombinant pegylated uricase ( urate oxidase ) , an enzyme not naturally found in humans , and is therefore highly immunogenic . this enzyme is designed to treat patients with symptomatic gout , refractory to standard uric acid lowering treatment , by breaking down the excess uric acid to the more soluble allantoin . in preclinical studies , we observed that immtor , when co-administered with pegadricase , induced antigen-specific immune tolerance to pegadricase and substantially reduced the formation of associated adas . based on our phase 1/2 clinical data , we believe that sel-212 has the potential to control sua levels and mitigate the formation of adas in response to the therapeutic enzyme . our phase 1 data provided evidence that immtor mitigated the formation of adas against pegadricase in a dose-dependent manner after a single dose of sel-212 . in our phase 2 trial , immtor inhibited the formation of adas in patients with up to five monthly doses , resulting in sustained reduction of sua levels . we also observed a lower-than-expected rate of gout flares in the first months after initiation of sel-212 treatment , with further reductions observed in months three to five . sel-212 , if successfully developed and approved , has the potential to offer a unique treatment for patients with chronic refractory gout , including reduced immunogenicity , improved efficacy , and monthly dosing compared to other fda-approved treatments , and provide clinical evidence supporting the utility of our immtor platform in providing patients with antigenic specific tolerance . in march 2019 , we initiated a phase 2 head-to-head clinical trial of sel-212 ( compare ) , in which sel-212 is being compared against the current fda-approved therapy for chronic refractory gout , krystexxa , in multiple clinical sites in the united states . we completed enrollment of our phase 2 head-to-head ( compare ) clinical study against krystexxa in december 2019 and expect to report top-line data in the third quarter of 2020. the two-armed , open label trial has enrolled approximately 150 patients , randomized 1:1 , with one arm receiving krystexxa ( as set forth in the prescribing information ) and the other arm receiving six monthly doses of sel-212 . the primary endpoint in the study is the percentage of patients in each arm that maintain sua control below 6.0 mg/dl , for at least 80 % of the time during months three and six . we plan to commence the phase 3 clinical program in sel-212 in the second half of 2020. we will require additional resources to complete the planned phase 3 clinical program for sel-212 . we expect our clinical and , if approved , marketing strategy for sel-212 to initially focus on the estimated 160,000 patients in the united states with chronic refractory gout , and to focus on those patients that are being treated by rheumatologists . gene therapy 76 in august 2019 , we entered into a feasibility study and license agreement with askbio , the askbio collaboration agreement , pursuant to which we and askbio will conduct proof of concept studies to potentially validate the use of our immtor platform in conjunction with an aav gene therapy to mitigate the formation of neutralizing anti-aav capsid antibodies , which currently precludes redosing . the initial product candidate being developed under this collaboration is gene therapy for mma which can cause severe developmental defects and premature death as a result of an accumulation of toxic metabolites . story_separator_special_tag we have based this estimate on assumptions that may prove to be wrong , and we could use our capital resources sooner than we currently expect . because of the uncertainty in securing additional capital , we have concluded that substantial doubt exists with respect to our ability to continue as a going concern within one year after the date of the filing of this annual report on form 10-k . for additional information , see “ liquidity and capital resources. ” the consolidated financial information presented below includes the accounts of selecta biosciences inc. and our wholly owned subsidiaries , selecta ( rus ) llc , a russian limited liability company , or selecta rus , and selecta biosciences security corporation , a massachusetts securities corporation . all intercompany accounts and transactions have been eliminated . grant and collaboration revenue to date , we have not generated any product sales . our revenue consists of grant and collaboration revenue , which includes amounts recognized related to upfront and milestone payments for research and development funding under collaboration and license agreements . in addition , we earn revenue under the terms of government contracts or grants , which require the performance of certain research and development activities . we expect that any revenue we generate will fluctuate from quarter to quarter because of the timing and amount of fees , research and development reimbursements and other payments from collaborators . we do not expect to generate revenue from product sales for at least the next several years . if we or our collaborators fail to complete the development of our product candidates in a timely manner or fail to obtain regulatory approval as needed , our ability to generate future revenue will be harmed , and will affect the results of our operations and financial position . for a further description of the agreements underlying our collaboration and grant‑based revenue , see notes 2 and 12 to our consolidated financial statements included elsewhere in this annual report on form 10-k . research and development our research and development expenses consist of external research and development costs , which we track on a program‑by‑program basis and primarily include cmo related costs , fees paid to cros and internal research and development costs , which are primarily compensation expenses for our research and development employees , lab supplies , analytical testing , allocated overhead costs and other related expenses . our internal research and development costs are often devoted to expanding our programs and are not necessarily allocable to a specific target . we have incurred a total of $ 240.8 million in research and development expenses from inception through december 31 , 2019 , with a majority of the expenses being spent on the development of sel‑212 and a prior nicotine vaccine candidate , and the remainder being spent on our various discovery and preclinical stage product candidate programs and the general expansion of our technology . in connection with our intention to focus on advancing our immtor platform , as stated in january 2019 , we have ceased ongoing work on our immune stimulation programs sela-070 and sel-701 , and currently do not have plans to move these programs forward or to perform any additional work on either of these programs . as we expand the clinical development of sel‑212 and our gene therapy programs , we expect our research and development expenses to increase . we expense research and development costs as incurred . conducting a significant amount of research and development is central to our business model . product candidates in clinical development generally have higher development costs than those in earlier stages of development , primarily due to the size , duration and cost of clinical trials . we plan to increase our research and development expenses for the foreseeable future as we seek to complete development of sel‑212 , and to further advance our preclinical and earlier stage research and development projects . the successful development of our clinical and preclinical product candidates is highly uncertain . at this time , we can not reasonably estimate the nature , timing or costs of the efforts that 78 will be necessary to complete the development of sel‑212 or any of our preclinical programs or the period , if any , in which material net cash inflows from these product candidates may commence . clinical development timelines , the probability of success and development costs can differ materially from our expectations . for example , if the fda or another regulatory authority were to require us to conduct clinical trials beyond those which we currently expect will be required for the completion of clinical development of a product candidate , or if we experience significant delays in enrollment in any of our clinical trials , we could be required to expend significant additional financial resources and time to complete any clinical development . the following table sets forth the components of our research and development expenses during the periods indicated ( in thousands ) : replace_table_token_2_th general and administrative general and administrative expenses consist primarily of salaries and related benefits , including stock-based compensation , related to our executive , finance , business development and support functions . other general and administrative expenses include facility-related costs not otherwise allocated to research and development expenses , travel expenses for our general and administrative personnel and professional fees for auditing , tax and corporate legal services , including intellectual property-related legal services . investment income investment income consists primarily of interest income earned on our cash and cash equivalents and short-term investments . interest expense interest expense consists of interest expense on amounts borrowed under our credit facilities .

results of operations comparison of the years ended december 31 , 2019 and 2018 revenue the following is a comparison of revenue for the years ended december 31 , 2019 and 2018 ( in thousands , except percentages ) : replace_table_token_3_th during the year ended december 31 , 2019 , we recognized $ 6.7 million in revenue upon expiration of the term for spark to exercise additional target options that represented material rights and less than $ 0.1 million of revenue for two shipments to spark under our collaboration agreement . during the year ended december 31 , 2018 , we recognized the remaining $ 0.9 million in grant revenues from nida after receiving final approval from nida . research and development the following is a comparison of research and development expenses for the years ended december 31 , 2019 and 2018 ( in thousands , except percentages ) : year ended december 31 , increase 2019 2018 ( decrease ) research and development $ 42,743 $ 47,687 $ ( 4,944 ) ( 10 ) % during the year ended december 31 , 2019 , our research and development expenses decreased by $ 5.0 million , or 10 % , as com pared to 2018 . the decrease reflects reduced costs in 2019 resulting from the completion of prior programs in 2018 combined with reduced salaries and benefits resulting from the headcount reduction in early 2019. the cost reductions were offset by an overall increase in costs incurred on our lead product candidate , sel-212 .

risk factors in this annual report on form 10-k. the following section is qualified in its entirety by the more detailed information , including our combined and consolidated financial statements and the notes thereto , which appears elsewhere in this annual report . overview organization we are a leading global provider of security products and solutions operating in three geographic regions : americas ; emeia ; and asia pacific . we sell a wide range of security products and solutions for end-users in commercial , institutional and residential markets worldwide , including into the education , healthcare , government , commercial office and single and multi-family residential markets . our strategic brands include schlage , von duprin , lcn , cisa , and interflex . trends and economic events current market conditions , including challenges in international markets , continue to impact our financial results . uneven global commercial new construction activity is negatively impacting our results , however u.s. residential and consumer markets have begun to improve , and we are seeing improvements in the u.s. new builder and replacement markets . based on information derived from third party sources , we estimate that the size of the global markets we serve was more than $ 30 billion in revenue in 2014 , comprised of $ 25 billion for mechanical hardware products and more than $ 5 billion for time , attendance , and workforce productivity systems and systems integration . we believe that the security products industry will benefit from several global macroeconomic and long-term demographic trends , which include heightened awareness of security requirements , increased global urbanization and the shift to a digital , interconnected environment . in the more established economies of north america and europe , where the security product industry 's compound annual growth rate was 1 to 2 % per year during the uneven economic conditions experienced over the past three years , we believe our markets are poised for a cyclical recovery driven in part by accelerating growth in the underlying commercial and residential construction markets and improved consumer confidence in the united states offsetting currency headwinds overseas . additionally , we expect growth in the global electronic product categories we serve to continue to outperform the industry as end-users adopt newer technologies in their facilities . the economic conditions discussed above and a number of other challenges and uncertainties that could affect our business are described under “ risk factors. ” 2014 significant events venezuela currency devaluation venezuela is treated as a highly inflationary economy under gaap . as a result , the u.s. dollar is the functional currency for our consolidated joint venture in venezuela . any currency remeasurement adjustments for non-u.s. dollar denominated monetary assets and liabilities and other transactional foreign exchange gains and losses are reflected in earnings . the venezuelan government 's official exchange rate is currently 6.3 venezuelan bolivars per u.s. dollar . the venezuelan government re-instituted a secondary exchange rate ( sicad i rate ) for select goods and services . the sicad i rate was 12 bolivars per u.s. dollar at december 31 , 2014. in march 2014 , the venezuelan government launched a sicad ii rate to provide a greater supply of usd from sources other than the venezuelan government . all companies located or domiciled in venezuela may bid for usd for any purpose . the sicad ii exchange rate was approximately 50 bolivars per u.s. dollar on december 31 , 2014. given accelerated deterioration in economic conditions driven by a significant drop in the price of oil and no expectation of improvement for the foreseeable future , we concluded that the sicad ii exchange rate was the most appropriate rate at which to value bolivar denominated assets and liabilities . as a result , on december 31 , 2014 , we moved the exchange rate applied to bolivars from the official rate to the sicad ii rate . we recorded a charge of $ 45.4 million ( before tax and non-controlling interest ) , or $ 0.28 per diluted share . the charge includes remeasurement of net monetary assets ( $ 12.1 million ) and a non-cash impairment 26 charge to adjust venezuelan inventory balances ( $ 33.3 million ) . had the sicad ii rate been applied throughout all of 2014 , we estimate it would have reduced full-year revenues and eps by approximately $ 95 million and $ 0.11 per share , respectively . after these charges , we had $ 4.6 million of bolivar-denominated net monetary assets and $ 8.9 million of inventory in venezuela as of december 31 , 2014. on february 9 , 2015 , the venezuelan government announced changes to its exchange rate system that included the launch of a new , market-based system called the marginal currency system , or “ simadi , ” that will replace the sicad ii rate . the company is currently evaluating this announcement . adoption of the simadi rate would result in additional charges to remeasure the net monetary assets and impair other assets . inventory accounting methodology in the fourth quarter of 2014 we elected to change our method of accounting for certain inventory from the last-in-first-out ( lifo ) method to the first-in-first-out ( fifo ) method and now all inventory is accounted for using the fifo method . we applied this change in method of inventory accounting by retrospectively adjusting the prior period financial statements . further details about the impact of this change are discussed in note 2 to the combined and consolidated financial statements . acquisitions in january 2014 , we completed the acquisition of certain assets of schlage lock de colombia s.a. , the second largest mechanical lock manufacturer in colombia . in april 2014 , we completed the acquisition of fire & security hardware pty limited ( fsh ) , an electromechanical locking provider in australia . total consideration paid for these acquisitions was approximately $ 23.0 million . story_separator_special_tag selling and administrative expenses for the year ended december 31 , 2014 , selling and administrative expenses as a percentage of revenue increased to 24.9 % from 23.3 % . selling and administrative expenses as a percentage of revenue for the year ended december 31 , 2014 was negatively impacted by increased restructuring charges ( 0.2 % ) , separation costs incurred in connection with the spin-off ( 1.2 % ) increased investments ( 1.0 % ) , the impact of the change in the order flow through our consolidated joint venture in asia discussed above ( 0.8 % ) and other inflation in excess of productivity ( 0.3 % ) . these increases were partially offset by favorable volume leverage ( 0.9 % ) . for the year ended december 31 , 2013 , selling and administrative expenses as a percentage of revenue increased to 23.3 % from 22.5 % . selling and administrative expenses as a percentage of revenue for the year ended december 31 , 2013 was negatively impacted by a $ 3.2 million increase in restructuring charges and non-recurring separation costs incurred in connection with the spin-off ( 0.1 % ) , inflation in excess of productivity benefits and other items ( 0.3 % ) and increased investment spending ( 0.4 % ) . operating income/margin operating income for the year ended december 31 , 2014 increased $ 85.5 million from the same period in 2013. operating income in the prior year included a $ 137.6 million goodwill impairment charge , as well as a $ 21.5 million gain on the sale of property in china . neither of these items recurred in the current year . operating income in the current year includes a $ 33.3 million non-cash inventory impairment related to the devaluation of the bolivar discussed above . the remaining increase in operating income was primarily due to pricing improvements and productivity in excess of inflation ( $ 36.9 million ) and increased volume ( $ 17.1 million ) . these increases were partially offset by increased restructuring charges and non-recurring separation costs incurred in connection with the spin-off ( $ 24.8 million ) and increased investments and other items ( $ 26.5 million ) . operating margin for the year ended december 31 , 2014 increased to 15.4 % from 11.6 % for the same period in 2013 . the increase was primarily due to the 2013 goodwill impairment charge discussed above ( 6.7 % ) , pricing improvements and productivity in excess of inflation ( 1.5 % ) , favorable volume/product mix ( 0.5 % ) and favorable foreign currency exchange rate movements ( 0.1 % ) . these increases were partially offset by the 2014 non-cash inventory impairment discussed above ( 1.6 % ) , increased non-recurring separation costs and restructuring charges ( 1.2 % ) , incremental investment spending primarily associated with new product development and other items ( 1.4 % ) and the impact of the change in order flow through our consolidated joint venture in asia and the 2013 gain on sale of a property in china discussed above ( 0.8 % ) . 30 operating income for the year ended december 31 , 2013 decreased $ 130.5 million from the same period in 2012. the decrease in operating income was primarily due to a $ 137.6 million goodwill impairment charge recorded in 2013 , increased investment spending ( $ 12.4 million ) , unfavorable foreign currency exchange rate movements ( $ 5.5 million ) and increased restructuring charges and non-recurring separation costs incurred in connection with the spin-off ( $ 9.9 million ) . these decreases were partially offset by the gain on a property sale in china ( $ 21.5 million ) , pricing improvements and productivity in excess of inflation ( $ 9.9 million ) and increased volume ( $ 3.5 million ) . operating margin for the year ended december 31 , 2013 increased to 11.6 % from 18.4 % for the same period in 2012 . operating margin for the year ended december 31 , 2013 was negatively impacted by a non-cash goodwill impairment charge ( 6.8 % ) , incremental investment spending associated with new product development ( 0.6 % ) , unfavorable product mix ( 0.5 % ) and restructuring charges and non-recurring separation costs ( 0.2 % ) . these decreases were partially offset by the gain on a property sale in china ( 1.1 % ) and favorable volume leverage ( 0.2 % ) . interest expense interest expense for the year ended december 31 , 2014 increased $ 43.6 million compared to the same period in 2013 as a result of the full year impact resulting from entering into $ 1,000 million senior secured credit facilities and issuing $ 300 million of senior notes in the fourth quarter of 2013 in conjunction with the spin-off from ingersoll rand . in the fourth quarter of 2014 , we incurred a non-cash charge of approximately $ 4.5 million for the write-off of unamortized term loan b facility debt issuance costs . interest expense for the year ended december 31 , 2013 increased $ 8.7 million compared with the same period of 2012 due to the issuance of debt in the fourth quarter of 2013 in conjunction with the spin-off from ingersoll rand . other expense , net the components of other expense , net , for the year ended december 31 are as follows : replace_table_token_7_th for the year ended december 31 , 2014 , other expense , net decreased by $ 2.6 million compared to the same period in 2013 . as discussed above , in the fourth quarter of 2014 we recorded a $ 12.1 million loss related to write down our venezuelan bolivar-denominated net monetary assets . this loss is reflected as exchange loss in the table above . in the prior year , we recorded a $ 6.2 million loss resulting from the official devaluation of the bolivar from 4.3 bolivars per u.s. dollar to 6.3 bolivars per u.s. dollar .

review of business segments we operate in and report financial results for three segments : americas , emeia , and asia pacific . these segments represent the level at which our chief operating decision maker reviews company financial performance and makes operating decisions . segment operating income is the measure of profit and loss that our chief operating decision maker uses to evaluate the financial performance of the business and as the basis for resource allocation , performance reviews , and compensation . for these reasons , we believe that segment operating income represents the most relevant measure of segment profit and loss . our chief operating decision maker may exclude certain charges or gains , such as corporate charges and other special charges , from operating income to arrive at a segment operating income that is a more meaningful measure of profit and loss upon which to base our operating decisions . we define segment operating margin as segment operating income as a percentage of net revenues . the segment discussions that follow describe the significant factors contributing to the changes in results for each segment included in continuing operations . effective january 1 , 2013 , we transferred a product line from our asia pacific segment to our americas segment . this transfer is reflected in the historical segment results for each of the fiscal years in the three-year period ended december 31 , 2013. americas our americas segment is a leading provider of security products and solutions in approximately 30 countries throughout north america and parts of south america . the segment sells a broad range of products and solutions including , locks , locksets , key systems , door closers , exit devices , doors and door frames , electronic product and access control systems to end-users in commercial , institutional and residential facilities , including into the education , healthcare , government , commercial office and single and multi-family residential markets .

earnings per share the company computes basic earnings ( loss ) per share by dividing net income ( loss ) attributable to common stockholders by the weighted average number story_separator_special_tag overview pros provides enterprise revenue and profit realization software solutions designed to help business-to-business ( `` b2b '' ) and business-to-consumer ( `` b2c '' ) companies accelerate sales , formulate winning pricing strategies and align product , demand and availability . our revenue and profit realization software solutions allow our customers to grow revenue , sustain profitability and modernize their business processes . fiscal 2015 overview fiscal 2015 was a transformational year for pros , as we shifted from primarily offering perpetual licenses of our solutions to a subscription based cloud-first strategy . as part of this shift , we introduced a number of changes to our business , including creating and introducing new cloud-only packages of our software , training our personnel , and increasing our focus on competitive differentiation in key industry verticals . we believe that the number of changes we implemented as part of cloud-first strategy had a negative impact on the pace of deal execution in the second half of 2015. however , these changes also yielded positive initial results in 2015 , as our recurring revenues , which consists of maintenance and subscription revenue , grew by 19 % over 2014. annualized recurring revenue ( `` arr '' ) is currently one of our key performance metrics to assess the health and trajectory of our overall cloud business . arr should be viewed independently of revenue , deferred revenue and any other gaap measure as arr is a performance metric and is not intended to be combined with any of these items . arr is defined as the annualized contracted recurring revenue from subscription and maintenance contracts . contracted revenue from perpetual license , term license and service agreements are not included within the arr metric . total arr as of december 31 , 2015 was $ 98.2 million , up from $ 85.0 million as of december 31 , 2014 , an increase of 16 % . free cash flow is another one of our key metrics that assess the strength of our business . free cash flow is a non-gaap financial measure which is defined as net cash provided by operating activities , less additions to property , plant and equipment and capitalized internal-use software development costs . we believe free cash flow may be useful to investors and other users of our financial information in evaluating the amount of cash generated by business operations , after cash used for additions to property , plant and equipment and capitalized internal-use software development costs . free cash flow generated for the year ended december 31 , 2015 was $ 8.5 million , up from a use of free cash flow of $ 8.1 million for the year ended december 31 , 2014 . financial performance summary total revenue for the year ended december 31 , 2015 , decreased $ 17.6 million to $ 168.2 million from $ 185.8 million for the year ended december 31 , 2014 , representing a 9 % decrease . this decrease in total revenue was primarily attributable to a decrease in license revenue , which was expected as we transitioned our business towards our subscription-based saas and cloud-based solutions . total license revenue for the year ended december 31 , 2015 , decreased $ 25.8 million to $ 32.7 million from $ 58.5 million for the year ended december 31 , 2014 , representing a 44 % decrease . this decrease in license revenue was expected as we transitioned our business towards our subscription-based saas and cloud-based solutions . total recurring revenue , which is comprised of our subscription and maintenance revenue , was $ 92.7 million for the year ended december 31 , 2015 as compared to $ 78.1 million for the year ended december 31 , 2014 , an increase of 19 % , as a result of our transition towards our subscription-based saas and cloud-based solutions . total deferred revenue was $ 65.3 million as of december 31 , 2015 , as compared to $ 58.4 million as of december 31 , 2014 , an increase of $ 6.9 million , or 12 % , primarily due to an increase in our subscription deferred revenue . operating cash flow was $ 15.5 million for the year ended december 31 , 2015 , as compared to $ 1.8 million for the year ended december 31 , 2014 , an increase of 761 % . revenue by geography the following geographic information is presented for the years ended december 31 , 2015 , 2014 and 2013 . pros categorizes geographic revenues based on the location of our customer 's headquarters . 27 replace_table_token_4_th acquisitions acquisitions could be another element to our corporate strategy . we believe future acquisitions could strengthen our competitive position , enhance the products and services that we can offer to customers , expand our customer base , grow our revenues and increase our overall value . fiscal 2014 acquisition in october 2013 , we entered into a tender offer agreement with cameleon software sa ( `` pros france '' ) . as a result of shares purchased in the market following the completion of the tender in january 2014 , the exercise of warrants in july 2014 , and second tender completed in november 2014 , we controlled 100 % of pros france 's common stock as of december 31 , 2014. we acquired pros france for total cash consideration of approximately $ 32 million , net of cash acquired . fiscal 2013 acquisition in december 2013 , we acquired signaldemand , inc. for total cash consideration of $ 13.5 million . financing activities in december 2014 , we issued $ 143.8 million aggregate principal amount of 2.0 % convertible senior notes due december 1 , 2019 , unless earlier purchased or converted . story_separator_special_tag during uncertain economic conditions , we generally experience longer sales cycles , increased scrutiny on purchasing decisions and overall cautiousness taken by customers . in addition , certain foreign countries continue to face significant economic and political crises , and it is possible that these crises could result in economic deterioration in the markets in which we operate . this economic uncertainty may negatively affect the overall demand environment in fiscal 2016 , particularly in europe . we believe that our expanded offerings of industry-specific solutions and innovative technology will enable us to stay competitive in a challenging economic environment as business leaders continue to focus on projects that quickly deliver value , however the extent to which the current economic conditions will further affect our business is uncertain . effective tax rate . the income tax rates vary from the federal and state statutory rates due to the valuation allowances on our deferred tax assets and foreign withholding taxes ; changing tax laws , regulations , and interpretations in multiple jurisdictions in which we operate ; changes to the financial accounting rules for income taxes ; unanticipated changes in tax rates ; differences in accounting and tax treatment of our equity-based compensation and the tax effects of purchase accounting for acquisitions . discussion of consolidated financial information revenue our revenue is derived from the licensing and implementation of software solutions , associated software maintenance and support , subscription-based solutions such as saas and cloud-based solutions and professional services . our arrangements with customers typically include some , but not all , of the following : ( a ) license fees for the use of our solutions either in perpetuity or over a specified term , ( b ) subscription fees for our saas and cloud-based services ( c ) professional service fees for configuration , 29 implementation and training services , and ( d ) maintenance and support fees related to technical support and software updates . if there is significant uncertainty about contract completion or collectability is not reasonably assured , revenue is deferred until the uncertainty is sufficiently resolved or collectability is reasonably assured . in addition , revenue is recognized when persuasive evidence of an arrangement exists , delivery has occurred or performed the service and fees are considered fixed and determinable . determining when these criteria have been satisfied often involves judgments that can have a significant impact on the timing and amount of revenue we report . in determining whether professional services revenue should be accounted for separately from license revenue , we evaluate whether the professional services are considered essential to the functionality of the software . this evaluation is based on factors such as : the nature of our software products ; whether they are ready for use by the customer upon receipt ; the nature of our professional services ; the availability of professional services from other vendors ; whether the timing of payments for license revenue coincides with performance of services ; and whether milestones or acceptance criteria exist that affect the realizability of the software license fee . license revenue . we derive the majority of our license revenue from the sale of perpetual licenses . for software license arrangements that do not require significant modification or customization of the underlying software , we recognize software licenses revenues at contract provided professional services are not considered essential to the delivery of the software and when : ( 1 ) we enter into a legally binding arrangement with a customer for the license of software ; ( 2 ) we deliver the products ; ( 3 ) the sale price is fixed or determinable and free of contingencies or significant uncertainties ; and ( 4 ) collection is probable . revenues that are not recognized at the time of sale because the foregoing conditions are not met , are recognized when those conditions are subsequently met . we evaluate the nature and scope of professional services for each arrangement and if we determine that the professional services revenue should not be accounted for separately from license revenue , the license revenue is recognized together with the professional services revenue using the percentage-of-completion method or completed contract method . the completed contract method is also used for contracts where there is a risk over final acceptance by the customer or for contracts that are short-term in nature . the percentage-of-completion method is measured by the percentage of man-days expended on an implementation during the reporting period as a percentage of the total man-days estimated to be necessary to complete the software implementation . we measure performance under the percentage-of-completion method using the total man-day method based on current estimates of man-days to complete the software implementation . we believe that for each such software implementation , man-days expended in proportion to total estimated man-days at completion represents the most reliable and meaningful measure for determining a software implementation 's progress toward completion . in addition , for fixed-fee software implementation arrangements , should a loss be anticipated on a contract , the full amount of the loss is recorded when the loss is determinable . see `` critical accounting policies and estimates '' for additional information regarding revenue recognition . subscription revenue . we also offer subscription-based solutions such as saas and cloud-based solutions . our saas and cloud-based solutions generally provide customers access to certain of our software solution within a cloud-based it environment that we manage and offer to customers on a subscription basis . revenues for our saas and cloud-based solutions are generally recognized ratably over the contract term commencing with the date our service is made available to customers and all other revenue recognition criteria have been satisfied . our saas and cloud-based solutions allow our customers to deploy pros solutions without any significant investment in hardware as pros software is integrated in cloud-based it environments that are deployed , supported and managed on our customers ' behalf .

results of operations comparison of year ended december 31 , 2015 with year ended december 31 , 2014 revenue : replace_table_token_5_th license revenue . for the year ended december 31 , 2015 , license revenue decreased $ 25.8 million to $ 32.7 million from $ 58.5 million for the year ended december 31 , 2014 , representing a 44 % decrease . our license revenue is dependent on the amount of perpetual licenses sold in the period , as well as the timing of revenue recognition . as a result of our shift to a cloud-first strategy , we experienced a decrease in the sale of perpetual licenses and a corresponding decrease in license revenue , which included a decrease of $ 18.2 million in license revenue recognized upon software delivery . we recognized $ 9.0 million and $ 27.2 million of license revenue upon software delivery for the years ended december 31 , 2015 and 2014 , respectively . as a result of our shift to a cloud-first strategy , we expect customers will be purchasing more subscription-based solutions such as saas and cloud-based solutions , resulting in lower future license revenue . services revenue . for the year ended december 31 , 2015 , services revenue decreased $ 6.4 million to $ 42.9 million from $ 49.2 million for the year ended december 31 , 2014 , representing a 13 % decrease . the decrease in services revenue was primarily attributable to several customer implementations that were completed in 2014 with significant professional services and to a lesser extent certain pre-packaged offerings requiring less professional services .

the guidance will be effective at the beginning of our first quarter of fiscal year 2020 and will require a story_separator_special_tag general our fiscal year ends on the sunday closest to september 30. the fiscal year ended on october 1 , 2017 included 52 weeks . the fiscal year ended on october 2 , 2016 included 53 weeks , with the extra week falling in our fourth fiscal quarter , and the fiscal year ended on september 27 , 2015 included 52 weeks . comparable store sales percentages below are calculated excluding the 53 rd week . all references to store counts , including data for new store openings , are reported net of related store closures , unless otherwise noted . financial highlights total net revenues increased 5 % to $ 22.4 billion in fiscal 2017 compared to $ 21.3 billion in fiscal 2016 . excluding $ 412.4 million from extra week of fiscal 2016 , net revenues grew 7 % . global comparable store sales grew 3 % driven by a 3 % increase in average ticket . consolidated operating income decreased to $ 4.1 billion in fiscal 2017 compared to operating income of $ 4.2 billion in fiscal 2016 . fiscal 2017 operating margin was 18.5 % compared to 19.6 % in fiscal 2016 . operating margin compression in fiscal 2017 was primarily driven by increased partner ( employee ) and digital investments , largely in the americas segment , restructuring and impairment charges and the absence of the 53rd week , partially offset by sales leverage . restructuring and impairment charges for fiscal 2017 were $ 153.5 million and primarily related to our strategic changes in our teavana business including a partial goodwill impairment , store asset impairments , costs associated with early closure of stores and severance . additional amounts incurred related to an impairment of our switzerland retail business and asset impairments of certain starbucks ® company-operated stores in canada . earnings per share ( “ eps ” ) for fiscal 2017 increased to $ 1.97 , compared to eps of $ 1.90 in fiscal 2016 , which benefited $ 0.06 per share from the extra week in fiscal 2016. the increase was primarily driven by growth in comparable store sales , improved sales leverage and the gain on the sale of singapore retail operations , partially offset by restructuring and impairment charges . cash flows from operations were $ 4.2 billion in fiscal 2017 compared to $ 4.6 billion in fiscal 2016 . the change was primarily due to the timing of our cash payments for income taxes . capital expenditures were $ 1.5 billion in fiscal 2017 compared to $ 1.4 billion in fiscal 2016 . we returned $ 3.5 billion to our shareholders in fiscal 2017 through share repurchases and dividends compared to $ 3.2 billion in fiscal 2016. overview starbucks results for fiscal 2017 continued to demonstrate the strength of our global business model , and our ability to successfully make disciplined investments in our business and our partners . consolidated total net revenues increased 5 % to $ 22.4 billion , primarily driven by incremental revenues from 2,320 net new store openings over the past 12 months and a 3 % growth in global comparable store sales , partially offset by the absence of the 53rd week . consolidated operating income declined $ 37 million , or 1 % , to $ 4.1 billion . operating margin declined 110 basis points to 18.5 % , primarily due to increased partner investments , largely in the americas segment , restructuring and impairment charges and the absence of the 53rd week , partially offset by sales leverage . earnings per share of $ 1.97 increased 4 % over the prior year earnings per share of $ 1.90. americas revenue grew by 6 % to $ 15.7 billion , primarily driven by incremental revenues from 952 net new store openings over the last 12 months and comparable store sales growth of 3 % , partially offset by the absence of the 53rd week . the success of our premium food offerings coupled with innovation across our coffee and tea beverage platforms drove the increase in comparable store sales . operating income declined $ 79 million to $ 3.7 billion and operating margin at 23.4 % declined by 190 basis points from a year ago , primarily due to increased investments in our store partners , a product mix shift largely towards food , and the absence of the 53rd week . these were partially offset by sales leverage . in our china/asia pacific segment , revenues grew by 10 % to $ 3.2 billion , primarily driven by incremental revenues from the opening of 1,036 net new stores over the past 12 months and a 3 % increase in comparable store sales , partially offset by the absence of the 53rd week and unfavorable foreign currency translation . operating income grew 21 % to $ 765 million , while operating margin expanded 210 basis points to 23.6 % . the overall margin expansion was primarily due to the transition to china 's new value added tax structure in fiscal 2016 and higher income from our joint venture operations . we now operate 7,479 stores in 15 countries in our china/asia pacific segment making this the second largest reportable segment . 23 we continue to execute on our strategy of repositioning the emea segment to a predominantly licensed model . as a result of this strategy , emea revenues declined $ 111 million to $ 1.0 billion , or 10 % , primarily driven by the absence of revenue related to the sale of our germany retail operations in the third quarter of fiscal 2016 and unfavorable foreign currency translation . partially offsetting the decrease were incremental revenues from the opening of 339 net new licensed stores over the past 12 months . story_separator_special_tag store operating expenses as a percentage of company-operated store revenues increased 80 basis points , primarily driven by higher partner and digital investments , largely in the americas segment ( approximately 150 basis points ) , partially offset by sales leverage ( approximately 90 basis points ) . other operating expenses as a percentage of total net revenues decreased 10 basis points . excluding the impact of company-operated store revenues , other operating expenses decreased 50 basis points , primarily due to lower performance-based compensation ( approximately 20 basis points ) . general and administrative expenses as a percentage of total net revenues decreased 20 basis points , primarily driven by lower performance-based compensation ( approximately 30 basis points ) , and employment taxes , including the lapping of higher employment taxes resulting from a multiple year audit in the prior year ( approximately 20 basis points ) . these were partially offset by increased salaries and benefits related to digital platforms , technology infrastructure and innovations . restructuring and impairments charges in fiscal 2017 were primarily the result of our strategic changes in teavana . we recorded $ 130 million of restructuring–related costs , including a partial goodwill impairment of $ 69 million , store asset impairments , and costs related to early store closure obligations and severance . additionally , we recorded $ 18 million of partial goodwill impairment relating to our switzerland retail business . income from equity investees increased $ 73 million , due to higher income from our cap joint venture operations , primarily china and south korea , as well as our north american coffee partnership . the combination of these changes resulted in an overall decrease in operating margin of 110 basis points in fiscal 2017 when compared to fiscal 2016 . other income and expenses replace_table_token_13_th interest income and other , net increased $ 167 million , primarily driven by gains from the sale of our singapore retail operations ( $ 84 million ) and our investment in square , inc. warrants ( $ 41 million ) . also contributing favorably was higher income recognized on unredeemed stored value card balances ( $ 44 million ) . interest expense increased $ 11 million primarily related to additional interest incurred on long-term debt issued in february 2016 , may 2016 and march 2017 , partially offset by lower interest expense from the repayment of our december 2016 notes . the effective tax rate for fiscal 2017 was 33.2 % compared to 32.9 % for fiscal 2016 . the increase in the effective tax rate was primarily due to unfavorability from non-deductible goodwill impairment charges recorded in the third quarter of fiscal 2017 ( approximately 70 basis points ) , and the lapping of the release of certain tax reserves in the third quarter of fiscal 2016 , primarily related to statute closures ( approximately 30 basis points ) . the increase was partially offset by the largely non-taxable gain on the sale of our singapore retail operations in the fourth quarter of fiscal 2017 ( approximately 70 basis points ) . 26 segment information story_separator_special_tag style= '' line-height:120 % ; padding-top:12px ; font-size:10pt ; '' > channel development replace_table_token_17_th discussion of our channel development segment results reflects the impact of an unfavorable revenue deduction adjustment recorded in the second quarter of fiscal 2017. while this adjustment was immaterial , the discussion below quantifies the impact to provide a better understanding of our results for fiscal 2017 . revenues channel development total net revenues for fiscal 2017 increased $ 76 million , or 4 % , over fiscal 2016 . cpg revenue growth was driven by increased sales through our international channels , primarily associated with our european and north american regions ( $ 35 million ) , u.s. packaged coffee ( $ 32 million ) and premium single-serve products ( $ 23 million ) . higher foodservice sales were primarily the result of a change to a direct distribution model and recognizing the benefit of full revenue from premium single-serve product sales . increased sales were partially offset by the absence of the 53rd week ( $ 40 million ) and an unfavorable revenue deduction adjustment pertaining to prior periods ( $ 13 million ) . operating expenses cost of sales as a percentage of total net revenues decreased 50 basis points , primarily driven by lower coffee costs ( approximately 90 basis points ) and leverage on cost of sales ( approximately 60 basis points ) , partially offset by a shift toward lower margin products ( approximately 100 basis points ) and the revenue deduction adjustment pertaining to prior periods ( approximately 30 basis points ) . other operating expenses as a percentage of total net revenues decreased 70 basis points , primarily driven by lower performance-based compensation ( approximately 40 basis points ) . general and administrative expenses as a percentage of total net revenues decreased 40 basis points , primarily driven by lower performance-based compensation ( approximately 20 basis points ) and salaries and benefits ( approximately 10 basis points ) . income from equity investees increased $ 28 million for fiscal 2017 , due to higher income from our north american coffee partnership joint venture , driven by increased sales of frappuccino ® and starbucks doubleshot ® beverages as well as new product launches over the past 12 months . the combination of these changes contributed to an overall increase in operating margin of 270 basis points in fiscal 2017 when compared to fiscal 2016 . 30 all other segments replace_table_token_18_th all other segments primarily includes teavana-branded stores , seattle 's best coffee , as well as certain developing businesses such as siren retail . the increase in the operating loss in the fourth quarter of fiscal 2017 compared to the fourth quarter of fiscal 2016 was primarily due to restructuring and impairment charges related to our strategy to close teavana retail stores and focus on teavana tea within starbucks ® stores .

results of operations by segment ( in millions ) : americas replace_table_token_14_th revenues americas total net revenues for fiscal 2017 increased $ 857 million , or 6 % , over fiscal 2016 , primarily due to increased revenues from company-operated stores ( contributing $ 749 million ) and licensed stores ( contributing $ 99 million ) . the increase in company-operated store revenues was driven by incremental revenues from 383 net new starbucks ® company-operated store openings over the past 12 months ( $ 585 million ) and a 3 % increase in comparable store sales ( $ 426 million ) , attributable to a 4 % increase in average ticket , partially offset by the absence of the 53rd week ( $ 258 million ) the increase in licensed store revenues was primarily driven by increased product sales to and royalty revenues from our licensees ( $ 127 million ) , primarily resulting from the opening of 569 net new starbucks ® licensed stores over the past 12 months and improved comparable store sales , partially offset by the absence of the 53rd week ( $ 31 million ) . operating expenses cost of sales including occupancy costs as a percentage of total net revenues increased 90 basis points , primarily due to a product mix shift ( approximately 70 basis points ) largely towards premium food . store operating expenses as a percentage of total net revenues increased 80 basis points . as a percentage of company-operated store revenues , store operating expenses increased 90 basis points , primarily driven by increased partner and digital investments ( approximately 180 basis points ) , partially offset by sales leverage on salaries and benefits ( approximately 80 basis points ) . other operating expenses as a percentage of total net revenues increased 20 basis points .

the company does not expect the adoption will have a material impact on results of operations story_separator_special_tag executive overview of the business the company is primarily engaged in the design , manufacture and sale of quality electrical and electronic products for a broad range of non-residential and residential construction , industrial and utility applications . products are either sourced complete , manufactured or assembled by subsidiaries in the united states , canada , switzerland , puerto rico , china , mexico , the united kingdom , brazil , australia spain and ireland . the company also participates in joint ventures in taiwan , hong kong and the philippines , and maintains offices in singapore , italy , china , india , mexico , south korea , chile , and countries in the middle east . the company employed approximately 17,700 individuals worldwide as of december 31 , 2017. the company 's reporting segments consist of the electrical segment and the power segment . results for 2017 , 2016 and 2015 by segment are included under “ segment results ” within this management 's discussion and analysis . the company 's long-term strategy is to serve its customers with reliable and innovative electrical and related infrastructure solutions with desired brands , high-quality service , and delivered through a competitive cost structure ; to complement organic revenue growth with acquisitions that enhance its product offerings ; and to allocate capital effectively to create shareholder value . our strategy to complement organic revenue growth with acquisitions focuses on acquiring assets that extend our capabilities , expand our product offerings , and present opportunities to compete in core , adjacent or complementary markets . our acquisition strategy also provides the opportunity to advance our revenue growth objectives during periods of weakness or inconsistency in our end-markets . our strategy to deliver products through a competitive cost structure has resulted in the restructuring and related activities we have initiated , beginning in 2014. our restructuring and related efforts include the consolidation of manufacturing and distribution facilities , workforce actions , as well as streamlining and consolidating our back-office functions . the primary objectives of our restructuring and related activities are to optimize our manufacturing footprint , cost structure , and effectiveness and efficiency of our workforce . productivity improvement also continues to be a key area of focus for the company and efforts to drive productivity work with our restructuring and related activities to minimize the impact of rising material costs and administrative cost inflation . material costs are approximately two-thirds of our cost of goods sold therefore volatility in this area can significantly impact profitability . our goal is to have pricing and productivity programs that offset material and other inflationary cost increases as well as pay for investments in key growth areas . productivity programs impact virtually all functional areas within the company by reducing or eliminating waste and improving processes . we continue to expand our efforts surrounding global product and component sourcing and supplier cost reduction programs . value engineering efforts , product transfers and the use of lean process improvement techniques are expected to continue to increase manufacturing efficiency . in addition , we continue to build upon the benefits of our enterprise resource planning system across all functions . acquisition of aclara on february 2 , 2018 the company acquired aclara for approximately $ 1.1 billion . aclara is a leading global supplier of smart infrastructure solutions for electric , gas , and water utilities , with advanced metering solutions and grid monitoring sensor technology , as well as leading software enabled installation services . the acquisition extends the power segment 's capabilities into smart automation technologies , accelerates ongoing innovation efforts to address utility customer demand for data and integrated solutions , and expands the segment 's reach to a broader set of utility customers . for additional information about the aclara acquisition , refer to note 2 — business acquisitions in the notes to the consolidated financial statements as well as the company 's current report on form 8-k filed on december 26 , 2017 . 18 hubbell incorporated - form 10-k outlook in 2018 , we expect aggregate growth across our end markets of approximately two to four percent and that our new product development initiatives will drive our net sales results to modestly out-perform end-market expectations . our end-market growth expectations include three to five percent growth in the oil and gas market , two to four percent growth in the electrical transmission and distribution , industrial , and residential markets , and one to three percent growth in the non-residential market . we expect acquisitions to contribute approximately 15 % to net sales growth in 2018 , including net sales growth from the acquisition of aclara . we expect reported earnings per diluted share for 2018 in the range of $ 6.10 to $ 6.50 and adjusted earnings per diluted share in the range of $ 6.95 to $ 7.35 ( 1 ) . finally , with our strong financial position and cash flows provided by operating activities , we expect to continue to enhance shareholder value through capital deployment . we expect free cash flow ( defined as cash flows from operating activities less capital expenditures ) to be equal to net income attributable to hubbell in 2018 . ( 1 ) effective with results of operations reported in the first quarter of 2018 , `` adjusted '' operating measures will no longer exclude restructuring and related costs , as these costs and the related savings are expected to return to a more consistent annual run-rate in 2018 , and therefore no longer affect the comparability of our underlying performance from period to period . our expectation for full year 2018 adjusted earnings per diluted share in the range of $ 6.95 to $ 7.35 excludes aclara acquisition-related and transaction costs . aclara acquisition-related costs include the amortization of identified intangible assets and inventory step-up amortization expense . story_separator_special_tag beginning in the fourth quarter of 2014 , our restructuring and related activities increased and continued at heightened levels through 2017 , primarily to align our cost structure with the needs of our business and also in response to conditions in certain of our end markets . we expect our restructuring programs and activities will continue in future years , however at a lower and more consistent run-rate of cost and savings as compared to the heightened levels we 've recently experienced . 20 hubbell incorporated - form 10-k reclassification costs in 2015 , our consolidated results of operations included costs associated with the reclassification of the company 's common stock to eliminate its two-class structure ( the `` reclassification '' and the `` reclassification costs '' ) . reclassification costs are primarily professional fees associated with the reclassification and are recognized in other expense , net in the consolidated statement of income . only a portion of the reclassification costs were tax deductible . additional information about the reclassification is included in note 15 — capital stock in the notes to consolidated financial statements as well as the company 's current reports on form 8-k filed on august 24 , 2015 and december 23 , 2015 and the company 's registration statement on form s-4 ( file no . 333-206898 ) , initially filed with the sec on september 11 , 2015 and declared effective on november 23 , 2015. the following table reconciles our adjusted financial measures to the directly comparable gaap financial measure ( in millions , except per share amounts ) : replace_table_token_5_th ( 1 ) in 2015 , the impact to the effective tax rate of ( 0.9 ) % relates to reclassification costs . only a portion of those costs were tax deductible . in 2017 , the impact of 0.2 % relates to the early extinguishment of debt . hubbell incorporated - form 10-k 21 the following table reconciles our restructuring costs to our restructuring and related costs for 2017 , 2016 and 2015 ( in millions ) : replace_table_token_6_th of the $ 23.7 million of restructuring and related costs incurred in 2017 , $ 17.7 million is recorded in the electrical segment and $ 6.0 million is recorded in the power segment . of the $ 35.0 million of restructuring and related costs incurred in 2016 , $ 32.1 million is recorded in the electrical segment and $ 2.9 million is recorded in the power segment . restructuring and related costs in cost of goods sold in 2016 includes a $ 12.5 million charge to record an estimated liability for the withdrawal from a multi-employer pension plan associated with the consolidation of two of our lighting facilities . restructuring related costs in s & a expense in 2017 and 2016 each include a gains on the sale of properties associated with restructuring actions of $ 6.2 million and $ 7.2 million , respectively . 2017 compared to 2016 net sales net sales of $ 3.7 billion in 2017 increased five percent as compared to 2016 . acquisitions added two percentage points to net sales in 2017 and organic volume , including the impact of pricing headwinds , added three percentage points . within our electrical segment , organic net sales growth came primarily from products sold into the energy-related , non-residential and residential construction markets . organic net sales within our power segment increased by six percentage points primarily driven by growth in the electrical transmission and distribution market . cost of goods sold cost of goods sold as a percentage of net sales in 2017 was 68.6 % and was flat as compared to 2016 . price and material cost headwinds as well as a 30 basis point headwind from acquisitions , were offset by gains from productivity initiatives that exceeded cost inflation , greater realized savings from our restructuring and related actions and lower restructuring and related costs in 2017. gross profit the gross profit margin for 2017 was 31.4 % and was flat as compared to 2016 . restructuring and related costs in cost of goods sold were $ 14.5 million lower in 2017 as compared to 2016 . excluding restructuring and related costs , the adjusted gross profit margin was 31.8 % and declined by 50 basis points as compared to 2016 . the decline is primarily due to price and material cost headwinds as well as a 30 basis point headwind from acquisitions , partially offset by gains from productivity initiatives that exceeded cost inflation and greater realized savings from our restructuring and related actions . the headwind from acquisitions includes our investment in iot capabilities in 2017 through the acquisition of idevices . selling & administrative expenses s & a expense in 2017 was $ 648.2 million and increased by $ 25.3 million compared to the same period of the prior year . s & a expense as a percentage of net sales declined by 10 basis points to 17.7 % in 2017 . excluding restructuring and related costs and aclara transaction costs , adjusted s & a expense as a percentage of net sales declined by 30 basis points to 17.3 % in 2017 primarily due to higher net sales volume and greater realized savings from our restructuring and related actions , partially offset by acquisitions , which increased the adjusted s & a expense as a percentage of net sales by approximately 10 basis points . 22 hubbell incorporated - form 10-k operating income operating income increased five percent in 2017 to $ 503.7 million and operating margin increased by 10 basis points to 13.7 % . excluding restructuring and related costs as well as aclara transaction costs , adjusted operating income increased four percent in 2017 to $ 534.1 million and the adjusted operating margin of 14.6 % was flat as compared to the prior year .

segment results electrical segment replace_table_token_7_th net sales in the electrical segment were $ 2.5 billion , up three percent in 2017 as compared with 2016 due to two percentage points of net sales growth from higher organic volume , including the impact of pricing headwinds , and one percentage point contributed by acquisitions . within the segment , the aggregate net sales of our commercial and industrial and construction and energy business groups increased by six percentage points , due to four percentage points of organic growth , and two percentage points of net sales growth from acquisitions . organic net sales growth of these businesses was driven primarily by our products serving the energy-related markets as well as the non-residential and residential construction markets . net sales of our lighting business group decreased one percent in 2017 as two percentage points of headwind from pricing , was only partially offset by one percentage point of volume growth . within the lighting business group , net sales of residential lighting products increased by three percent , while net sales of commercial and industrial lighting products declined by two percentage points , primarily due to headwinds on pricing . operating income in the electrical segment for 2017 was $ 282.5 million and increased six percent compared to 2016 . operating margin in 2017 increased by approximately 30 basis points to 11.2 % . excluding restructuring and related costs , the adjusted operating margin decreased by 30 basis points to 11.9 % in 2017 . the decrease in the adjusted operating margin is primarily due to price and material cost headwinds and acquisitions . acquisitions reduced the adjusted operating margin by approximately 50 basis points in 2017 , and includes our investment in iot capabilities through the acquisition of idevices . the unfavorable impact of those items was partially offset by greater realized savings from our restructuring and related actions .

in certain instances , the company enters into a contract with a customer that includes a promise to provide 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 annual report on form 10-k. as discussed in the section titled `` special note regarding forward looking statements , '' the following discussion and analysis 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 . factors that could cause or contribute to these differences include , but are not limited to , those discussed in the section titled `` risk factors '' under part i , item 1a in this annual report on form 10-k. overview yext is a knowledge engine . our platform lets businesses control their digital knowledge in the cloud and sync it to more than 150 services and applications , which we refer to as our knowledge network and includes amazon alexa , apple maps , bing , cortana , facebook , google , google assistant , google maps , siri and yelp . we have established direct data integrations with applications in our knowledge network that end consumers around the globe use to discover new businesses , read reviews and find accurate answers to their queries . our cloud-based platform , the yext knowledge engine , powers all of our key features , including listings , pages and reviews , along with our other features and capabilities . we offer annual and multi-year subscriptions to our platform . subscriptions are offered in a discrete range of packages with pricing based on specified feature sets and the number of licenses managed with our platform . we sell our solution globally to customers of all sizes , through direct sales efforts to our customers , including third-party resellers , and through a self-service purchase process . in transactions with resellers , we are only party to the transaction with the reseller and are not a party to the reseller 's transaction with its customer . while the majority of our revenue is based in the u.s. , we continue to grow internationally . we offer the same services internationally as we do in the united states , and we intend to continue to pursue a strategy of expanding our international operations . our revenue from non-u.s. operations was more than 14 % of total revenue for the fiscal year ended january 31 , 2019 . our non-u.s. revenue is defined as revenue derived from contracts that are originally entered into with our non-u.s. offices , regardless of the location of the customer . we generally direct non-u.s. customer sales to our non-u.s. offices . our business has evolved in recent years . for example : in 2016 , we launched specialized integrations to our platform with applications like uber and snapchat , added our reviews feature to our platform and held our inaugural industry and customer event in new york city . in 2017 , we introduced the yext app directory , which enables businesses to connect information from systems across the business , such as workforce management systems and customer relationship management databases and held our second annual industry and customer event , onward 2017 ( formerly called `` locationworld '' ) , in november 2017 , in new york city . in 2018 , we launched a global integration with amazon to give businesses control over the answers amazon alexa provides about them and held our third annual industry and customer event , onward18 , in october 2018 , in new york city . we have experienced rapid growth in recent periods , nearly all of which has been organic growth as we have not historically conducted many acquisitions . our revenue was $ 228.3 million , $ 170.2 million and $ 124.3 million for the fiscal years ended january 31 , 2019 , 2018 and 2017 , respectively . fiscal year our fiscal year ends on january 31 st . references to fiscal 2019 , for example , are to the fiscal year ended january 31 , 2019 . components of results of operations revenue we derive our revenue primarily from subscriptions and associated support to our cloud-based knowledge engine platform . our contracts are typically one year in length , but may be up to three years or longer in length . revenue is a function of the number of customers , the number of licenses with each customer , the package to which each customer subscribes , the price of the package and renewal rates . revenue is generally recognized ratably over the contract term beginning on the commencement date of each contract , which is the date our platform is made available to customers . at the beginning of each subscription term we invoice our customers , typically in annual installments , but also monthly , quarterly , and semi-annually . amounts that have been invoiced for non-cancelable contracts are recorded in accounts receivable and in unearned revenue or revenue , depending on when the transfer of control to customers has occurred . 37 cost of revenue cost of revenue primarily relates to costs incurred in association with our cloud-based knowledge engine platform , which includes fees we pay to our knowledge network application providers . the nature of these arrangements may be unpaid , fixed , or variable . the arrangements with many of our larger providers are unpaid . as the value of our customers ' digital knowledge increases over time to our knowledge network application providers , we expect that we will be able to negotiate lower or no fee contracts and , therefore , our provider fees as a percentage of total revenue will generally decline . story_separator_special_tag 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 . credit facility on march 16 , 2016 , we entered into a loan and security agreement with silicon valley bank that provides for a $ 15.0 million revolving credit line ( `` revolving line '' ) and a $ 7.0 million letter of credit facility ( together with the revolving line , the `` credit agreement '' ) . the original credit agreement had a maturity date of march 16 , 2018 . subsequent to the fiscal year ended january 31 , 2018 , in march 2018 , the credit agreement was amended to extend the maturity date to march 16 , 2020. we are obligated to pay ongoing commitment fees at a rate equal to 0.25 % for the revolving line and 1.75 % for any issued letters of credit . subject to certain terms of the credit agreement , we may borrow , prepay and reborrow amounts under the revolving line at any time during the agreement and amounts repaid or prepaid may be reborrowed . interest rates on borrowings under the revolving line will be based on one-half of one percent ( 0.50 % ) above the prime rate . the prime rate is defined as the rate of interest per annum from time to time published in the money rate section of the wall street journal . the credit agreement contains certain customary affirmative and negative covenants , including an adjusted quick ratio of at least 1.25 to 1.00 , minimum revenue , a limit on our ability to incur additional indebtedness , dispose of assets , make certain acquisition transactions , pay dividends or make distributions , and certain other restrictions on our activities . as of january 31 , 2019 , we were in compliance with all debt covenants . as of such date , the $ 15.0 million revolving line was fully available . the $ 7.0 million letter of credit facility had $ 5.3 million allocated as security in connection with office space as of the fiscal year ended january 31 , 2019. subsequent to the fiscal year-end , in february 2019 , an additional $ 1.4 million was allocated in connection with new office space , resulting in $ 0.3 million remaining available under the letter of credit facility . cash flows the following table summarizes our cash flows : replace_table_token_12_th 42 operating activities net cash provided by operating activities of $ 5.2 million for the fiscal year ended january 31 , 2019 was primarily due to a change in unearned revenue of $ 47.0 million and non-cash charges related to stock‑based compensation expense of $ 44.2 million , as well as a change in accounts payable , accrued expenses and other current liabilities of $ 17.3 million and non-cash charges related to depreciation and amortization expense of $ 6.8 million . these increases were partially offset by the net loss of $ 74.8 million , as well as changes in costs to obtain revenue contracts of $ 16.8 million , accounts receivable of $ 11.6 million , mainly due to timing of billing and cash collections during the period , and prepaid expenses and other current assets of $ 6.7 million . net cash used in operating activities of $ 32.4 million for the fiscal year ended january 31 , 2018 was primarily due to the net loss of $ 66.6 million , a change in accounts receivable of $ 17.0 million , mainly due to timing of billing and cash collections during the period , a change in deferred commissions of $ 4.4 million and a change in prepaid expenses and other current assets of $ 4.0 million . these decreases were partially offset by a change in deferred revenue of $ 31.8 million , stock‑based compensation expense of $ 22.4 million , depreciation and amortization of $ 5.1 million and a change in deferred rent of $ 0.8 million . net cash used in operating activities of $ 13.5 million for the fiscal year ended january 31 , 2017 was primarily due to a net loss of $ 43.2 million , partially offset by stock-based compensation expense of $ 9.9 million , and depreciation and amortization of $ 4.1 million . the net change in operating assets and liabilities was primarily due to a change in the deferred revenue balance of $ 20.9 million and accounts receivable balance of $ 4.1 million , mainly due to timing of billing and cash collections during the period . the increase in accounts payable , accrued expenses and other current liabilities of $ 6.0 million was offset by increases in prepaid expenses and other current assets of $ 1.6 million and deferred commissions of $ 5.6 million . the increase in deferred commissions reflected the growth in headcount and sales resulting in increased compensation and sales commissions . investing activities net cash provided by investing activities of $ 28.1 million for the fiscal year ended january 31 , 2019 was due to maturities of marketable securities of $ 86.3 million , partially offset by purchases of marketable securities of $ 52.9 million , and capital expenditures of $ 5.3 million . net cash used in investing activities of $ 88.1 million for the fiscal year ended january 31 , 2018 was related to purchases of marketable securities of $ 110.6 million and capital expenditures of $ 3.7 million , offset by maturities and sales associated with marketable securities of $ 26.2 million . net cash used in investing activities for the fiscal year ended january 31 , 2017 was $ 3.8 million and primarily related to capital expenditures of $ 3.5 million .

results of operations the following table sets forth selected consolidated statement of operations data for each of the periods indicated : replace_table_token_4_th ( 1 ) results for the fiscal year ended january 31 , 2019 reflect our modified retrospective adoption of asu 2014-09. results for the fiscal years ended january 31 , 2018 and 2017 , respectively , continue to be reported in accordance with historical accounting standards under asc 605. see note 2 `` summary of significant accounting policies , '' for further discussion . ( 2 ) amounts include stock-based compensation expense as follows : replace_table_token_5_th 38 the following table sets forth selected consolidated statements of operations data for each of the periods indicated as a percentage of total revenue : replace_table_token_6_th fiscal year ended january 31 , 2019 compared to fiscal year ended january 31 , 2018 revenue and cost of revenue replace_table_token_7_th total revenue was $ 228.3 million for the fiscal year ended january 31 , 2019 , compared to $ 170.2 million for the fiscal year ended january 31 , 2018 , an increase of $ 58.1 million or 34 % . this increase was primarily due to new customers and expanded subscriptions sold to existing customers . revenue from our enterprise and mid-size customers , which include third-party reseller customers , grew from approximately $ 152.7 million to $ 213.0 million , and excludes revenue from small business customers , which by their nature have inherently high turnover . cost of revenue was $ 57.4 million for the fiscal year ended january 31 , 2019 , compared to $ 44.1 million for the fiscal year ended january 31 , 2018 , an increase of $ 13.3 million or 30 % . this increase was primarily due to a $ 5.2 million increase in personnel‑related costs , which mainly consisted of salaries and wages .

abbvie 's mission is to use its expertise , dedicated people and unique approach to innovation to develop and market advanced therapies that address some of the world 's most complex and serious diseases . abbvie 's products are focused on treating conditions such as chronic autoimmune diseases in rheumatology , gastroenterology and dermatology ; oncology , including blood cancers ; virology , including hepatitis c ( hcv ) and human immunodeficiency virus ( hiv ) ; neurological disorders , such as parkinson 's disease ; metabolic diseases , including thyroid disease and complications associated with cystic fibrosis ; as well as other serious health conditions . abbvie also has a pipeline of promising new medicines across such important medical specialties as immunology , virology/liver disease , oncology , neurology , cystic fibrosis and women 's health . abbvie 's products are generally sold worldwide directly to wholesalers , distributors , government agencies , health care facilities , specialty pharmacies , and independent retailers from abbvie-owned distribution centers and public warehouses . in the united states , abbvie distributes pharmaceutical products principally through independent wholesale distributors , with some sales directly to pharmacies and patients . outside the united states , sales are made either directly to customers or through distributors , depending on the market served . certain products are co-marketed or co-promoted with other companies . abbvie has approximately 28,000 employees . abbvie operates in one business segment—pharmaceutical products . on may 26 , 2015 , abbvie completed its acquisition of pharmacyclics , inc. ( pharmacyclics ) , a biopharmaceutical company that develops and commercializes novel therapies for people impacted by cancer , and its flagship asset imbruvica® ( ibrutinib ) , a novel , orally active , selective covalent inhibitor of bruton 's tyrosine kinase ( btk ) . as part of a worldwide collaboration and license agreement with janssen biotech , inc. , one of the janssen pharmaceutical companies of johnson & johnson ( janssen ) , imbruvica is approved for use in the united states , canada , and the european union ( eu ) as well as in other countries worldwide . in the united states , abbvie co-markets imbruvica for four indications approved by the u.s. food and drug administration ( fda ) prior to the acquisition date : ( i ) for the treatment of patients with mantle cell lymphoma ( mcl ) who have received at least one prior therapy ; ( ii ) for the treatment of patients with chronic lymphocytic leukemia ( cll ) who have received at least one prior therapy ; ( iii ) for the treatment of cll patients with deletion of the short arm chromosome 17 ( del 17p cll ) ; and ( iv ) for the treatment of patients with waldenstrom 's macroglobulinemia . in the eu , janssen markets imbruvica . at the date of the acquisition , imbruvica was indicated in the eu for the treatment of adult patients with relapsed or refractory mcl , or adult patients with cll who have received at least one prior therapy , or in first-line in the presence of 17p deletion or tp53 mutation in patients unsuitable for chemoimmunotherapy . the acquisition will accelerate abbvie 's clinical and commercial presence in oncology , strengthen its pipeline , and establish a leadership position in hematological oncology . the acquisition will also accelerate abbvie 's revenue and earnings growth and further diversify its revenue base . abbvie expects the acquisition to be accretive to earnings beginning in 2017. refer to note 5 entitled `` licensing , acquisitions and other arrangements '' of the notes to condensed consolidated financial statements included under ​ 32 | 2015 form 10-k ​ ​ part ii , item 8 , `` financial statements and supplementary data '' for further information regarding the acquisition of pharmacyclics . story_separator_special_tag acquire or collaborate on compounds currently in development at other biotechnology or pharmaceutical companies . abbvie 's pipeline currently includes more than 50 compounds or indications in clinical development individually or under collaboration or license agreements and is focused on such important medical specialties as immunology , oncology , virology/liver disease , and neurology along with targeted investments in renal disease , cystic fibrosis , and women 's health . of these programs , more than 30 are in mid- and late-stage development . the following sections summarize transitions of significant programs from phase 2 development to phase 3 development as well as developments in significant phase 3 and registration programs . abbvie expects multiple phase 2 programs to transition into phase 3 programs during 2016 . ​ 34 | 2015 form 10-k ​ ​ significant clinical programs approved or submitted abbvie submitted for review or received approval for the following significant late-stage development programs : immunology the fda granted humira orphan drug designation for the treatment of moderate-to-severe hidradenitis suppurativa ( hs ) , a painful , chronic inflammatory skin disease . abbvie 's supplemental biological license application ( bla ) in the united states and its marketing authorization in the eu were approved by the fda and the european medicines agency ( ema ) in 2015 , respectively . approval for this indication represents the thirteenth indication for humira in major geographies around the world . in april 2015 abbvie announced that the european commission ( ec ) granted marketing authorization for humira for the treatment of severe chronic plaque psoriasis in children and adolescence from four years of age who have had an inadequate response to or are inappropriate candidates for topical therapy and phototherapies . with the ec decision , humira is now approved for use in this indication in all member states of the eu . abbvie submitted regulatory applications in the united states and the eu for the use of humira in the treatment of uveitis . story_separator_special_tag validation confirms that the submission is complete and signifies the initiation of the ​ 36 | 2015 form 10-k ​ ​ review process by the chmp . in april 2015 , abbvie and biogen announced that the fda accepted for review the registration submission in the united states . other significant developments transitions of significant programs from phase 2 to phase 3 development , as well as other significant developments , included the following : immunology in january 2016 , abbvie announced the commencement of a phase 3 clinical trial program to study the use of abbvie 's once-daily formulation of abt-494 , its internally developed investigational selective janus kinase 1 ( jak-1 ) inhibitor , for the treatment of rheumatoid arthritis . a phase 2 trial of abt-494 for the treatment of crohn 's disease is also ongoing . in 2015 , abbvie received a decision by the ec regarding compliance with its pediatric investigation plan for humira , which ensures that necessary data are obtained through studies in children . as a result of this positive decision , the company is seeking an extension from each eu member state where a supplementary protection certificate is held . once approved , this will extend the humira composition of matter patent in the eu by six months from april 2018 to october 2018. oncology in july 2015 , abbvie initiated a phase 3 study for the use of veliparib ( abt-888 ) , a parp-inhibitor , for the treatment of ovarian cancer in combination with chemotherapy . veliparib is also in phase 3 development for various forms of breast and lung cancer . abbvie recently initiated its first phase 3 clinical trial for imbruvica in solid tumors . the trial will evaluate the safety and efficacy of imbruvica in combination with gemcitabine and nab-paclitaxel for first-line treatment of patients with metastatic pancreatic adenocarcinoma . virology/liver disease in october 2015 , in consultation with the fda , the product inserts in the united states for viekira pak and technivie were updated from `` not recommended in child-pugh b patients '' to a contraindication in patients with child-pugh b cirrhosis . patients classified as child-pugh c remained contraindicated as they have been since approval . in january 2016 , abbvie initiated a phase 3 clinical trial program evaluating the safety and efficacy of its next-generation , all-oral , once-daily , pan-genotypic , rbv-free investigational hcv regimen , which includes abt-493 , a ns3/4a protease inhibitor , and abt-530 , an ns5a inhibitor . other abbvie is developing a novel oral gonadotropin-releasing hormone ( gnrh ) antagonist , elagolix , under a collaboration with neurocrine biosciences ( neurocrine ) for the treatment of endometriosis-related pain and uterine fibroids . in january 2016 , abbvie announced the initiation of the first of two planned phase 3 studies evaluating the safety and efficacy of elagolix in the treatment of patients with uterine fibroids . abbvie will make a milestone payment of $ 15 million to neurocrine upon enrollment of the first patient . elagolix is in late-stage development for endometriosis . in 2012 , abbvie entered into a collaboration with galapagos nv ( galapagos ) to develop filgotinib , an oral jak1 inhibitor . in 2015 , following a thorough review of available data , abbvie announced that it will not exercise its right to in-license filgotinib from galapagos . pursuant to the terms of the global collaboration agreement with galapagos , all rights to filgotinib reverted solely to galapagos . ​ ​ ​ 2015 form 10-k | 37 in 2015 , abbvie also augmented its pipeline through strategic licensing and partnering activities including in-licensing an anti-tau antibody ( abbv-8e12 ) for the treatment of alzheimer 's disease and other neurological disorders from c 2 n , a privately held protein diagnostic and therapeutic discovery company . refer to note 5 of the notes to consolidated financial statements included under item 8 , `` financial statements and supplementary data '' for further information regarding the license agreement with c 2 n. results of operations net revenues the comparisons presented at constant currency rates reflect comparative local currency net revenues at the prior year 's foreign exchange rates . this measure provides information on the change in net revenues assuming that foreign currency exchange rates had not changed between the prior and the current period . abbvie believes that the non-gaap measure of change in net revenues at constant currency rates , when used in conjunction with the gaap measure of change in net revenues at actual currency rates , may provide a more complete understanding of the company 's operations and can facilitate analysis of the company 's results of operations , particularly in evaluating performance from one period to another . replace_table_token_3_th ​ 38 | 2015 form 10-k ​ ​ the following table details abbvie 's worldwide net revenues : replace_table_token_4_th n/m—not meaningful . n/a—not applicable . ​ ​ ​ 2015 form 10-k | 39 the following discussion and analysis of abbvie 's net revenues by product is presented on a constant currency basis . global humira sales increased 19 percent in both 2015 and 2014 , primarily as a result of market growth across therapeutic categories and geographies , higher market share , approval of new indications , and favorable pricing in certain geographies . in the united states , humira revenues increased 29 percent in 2015 and 25 percent in 2014 , driven by prescription volume , favorable pricing , and market growth across all indications . internationally , humira revenues increased 9 percent in 2015 and 13 percent in 2014 , driven primarily by growth across indications in certain geographies . abbvie continues to pursue several new indications to help further differentiate humira from competing products and add to the sustainability and future growth of humira .

2015 financial results abbvie 's strategy has focused on delivering strong financial results , advancing and investing in its pipeline , and returning value to shareholders while ensuring a strong , sustainable growth business over the long term . in 2015 , abbvie 's worldwide net revenues grew by 15 percent to $ 22.9 billion , driven primarily by the continued strength of humira , both in the united states and internationally , the global launch of abbvie 's interferon-free hcv treatment , revenue growth in other key products including creon and duodopa , and post-acquisition revenues related to imbruvica . these increases were partially offset by a decline in net revenues of androgel , principally due to continued market declines and the entry of generic competition for the androgel 1 % formulation , as well as the continued decline of the company 's lipid franchise , and the unfavorable impact of foreign exchange . the company 's financial performance in 2015 included delivering fully diluted earnings per share of $ 3.13 , including after-tax costs totaling $ 410 million incurred in connection with the acquisition and integration of pharmacyclics , a $ 350 million after-tax charge for the purchase of a rare pediatric disease priority review voucher ( prv ) from united therapeutics corporation , a $ 100 million after-tax charge as a result of entering into an exclusive worldwide license agreement with c 2 n diagnostics ( c 2 n ) , after-tax foreign exchange losses of $ 170 million as a result of the liquidation in 2015 of remaining foreign currency positions related to the terminated proposed combination with shire plc ( shire ) in 2014 , after-tax charges of $ 129 million to increase the company 's litigation reserves , and an $ 83 million after-tax charge due to the achievement of a development milestone under the global collaboration with infinity pharmaceuticals , inc. ( infinity ) . refer to note 5 for further information regarding these items .

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 annual report on form 10-k , including information with respect to our plans and strategy for our business , includes forward-looking statements that involve risks and uncertainties . as a result of many factors , including those factors set forth in the “ risk factors ” section of this annual report on form 10-k , our actual results could differ materially from the results described , in or implied , by these forward-looking statements . overview our mission is to cure duchenne muscular dystrophy , or duchenne , a genetic muscle-wasting disease predominantly affecting boys , with symptoms that usually manifest between three and five years of age . duchenne is a progressive , irreversible and ultimately fatal disease that affects approximately one in every 3,500 to 5,000 live male births and has an estimated prevalence of 10,000 to 15,000 cases in the united states alone . duchenne is caused by mutations in the dystrophin gene , which result in the absence or near-absence of dystrophin protein . dystrophin protein works to strengthen muscle fibers and protect them from daily wear and tear . without functioning dystrophin and certain associated proteins , muscles suffer excessive damage from normal daily activities and are unable to regenerate , leading to the build-up of fibrotic , or scar , and fat tissue . there is no cure for duchenne and , for the vast majority of patients , there are no satisfactory symptomatic or disease-modifying treatments . our efforts are focused on our lead product candidate , sgt-001 , a gene transfer candidate under investigation for its ability to drive functional dystrophin protein expression in patients ' muscles and improve the course of the disease . based on our preclinical program that included multiple animal species of different phenotypes and genetic variations , as well as preliminary clinical trial biomarker results , we believe that sgt-001 , has the potential to slow or even halt the progression of duchenne , regardless of the type of genetic mutation or stage of the disease . since our inception , we have devoted substantial resources to identifying and developing sgt-001 and our other product candidates , developing our manufacturing processes , organizing and staffing our company and providing general and administrative support for these operations . we have incurred significant losses every year since our inception . we do not have any products approved for sale . to date , we have not generated any revenue . our ability to eventually generate any product revenue sufficient to achieve profitability will depend on the successful development , approval and eventual commercialization of sgt-001 and our other product candidates . if successfully developed and approved , we intend to commercialize sgt-001 in the united states and european union and may enter into licensing agreements or strategic collaborations in other markets . if we generate product sales or enter into licensing agreements or strategic collaborations , we expect that any revenue we generate will fluctuate from quarter to quarter and year to year as a result of the timing and amount of any product sales , license fees , milestone payments and other payments . if we fail to complete the development of sgt-001 and our other product candidates in a timely manner or obtain regulatory approval of them , our ability to generate future revenue , and our results of operations and financial position , would be materially adversely affected . sgt-001 has been granted rare pediatric disease designation , or rpdd , and fast track designation , in the united states and orphan drug designations in both the united states and european union . the safety and efficacy of sgt-001 are currently being evaluated in a phase i/ii clinical trial called ignite dmd . due to our significant research and development expenditure , licensing and patent investment , and general administrative costs associated with our operations , we have generated substantial operating losses in each period since our inception . our net losses were $ 88.3 million , $ 117.2 million and $ 74.8 million for the years ended december 31 , 2020 , 2019 and 2018 , respectively . as of december 31 , 2020 , we had an accumulated deficit of $ 404.6 million . we expect to incur significant expenses and operating losses for the foreseeable future . in january 2020 , we announced a reduction in workforce by approximately one third as part of a strategic plan designed to create a leaner company focused on advancing sgt-001 . as we seek to develop and commercialize sgt-001 or any other product candidates , we anticipate that our expenses will increase significantly and that we will need substantial additional funding to support our continuing operations . until such time as we can generate significant revenue from product sales , if ever , we expect to finance our operations through a combination of public or private equity financings , debt financings or other sources , which may include licensing agreements or strategic collaborations . we may be unable to raise additional funds or enter into such agreements or arrangements when needed on favorable terms , if at all . if we fail to raise capital or enter into such agreements as and when needed , we may have to significantly delay , scale back or discontinue the development or commercialization of sgt-001 or our other product candidates . 86 because of the numerous risks and uncertainties associated with product development , we are unable to predict the timing or amount of increased expenses or determine when or if we will be able to achieve or maintain profitability . even if we are able to generate revenue from product sales , we may not become profitable . story_separator_special_tag as a result of the corporate conversion , the holders of the series 1 and 2 senior preferred and junior preferred units and series a , b , c and d common units of solid biosciences , llc became holders of common stock of solid biosciences inc. the consolidated financial statements included elsewhere in this annual report on form 10-k are those of solid biosciences inc. and its subsidiaries . financial operations overview revenue we have not generated any revenue to date and do not expect to generate any revenue from the sale of our products for the next few years , if ever . if our development efforts for sgt-001 or our other product candidates are successful and result in marketing approval , we may generate revenue in the future from product sales . in october 2020 , we executed the collaboration agreement and we expect to recognize revenue in 2021. operating expenses we classify our operating expenses into two categories : research and development , and general and administrative expenses . personnel costs , including salaries , benefits , bonuses and equity-based compensation expense , comprise a significant component of each of these expense categories . we allocate expenses associated with personnel costs based on the nature of work associated with these resources . research and development expenses research and development expenses consist primarily of costs incurred for our research activities , including our discovery efforts , and the development of sgt-001 and our other product candidates and include : expenses incurred under agreements with third parties , including cros , that conduct research and preclinical activities on our behalf , as well as cmos , that manufacture sgt-001 and our other product candidates for use in our preclinical studies and clinical trials ; salaries , benefits and other related costs , including equity-based compensation expense , for personnel engaged in research and development functions ; costs of outside consultants , engaged to assist in our research and development activities , including their fees , equity-based compensation and related travel expenses ; costs of laboratory supplies and acquiring , developing and manufacturing preclinical study and clinical trial materials ; costs incurred in seeking regulatory approval of sgt-001 and our other product candidates ; expenses incurred under our intellectual property licenses ; and facility-related research and development expenses , which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs . we expense research and development expenses as incurred . we recognize costs for certain development activities , such as preclinical research and development and clinical trial costs , based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors , collaborators and third-party service providers . payments for these activities are based on the terms of the individual agreements , which may differ from the pattern of costs incurred , and are reflected in our consolidated financial statements as prepaid or accrued research and development expenses . we typically use our employee and infrastructure resources across our product candidates . we track outsourced development costs and milestone payments made under our licensing arrangements by product candidates , but we do not allocate personnel costs , license payments made under our licensing arrangements or other internal costs to product candidates on a program-specific basis . these costs are included in unallocated research and development expenses in the table below . 88 the following table summarizes our research and development expenses by product candidates for the respective periods : replace_table_token_1_th we can not determine with certainty the duration , costs and timing of clinical trials of sgt-001 and our other product candidates or if , when or to what extent we will generate revenue from the commercialization and sale of any of our product candidates for which we obtain marketing approval or our other research and development expenses . we may never succeed in obtaining marketing approval for any of our product candidates . the duration , costs and timing of clinical trials and development of our product candidates will depend on a variety of factors , including : the scope , rate of progress , expense and results of any clinical trials of sgt-001 or other product candidates and other research and development activities that we may conduct ; the imposition of regulatory restrictions on clinical trials , including full and partial clinical holds and the time and activities required to lift any such holds ; uncertainties in clinical trial design and patient enrollment or drop out or discontinuation rates ; significant and changing government regulation and regulatory guidance ; potential additional studies or clinical trials requested by regulatory agencies ; the timing and receipt of any marketing approvals ; and the expense of filing , prosecuting , defending and enforcing any patent claims and other intellectual property rights . 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 that our research and development expenses will continue to increase for the foreseeable future as we proceed with clinical trials for sgt-001 , initiate clinical trials for product candidates other than sgt-001 and continue to identify and develop additional product candidates . general and administrative expenses general and administrative expenses consist primarily of salaries and other related costs , including equity-based compensation , for personnel in our executive , finance , business development and administrative functions . general and administrative expenses also include legal fees relating to patent and corporate matters , professional fees for accounting , auditing , tax and consulting services , insurance costs , travel expenses , and facility-related expenses , which include direct depreciation costs and allocated expenses for rent and maintenance of office facilities and other operating costs .

results of operations comparison of the years ended december 31 , 2020 and 2019 the following table summarizes our results of operations for the years ended december 31 , 2020 and 2019 : replace_table_token_2_th research and development expenses replace_table_token_3_th research and development expenses for the year ended december 31 , 2020 were $ 64.9 million , compared to $ 94.7 million for the year ended december 31 , 2019. the decrease of $ 29.9 million in research and development costs was due to a decrease in unallocated research and development costs of $ 12.3 million primarily due to a reduction in personnel and facility related expenses as a result of the restructuring that occurred in january 2020 , and a $ 15.8 million decrease in costs related to our lead product candidate sgt-001 driven by a reduction in manufacturing costs of $ 17.3 million partially offset by an increase in clinical costs of $ 1.5 million primarily driven by clinical consulting costs . the reduction in research and development was also driven by a $ 1.8 million decrease in costs related to other product candidates as we focused on advancing sgt-001 . general and administrative expenses general and administrative expenses were $ 21.6 million for the year ended december 31 , 2020 , compared to $ 24.6 million for the year ended december 31 , 2019. the decrease of $ 3.0 million was due to a decrease in personnel related expenses of $ 2.9 million partially due to the restructuring that occurred in january 2020 and a net decrease in corporate expenses of $ 0.1 million . 93 restructuring charges during the year ended december 31 , 2020 , we recorded charges of $ 1.9 million related to severance and other employee-related costs .

as measured by both the number of returns prepared , we believe we are the second largest retail preparer of individual tax returns in both the united states and canada . our tax preparation services and related tax settlement products are offered primarily through franchised locations , although we operate a limited number of company-owned offices each tax season . approximately 53 % of our revenue for fiscal year 2016 was derived from franchise fees , ad fees , royalties , and advertising fees , and for this reason , continued growth in and seasoning of our franchise locations is viewed by management as the key to our future performance . our revenue primarily consists of the following components : franchise fees : our standard franchise fee per territory is $ 40,000 , and we offer our franchisees flexible structures and financing options for franchise fees . franchise fee revenue is recognized when our obligations to prepare the franchisee for operation are substantially complete and as cash is received . ad fees : our fees for ad areas vary based on our assessment of the revenue potential of each ad area , and also depend on the performance of any existing franchisees within the ad area being sold . our ads generally receive 50 % of franchise fees , royalties , and a portion of the interest income derived from territories located in their area . ad fees received are recognized as revenue on a straight-line basis over the initial contract term of each ad agreement , which has historically been ten years , with the cumulative amount of revenue recognized not to exceed the amount of cash received . we recently changed the term of new and renewal ad contracts to six years . royalties : our franchise agreements require franchisees to pay us a base royalty typically equal to 14 % of the franchisee 's tax preparation revenue , subject to certain specified minimums . advertising fees : our franchise agreements require all franchisees to pay us an advertising fee of 5 % of the franchisee 's tax preparation revenue , which we use primarily to fund collective advertising efforts . financial products : we offer two types of tax settlement financial products : refund transfer products , which involve providing a means by which a customer may receive his or her refund more quickly and conveniently , and refund-based loans . we earn fees from the arranging of the sale of these financial products . interest income : we earn interest income from our franchisees and ads related to both indebtedness for the unpaid portions of their franchise fees and ad territory fees , and for other loans we extend to our franchisees related to the operation of their territories . for franchise fees and ad loans upon which the underlying revenue has not been recognized , we recognize the interest income only to the extent of actual payment . we also earn interest on our accounts receivable . tax preparation fees : we earn tax preparation fees , net of discounts , directly from both the operation of company-owned offices and providing tax preparation services through our online tax return products . for purposes of this section and throughout this annual report , all references to `` fiscal 2016 , '' `` fiscal 2015 , '' and `` fiscal 2014 `` refer to our fiscal years ended april 30 , 2016 , 2015 , and 2014 , respectively . for purposes of this section and throughout this annual report , all references to `` year '' or `` years '' are the respective fiscal year or years ended april 30 unless otherwise noted in this annual report , and all references to `` tax season '' refer to the period between january 1 and april 30 of the referenced year . 36 replace_table_token_6_th ( 1 ) previously reported online return counts for fiscal years prior to 2015 have been restated to reflect accepted e-files only . no changes were made to previously reported returns for office counts . ( 2 ) our systemwide revenue represents the total tax preparation revenue generated by our franchised and company-owned offices . it does not represent our revenue because our franchise royalties are derived from the operations of our franchisees . because we maintain an infrastructure to support systemwide operations , we consider growth in systemwide revenue to be an important measurement . ( 3 ) net average fee per tax return filed reflect amounts for our franchised and company-owned offices . in evaluating our performance , management focuses on several metrics that we believe are key to our continued success : net growth in permanent office locations . the change in permanent office locations from year to year is a function of the opening of new offices , offset by locations that our franchisees or we close . opening new permanent offices can be accomplished by the sale of new territories or the opening of permanent offices in previously sold territories . during the 2016 tax season , we stressed the importance to our franchisees of opening permanent locations in new territories . in fiscal 2016 , on a net basis , our franchisees operated 196 more 37 permanent offices in the u.s. , compared to operating 101 more permanent offices in fiscal 2015 compared to fiscal 2014. prior to the 2015 tax season , walmart substantially changed the way in which it charged rent to our franchisees for walmart kiosk locations . as a result , our franchisees operated fewer such offices during the 2016 and 2015 tax seasons and we have deemphasized seasonal offices such as kiosks as part of our growth plans . we utilize our ad program to focus on areas with large underdeveloped groups of territories we believe would benefit from the dedicated sales attention that an ad brings to our franchise sales process . story_separator_special_tag this was partially offset by a $ 0.9 million increase in canadian tax preparation revenue because we operated a larger number of company-owned offices in canada , which would have resulted in a larger offset but for a negative impact of the exchange rate of $ 0.3 million . operating expenses . the following table details the amounts and changes in our operating expenses in and from fiscal 2015 and fiscal 2014 . replace_table_token_12_th our total operating expenses increased by $ 21.9 million , or 18 % , in fiscal 2015 compared to fiscal 2014 . the largest components of this increase were as follows : a $ 2.7 million increase in employee compensation and benefit expenses during fiscal 2015 over fiscal 2014 caused primarily by the following : ◦ a $ 2.1 million increase in salary and related expenses to support growth initiatives . ◦ a $ 0.9 million increase in executive severance costs . ◦ a $ 0.9 million reduction in stock compensation expense in fiscal 2014 related to a change from liability classified awards to equity classified awards that did not recur in fiscal 2015 . 42 a $ 5.8 million increase in selling , general , and administrative expenses during fiscal 2015 over fiscal 2014 , caused primarily by the following : ◦ an increase of $ 7.6 million related to the tentative settlements of our class action litigation cases , net of estimated recoveries . ◦ an increase of $ 1.4 million in expenses related to our investment in siempretax+ and our aca initiatives . ◦ an increase of $ 1.1 million in bank fees due to our decision to originate a larger portion of financial products through our in-house financial subsidiary . the increases were partially offset by the following : ◦ a $ 2.9 million reduction in bad debt expense due to fewer franchisee terminations occurring in fiscal 2015 compared to fiscal 2014 . ◦ a reduction of $ 0.9 million in restatement costs that occurred in fiscal 2014 , but not in fiscal 2015 . ◦ a reduction in professional fees of $ 0.9 million for advertising-related expenses that occurred in fiscal 2014 , but not in fiscal 2015. a $ 3.2 million increase in advertising expense caused primarily by the following : ◦ a $ 1.0 million in spending on advertising above the amount required to utilize the advertising fund established by franchisee advertising fees . ◦ a $ 1.0 million increase related to launching the siempretax+ brand and advertising designed to attract new franchisees . ◦ a $ 0.9 million increase in expenses that were spent in professional fees in fiscal 2014 but that were spent in advertising in fiscal 2015. an increase of $ 0.6 million in depreciation and amortization consisting of a $ 2.1 million depreciation expense related to placing a portion of libpro software program into service , offset by a decrease in amortization expense on company-owned offices , which is now recorded as assets held for sale and no longer amortized . an $ 8.4 million impairment charge related to our online software and acquired customer lists . the online market is increasingly competitive due to aggressive pricing actions and increased advertising by significantly larger competitors . these factors have adversely affected our ability to recover the carrying value of our online software and acquired customer lists . the impairment charge was measured by the amount in which the carrying value exceeded the estimated fair value of the online software and acquired customer lists . see note 5 of the notes to our consolidated financial statements for a description of the impairment related to the company 's online software and acquired online customer lists . income taxes . the following table sets forth certain information regarding our income taxes for the fiscal years ended april 30 , 2015 and 2014 . replace_table_token_13_th the decrease in our income tax rate from fiscal 2014 to fiscal 2015 relates primarily to higher tax deductions for stock option expense coupled with the decline in income before income taxes . net income . our net income decreased by 60 % in fiscal 2015 over fiscal 2014 , primarily as a result of higher operating expenses associated with our growth initiatives , an $ 8.4 million impairment charge related to our online software and acquired customer lists , and $ 7.6 million in tentative settlements of our class action litigation cases , net of estimated recoveries . 43 liquidity and capital resources overview of factors affecting our liquidity seasonality of cash flow . our tax return preparation business is seasonal , and most of our revenues and cash flow are generated during the period from late january through april 30. following each tax season , from may 1 through late january of the following year , we rely significantly on excess operating cash flow from the previous season , from cash payments made by franchisees and ads who purchase new territories and areas prior to the next tax season , and on the use of our credit facility to fund our operating expenses and invest in the future growth of our business . our business has historically generated a strong operating cash flow from operations on an annual basis . we devote a significant portion of our cash resources during the off season to finance the working capital needs of our franchisees , and expenditures for property , equipment and software . credit facility . our amended credit facility consists of a $ 21.2 million term loan and a revolving credit facility that currently allows borrowing of up to $ 203.8 million with an accordion feature that permits the company to request an increase in availability of up to an additional $ 50.0 million . outstanding borrowings accrue interest , which is paid monthly , at a rate of the one-month london interbank offered rate ( `` libor '' ) plus a margin ranging from 1.50 % to 2.25 % depending on the company 's leverage ratio .

results of operations fiscal year 2016 compared to fiscal year 2015 revenues . the table below sets forth the components and changes in our revenue for the years ended april 30 , 2016 and 2015 . replace_table_token_8_th our total revenue increase d by $ 11.3 million , or 7 % , in fiscal 2016 over fiscal 2015 . this increase was primarily due to the following : a $ 8.3 million increase in financial products , due primarily to the success of our new refund-based advance product , improved pricing and our decision to process 100 % of our refund transfers through jth financial this year , which allows us to recognize the full amount charged to the customer as revenue . a $ 5.4 million increase in tax preparation fees driven by an increase in the number of company-owned offices in fiscal 2016 as compared to fiscal 2015. in fiscal 2016 we operated 310 company-owned offices compared to 182 in fiscal 2015. offset by a $ 1.2 million decrease in franchise fees primarily attributable to receiving lower cash down payments and lower cash payments on notes from our franchisees in fiscal 2016 . franchise fee revenue is recognized when our obligations to prepare the franchisee for operations are substantially complete and as cash is received . operating expenses . the following table details the amounts and changes in our operating expenses in and from fiscal 2016 and fiscal 2015 . replace_table_token_9_th 40 our total operating expenses decrease d by $ 5.8 million , or 4 % , in fiscal 2016 compared to fiscal 2015 .

dilutive income per share includes the potentially dilutive effect , if any , which would occur if our outstanding options to purchase our common stock were exercised . for all periods presented dilutive net income per share is equivalent to basic net income per share . new accounting pronouncements in june 2016 , the fasb issued an accounting standards update which replaces the incurred loss impairment methodology currently in use with a methodology that reflects expected credit losses and requires consideration of a story_separator_special_tag you should read the following discussion and analysis together with our consolidated financial statements and notes thereto included in this annual report on form 10-k. the following information contains forward-looking statements , which are subject to risks and uncertainties . should one or more of these risks or uncertainties materialize , actual results may differ materially from those expressed or implied by the forward-looking statements . please see “ special note regarding forward-looking statements ” above for a description of these risks and uncertainties . dollar amounts are presented in thousands , except per share data and where indicated in millions . overview lightstone value plus real estate investment trust , inc. ( the “ lightstone reit ” ) , ( together with the operating partnership ( as defined below ) , the “ company ” , also referred to as “ we ” , “ our ” or “ us ” herein ) has and expects to continue to acquire and operate or develop in the future , commercial , residential and hospitality properties and or make real estate-related investments , principally in the united states . our acquisitions and investments are , principally conducted through the operating partnership , and may include both portfolios and individual properties . as of december 31 , 2020 , we have ownership interests in ( i ) two consolidated operating properties , ( ii ) three consolidated development properties and ( iii ) seven unconsolidated operating properties . with respect to our consolidated operating properties , we wholly own the st. augustine outlet center , a retail property containing approximately 0.3 million square feet of gross leasable area , and have a majority ownership interest of approximately 59.2 % in gantry park landing , a multi-family residential property containing 199 apartment units . with respect to our consolidated development properties , we wholly own three projects consisting of the lower east side moxy hotel , the exterior street project and the santa clara data center . we also hold a 2.5 % ownership interest in seven hotel properties through a joint venture ( the “ joint venture ” ) which we account for using a measurement alternative under which the joint venture is measured at cost , adjusted for observable price changes and impairments , if any . the joint venture is between us and the operating partnership of lightstone value plus real estate investment trust ii , inc. ( “ lightstone ii ” ) , a real estate investment trust also sponsored by our sponsor , which has a 97.5 % ownership interest in the joint venture . furthermore , we have other real estate-related investments , including preferred contributions that were made pursuant to agreements with various related party entities ( the “ preferred investments ” ) and nonrecourse promissory notes made to unaffiliated third-parties . our real estate investments have been and are expected to continue to be held by the company alone or jointly with other parties . 16 we do not have employees . we entered into an advisory agreement pursuant to which the advisor supervises and manages our day-to-day operations and selects our real estate and real estate related investments , subject to oversight by our board of directors . we pay the advisor fees for services related to the investment and management of our assets , and we will reimburse the advisor for certain expenses incurred on our behalf . to maintain our qualification as a reit , we engage in certain activities through taxable reit subsidiaries ( “ trss ” ) . as such , we may still be subject to u.s. federal and state income and franchise taxes from these activities . acquisitions and investment strategy we have , to date , acquired and or developed residential , commercial and hospitality properties principally , all of which are located in the united states and also made other real estate-related investments . our acquisitions have included both portfolios and individual properties . our current operating properties consist of one retail property ( the st. augustine outlet center ) and one multi-family residential property ( gantry park landing ) . we have also acquired various parcels of land and air rights related to the development and construction of real estate properties . additionally , we have made preferred investments in related parties and originated nonrecourse loans to unaffiliated third-party borrowers . investments in real estate are generally made through the purchase of all or part of a fee simple ownership , or all or part of a leasehold interest . we may also purchase limited partnership interests , limited liability company interests and other equity securities . we may also enter into joint ventures with related parties for the acquisition , development or improvement of properties as well as general partnerships , co-tenancies and other participations with real estate developers , owners and others for the purpose of developing , owning and operating real properties . we will not enter into a joint venture to make an investment that we would not be permitted to make on our own . not more than 10 % of our total assets will be invested in unimproved real property . for purposes of this paragraph , “ unimproved real properties ” does not include properties acquired for the purpose of producing rental or other operating income , properties under construction and properties for which development or construction is planned within one year . story_separator_special_tag these accounting policies are most important to the portrayal of our results and financial position , either because of the significance of the financial statement items to which they relate or because they require our management 's most difficult , subjective or complex judgments . revenue recognition our revenue , which is comprised largely of rental income , includes rents that tenants pay in accordance with the terms of their respective leases reported on a straight-line basis over the initial term of the lease . since our leases may provide for rental increases at specified intervals , straight-line basis accounting requires us to record as an asset , and include in revenue , unbilled rent that we only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease . in addition , we will defer the recognition of contingent rental income , such as percentage rents , until the specific target which triggers the contingent rental income is achieved . cost recoveries from tenants will be included in tenant recovery income in the period the related costs are incurred . investments in real estate we generally record investments in real estate at cost and capitalize improvements and replacements when they extend the useful life or improve the efficiency of the asset . we expense costs of ordinary repairs and maintenance as incurred . we compute depreciation using the straight-line method over the estimated useful lives of the applicable real estate asset . we generally use estimated useful lives of up to thirty-nine years for buildings and improvements , five to ten years for furniture and fixtures and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests . we make subjective assessments as to the useful lives of our properties for purposes of determining the amount of depreciation to record on an annual basis with respect to our investments in real estate . these assessments have a direct impact on our net income because , if we were to shorten the expected useful lives of our investments in real estate , we would depreciate these investments over fewer years , resulting in more depreciation expense and lower net income on an annual basis . 18 we record assets and groups of assets and liabilities which comprise disposal groups as “ held for sale ” when all of the following criteria are met : a decision has been made to sell , the assets are available for sale immediately , the assets are being actively marketed at a reasonable price in relation to the current fair value , a sale has been or is expected to be concluded within twelve months of the balance sheet date , and significant changes to the plan to sell are not expected . the assets and disposal groups held for sale are valued at the lower of book value or fair value less disposal costs . for sales of real estate or assets classified as held for sale , we evaluate whether a disposal transaction meets the criteria of a strategic shift and will have a major effect on our operations and financial results to determine if the results of operations and gains on sale of real estate will be presented as part of our continuing operations or as discontinued operations in our consolidated statements of operations . if the disposal represents a strategic shift , it will be classified as discontinued operations for all periods presented ; if not , it will be presented in continuing operations . we evaluate the recoverability of our investments in real estate assets at the lowest identifiable level , the individual property level . an impairment loss is recognized only if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value . we evaluate the long-lived assets for potential impairment whenever events or changes in circumstances indicate that the undiscounted projected cash flows are less than the carrying amount for a particular property . no single indicator would necessarily result in us preparing an estimate to determine if a long-lived asset 's future undiscounted cash flows are less than its book value . we use judgment to determine if the severity of any single indicator , or the fact there are a number of indicators of less severity that when combined , would result in an indication that a long-lived asset requires an estimate of the undiscounted cash flows to determine if an impairment has occurred . relevant facts and circumstances include , among others , significant underperformance relative to historical or projected future operating results and significant negative industry or economic trends . the estimated cash flows used for the impairment analysis are subjective and require us to use our judgment and the determination of estimated fair value are based on our plans for the respective assets and our views of market and economic conditions . the estimates consider matters such as future operating income , market and other applicable trends and residual value , as well as the effects of demand , competition , and recent sales data for comparable properties . changes in estimated future cash flows due to changes in our plans or views of market and economic conditions could result in recognition of impairment losses , which , under the applicable accounting guidance , may be substantial . accounting for asset acquisitions the cost of the acquisition in an asset acquisition is allocated to the acquired tangible assets , consisting of land , building and tenant improvements , and identified intangible assets and liabilities , consisting of the value of above-market and below-market leases for acquired in-place leases and the value of tenant relationships , and certain liabilities such as assumed debt and contingent liabilities on the basis of their relative fair values . fees incurred related to asset acquisitions are capitalized as part of the cost of the investment .

results of operations dispositions - continuing operations the following disposition did not represent a strategic shift that had a major effect on our operations and financial results and therefore did not qualify to be reported as discontinued operations and its operating results are reflected in our results from continuing operations in the consolidated statements of operations for all periods presented through the date of disposition : depaul plaza on september 20 , 2019 , we disposed of a retail center located in bridgeton , missouri ( “ depaul plaza ” ) , to an unrelated third party for aggregate consideration of approximately $ 19.8 million , excluding closing and other related costs . in connection with the disposition , we recorded a gain on the disposition of real estate of approximately $ 1.0 million during the year ended december 31 , 2019. dispositions - discontinued operations the following dispositions qualified to be reported as discontinued operations and their operating results are classified as discontinued operations in the consolidated statements of operations for all periods presented through their respective dates of disposition : disposition transactions related to gulf coast industrial portfolio we had an outstanding non-recourse mortgage loan ( the “ gulf coast industrial portfolio mortgage loan ” ) which was originated in february 2007 and subsequently transferred during the third quarter of 2012 to a special servicer that discontinued scheduled debt service payments and notified us that the loan was in default and due on demand . the gulf coast industrial portfolio mortgage loan was initially cross-collateralized by a portfolio of 14 industrial properties ( collectively , the “ gulf coast industrial portfolio ” ) including 10 properties located in louisiana ( seven properties located in new orleans and three properties located in baton rouge , and collectively , the “ louisiana assets ” ) and four properties located in san antonio , texas ( the “ san antonio assets ” ) .

you should read the information in this section in conjunction with the company 's consolidated financial statements and accompanying notes thereto beginning on page f‑1 following item 16 of this form 10-k. critical accounting policies our accounting policies are integral to understanding the results reported and are described in note 2 to our consolidated financial statements beginning on page f-1 . in preparing the consolidated financial statements , management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of financial condition and revenues and expenses for the periods then ended . actual results could differ significantly from those estimates . a material estimate that is particularly susceptible to significant change relates to the determination of the allowance for loan losses . the allowance for loan losses is established through provisions for loan losses charged against income . loans deemed to be uncollectible are charged against the allowance for loan losses , and subsequent recoveries , if any , are credited to the allowance . the allowance for loan losses is maintained at a level by management which represents the evaluation of known and inherent risks in the loan portfolio at the consolidated balance sheet date that are both probable and reasonable to estimate . management 's periodic evaluation of 20 the adequacy of the allowance is based on the company 's past loan loss experience , known and inherent risks in the portfolio , adverse situations that may affect the borrower 's ability to repay , the estimated value of any underlying collateral , the composition of the loan portfolio , current economic conditions , and other relevant factors . this evaluation is inherently subjective , as it requires material estimates that may be susceptible to significant change , including the amounts and timing of future cash flows expected to be received on impaired loans . in addition , various regulatory agencies , as an integral part of their examination process , periodically review the company 's allowance for loan losses . such agencies may require the company to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examinations . the company 's loan portfolio is comprised of the following segments : residential mortgage , commercial real estate , construction , commercial and industrial and consumer . some segments of the company 's loan receivable portfolio are further disaggregated into classes which allow management to more accurately monitor risk and performance . accordingly , the methodology and allowance calculation includes the segmentation of the total loan portfolio . the residential mortgage loan segment is disaggregated into two classes : one-to-four family loans , which are primarily first liens , and home equity loans , which consist of first and second liens . the commercial real estate loan segment includes owner and non-owner occupied loans which have medium risk based on historical experience with these types of loans . the construction loan segment is further disaggregated into two classes : one-to-four family owner-occupied , which includes land loans , whereby the owner is known and there is less risk , and other , whereby the property is generally under development and tends to have more risk than the one-to-four family owner-occupied loans . the commercial and industrial loan segment consists of loans made for the purpose of financing the activities of commercial customers . the commercial and industrial loans carry a mix of loans secured by real estate and unsecured lines of credit some of which are for high net worth individuals . the consumer loan segment consists primarily of installment loans and overdraft lines of credit connected with customer deposit accounts . the allowance consists of specific , general and unallocated components . the specific component is related to loans that are classified as impaired . for loans classified as impaired , an allowance is established when the discounted cash flows ( or collateral value or observable market price ) of the impaired loan is lower than the carrying value of that loan . the general component covers pools of loans by loan class and is based on historical loss experience adjusted for qualitative factors . these qualitative risk factors include : 1. lending policies and procedures , including underwriting standards and collection , charge-off , and recovery practices . 2. national , regional , and local economic and business conditions as well as the condition of various market segments , including the value of underlying collateral for collateral dependent loans . 3. nature and volume of the portfolio and terms of loans . 4. experience , ability , and depth of lending management and staff . 5. volume and severity of past due , classified and nonaccrual loans as well as and other loan modifications . 6. quality of the company 's loan review system , and the degree of oversight by the company 's board of directors . 7. existence and effect of any concentrations of credit and changes in the level of such concentrations . 8. effect of external factors , such as competition and legal and regulatory requirements . each factor is assigned a value to reflect improving , stable or declining conditions based on management 's best judgment using relevant information available at the time of the evaluation . the unallocated component is maintained to cover uncertainties that could affect management 's estimate of probable losses . the unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio . a loan is considered impaired when , based on current information and events , it is probable that the company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement . factors considered by management in determining impairment include payment status , collateral value and the probability of collecting scheduled principal and interest payments when due . story_separator_special_tag our return on average equity for the year ended december 31 , 2017 was 3.67 % compared to 1.54 % for the year ended december 31 , 2016 . comparison of financial condition at december 31 , 2017 and 2016 general . total assets at december 31 , 2017 were $ 563.0 million versus $ 461.6 million at december 31 , 2016 with the increase attributable mainly to loan growth . during the year ended december 31 , 2017 , the company experienced growth of $ 105.4 million , or 28.6 % , in loans receivable , net and a $ 698,000 , or 48.7 % increase in fhlb of new york stock . securities held to maturity decreased $ 5.6 million primarily as a result of maturities and principal repayments . other assets decreased $ 390,000 primarily due to the decrease in deferred tax assets . deposits increased by $ 86.6 million while fhlb advances increased by $ 15.0 million . the ratio of average interest-earning assets to average-interest bearing liabilities was 124.7 % for the year ended december 31 , 2017 as compared to 131.9 % for the year ended december 31 , 2016. loans . loans receivable , net , increased $ 105.4 million , or 28.6 % , from $ 368.0 million at december 31 , 2016 to $ 473.4 million at december 31 , 2017. the bank 's commercial and multi-family real estate loan portfolio grew by $ 72.0 million , or 57.8 % , since december 31 , 2016 , aided in part by the closing of $ 57.7 million in purchased and participation loans . the commercial and industrial portfolio increased by $ 28.2 million , or 62.4 % , on stronger loan demand , while the construction loan portfolio increased approximately $ 13.9 million as a result of new projects . the residential mortgage portfolio , consisting of one-to-four family residential loans and home equity loans , decreased $ 8.1 million to $ 184.7 million from $ 192.8 million as of year-end 2016. all remaining portfolios were consistent with prior year-end levels . securities . the securities held to maturity portfolio totaled $ 38.5 million at december 31 , 2017 compared to $ 44.1 million at december 31 , 2016. maturities , calls and principal repayments during 2017 totaled $ 6.7 million and $ 1.2 million in securities were purchased during 2017 compared to $ 34.8 million of maturities , calls and principal repayments and no purchases during 2016 . 22 deposits . total deposits at december 31 , 2017 increased to $ 448.9 million from $ 362.3 million at december 31 , 2016. overall , deposits increased by $ 86.6 million with non-interest bearing balances decreasing by $ 7.4 million and interest bearing deposits increasing $ 94.1 million since december 31 , 2016 as the company focused on deposit pricing and the development of deeper commercial and small business relationships . borrowings . total borrowings were $ 37.7 million at december 31 , 2017 compared to $ 22.7 million at december 31 , 2016. during the year , we executed on four fhlb medium term advances for a total $ 25.0 million . the advances were for terms of 3 , 4 , and 5 years with an average rate of 2.04 % . in addition , we had a maturity of $ 10.0 million at a rate of 3.27 % . there were no overnight advances with the fhlb of new york at december 31 , 2017 or december 31 , 2016. equity . stockholders ' equity was $ 73.0 million at december 31 , 2017 compared to $ 73.2 million at december 31 , 2016 , a decrease of $ 160,000 or 0.2 % . the decrease in shareholders ' equity was primarily due to a $ 2.5 million , or $ 0.425 per share , dividend paid in the third quarter to shareholders . this reduction was partially offset by a $ 2.7 increase in retained earnings related to net income . comparison of operating results for the years ended december 31 , 2017 and 2016 story_separator_special_tag non-performing loans increased to 130.99 % at december 31 , 2017 from 64.13 % at december 31 , 2016. non-performing loans to total loans were 0.83 % at december 31 , 2017 compared to 1.84 % at december 31 , 2016. annualized net charge-offs to average loans outstanding ratios were 0.06 % for the year ended december 31 , 2017 compared to ( 0.02 ) % for the year ended december 31 , 2016. while management believes the allowance for loan losses is adequate for the risk in the loan portfolio , there can be no assurance that future increases may not be necessary . non-interest income . this category includes fees derived from checking accounts , atm transactions , debit card use and other fees . it also includes increases in the cash-surrender value of our bank owned life insurance . overall , non-interest income was $ 822,000 for the year ended december 31 , 2017 compared to $ 1,041,000 for the year ended december 31 , 2016 , a decrease of $ 219,000 or 21.0 % . income from fees and service charges totaled $ 342,000 for the year ended december 31 , 2017 compared to $ 333,000 for the year ended december 31 , 2016 , an increase of $ 9,000 or 2.7 % . the increase was attributable to higher services fees charged during the year . income on bank owned life insurance was $ 413,000 and $ 316,000 for the years ended december 31 , 2017 and 2016 , while other non-interest income was $ 67,000 and $ 392,000 for the years ended december 31 , 2017 and 2016 , respectively . bank owned life insurance income rose due to the purchase of $ 6.0 million in new life insurance policies during 2016. in addition , other non-interest income declined due to a $ 350,000 recovery in 2016 related to a wire fraud loss recorded in 2014. non-interest expenses . total non-interest expenses increased by $ 791,000 , or 7.6

general . our results of operations depend primarily on our net interest income . net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities . it is a function of the average balances of loans and investments versus deposits and borrowed funds outstanding in any one period and the yields earned on those loans and investments and the cost of those deposits and borrowed funds . our results of operations are also affected by our provision for loan losses , non-interest income and non-interest expense . non-interest income includes service fees and charges , and income on bank owned life insurance . non-interest expense includes salaries and employee benefits , occupancy and equipment expense and other general and administrative expenses such as service bureau fees and advertising costs . the company reported net income of $ 2.7 million for december 31 , 2017 compared to net income of $ 1.2 million for the year ended december 31 , 2016 , representing an increase of $ 1.6 million or 134.5 % . this increase was largely driven by a $ 4.1 million increase in net interest income . offsetting this were an increase in non-interest expense of $ 791,000 , an increase in the provision for loan losses of $ 385,000 , and a decrease of $ 219,000 in non-interest income . income tax expense increased $ 1.1 million for the year ended december 31 , 2017 versus 2016 due to the increase in pre-tax income and the revaluation of the company 's deferred tax asset as a result of the passage of the tax cuts and jobs act on december 22 , 2017 which significantly reduced corporate tax rates . net interest income .

holders of class b common stock will have the right to elect story_separator_special_tag the following discussion and analysis of the company 's financial condition and results of operations should be read in conjunction with our audited financial statements and the notes related thereto which are included in “ item 8. financial statements and supplementary data ” of this annual report on form 10-k. certain information contained in the discussion and analysis set forth below includes forward-looking statements . our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors , including those set forth under “ special note regarding forward-looking statements , ” “ item 1a . risk factors ” and elsewhere in this annual report on form 10-k. overview we are a blank check company formed under the laws of the state of delaware for the purpose of effecting a merger , capital stock exchange , asset acquisition , stock purchase , reorganization or other similar business combination with one or more businesses . we intend to effectuate our business combination using cash from the proceeds of the initial public offering and the sale of the private placement warrants , our capital stock , debt or a combination of cash , stock and debt . we expect to continue to incur significant costs in the pursuit of our acquisition plans . we can not assure you that our plans to raise capital or to complete our initial business combination will be successful . recent developments on february 28 , 2021 , we entered into a business combination agreement ( the “ transaction agreement ” ) by and among us , merger sub , spire , and certain of spire 's stockholders ( the “ founders ” ) . merger sub will be merged with and into spire ( the “ merger ” and together with the other transactions contemplated by the transaction agreement , the “ transactions ” ) , with spire surviving the merger . as a result of the transactions , as further described below , it is expected that the equityholders of spire , as of immediately prior to the merger , will hold approximately 60.8 % of the fully diluted outstanding equity interests of the company . at the effective time of the merger ( the “ effective time ” ) , by virtue of the merger and without any action on the part of our , merger sub , spire or the holders of any of spire 's securities , each share of outstanding capital stock of spire ( the “ company capital stock ” ) will be canceled and converted into ( i ) the right to receive at closing the number of shares of the company class a common stock ( the “ company class a common stock ” ) based on the pro rata portion applicable to such share of company capital stock , of an aggregate purchase price of approximately $ 1.1 billion , and ( ii ) the contingent “ earn-out ” right to receive a pro rata portion of up to 8,000,000 shares of the company class a common stock in the aggregate based on the achievement of certain trading price targets following the closing , which amount of “ earn-out ” shares will be adjusted based on a formula set forth in the transaction agreement to reflect a portion of the value of such “ earn-out ” shares allocated to holders of company options assumed by the company in the merger . the transaction agreement contains customary representations and warranties of the parties , thereto and the closing is subject to certain conditions as further described in the transaction agreement . story_separator_special_tag debt , capital lease obligations , operating lease obligations or long-term liabilities , other than an agreement to pay the sponsor a monthly fee of $ 10,000 for office space , administrative and support services to the company . 39 we began incurring these fees on september 9 , 2020 and will continue to incur these fees monthly until the earlier of the completion of the business combination and our liquidation . the underwriters are entitled to a deferred fee of $ 0.35 per unit , or $ 8,050,000 in the aggregate . the deferred fee will be waived by the underwriter in the event that the company does not complete a business combination , subject to the terms of the underwriting agreement . critical accounting policies the preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the united states of america requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities , disclosure of contingent assets and liabilities at the date of the financial statements , and income and expenses during the periods reported . actual results could materially differ from those estimates . we have identified the following critical accounting policies : class a common stock subject to possible redemption we account for our shares of class a common stock subject to possible redemption in accordance with the guidance in accounting standards codification ( “ asc ” ) topic 480 “ distinguishing liabilities from equity. ” shares of class a common stock subject to mandatory redemption is classified as a liability instrument and is measured at fair value . conditionally redeemable common stock ( including common stock that features redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within our control ) is classified as temporary equity . at all other times , common stock is classified as stockholders ' equity . our common stock features certain redemption rights that are considered to be outside of our control and subject to occurrence of uncertain future events . accordingly , the class a common stock subject to possible redemption is presented as temporary equity , outside of the stockholders ' equity section of our balance sheet . net loss per common share we apply the two-class method in calculating earnings per share . story_separator_special_tag since january 2019 , mr. coleman has served as an advisory board member of the national defense industrial association , since june 2019 as a board member of blackhorse solutions , inc. , and since march 2014 as a board member of lookingglass cyber solutions . mr. coleman is also a shareholder in each of blackhorse solutions , inc. and lookingglass cyber solutions . mr. coleman received his bachelor of science degree in computer science from clarion university of pennsylvania . we believe mr. coleman 's significant experience in the defense and intelligence sectors in both private and public companies makes him well qualified to serve as our chief executive officer and chairman of our board of directors . jack pearlstein is our co-founder , executive vice president and chief financial officer , and has served as a member of our board of directors since august 2020. mr. pearlstein , has over 25 years of operating experience in the technology sector , including over 10 years of operating experience with companies providing expertise and technology to the u.s. defense and intelligence communities . throughout mr. pearlstein 's career , he has completed over 40 acquisitions , mergers and divestitures and dozens of complex financing transactions . from june 2014 through june 2020 , mr. pearlstein served as executive vice president and chief financial officer of cision , ltd. ( nyse : cisn ) , a leading global provider of software and services to public relations and marketing communications professionals . from june 2009 to november 2013 , mr. pearlstein was the chief financial officer of six3 systems , inc. , a leading provider of cybersecurity , intelligence , surveillance , and reconnaissance services and technology to the dod and the ic . from april 2006 to march 2009 , mr. pearlstein served as the chief financial officer of solera holdings , inc. ( nyse : slh ) , a leading global provider of software and services to the automobile insurance claims processing industry . from september 2001 until its sale to bae systems north america , inc. , the u.s. subsidiary of bae systems plc in october 2004 , mr. pearlstein served as the chief financial officer , treasurer and secretary of digitalnet holdings , inc. , ( nasdaq : dnet ) a leading provider of technology services and software to the u.s. government defense , intelligence , and civilian agencies . from september 2000 until july 2001 , mr. pearlstein served as chief financial officer of commerce one , inc. 's ( nasdaq : cmrc ) global services division , which he joined in september 2000 when commerce one , inc. acquired appnet , inc. ( nasdaq : apnt ) , a leading provider of technology-based professional services and solutions . mr. pearlstein served as appnet 's senior vice president from july 1998 through may 1999 , and as appnet 's chief financial officer from may 1999 through september 2000. mr. pearlstein received his bachelor of science degree in accounting from new york university and his master 's of business administration in finance , from the george washington university . we believe mr. pearlstein 's significant experience in the defense and intelligence sectors in both private and public companies makes him well qualified to serve as a member of our board of directors . william p. crowell has served on our board of directors since the completion of our initial public offering . mr. crowell is a partner and independent consultant specializing in information technology , security , and intelligence systems . until the acquisition by cisco in june 2007 , he was chairman of broadware technologies , inc. , a video surveillance software company . mr. crowell was also a director at the following companies : arcsight , inc. , a public security company , which was acquired by hp in 2010 ; narus , inc. , which was acquired by boeing in 2010 ; six3 systems , which was acquired by caci in 2013 , airpatrol corporation , wireless network security company acquired by sysorex in 2014 , and fixmo , inc. , a mobile device security 42 company acquired by good technologies in 2014. he was also a director at safenet , inc. , an encryption , data protection , and authentication solutions company , which was acquired by gemalto in 2015. mr. crowell also served as a director on the ssa board of drs and the sap ns2 proxy board . mr. crowell served as president and ceo of cylink corporation , a public company and leading provider of e-business security solutions , from 1998 to 2003 , when cylink was acquired by safenet , inc. mr. crowell came to cylink from the national security agency ( the “ nsa ” ) , where he held a series of senior positions in operations , analysis , strategic planning , research and development , and finance . he served as deputy director of operations at the nsa from 1991 to 1994 , running its core signals intelligence mission . in february 1994 he was appointed by president clinton as the deputy director of nsa , and served in that post until his retirement in september 1997. from 1989 to 1990 , crowell served as vice president at atlantic aerospace electronics corporation ( later acquired by titan corp ) , leading business development in space technology , signal processing , and intelligence systems . in april 1999 , mr. crowell was appointed to the president 's export council ( pec ) , which advised the administration on trade and export policy . after 9/11 , he served on the markle foundation task force on national security in the information age , which published three landmark studies on homeland security and information sharing . he has also served on numerous panels to investigate and improve military command and control , intelligence , and security systems , and served as chairman of the director of national intelligence ( dni ) senior advisory group from 2007 to 2014. he served on the department of homeland security science and technology advisory board from 2013 to 2015.

results of operations we have neither engaged in any operations nor generated any revenues to date . our only activities through december 31 , 2020 were organizational activities , those necessary to prepare for the initial public offering , and identifying a target for our business combination , activities in connection with the proposed acquisition of spire . we do not expect to generate any operating revenues until after the completion of our business combination . we generate non-operating income in the form of interest income on marketable securities held in the trust account . we incur expenses as a result of being a public company ( for legal , financial reporting , accounting and auditing compliance ) , as well as for due diligence expenses . for the period from may 29 , 2020 ( inception ) through december 31 , 2020 , we had a net loss of $ 1,033,642 , which consists of operating costs of $ 1,040,966 , offset by interest earned on marketable securities held in the trust account of $ 7,324. liquidity and capital resources on september 14 , 2020 , we consummated the initial public offering of 23,000,000 units , which includes the full exercise by the underwriters of the over-allotment option of 3,000,000 units , at $ 10.00 per unit , generating gross proceeds of $ 230,000,000 . 38 simultaneously with the closing of the initial public offering , we consummated the sale of 6,600,000 private placement warrants to the sponsor at a price of $ 1.00 per warrant , generating gross proceeds of $ 6,600,000. following the initial public offering , the exercise of the over-allotment option and the sale of the private placement warrants , a total of $ 230,000,000 was placed in the trust account . we incurred $ 13,056,945 in transaction costs , including $ 4,600,000 of underwriting fees , $ 8,050,000 of deferred underwriting fees and $ 406,945 of other costs .

please see “ risk factors ” and “ forward-looking statements ” for a discussion of the uncertainties , risks and assumptions associated with these statements . you should read the following discussion in conjunction with the combined financial statements and related notes and other financial information appearing elsewhere in this annual report . the following discussion is designed to provide a better understanding of our financial statements , including a brief discussion of our business , key factors that impacted our performance and a summary of our operating results . the following discussion should be read in conjunction with the financial statements and the notes thereto included in item 8 of this annual report on form 10-k. historical results and percentage relationships among any amounts in the financial statements are not necessarily indicative of trends in operating results for any future periods . overview of our business we are a maryland corporation which has elected to be treated and operates as an internally managed business development company , or bdc , under the investment company act of 1940 , or 1940 act . our wholly-owned subsidiaries , triangle mezzanine fund lllp , or triangle sbic , and triangle mezzanine fund ii lp , or triangle sbic ii , are licensed as small business investment companies , or sbics , by the united states small business administration , or sba . in addition , triangle sbic has also elected to be treated as a bdc under the 1940 act . we , triangle sbic and triangle sbic ii invest primarily in debt instruments , equity investments , warrants and other securities of lower middle market privately-held companies located primarily in the united states . our business is to provide capital to lower middle market companies in the united states . we focus on investments in companies with a history of generating revenues and positive cash flows , an established market position and a proven management team with a strong operating discipline . our target portfolio company has annual revenues between $ 20.0 million and $ 200.0 million and annual earnings before interest , taxes , depreciation and amortization , or ebitda , between $ 3.0 million and $ 35.0 million . we invest primarily in subordinated debt securities secured by second lien security interests in portfolio company assets , coupled with equity interests . on a more limited basis , we also invest in senior debt securities secured by first lien security interests in portfolio company assets . our investments generally range from $ 5.0 million to $ 35.0 million per portfolio company . in certain situations , we have partnered with other funds to provide larger financing commitments . we generate revenues in the form of interest income , primarily from our investments in debt securities , loan origination and other fees and dividend income . fees generated in connection with our debt investments are recognized over the life of the loan using the effective interest method or , in some cases , recognized as earned . in addition , we generate revenue in the form of capital gains , if any , on warrants or other equity-related securities that we acquire from our portfolio companies . our debt investments generally have a term of between three and seven years and typically bear interest at fixed rates between 10.0 % and 15.0 % per annum . certain of our debt investments have a form of interest , referred to as payment-in-kind , or pik , interest , that is not paid currently but is instead accrued and added to the loan balance and paid at the end of the term . in our negotiations with potential portfolio companies , we generally seek to minimize pik interest . cash interest on our debt investments is generally payable monthly ; however , some of our debt investments pay cash interest on a quarterly basis . as of december 31 , 2015 and 2014 , the weighted average yield on our outstanding debt investments other than non-accrual debt investments was 12.2 % and 13.0 % , respectively . the weighted average yield on all of our outstanding investments ( including equity and equity-linked investments but excluding non-accrual debt investments ) was 10.6 % and 11.6 % as of december 31 , 2015 and 2014 , respectively . the weighted average yield on all of our outstanding investments ( including equity and equity-linked investments and non-accrual debt investments ) was 10.2 % and 10.8 % as of december 31 , 2015 and 2014 , respectively . triangle sbic and triangle sbic ii are eligible to issue debentures to the sba , which pools these with debentures of other sbics and sells them in the capital markets at favorable interest rates , in part as a result of the guarantee of payment from the sba . triangle sbic and triangle sbic ii invest these funds in portfolio companies . 65 we intend to continue to operate triangle sbic and triangle sbic ii as sbics , subject to sba approval , and have utilized the proceeds from the issuance of sba-guaranteed debentures , referred to herein as sba leverage , to enhance returns to our stockholders . portfolio composition the total value of our investment portfolio was $ 977.3 million as of december 31 , 2015 , as compared to $ 887.2 million as of december 31 , 2014 . as of december 31 , 2015 , we had investments in 92 portfolio companies with an aggregate cost of $ 1.0 billion . as of december 31 , 2014 , we had investments in 91 portfolio companies with an aggregate cost of $ 922.1 million . as of both december 31 , 2015 and 2014 , none of our portfolio investments represented greater than 10 % of the total fair value of our investment portfolio . story_separator_special_tag gerli and company in november 2008 , we placed our debt investments in gerli and company , or gerli , on non-accrual status . as a result , under generally accepted accounting principles in the united states , or u.s. gaap , we no longer recognize interest income on our debt investments in gerli for financial reporting purposes . in the year ended december 31 , 2015 , we recognized total unrealized depreciation on our debt investments in gerli of $ 0.1 million . as of december 31 , 2015 , the cost of our debt investments in gerli was $ 3.4 million and the fair value was $ 0.8 million . powerdirect marketing , llc in august 2014 , we placed our debt investment in powerdirect marketing , llc , or powerdirect , on non-accrual status effective with the monthly payment due july 31 , 2014. as a result , under u.s. gaap , we no longer recognize interest income on our debt investment in powerdirect for financial reporting purposes . during the year ended december 31 , 2015 , we recorded unrealized depreciation of $ 1.1 million on our debt investment in powerdirect . as of december 31 , 2015 , the cost of our debt investment in powerdirect was $ 6.6 million and the fair value of such investment was $ 2.7 million . pik non-accrual assets in addition to our non-accrual assets , as of december 31 , 2015 , we had debt investments in two portfolio companies ( our first-out subordinated note to bfn ( 3 % cash , 14 % pik ) and our term loan b senior note to fcl graphics , inc. ( 8.0 % cash , 2 % pik ) ) that were on non-accrual only with respect to the pik interest component of the loans . as of december 31 , 2015 , the fair value of these debt investments was $ 2.2 million , or 0.2 % of the total fair value of our portfolio and the cost of these debt investments was $ 15.4 million , or 1.5 % of the total cost of our portfolio . story_separator_special_tag style= '' font-family : inherit ; font-size:10pt ; '' > december 31 , 2014 . non-recurring fee income was $ 5.0 million for the year ended december 31 , 2014 , as compared to $ 7.1 million for the year ended december 31 , 2013 , and non-recurring dividend income was $ 6.5 million for the year ended december 31 , 2014 , as compared to $ 4.2 million for the year ended december 31 , 2013 . operating expenses for the year ended december 31 , 2014 , operating expenses increased by 7.6 % to $ 42.5 million from $ 39.5 million for the year ended december 31 , 2013 . our operating expenses consist of interest and other financing fees and general and administrative expenses . for the year ended december 31 , 2014 , interest and other financing fees increased by 4.7 % to $ 21.2 million from $ 20.2 million for the year ended december 31 , 2013 . the increase in interest and other financing fees was related to an increase in interest on borrowings under our credit facility of $ 0.6 million for the year ended december 31 , 2014 , and an increase in interest and financing fees on our sba-guaranteed debentures of $ 0.3 million for the year ended december 31 , 2014 . our general and administrative expenses are primarily influenced by compensation , headcount and levels of business activity . our compensation expenses include salaries , discretionary compensation , equity-based compensation and benefits . discretionary compensation is significantly impacted by our level of total investment income , our investment results including investment realizations , prevailing labor markets and the external environment . as a result of these and other factors , our compensation expense can fluctuate materially from period to period . accordingly , the amount of compensation expense recognized in any particular period may not be indicative of compensation expense in a future period . for the year ended december 31 , 2014 , general and administrative expenses increased by 10.6 % to $ 21.3 million from $ 19.3 million for the year ended december 31 , 2013 . in addition , our efficiency ratio ( defined as general and administrative expenses as a percentage of total investment income ) increased to 20.4 % for the year ended december 31 , 2014 from 19.1 % for the year ended december 31 , 2013 . the increase in general and administrative expenses in the year ended december 31 , 2014 was primarily related to increased equity-based compensation . net investment income as a result of the $ 3.5 million increase in total investment income and the $ 3.0 million increase in expenses , net investment income for the year ended december 31 , 2014 was $ 62.0 million compared to net investment income of $ 61.5 million during the year ended december 31 , 2013 . net increase in net assets resulting from operations for the year ended december 31 , 2014 , we recognized net realized gains totaling $ 13.6 million , which consisted of net gains on the sales/repayments of thirteen non-control/non-affiliate investments totaling $ 24.1 71 million and gains on the sales of two affiliate equity investments of $ 14.4 million , offset by ( i ) a loss on the restructuring of one non-control/non-affiliate investment totaling $ 10.8 million , ( ii ) a loss relating to the write-off of one non-control/non-affiliate investment totaling $ 5.9 million , ( iii ) losses on the write-offs of two affiliate investments of $ 6.7 million , ( iv ) a loss on the restructuring of one control investment totaling $ 0.5 million and ( v ) a loss relating to the write-off of one control investment of $ 1.0 million .

results of operations comparison of years ended december 31 , 2015 and december 31 , 2014 investment income for the year ended december 31 , 2015 , total investment income was $ 121.3 million , a 16.1 % increase from $ 104.5 million of total investment income for the year ended december 31 , 2014 . the increase of $ 16.8 million was primarily due to ( i ) higher average portfolio loan balances from december 31 , 2014 to december 31 , 2015 and ( ii ) an increase in non-recurring fee income of $ 4.8 million . these increases were partially offset by a decrease in non-recurring dividend income of $ 1.5 million , a $ 0.6 million decrease in investment income relating to non-accrual assets and a decrease in the weighted average yield on our debt investments from december 31 , 2014 to december 31 , 2015 . non-recurring fee income was $ 9.9 million for the year ended december 31 , 2015 , as compared to $ 5.0 million for the year ended december 31 , 2014 , and non-recurring dividend income was $ 5.0 million for the year ended december 31 , 2015 , as compared to $ 6.5 million for the year ended december 31 , 2014 . 69 operating expenses for the year ended december 31 , 2015 , operating expenses increased by 16.9 % to $ 49.7 million from $ 42.5 million for the year ended december 31 , 2014 . our operating expenses consist of interest and other financing fees and general and administrative expenses . for the year ended december 31 , 2015 , interest and other financing fees increased by 26.3 % to $ 26.8 million from $ 21.2 million for the year ended december 31 , 2014 .

. our non-management directors have no shares subject to option awards outstanding as of december 31 , story_separator_special_tag the following management 's discussion and analysis of financial condition and results of operations , as well as other portions of this form 10-k , may contain certain statements that constitute forward-looking statements within the meaning of the federal securities laws . 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 . such statements are not guarantees of future performance and involve a number of assumptions , risks and uncertainties that could cause actual results to differ materially from expected results . you should not place any undue reliance on any forward-looking statement and should consider all uncertainties and risks discussed in this report , including those under “ forward-looking statements ” and item 1a , risk factors above , as well as those provided in any subsequent sec filings . overview ocwen is a leader in the servicing industry in foreclosure prevention and loss mitigation that helps families stay in their homes and improves financial outcomes for investors . our leadership in the industry is evidenced by our high cure rate for delinquent loans and above average rate of continuing performance by borrowers whose loans we have modified . ocwen has completed over 559,000 loan modifications since january 2008. we are also an innovator in the industry , as evidenced by our sam program . the sam program incorporates principal reductions and lower payments for borrowers while providing a net present value for mortgage loan investors that is superior to that of foreclosure , including the ability to recoup principal reductions if property values increase over time . this program was developed in 2012 , and was expanded in 2013 to all states where the program is permitted . through december 31 , 2014 , we have completed over 48,000 modifications under the sam program . ocwen has been a leader in hamp modifications since its inception in 2009. ocwen has completed 20 % of all hamp-sponsored modifications , 45 % more than the next highest servicer , according to data published by mha in december 2014. ocwen achieved 3-star ratings , the highest score , on all seven compliance categories in the same report . from 2010 through 2013 , our business grew rapidly via portfolio and business acquisitions . however , we made no significant acquisitions during 2014 and , as a result , the upb of our residential servicing portfolio declined from $ 464.7 billion as of december 31 , 2013 to $ 398.7 billion as of december 31 , 2014. our growth ceased primarily as a result of significant regulatory scrutiny in the state of new york , which resulted in a settlement with the ny dfs in december 2014. we also entered into a more limited settlement with the ca dbo in january 2015. our recent regulatory settlements have significantly impacted our ability to grow our servicing portfolio because we have agreed to restrictions in our consent orders with the ny dfs and ca dbo that effectively prohibit future acquisitions of servicing until we have satisfied the respective conditions in those consent orders . under the ny dfs consent order , we may acquire msrs upon ( a ) meeting benchmarks specified by a to-be-appointed operations monitor ) relating to our boarding 42 process for newly acquired msrs and our ability to adequately service newly acquired msrs and our existing loan portfolio , and ( b ) the ny dfs 's approval , not to be unreasonably withheld . under the ca dbo consent order , we agreed to cease acquiring any additional msrs for loans secured in california until the ca dbo is satisfied that ols can satisfactorily respond to the requests for information and documentation made in the course of a regulatory exam . if we are unable to satisfy these conditions , we will be unable to grow our servicing portfolio through acquisitions . as a result of the current regulatory environment , we have faced , and expect to continue to face , increased regulatory and public scrutiny as well as stricter and more comprehensive regulation of our business . we continue to work diligently to assess the implications of the regulatory environment in which we operate and to meet the requirements of the current environment . we devote substantial resources to regulatory compliance , while , at the same time , striving to meet the needs and expectations of our customers , clients and other stakeholders . during 2015 , we have been executing on our strategy , as announced in december 2014 , to sell certain of our agency msrs . there are multiple reasons for this strategy . first , reducing our exposure to agency servicing will reduce our exposure to interest rate movements . prime servicing and msr valuation are highly sensitive to interest rate movements , and we would like to reduce this risk to the business . second , as of december 31 , 2014 , we carried these msrs at the lower of cost or fair value and expect that selling these assets will enable us to recognize income currently as opposed to over time . third , given the magnitude of the portfolio , we expect that sales of agency msrs will generate significant liquidity in 2015. we currently expect to receive approximately $ 852.0 million of proceeds from announced asset sales , subject in each case to necessary approvals and the satisfaction of closing conditions . we expect that the majority of such proceeds will be used for prepayments under our sstl . story_separator_special_tag we issued $ 350.0 million senior unsecured notes with an interest rate of 6.625 % on may 12 , 2014. these notes are general senior unsecured obligations and will mature on may 15 , 2019. we used a portion of the proceeds from the senior unsecured notes to repurchase common stock and to pay down match funded liabilities . mezzanine equity results from the issuance of 162,000 preferred shares in connection with the homeward acquisition . on july 14 , 2014 , holders of our preferred shares elected to convert the remaining 62,000 shares into 1,950,296 shares of common stock . we paid $ 72.3 million to repurchase all 1,950,296 shares of ocwen common stock that were issued upon the conversion of the remaining preferred shares . we completed the repurchase of 10,420,396 common shares in the open market for $ 310.2 million during 2014 under the stock repurchase plan that we announced on october 31 , 2013 . segment results of operations servicing servicing involves the collection and remittance of principal and interest payments received from borrowers , the administration of mortgage escrow accounts , the collection of insurance claims , the management of loans that are delinquent or in foreclosure or bankruptcy , including making servicing advances , evaluating loans for modification and other loss mitigation activities and , if necessary , foreclosure referrals and reo sales on behalf of investors or other servicers . master servicing involves the collection of payments from servicers and the distribution of funds to investors in mortgage and asset-backed securities and whole loan packages . we earn contractual monthly servicing fees pursuant to servicing agreements ( which are typically payable as a percentage of upb ) as well as ancillary fees in connection with owned msrs . we also earn fees under both subservicing and special servicing arrangements with banks and other institutions that own the msrs . we typically earn these fees either as a percentage of upb or on a per loan basis . per loan fees typically vary based on delinquency status . we recognize servicing fees as revenue when the fees are earned , which is generally when the borrower makes a payment or when a delinquent loan is resolved through modification ( hamp or non-hamp ) , repayment plan , payoff or through the sale of the underlying mortgaged property following foreclosure . our revenue recognition is , therefore , a function of upb , the number of payments received and delinquent loans that resolve . when a loan becomes current via our non-hamp modification process , deferred servicing fees and late fees are considered earned and are recognized as revenue . however , if any debt is forgiven as part of a non-hamp modification , no late fees are collected or earned . when a loan becomes current via the hamp modification process , deferred servicing fees are earned and recognized as revenue . however , late fees are forfeited . initial hamp fees are also recognized as revenue at that time . in addition , under hamp , if a modified loan remains less than 90 days delinquent , we earn hamp success fees at the first , second and third anniversaries of the start of the trial modification . servicing fees are supplemented by ancillary income , including : fees from the federal government for hamp ( from completing new hamp modifications and from the continued success of prior hamp modifications on the anniversary date of the hamp trial modification ) ; interest earned on loan payments that we have collected but have not yet remitted to the owner of the mortgage ( float earnings ) ; referral commissions from brokers for reo properties sold through our network of brokers ; speedpay ® fees from borrowers who pay by telephone or through the internet ; and late fees from borrowers who were delinquent in remitting their monthly mortgage payments but have subsequently become current . see note 9 — mortgage servicing to the consolidated financial statements for additional information on the composition of our servicing revenue . loan resolutions ( modification , repayment plans and reo sales ) the importance of loan resolution to our financial performance is heightened by our revenue recognition policies . we do not recognize delinquent servicing fees or late fees as revenue until we collect cash on the related loan . loan resolution 48 activities address the pipeline of delinquent loans and generally lead to ( i ) modification of the loan terms , ( ii ) repayment plan alternatives , ( iii ) a discounted payoff of the loan ( e.g. , a “ short sale ” ) or ( iv ) foreclosure or deed-in-lieu-of-foreclosure and sale of the resulting reo . loan modifications must be made in accordance with the applicable servicing agreement . the applicable servicing agreement may require or impose restrictions upon , or forbid , loan modifications . the majority of loans that we modify are delinquent , although we do modify some performing loans pro-actively under the american securitization forum guidelines . the most common term modified is the interest rate . some modifications also involve the forgiveness or forbearance ( i.e. , rescheduling ) of delinquent principal and interest . to select the best resolution for a delinquent loan , we perform a structured analysis of all options using information provided by the borrower as well as external data , including recent broker price opinions to value the mortgaged property . we then use a proprietary model to determine the option with the optimal present value for the loan investor that includes an assessment of re-default risk . loan modifications are designed to achieve a higher net present value than the foreclosure alternative . inquiries into servicer foreclosure practices by state or federal government bodies , regulators or courts are continuing and bring the possibility of adverse regulatory actions , including extending foreclosure timelines . foreclosure delays slow the recovery of delinquent servicing fees and advances . our average completed foreclosure timelines increased in 2014 due to internal and macroeconomic impacts .

operations summary our consolidated operating results for the past three years have been significantly impacted by portfolio and platform acquisitions , subsequent integrations , goodwill impairment and various regulatory settlement and other costs . the operating results of the acquired businesses are included in our operating results since their respective acquisition dates . 43 the following table summarizes our consolidated operating results for the years indicated : replace_table_token_10_th year ended december 31 , 2014 versus 2013 . servicing and subservicing fees for 2014 were 4 % higher than 2013 primarily as a result of 2014 including a full year of revenue attributed to the rescap acquisition , which settled on february 15 , 2013 , and various asset acquisitions completed throughout 2013 , and consistent with the 4 % increase in the total average portfolio upb . gains on loans held for sale increased in 2014 largely due to gains recognized in connection with three transactions whereby we purchased delinquent fha-insured loans out of ginnie mae guaranteed securitizations and immediately sold the loans and related advances ( the ginnie mae ebo transactions ) . gains on loans held for sale from our lending operations declined slightly in 2014 where lower origination volumes were largely offset by shifts in the origination mix from the lower margin correspondent channel to the higher margin direct channel . operating expenses increased 56 % in 2014 as compared to 2013 due primarily to goodwill impairment losses , higher professional services expenses , including settlements , as well as platform integration costs and msr valuation related impacts .

goodwill and other intangible assets story_separator_special_tag overview we are a leading global provider of data-driven marketing and loyalty solutions serving large , consumer-based businesses in a variety of industries . we offer a comprehensive portfolio of integrated outsourced marketing solutions , including customer loyalty programs , database marketing services , end-to-end marketing services , analytics and creative services , direct marketing services and private label and co-brand retail credit card programs . we focus on facilitating and managing interactions between our clients and their customers through all consumer marketing channels , including in-store , online , email , social media , mobile , direct mail and telephone . we capture and analyze data created during each customer interaction , leveraging the insight derived from that data to enable clients to identify and acquire new customers and to enhance customer loyalty . we believe that our services are becoming increasingly valuable as businesses shift marketing resources away from traditional mass marketing toward targeted marketing programs that provide measurable returns on marketing investments . we operate in the following reportable segments : loyaltyone , epsilon , and private label services and credit . loyaltyone loyaltyone generates revenue primarily from our coalition loyalty program in canada , the air miles reward program , and brandloyalty as described more fully below . revenue increased $ 487.4 million , or 53.0 % , to $ 1.4 billion and adjusted ebitda , net increased $ 49.0 million for the year ended december 31 , 2014 as compared to the same period in 2013 , due to the brandloyalty acquisition , which added $ 545.8 million and $ 64.6 million to revenue and adjusted ebitda , net , respectively . a weaker canadian dollar negatively impacted the results of operations for the year ended december 31 , 2014 , as the average foreign currency exchange rate was $ 0.91 as compared to $ 0.97 in the prior year period , which lowered revenue and adjusted ebitda , net by $ 58.2 million and $ 16.8 million , respectively . on january 2 , 2014 , we acquired a 60 % ownership interest in brandloyalty , a netherlands-based , data-driven loyalty marketer that designs , organizes , implements and evaluates innovative and tailor-made loyalty programs for food retailers worldwide . the acquisition expands our presence across europe , asia and latin america . for additional information on the brandloyalty acquisition , see note 3 , `` acquisitions , '' of the notes to consolidated financial statements . brandloyalty is consolidated in our financial statements and included in our results of operations as of the date of acquisition . pursuant to the brandloyalty share purchase agreement , we may acquire the remaining 40 % ownership interest in brandloyalty from the sellers over a four-year period , or 10 % per year , based upon predetermined valuation multiples . if specified annual earnings targets are met by brandloyalty , we must acquire the additional 10 % ownership interest for the year achieved ; otherwise the seller has a put option to sell us the 10 % ownership interest for the respective year . the brandloyalty share purchase agreement also contains an earn-out provision for which we have recorded a contingent liability of approximately $ 326.0 million as of december 31 , 2014 , of which $ 105.9 million is included in operating expenses in our consolidated statements of income . as the earnings target specified in the share purchase agreement was met , we acquired an additional 10 % ownership interest effective january 1 , 2015 , increasing our ownership interest in brandloyalty to 70 % . for the air miles reward program , air miles reward miles issued and air miles reward miles redeemed are the two primary drivers of loyaltyone 's revenue and indicators of success of the program . the number of air miles reward miles issued impacts the number of future air miles reward miles available to be redeemed . this can also impact our future revenue recognized with respect to the number of air miles reward miles redeemed and the amount of breakage for those air miles reward miles expected to remain unredeemed . the estimated breakage rate changed from 28 % to 27 % effective december 31 , 2012 and from 27 % to 26 % effective december 31 , 2013. as of december 31 , 2014 , the estimated breakage rate remained at 26 % . for those sponsor contracts not yet subject to accounting standards update , or asu , 2009‑13 , `` multiple-deliverable revenue arrangements , '' the fees received from air miles reward miles issued are allocated between the redemption element based on the fair value of the redemption element and the service element based on the residual method . for sponsor contracts subject to asu 2009‑13 , we determine the selling price for all of the deliverables in the arrangement , and use the relative selling price method to allocate the arrangement consideration among the deliverables . proceeds from the issuance of air miles reward miles under these contracts are allocated to three elements : the redemption element , the service element and the brand element . revenue for the redemption element is recognized at the time an air miles reward mile is redeemed . for the service element , revenue is recognized over the estimated life of an air miles reward mile . revenue attributable to the brand element is recognized at the time an air miles reward mile is issued . air miles reward miles issued during the year ended december 31 , 2014 increased 1.5 % compared to 2013 due to an increase in air miles reward miles issued under the air miles cash program option . story_separator_special_tag we expect our 2015 charge-off rate to be consistent with 2014. during the year ended december 31 , 2014 , we announced new multi-year agreements to provide private label credit card services to overstock.com , jd williams , international diamond distributors , venus , gamestop corporation and mayors jewelers . we also announced multi-year renewal agreements with bealls and burkes outlet and eddie bauer to continue providing private label credit card services . we announced multi-year renewal agreements with hsn , ann inc. brands , ann taylor and loft , and furniture retailer arhaus , to continue providing private label and co-brand credit card services . additionally , we announced new multi-year agreements to provide co-brand credit card services to american kennel club , orbitz , dsw inc. , virgin america , good sam enterprises and bj 's wholesale club . we also signed a new multi-year agreement to provide co-brand and private label credit card services to meijer , one of the largest retailers in the u.s. during 2014 , we acquired four credit card portfolios for an aggregate purchase price of approximately $ 976.5 million , one of which remains subject to customary purchase price adjustments . 25 index discussion of critical accounting policies and estimates our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements , which have been prepared in accordance with accounting policies that are described in the notes to consolidated financial statements . the preparation of the consolidated financial statements requires management 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 continually evaluate our judgments and estimates in determination of our financial condition and operating results . estimates are based on information available as of the date of the financial statements and , accordingly , actual results could differ from these estimates , sometimes materially . critical accounting policies and estimates are defined as those that are both most important to the portrayal of our financial condition and operating results and require management 's most subjective judgments . the primary critical accounting policies and estimates are described below . allowance for loan loss . we maintain an allowance for loan loss at a level that is appropriate to absorb probable losses inherent in credit card and loan receivables . the allowance for loan loss covers forecasted uncollectable principal as well as unpaid interest and fees . the allowance for loan loss is evaluated monthly for appropriateness . in estimating the allowance for principal loan losses , we utilize a migration analysis of delinquent and current credit card and loan receivables . migration analysis is a technique used to estimate the likelihood that a credit card or loan receivable will progress through the various stages of delinquency to charge-off . in evaluating the allowance for loan loss for both principal and unpaid interest and fees , management also considers factors that may impact loan loss experience , including seasoning , loan volume and amounts , payment rates and forecasting uncertainties . the allowance is maintained through an adjustment to the provision for loan loss . charge-offs of principal amounts , net of recoveries are deducted from the allowance . net charge-offs include the principal amount of losses from credit cardholders unwilling or unable to pay their account balances , as well as bankrupt and deceased credit cardholders , less recoveries and exclude charged-off interest , fees and fraud losses . charged-off interest and fees reduce finance charges , net while fraud losses are recorded as an expense . credit card and loan receivables , including unpaid interest and fees , are charged-off at the end of the month during which an account becomes 180 days contractually past due , except in the case of customer bankruptcies or death . credit card and loan receivables , including unpaid interest and fees , associated with customer bankruptcies or death are charged-off at the end of each month subsequent to 60 days after the receipt of notification of the bankruptcy or death , but in any case , not later than the 180-day contractual time frame . we record the actual charge-offs for unpaid interest and fees as a reduction to finance charges , net . in estimating the allowance for uncollectable unpaid interest and fees , we utilize historical charge-off trends , analyzing actual charge-offs for the prior three months . the allowance for unpaid interest and fees is maintained through an adjustment to finance charges , net . if management used different assumptions in estimating net losses that could be incurred , the impact to the allowance for loan loss could have a material effect on our consolidated financial condition and results of operations . for example , a 100 basis point change in management 's estimate of incurred net loan losses could have resulted in a change of approximately $ 107.1 million in the allowance for loan loss at december 31 , 2014 , with a corresponding change in the provision for loan loss . 26 index revenue recognition . we recognize revenue when all of the following criteria are satisfied : ( i ) persuasive evidence of an arrangement exists ; ( ii ) the price is fixed or determinable ; ( iii ) collectability is reasonably assured ; and ( iv ) the service has been performed or the product has been delivered . we may also enter into contracts that contain multiple deliverables . judgment is required to properly identify the accounting units of the multiple deliverable transactions and to determine the manner in which revenue should be allocated among the accounting units . moreover , judgment is used to interpret the terms and determine when all the criteria of revenue recognition have been met in order for revenue recognition to occur in the appropriate accounting period .

consolidated results of operations replace_table_token_9_th 29 index year ended december 31 , 2014 compared to the year ended december 31 , 2013 revenue . total revenue increased $ 983.9 million , or 22.8 % , to $ 5.3 billion for the year ended december 31 , 2014 from $ 4.3 billion for the year ended december 31 , 2013. the net increase was due to the following : transaction . revenue increased $ 8.4 million , or 2.5 % , to $ 337.4 million for the year ended december 31 , 2014 . other servicing fees charged to our credit cardholders increased $ 26.7 million due to increased volumes . this increase was offset by a decline of $ 12.3 million in merchant fees , which are transaction fees charged to the retailer , due to increased royalty payments associated with new clients and the increase in associated credit sales . air miles reward miles issuance fees , for which we provide marketing and administrative services , also decreased $ 7.6 million due to the impact of an unfavorable canadian exchange rate . redemption . revenue increased $ 466.1 million , or 79.4 % , to $ 1.1 billion for the year ended december 31 , 2014 due to the brandloyalty acquisition , which added $ 538.9 million . these increases were offset by an unfavorable canadian exchange rate , which negatively impacted redemption revenue by $ 36.6 million , and the change in estimate of our breakage rate in prior years . finance charges , net . revenue increased $ 347.0 million , or 17.7 % , to $ 2.3 billion for the year ended december 31 , 2014 due to a 21.3 % increase in average credit card and loan receivables , which increased revenue $ 417.0 million through a combination of recent credit card portfolio acquisitions and strong credit cardholder spending .

forfeitures the share-based compensation expense has been reduced for estimated forfeitures . the estimated forfeiture rate is based on historical experience 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 cancer treatment options for patients . our portfolio includes biologic and small‑molecule immunotherapy product candidates to treat a wide range of oncology indications . our lead product candidate , hyperacute pancreas , is being studied in a phase 3 clinical trial in surgically‑resected pancreatic cancer patients that is being performed under a special protocol assessment , or spa , with the united states food and drug administration , or fda . we initiated this trial based on encouraging phase 2 data that suggests improvement in both disease-free and overall survival . we have three additional product candidates in clinical development , including hyperacute lung , which is being studied in a phase 1/2 clinical trial conducted at the national cancer institute , or nci , and hyperacute melanoma , which is being studied in an investigator‑initiated phase 2 clinical trial . to date , our hyperacute product candidates have been dosed in more than 200 cancer patients , either as a monotherapy or in combination with other therapies , and have demonstrated a favorable safety profile . our hyperacute product candidates are based on our proprietary hyperacute immunotherapy technology , which is designed to stimulate the human immune system . our product candidates are designed with an objective to harness multiple components of the innate immune system to combat cancer , either as a monotherapy or in combination with current treatment regimens without incremental toxicity . we are also conducting small‑molecule based research and development with an aim to produce new drugs capable of breaking the immune system 's tolerance to cancer through inhibition of the indoleamine‑ ( 2,3 ) ‑dioxygenase , or ido , pathway . we are currently studying our lead ido pathway inhibitor product candidate , d-1-methyltryptophan , or d-1mt , in collaboration with the national cancer institute , or nci , in multiple phase 1b/2 clinical trials . we believe that our immunotherapeutic technologies will enable us to discover , develop and commercialize multiple product candidates that can be used either alone or in combination to enhance or potentially replace current therapies to treat cancer with underserved patient populations and significant market potential . we are a development stage company and have incurred significant losses since our inception . as of december 31 , 2011 , we had an accumulated deficit of $ 81.5 million . we incurred a net loss of $ 18.1 million , $ 16.2 million and $ 10.0 million for the years ended december 31 , 2011 , 2010 , and 2009 , respectively . we expect our losses to increase over the next several years as we advance into late-stage clinical trials and pursue regulatory approval of our product candidates . in addition , if one or more of our product candidates are approved for marketing , we will incur significant expenses for the initiation of commercialization activities . on october 19 , 2011 , the company 's board of directors approved a 2.1-for-one reverse split of the company 's common stock to be effected prior to the effective date of the company 's ipo . in connection with the reverse split , the company filed a certificate of amendment of the restated certificate of incorporation with the secretary of state of delaware on october 25 , 2011 making the reverse split effective . all share and per share amounts have been retroactively restated in the accompanying financial statements and notes for all periods presented . initial public offering on november 16 , 2011 , we completed our initial public offering , or ipo , of common stock pursuant to a registration statement on form s-1that was declared effective on november 10 , 2011. we sold 6,200,000 shares of our common stock , at a price of $ 7.00 per share . as a result of the ipo , we raised a total of $ 37.6 million in net proceeds after deducting underwriting discounts and commissions of $ 3.0 million and offering expenses of $ 2.9 million . costs directly associated with our ipo were capitalized and recorded as deferred ipo costs prior to the closing of the ipo . these costs have been recorded as a reduction of the proceeds received in arriving at the amount to be recorded in additional paid-in capital . upon the closing of the ipo , 14,270,113 63 shares of our convertible preferred stock automatically converted into 10,719,353 shares of our common stock , which also reflected conversion price adjustments to our preferred stock . financial overview revenues from our inception through december 31 , 2011 , we have not generated any revenue from product sales . story_separator_special_tag the net change in the total valuation allowance for the years ended december 31 , 2011 and 2010 was an increase of $ 3.9 million and $ 3.4 million , respectively . in assessing the realizability of deferred tax assets , management considers 65 whether it is more likely than not that some portion or all of the deferred tax assets will not be realized . the ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible . management considers the scheduled reversal of deferred tax liabilities , projected taxable income , and tax planning strategies in making this assessment . valuation allowances have been established for the entire amount of the net deferred tax assets as of december 31 , 2011 and 2010 , due to the uncertainty of future recoverability . as of december 31 , 2011 and december 31 , 2010 , we had federal net operating loss carryforwards of $ 76.2 million and $ 62.1 million and federal research credit carryforwards of $ 2.9 million and $ 2.1 million , respectively , that expire at various dates from 2020 through 2031. sections 382 and 383 of the internal revenue code limit a corporation 's ability to utilize its net operating loss carryforwards and certain other tax attributes ( including research credits ) to offset any future taxable income or tax if the corporation experiences a cumulative ownership change of more than 50 % over any rolling three year period . state net operating loss carryforwards ( and certain other tax attributes ) may be similarly limited . an ownership change can therefore result in significantly greater tax liabilities than a corporation would incur in the absence of such a change and any increased liabilities could adversely affect the corporation 's business , results of operations , financial condition and cash flow . based on a preliminary analysis , we believe that , from its inception through december 31 , 2009 , newlink experienced section 382 ownership changes in september 2001 and march 2003. these two ownership changes limit newlink 's ability to utilize its federal net operating loss carryforwards ( and certain other tax attributes ) that accrued prior to the 2003 ownership change . in addition , the net operating loss carryforwards ( and certain other tax attributes ) of our subsidiary may be limited by sections 382 and 383 as a result of a prior ownership change of the subsidiary . additional analysis will be required to determine whether changes in our ownership since december 31 , 2009 and or changes in our ownership that resulted from our ipo have caused another ownership change to occur . any such change could result in significant limitations on all of our net operating loss carryforwards and other tax attributes . even if another ownership change has not occurred , additional ownership changes may occur in the future as a result of events over which we will have little or no control , including purchases and sales of our equity by our 5 % stockholders , the emergence of new 5 % stockholders , additional equity offerings or redemptions of our stock or certain changes in the ownership of any of our 5 % stockholders . income tax expense was $ 0 for the years ended december 31 , 2011 and 2010 . income tax expense differs from the amount that would be expected after applying the statutory united states federal income tax rate primarily due to changes in the valuation allowance for deferred taxes . critical accounting policies and significant judgments and estimates we have prepared our financial statements in accordance with united states generally accepted accounting principles . our preparation of these financial statements requires us to make estimates , assumptions and judgments that affect the reported amounts of assets , liabilities , expenses and related disclosures at the date of the financial statements , as well as revenues and expenses during the reporting periods . we evaluate our estimates and judgments on an ongoing basis . we base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances , the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources . actual results could therefore differ materially from these estimates under different assumptions or conditions . we have reviewed our critical accounting policies and estimates with the audit committee of our board of directors . while our significant accounting policies are described in more detail in note 2 to our financial statements included later in this annual report , we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements . expenses accrued under contractual arrangements with third parties ; accrued clinical expenses as part of the process of preparing our financial statements , we are required to estimate our accrued expenses . this process involves reviewing open contracts and purchase orders , communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost . the majority of our service providers invoice us monthly in arrears for services performed . we make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time . we periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary .

results of operations comparison of the years ended december 31 , 2011 and 2010 revenues . revenues for the twelve months ended december 31 , 2011 were $ 1.9 million , decreasing from $ 2.1 million for the same period in 2010. the decrease in revenue of $ 207,000 was due to a one-time qualifying therapeutic discovery project grant in 2010 of $ 244,000 offset by increased grant billings on research under various dod contracts and nih grants of $ 37,000. on september 21 , 2011 , bps entered into an amendment to a dod contract extending the contract period to september 24 , 2013 and increasing the aggregate amounts for which bps may receive reimbursements by $ 3.4 million to a total of up to approximately $ 7.1 million . 69 research and development expenses . research and development expenses for the twelve months ended december 31 , 2011 were $ 14.3 million , increasing from $ 12.7 million for the same period in 2010. the $ 1.6 million increase was primarily due to an increase of $ 744,000 in personnel-related expenses and an increase of $ 888,000 in clinical trial expense , contract research and other expenses offset by a decrease of $ 43,000 in equipment and supplies . general and administrative expenses . general and administrative expenses for the twelve months ended december 31 , 2011 were $ 5.7 million , decreasing from $ 6.1 million for the same period in 2010. the $ 400,000 decrease was primarily due to a decrease of $ 984,000 in legal fees and $ 65,000 in licensing fees , offset by an increase of $ 406,000 in personnel expenses , $ 108,000 in accounting expenses , $ 91,000 in recruiting , and $ 44,000 in insurance and other expenses . interest income and expense .

f-10 recently-issued accounting standards : in may 2014 , the fasb issued guidance on the accounting for revenue from contracts with customers that will supersede most existing revenue recognition guidance , including industry-specific guidance . the core principle requires an entity to recognize revenue to depict the transfer of goods and 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 . in addition , the guidance requires enhanced disclosures regarding the nature , timing and uncertainty of revenue and cash flows arising from an entity 's contracts with customers . this guidance is effective for interim and annual reporting periods beginning on or after december 15 , 2017. entities can choose to apply the guidance using either the full retrospective approach or a modified retrospective approach . management believes that the adoption of this guidance will not have a material impact on our financial statements . in june 2014 , the fasb issued guidance that clarifies the accounting for share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period . in this case , the performance target would be required to be treated as a performance condition , and should not be reflected in estimating the grant-date fair value of the award . the guidance also addresses when to recognize the related compensation cost . this guidance is effective for fiscal years , and interim periods within those years , beginning after december 15 , 2015. management believes that the adoption of this guidance will not have a material impact on our financial statements . in june 2014 accounting standards update 2014-10 removed the definition of a development stage entity from the master glossary of the accounting standards codification , thereby removing the financial reporting distinction between development stage entities and other reporting entities from u.s. gaap . in addition , the amendments eliminate the requirements for development stage entities to ( 1 ) present inception-to-date information in the statements of income , cash flows , and shareholder equity , ( 2 ) label the financial statements as those of a development stage entity , ( 3 ) disclose a description of the development stage activities in which the entity is engaged , and ( 4 ) disclose in the first year in which the entity is no longer a development stage entity that in prior years it had been in the development stage . this asu is effective for annual reporting periods beginning after december 15 , 2014 , and interim periods therein . early adoption is permitted . the company has elected to adopt this asu effective with the december 31 , 2014 annual report on form 10-k and its adoption resulted in the removal of previously required development stage financial information . asu 2014-15 – `` presentation of financial statements—going concern—disclosure of uncertainties about an entity 's ability to continue as a going concern ( `` asu 2014-15 `` ) . `` in august 2014 , the fasb issued asu 2014-15 requiring management to assess an entity 's ability to continue as a going concern , and to provide related footnote disclosures in certain circumstances . asu 2014-15 is effective for annual periods , and interim periods within those annual periods , starting december 15 , 2016 ; the company 's first quarter of fiscal 2016. note 3 – major customer the company has one major customer , which represents approximately 80 % of total sales for the years ended december 31 , 2015 and 2014 , respectively . note 4 – shareholder advances and related party transactions during the second quarter of 2014 , the principal shareholder sold baby products inventory story_separator_special_tag the following management 's discussion and analysis should be read in conjunction with our financial statements and the notes thereto and the other financial information appearing elsewhere in this report . in addition to historical information , the following discussion contains certain forward-looking information . see `` special note regarding forward looking statements '' above for certain information concerning those forward looking statements . story_separator_special_tag style= '' width : 100 % ; font : 10pt times new roman '' > 17 operating expenses our operating expenses were $ 40,145 for the year ended december 31 , 2015 and $ 18,039 for the year ended december 31 , 2014. the increase in our operating expenses in 2015 was due to an increase in professional fees related to being a public reporting company and fees associated with becoming listed on the otcqb exchange and registering the company 's stock with the depository trust company ( dtc ) . net loss our net loss for the year ended december 31 , 2015 was $ 36,579 and was $ 13,475 for the year ended december 31 , 2014. the increase in net loss in 2015 was due to the reasons stated above . impact of potential loss of our major customer on our liquidity currently sales to our major customer constitute approximately 80 % of our total revenue . any substantial decrease in selling our products to them will substantially affect our operating results and liquidity . although we currently have a satisfactory relationship with our major customer , if they were to terminate their relationship or stop ordering products from us , these events would currently result in a loss of substantially all of our revenue which would have a material impact on the liquidity of our company . it is uncertain how long our major customer will continue to order products from us as we do not have any assurances from them as to how long they will continue ordering products from us . we do not have an exclusive agreement with them for selling our type of products to them . story_separator_special_tag in the event that the company is not able to retain our major customer or obtain new customers , we will incur increased operating losses and we will need to raise additional capital to maintain our current operations . we presently are seeking to increase our web-based sales by attracting new customers to our websites . we are not presently negotiating any agreements with any new major customers . liquidity and capital resources as of december 31 , 2015 , we had cash of $ 1,983 , total assets of $ 1,983 and a working capital deficit of $ 24,983 compared to $ 26,693 in cash , $ 26,693 in total assets and $ 11,596 in working capital as of december 31 , 2014. the following table provides detailed information about our net cash flow for all financial statement periods presented in this report : cash flow replace_table_token_1_th operating activities cash used in operating activities in the year ended december 31 , 2015 consisted of net loss as well as the effect of changes in working capital . cash used in operating activities in the year ended december 31 , 2015 was $ 37,710 , which consisted of a net loss of $ 36,579 , and a decrease in accrued liabilities of $ 1,131 . 18 cash used in operating activities in the year ended december 31 , 2014 consisted of net loss as well as the effect of changes in working capital . cash used in operating activities in the year ended december 31 , 2014 was $ 9,961 , which consisted of a net loss of $ 13,475 , non-cash charge of inventory acquired from our principal shareholder through shareholder advances of $ 3,378 and cash provided by working capital of $ 136. the cash provided by working capital was due to an increase in accrued liabilities of $ 136. investing activities during the years ended december 31 , 2015 and 2014 we had no investing activities . financing activities during the year ended december 31 , 2015 , we had net cash provided by financing activities of $ 13,000 as compared to net cash flows provided by financing activities of $ 32,170 for the year ended december 31 , 2014 a decrease of $ 19,170. this decrease in cash provided by financing activities is due to the decrease in proceeds from the sale of our common stock of $ 22,170 , offset by an increase in short term cash advances from our principal shareholder of $ 3,000. see note 5 of the notes to our financial statements included in this annual report on form 10-k for information regarding our stockholders ' equity . during the year ended december 31 , 2015 , our total cash requirements will exceed our cash balances . currently , we do not have sufficient cash in our bank accounts to cover our estimated expenses for the next 12 months . our current projected average monthly negative cash flow is approximately $ 2,000 per month . based on our current cash position at december 31 , 2015 and projected spending , we do not have sufficient cash on hand to fund our current operations . we anticipate meeting our future cash requirements through a combination of equity financing from the proceeds of this offering and debt financing from our principal shareholder to fund the costs of developing the business and being a public reporting company . although we anticipate meeting our future cash requirements though , among other things , debt financing from our principal shareholder , we do not currently have any agreements with our principal shareholder to provide such financing , written or unwritten . we estimate that our operating expenses , based on us being able to raise the necessary equity capital to execute our business plan , will be approximately $ 100,000 as described in the table below . these estimates may change significantly depending on the nature of our future business activities and our ability to raise capital from shareholders or other sources . replace_table_token_2_th 19 we intend to meet our cash requirements for the next 12 months through a combination of debt financing and equity financing . we currently do not have any arrangements in place for the completion of any financings and there is no assurance that we will be successful in completing any further financings or raising any capital . there is no assurance that any financing will be available or if available , on terms that will be acceptable to us . we may not raise sufficient funds to fully carry out any business plan . management 's plans for the company may include securing a suitable merger partner or acquiring private companies to create investment value for the company . however , no assurance can be given that management will be successful in its efforts . off-balance sheet arrangements as of the date of this report , we have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition , changes in our financial condition , revenues or expenses , results of operations , liquidity , capital expenditures or capital resources that are material to our stockholders . inflation the effect of inflation on our revenues and operating results has not been significant . critical accounting policies our financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation . a complete listing of these policies is included in note 2 of the notes to our financial statements for the years ended december 31 , 2015 and 2014. we have identified below the accounting policies that are of particular importance in the presentation of our financial position , results of operations and cash flows , and which require the application of significant judgment by management . revenue recognition sales to consumers are recorded when goods are shipped and are reported net of allowances

overview we are a web-based retailer of clothing , accessories and other personalized gifts for children . we currently sell our products through our website www.polkadotpatch.com . we do not have any stores or outlets . we are in the process of rebranding our business under the name maple tree kids . we are devoting a substantial amount of our efforts promoting our personalized children products , creating a new logo , marketing and sales collateral , and creating a new website , www.mapletreekids.com and as a result of these corporate development efforts and current financial position , we received a going concern audit opinion from our audit firm . we can acquire our products from approximately 35 wholesale vendors all located in the united states who will also drop-ship the inventory we purchase from them to our customers . we do not manufacture any of our own products . we have not entered into any formal supply agreements with these vendors . we are required to pay in full for products purchased from these vendors upon delivery . if the prices charged by these vendors increase and we are not able to pass on the increased price to our customers , then our margins will be reduced and this will affect our potential for future profitability . principal factors affecting our financial performance our operating results are primarily affected by the following factors : · our auditors have issued a going concern opinion . this means that there is substantial doubt that we can continue as an ongoing business for the next 12 months .

overview of conmed corporation conmed corporation ( “ conmed ” , the “ company ” , “ we ” or “ us ” ) is a medical technology company that provides surgical devices and equipment for minimally invasive procedures . the company 's products are used by surgeons and physicians in a variety of specialties including orthopedics , general surgery , gynecology , neurosurgery , thoracic surgery and gastroenterology . our product lines consist of orthopedic surgery and general surgery . orthopedic surgery consists of sports medicine instrumentation and small bone , large bone and specialty powered surgical instruments as well as , imaging systems for use in minimally invasive surgery procedures including 2dhd and 3dhd vision technologies and service fees related to the promotion and marketing of sports medicine allograft tissue . general surgery consists of a complete line of endo-mechanical instrumentation for minimally invasive laparoscopic and gastrointestinal procedures , a line of cardiac monitoring products as well as electrosurgical generators and related instruments . these product lines as a percentage of consolidated net sales are as follows : replace_table_token_5_th a significant amount of our products are used in surgical procedures with approximately 79 % of our revenues derived from the sale of single-use products . our capital equipment offerings also facilitate the ongoing sale of related single-use products and accessories , thus providing us with a recurring revenue stream . we manufacture substantially all of our products in facilities located in the united states and mexico . we market our products both domestically and internationally directly to customers and through distributors . international sales approximated 48 % in 2018 , 2017 and 2016 . business environment on february 11 , 2019 , we acquired buffalo filter and all of the issued and outstanding common stock of palmerton holdings , inc. from filtration group fgc llc ( the “ buffalo filter acquisition ” ) for approximately $ 365 million , in cash , subject to customary adjustments for working capital , cash held by buffalo filter at closing , indebtedness of buffalo filter , expenses related to the transaction and other related fees and expenses . buffalo filter develops , manufactures and markets smoke evacuation technologies that are complementary to our advanced surgical portfolio . we financed the purchase price for the buffalo filter acquisition using a combination of the issuance of $ 345.0 million of 2.625 % convertible notes due 2024 issued on january 29 , 2019 ( the convertible notes ” ) and the incurrence of indebtedness under our sixth amended and restated senior secured credit agreement , which closed on february 7 , 2019 . refer to financing cash flows and note 17 to the consolidated financial statements for further details . critical accounting policies preparation of our financial statements requires us to make estimates and assumptions which affect the reported amounts of assets , liabilities , revenues and expenses . note 1 to the consolidated financial statements describes the significant accounting policies used in preparation of the consolidated financial statements . the most significant areas involving management judgments and estimates are described below and are considered by management to be critical to understanding the financial condition and results of operations of conmed corporation . actual results may or may not differ from these estimates . inventory valuation we value inventory at the lower of cost and net realizable value based on historical experience and life of inventory . we write-off excess and obsolete inventory resulting from the inability to sell our products at prices in excess of current carrying costs . we make estimates regarding the future recoverability of the costs of our products and record a provision for excess and obsolete 22 inventories based on historical experience and expected future trends . market changes or new product introductions could impact demand for our products and require inventory write-downs . goodwill and intangible assets we have a history of growth through acquisitions . assets and liabilities of acquired businesses are recorded at their estimated fair values as of the date of acquisition . goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses . factors that contribute to the recognition of goodwill include synergies that are specific to our business and are expected to increase net sales and profits ; acquisition of a talented workforce ; cost savings opportunities ; the strategic benefit of expanding our presence in core and adjacent markets ; and diversifying our product portfolio . customer and distributor relationships , trademarks , tradenames , developed technology , patents and other intangible assets primarily represent allocations of purchase price to identifiable intangible assets of acquired businesses . sales representation , marketing and promotional rights represent intangible assets created under our agreement with musculoskeletal transplant foundation ( “ mtf ” ) . determining the fair value of intangible assets acquired as part of a business combination requires us to make significant estimates . these estimates include the amount and timing of projected future cash flows of each project or technology , the discount rate used to discount those cash flows to present value , the assessment of the asset 's useful life , and the consideration of legal , technical , regulatory , economic , and competitive risks . goodwill and intangible assets deemed to have indefinite lives are not amortized , but are subject to at least annual impairment testing . it is our policy to perform our annual impairment testing in the fourth quarter . the identification and measurement of goodwill impairment involves the estimation of the fair value of our business . estimates of fair value are based on the best information available as of the date of the assessment . we completed our goodwill impairment testing during the fourth quarter of 2018 . we performed our impairment test utilizing the market capitalization approach to determine whether the fair value of a reporting unit is less than its carrying amount . based upon our assessment , the fair value continues to exceed carrying value . story_separator_special_tag liquidity and capital resources our liquidity needs arise primarily from capital investments , working capital requirements and payments on indebtedness under the amended and restated senior credit agreement , described below . we have historically met these liquidity requirements with funds generated from operations and borrowings under our revolving credit facility . in addition , we have historically used term borrowings , including borrowings under the fifth amended and restated senior credit agreement and borrowings under separate loan facilities , in the case of real property purchases , to finance our acquisitions . we also have the ability to raise funds through the sale of stock or we may issue debt through a private placement or public offering . management believes that cash flow from operations , including cash and cash equivalents on hand and available borrowing capacity under our amended and restated senior credit agreement , will be adequate to meet our anticipated operating working capital requirements , debt service , funding of capital expenditures and common stock repurchases in the foreseeable future . we had total cash on hand at december 31 , 2018 of $ 17.5 million , of which approximately $ 16.1 million was held by our foreign subsidiaries outside the united states with unremitted earnings . during 2018 , we redeployed $ 25.4 million of cash from certain non-u.s. subsidiaries primarily for u.s. debt reduction . this cash consisted of earnings that were taxed in 2017 as part of the deemed repatriation toll charge implemented by tax reform . if we were to repatriate the remaining unremitted earnings that have been taxed as part of the deemed repatriation toll charge , we would be required to accrue and pay withholding taxes in certain foreign jurisdictions . we have accrued a deferred tax liability for foreign withholding taxes related to the amount of the remaining cumulative unremitted earnings as of december 31 , 2017 as these are not considered permanently reinvested . it is our intention to permanently reinvest all future foreign earnings for periods occurring after december 31 , 2017. the amount of such untaxed foreign earnings for the periods occurring after december 2017 totaled $ 18.4 million . if we were to repatriate these funds , we would be required to accrue and pay taxes on such amounts . the company has estimated foreign withholding taxes of $ 0.6 million would be due if these earnings were repatriated . operating cash flows 27 our net working capital position was $ 213.4 million at december 31 , 2018 . net cash provided by operating activities was $ 74.7 million in 2018 , $ 65.6 million in 2017 and $ 39.9 million in 2016 generated on net income of $ 40.9 million in 2018 , $ 55.5 million in 2017 and $ 14.7 million in 2016 . the increase in cash flows from operating activities in 2018 compared to 2017 is primarily due to the increase in net income ( excluding the non-cash impact of tax reform ) as 2017 included costs associated with restructuring and legal matters as further described in note 13 to the consolidated financial statements , including a $ 12.2 million accrual related to the lexion trial verdict . this accrual was subsequently paid during 2018 , thereby partially offsetting the increase in operating cash flows in 2018. in addition , other significant changes in assets and liabilities affecting cash flows include the following : a decrease in cash flows from inventory is caused primarily by an increase in production to support new product introductions and sales growth ; an increase in cash flows from accounts payable is due to timing of payments and increased raw material purchases ; an increase in cash flows from accrued compensation and benefits is caused by higher commission and incentive compensation accruals associated with increased sales ; and a decrease in cash flows from other liabilities is caused primarily by the aforementioned lexion trial verdict payment during 2018. the increase in cash provided by operating activities from 2017 to 2016 is mainly related to the prior year having significant cash outflows resulting from the surgiquest , inc. acquisition whereby 2017 had a $ 12.2 million accrual related to the lexion trial verdict , as further described in notes 12 and 13 to the consolidated financial statements . investing cash flows net cash used in investing activities decreased to $ 16.5 million in 2018 compared to $ 29.1 million in 2017 primarily due to there being no payments related to business and asset acquisitions during 2018 as compared to the $ 16.2 million in 2017 . net cash used in investing activities decreased to $ 29.1 million in 2017 compared to $ 266.0 million in 2016 primarily due to the $ 16.2 million in payments related to acquiring businesses , assets and a distributor in 2017 as compared to the payment for the surgiquest acquisition in 2016 of $ 256.5 million . this decrease was also offset by $ 5.2 million in proceeds from the sale of our centennial , colorado facility during 2016. capital expenditures were $ 16.5 million , $ 12.8 million and $ 14.8 million in 2018 , 2017 and 2016 , respectively . capital expenditures are expected to be in the $ 15.0 million to $ 20.0 million range for 2019 . financing cash flows financing activities in 2018 used cash of $ 72.3 million compared to using cash of $ 34.9 million in 2017 and providing cash of $ 182.5 million in 2016 . below is a summary of the significant financing activities : during 2016 , we had borrowings of $ 175.0 million on our term loan . we repaid $ 13.1 million in 2018 and $ 8.8 million in each of 2017 and 2016 in accordance with the agreement , as further described below . during 2018 and 2017 , we had net repayments on our revolving line of credit of $ 15.0 million and $ 2.0 million , respectively , as compared to net borrowings of $ 62.7 million in 2016 .

consolidated results of operations the following table presents , as a percentage of net sales , certain categories included in our consolidated statements of comprehensive income for the periods indicated : replace_table_token_6_th 24 net sales the following table presents net sales by product line for the years ended december 31 , 2018 , 2017 and 2016 : replace_table_token_7_th replace_table_token_8_th ( a ) adjusted net sales growth is measured in constant currency and is adjusted for administrative fees that we began recording as a reduction of revenue under accounting standards codification 606 , revenue from contracts with customers ( `` asc 606 '' ) on january 1 , 2018. refer to note 16 to the consolidated financial statements and non-gaap financial measures below for further details . net sales increased 7.9 % to $ 859.6 million in 2018 and 4.3 % in 2017 to $ 796.4 million from $ 763.5 million in 2016 . the increase in 2018 was due to growth in both the orthopedic and general surgery product lines , as described below . the adoption of asc 606 reduced sales by $ 8.3 million in 2018 , as we are required to report certain costs previously recorded in selling and administrative expense and principally related to administration fees paid to group purchasing organizations , as a reduction of revenue beginning in 2018. the increase in 2017 was due to the continued growth in general surgery and the return to growth in orthopedic surgery , as described below . orthopedic surgery sales increased 4.1 % in 2018 to $ 446.7 million and 1.6 % in 2017 to $ 428.9 million from $ 422.1 million in 2016 . in 2018 , the increase was primarily due to continued growth in our sports medicine and powered instrument offerings driven by the introduction of new products .

based on this discrete event , we extended our forecast of projected taxable income from two years to three years for the portion of our deferred tax asset for which it was more likely than not that a tax benefit would be 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 . see the discussion of forward-looking statements on page 1 of part i of this report . overview stamps.com ò is the leading provider of internet-based postage solutions . our customers use our service to mail and ship a variety of mail pieces , including postcards , envelopes , flats and packages , using a wide range of united states postal service ( “ usps ” ) mail classes , including first class mail® , priority mail® , priority mail express® , media mail® , parcel select® , and others . customers using our service receive discounted postage rates compared to usps retail rates on certain mail pieces such as first class letters and domestic and international priority mail and priority mail express packages . our customers include individuals , small businesses , home offices , medium-size businesses and large enterprises , and within these segments we target both mailers and shippers . we were the first ever usps-licensed vendor to offer pc postage® in a software-only business model in 1999. pc postage business references when we refer to our “ pc postage business ” , we are referring to our pc postage service and integrations , mailing & shipping supplies store and branded insurance offering . we do not include our photostamps business when we refer to our pc postage business . when we refer to our `` core pc postage business '' , we are referring to the portion of our pc postage business targeting our small business , enterprise and high volume shipping customers acquired through our core pc postage marketing channels which include partnerships , online advertising , direct mail , direct sales , traditional media advertising and others . when we refer to our `` non-core pc postage business '' , we are referring to the portion of our pc postage business that targets a more consumer oriented customer through the online enhanced promotion marketing channel . in the online enhanced promotion marketing channel , we work with various companies to advertise our service in a variety of sites on the internet . these companies typically offer an additional promotion ( beyond what we typically offer ) directly to the customer in order to get the customer to try our service and we find that this channel attracts more consumer oriented customers . when we refer to our “ pc postage revenue ” , we are referring to our service , product and insurance revenue generated by all of our pc postage customers . when we refer to our “ core pc postage revenue ” , we are referring to the portion of the service , product and insurance revenue that was generated by customers who were acquired through our core pc postage marketing channels . when we refer to our “ non-core pc postage revenue ” , we are referring to the portion of the service , product and insurance revenue that was generated by customers who were acquired through our online enhanced promotion marketing channel . within our pc postage business , we believe it is useful to discuss our core pc postage business separately from our non-core pc postage business because each business targets and typically serves different customer segments and utilizes different marketing channels to acquire those customers . as a result of these differences , the core and non-core pc postage businesses typically experience different customer and financial metrics results and trends which are best discussed separately from each other . 24 story_separator_special_tag periods to maintain or improve profitability in that business , although we believe that there may be potential opportunities to grow the business in a better economic environment . as a result of this decision photostamps revenue decreased 17 % to $ 4.7 million in 2013 from $ 5.7 million in 2012. total photostamps sheets shipped in 2013 decreased 20 % to 255 thousand compared to 2012 and average revenue per photostamps sheet shipped increased 4 % to $ 18.50 in 2013 compared to 2012. the decrease in sheets shipped was primarily attributable to our lower marketing spend and the increase in average revenue per sheet shipped was primarily attributable to less discounting on custom negotiated pricing . 26 cost of revenue the following table shows cost of revenues and cost of revenues as a percentage of its associated revenue for the periods indicated ( in 000s except percentage ) : replace_table_token_11_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 mailing & shipping supplies store and the related costs of shipping and handling . the cost of insurance revenue principally consists of parcel insurance offering costs . cost of photostamps revenue principally consists of the face value of postage , customer service , image review costs , and printing and fulfillment costs . story_separator_special_tag the income tax benefit in 2013 was $ 9.6 million which was lower than the $ 13.9 million income tax benefit in 2012. the decrease was primarily attributable to a lower reduction of a portion of our valuation allowance in 2013 as compared to the reduction of a portion of our valuation allowance release in 2012. we evaluated the appropriateness of our deferred tax assets and related valuation allowance in accordance with accounting standards codification ( “ asc ” ) 740 based on all available positive and negative evidence . on march 6 , 2012 , we entered into a binding agreement with psi systems , inc. ( “ psi ” ) to resolve all outstanding patent litigation among the parties . because the psi litigation settlement occurred during the first quarter of 2012 , we eliminated what had previously been negative evidence at that time . the litigation settlement then became positive evidence because ( 1 ) it eliminated the hard-to-predict fluctuations in litigation expenditures , which we expected to be material in future forecasts , ( 2 ) it eliminated the potential for a material negative financial judgment against us and ( 3 ) it eliminated the possibility of an injunction against us . we believed the other positive and negative evidence we evaluated was consistent ( e.g. , no material change had occurred ) relative to our evaluation of this evidence in prior periods . based on this discrete event , we extended our forecast of projected taxable income from two years to three years for the portion of our deferred tax asset for which it was more likely than not that a tax benefit would be realized under asc 740 as of march 31 , 2012. as a result , we released a portion of our valuation allowance totaling $ 11.9 million during the first quarter of 2012. during the fourth quarter of 2012 , we re-evaluated positive and negative evidence relating to our gross deferred tax assets and valuation allowance noting that there was no additional discrete event subsequent to the first quarter of 2012. during the fourth quarter of 2012 , we updated our three year forecast of projected taxable income . based on the updated forecast and a change in the california state tax laws , we recorded another release of a portion of our valuation allowance in the fourth quarter of 2012 totaling approximately $ 2.5 million . during the fourth quarter of 2013 , we re-evaluated positive and negative evidence relating to our gross deferred tax assets and valuation allowance noting that there was no discrete event that occurred during 2013 year . during the fourth quarter of 2012 , we updated our three year forecast of projected taxable income . based on the updated forecast we recorded another release of a portion of our valuation allowance in the fourth quarter of 2013 totaling approximately $ 9.7 million . as of december 31 , 2013 , we have recorded approximately $ 40 million of net deferred tax assets on the balance sheet , and we continued to maintain a valuation allowance for the remainder of our gross deferred tax assets . during 2013 , we recorded current tax provision for corporate alternative minimum federal and state taxes of approximately $ 158,000. during 2012 , we recorded current tax provision for corporate alternative minimum federal and state taxes of approximately $ 565,000. the decrease in current tax provision in 2013 compared to 2012 is primarily due to lower taxable income in 2013 as a result of a change in california state tax laws and additional temporary differences . expectations for 2014 we expect the following trends for 2014 : · we expect fiscal 2014 revenue to be in the range between $ 125 million and $ 140 million . · we expect growth in 2014 core pc postage revenue to be up 5 % to 10 % compared to 2013. our ability to grow our core pc postage revenue is dependent on our ability to increase our small business customer acquisition spending on marketing programs resulting in the addition of new customers and so to the extent we are not able to achieve our target increase in spending , as outlined below , this would negatively impact our 2014 core pc postage revenue growth expectations . 29 · we expect non-core pc postage revenue and photostamps revenue will continue to be down in 2014 compared to 2013 as we expect to continue to minimize investments in these areas of our business . · we are targeting small business customer acquisition spending on our core pc postage marketing channels to be up 5 % - 10 % in 2014 compared to 2013. we will continue to monitor our customer metrics and the state of the economy and adjust our level of spending accordingly . · customer acquisition spending is expensed in the period incurred while the revenue and profits associated with the acquired customer is earned over the customer 's lifetime . as a result , increased customer acquisition spending in future periods could result in a reduction in operating profit and cash flow compared to past periods . · we expect research and development expenses to be higher in 2014 as compared to 2013 , primarily related to an expected increase in headcount costs to support the growth in our products and services . · we expect general and administrative expenses to be higher in 2014 as compared to 2013 , primarily related to an expected increase in costs to build and support the infrastructure necessary to grow the business . · we expect capital expenditures for the business to be approximately $ 2.5 million . as discussed above , our expectations are subject to substantial uncertainty and our results are subject to macro economic factors and other factors which could cause these trends to be worse than our current expectation or which could cause actual results to be materially different than our current expectations .

results of operations years ended december 31 , 2013 and 2012 total revenue increased 11 % to $ 127.8 million in 2013 from $ 115.7 million in 2012. pc postage revenue , which includes service revenue , product revenue and insurance revenue , was $ 123.1 million in 2013 , an increase of 12 % from $ 110.0 million in 2012. photostamps revenue decreased 17 % to $ 4.7 million in 2013 from $ 5.7 million in 2012. other revenue decreased 86 % to $ 1,000 in 2013 from $ 7,000 in 2012. the following table sets forth the breakdown of revenue for 2013 and 2012 and the resulting percent change ( revenue in $ 000s ) : replace_table_token_6_th core pc postage revenue in 2013 was $ 120.2 million , an increase of 12 % from $ 107.0 million in 2012. non-core pc postage revenue in 2013 was $ 2.9 million , a decrease of 5 % from $ 3.0 million in 2012. the following table sets forth the breakdown of pc postage revenue , which includes core pc postage revenue and non-core pc postage revenue for 2013 and 2012 and the resulting percent change ( revenue in $ 000s ) : replace_table_token_7_th the increase in core pc postage revenue was primarily attributable to an increase in paid customers . annual average paid customers increased 11 % to 466,000 in 2013 from 421,000 in 2012. the decrease in non-core pc postage revenue was primarily attributable to lower marketing spend in the online enhanced promotion channel . we define paid customers for the quarter as ones from whom we successfully collected service fees 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 .

simplifying the presentation of debt issuance costs in april 2015 , the fasb issued guidance requiring debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability . in august 2015 , the fasb issued guidance clarifying that debt issuance costs related to line-of-credit and other revolving debt arrangements may be deferred and presented as an asset . the guidance is effective retrospectively for annual periods beginning after december 15 , 2015 and interim periods within those annual periods . this guidance will require the company to reclassify its debt issuance costs associated with its debt other than line-of-credit and other revolving debt arrangements on its consolidated balance sheets from “ prepaid expenses and other assets ” to “ debt ” on a retrospective basis . the company is in the process of assessing the potential impacts of adopting this guidance on its financial condition . the new guidance will not affect the company 's results of operations or cash flows . customer 's accounting for fees paid in a cloud computing arrangement in april 2015 , the fasb issued guidance for customers about whether a cloud computing arrangement includes a software license . if a cloud computing arrangement includes a software license , then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses . if a cloud computing arrangement does not include a software license , the customer should account for the arrangement as a service contract . this new guidance is effective for annual periods , including interim periods within those annual periods , beginning after december 15 , 2015. the company is in the process of determining the method of adoption and assessing the overall impacts of adopting this guidance on its financial position , results of operations and cash flows . 90 hertz global holdings , inc. and subsidiaries notes to consolidated financial statements ( continued ) simplifying the subsequent measurement of inventory in july 2015 , the fasb issued guidance that requires inventory to be measured at the lower of cost and net realizable value , excluding inventory measured using the last-in , first-out method or the retail inventory method . net realizable value is defined as the estimated selling prices in the ordinary course of business , less reasonably predictable costs of completion , disposal , and transportation . current guidance requires inventory to be measured at the lower of story_separator_special_tag the assumed volatility for our stock is based on our historical stock price data . the assumed dividend yield is zero . the risk-free interest rate is the implied zero-coupon yield for u.s. treasury securities having a maturity approximately equal to the expected term of the options , as of the grant dates . the non-cash stock-based compensation expense associated with the hertz global holdings , inc. stock incentive plan ( “ stock incentive plan ” ) the hertz global holdings , inc. director stock incentive plan ( “ director plan ” ) and the hertz global holdings , inc. 2008 omnibus incentive plan ( “ omnibus plan ” ) are pushed down from hertz holdings and recorded on the books at the hertz level . see note 8 , `` stock-based compensation , '' to the notes to our consolidated financial statements included in this annual report under the caption item 8 , `` financial statements and supplementary data. ” acquisition accounting we record acquisitions resulting in the consolidation of an enterprise using the acquisition method of accounting . under this method , the acquiring company records the assets acquired , including intangible assets that can be identified and named , and liabilities assumed based on their estimated fair values at the date of acquisition . the purchase price in excess of the fair value of the assets acquired and liabilities assumed is recorded as goodwill . if the assets acquired , net of liabilities assumed , are greater than the purchase price paid then a bargain purchase has occurred and we will recognize the gain immediately in earnings . among other sources of relevant information , we may use independent appraisals and actuarial or other valuations to assist in determining the estimated fair values of the assets and liabilities . various assumptions are used in the determination of these estimated fair values including discount rates , market and volume growth rates , expected royalty rates , ebitda margins and other prospective financial information . transaction costs associated with acquisitions are expensed as incurred . recent accounting pronouncements for a discussion of recent accounting pronouncements , see note 2 , `` story_separator_special_tag style= '' line-height:120 % ; text-align : justify ; font-size:10pt ; '' > we do not hedge our operating results against currency movement as they are primarily translational in nature . using foreign currency forward rates as of december 2015 , we expect revenue growth to be negatively impacted by approximately 1 % over a 12-month period . additionally , each 1 % point change in foreign currency movements is estimated to impact our adjusted pre-tax income by an estimated $ 2 million over a 12-month period . fuel risks we purchase unleaded gasoline and diesel fuel at prevailing market rates . we are subject to price exposure related to the fluctuations in the price of fuel . we anticipate that fuel risk will remain a market risk for the foreseeable future . we have determined that a 10 % hypothetical change in the price of fuel will not have a material impact on our earnings . inflation the increased cost of vehicles is the primary inflationary factor affecting us . many of our other operating expenses are also expected to increase with inflation , including health care costs and gasoline . management does not expect that the effect of inflation on our overall operating costs will be greater for us than for story_separator_special_tag simplifying the presentation of debt issuance costs in april 2015 , the fasb issued guidance requiring debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability . in august 2015 , the fasb issued guidance clarifying that debt issuance costs related to line-of-credit and other revolving debt arrangements may be deferred and presented as an asset . the guidance is effective retrospectively for annual periods beginning after december 15 , 2015 and interim periods within those annual periods . this guidance will require the company to reclassify its debt issuance costs associated with its debt other than line-of-credit and other revolving debt arrangements on its consolidated balance sheets from “ prepaid expenses and other assets ” to “ debt ” on a retrospective basis . the company is in the process of assessing the potential impacts of adopting this guidance on its financial condition . the new guidance will not affect the company 's results of operations or cash flows . customer 's accounting for fees paid in a cloud computing arrangement in april 2015 , the fasb issued guidance for customers about whether a cloud computing arrangement includes a software license . if a cloud computing arrangement includes a software license , then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses . if a cloud computing arrangement does not include a software license , the customer should account for the arrangement as a service contract . this new guidance is effective for annual periods , including interim periods within those annual periods , beginning after december 15 , 2015. the company is in the process of determining the method of adoption and assessing the overall impacts of adopting this guidance on its financial position , results of operations and cash flows . 90 hertz global holdings , inc. and subsidiaries notes to consolidated financial statements ( continued ) simplifying the subsequent measurement of inventory in july 2015 , the fasb issued guidance that requires inventory to be measured at the lower of cost and net realizable value , excluding inventory measured using the last-in , first-out method or the retail inventory method . net realizable value is defined as the estimated selling prices in the ordinary course of business , less reasonably predictable costs of completion , disposal , and transportation . current guidance requires inventory to be measured at the lower of story_separator_special_tag the assumed volatility for our stock is based on our historical stock price data . the assumed dividend yield is zero . the risk-free interest rate is the implied zero-coupon yield for u.s. treasury securities having a maturity approximately equal to the expected term of the options , as of the grant dates . the non-cash stock-based compensation expense associated with the hertz global holdings , inc. stock incentive plan ( “ stock incentive plan ” ) the hertz global holdings , inc. director stock incentive plan ( “ director plan ” ) and the hertz global holdings , inc. 2008 omnibus incentive plan ( “ omnibus plan ” ) are pushed down from hertz holdings and recorded on the books at the hertz level . see note 8 , `` stock-based compensation , '' to the notes to our consolidated financial statements included in this annual report under the caption item 8 , `` financial statements and supplementary data. ” acquisition accounting we record acquisitions resulting in the consolidation of an enterprise using the acquisition method of accounting . under this method , the acquiring company records the assets acquired , including intangible assets that can be identified and named , and liabilities assumed based on their estimated fair values at the date of acquisition . the purchase price in excess of the fair value of the assets acquired and liabilities assumed is recorded as goodwill . if the assets acquired , net of liabilities assumed , are greater than the purchase price paid then a bargain purchase has occurred and we will recognize the gain immediately in earnings . among other sources of relevant information , we may use independent appraisals and actuarial or other valuations to assist in determining the estimated fair values of the assets and liabilities . various assumptions are used in the determination of these estimated fair values including discount rates , market and volume growth rates , expected royalty rates , ebitda margins and other prospective financial information . transaction costs associated with acquisitions are expensed as incurred . recent accounting pronouncements for a discussion of recent accounting pronouncements , see note 2 , `` story_separator_special_tag style= '' line-height:120 % ; text-align : justify ; font-size:10pt ; '' > we do not hedge our operating results against currency movement as they are primarily translational in nature . using foreign currency forward rates as of december 2015 , we expect revenue growth to be negatively impacted by approximately 1 % over a 12-month period . additionally , each 1 % point change in foreign currency movements is estimated to impact our adjusted pre-tax income by an estimated $ 2 million over a 12-month period . fuel risks we purchase unleaded gasoline and diesel fuel at prevailing market rates . we are subject to price exposure related to the fluctuations in the price of fuel . we anticipate that fuel risk will remain a market risk for the foreseeable future . we have determined that a 10 % hypothetical change in the price of fuel will not have a material impact on our earnings . inflation the increased cost of vehicles is the primary inflationary factor affecting us . many of our other operating expenses are also expected to increase with inflation , including health care costs and gasoline . management does not expect that the effect of inflation on our overall operating costs will be greater for us than for

summary of critical and significant accounting policies , '' — `` recent accounting pronouncements , '' to the notes to our consolidated financial statements included in this annual report under the caption item 8 , `` financial statements and supplementary data. ” item 7a . quantitative and qualitative disclosures about market risk risk management for a discussion of additional risks arising from our operations , including vehicle liability , general liability and property damage insurable risks , see “ item 1—business—risk management ” in this annual report . market risks we are exposed to a variety of market risks , including the effects of changes in interest rates ( including credit spreads ) , foreign currency exchange rates and fluctuations in fuel prices . we manage our exposure to these market risks through our regular operating and financing activities and , when deemed appropriate , through the use of derivative financial instruments . derivative financial instruments are viewed as risk management tools and have not been used for speculative or trading purposes . in addition , derivative financial instruments are entered into with a diversified group of major financial institutions in order to manage our exposure to counterparty nonperformance on such instruments . interest rate risk we have a significant amount of debt with a mix of fixed and variable rates of interest . floating rate debt carries interest based generally on libor , euro inter-bank offered rate ( “ euribor ” ) or their equivalents for local currencies or bank conduit commercial paper rates plus an applicable margin . increases in interest rates could therefore significantly increase the associated interest payments that we are required to make on this debt . see note 6 , `` debt , '' to the notes to our consolidated financial statements included in this annual report under the caption item 8 , `` financial statements and supplementary data.

acquisitions fiscal 2018 acquisitions procoplast s.a. on july 27 , 2017 , we acquired 100 % of the stock of procoplast for $ 22.2 million in cash , net of cash acquired . the business , located near the belgian-german border , is an story_separator_special_tag overview we are a global manufacturer of component and subsystem devices with manufacturing , design and testing facilities in belgium , canada , china , egypt , germany , india , italy , lebanon , malta , mexico , singapore , switzerland , the united kingdom and the united states . our primary manufacturing facilities are located in shanghai , china ; cairo , egypt ; mriehel , malta ; monterrey and fresnillo , mexico ; and nelson , british columbia , canada . we design , manufacture and market devices employing electrical , radio remote control , electronic , wireless , sensing and optical technologies . our business is managed on a segment basis , with those segments being automotive , interface , power products and other . for more information regarding the business and products of these segments , see “ item 1. business. ” our components are found in the primary end-markets of the aerospace , appliance , automotive , construction , consumer and industrial equipment , communications ( including information processing and storage , networking equipment and wireless and terrestrial voice/data systems ) , medical , rail and other transportation industries . recent transactions on july 27 , 2017 , we acquired 100 % of the stock of procoplast for $ 22.2 million in cash , net of cash acquired . the business , located near the belgian-german border , is an independent manufacturer of automotive assemblies . the accounts and transactions of procoplast have been included in the automotive segment in the consolidated financial statements from the effective date of the acquisition . on october 3 , 2017 , methode acquired 100 % of the outstanding common shares of pacific insight in a cash transaction for $ 108.7 million , net of cash acquired . pacific insight , headquartered in vancouver , british columbia , canada , is a global solutions provider offering design , development , manufacturing and delivery of lighting and electronic products and full-service solutions to the automotive and commercial vehicle markets . its technology in led-based ambient and direct lighting will expand our presence within the automotive interior , as well as augment our efforts in overhead console and other areas . the accounts and transactions of pacific insight have been included in the automotive segment in the consolidated financial statements from the effective date of the acquisition . for more information regarding the acquisitions of procoplast and pacific insight , see “ note 2. acquisitions. ” plan to repurchase common stock in september 2015 , the board of directors authorized the repurchase of up to $ 100 million of the company 's outstanding common stock through september 1 , 2017. the company purchased no outstanding common stock during the fiscal year ended april 28 , 2018 , which leaves the total repurchased under the plan at 2,277,466 shares of outstanding common stock for $ 71.9 million . the plan expired on september 1 , 2017. hetronic germany-gmbh matters for several years , hetronic germany-gmbh and hydronic-steuersysteme-gmbh ( the “ fuchs companies ” ) served as our distributors for germany , austria and other central and eastern european countries pursuant to their respective intellectual property licenses and distribution and assembly agreements . we became aware that the fuchs companies and their managing director , albert fuchs , had materially violated those agreements . as a result , we terminated all of our agreements with the fuchs companies . on june 20 , 2014 , we filed a lawsuit against the fuchs companies in the federal district court for the western district of oklahoma alleging material breaches of the distribution and assembly agreements and seeking damages , as well as various forms of injunctive relief . the defendants have filed counterclaims alleging breach of contract , interference with business relations and business slander , and an affiliated company has filed a suit in front of the european union intellectual property office seeking to invalidate the company 's nova trademark in the eu . on april 2 , 2015 , we amended our complaint against the fuchs companies to add additional unfair competition and lanham act claims and to add additional affiliated parties . as of april 28 , 2018 , discovery has been closed , and the parties are briefing summary judgment . we incurred legal fees of $ 8.1 million , $ 11.0 million and $ 9.9 million in fiscal 2018 , fiscal 2017 and fiscal 2016 , respectively , related to the lawsuits . these amounts are included in the selling and administrative expenses in the interface segment . 13 results of operations results of operations for the fiscal year ended april 28 , 2018 , as compared to the fiscal year ended april 29 , 2017 . consolidated results below is a table summarizing results for the fiscal years ended : replace_table_token_4_th net sales . consolidated net sales increased by $ 91.8 million , or 11.2 % , to $ 908.3 million for the fiscal year ended april 28 , 2018 , from $ 816.5 million for the fiscal year ended april 29 , 2017 . the automotive segment net sales increased $ 96.5 million , or 15.3 % , to $ 728.7 million for the fiscal year ended april 28 , 2018 , from $ 632.2 million for the fiscal year ended april 29 , 2017 . automotive segment net sales for fiscal 2018 included $ 80.8 million from our newly acquired businesses , pacific insight and procoplast . the interface segment net sales decreased $ 11.6 million , or 9.1 % , to $ 115.8 million for the fiscal year ended april 28 , 2018 , compared to $ 127.4 million for the fiscal year ended april 29 , 2017 . story_separator_special_tag other income , net increased $ 1.7 million to $ 6.4 million for the fiscal year ended april 28 , 2018 , compared to $ 4.7 million for the fiscal year ended april 29 , 2017 . during fiscal 2018 , the company recorded a gain of $ 1.6 million related to the sale of exclusive rights for a licensing agreement . fiscal 2018 and fiscal 2017 include $ 7.3 million and $ 4.5 million , respectively , for an international government grant for maintaining certain employment levels during those periods . all other amounts for both fiscal 2018 and fiscal 2017 relate to currency rate fluctuations . the functional currencies of our foreign operations are the british pound , canadian dollar , chinese yuan , euro , indian rupee , mexican peso , singapore dollar and swiss franc . some foreign operations have transactions denominated in currencies other than their functional currencies , primarily sales in u.s. dollars and euros , creating exchange rate sensitivities . income tax expense . income tax expense increased $ 43.6 million , or 189.6 % , to $ 66.6 million for the fiscal year ended april 28 , 2018 , compared to $ 23.0 million for the fiscal year ended april 29 , 2017 . the company 's effective tax rate increased to 53.8 % for the fiscal year ended april 28 , 2018 , compared to 19.9 % for the fiscal year ended april 29 , 2017 . the change in the effective tax rate was primarily due to the enactment of u.s. tax reform , partially offset by foreign investment tax credits . of the total income tax expense of $ 66.6 million recorded during fiscal 2018 , $ 53.7 million relates to u.s. tax reform . this can be further broken down into a provisional estimate of $ 48.5 million for a one-time repatriation tax and $ 5.2 million for the re-measurement of u.s. deferred tax assets in the consolidated financial statement . the results for fiscal 2018 include a tax benefit of $ 9.8 million for foreign investment tax credits , compared to $ 4.0 million in fiscal 2017. in addition , there were favorable tax impacts primarily related to changes in foreign tax rates in fiscal 2018. for further details , regarding the impacts of u.s. tax reform during fiscal 2018 , refer to note 5 , “ income taxes. ” 15 net income . net income decreased $ 35.7 million , or 38.4 % , to $ 57.2 million for the fiscal year ended april 28 , 2018 , compared to $ 92.9 million for the fiscal year ended april 29 , 2017 . net income for fiscal 2018 was unfavorably impacted by increased tax expense due to the enactment of u.s. tax reform , higher intangible asset amortization , customer pricing reductions , acquisition fees and purchase accounting adjustments , increased research and development initiatives for the medical devices business , higher wages and higher interest expenses . these were partially offset by lower stock award amortization related to our long-term incentive program , increased government grants , increased sales volumes from our new acquisitions and the gain on the sale of a licensing agreement . net income for fiscal 2017 was favorably impacted due to adjustments for commodity pricing and the reversal of accruals related to resolved customer commercial issues . operating segments automotive segment results below is a table summarizing results for the fiscal years ended : replace_table_token_5_th net sales . automotive segment net sales increased $ 96.5 million , or 15.3 % , to $ 728.7 million for the fiscal year ended april 28 , 2018 , from $ 632.2 million for the fiscal year ended april 29 , 2017 . net sales increased in north america by $ 48.0 million , or 13.0 % , to $ 417.4 million for the fiscal year ended april 28 , 2018 , compared to $ 369.4 million for the fiscal year ended april 29 , 2017 . north american automotive sales included $ 54.4 million from our newly acquired business , pacific insight , which was acquired in the second quarter of fiscal 2018. other north american sales increased for our user interface assemblies due to new program launches in fiscal 2018. sales declined for our integrated center stack products primarily due to pricing reductions , partially offset by higher sales volumes . sales for our transmission lead-frame assemblies decreased due to a combination of pricing reductions and lower sales volumes in fiscal 2018 , compared to fiscal 2017. net sales increased in europe by $ 61.4 million , or 40.4 % , to $ 213.3 million for the fiscal year ended april 28 , 2018 , compared to $ 151.9 million for the fiscal year ended april 29 , 2017 . the increase in the european sales includes $ 26.4 million from our newly acquired business , procoplast , which was acquired in the first quarter of fiscal 2018. other european sales increased primarily due to increased customer funded tooling and design fees , favorable currency rate fluctuations and higher sales volumes of hidden switches and sensor products . net sales in asia decreased $ 12.9 million , or 11.6 % , to $ 98.0 million for the fiscal year ended april 28 , 2018 , compared to $ 110.9 million for the fiscal year ended april 29 , 2017 , primarily due to lower sales of our transmission lead-frame assemblies due to a combination of pricing reductions and lower sales volumes . we also experienced lower sales volumes for our steering angle sensor products , as the products approach end of production . translation of foreign operations ' net sales increased reported net sales by $ 13.1 million , or 1.8 % , for the fiscal year ended april 28 , 2018 , compared to the average currency rates for the fiscal year ended april 29 , 2017 , primarily due to the strengthening of the euro and chinese yuan as compared to the u.s. dollar . cost of products sold .

other segment results below is a table summarizing results for the fiscal years ended : replace_table_token_8_th net sales . the businesses in this segment were medical devices and inverters and battery systems . the inverters and battery systems business was shuttered at the end of fiscal 2017 due to adverse business conditions . both businesses had minimal net sales in the fiscal years ended april 28 , 2018 and april 29 , 2017 , respectively , due to newly launched products . cost of products sold . other segment cost of products sold was $ 3.8 million for the fiscal year ended april 28 , 2018 , compared to $ 6.5 million for the fiscal year ended april 29 , 2017 . the decrease primarily relates to the shuttered business that was closed at the end of fiscal 2017. the decrease was partially offset by the vertical manufacturing integration of some key components in medical device products and research efforts to expand the product offerings . gross profit . the other segment gross profit was a loss of $ 3.5 million and $ 6.2 million for the fiscal years ended april 28 , 2018 and april 29 , 2017 , respectively . the decreased loss primarily relates to the shuttered business , partially offset with increased research and development initiatives for medical devices . selling and administrative expenses . selling and administrative expenses increased $ 1.7 million , or 27.4 % , to $ 7.9 million for the fiscal year ended april 28 , 2018 , compared to $ 6.2 million for the fiscal year ended april 29 , 2017 .

another major benefit to the industry was the blender 's credit , which allowed gasoline distributors who blended ethanol with gasoline to receive a federal excise tax credit of $ 0.45 per gallon of pure ethanol used , or $ 0.045 per gallon for e10 and $ 0.3825 per gallon for e85 . the blender 's credit expired on december 31 , 2011 ; however , even without the blender 's credit , ethanol remains at a discount to gasoline . on july 21 , 2010 , president obama signed the dodd-frank wall street reform and consumer protection act , or the reform act , which , among other things , aims to improve transparency and accountability in derivative markets . while the reform act increases the regulatory authority of the commodity futures trading commission , or cftc , regarding over-the-counter derivatives , there is uncertainty on several issues related to market clearing , definitions of market participants , reporting , and capital requirements . while many details remain to be addressed in cftc rulemaking proceedings , at this time we do not anticipate any material impact to our risk management strategy . critical accounting policies and estimates this disclosure is based upon our consolidated financial statements , which have been prepared in accordance with accounting principles generally accepted in the united states . the preparation of these financial statements requires that we make estimates and assumptions that affect the reported amounts of assets , liabilities , revenues and expenses , and related disclosure of contingent assets and liabilities . we base our estimates on historical experience and other assumptions that we believe are proper and reasonable under the circumstances . we continually evaluate the appropriateness of estimates and assumptions used in the preparation of our consolidated financial statements . actual results could differ materially from those estimates . key accounting policies , including but not limited to those relating to revenue recognition , property and equipment , impairment of long-lived assets and goodwill , derivative financial instruments , and accounting for income taxes , are impacted significantly by judgments , assumptions and estimates used in the preparation of the consolidated financial statements . 34 revenue recognition we recognize revenue when all of the following criteria are satisfied : persuasive evidence of an arrangement exists ; risk of loss and title transfer to the customer ; the price is fixed and determinable ; and collectability is reasonably assured . for sales of ethanol , corn oil and distillers grains , we recognize revenue when title to the product and risk of loss transfer to an external customer . we routinely enter into fixed-price , physical-delivery ethanol sales agreements . in certain instances , we intend to settle the transaction by open market purchases of ethanol rather than by delivery from our own production . these transactions are reported net as a component of revenues . revenue from sales of agricultural commodities , fertilizers and other similar products is recognized when title to the product and risk of loss transfer to the customer , which is dependent on the agreed upon sales terms with the customer . these sales terms provide for passage of title either at the time shipment is made or at the time the commodity has been delivered to its destination and final weights , grades and settlement prices have been agreed upon with the customer . shipping and handling costs are recorded on a gross basis in the statements of operations with amounts billed included in revenues and also as a component of cost of goods sold . revenue from grain storage is recognized as services are rendered . revenue related to grain merchandising is recorded on a gross basis . revenue related to our marketing operations for third parties is recorded on a gross basis in the consolidated financial statements , as we take title to the product and assume risk of loss . unearned revenue is reflected on our consolidated balance sheet for goods in transit for which we have received payment and title has not been transferred to the external customer . revenue from ethanol transload and splash blending services is recognized as these services are rendered . intercompany revenues are eliminated on a consolidated basis for reporting purposes . property and equipment property and equipment are stated at cost less accumulated depreciation . depreciation on our ethanol production facilities , grain storage facilities , railroad track , computer equipment and software , office furniture and equipment , vehicles , and other fixed assets has been provided on the straight-line method over the estimated useful lives of the assets , which currently range from 3 to 40 years . land improvements are capitalized and depreciated . expenditures for property betterments and renewals are capitalized . costs of repairs and maintenance are charged to expense as incurred . we periodically evaluate whether events and circumstances have occurred that may warrant revision of the estimated useful life of fixed assets , which is accounted for prospectively . impairment of long-lived assets and goodwill our long-lived assets consist of property and equipment . we review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable . we measure recoverability of assets to be held and used by comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset . if the carrying amount of an asset exceeds its estimated future cash flows , we record an impairment charge in the amount by which the carrying amount of the asset exceeds the fair value of the asset . no impairment charges have been recorded during the periods presented . story_separator_special_tag our goodwill consists of amounts relating to our acquisitions of green plains ord , green plains central city , green plains holdings ii , green plains otter tail and blendstar . we review goodwill at an individual plant or subsidiary level for impairment at least annually , as of october 1 , or more frequently whenever events or changes in circumstances indicate that impairment may have occurred . we perform a two-step impairment test to evaluate goodwill . under the first step , we compare the estimated fair value of the reporting unit with its carrying value ( including goodwill ) . if the estimated fair value of the reporting unit is less than its carrying value , we complete a second step to determine the amount of the goodwill impairment that we should record . in the second step , we determine an implied fair value of the reporting unit 's goodwill by 35 allocating the reporting unit 's fair value to all of its assets and liabilities other than goodwill . we compare the resulting implied fair value of the goodwill to the carrying amount and record an impairment charge for the difference . as of our most recent annual review of goodwill , we have determined that the estimated fair value of each reporting unit substantially exceeds each of their respective carrying values . the reviews of long-lived assets and goodwill require making estimates regarding amount and timing of projected cash flows to be generated by an asset or asset group over an extended period of time . management judgment regarding the existence of circumstances that indicate impairment is based on numerous potential factors including , but not limited to , a decline in our future projected cash flows , a decision to suspend operations at a plant for an extended period of time , a sustained decline in our market capitalization , a sustained decline in market prices for similar assets or businesses , or a significant adverse change in legal or regulatory factors or the business climate . significant management judgment is required in determining the fair value of our long-lived assets and goodwill to measure impairment , including projections of future cash flows . fair value is determined through various valuation techniques including discounted cash flow models , market values and third-party independent appraisals , as considered necessary . changes in estimates of fair value could result in a write-down of the asset in a future period . given the current economic and regulatory environment and uncertainties regarding the impact on our business , there are no assurances that our estimates and assumptions will prove to be an accurate prediction of the future . derivative financial instruments we use various financial instruments , including derivatives , to minimize the effects of the volatility of commodity price changes primarily related to corn , natural gas and ethanol . we monitor and manage this exposure as part of our overall risk management policy . as such , we seek to reduce the potentially adverse effects that the volatility of these markets may have on our operating results . we may take hedging positions in these commodities as one way to mitigate risk . we have put in place commodity price risk management strategies that seek to reduce significant , unanticipated earnings fluctuations that may arise from volatility in commodity prices , principally through the use of derivative instruments . while we attempt to link our hedging activities to our purchase and sales activities , there are situations where these hedging activities can themselves result in losses . by using derivatives to hedge exposures to changes in commodity prices , we have exposures on these derivatives to credit and market risk . we are exposed to credit risk that the counterparty might fail to fulfill its performance obligations under the terms of the derivative contract . we minimize our credit risk by entering into transactions with high quality counterparties , limiting the amount of financial exposure we have with each counterparty and monitoring the financial condition of our counterparties . market risk is the risk that the value of the financial instrument might be adversely affected by a change in commodity prices or interest rates . we manage market risk by incorporating monitoring parameters within our risk management strategy that limit the types of derivative instruments and derivative strategies we use , and the degree of market risk that may be undertaken by the use of derivative instruments . we evaluate our contracts to determine whether the contracts are derivatives as certain derivative contracts that involve physical delivery may qualify for the normal purchases or normal sales exemption as they will be expected to be used or sold over a reasonable period in the normal course of business . any derivative contracts that do not meet the normal purchase or sales criteria are recorded at fair value with the unrealized gains and losses from the change in fair value recorded in operating income unless the contracts qualify for hedge accounting treatment . certain qualifying derivatives within our ethanol production segment are designed as cash flow hedges . prior to entering into cash flow hedges , we evaluate the derivative instrument to ascertain its effectiveness . for cash flow hedges , any ineffectiveness is recognized in current period results , while other unrealized gains and losses are reflected in accumulated other comprehensive income until gains and losses from the underlying hedged transaction are realized . in the event that it becomes probable that a forecasted transaction will not occur , we would discontinue cash flow hedge treatment , which would affect earnings . these derivative financial instruments are recognized in other current assets or liabilities at fair value . we use exchange-traded futures and options contracts to minimize the effects of changes in the prices of agricultural commodities on our grain inventories and forward purchase and sales contracts within our agribusiness segment . exchange-traded futures and options contracts

segment results our operations fall within the following four segments : ( 1 ) production of ethanol and related distillers grains , collectively referred to as ethanol production , ( 2 ) corn oil production , ( 3 ) grain warehousing and marketing , as well as sales and related services of agronomy and petroleum products , collectively referred to as agribusiness , and ( 4 ) marketing and distribution of company-produced and third-party ethanol , distillers grains and corn oil , collectively referred to as marketing and distribution . selling , general and administrative expenses , primarily consisting of compensation of corporate employees , professional fees and overhead costs not directly related to a specific operating segment , are reflected in the table below as corporate activities . when the company 's management evaluates segment performance , they review the information provided below , as well as segment earnings before interest , income taxes , noncontrolling interest , depreciation and amortization . during the normal course of business , our operating segments enter into transactions with one another . for example , our ethanol production and corn oil production segments sell ethanol , distillers grains and corn oil to our marketing and distribution segment and our agribusiness segment sells grain to our ethanol production segment . these intersegment activities are recorded by each segment at prices approximating market and treated as if they are third-party transactions . consequently , these transactions impact segment performance . however , intersegment revenues and corresponding costs are eliminated in consolidation , and do not impact our consolidated results .

in september 2013 the company entered into a share purchase agreement and a strategic alliance with yec , pursuant to which yec has agreed to distribute the company 's products , in addition to providing sales , marketing story_separator_special_tag the following discussion and analysis should be read in conjunction with “ part i. item 6. selected financial data ” and our consolidated financial statements and the related notes included elsewhere in this annual report . this discussion contains forward-looking statements that are based on our management 's current expectations , estimates and projections for our business , which are subject to a number of risks and uncertainties . our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors , including those set forth under “ special note regarding forward-looking statements and “ part i. item 1a . risk factors. ” overview we are an innovative medical device company that is designing , developing and commercializing exoskeletons that allow individuals with mobility impairments or other medical conditions the ability to stand and walk once again . we have developed and are continuing to commercialize rewalk , an exoskeleton that uses our patented tilt-sensor technology and an onboard computer and motion sensors to drive motorized legs that power movement . additionally , we are developing and intend to commercialize a lightweight soft suit exoskeleton , designed to support mobility for individuals suffering from other lower limb disabilities such as stroke , multiple sclerosis , cerebral palsy , parkinson 's disease and elderly assistance . we have in the past generated and in the future expect to generate revenues from a combination of third-party payors , self-payors , including private and government employers , and institutions . while a broad uniform policy of coverage and reimbursement by third-party commercial payors currently does not exist for electronic exoskeleton technologies such as rewalk , we are pursuing various paths of reimbursement and support fundraising efforts by institutions and clinics . in december 2015 , the u.s. department of veterans affairs ( the “ va ” ) issued a national policy for the evaluation , training and procurement of rewalk personal exoskeleton systems for all qualifying veterans across the united states . the va policy is the first national coverage policy in the united states for qualifying individuals who have suffered spinal cord injury . in june 2018 , the va updated its national policy to provide expanded access to rewalk exoskeletons for veterans in private rehabilitation clinics through the veterans choice program . under the va 's revised policy , the exoskeleton evaluation process will have all veterans flow through one of 24 designated spinal cord injury va centers ( “ sci/d ” ) . once a veteran is determined to be qualified for training and procurement of his/her own exoskeleton system , the individual may be allowed to pursue training on exoskeleton use , such as use of the rewalk ( i ) at the applicable sci/d hub center ; ( ii ) on a case-by-case basis , at a qualified va hospital designated by the va 's “ hub & spoke ” program ; or ( iii ) on a case-by-case basis , at a qualified private rehabilitation center via the va 's veteran 's choice program , through which veterans can receive care from a community provider paid for by the va. additionally , to date several private insurers in the united states and europe have provided reimbursement for rewalk in certain cases , and in september 2017 , each of german insurer barmer gek ( “ barmer ” ) and national social accident insurance provider deutsche gesetzliche unfallversicherung ( “ dguv ” ) , signed a confirmation and letter of agreement , respectively , regarding the provision of rewalk systems for all qualifying beneficiaries . in february 2018 , the head office of german statutory health insurance , or shi , spitzenverband ( “ gkv ” ) confirmed their decision to list the rewalk personal 6.0 exoskeleton system in the german medical device directory . this decision means that rewalk will be listed among all medical devices for compensation , which shi providers can procure for any approved beneficiary on a case-by-case basis . we have incurred net losses and negative cash flow from operations since inception and anticipate this to continue in the near term . in 2019 , we will continue to evaluate spending to reduce where possible while continuing to focus resources on regulatory activities to obtain clearance for the restore device in the united states and europe , activities to commercialize the restore device for stroke patients by the third quarter of 2019 and our rewalk personal device , achieving additional commercial reimbursement coverage decisions for our rewalk personal device , and activities related to our fda 522 postmarket study . 62 components of our statements of operations revenues we currently rely , and in the future will rely , on sales and rentals of our rewalk systems and related service contracts and extended warranties for our revenue . our revenue is generated from a combination of third-party payors , institutions and self-payors , including private and government employers . payments for our products by third party payors have been made primarily through case-by-case determinations . third-party payors include , without limitation , private insurance plans and managed care programs , government programs including the us department of veterans affairs , and worker 's compensation payments . we expect that third-party payors will be an increasingly important source of revenue in the future . in december 2015 , the va issued a national policy for the evaluation , training and procurement of rewalk personal exoskeleton systems for all qualifying veterans across the united states . the va policy is the first national coverage policy in the united states for qualifying individuals who have suffered spinal cord injury . story_separator_special_tag on june 9 , 2017 , $ 3.0 million of the outstanding principal amount was extended by an additional three years with the same interest rate and became subject to repayment in accordance with , and subject to the terms of the kreos convertible note . on november 20 , 2018 , the company agreed to repay $ 3.6 million to kreos in satisfaction of all outstanding indebtedness under the kreos convertible note and other related payments , including prepayment costs and end of loan payments and kreos agreed to terminate the kreos convertible note . the company repaid kreos the $ 3.6 million by issuing to kreos 4,800,000 units and 7,200,000 pre-funded units at the applicable public offering prices for an aggregate price of $ 3.6 million ( including the aggregate exercise price for the ordinary shares to be received upon exercise of the pre-funded warrants , assuming kreos exercises all of the pre-funded warrants it purchased as part of the company 's public offering . the company and kreos also agreed to revise the principal and the repayment schedule under the kreos loan agreement . additionally , kreos and the company entered into the kreos warrant amendment , which amended the exercise price of the warrant to purchase 167,012 ordinary shares currently held by kreos from $ 9.64 to $ 0.30. for further discussion of the loan agreement with kreos , see “ -liquidity and capital resources ” below and also note 6 to our audited consolidated financial statements below . taxes on income as of december 31 , 2018 , we had not yet generated taxable income in israel . as of that date , our net operating loss carry forwards for israeli tax purposes amounted to approximately $ 121.9 million and our net operating loss carry forwards for u.s. tax purposes amounted to approximately $ 140 thousands after we utilize our net operating loss carry forwards , we are eligible for certain tax benefits in israel under the law for the encouragement of capital investments , 1959. our benefit period currently ends ten years after the year in which we first have taxable income in israel provided that the benefit period will not extend beyond 2024. our taxable income generated outside of israel will be subject to the regular corporate tax rate in the applicable jurisdictions . as a result , our effective tax rate will be a function of the relative proportion of our taxable income that is generated in those locations compared to our overall net income . grants and other funding bird foundation and ao & p in july 2009 , we entered into a grant agreement with the bird foundation and allied orthotics & prosthetics inc. , or the ao & p . ao & p was the distributor of our products at the time . we received $ 500 thousand and ao & p received $ 60 thousand . the agreement with the bird foundation required us to pay a royalty at a rate of 5 % on sales of rewalk systems and related services . the repayment requirement is equal to the amount of the grant multiplied by an increasing contractual percentage in an amount up to 150 % . 64 under the agreement ao & p is responsible for repayment of its grant . however , pursuant to the agreement , we are required to make any payments on which ao & p defaults . as of december 31 , 2015 and through december 31 , 2018 , there was no contingent liability to the bird foundation . in 2014 , we recorded an expense of $ 466 thousand as a settlement for the prepayment , at a discount , of amounts due under the agreement . israel innovation authority ( formerly known as office of the chief scientist ) from our inception through december 31 , 2018 we have received a total of $ 1.97 million in funding from the iia , $ 1.57 million of which are royalty-bearing grants , while $ 400 thousand were received in consideration for an investment in our preferred shares . out of the royalty-bearing grants received , we have paid royalties to the iia in the total amount of $ 50 thousand . we may apply to receive additional grants to support our research and development activities in 2017. the agreements with iia require us to pay royalties at a rate of 3 % -3.5 % on sales of rewalk systems and related services up to the total amount of funding received , linked to the dollar and bearing interest at an annual rate of libor applicable to dollar deposits . if we transfer iia-supported technology or know-how outside of israel , we will be liable for additional payments to iia depending upon the value of the transferred technology or know-how , the amount of iia support , the time of completion of the iia-supported research project and other factors . as of december 31 , 2018 , the aggregate contingent liability to the iia was $ 1.5 million . for more information , see “ part i , item 1a . risk factors-we have received israeli government grants for certain of our research and development activities and we may receive additional grants in the future . the terms of those grants restrict our ability to manufacture products or transfer technologies outside of israel ... ” story_separator_special_tag is driven by lower personnel and personnel-related costs and reduced consulting expenses as result of our cost reduction efforts . general and administrative expenses our general and administrative expenses for 2017 and 2016 were as follows ( in thousands ) : replace_table_token_14_th general and administrative expenses decreased $ 0.5 million , or 6 % , during 2017 compared to 2016. the decrease in expenses is primarily attributable to lower professional expenses and personnel-related costs . financial expenses , net our financial expenses , net for 2017 and 2016 were as follows ( in thousands ) : replace_table_token_15_th financial expenses , net , increased $ 0.2 million , or 11 % during 2017 compared to 2016.

results of operations year ended december 31 , 2018 compared to year ended december 31 , 2017 revenues our revenues for 2018 and 2017 were as follows ( dollars in thousands , except unit amounts ) replace_table_token_3_th revenues decreased by $ 1.2 million , or 16 % , during 2018 compared to 2017 driven by decrease in rewalk personal devices sales of $ 1.2 million , or 16 % , as well as decrease in revenues from rewalk rehabilitation units of $ 21 thousand , or 7 % during 2018 compared to 2017. the decrease in revenue was primarily due to decrease in the quantity of units sold and placed , in the u.s and europe offset with a change in sales mix in the future we expect our growth to be driven by sales of our rewalk personal device to third-party payors as we continue to focus our resources on broader commercial coverage policies with third-party payors as well as sales of the restore device to rehabilitation institutes . 65 gross profit our gross profit for 2018 and 2017 were as follows ( in thousands ) : replace_table_token_4_th gross profit was 43 % of revenue for 2018 , compared to gross profit of 40 % of revenue for 2017. the increase in gross profit was driven by sales mix and lower product costs . we expect our gross profit to continue its gradual improvement as we increase our sales volumes and decrease the product manufacturing costs , which may be partially offset by potential price increases of parts .

asu 2017-09 , “ compensation—stock compensation ( topic 718 ) : scope of modification accounting ” story_separator_special_tag overview oconee federal savings and loan association has historically operated as a traditional thrift institution headquartered in seneca , south carolina . our principal business consists of attracting retail deposits from the general public in our market area and investing those deposits , together with funds generated from operations , in one-to-four family residential mortgage loans and , to a much lesser extent , nonresidential mortgage , construction and land and other loans . we also invest in u.s. government and federal agency securities , mortgage-backed securities and municipal securities . our revenues are derived principally from the interest on loans and securities and loan fees and service charges . our primary sources of funds are deposits and principal and interest payments on loans and securities . at june 30 , 2019 , we had total assets of $ 527.8 million , total deposits of $ 419.1 million and total equity of $ 88.3 million . a significant majority of our assets consist of long-term , fixed-rate residential mortgage loans and , to a much lesser extent , investment-quality securities , which we have funded primarily with deposit accounts and the repayment of existing loans . our results of operations depend primarily on our net interest income . net interest income is the difference between the interest income we earn on our interest-earning assets , consisting primarily of loans , investment securities ( including u.s. government and federal agency securities , mortgage-backed securities and municipal securities ) and other interest-earning assets , primarily interest-earning deposits at other financial institutions , and the interest paid on our interest-bearing liabilities , consisting primarily of savings and transaction accounts and certificates of deposit . our results of operations also are affected by our provisions for loan losses , noninterest income and noninterest expense . noninterest income currently consists primarily of service charges on deposit accounts and miscellaneous other income . noninterest expense currently consists primarily of compensation and employee benefits , occupancy and equipment expenses , data processing , professional and supervisory fees , office expense , provision for real estate owned and related expenses , and other operating expenses . our results of operations also may be affected significantly by general and local economic and competitive conditions , changes in market interest rates , governmental policies and actions of regulatory authorities . other than our loans for the construction of one-to-four family residential mortgage loans , we do not offer “ interest only ” mortgage loans on one-to-four family residential properties ( where the borrower pays interest for an initial period , after which the loan converts to a fully amortizing loan ) . we also do not offer loans that provide for negative amortization of principal , such as “ option arm ” loans , where the borrower can pay less than the interest owed on his or her loan , resulting in an increased principal balance during the life of the loan . we do not offer “ subprime loans ” ( loans that generally target borrowers with weakened credit histories typically characterized by payment delinquencies , previous charge-offs , judgments , bankruptcies , or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios ) or alt-a loans . critical accounting policies we consider accounting policies that require management to exercise significant judgment or discretion or make significant assumptions that have , or could have , a material impact on the carrying value of certain assets or on income , to be critical accounting policies . additional discussions of these policies are discussed in note 1 “ summary of significant accounting policies ” to the accompanying consolidated financial statements contained in item 8. we consider the following to be our critical accounting policies : allowance for loan losses . our allowance for loan losses is the estimated amount considered necessary to reflect probable losses inherent in the loan portfolio at the balance sheet date . the allowance is established through the provision for loan losses , which is charged against income . in determining the allowance for loan losses , management makes significant estimates and judgments , which to some extent involve assumptions about borrowers ' abilities to continue to make future principal and interest payments . these estimates and judgments involve a high degree of judgment and subjectivity and are based on facts and circumstances that existed at the date in which the allowance is determined . changes in the macro and micro economic environment can have a significant impact on these estimates and judgments in the future that could result in changes to the allowance for loan losses . 31 integral to our allowance methodology is the use of a loan grading system whereby all loans are assigned a grade based on the risk profile of each loan . loan grades are initially assigned at origination and are routinely evaluated to determine if grades need to be changed . through our internal credit review function , ongoing credit monitoring , and continuous review of past due trends , loan grades are adjusted by management either to respond to improvements in or deterioration of credit . loan grades are determined based on an evaluation of relevant information about the ability of borrowers to service their debt such as current financial information , historical payment experience , credit documentation , public information , and current economic trends , among other factors . the allowance methodology consists of two parts : an evaluation of loss for specific loans and an evaluation of loss for homogenous pools of loans , commonly referred to as the specific and general valuation allowance . certain loans exhibiting signs of potential credit weakness are evaluated individually for impairment . a loan is considered to be impaired if it is probable that we will not receive substantially all contractual principal and interest payments . story_separator_special_tag if current available information raises doubt as to the realization of the deferred tax assets , a valuation allowance is established . these judgments and estimates are reviewed on a continual basis as regulatory and business factors change . business strategy we have continued our primarily focus on the execution of our community oriented retail banking strategy . highlights of our current business strategy include the following : ● continue to focus on residential lending . we have been and will continue to be primarily a one-to-four family residential mortgage lender for borrowers in our market area . as of june 30 , 2019 , $ 289.1 million , or 80.3 % , of our total loan portfolio consisted of one-to-four family residential mortgage loans ( including home equity loans ) . in the future , we may gradually increase our residential construction and home equity loan portfolios . ● maintain a modest portfolio of nonresidential real estate loans . we have historically maintained a small portfolio of nonresidential real estate loans . our nonresidential real estate loans were $ 19.4 million , or 5.4 % of our total loan portfolio at june 30 , 2019 . ● manage interest rate risk while maintaining or enhancing , to the extent practicable , our net interest margin . subject to market conditions , we have sought to enhance net interest income by emphasizing controls on the cost of funds , particularly on the deposit products that we offer , rather than attempting to maximize asset yields , as loans with high yields often involve greater credit risk and may be repaid during periods of decreasing market interest rates . in addition , in view of our strong capital position , from time to time , we place more emphasis on enhancing our net interest income than on limiting our interest rate risk . ● rely on community orientation and high quality service to maintain and build a loyal local customer base and maintain our status as an independent community-based institution . we were established in 1924 and have been operating continuously in oconee county since that time . by using our recognized brand name and the goodwill developed over years of providing timely , efficient banking services , we have been able to attract a solid base of local retail customers on which to continue to build our banking business . we have historically focused on promoting relationships within our community rather than specific banking products , and we expect to continue to build our customer base by relying on customer referrals and referrals from local builders and realtors . we extend this strategy to the rabun and stephens counties as well . ● adhere to conservative underwriting guidelines to maintain strong asset quality . we have emphasized maintaining strong asset quality by following conservative underwriting guidelines , sound loan administration , and focusing on loans secured by real estate located within our market area only . our nonperforming assets totaled $ 4.7 million , or 0.90 % of total assets at june 30 , 2019. our total nonperforming loans to total loans ratio was 1.09 % at june 30 , 2019. total loan delinquencies , 30 days or more past due , as of june 30 , 2019 , were $ 8.7 million , or 2.4 % of total loans . total loan delinquencies , 30 days or more past due , as of june 30 , 2018 , were $ 9.2 million , or 2.8 % of total loans . 33 comparison of financial condition at june 30 , 2019 and june 30 , 2018 our total assets increased by $ 39.8 million , or 8.2 % , to $ 527.8 million at june 30 , 2019 from $ 488.0 million at june 30 , 2018. our total cash increased by $ 26.8 million , or 270.2 % , to $ 36.7 million at june 30 , 2019 from $ 9.9 million at june 30 , 2018. this increase was primarily due to deposit growth . funds are being temporarily held in interest earning deposits pending repayment of fhlb advances . our total cash and deposit balance includes the deposits of oconee federal , mhc . securities available-for-sale decreased $ 19.7 million from june 30 , 2018 to june 30 , 2019. the association is not actively replenishing security repayments and maturities with purchases due to the funding needs of our loan portfolio . total gross loans increased $ 32.3 million to $ 360.1 million at june 30 , 2019 from $ 327.8 million at june 30 , 2018. the majority of the increase was in our one-to-four family loans and construction loans , which increased by $ 19.2 million and $ 6.1 million , respectively , from june 30 , 2018 to june 30 , 2019. loan growth was funded by liquidation of securities available-for-sale , increase in interest earning deposits and increases in fhlb advances . our total deposits increased to $ 419.1 million at june 30 , 2019 from $ 387.6 million at june 30 , 2018. we believe the increased interest rate environment over the past year has made bank accounts more attractive to our customers . we generally do not accept brokered deposits and no brokered deposits were accepted during the year ended june 30 , 2019. we had $ 19.0 million and $ 14.5 million in advances from the fhlb as of june 30 , 2019 and june 30 , 2018 , respectively . we had credit available under a loan agreement with the fhlb in the amount of 25 % of total assets , or approximately $ 128.1 million and $ 121.2 million at june 30 , 2019 and june 30 , 2018 , respectively . our total stockholders ' equity increased $ 3.4 million to $ 88.3 million at june 30 , 2019 from $ 84.9 million at june 30 , 2018. the increase is primarily the result of net income for the year ended june 30 , 2019 of $ 3.7 million .

general . net income increased by $ 685 thousand , or 22.6 % , to $ 3.7 million for the year ended june 30 , 2019 from $ 3.0 million for the year ended june 30 , 2018 , primarily due to a reduction in tax expense . in further detail , there was an increase in net interest income before the provision for loan losses of $ 17 thousand , or 0.1 % , and an increase in noninterest income of $ 31 thousand , or 1.9 % . these increases in income were offset with an increase in loan loss provision of $ 110 thousand , or 101.9 % , and an increase in noninterest expense of $ 84 thousand , or 0.7 % . tax expense decreased $ 831 thousand , or 48.7 % . interest income . interest income increased by $ 1.8 million , or 10.6 % , to $ 18.8 million for the year ended june 30 , 2019 from $ 17.0 million for the year ended june 30 , 2018. the increase was primarily the result of an increase in our average outstanding interest earning asset balances for the year ended june 30 , 2019 as compared to the year ended june 30 , 2018. the average balance of interest-earning assets increased to $ 470.7 million for the year ended june 30 , 2019 from $ 444.8 million for the year ended june 30 , 2018. the average yield on interest-earning assets increased to 4.00 % for the year ended june 30 , 2018 from 3.83 % for the year ended june 30 , 2018. interest income on loans increased $ 1.8 million , or 12.0 % , to $ 16.2 million for the year ended june 30 , 2019 from $ 14.4 million for the year ended june 30 , 2018. the average balance of our loans increased to $ 351.2 million for the year ended june 30 , 2019 from $ 316.5 million for the year ended june 30 ,

in response to the short-term outlook , the company has taken aggressive actions to conserve cash , right-size its operations and cost structure , and will continue to do so based on its forecast . these actions included adjustments to workforce , reduced purchases of raw materials and reductions in selling , general , and administrative expenses . the company continues to review its internal processes to identify inefficiencies and cost reduction opportunities . the company will continue to scrutinize its relationships with external suppliers to ensure it is achieving the highest quality materials and services at the most competitive cost . story_separator_special_tag affect reported amounts and disclosures . estimates and assumptions are used , among other places , when accounting for certain revenue ( e.g . contract accounting ) , expense , and asset and liability valuations . the company believes that the estimates and assumptions made in preparing the consolidated financial statements are reasonable , but are inherently uncertain . assumptions may be incomplete or inaccurate and unanticipated events may occur . the company is subject to risks and uncertainties that may cause actual results to differ from estimated results . revenues & expenses revenues from contracts for the design , manufacture and sale of asphalt plants are recognized under the percentage-of-completion method . the percentage-of-completion method of accounting for these contracts recognizes revenue , net of any promotional discounts , and costs in proportion to actual labor costs incurred as compared with total estimated labor costs expected to be incurred during the entire contract . pre-contract costs are expensed as incurred . changes to total estimated contract costs or losses , if any , are recognized in the period in which they are determined . revenue recognized in excess of amounts billed is classified as current assets under “costs and estimated earnings in excess of billings.” the company anticipates that all incurred costs associated with these contracts at september 30 , 2013 , will be billed and collected within one year . revenues from all other contracts for the design and manufacture of custom equipment , for service and for parts sales , net of any discounts and return allowances , are recorded when the following four revenue recognition criteria are met : product is delivered or service is performed , persuasive evidence of an arrangement exists , the selling price is fixed or determinable , and collectability is reasonably assured . returns and allowances , which reduce product revenue , are estimated using historical experience . provisions for estimated returns and allowances and other adjustments are provided for in the same period the related sales are recorded . product warranty costs are estimated using historical experience and known issues and are charged to production costs as revenue is recognized . 18 all product engineering and development costs , and selling , general and administrative expenses are charged to operations as incurred . provision is made for any anticipated contract losses in the period that the loss becomes evident . the allowance for doubtful accounts is determined by performing a specific review of all account balances greater than 90 days past due and other higher risk amounts to determine collectability and also adjusting for any known customer payment issues with account balances in the less-than-90-day past due aging buckets . account balances are charged off against the allowance for doubtful accounts when they are determined to be uncollectable . any recoveries of account balances previously considered in the allowance for doubtful accounts reduce future additions to the allowance for doubtful accounts . inventories inventories are valued at the lower of cost or market , with cost being determined principally by using the last-in , first-out ( “lifo” ) method and market defined as replacement cost for raw materials and net realizable value for work in process and finished goods ( see note 2 ) . appropriate consideration is given to obsolescence , excessive levels , deterioration , possible alternative uses and other factors in determining net realizable value . the cost of work in process and finished goods includes materials , direct labor , variable costs and overhead . the company evaluates the need to record inventory adjustments on all inventories , including raw material , work in process , finished goods , spare parts and used equipment . used equipment acquired by the company on trade-in from customers is carried at estimated net realizable value . unless specific circumstances warrant different treatment regarding inventory obsolescence , the cost basis of inventories three to four years old are reduced by 50 % , while the cost basis of inventories four to five years old are reduced by 75 % , and the cost basis of inventories greater than five years old are reduced to zero . inventory is typically reviewed for obsolescence on an annual basis computed as of september 30th , the company 's fiscal year end . if significant known changes in trends , technology or other specific circumstances that warrant consideration occur during the year , then the impact on obsolescence is considered at that time . investments marketable debt and equity securities are categorized as trading securities and are thus marked to market and stated at fair value . fair value is determined using the quoted closing or latest bid prices for level 1 investments and market standard valuation methodologies for level 2 investments . realized gains and losses on investment transactions are determined by specific identification and are recognized as incurred in the consolidated statements of operations . net unrealized gains and losses are reported in the consolidated statements of operations in the current period and represent the change in the fair value of investment holdings during the period . long lived asset impairment property and equipment and intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset ( or asset group ) may not be recoverable . an story_separator_special_tag in response to the short-term outlook , the company has taken aggressive actions to conserve cash , right-size its operations and cost structure , and will continue to do so based on its forecast . these actions included adjustments to workforce , reduced purchases of raw materials and reductions in selling , general , and administrative expenses . the company continues to review its internal processes to identify inefficiencies and cost reduction opportunities . the company will continue to scrutinize its relationships with external suppliers to ensure it is achieving the highest quality materials and services at the most competitive cost . story_separator_special_tag affect reported amounts and disclosures . estimates and assumptions are used , among other places , when accounting for certain revenue ( e.g . contract accounting ) , expense , and asset and liability valuations . the company believes that the estimates and assumptions made in preparing the consolidated financial statements are reasonable , but are inherently uncertain . assumptions may be incomplete or inaccurate and unanticipated events may occur . the company is subject to risks and uncertainties that may cause actual results to differ from estimated results . revenues & expenses revenues from contracts for the design , manufacture and sale of asphalt plants are recognized under the percentage-of-completion method . the percentage-of-completion method of accounting for these contracts recognizes revenue , net of any promotional discounts , and costs in proportion to actual labor costs incurred as compared with total estimated labor costs expected to be incurred during the entire contract . pre-contract costs are expensed as incurred . changes to total estimated contract costs or losses , if any , are recognized in the period in which they are determined . revenue recognized in excess of amounts billed is classified as current assets under “costs and estimated earnings in excess of billings.” the company anticipates that all incurred costs associated with these contracts at september 30 , 2013 , will be billed and collected within one year . revenues from all other contracts for the design and manufacture of custom equipment , for service and for parts sales , net of any discounts and return allowances , are recorded when the following four revenue recognition criteria are met : product is delivered or service is performed , persuasive evidence of an arrangement exists , the selling price is fixed or determinable , and collectability is reasonably assured . returns and allowances , which reduce product revenue , are estimated using historical experience . provisions for estimated returns and allowances and other adjustments are provided for in the same period the related sales are recorded . product warranty costs are estimated using historical experience and known issues and are charged to production costs as revenue is recognized . 18 all product engineering and development costs , and selling , general and administrative expenses are charged to operations as incurred . provision is made for any anticipated contract losses in the period that the loss becomes evident . the allowance for doubtful accounts is determined by performing a specific review of all account balances greater than 90 days past due and other higher risk amounts to determine collectability and also adjusting for any known customer payment issues with account balances in the less-than-90-day past due aging buckets . account balances are charged off against the allowance for doubtful accounts when they are determined to be uncollectable . any recoveries of account balances previously considered in the allowance for doubtful accounts reduce future additions to the allowance for doubtful accounts . inventories inventories are valued at the lower of cost or market , with cost being determined principally by using the last-in , first-out ( “lifo” ) method and market defined as replacement cost for raw materials and net realizable value for work in process and finished goods ( see note 2 ) . appropriate consideration is given to obsolescence , excessive levels , deterioration , possible alternative uses and other factors in determining net realizable value . the cost of work in process and finished goods includes materials , direct labor , variable costs and overhead . the company evaluates the need to record inventory adjustments on all inventories , including raw material , work in process , finished goods , spare parts and used equipment . used equipment acquired by the company on trade-in from customers is carried at estimated net realizable value . unless specific circumstances warrant different treatment regarding inventory obsolescence , the cost basis of inventories three to four years old are reduced by 50 % , while the cost basis of inventories four to five years old are reduced by 75 % , and the cost basis of inventories greater than five years old are reduced to zero . inventory is typically reviewed for obsolescence on an annual basis computed as of september 30th , the company 's fiscal year end . if significant known changes in trends , technology or other specific circumstances that warrant consideration occur during the year , then the impact on obsolescence is considered at that time . investments marketable debt and equity securities are categorized as trading securities and are thus marked to market and stated at fair value . fair value is determined using the quoted closing or latest bid prices for level 1 investments and market standard valuation methodologies for level 2 investments . realized gains and losses on investment transactions are determined by specific identification and are recognized as incurred in the consolidated statements of operations . net unrealized gains and losses are reported in the consolidated statements of operations in the current period and represent the change in the fair value of investment holdings during the period . long lived asset impairment property and equipment and intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset ( or asset group ) may not be recoverable . an

results of operations year ended september 30 , 2013 compared with the year ended september 30 , 2012 net revenues for the year ended september 30 , 2013 were $ 48.9 million , a decrease of 22.5 % or $ 14.3 million from $ 63.2 million for the year ended september 30 , 2012. the decrease in net revenues was the result of the successful completion of a large asphalt plant delivered in fiscal 2012 and continued weak domestic road-building activity . in addition , canadian sales declined as the canadian government 's infrastructure spend under the “building canada” plan nears completion . gross margins for fiscal 2013 were $ 11.0 million , or 22.5 % of net revenues , versus $ 12.0 million in 2012 , or 19.0 % of net revenues . the gross margin increase of 350 basis points in 2013 was due to reduced material costs and improved manufacturing efficiencies . 16 product engineering and development expenses decreased $ 626,000 or 26.8 % to $ 1,713,000 in 2013 in line with the decrease in revenues . selling , general and administrative expenses decreased $ 2,586,000 or 27.8 % to $ 6,712,000 as a result of reduced commissions and headcount reductions related to the lower revenues , and lower legal and advertising expenses . the company has historically participated in the construction industry 's triennial conexpo-con/agg show ( “conexpo” ) . the costs associated with the company 's full-scale conexpo exhibits have been significant . during fiscal 2013 , the company reduced its estimated advertising expenses for the 2014 conexpo show by $ 750,000 as management deemed it prudent to curtail such expenditures due to the current condition of the highway construction industry .

these statements relate to , among other things , our strategy ; the possible clinical benefits of neod001 , prx002 and prx003 ; a contemplated phase 2 study for prx002 and a possible phase 2 study for prx003 ; the contemplated clinical development of prx004 ; research and development ( `` “ r & d ” ) and general and administrative ( “ g & a ” ) expenses in 2017 ; and the sufficiency of our cash and cash equivalents . forward-looking statements may include words such as “ aim , ” “ anticipate , ” “ assume , ” “ believe , ” “ contemplate , ” “ continue , ” “ could , ” “ due , ” “ estimate , ” “ expect , ” “ goal , ” “ intend , ” “ may , ” “ objective ” “ plan , ” “ predict , ” “ potential , ” “ positioned , ” “ seek , ” “ should , ” “ target , ” “ will , ” “ would , ” and other similar expressions that are predictions of or indicate future events and future trends , or the negative of these terms or other comparable terminology . forward-looking statements are subject to risks and uncertainties , and actual events or results may differ materially . factors that could cause our actual results to differ materially include , but are not limited to , the risks and uncertainties listed below as well as those discussed under item 1a - risk factors of this form 10-k. our ability to obtain additional financing in future offerings ; our operating losses ; our ability to successfully complete research and development of our drug candidates ; our ability to develop , manufacture and commercialize products ; our collaboration with roche pursuant to the license agreement ; our ability to protect our patents and other intellectual property ; our ability to hire and retain key employees ; tax treatment of our separation from elan and subsequent distribution of our ordinary shares ; our ability to maintain financial flexibility and sufficient cash , cash equivalents , and investments and other assets capable of being monetized to meet our liquidity requirements ; potential disruptions in the u.s. and global capital and credit markets ; government regulation of our industry ; the volatility of our ordinary share price ; business disruptions ; and the other risks and uncertainties described in item 1a - risk factors of this form 10-k. we undertake no obligation to revise or update any forward-looking statements to reflect any event or circumstance that arises after the date of this report . this discussion should be read in conjunction with the consolidated financial statements and notes presented in item 8 of this form 10-k. overview prothena corporation plc is a global , late-stage clinical biotechnology company establishing fully-integrated research , development and commercial capabilities . fueled by its deep scientific understanding built over decades of research in protein misfolding and cell adhesion - the root causes of many serious or currently untreatable amyloid and inflammatory diseases - prothena seeks to fundamentally change the course of progressive diseases associated with this biology . our pipeline of antibody-based product candidates target a number of potential indications including al amyloidosis ( neod001 ) , parkinson 's disease and other related synucleinopathies ( prx002 ) , inflammatory diseases including psoriasis and psoriatic arthritis ( prx003 ) and attr amyloidosis ( prx004 ) . the company continues discovery of additional novel therapeutic candidates where our deep scientific understanding of disease pathology can be leveraged . we are a public limited company formed under the laws of ireland . we separated from elan corporation , plc ( “ elan ” ) on december 20 , 2012. after the separation from elan , and the related distribution of the company 's ordinary shares to elan 's shareholders , our ordinary shares began trading on the nasdaq global market under the symbol “ prta ” on december 21 , 2012 and currently trade on the nasdaq global select market . 45 recent developments neod001 for the potential treatment of al amyloidosis neod001 is an investigational monoclonal antibody that targets circulating misfolded soluble light chain and deposited insoluble amyloid for the potential treatment of al amyloidosis . results from the dose-escalation portion ( n=27 ) of the phase 1/2 clinical study of neod001 in patients with al amyloidosis and persistent organ dysfunction were published in the journal of clinical oncology in february 2016. in july 2016 , we presented positive interim data from the phase 1/2 clinical study from patients in both the dose escalation and expansion phases ( n=69 ) at the international symposium on amyloidosis ( isa ) ; and in december 2016 , results from the completed study were presented in an oral session at the american society of hematology ( ash ) annual meeting . results from this phase 1/2 study demonstrated that neod001 was safe and well-tolerated in patients with al amyloidosis and persistent organ dysfunction . the analysis showed that a total of 69 patients across the dose-escalation and expansion portions of the study received more than 990 infusions of up to 24 mg/kg , with a mean treatment duration of 12.8 months . in a best response analysis of patients in the phase 1/2 study who received neod001 , 53 % or 19 of 36 total cardiac-evaluable patients demonstrated a cardiac response , defined as more than 30 % and 300 pg/ml decrease in levels of nt-probnp . story_separator_special_tag in march 2016 , we published preclinical data in the journal amyloid suggesting that our antibodies have unique biological activity that may lead to the prevention of deposition , and enhancement of clearance , of attr in patients with both wild type and hereditary ttr-mediated amyloidosis . january 2016 offering in january 2016 , we completed an underwritten public offering of an aggregate of 2,587,500 of our ordinary shares at a public offering price of $ 53.00 per ordinary share . the company received aggregate net proceeds of approximately $ 128.6 million , after deducting the underwriting discount and estimated offering costs . critical accounting policies and estimates management 's discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements , which have been prepared in accordance with the accounting principles generally accepted in the u.s. ( `` gaap '' ) . the preparation of these consolidated financial statements requires us to make estimates and assumptions for the reported amounts of assets , liabilities , revenues , expenses and related disclosures . we believe the following policies to be critical to the judgments and estimates used in the preparation of our financial statements . revenue recognition revenue is recognized when earned and non-refundable , when payment is reasonably assured , and when there is no future obligation with respect to the revenue , in accordance with the terms prescribed in the applicable contract . multiple element arrangements our revenues are generated primarily through our license , development and commercialization agreement . these types of agreements generally contain multiple elements , or deliverables , which may include ( i ) licenses to our technology , ( ii ) r & d activities to be performed on behalf of the collaborative partner , and ( iii ) in certain cases , services or obligations in connection with the manufacturing or supply of preclinical and clinical material . payments to us under these arrangements typically include one or more of the following : non-refundable , upfront license fees ; funding of research and or development efforts ; milestone payments ; and royalties on future product sales . 47 revenue under license , development and commercialization agreements is recognized based on the performance requirements of the contract . determinations of whether persuasive evidence of an arrangement exists and whether delivery has occurred or services have been rendered are based on management 's judgments regarding the fixed nature of the fees charged for deliverables and the collectability of those fees . should changes in conditions cause management to determine that these criteria are not met for any new or modified transactions , revenue recognized could be adversely affected . we recognize revenue related to license , development and commercialization agreements in accordance with the provisions of fasb asc topic 605-25 , “ revenue recognition - multiple-element arrangements. ” we evaluate all deliverables within an arrangement to determine whether or not they provide value on a stand-alone basis . based on this evaluation , the deliverables are separated into units of accounting . the arrangement consideration that is fixed or determinable at the inception of the arrangement is allocated to the separate units of accounting based on their relative selling prices . we may exercise significant judgment in determining whether a deliverable is a separate unit of accounting , as well as in estimating the selling prices of such unit of accounting . a change in such judgment could result in a significant change in the period in which revenue is recognized . to determine the selling price of a separate deliverable , we use the hierarchy as prescribed in asc topic 605-25 based on vendor-specific objective evidence ( `` vsoe '' ) , third-party evidence ( `` tpe '' ) or best estimate of selling price ( `` besp '' ) . vsoe is based on the price charged when the element is sold separately and is the price actually charged for that deliverable . tpe is determined based on third party evidence for a similar deliverable when sold separately and besp is the estimated selling price at which we would transact a sale if the elements of collaboration and license arrangements were sold on a stand-alone basis to the buyer . we may not be able to establish vsoe or tpe for the deliverables within collaboration and license arrangements , as we may not have a history of entering into such arrangements or selling the individual deliverables within such arrangements separately . in addition , there may be significant differentiation in these arrangements , which indicates that comparable third party pricing may not be available . we may determine that the selling price for the deliverables within collaboration and license arrangements should be determined using besp . the process for determining besp involves significant judgment on our part and includes consideration of multiple factors such as estimated direct expenses and other costs , and available data . payments or full reimbursements resulting from our r & d efforts for those arrangements where such efforts are considered as deliverables are recognized as the services are performed and are presented on a gross basis so long as there is persuasive evidence of an arrangement , the fee is fixed or determinable , and collection of the related receivable is reasonably assured . however , such funding is recognized as a reduction of r & d expense when we engage in a r & d project jointly with another entity , with both entities participating in project activities and sharing costs and potential benefits of the project . accordingly , reimbursement of r & d expenses pursuant to the cost-sharing provisions of our agreements with roche is recognized as a reduction to r & d expense . milestone revenue we account for milestones under asu no . 2010-17 , `` milestone method of revenue recognition '' . under the milestone method , contingent consideration received from the achievement of a substantive milestone is recognized in its entirety in the period in which the milestone is achieved .

results of operations comparison of years ended december 31 , 2016 , 2015 and 2014 revenue replace_table_token_3_th total revenue was $ 1.1 million , $ 1.6 million and $ 50.9 million for the years ended december 31 , 2016 , 2015 and 2014 , respectively . collaboration revenue includes reimbursements under our license agreement with roche , which became effective january 2014 . the portion of the amounts recognized as collaboration revenue for the milestone and the development reimbursements 50 were based on the relative selling price method in applying multiple element accounting . see note 8 to the consolidated financial statements “ roche license agreement ” for more information . collaboration revenue for the year ended december 31 , 2016 consisted of reimbursement for research service of $ 1.1 million . collaboration revenue for the year ended december 31 , 2015 consisted of the following amounts from roche under the license agreement : reimbursement for development costs of $ 5.1 million ( of which $ 0.2 million was recognized as collaboration license revenue ) and reimbursement for research services of $ 1.4 million . conversely , collaboration revenue for the year ended december 31 , 2014 consisted of the following amounts : a one-time , non-refundable , non-creditable upfront payment of $ 30.0 million ( which was recognized as collaboration license revenue ) , a clinical milestone payment from roche of $ 15.0 million ( of which $ 13.3 million was recognized as collaboration revenue ) , reimbursement for development costs of $ 6.0 million ( of which $ 5.3 million was recognized as collaboration license revenue ) and reimbursement for research services of $ 1.7 million . related-party revenue for the year ended december 31 , 2014 was comprised of fees earned from the provision of research and development services to elan . total related-party revenue decreased by $ 142,000 , or 21 % , during the year ended december 31 , 2014 , compared to the corresponding period of the prior year .

▪ during the three months ended march 31 , 2018 , we recorded a gain of $ 0.6 ( to “ other expense , net ” ) representing the change in fair value of the old swaps from january 1 , 2018 through the date of settlement on march 8 , 2018 . ◦ new swaps ▪ the new swaps have an initial notional amount of $ 260.0 and effectively convert a portion of our borrowings under our senior credit agreement to a fixed interest rate of 2.535 % , plus the applicable margin . ▪ we have designated , and are accounting for , the new swaps as cash flow hedges . on april 30 , 2018 , we reached an agreement with a subsidiary of mutares ag , the acquirer of balcke dürr in 2016 ( the “ buyer ” ) , on ( i ) the amount of cash and working capital of balcke dürr at the closing date of the sale and ( ii ) various other matters . the settlement resulted in : ◦ a net payment from the buyer in the amount of euro 3.0 ; and ◦ a gain , net of tax , of $ 3.8 , which was recorded to “ gain ( loss ) on disposition of discontinued operations , net of tax ” during 2018. on june 7 , 2018 , we completed the acquisition of cues - see notes 1 and 4 to our consolidated financial statements for additional details : ◦ the purchase price for cues was $ 164.4 , net of cash acquired of $ 20.6 . ◦ cues ' revenues for the twelve months prior to the acquisition were approximately $ 84.0 . ◦ the post-acquisition operating results of cues are reflected within our detection and measurement reportable segment . during the second quarter of 2018 , as a continuation of our strategic shift away from power generation end markets , we initiated a plan to wind-down the heat transfer business . ◦ in connection with the planned wind-down , we recorded charges of $ 3.5 during 2018 with $ 0.9 related to the write-down of inventories ( included in “ cost of products sold ” ) , $ 0.6 related to the impairment of machinery and equipment and $ 2.0 related to severance costs ( both included in “ special charges , net ” ) . ◦ in addition , we sold certain intangible assets of the heat transfer business for net cash proceeds of $ 4.8 , which resulted in a gain of less than $ 0.1 within our 2018 operating results . ◦ we anticipate completing the wind-down during the first half of 2019. actuarial losses on pension and postretirement plans ( see notes 1 and 10 to our consolidated financial statements for additional details ) - we recorded net actuarial losses of $ 6.6 in the fourth quarter of 2018 in connection with the annual remeasurement of our pension and postretirement plans . 2017 : income tax matters ( see notes 1 and 11 to our consolidated financial statements for additional details ) : ◦ during the fourth quarter of 2017 , we recorded an income tax benefit of $ 77.6 for a worthless stock deduction in the u.s. associated with our investment in a south african subsidiary . ◦ on december 22 , 2017 , the act was enacted which significantly changes u.s. income tax law for businesses and individuals . as a result of the act , we recorded provisional net income tax charges of $ 11.8 during the fourth quarter of 2017. gain from a contract settlement - during the third quarter of 2017 , we settled a contract that had been suspended and then ultimately cancelled by a customer . in connection with the settlement , we : ◦ received cash proceeds of $ 9.0 and other consideration ; and ◦ recorded a gain of $ 10.2. amendment of senior credit agreement - on december 19 , 2017 , we amended our senior credit agreement ( see note 12 to our consolidated financial statements for additional details ) . in connection with the amendment , we recorded : ◦ a charge of $ 0.9 associated with the write-off of a portion of the deferred financing costs associated with the senior credit agreement ; and 23 ◦ a gain of $ 2.7 related to the discontinuance of hedge accounting for the interest rate swap agreements that were entered into to hedge the interest rate risk on our then existing term loan . actuarial gains and losses on pension and postretirement plans ( see notes 1 and 10 to our consolidated financial statements for additional details ) - we recorded : ◦ an actuarial gain during the third quarter of 2017 of $ 2.6 related to an amendment to our postretirement plans ; and ◦ net actuarial losses of $ 4.2 in the fourth quarter of 2017 in connection with the annual remeasurement of our pension and postretirement plans . 2016 : sale of dry cooling business - on march 30 , 2016 , we completed the sale of the dry cooling business ( see notes 1 and 4 to our consolidated financial statements for additional details ) . in connection with the sale , we : ◦ received cash proceeds of $ 47.6 ; and ◦ recorded a gain of $ 18.4 , which includes a reclassification from “ accumulated other comprehensive income ” of $ 40.4 related to foreign currency translation . sale of balcke dürr - on december 30 , 2016 , we completed the sale of balcke dürr ( see notes 1 , 4 , and 16 to our consolidated financial statements for additional details ) . ◦ the results of balcke dürr are presented as a discontinued operation . story_separator_special_tag additionally , during 2017 , gross profit and gross profit as a percentage of revenues were 25 negatively impacted by a reduction in gross profit of $ 52.8 resulting from revisions to expected revenues and costs on our large power projects in south africa . lastly , during 2018 , gross profit and gross profit as a percentage of revenue were negatively impacted by ( i ) charges of $ 4.6 associated with the excess fair value ( over historical cost ) of inventory acquired in the schonstedt and cues transactions which has been subsequently sold and ( ii ) a decline in profitability during 2018 for our power transformer business associated primarily with a less profitable sale mix , higher commodity costs , and less favorable cost absorption . the decrease in gross profit and gross profit as a percentage of revenue in 2017 , compared to 2016 , was due primarily to the reduction in gross profit noted above of $ 52.8 related to our large power projects in south africa , partially offset by the impact of the organic revenue growth in our detection and measurement reportable segment noted above . selling , general and administrative ( “ sg & a ” ) expense — for 2018 , the increase in sg & a expense , compared to 2017 , was primarily a result of the incremental sg & a associated with schonstedt and cues since their respective dates of acquisition and higher professional fees related to acquisition activities , partially offset by cost reductions associated with restructuring actions implemented over the past year . for 2017 , the decrease in sg & a expense , compared to 2016 , was due primarily to the impact of ( i ) the sale of the dry cooling business at the end of the first quarter of 2016 and ( ii ) cost reduction actions within certain of our businesses during 2017. intangible amortization — for 2018 , the increase in intangible amortization , compared to 2017 , was due to the impact of the intangible assets acquired in connection with the schonstedt and cues transactions . for 2017 , the decline in intangible amortization , compared to 2016 , was primarily due to the impact of the $ 23.9 impairment charge recorded in the fourth quarter of 2016 associated with our heat transfer business 's definite-lived intangible assets . impairment of intangible assets — during 2016 , we recorded impairment charges of $ 30.1 related to the intangible assets of our heat transfer business , which included $ 23.9 for definite-lived intangible assets and $ 6.2 for indefinite-lived intangible assets . special charges , net — special charges , net , related primarily to restructuring initiatives to consolidate manufacturing , distribution , sales and administrative facilities , reduce workforce , and rationalize certain product lines . see note 7 to our consolidated financial statements for the details of actions taken in 2018 , 2017 and 2016. the components of special charges , net , are as follows : replace_table_token_4_th gain on contract settlement — during the third quarter of 2017 , we settled a contract that had been suspended and then ultimately cancelled by a customer of our heat transfer business for cash proceeds of $ 9.0 and other consideration . in connection with the settlement , we recorded a gain of $ 10.2. gain on sale of dry cooling business — on march 30 , 2016 , we completed the sale of our dry cooling business resulting in a gain of $ 18.4. see notes 1 and 4 to our consolidated financial statements for additional details . other expense , net — other expense , net , for 2018 was composed primarily of pension and postretirement expense of $ 3.9 , charges of $ 5.0 associated with legacy environmental matters , and charges of $ 2.0 associated with asbestos product liability matters , partially offset by income of $ 1.5 related to the reduction of the parent company guarantees and bank surety bonds liability and the amortization of related indemnification assets that remain outstanding in connection with the balcke dürr sale , income from company-owned life insurance policies of $ 0.9 , and equity earnings in joint ventures of $ 0.6. other expense , net , for 2017 was composed primarily of pension and postretirement expense of $ 5.1 , charges of $ 3.5 associated with asbestos product liability matters , foreign currency transaction losses of $ 2.9 , and losses on currency forward embedded derivatives ( “ fx embedded derivatives ” ) of $ 0.6 , partially offset by a gain of $ 2.7 associated with the discontinuance of hedge accounting on our interest rate swap agreements , income from company-owned life insurance policies of $ 1.7 , and equity earnings in joint ventures of $ 0.7. other expense , net , for 2016 was composed primarily of pension and postretirement expense of $ 15.0 , charges of $ 4.2 associated with asbestos product liability matters , losses on foreign currency forward contracts ( “ fx forward contracts ” ) of $ 5.1 , 26 and losses on fx embedded derivatives of $ 1.2. these amounts were offset partially by foreign currency transaction gains of $ 3.9 , income from company-owned life insurance policies of $ 2.8 , equity earnings in joint ventures of $ 1.5 , income associated with transition services provided in connection with the sale of the dry cooling business of $ 0.9 , and gains on asset sales of $ 0.9. interest expense , net — interest expense , net , includes both interest expense and interest income . the increase in interest expense , net , during 2018 , compared to 2017 , was primarily a result of the borrowings required to finance the acquisition of cues and a higher weighted-average interest rate during 2018 on the outstanding borrowings of our senior credit facilities .

and results of operations ( all currency and share amounts are in millions ) the following should be read in conjunction with our consolidated financial statements and the related notes thereto . unless otherwise indicated , amounts provided in item 7 pertain to continuing operations only . executive overview revenue for 2018 totaled $ 1,538.6 , compared to $ 1,425.8 in 2017 ( and $ 1,472.3 in 2016 ) . the increase in revenues was primarily due to the impact of the acquisitions of schonstedt and cues during 2018 ( see below for additional details ) . in addition , revenues for 2018 were higher , when compared to 2017 , due to ( i ) the impact of the adoption of asc 606 ( see below for additional details ) and ( ii ) a reduction in revenue of $ 36.9 during 2017 resulting from revisions to the expected revenues and costs on our large power projects in south africa ( see note 14 to our consolidated financial statements for additional details ) . organic revenue was generally flat in 2018 as the significant increases for the businesses within our hvac reportable segment were offset by declines associated with ( i ) lower sales of process cooling products and ( ii ) the continued wind-down of our heat transfer business ( see below for additional details ) and our large power projects in south africa . the decrease in revenue in 2017 , compared to 2016 , was due primarily to the aforementioned $ 36.9 reduction in revenue on our large power projects in south africa and , to a lesser extent , a decline in organic revenue . for 2018 , operating income totaled $ 107.6 , compared to $ 59.9 in 2017 ( and $ 70.0 in 2016 ) . the increase in operating income during 2018 , compared to 2017 , was primarily due to an increase in profits within our hvac reportable segment associated with organic revenue growth during the year .

all of our directors are entitled to receive cash compensation of $ 1,500 each quarter and are reimbursed for reasonable out-of-pocket expenses incurred in attending board or committee meetings . audit committee members receive a fee of $ 500 per meeting . in february 2009 , the directors agreed to temporarily forgo the director fees as part of our overall efforts to control costs . the temporary practice of not paying director 's fees continued during 2010. our board of directors does not have a compensation committee or other committee performing equivalent functions . during 2010 , mr. lundin was the only officer or employee who participated in the board 's deliberations concerning executive officer compensation . during 2010 , none of the executive officers served on the compensation committee or board of directors of any other company of which any other member of the board of directors was an executive officer . audit committee our board of directors has established an audit committee to assess , report and make recommendations to the board of directors regarding our independent auditors , financial statements , internal audit activities and legal compliance . our audit committee consists of messrs. hoak , kern and lundquist with mr. lundquist serving as the chair . the board of directors has determined that each of messrs. hoak and lundquist is an “audit committee financial expert” as defined by the rules of the sec . 44 finance code of professional conduct we have adopted a finance code of professional conduct applicable to our chief executive officer , chief financial officer , corporate controller and all other employees of our finance organization which satisfies the sec 's requirements for a “code of ethics.” a copy of the finance code of professional conduct has been incorporated by reference as an exhibit to this report . item 11. executive compensation . this section provides information regarding the compensation program in place for our executive officers for 2010. it includes information regarding the overall objectives of the compensation program and each element of compensation provided . our board of directors believes that compensation for our executive officers should reward superior performance that creates long-term investor value and encourage executives who deliver that performance to remain with our company and to continue that level of performance . compensation is reviewed and approved by our board of directors during regularly scheduled board meetings . during 2010 , all of the compensation received by our executive officers was in the form of cash compensation . this reflects the view of our board of directors that additional equity ownership of our company was not needed to align the interests of our executive officers with stockholders due to the fact that each of the executive officers already holds substantial equity in our company . the elements of our executive compensation program are : salary base salary for each of our officers is specified in their respective employment agreements . in 2006 , the employment agreements of mr. lundin , ms. loughran and mr. young were amended to increase each officer 's base salary effective as of october 1 , 2006. these amendments to the employment agreements represented the first increase in base salary for these officers since their employment agreements were entered into on april 5 , 2004. in determining to increase the salaries of these officers , our board of directors considered our strong performance during that time . mr. lundin , ms. loughran , and mr. young agreed to take salary reductions of $ 50,000 , $ 25,000 and $ 25,000 respectively , in 2009 as part of our overall efforts to control costs . during august of 2010 , mr. lundin , ms loughran , and mr. young salaries were restored to levels prior to the salary reductions . bonus bonuses for mr. lundin , ms. loughran and mr. young are awarded at the discretion of the board of directors . bonus amounts are based on our overall performance during the year as well as individual performance . factors considered by our board of directors in making its bonus determinations include revenue , operating cash flow and cost efficiencies realized . however , bonus targets are not set in advance , and no particular factor carries greater weight than any other factor . our board of directors also considers the recommendations of mr. lundin in determining the bonuses to be paid to ms. loughran and mr. young . in 2010 , our board of directors granted discretionary bonuses in the amount of $ 200,000 , in part , to partially offset reduced or stagnant salary levels . stock options we occasionally grant nonqualified stock options to certain employees , including the executive officers , pursuant to the da-lite screen company , inc. 1999 stock option plan and the da-lite screen company inc. 2010 stock option plan . the purposes of these plans are ( i ) to align the interests of our stockholders and the recipients of options under this plan by increasing the proprietary interest of those recipients in our growth and success , ( ii ) to advance our best interests by attracting and retaining key employees and ( iii ) to motivate recipients of options to act in the long-term best interests of our company and our stockholders . 45 options granted under the 1999 stock option plan generally vest one-fifth each year from the anniversary date of grant and expire on the tenth anniversary of the date of grant . options granted under the 2010 stock option plan are generally fully vested and exercisable upon issuance . in 2010 , 159,000 options were granted under the 2010 stock option plan . story_separator_special_tag 20 liquidity and capital resources the company expects to be able to fund its working capital requirements , interest expense , capital expenditures and its distributions to stockholders with cash generated from operations , although there can be no assurances in this regard . the company issued $ 105 million aggregate principle amount of 12 1 / 2 % senior notes during the first quarter of 2010. these notes were issued with an original issue discount at a price of 97.305 % and this debt was recorded at the discounted amount of $ 102.2 million . the discount will be accreted over the life of these notes as interest expense . in march 2010 , the company repurchased $ 43.5 million of the outstanding principal amount of its 9 1 / 2 % senior notes from the open market for an aggregate purchase price of $ 44.5 million . on may 17 , 2010 , the company redeemed the remaining $ 54.5 million of the 9 1 / 2 % senior notes at a purchase price equal to the principal amount . the funds to repurchase these notes were from the $ 102.2 million cash received from of the issuance of the 12 1 / 2 % senior notes along with the borrowings under our bank credit facility . on september 2 , 2010 , the company repurchased $ 10.8 million of the outstanding $ 105.0 million principal amount of its 12 1 / 2 % senior notes from the open market for an aggregate purchase price of $ 11.0 million . the company retired these notes and wrote-off the purchase premium and the deferred financing cost related to the repurchase . the company increased its borrowing under the unsecured revolving credit facility in connection with the repurchase . pursuant to the terms of the 12 1 / 2 % senior notes , the company is required to offer to purchase from all noteholders , on a pro rata basis , an aggregated principal amount of $ 5.9 million of the 12 1 / 2 % senior notes at a purchase price of 103.000 % ( plus accrued interest to the redemption date ) . management believes the principal indicators of the company 's liquidity are its cash position ( total cash and cash equivalents ) , remaining availability under its bank credit facilities and its excess working capital . at december 31 , 2010 , the company 's cash position was $ 1.2 million , an increase of $ 0.6 million from january 1 , 2010. additionally , the company has an unsecured revolving credit facility , with maximum possible borrowings equal to $ 19.5 million , which expires in may 2012. this facility is subject to and cross defaulted with the terms , conditions and covenants relating to our 12 1 / 2 % senior notes . as part of this agreement , lake city bank may demand full payment at any time . when borrowings have taken place , the company has paid down on the line as funds have become available . the line of credit has been classified as short term . interest on any outstanding borrowings related to this line of credit is calculated at the prime rate , subject to a floor of 4.00 % . as the prime rate is below the floor , the interest rate in effect as of december 31 , 2010 was 4.00 % . at december 31 , 2010 , the company had no outstanding balance under this line of credit . da-lite 's working capital position increased to $ 17.3 million ( including $ 1.2 million of total cash and cash equivalents ) at december 31 , 2010 , from $ 13.5 million ( including $ 0.6 million of total cash and cash equivalents ) at january 1 , 2010. the company 's dutch subsidiary , projecta , has an overdraft line of credit , with maximum possible borrowings equal to 1.5 million euros . projecta 's agreement with abn amro bank ( as successor to fortis bank ) has no fixed expiration date . interest on outstanding borrowings in europe related to projecta 's overdraft line of credit is calculated at the abn amro bank basic rate plus 1.50 % , the sum of which was 5.80 % on december 31 , 2010. at december 31 , 2010 , projecta had no outstanding balances under this credit facility . 21 cash flows cash provided by operating activities in 2010 was $ 21.3 million , as compared to $ 29.1 million in 2009 , a decrease of $ 7.7 million or 26.5 % that resulted primarily from changes in the levels of accounts receivables , inventories , and accrued expenses . cash used in investing activities was $ 1.0 million in 2010 , as compared to $ 2.1 million in 2009. the reduction in cash used in investing activities in 2010 resulted from a reduction in capital expenditures as compared to 2009. cash used in financing activities was $ 19.6 million in 2010 , as compared to $ 28.3 million in 2009. the decrease in cash used in financing activities in 2010 was primarily due to the refinancing and a decrease in distributions to shareholders of $ 2.2 million . our primary uses of cash provided by operating activities over the next twelve months are expected to consist of disbursements related to tax distributions to shareholders and capital expenditures . capital expenditures capital expenditures were $ 1.0 million in 2010 and $ 2.0 million in 2009. substantially all of the expenditures in 2010 and 2009 were related to machinery and equipment purchases .

results of operations year ended december 31 , 2010 , compared with year ended january 1 , 2010 net sales . net sales were $ 131.9 million for 2010 , as compared to net sales of $ 130.3 million for 2009 , an increase of $ 1.6 million or 1.2 % . net sales by our united states ( u.s. ) operations increased 2.1 % . in the u.s. , electric screen sales increased $ 1.4 million , wall screen sales decreased $ 0.5 million , portable screens sales increased $ 0.8 million and other products increased $ 0.7 million . overall sales were positively impacted by an improvement in the economy , in the hospitality , business/it and housing markets . portable screen sales were positively impacted by a slight increase in demand from the rental and staging markets within the broader hospitality market . net sales from our european subsidiaries decreased by $ 0.7 million or 3.6 % . the stronger dollar resulted in a decrease of $ 1.0 million in net sales . cost of sales . cost of sales were $ 80.5 million for 2010 , as compared to $ 83.9 million for 2009 , a decrease of $ 3.4 million or 4.0 % . as a percentage of net sales , the cost of sales represented 61.0 % and 64.4 % for 2010 and 2009 , respectively . this constitutes a 3.4 percentage point increase in margin . this overall increase resulted primarily from the decrease in material cost in the u.s. facilities and increased adoption of lean manufacturing techniques . margins at our u.s. facilities increased 2.9 points due to sourcing lower-cost materials and components internationally , while margins at our european operations increased 1.5 points . selling , general and administrative expenses .

the company conducts these activities through three business segments : ( i ) electric utility , ( ii ) natural gas transportation and storage and ( iii ) natural gas gathering and processing . the electric utility segment generates , transmits , distributes and sells electric energy in oklahoma and western arkansas . its operations are conducted through og & e and are subject to regulation by the occ , the apsc and the ferc . og & e was incorporated in 1902 under the laws of the oklahoma territory . og & e is the largest electric utility in oklahoma and its franchised service territory includes the fort smith , arkansas area . og & e sold its retail natural gas business in 1928 and is no longer engaged in the natural gas distribution business . enogex is a provider of integrated natural gas midstream services . enogex is engaged in the business of gathering , processing , transporting and storing natural gas . most of enogex 's natural gas gathering , processing , transportation and storage assets are strategically located in the arkoma and anadarko basins of oklahoma and the texas panhandle . during the third quarter of 2012 , the operations and activities of eer were fully integrated with those of enogex through the creation of a new commodity management organization . this new organization is intended to facilitate the execution of enogex 's strategy through an enhanced focus on asset optimization and active management of its growing natural gas , ngls and condensate positions . the operations of eer , including asset management activities , have been included in the natural gas transportation and storage segment and have been restated for all prior periods presented . enogex 's operations are now organized into two business segments : ( i ) natural gas transportation and storage and ( ii ) natural gas gathering and processing . at december 31 , 2012 , oge energy indirectly owns a 79.9 percent membership interest in enogex holdings , which in turn owns all of the membership interests in enogex llc . overview company strategy the company 's mission is to fulfill its critical role in the nation 's electric utility and natural gas midstream pipeline infrastructure and meet individual customers ' needs for energy and related services focusing on safety , efficiency , reliability , customer service and risk management . the company 's corporate strategy is to continue to maintain its existing business mix and diversified asset position of its regulated electric utility business and unregulated natural gas midstream business while providing competitive energy products and services to customers primarily in the south central united states as well as seeking growth opportunities in both businesses . og & e is focused on increased investment to preserve system reliability and meet load growth by adding and maintaining infrastructure equipment and replacing aging transmission and distribution systems . og & e expects to maintain a diverse generation portfolio while remaining environmentally responsible . og & e is focused on maintaining strong regulatory and legislative relationships for the long-term benefit of its customers . in an effort to encourage more efficient use of electricity , og & e is also providing energy management solutions to its customers through the smart grid program that utilizes newer technology to improve operational and environmental performance as well as allow customers to monitor and manage their energy usage , which should help reduce demand during critical peak times , resulting in lower capacity requirements . if these initiatives are successful , og & e believes it may be able to defer the construction or acquisition of any incremental fossil fuel generation capacity until 2020. the smart grid program also provides benefits to og & e , including more efficient use of its resources and access to increased information about customer usage , which should enable og & e to have better distribution system planning data , better response to customer usage questions and faster detection and restoration of system outages . as the smart grid platform matures , og & e anticipates providing new products and services to its customers . in addition , og & e is also pursuing additional transmission-related opportunities within the spp . enogex 's business plan entails growing its businesses and providing attractive financial returns through efficient operations and effective commercial management of its assets . enogex also plans to capture growth opportunities through expansion projects , increased utilization of existing assets and through acquisitions ( including joint ventures ) in and around its footprint and attracting new customers . in addition , enogex is seeking to geographically diversify its gathering , processing and transportation businesses principally by expanding into other areas that are complementary with the company 's capabilities . enogex expects to accomplish this diversification by undertaking organic growth projects and through acquisitions . additionally , the company wants to achieve a premium valuation of its businesses relative to its peers , grow earnings per share with a stable earnings pattern , create a high performance culture and achieve desired outcomes with target stakeholders . 43 the company 's financial objectives include a long-term annual earnings growth rate of five to seven percent on a weather-normalized basis , maintaining a strong credit rating as well as increasing the dividend to meet the company 's dividend payout objectives . the company 's target payout ratio is to pay out dividends no more than 60 percent of its normalized earnings on an annual basis . the target payout ratio has been determined after consideration of numerous factors , including the largely retail composition of the company 's shareholder base , the company 's financial position , the company 's growth targets , the composition of the company 's assets and investment opportunities . story_separator_special_tag benefit related to the medicare part d subsidy discussed above . non-recurring item . during 2011 , enogex had an increase in net income of $ 2.3 million relating to the sale of the harrah processing plant and the associated wellston and davenport gathering assets in april 2011 , which enogex does not consider to be reflective of its ongoing performance . timing item . enogex 's net income in 2011 was $ 82.2 million , which included a loss of $ 2.6 million resulting from recording enogex 's natural gas storage inventory at the lower of cost or market value . the offsetting gains from the sale of withdrawals from inventory were realized during the first quarter of 2012. recent developments and regulatory matters og & e spp transmission projects in 2007 , the spp notified og & e to construct 44 miles of a new 345 kilovolt transmission line originating at og & e 's existing sooner 345 kilovolt substation and proceeding generally in a northerly direction to the oklahoma/kansas stateline ( referred to as the sooner-rose hill project ) . at the oklahoma/kansas stateline , the line connects to the companion line constructed in kansas by westar energy . the transmission line was placed in service in april 2012. the total capital expenditures associated with this project were $ 45 million . in january 2009 , og & e received notification from the spp to begin construction on 50 miles of a new 345 kilovolt transmission line and substation upgrades at og & e 's sunnyside substation , among other projects . in april 2009 , western farmers electric cooperative assigned to og & e the construction of 50 miles of line designated by the spp to be built by western farmers electric cooperative . the new line extends from og & e 's sunnyside substation near ardmore , oklahoma , 123.5 miles to the hugo substation owned by western farmers electric cooperative near hugo , oklahoma . the transmission line was completed in april 2012. the total capital expenditures associated with this project were $ 157 million . as discussed in note 17 of notes to consolidated financial statements , the occ approved a settlement agreement in og & e 's 2011 oklahoma rate case filing that included an expedited procedure for recovering the costs of the two projects . on july 31 , 2012 , og & e filed an application with the occ requesting an order authorizing recovery for the two projects through the spp transmission systems additions rider . on october 2 , 2012 , all parties signed a settlement agreement in this matter which stated : ( i ) the parties agree not to oppose requested relief sought by og & e , ( ii ) og & e will host meetings to discuss the spp 's transmission planning process , including any future transmission projects for which og & e has received a notice to construct from the spp , and ( iii ) there will be opportunities for parties to provide input related to transmission planning studies that the spp performs to identify future transmission projects . on october 25 , 2012 , the occ issued an order approving the settlement agreement and granting og & e cost recovery for the two projects . og & e initiated cost recovery beginning with the first billing cycle in november 2012. og & e demand and energy efficiency program filing on july 2 , 2012 , og & e filed an application with the occ requesting approval of og & e 's 2013 demand portfolio , the authorization to recover the program costs , lost revenues associated with any achieved energy , demand savings and performance based incentives through the demand program rider and the recovery of costs associated with research and development investments . on july 16 , 2012 , og & e filed an amended application which modified various calculations to reflect the rate of return authorized by the occ in og & e 's 2011 rate case order and provided for consideration of a peak time rebate program . on december 20 , 2012 , the occ approved a settlement with all parties in this matter . key terms of the settlement included ( i ) approval of the program budgets proposed by og & e and an additional amount of approximately $ 7 million over the three-year period for the energy efficiency programs , ( ii ) approval of og & e 's proposed demand program rider tariff , ( iii ) the recovery through the demand program rider of the increased program costs and the net lost revenues , incentives and research and development investments requested by og & e , with the exception of lost revenues resulting from the integrated volt var control program ( automated intelligence to control voltage and power on the distribution lines ) and incentives for the smarthours® and integrated volt var control demand response programs , ( iv ) recovery of the program costs on a levelized basis over the three-year period , ( v ) 45 consideration of implementing a peak time rebate program in 2015 and ( vi ) the periodic filing of additional reports . the demand program rider became effective on january 1 , 2013. og & e fuel adjustment clause review for calendar year 2010 the occ routinely reviews the costs recovered from customers through og & e 's fuel adjustment clause . on august 19 , 2011 , the occ staff filed an application to review og & e 's fuel adjustment clause for calendar year 2010 , including the prudence of og & e 's electric generation , purchased power and fuel procurement costs .

results of operations the following discussion and analysis presents factors that affected the company 's consolidated results of operations for the years ended december 31 , 2012 , 2011 and 2010 and the company 's consolidated financial position at december 31 , 2012 and 2011 . the following information should be read in conjunction with the consolidated financial statements and notes thereto . known trends and contingencies of a material nature are discussed to the extent considered relevant . replace_table_token_9_th in reviewing its consolidated operating results , the company believes that it is appropriate to focus on operating income as reported in its consolidated statements of income as operating income indicates the ongoing profitability of the company excluding the cost of capital and income taxes . operating income ( loss ) by business segment replace_table_token_10_th ( a ) during the third quarter of 2012 , the operations and activities of eer were fully integrated with those of enogex through the creation of a new commodity management organization . the operations of eer , including asset management activities , have been included in the natural gas transportation and storage segment and have been restated for all prior periods presented . ( b ) other operations primarily includes the operations of the holding company and consolidating eliminations . the following operating income analysis by business segment includes intercompany transactions that are eliminated in the consolidated financial statements . 49 og & e ( electric utility ) replace_table_token_11_th ( a ) degree days are calculated as follows : the high and low degrees of a particular day are added together and then averaged . if the calculated average is above 65 degrees , then the difference between the calculated average and 65 is expressed as cooling degree days , with each degree of difference equaling one cooling degree day .

118 , for the re-measurement of deferred tax balances as of december 31 , 2017. during the three story_separator_special_tag overview in 2017 and 2016 , net income was $ 67.2 million and $ 48.7 million , respectively . diluted earnings per share increased $ 0.39 to $ 1.40 or 38.6 % from 2016 to 2017. the $ 18.5 million increase in net income was primarily the result of increased rates adopted in the recent california grc , a decrease in other operations expense , which included a grc settlement agreement to write-off $ 3.2 million associated with a canceled water supply project in bakersfield in 2016 , and a $ 2.5 million increase in estimated unbilled revenue in 2017. these decreases were partially offset by increases in depreciation and amortization , employee wage , property tax , and net interest expenses . net other income increased $ 3.5 million to $ 6.5 million in 2017 , due primarily to the authorization of allowance for equity funds used during construction and unrealized gains on certain benefit plan investments . in 2016 and 2015 , net income was $ 48.7 million and $ 45.0 million , respectively . diluted earnings per share increased $ 0.07 to $ 1.01 or 7.5 % from 2015 to 2016. the $ 3.7 million increase in net income was primarily a result of a $ 2.8 million net resolution of several regulatory memorandum and balancing accounts in the cal water 2015 grc settlement agreement , a $ 1.9 million increase from the recovery of prior years ' incremental drought program costs , and a $ 1.7 million increase in estimated unbilled revenue in 2016. these increases were partially offset by increases in other operations expense , which included a grc settlement agreement to write-off $ 3.2 million associated with a canceled water supply project in bakersfield , increases in depreciation and amortization , maintenance , property tax , employee wage , and net interest expenses . net other income increased $ 1.9 million to $ 3.0 million in 2016 , due primarily to the resolution of $ 1.5 million of litigation proceeds in the grc settlement agreement and unrealized gains on certain benefit plan investments . we plan to continue to seek rate relief to recover our operating cost increases and receive reasonable returns on invested capital . we expect to fund our long-term capital needs through a combination of debt , common stock offerings , and cash flow from operations . critical accounting policies and estimates we maintain our accounting records in accordance with accounting principles generally accepted in the united states of america and as directed by the commissions to which our operations are subject . the process of preparing financial statements requires the use of estimates on the part of management . the estimates used by management are based on historic experience and an understanding of current facts and circumstances . a summary of our significant accounting policies is listed in note 2 of the notes to consolidated financial statements . the following sections describe those policies where the level of subjectivity , judgment , and variability of estimates could have a material impact on the financial condition , operating performance , and cash flows of the business . revenue recognition revenue generally includes monthly cycle customer billings for regulated water and wastewater services at rates authorized by the commissions ( plus an estimate for water used between the customer 's last meter reading and the end of the accounting period ) and billings to certain non-regulated customers at rates authorized by contract with government agencies . the company 's regulated water and waste water revenue requirements are authorized by the commissions in the states in which we operate . the revenue requirements are intended to provide the company a reasonable opportunity to recover its cost of service and earn a return on investments . for metered customers , cal water recognizes revenue from rates which are designed and authorized by the cpuc . under the wram , cal water records the adopted level of volumetric revenues , which would include recovery of cost of service and a return on investments as established by the cpuc for metered accounts . the adopted volumetric revenue considers the seasonality of consumption of water based upon historical averages . the variance between adopted volumetric revenues and actual billed volumetric revenues for metered accounts is recorded as a component of revenue with an offsetting entry to a regulatory asset or liability balancing account ( tracked individually for each cal water district ) subject to certain criteria under the accounting for regulated operations . the variance amount represents amounts that will be billed or refunded to customers in the future . in addition to volumetric revenues , the revenue requirements approved by the cpuc include service charges , flat rate charges , and other items not subject to the wram . cost-recovery rates are designed to permit full recovery of certain costs allowed to be recovered by the commissions . cost-recovery rates such as the mcba provides for recovery of adopted expense levels for purchased water , purchased power and pump taxes , as established by the cpuc . in addition , cost-recovery rates include recovery of cost related to water conservation programs and certain other operating expenses adopted by the cpuc . variances ( which include the effects of changes in both rate and volume for the mcba ) between adopted and actual costs are recorded as a component of revenue , as the amount of such variances will 31 be recovered from or refunded to our customers at a later date . cost-recovery expenses are generally recognized when the expenses are incurred with no markup for return or profit . the balances in the wram and mcba assets and liabilities accounts will fluctuate on a monthly basis depending upon the variance between adopted and actual results . story_separator_special_tag there are aspects to the tcja that contain technical matters that require management to interpret the legislation and make judgments until further guidance becomes available . as a result , changes in management 's judgments could materially affect amounts recognized in the financial statements . pension and postretirement health care benefits we incur costs associated with our pension and postretirement health care benefits plans . to measure the expense of these benefits , our management must estimate compensation increases , mortality rates , future health cost increases and discount rates used to value related liabilities and to determine appropriate funding . different estimates used by our management could result in significant variances in the cost recognized for pension and postretirement health care benefit plans . the estimates used are based on historical experience , current facts , future expectations , and recommendations from independent advisors and actuaries . we use an investment advisor to provide advice in managing the plan 's investments . we anticipate any increases in funding for the pension benefits plans will be recovered in future rate filings , thereby mitigating the financial impact . we believe it is probable that future costs will be recovered in future rates and therefore have recorded a regulatory asset in accordance with generally accepted accounting principles . changes to the pension benefits actuarial assumptions can significantly affect pension costs , regulatory assets , and liabilities . the following table reflects the sensitivity of pension amounts reported for the year ended december 31 , 2017 , to changes in actuarial assumptions : replace_table_token_8_th 33 story_separator_special_tag 2017 , purchased power expenses increased $ 1.7 million , or 6.2 % , mainly due to 5.4 % increase in well water production . in 2016 , purchased power expenses decreased $ 0.7 million , or 2.5 % , mainly due to 4.1 % decrease in well water production . changes in climate change regulations could increase the cost of purchased power expenses which in turn would result in an increase in the rates our power suppliers charge us . any change in pricing of our purchased power expenses in california would be recovered from our customers through the mcba mechanism . any change in power costs in other states would be requested to be recovered by the customers in those states . the impact of such legislation , is dependent upon the enacted date , the factors that impact our suppliers cost structure , and their ability to pass the costs to us in their approved tariffs . these items are not known at this time . administrative and general expenses administrative and general expenses include payroll related to administrative and general functions , all employee benefits charged to expense accounts , insurance expenses , legal fees , expenses associated with being a public company , and general corporate expenses . during 2017 , administrative and general expenses increased $ 4.4 million or 4.5 % , as compared to 2016. the increase was mostly due to increases in uninsured loss costs of $ 1.5 million , employee wages of $ 1.8 million , and employee pension and other postretirement benefit costs of $ 0.7 million . employee pension benefit expenses are fully recovered in rates and are tracked in a balancing account , such that revenues are recovered on a dollar-for-dollar basis up to the amounts authorized in the 2015 grc . employee and retiree medical expenses are recovered in rates through a balancing account authorized in the 2015 grc , such that revenues are recovered up to 85 % of the variance between adopted and recorded expenses . during 2016 , administrative and general expenses decreased $ 14.6 million or 12.9 % , as compared to 2015. the decrease was mostly due to decreases in employee pension and other postretirement benefit costs of $ 10.2 million , a decrease in california drought program costs of $ 3.0 million , and a decrease in uninsured loss costs of $ 0.9 million . the decreases were partially offset by employee wage increases of $ 1.1 million . wage increases became effective january 1 , 2016. employee pension benefit expenses are fully recovered in rates and are tracked in a balancing account , such that revenues are recovered on a dollar-for-dollar basis 35 up to the amounts authorized in the 2012 grc . employee and retiree medical expenses are recovered in rates through a balancing account authorized in the 2012 grc , such that revenues are recovered up to 85 % of the variance between adopted and recorded expenses . other operations expenses the components of other operations expenses include payroll , material and supplies , and contract service costs of operating the regulated water systems , including the costs associated with water transmission and distribution , pumping , water quality , meter reading , billing , operations of district offices , and water conservation programs . during 2017 , other operations expenses decreased $ 5.6 million , or 7.0 % , compared to 2016. the decrease was mostly due to conservation program expense decreases of $ 4.3 million , the write-off of $ 3.2 million of capital costs in 2016 , and $ 2.0 million of mcba cost deferral associated with the deferral of operating revenue . the decreases were partially offset by employee wage increases of $ 1.3 million , the write-off of $ 1.1 million of costs in 2017 that were previously capitalized , state of department of public health fee increase of $ 0.7 million , and a software maintenance and licensing cost increase of $ 0.7 million . conservation program expenses are fully recovered in rates and are tracked in a balancing account if it is within the authorized amount , such that revenues are recovered on a dollar-for-dollar basis up to the amounts authorized in the 2015 grc .

results of operations operating revenue operating revenue in 2017 was $ 666.9 million , an increase of $ 57.5 million , or 9.4 % , over 2016. operating revenue in 2016 was $ 609.4 million , an increase of $ 21.0 million , or 3.6 % , over 2015. the sources of changes in operating revenue were : replace_table_token_9_th _ ( 1 ) in 2017 , the operating revenue increase is due to rate increases ( see table in rates and regulation section below ) and an increase of $ 2.5 million in estimated unbilled revenue mostly due to a combination of higher average daily customer billing rates and an increase in unbilled days at the end of 2017 as compared to 2016. the operating revenue increase in 2016 resulted from rate increases and an increase of $ 2.6 million in estimated unbilled revenue mostly due an increase in unbilled days at the end of 2016 as compared to 2015 . ( 2 ) the mcba revenue increase in 2017 resulted from an increase in actual water production costs relative to adopted water production costs in 2017 as compared to 2016. the mcba revenue decrease in 2016 resulted from a significant reduction in customer consumption in california caused by drought conditions . as required by the mcba mechanism , the change in water production costs in california changes operating revenue in the same amount . ( 3 ) the other balancing accounts revenue consists of the pension , conservation and health care balancing account revenues . pension and conservation balancing account revenues are the differences between actual expenses and adopted rate recovery . health care balancing account revenue is 85 % of the difference between actual health care expenses and adopted rate recovery .

no nso shall be assignable or otherwise transferable except by will or the laws of descent and distribution or except as permitted in accordance with sec release no.33-7646 as effective april 7 , 1999. the plan may be amended , altered , suspended , discontinued or terminated by the board of directors without further stockholder approval , unless such approval is required by law or regulation or under the rules of the stock exchange or automated quotation system on which the common stock is then listed or quoted . thus , stockholder approval will not necessarily be required for amendments which might increase the cost of the plan or broaden eligibility except that no amendment or alteration to the plan shall be made without the approval of stockholders which would ( a ) increase the total number of shares reserved for the purposes of the plan or decrease the nso price ( except as provided in paragraph 9 of the plan ) or change the classes of persons eligible to participate in the plan or ( b ) extend the nso period or ( c ) materially increase the benefits accruing to plan participants or ( d ) materially modify plan participation eligibility requirements or ( e ) extend the expiration date of the plan . unless otherwise indicated the plan will remain in effect for a period of ten years from the date adopted unless terminated earlier by the board of directors except as to nsos then outstanding , which shall remain in effect until they have expired or been exercised . no options have been granted and outstanding under the plan . capital contribution in september 2012 , the company received a cash contribution of capital from business associates of its president in the amount of $ 12,500 which was used to pay accrued obligations . note 5 – convertible note payable the company incurred $ 42,000 of legal costs in connection with its decision to become publicly reporting . in december 2009 , the company entered into a convertible note payable with its outside counsel , gary b. wolff , to satisfy the obligation . the convertible note is payable on demand , bears interest at 2 % per annum and is convertible into shares of the company 's common stock at a price per share equal to the par value of $ 0.001 . conversion can be in whole or in any portion of the outstanding principal balance at the option of the holder . note 6 – related party transactions substantially all of the company 's revenues are and will continue to be derived by writing and amending all of the pension plans for the clients of actuarial ideas , inc. , an actuarial and consulting firm controlled by the company 's president . at december 31 , 2012 and 2011 , actuarial ideas , inc. was owed $ 60,578 and $ 22,474 for expenses paid for the company . f-9 the company began paying a management fee to actuarial ideas , inc. equivalent to $ 1,500 per month plus 5 % of revenues collected for us from customers by actuarial ideas , inc. the company also pays its president an annual salary of $ 30,000 for which he devotes approximately 15 % of his time to the company . richard cohen , the company 's treasurer , devotes approximately 10 % of his time to the company and receives an annual salary of $ 6,000 for the company . the cost of salaries is included as cost of sales in the accompanying statement of operations . note 7 – income taxes the company was a line of business of actuarial ideas , inc. , until march 19 , 2007 during which time the company was treated as a part of actuarial ideas , inc. for federal income tax purposes . the company accounts for income taxes under section 740-10-30 of the fasb accounting standards codification . deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse . in accordance with fasb asc 740 , the company applies the `` more likely than not `` threshold to the recognition and derecognition of tax positions for its financial statements . using that guidance , the company had no uncertain tax positions that qualify for either recognition or disclosure in the financial statements as of december 31 , 2011 or 2010. at december 31 , 2012 the company had net operating loss carry-forwards of $ 177,710 that may be offset against future federal taxable income through 2031. no tax benefit has been recognized with respect to these net operating loss carry-forwards in the accompanying financial statements because the company believes that realization is not likely . accordingly , the potential tax benefits of the net loss carry-forwards are fully offset by a valuation allowance . all differences between operating results for financial reporting purposes and operating results for income tax purposes are de minimis . note 8 – accounts payable and accrued expenses the company recorded a liability of $ 36,092 for professional services in 2009 which is included the caption `` accrued expenses . `` the amount remained unchanged as of december 31 , 2012. the company believes that the amount billed was excessive and is exploring its options with respect to this item . story_separator_special_tag accounts payable and accrued expenses at december 31 were : replace_table_token_8_th note 9 - subsequent events the company has evaluated all events that occurred after the balance sheet date of december 31 , 2012 through april 17 story_separator_special_tag we were formed as a line of business by actuarial ideas , inc. in january 2005 and became a separate legal entity on march 19 , 2007. we write all of the pension plans for the clients of actuarial ideas , inc. , an actuarial and consulting firm controlled by our president , mark cohen . at the time that we became a separate legal entity , we entered into an agreement with actuarial ideas , inc. under which we continue to write and edit all the pension and retirement plans for its clients . prior to being a separate legal entity , we were structured as a line of business of actuarial ideas , inc. which allocated a portion of all of its combined costs to us based on the relationship of our revenues to total actuarial ideas , inc. revenues . the revenues represented specifically identified revenue for our business line and are not allocations . actuarial ideas , inc. maintained all of its records based on the nature of each type of revenue producing activity . all of the revenue associated with writing pension plans was segregated and specifically identified . costs of sales consist primarily of salaries , rent , communications and travel costs . actuarial ideas , inc. believes that the allocation was consistent with the percentage of time and resources devoted to us during each period and conforms to guidelines described in sab topic 1b1 . commencing july 1 , 2007 , cost allocations from actuarial ideas , inc. ceased , and we began paying a management fee to actuarial ideas , inc. equivalent to $ 1,500 per month plus 5 % of revenues collected for us from customers by actuarial ideas , inc. the management fee covers the costs of rent , administrative and computerized recordkeeping costs , communications and other office costs . it does not include the salaries that we agreed to pay , professional fees and any separate marketing costs that we elect to incur . we also pay ( i ) mr. cohen an annual salary of $ 30,000 for which he devotes 15 % of his time to us ( ii ) richard cohen , our treasurer , devotes 10 % of his time to us and receives an annual salary of $ 6,000. for the immediate future , actuarial ideas , inc. will refer business to us by advising its clients that the project will be completed more efficiently be engaging us than by engaging any entity other than us to complete a portion of the required tasks . it will provide us the basic information and background . we will use this information to draft or amend pension plans . we will be completely dependent on these referrals from actuarial ideas , inc. for our revenue for at least the next 18 to 24 months . when resources permit in the future , we will seek business from other sources in addition to actuarial ideas , inc. this work will be performed or supervised by mr. cohen . more than 60 % of our revenues are generally earned in november and december . while operating in this manner , we will have fixed costs limited to the salary due to mr. cohen and the fixed portion of the management fee ( $ 1,500 per month ) . we are not aware of any material changes to our operations for the next 12 months compared to the level of operations during the past 12 months . the third paragraph in liquidity below summarizes what our overall expenses will be if this level of operations takes place . 15 we believe that being a public entity may provide us ( and our president , mark cohen ) benefits in visibility and the way that we are perceived by potential business referral sources and prospective customers . these sources may refer new business to us directly or to actuarial ideas , inc. which also will result in additional revenue for us . ultimately , the goal of this process will be to develop sources of business beyond actuarial ideas , inc. however , we have not done any studies or performed any surveys to determine the likelihood that these shareholders will actually make referrals to us and there can be no assurances that we will be successful in any of this regard . operations december 31 2012 and 2011 a summary of operations is : replace_table_token_1_th we currently perform work for approximately 150 plans that relate to actuarial idea 's clients whose work has been referred to us . more than half of these plans are defined benefit plans . the remainder is split among defined contribution plans such as profit sharing plans , money purchase plans , and 401 ( k ) plans . our revenue and operations were severely hurt by the ongoing downturn in the economy . this downturn resulted in very few companies establishing new pension plans . companies with existing pension plans made as few changes or reviews as possible because of the economic uncertainties . our financial situation was severely impacted because of these uncertainties and conditions . commencing july 1 , 2007 , we began paying a management fee to actuarial ideas , inc. equivalent to $ 1,500 per month plus 5 % of revenues collected for us from customers by actuarial ideas , inc. the management fee covers the costs of rent , administrative and computerized recordkeeping costs , communications and other office costs . it does not include the salaries that we agreed to pay , professional fees and any separate marketing costs that we elect to incur . we also pay mr. mark cohen an annual salary of $ 30,000 for

general and administrative expenses consist principally of : 2012 management fee ( $ 18,000 ) ; payroll taxes ( $ 2,674 ) , and customer service fee ( $ 1,002 ) 2011 management fee ( $ 18,000 ) ; payroll taxes ( $ 2,754 ) , and customer service fee ( $ 1,469 ) 16 liquidity in september 2012 , we received an unsolicited cash contribution of capital from business associates of our president in the amount of $ 12,500 which was used to pay accrued obligations . as a corporate policy , we will not incur any cash obligations that we can not satisfy with known resources , as are described below and or elsewhere herein . we believe that the perception that many people have of a public company make it more likely that they will accept securities from a public company as consideration for indebtedness to them than they would from a private company . we have not performed any studies of this matter . our conclusion is based on our own observations . however , there can be no assurances that we will be successful in any of those efforts . additionally , issuance of shares would necessarily dilute the percentage of ownership interest of our stockholders . issuing restricted shares of our common stock to independent subcontractors or others who may be in a position to refer business or customers to us would enable us to operate and expand our business more effectively . having shares of our common stock may also give such entities a greater feeling of identity with us which may result in more referred business . conversely , such issuances of our shares would necessarily dilute the percentage of ownership interest of our existing stockholders . despite the fact our president is willing to consider providing us with a loan or advance to us on a case by case basis his resources are not unlimited .

such forward-looking statements include our expectations regarding revenue , gross margin , expenses , cash flows and other financial items ; any statements of the plans , strategies and objectives of management for future operations and personnel ; statements related to the integration of transmode ; factors that may affect our operating results ; anticipated customer activity ; statements concerning new products or services , including new product costs , and delivery dates ; statements related to capital expenditures ; statements related to future economic conditions , performance , market growth or our sales cycle ; statements related to our convertible senior notes ; statements related to the effects of litigation on our financial position , results of operations or cash flows ; statements related to the timing and impact of transfer pricing reserves or our effective tax rate ; statements as to industry trends and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing . these statements are often identified by the use of words such as `` anticipate , '' `` believe , '' `` continue , '' `` could , '' `` estimate , '' `` expect , '' `` intend , '' `` may , '' or `` will , '' and similar expressions or variations . these statements are based on the beliefs and assumptions of our management based on information currently available to management . such forward-looking statements are subject to risks , uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements . 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 in item 1a of this annual report on form 10-k. you should review these risk factors for a more complete understanding of the risks associated with an investment in our securities . such forward-looking statements speak only as of the date of this report . we disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements . the following discussion and analysis should be read in conjunction with our “ selected financial data ” included in item 6 of this annual report on form 10-k and consolidated financial statements and notes thereto included elsewhere in this annual report on form 10-k. overview we provide optical transport networking equipment , software and services to service providers across the globe . optical transport networks are deployed by service providers facing significant demands for optical bandwidth prompted by increased use of high-speed internet access , mobile broadband , high-definition video streaming services , business ethernet services and cloud-based services . we manufacture large-scale indium phosphide pics , which are used as a key differentiating component inside our intelligent transport network platforms . the infinera intelligent transport network architecture enables service providers to scale network bandwidth , accelerate service innovation and simplify optical network operations . service providers across the globe rely on infinera intelligent transport networks to enable services that create rich end-user experiences based on efficient , high-bandwidth optical networking . late in 2014 , building on our leadership in long-haul and sub-sea networks , we introduced the cloud xpress , targeting the dci market , which we believe will be a rapidly growing market as cloud infrastructures continue to evolve . on august 20 , 2015 , we successfully completed our public offer to the shareholders of transmode , acquiring 95.8 % of the outstanding common shares and voting interest in transmode . transmode is a metro packet-optical networking company based in stockholm , sweden . the combination of the two companies brings together a complementary set of customers , products and technologies into one company . with the acquisition of transmode and the introduction of the infinera xtc-2/2e during 2015 , we now provide an end-to-end portfolio of packet-optical solutions for metro , dci , long-haul and subsea networks . we believe we are well positioned to address the changing requirements of our growing and diverse customer base . we primarily sell our products through our direct sales force , with a small portion sold indirectly through resellers . we derived 93 % , 95 % and 92 % of our revenue from direct sales to customers for 2015 , 2014 and 2013 , respectively . we expect to continue generating a substantial majority of our revenue from direct sales in the future . we are headquartered in sunnyvale , california , with employees located throughout the americas , europe and the asia pacific region . we expect to continue to add personnel in the united states and 36 internationally to develop our products , provide additional sales support for key market verticals and emerging geographic regions , and invest in personnel to allow our business to scale to support our expanded business opportunities . 2015 financial and business performance we continued our transformation to a multi-market company in 2015 by adding metro and dci to our core long-haul business . we grew total revenue by 33 % compared to 2014 including revenue from transmode in the post-acquisition period . organically , excluding the partial year of transmode revenues , our revenues grew in the mid-20 % range in 2015 , marking the third consecutive year we have grown significantly faster than the overall wdm market . we also continued to expand our gross margin and operating margin in 2015 , demonstrating the leverage we have achieved from our vertical integration , the value proposition of our intelligent transport network and our commitment to prudent expense management . story_separator_special_tag in addition , we had increased facilities and depreciation costs of $ 3.0 million , increased costs of professional outside services of $ 2.1 million to support cloud xpress development activities , and increased other discretionary spending of $ 0.7 million in order to support our growing business . these increases were partially offset by a decrease in prototype and non-recurring engineering expense of $ 2.0 million due to timing of certain projects and decreased stock-based compensation expense of $ 2.0 million due to lower equity activity as compared to 2013. sales and marketing expenses 2015 compared to 2014. sales and marketing expenses increased $ 22.4 million , or 28 % , in 2015 from 2014 primarily driven by increased personnel costs of $ 11.7 million as a result of higher sales commissions and incremental headcount to support the continued expansion of our business into new markets and customer verticals . we also had increased discretionary spending of $ 2.6 million , amortization of intangible assets of $ 2.2 million , prototype and lab trial spending of $ 2.0 million , and other marketing expenses of $ 3.9 million . the inclusion of the transmode business during 2015 increased sales and marketing expense by $ 12.1 million . 2014 compared to 2013. sales and marketing expenses increased $ 6.2 million , or 9 % , in 2014 from 2013 primarily due to increased compensation expenses of $ 3.6 million from higher headcount to support the continued expansion of our business and higher sales commissions associated with revenue growth that was higher than our plan for the year . we also had increased travel , trade show and other marketing related expenses of $ 2.0 million and other discretionary spending of $ 0.9 million in order to support our growing business . these increases were partially offset by lower lab trial and related expenses of $ 1.5 million . general and administrative expenses 2015 compared to 2014 . general and administrative expenses increased $ 13.2 million , or 27 % , in 2015 from 2014. during 2015 , the increases were primarily due to acquisition-related expenses related to the transmode acquisition of $ 6.8 million . additionally , we incurred increased personnel costs of $ 4.6 million driven by incremental headcount and higher discretionary spending of $ 1.7 million to support our growing business . the inclusion of the transmode business increased general and administrative expenses by $ 2.2 million . 2014 compared to 2013 . general and administrative expenses increased $ 3.2 million , or 7 % , in 2014 from 2013 primarily due to higher compensation expenses of $ 2.7 million due to an increase in headcount as we continue to expand our team to support our growing business . in addition , we had increased equipment and 41 software expenses and other discretionary spending of $ 1.0 million . these increases were partially offset by decreased depreciation expense of $ 0.5 million . other income ( expense ) , net replace_table_token_10_th 2015 compared to 2014. interest income increased mainly due to a higher average investment balance due to cash generated from the business during the year . interest expense for 2015 increased by $ 0.9 million due to an increase of amortization of discount and issuance costs related to the $ 150.0 million of 1.75 % convertible senior notes ( the `` notes '' ) . other gain ( loss ) , net , for 2015 mainly comprised of $ 1.3 million of gains due to foreign currency exchange rate changes and a $ 1.1 million gain primarily from foreign currency forward contracts that we entered into to hedge currency exposures associated with the cash portion of the offer to acquire transmode . other gain ( loss ) , net , for 2014 mainly comprised of $ 1.4 million of losses due to foreign currency exchange rate changes . 2014 compared to 2013. interest income increased mainly due to a higher average investment balance due to having the proceeds from the notes for the full year and cash generated from the business . interest expense for 2015 and 2014 consisted of amortization of debt discount costs , debt issuance costs and contractual interest expense related to the notes issued in may 2013. see note 11 , “ convertible senior notes , ” to the notes to consolidated financial statements for more information . other gain ( loss ) , net for 2014 was mainly comprised of $ 1.4 million of losses due to foreign currency exchange rate changes . other gain ( loss ) , net for 2013 included $ 1.4 million of losses due to foreign currency exchange , partially offset by a gain of $ 0.2 million from auction rate securities ( “ ars ” ) sold . income tax provision we recognized income tax expense of $ 1.1 million on income before income taxes of $ 52.0 million , $ 2.8 million on income before income taxes of $ 16.4 million and $ 1.7 million on loss before income taxes of $ 30.5 million in fiscal years 2015 , 2014 and 2013 , respectively . the resulting effective tax rates were 2.1 % , 16.8 % and ( 5.4 ) % for 2015 , 2014 and 2013 , respectively . the 2015 and 2014 effective tax rates differ from the expected statutory rate of 35 % based upon the utilization of unbenefited u.s. loss carryforwards , offset by state income taxes and foreign taxes provided on foreign subsidiary earnings . the decrease in 2015 tax expense compared to 2014 tax expense relates to the tax benefit of acquisition related amortization expenses and charges , offset by higher state income taxes because of the profitable position of our u.s. operations , additional tax reserves and an increase in taxable foreign profits in certain jurisdictions . the tax expense for 2014 was greater than 2013 due to higher income and associated taxes as well as increases in state taxes as a result of income that could not be offset by loss carryforwards .

results of operations revenue the following table sets forth , for periods presented , certain consolidated statements of operations information ( in thousands , except percentages ) : replace_table_token_3_th replace_table_token_4_th 2015 compared to 2014. product revenue increased by $ 197.0 million , or 34 % , in 2015 from 2014. the increase was primarily driven by continued momentum associated with the infinera dtn-x platform through both new network builds and capacity adds to existing networks . additionally , we benefited from the inclusion of revenue from transmode 's metro products since the acquisition , which occurred during the third quarter of 2015. in 2015 , we also experienced significant growth in revenue associated with our cloud xpress platform , which was introduced during the fourth quarter of 2014. these increases were partially offset by a reduction in sales of the dtn platform , reflecting the continued shift to 100gbps network deployments . services revenue increased by $ 21.7 million , or 23 % , in 2015 from 2014. the increase was primarily due to higher on-going support services as we continued to grow our installed base . additionally , during 2015 , we experienced higher levels of deployment services as customers built new networks utilizing our teams ' expertise . our services revenue also benefited from the inclusion of transmode 's services revenue since the acquisition . 2014 compared to 2013. total product revenue increased by $ 106.9 million , or 23 % , in 2014 from 2013. this increase was primarily driven by the continued strong market adoption of the infinera dtn-x platform as our customers continued to deploy our products to meet the growing bandwidth needs of their networks . the 38 increase in infinera dtn-x platform revenue was partially offset by a reduction in sales of the infinera dtn platform .

the interest rate swap agreement is intended to mitigate the impact of rising interest story_separator_special_tag you should read the following discussion and analysis in conjunction with the information set forth under “ item 6 - selected financial data ” and our consolidated financial statements and the notes thereto included in item 8 in this annual report on form 10-k. the statements in this discussion regarding industry outlook , our long-term strategy , our expectations regarding our future performance , liquidity and capital resources and other non-historical statements in this discussion are forward-looking statements . see “ forward-looking information ” on page ii of this annual report on form 10-k. these forward-looking statements are subject to numerous risks and uncertainties , including , but not limited to , the risks and uncertainties described under “ item 1a - risk factors. ” our actual results may differ materially from those contained in or implied by any forward-looking statements . 34 restatement this md & a gives effect to certain adjustments made to our previously reported consolidated financial statements as of and for the year ended december 31 , 2018. due to the restatement of this period , the data set forth in this md & a may not be comparable to discussions and data included in our previously filed annual report on form 10-k for 2018. refer to notes 2 and 19 of the accompanying audited financial statements for further details related to the restatement and immaterial correction of errors and the impact on our consolidated financial statements . company overview commercial vehicle group , inc. ( through its subsidiaries ) is a leading supplier of electrical wire harnesses , seating systems , and a full range of other cab related products for the global commercial vehicle markets , including medium- and heavy-duty trucks ( `` md/hd truck '' ) and medium- and heavy-construction vehicles . we also supply electrical wire harnesses , control panels , electro-mechanical and cable assemblies , seating systems and other products to automotive , military , bus , agriculture , transportation , mining , industrial and off-road recreational markets . we have manufacturing operations in the united states , mexico , china , united kingdom , czech republic , ukraine , thailand , india and australia . our products are primarily sold in north america , europe , and the asia-pacific region . we are differentiated from automotive industry suppliers by our ability to manufacture low volume , customized products on a sequenced basis to meet the requirements of our customers . we believe our products are used by a majority of the north american md/hd truck and many medium- and heavy-duty construction vehicle original equipment manufacturers ( “ oems ” ) , and to a lesser extent other makers of industrial equipment . in the quarter ended december 31 , 2018 , we completed a strategic reorganization of our operations into two business segments , electrical systems and global seating . the reorganization allows the company to better focus its business along product lines , as opposed to end markets , which the company believes enhances the effectiveness of seeking out growth opportunities and shareholder value . business overview for the year ended december 31 , 2019 , approximately 49 % of our revenue was generated from sales to north american md/hd truck oems . our remaining revenue was primarily derived from sales to oems in the global construction equipment market , aftermarket and oe service organizations , military market and specialty markets . demand for our products may be driven by preferences of the end-user of the vehicle , particularly with respect to heavy-duty trucks . unlike the automotive industry , heavy-duty truck oems generally afford the end-user the ability to specify many of the component parts that will be used to manufacture the vehicle , including a wide variety of cab interior styles and colors , brand and type of seats , type of seat fabric and color , and interior styling . certain of our products are only utilized in heavy-duty trucks , such as our storage systems , sleeper boxes and privacy curtains . to the extent that demand for higher content vehicles increases or decreases , our revenues and gross profit will be impacted positively or negatively . we generally compete for new business at the beginning of the development of a new vehicle platform and upon the redesign of existing programs . new platform development generally begins one to three years before the marketing of such models by our customers . contract durations for commercial vehicle products generally extend for the entire life of the platform . several of the major truck makers have upgraded their truck platforms and we believe we have maintained our share of content in these platforms . we continue to pursue opportunities to expand our content . demand for our heavy-duty ( or `` class 8 '' ) truck products is generally dependent on the number of new heavy-duty trucks manufactured in north america , which in turn is a function of general economic conditions , interest rates , changes in government regulations , consumer spending , fuel costs , freight costs , fleet operators ' financial health and access to capital , used truck prices and our customers ' inventory levels . new heavy-duty truck demand has historically been cyclical and is particularly sensitive to the industrial sector of the economy , which generates a significant portion of the freight tonnage hauled by commercial vehicles . north american heavy-duty truck production was 342,000 units in 2019. according to a february 2020 report by act research , a publisher of industry market research , north american class 8 production levels are expected to decrease to 225,000 units in 2020 , steadily increase to 340,000 units in 2023 and then decline to 246,000 units in 2024. act research estimated that the average age of active north american class 8 trucks was 6.4 and 6.6 years in 2019 and 2018 , respectively . as vehicles age , maintenance costs typically increase . story_separator_special_tag 2019 revenues were adversely impacted by foreign currency exchange translation of $ 10.4 million , which is reflected in the change in revenue above . gross profit . included in gross profit is cost of revenues , which consists primarily of raw materials and purchased components for our products , wages and benefits for our employees and overhead expenses such as manufacturing supplies , facility rent and utilities costs related to our operations . cost of revenues increased $ 23.3 million , or 3.0 % , resulting from an increase in raw material and purchased component costs of $ 12.1 million , wages and benefits of $ 2.0 million and overhead expenses of $ 9.2 million . supplier price increases and costs associated with difficult labor markets , including higher labor costs , adversely impacted material and labor costs . beginning in the first quarter of 2019 , the imposition by mexico of a new statutory minimum wage in the free zone of the northern border ( the “ border minimum wage ” ) , a geographic area running along and just south of the u.s. / mexico 37 border and encompassing our wire harness facility in agua prieta , mexico , adversely impacted labor costs . a number of actions , including pricing adjustments on certain products , reduced the impact of the border minimum wage . the net unfavorable impact of the border minimum wage on the 2019 results was approximately $ 2.3 million . costs associated with a supplier of fabricated metals that sought bankruptcy relief in the second quarter of 2019 ( the `` troubled supplier '' ) adversely impacted the current year by $ 3.1 million . costs associated with manufacturing investments in our global wire harness and north american trim businesses ( the `` manufacturing investments '' ) are included in 2019 results and approximate $ 1.8 million . employee separation costs and charges associated with manufacturing capacity rationalization ( the `` restructuring initiatives '' ) that began in 2019 totaling $ 2.2 million adversely impacted gross profit in 2019 . the restructuring initiatives are expected to mitigate the impact of lower production volumes in 2020. as a percentage of revenues , gross profit margin was 11.7 % for the year ended december 31 , 2019 compared to 13.9 % for the year ended december 31 , 2018 . selling , general and administrative expenses . selling , general and administrative ( `` sg & a '' ) expenses consist primarily of wages and benefits and other overhead expenses such as marketing , travel , legal , audit , rent and utilities costs , which are not directly or indirectly associated with the manufacturing of our products . sg & a expenses increased $ 1.9 million in the year ended december 31 , 2019 as compared to the year ended december 31 , 2018 due primarily to costs of $ 0.9 million associated with the acquisition of the assets of fse and costs of $ 0.8 million associated with the restructuring initiatives . other ( income ) expense . the 2019 results include a $ 2.5 million non-cash charge associated with the early payout of benefits to term vested participants in the u.s. pension plan , which reduced future financial risk associated with the u.s. pension plan and contributed to an improvement in funded status to approximately 100 % . interest expense . interest expense includes the mark-to-market impact of an interest rate swap agreement , which resulted in a $ 1.9 million non-cash charge in the year ended december 31 , 2019 and a $ 0.8 million gain in the prior year . provision for income taxes . income tax provisions of $ 5.8 million and $ 8.1 million were recorded for the fiscal years ended december 31 , 2019 and 2018 , respectively . the year over year change in the tax provision was primarily attributable to the lower tax expense resulting from the decrease in income before provision for income taxes , offset by a decrease in the amount of favorable , period-specific tax adjustments and an increase in withholding tax expense recorded in the current year for the impact of the repatriation of earnings from certain foreign subsidiaries . electrical systems segment results the table below sets forth certain electrical systems segment operating data for the periods indicated ( dollars are in thousands ) : replace_table_token_7_th revenues . the increase in electrical systems segment 2019 revenues is primarily a result of : a $ 18.6 million , or 7 % , increase in oem north american md/hd truck revenues ; a $ 10.2 million , or 55 % , increase in military revenues primarily attributable to the fse acquisition ; a $ 2.0 million , or 2 % , decrease in oem construction equipment revenues ; and a $ 8.7 million , or 6 % , decrease in other revenue . electrical systems segment 2019 revenues were adversely impacted by foreign currency exchange translation of $ 3.7 million , which is reflected in the changes in revenue above . gross profit . included in gross profit is cost of revenues , which increased $ 29.2 million , or 6.6 % , as a result of an increase in raw material and purchased component costs of $ 13.8 million , wages and benefits of $ 4.4 million and overhead expenses of $ 11.0 million . inflationary pressures affecting the company 's raw material , purchased component , labor and labor associated costs adversely affected cost of revenues . also adversely impacting 2019 results , was the border minimum wage , approximately $ 2.3 million ; the troubled supplier , approximately $ 3.1 million ; and costs associated with the manufacturing investments , approximately $ 1.8 million . cost control and cost recovery initiatives , including pricing adjustments , reduced the impact of these 38 cost pressures on gross profit . gross profit for the year ended december 31 , 2019 was also adversely impacted by costs of $ 1.8 million associated with the restructuring initiatives .

global seating segment results the table below sets forth certain global seating segment operating data for the periods indicated ( dollars are in thousands ) : replace_table_token_8_th revenues . the decrease in global seating segment 2019 revenues is primarily a result of : a $ 8.2 million , or 5 % , increase in oem north american md/hd truck revenues ; a $ 18.3 million , or 19 % , decrease in oem construction equipment revenues ; a $ 5.4 million , or 6 % , decrease in aftermarket revenues ; and a $ 0.4 million , or 1 % , decrease in other revenues . global seating segment 2019 revenues were adversely impacted by foreign currency exchange translation of $ 6.7 million , which is reflected in the changes in revenue above . gross profit . included in gross profit is cost of revenues , which decreased $ 6.9 million , or 2.0 % , as a result of a decrease in raw material and purchased component costs of $ 3.1 million , wages and benefits of $ 2.4 million and overhead expenses of $ 1.4 million . inflationary pressures affecting the company 's raw material , purchased component , labor and labor associated costs adversely affected cost of revenues . cost control and cost recovery initiatives , including pricing adjustments , reduced the impact of these cost pressures on gross profit . gross profit for the year ended december 31 , 2019 was also adversely impacted by costs of $ 0.4 million associated with the restructuring initiatives . as a percentage of revenues , gross profit was 11.8 % for the year ended december 31 , 2019 compared to 13.6 % for the year ended december 31 , 2018 . selling , general and administrative expenses . global seating segment sg & a expenses decreased $ 2.0 million , or 8.9 % , for the year ended december 31 , 2019 compared to the year ended december 31 , 2018 , reflecting a focus on cost discipline .

the increase in fiscal year 2012 compared to fiscal year 2011 was due to increased business levels at the hotel properties , reflecting the improving economy and its impact on the travel industry . net cash used in investing activities totaled $ ( 970,000 ) and $ ( 1.1 ) million for the years ended january 31 , 2012 and 2011 , respectively . the decrease in funds used in 2012 as compared to 2011 was due to reduced capital refurbishment projects . net cash provided by financing activities totaled $ 522,000 and $ 1.9 million for the years ended january 31 , 2012 and 2011 , respectively . the decrease was due to the $ 2.2 million of funds raised in the sale of non-controlling interests in the albuquerque subsidiary during fiscal year 2011. as of january 31 , 2012 , we had no commitments for capital expenditures beyond a 4 % reserve for refurbishment and replacements that is set aside annually , as described below . we continue to contribute to a capital expenditures fund ( the “ fund ” ) an amount equal to 4 % of the innsuites hotels ' revenues from operation of the hotels . the fund is restricted by the mortgage lender for four of our properties . as of january 31 , 2012 , $ 136,808 was held in these accounts and is reported on our consolidated balance sheet as “ restricted cash. ” the fund is intended to be used for capital improvements to the hotels and refurbishment and replacement of furniture , fixtures and equipment . during the twelve months ended january 31 , 2012 and 2011 , the hotels spent approximately $ 970,000 and $ 1.1 million , respectively , for capital expenditures . we consider the majority of these improvements to be revenue producing . therefore , these amounts are capitalized and depreciated over their estimated useful lives . we plan to spend approximately $ 505,000 for capital expenditures in fiscal year 2013. the hotels also spent approximately $ 1.4 million and $ 1.3 million during fiscal years 2012 and 2011 , respectively , on repairs and maintenance and these amounts have been charged to expense as incurred . we have minimum debt payments of $ 2.0 million and $ 6.0 million due during fiscal years 2013 and 2014 , respectively . on november 23 , 2010 , we established a revolving bank line of credit , with a credit limit of $ 500,000. the line of credit bears interest at the prime rate plus 2.75 % per annum with a 6.0 % rate floor , has no financial covenants and matures on may 23 , 2012. management is actively working with the lender to extend this line of credit . if the trust maintains bank balances of at least $ 250,000 with the lender , the line of credit bears interest at the prime rate plus 1.0 % with a 6.0 % rate floor . the line is secured by a junior security interest in the yuma , arizona property and our trade receivables . mr. wirth is a guarantor on the line of credit . on january 31 , 2012 , the trust had drawn no funds under the line of credit . the largest outstanding balance on the line of credit during fiscal year 2012 was $ 169,972. as of january 31 , 2012 , we had mortgage notes payable of $ 21.3 million outstanding with respect to the hotels , $ 551,000 in secured promissory notes outstanding to unrelated third parties arising from the shares of beneficial interest and partnership unit repurchases , and no principal due and payable under notes and advances payable to mr. wirth and his affiliates . we may seek to negotiate additional credit facilities or issue debt instruments . any debt incurred or issued by us may be secured or unsecured , long-term , medium-term or short-term , bear interest at a fixed or variable rate and be subject to such other terms as we consider prudent . 7 sale of ownership interests in albuquerque subsidiary on july 22 , 2010 , the board of trustees unanimously approved , with mr. wirth abstaining , for the partnership to enter into an agreement with rare earth financial , llc ( “ rare earth ” ) , an affiliate of mr. wirth , to sell additional units in albuquerque suite hospitality , llc ( the “ albuquerque entity ” ) , which owns and operates the albuquerque , new mexico hotel property . under the agreement , rare earth agreed to either purchase or bring in other investors to purchase at least 51 % of the membership interests in the albuquerque entity and the parties agreed to restructure the operating agreement of the albuquerque entity . a total of 400 units were available for sale for $ 10,000 per unit , with a two-unit minimum subscription . on october 29 , 2010 , the parties revised the operating agreement . under the new operating agreement , rare earth became the administrative member of the albuquerque entity , in charge of the day-to-day management of the company . additionally , the membership interests in the albuquerque entity were allocated to three classes with differing cumulative priority distribution rights . class a units are owned by unrelated third parties and have first priority for distributions , class b units are owned by the trust and or the partnership and have second priority for distributions , and class c units are owned by rare earth or other affiliates of mr. wirth and have the lowest priority for distributions from the albuquerque entity . priority distributions are cumulative for 5 years . story_separator_special_tag in the event that funds generated from a triggering event are insufficient to pay the total amount of all such accumulated distributions owed to the members , all class a members will participate pro rata in the funds available for distribution to them until paid in full , then class b , and then class c. after all investors have received their initial capital plus a 7 % per annum simple return , any additional profits will be allocated 50 % to rare earth , with the remaining 50 % allocated proportionately to all unit classes . priority distributions to all classes are projected to be $ 428,400 each year for fiscal years 2013 through 2017. the tucson entity is required to use its best efforts to pay the priority distributions . the trust does not guarantee and is not otherwise obligated to pay the cumulative priority distributions . innsuites hotels will continue to provide management , licensing and reservation services to the property . at january 31 , 2012 , the partnership had sold 245.5 units to unrelated parties at $ 10,000 per unit totaling $ 2,447,000. as of january 31 , 2012 , the partnership holds a 56.17 % ownership interest in the tucson entity , the trust holds a 1.79 % ownership interest , mr. wirth and his affiliates hold a 1.96 % interest , and other parties hold a 40.11 % interest . the tucson entity has minimum preference payments to unrelated unit holders of $ 171,850 , to the trust of $ 7,700 , to the partnership of $ 240,450 and to rare earth of $ 8,400 per year payable quarterly for calendar years 2013 and 2014. during calendar year 2012 , the tucson entity has remaining minimun preference payments to unrelated unit holders of $ 77,038 , to the trust of $ 130 , to the partnership of $ 231,559 and to rare earth of $ 1,100. restructuring agreement for ontario hospitality properties subsidiary at the february 1 , 2012 board of trustees meeting , the board authorized the trust 's management to enter into a contract to sell less than 50 % of the partnership 's ownership interest in ontario hospitality properties , lp ( the “ ontario entity ” ) , which operates the ontario , california property and was then wholly-owned by the partnership . on february 29 , 2012 , the trust and partnership entered into a restructuring agreement with rare earth to allow for the sale of minority interest units in the ontario entity . under the agreement , rare earth agreed to either purchase or bring in other investors to purchase up to 250 units of the ontario entity for $ 10,000 per unit , which represents approximately 49.02 % of the outstanding partnership units in the ontario entity , and the parties agreed to restructure the limited partnership agreement of the ontario entity . under the restructured limited partnership agreement , rare earth became a general partner of the ontario entity along with the partnership . additionally , the partnership interests in the ontario entity were allocated to three classes with differing cumulative priority distribution rights . class a units will be owned by unrelated third parties and will have first priority for distributions , class b units will be owned by the trust and or the partnership and will have second priority for distributions , and class c units will be owned by rare earth or other affiliates of mr. wirth and will have the lowest priority for distributions from the ontario entity . rare earth is also entitled to a formation fee equal to $ 320,000 or an alternate fee of 8 % of total capital raised , payable in either cash or units in the ontario entity . after all investors have received their initial capital plus a 7 % per annum simple return , any additional profits will be allocated 50 % to rare earth , with the remaining 50 % allocated proportionately to all unit classes . the first funds related to this syndication were received on march 5 , 2012 and as of april 6 , 2012 , the partnership has received $ 900,000 in connection with the ontario syndication . innsuites hotels will continue to provide management , licensing and reservation services to the property . priority distributions to all classes are projected to be approximately $ 192,000 for the remainder of fiscal year 2013 , approximately $ 82,250 for fiscal year 2014 , $ 89,250 for fiscal years 2015 through 2017 and $ 22,312 for fiscal year 2018 . 8 compliance with continued listing standards of nyse amex on september 30 , 2010 , the trust received a letter from the nyse amex llc ( the `` nyse amex '' ) informing the trust that the staff of the nyse amex 's corporate compliance department has determined that the trust is not in compliance with section 1003 ( a ) ( ii ) of the nyse amex company guide due to the trust having stockholders ' equity of less than $ 4.0 million and losses from continuing operations in three of its four most recent fiscal years . the nyse amex 's letter informed the trust that , to maintain its listing , it was required to submit a plan of compliance by november 1 , 2010 , addressing how it intended to regain compliance with the nyse amex 's continued listing standards within a maximum of 18 months . the nyse amex 's letter provided that if the plan submitted by the trust were accepted by the nyse amex , the trust would likely be able to continue its listing during the 18-month plan period , during which time it would be subject to periodic review to determine whether it was making progress consistent with the trust 's plan . the trust submitted its plan on november 1 , 2010. the plan included improved hotel operating profits as

general the following discussion should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this form 10-k. at january 31 , 2012 , through our sole general partner 's interest in the partnership , we owned a 71.98 % interest in hotels in ontario , ca and tucson , az , direct 42.25 % interest in the albuquerque , nm hotel , 42.20 % interest in another tucson , az hotel , and a 99.9 % direct interest in the yuma , az hotel . at january 31 , 2011 through our sole general partner 's interest in the partnership we owned a 71.41 % interest in three of the hotels , a 23.79 % in one of the hotels , and we owned a 99.9 % direct interest in one hotel . we purchased 75,726 partnership units during the year ended january 31 , 2012. we did not purchase any partnership units during the year ended january 31 , 2011. our expenses consist primarily of property taxes , insurance , corporate overhead , interest on mortgage debt , professional fees , depreciation of the hotels and hotel operating expenses . hotel operating expenses consist primarily of payroll , guest and maintenance supplies , marketing and utilities expenses . under the terms of its partnership agreement , the partnership is required to reimburse us for all such expenses . accordingly , management believes that a review of the historical performance of the operations of the hotels , particularly with respect to occupancy , which is calculated as rooms sold divided by total rooms available , average daily rate ( “ adr ” ) , calculated as total room revenue divided by number of rooms sold , and revenue per available room ( “ revpar ” ) , calculated as total room revenue divided by number of rooms available , is appropriate for understanding revenue from the hotels . in fiscal year 2012 , occupancy increased 6.77 % to 61.73 % from 54.96 % in the prior year .

neer 's materials , supplies and fossil fuel inventories are carried at the lower of weighted-average cost or market , unless evidence indicates that the weighted-average cost ( even if in excess of market ) will be recovered with a normal profit upon sale in the ordinary course of business . energy trading - nee provides full energy and capacity requirements services primarily to distribution utilities , which include load-following services and various ancillary services , in certain markets and engages in power and gas marketing and trading activities to optimize the value of electricity and fuel contracts , generating facilities and gas infrastructure assets , as well as to take advantage of projected favorable commodity price movements . trading contracts that story_separator_special_tag overview nee 's operating performance is driven primarily by the operations of its two principal subsidiaries , fpl , which serves approximately 4.7 million customer accounts in florida and is one of the largest rate-regulated electric utilities in the u.s. , and neer , which together with affiliated entities is the largest generator in north america of renewable energy from the wind and sun . the table below presents nee 's net income ( loss ) and earnings ( loss ) per share by reportable segment - fpl , neer and corporate and other , which is primarily comprised of the operating results of neet , fpl fibernet and other business activities , as well as other income and expense items , including interest expense , income taxes and eliminating entries ( see note 14 for additional segment information , including reported results from continuing operations ) . the following discussions should be read in conjunction with the notes to the consolidated financial statements contained herein and all comparisons are with the corresponding items in the prior year . replace_table_token_12_th ( a ) neer 's results reflect an allocation of interest expense from neech based on a deemed capital structure of 70 % debt and allocated shared service costs . for the five years ended december 31 , 2013 , nee delivered a total shareholder return of approximately 105 % , below the s & p 500 's 128 % return , but well above the s & p 500 utilities ' 62 % return and the dow jones u.s. electricity 's 53 % return . the historical stock performance of nee 's common stock shown in the performance graph below is not necessarily indicative of future stock price performance . 43 adjusted earnings nee prepares its financial statements under gaap . however , management uses earnings excluding certain items ( adjusted earnings ) , a non-gaap financial measure , internally for financial planning , for analysis of performance , for reporting of results to the board of directors and as an input in determining performance-based compensation under nee 's employee incentive compensation plans . nee also uses adjusted earnings when communicating its financial results and earnings outlook to investors . nee 's management believes adjusted earnings provides a more meaningful representation of the company 's fundamental earnings power . although the excluded amounts are properly included in the determination of net income under gaap , management believes that the amount and or nature of such items make period to period comparisons of operations difficult and potentially confusing . adjusted earnings do not represent a substitute for net income , as prepared under gaap . adjusted earnings exclude the unrealized mark-to-market effect of non-qualifying hedges ( as described below ) and otti losses on securities held in neer 's nuclear decommissioning funds , net of the reversal of previously recognized otti losses on securities sold and losses on securities where price recovery was deemed unlikely ( collectively , otti reversals ) . however , other adjustments may be made from time to time with the intent to provide more meaningful and comparable results of ongoing operations . nee and neer segregate into two categories unrealized mark-to-market gains and losses on derivative transactions . the first category , referred to as non-qualifying hedges , represents certain energy derivative transactions , and , beginning in 2013 , certain interest rate derivative transactions entered into as economic hedges , which do not meet the requirements for hedge accounting , or for which hedge accounting treatment is not elected or has been discontinued . changes in the fair value of those transactions are marked to market and reported in the consolidated statements of income , resulting in earnings volatility because the economic offset to the positions are not marked to market . as a consequence , nee 's net income reflects only the movement in one part of economically-linked transactions . for example , a gain ( loss ) in the non-qualifying hedge category for certain energy derivatives is offset by decreases ( increases ) in the fair value of related physical asset positions in the portfolio or contracts , which are not marked to market under gaap . for this reason , nee 's management views results expressed excluding the unrealized mark-to-market impact of the non-qualifying hedges as a meaningful measure of current period performance . the second category , referred to as trading activities , which is included in adjusted earnings , represents the net unrealized effect of actively traded positions entered into to take advantage of expected market price movements and all other commodity hedging activities . at fpl , substantially all changes in the fair value of energy derivative transactions are deferred as a regulatory asset or liability until the contracts are settled , and , upon settlement , any gains or losses are passed through the fuel clause . see note 3. in 2011 , subsidiaries of neer completed the sales of their ownership interests in five natural gas-fired generating plants with a total generating capacity of approximately 2,700 mw located in california , virginia , alabama , south carolina and rhode island . story_separator_special_tag as of december 31 , 2013 , nee 's total net available liquidity was approximately $ 6.7 billion , of which fpl 's portion was approximately $ 3.0 billion . outlook fpl 's 2012 rate agreement continues to provide , among other things , a high degree of base rate predictability through december 2016 , including allowances for rate increases when the modernized cape canaveral , riviera beach and port everglades power plants are placed in service , and permits fpl to record reserve amortization up to $ 400 million over the 2013 to 2016 period ( see item 1. business - fpl - fpl regulation - fpl rate regulation - base rates - rates effective january 1 , 2013 - december 31 , 45 2016 ) . fpl 's allowed regulatory roe over this period is 10.50 % , with a range of plus or minus 100 basis points . in 2013 , fpl amortized $ 155 million of the reserve and the cape canaveral power plant was placed in service in april 2013. fpl expects that the use of reserve amortization in 2013 will be more than in any of the remaining years of the 2012 rate agreement . nee 's strategy at both of its principal businesses seeks to meet customer needs more economically and reliably than competitors . meeting customer needs frequently requires the commitment of large capital expenditures to projects that have long lives and such commitments are difficult to reverse once made . subsidiaries of nee have made commitments to a variety of major capital projects that are expected to be completed over the next several years . while nee management believes that these projects individually and collectively are attractive investments with the potential to create value for shareholders , there can be no guarantee that all or any of these projects will be successful . because of their importance , management focuses particular attention on these large projects . in 2014 , nee expects to focus efforts in particular on the following initiatives : at fpl : sustaining fpl 's customer value proposition : the combination of low bills , good reliability and excellent customer service that fpl currently provides its customers is both an objective of fpl 's strategy and an important contributor to its long-term business success . fpl seeks to , at a minimum , maintain and ideally improve its overall customer value proposition . major capital projects : fpl is currently engaged in a large capital expansion program and its objective is to bring these projects in on schedule and within budget . this program includes modernizing its riviera beach and port everglades power plants to high-efficiency natural gas-fired units ( approximately 1,200 mw at riviera beach and 1,240 mw at port everglades ) to be placed in service in the second quarter of 2014 and mid-2016 , respectively . storm hardening and reliability : fpl plans to continue to invest in storm hardening and reliability efforts . at neer : maintaining excellence in day-to-day operations : neer has developed a track record of generally running its facilities reliably and cost-effectively . the company seeks to , at a minimum , maintain and ideally improve its operating performance . solar : add approximately 805 mw of new solar generation during 2014 through 2016 , including a 20 mw solar pv project completed in january 2014 , the 125 mw to complete the genesis solar project in california , the 120 mw to complete neer 's portion of the desert sunlight solar pv project in california , the 250 mw mccoy solar pv project in california and the pending acquisition of development rights for a 250 mw solar pv project in nevada which is expected to close in march 2014 and complete construction in 2016. wind : add approximately 600 mw of new canadian wind generation and 2,000 to 2,500 mw of new u.s. wind generation during 2013 through 2015 , of which 125 mw and 250 mw was placed in service in 2013 in canada and the u.s. , respectively . nuclear : complete the four planned nuclear refueling outages in 2014. at sabal trail and florida southeast connection : continue to pursue ferc approval to build , own and operate the northern and southern portions of the natural gas pipeline system . in addition , nee and fpl devote effort to numerous other initiatives designed to support their long-term growth and development . there can be no guarantees that nee or fpl will be successful in attaining their goals with respect to any of these initiatives . for additional information on certain of the above matters , see item 1. business . story_separator_special_tag style= '' vertical-align : top '' > in 2012 , higher cost recovery clause results of $ 52 million , partly offset , in 2013 , by , lower cost recovery clause results of $ 45 million primarily due to the transfer of new nuclear capacity to retail rate base as discussed below under retail base , cost recovery clauses and interest expense , and the $ 32 million of after-tax charges associated with the cost savings initiative . fpl 's operating revenues consisted of the following : replace_table_token_14_th retail base fpsc rate orders in 2013 , fpl 's retail base revenues benefited from the 2012 rate agreement as retail base rates and charges were designed to increase approximately $ 350 million on an annualized basis , as well as a $ 164 million annualized retail base rate increase associated with the cape canaveral power plant , which was placed in service in april 2013. the 2012 rate agreement : remains in effect until december 2016 , establishes fpl 's allowed regulatory roe at 10.50 % , with a range of plus or minus 100 basis points , and allows for additional retail base rate increases as the modernized riviera beach and port everglades projects become operational ( which is expected in the second quarter of 2014 and mid-2016 , respectively ) .

results of operations nee 's net income for 2013 was $ 1.91 billion , compared to $ 1.91 billion in 2012 and $ 1.92 billion in 2011. in 2013 , net income was unfavorably affected by lower results at neer offset by higher results at fpl and corporate and other . the decrease in nee 's 2012 net income was primarily due to the absence of certain income tax benefits at corporate and other recorded in 2011 and lower results at neer , partly offset by improved results at fpl . nee 's effective income tax rate for all periods presented reflects ptcs for wind projects at neer and deferred income tax benefits associated with convertible itcs under the american recovery and reinvestment act of 2009 , as amended ( recovery act ) . ptcs and deferred income tax benefits associated with convertible itcs can significantly affect nee 's effective income tax rate depending on the amount of pretax income . the amount of ptcs recognized can be significantly affected by wind generation and by the roll off of ptcs on certain wind projects after ten years of production ( ptc roll off ) . in addition , nee 's effective income tax rate for 2013 was unfavorably affected by the establishment of a full valuation allowance on the deferred tax assets associated with the spain solar projects . see note 1 - income taxes , note 1 - sale of differential membership interests , note 4 - nonrecurring fair value measurements and note 5. also see item 1. business - neer - generation and other operations - neer fuel/technology mix - policy incentives for renewable energy projects , for a discussion of the taxpayer relief act . 46 fpl : results of operations fpl obtains its operating revenues primarily from the sale of electricity to retail customers at rates established by the fpsc through base rates and cost recovery clause mechanisms .

the fair value of derivative instruments with a positive fair value are reported in accrued income and other assets in the consolidated balance sheets , while derivative instruments with a negative fair value are reported in accrued expenses and other liabilities in the consolidated balance sheets . fair value measurements the company records or discloses certain assets and liabilities at fair value . asc topic 820 , fair value measurements , 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 report . this discussion and analysis includes certain forward-looking statements that involve risks , uncertainties and assumptions . you should review the “ risk factors ” section of this report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by such forward-looking statements . see “ cautionary note regarding forward-looking statements ” at the beginning of this report . overview we offer a wide range of commercial , small business , consumer and municipal banking products and services . we conduct our consumer and small business deposit operations primarily through online channels on a nationwide basis and have no traditional branch offices . our residential mortgage products are offered nationwide primarily through an online direct-to-consumer platform and are supplemented with central indiana-based mortgage and construction lending . our consumer lending products are primarily originated on a nationwide basis over the internet as well as through relationships with dealerships and financing partners . our commercial banking products and services are delivered through a relationship banking model and include commercial real estate ( “ cre ” ) banking , commercial and industrial ( “ c & i ” ) banking , public finance , healthcare finance and commercial deposits and treasury management . through our cre team , we offer single tenant lease financing on a nationwide basis in addition to traditional investor cre and construction loans primarily within central indiana and adjacent markets . to meet the needs of commercial borrowers and depositors located primarily in central indiana , phoenix , arizona and adjacent markets , our c & i banking team provides credit solutions such as lines of credit , term loans , owner-occupied cre loans and corporate credit cards . our public finance team , established in early 2017 , provides a range of public and municipal lending and leasing products to government entities on a nationwide basis . healthcare finance was established in the second quarter of 2017 in conjunction with our strategic partnership with lendeavor , inc. , a san francisco-based technology-enabled lender to healthcare practices , and provides lending for healthcare practice finance or acquisition , acquiring or refinancing owner-occupied cre and equipment purchases . initial efforts within healthcare finance have primarily focused on the west coast with plans to expand nationwide . our commercial deposits and treasury management team works with the other commercial teams to provide deposit products and treasury management services to our commercial and municipal lending customers as well as pursues commercial deposit opportunities in business segments where we have no credit relationships . story_separator_special_tag td > twelve months ended december 31 , 2017 vs. december 31 , 2016 due to changes in ( amounts in thousands ) volume rate net volume rate net interest income loans , including loans held-for-sale $ 29,126 $ ( 509 ) $ 28,617 $ 22,580 $ ( 1,169 ) $ 21,411 securities – taxable ( 212 ) 806 594 2,077 633 2,710 securities – non-taxable ( 49 ) 73 24 897 33 930 other earning assets 789 746 1,535 85 662 747 total 29,654 1,116 30,770 25,639 159 25,798 interest expense interest-bearing deposits 9,117 9,392 18,509 5,726 2,396 8,122 other borrowed funds 1,855 2,121 3,976 3,458 ( 75 ) 3,383 total 10,972 11,513 22,485 9,184 2,321 11,505 increase ( decrease ) in net interest income $ 18,682 $ ( 10,397 ) $ 8,285 $ 16,455 $ ( 2,162 ) $ 14,293 2018 v. 2017 net interest income for the twelve months ended december 31 , 2018 was $ 62.3 million , an increase of $ 8.3 million , or 15.3 % , compared to $ 54.0 million for the twelve months ended december 31 , 2017 . the increase in net interest income was the result of a $ 30.8 million , or 36.3 % , increase in total interest income to $ 115.5 million for the twelve months ended december 31 , 2018 compared to $ 84.7 million for the twelve months ended december 31 , 2017 . the increase in total interest income was partially offset by a $ 22.5 million , or 73.2 % , increase in total interest expense to $ 53.2 million for the twelve months ended december 31 , 2018 compared to $ 30.7 million for the twelve months ended december 31 , 2017 . the increase in total interest income was due primarily to an increase in interest earned on loans resulting from an increase of $ 700.3 million , or 41.6 % , in the average balance of loans , including loans held-for-sale , for the twelve months ended december 31 , 2018 compared to the twelve months ended december 31 , 2017 , as well as an increase of $ 36.6 million in the average balance of other earning assets and a 77 basis point ( `` bp '' ) increase in the yield earned on other earning assets . the increase in total interest income was also due to a 19 bp increase in the yield earned on the securities portfolio , partially offset by a $ 10.1 million , or 2.0 % , decrease in the average balance of securities and a decline in the yield earned on loans , including loans held-for-sale , of 3 bps . story_separator_special_tag the decrease in noninterest income was primarily driven by a decrease of $ 2.1 million , or 27.0 % , in mortgage banking activities , partially offset by gains on sale of loans and other noninterest income . the decrease in revenue from mortgage banking activities was due primarily to decreases in mortgage held-for-sale ( `` hfs '' ) origination and sales volumes , due to a decline in mortgage refinance activity , and a decrease in gain on sale margin . 2017 v. 2016 during the twelve months ended december 31 , 2017 , noninterest income totaled $ 10.5 million , representing a decrease of $ 3.5 million , or 25.1 % , compared to $ 14.1 million for the twelve months ended december 31 , 2016 . the decrease in noninterest income was primarily driven by a decrease of $ 4.6 million , or 36.8 % , in mortgage banking activities , partially offset by gains on sale of loans and other noninterest income . the decrease in revenue from mortgage banking activities was due primarily to decreases in mortgage held-for-sale hfs origination and sales volumes . during 2017 , portfolio mortgage originations increased relative to the comparable period in 2016 while mortgage hfs volume declined , contributing to the decline in revenue from mortgage banking activities . the increase in gain on sale of loans was due to the sale of $ 24.7 million of single tenant lease financing loans , which was the first sale of this loan type in the company 's history . the increase in other noninterest income was due primarily to a $ 0.4 million increase in income from bank-owned life insurance and a $ 0.4 million increase in income from subleasing the company 's former corporate office . noninterest expense the following table presents noninterest expense for the five most recent years . replace_table_token_6_th 2018 v. 2017 noninterest expense for the twelve months ended december 31 , 2018 was $ 43.2 million , compared to $ 36.7 million for the twelve months ended december 31 , 2017 . the increase of $ 6.5 million , or 17.6 % , compared to the twelve months ended december 31 , 2017 was primarily due to a $ 2.4 million write-down of other real estate owned , a $ 2.0 million increase in salaries and employee benefits , a $ 0.8 million increase in premises and equipment expenses and a $ 0.5 million increase in deposit insurance premium expenses . the write-down of other real estate owned was due to the revaluation of one commercial property , consisting of two buildings , driven by deteriorating conditions in the market where the properties are located and the commencement of a marketing strategy to move the property off the company 's balance sheet . the increase in salaries and benefits was primarily due to changes in employee mix . although the number of full-time employees decreased from 2017 , recent hires in the company 's commercial lending verticals and support areas were generally in higher skill positions and led to an increase in employee salary and equity compensation expense . additionally , the company experienced an increase in benefits expense , primarily related to higher medical , prescription drug and dental insurance claims . these increases were partially offset by a decrease in bonus expense primarily related to a reduction in senior management incentive compensation due to 2018 financial performance being below the targets established under the company 's annual bonus plan for 2018. the increase in premises and equipment was primarily due to technology-related expenses and the increase in deposit insurance premium was due primarily to the company 's year-over-year asset growth , which impacts the formula used by the fdic to calculate deposit insurance . 30 2017 v. 2016 noninterest expense for the twelve months ended december 31 , 2017 was $ 36.7 million , compared to $ 31.5 million for the twelve months ended december 31 , 2016 . the increase of $ 5.3 million , or 16.8 % , compared to the twelve months ended december 31 , 2016 was primarily due to increases of $ 3.8 million in salaries and employee benefits , $ 0.6 million in marketing , advertising and promotion expenses , $ 0.5 million in premises and equipment expenses , $ 0.5 million in other and $ 0.3 million in deposit insurance premium expenses . the increase in salaries and employee benefits was driven primarily by merit compensation increases ; personnel growth ; higher claims experience related to medical , prescription drug and dental insurance ; and equity compensation expense . the increase in marketing , advertising and promotion expenses was driven primarily by digital marketing initiatives and higher mortgage lead generation costs . the increase in premises and equipment was due primarily to technology-related expenses . the increase in other was due primarily to repairs and maintenance expenses related to commercial oreo and the increase in deposit insurance premium was due primarily to the company 's year-over-year asset growth , which impacts the formula used by the fdic to calculate deposit insurance . income taxes the following table reconciles reported income tax expense to that computed at the statutory federal tax rate for the five most recent years . replace_table_token_7_th 2018 v. 2017 the company recognized income tax expense of $ 2.1 million in 2018 , resulting in an effective tax rate of 8.6 % , compared to $ 7.7 million and an effective tax rate of 33.6 % in 2017. the company 's federal statutory tax rate was 21 % in 2018 and 35 % in 2017. in 2018 , the variance from the federal statutory rate was due primarily to tax-exempt income , partially offset by state income taxes . interest income on certain loans issued by or securities made to governmental , municipal and not-for-profit entities , and earnings from bank-owned life insurance were the primary components of tax-exempt income .

results of operations refer to item 6 of this report for a summary of the company 's financial performance for the five most recent years . during the twelve months ended december 31 , 2018 , net income was $ 21.9 million , or $ 2.30 per diluted share , compared to net income of $ 15.2 million , or $ 2.13 per diluted share , for the twelve months ended december 31 , 2017 and net income of $ 12.1 million , or $ 2.30 per diluted share , for the twelve months ended december 31 , 2016 . the $ 6.7 million increase in net income for the twelve months ended december 31 , 2018 compared to the twelve months ended december 31 , 2017 was due primarily to an $ 8.3 million increase in net interest income , a $ 5.7 million decrease in income tax expense and a $ 1.0 million decrease in provision for loan losses , but was partially offset by a $ 6.5 million increase in noninterest expense and a $ 1.8 million decrease in noninterest income . the increase in net income of $ 3.2 million for the twelve months ended december 31 , 2017 compared to the twelve months ended december 31 , 2016 was due primarily to a $ 14.3 million increase in net interest income , but was partially offset by a $ 3.5 million decrease in noninterest income , a $ 5.3 million increase in noninterest expense , a $ 0.5 million increase in provision for loan losses and a $ 1.8 million increase in income tax expense . during the twelve months ended december 31 , 2018 , return on average assets was 0.72 % , compared to 0.66 % for the twelve months ended december 31 , 2017 and 0.74 % for the twelve months ended december 31 , 2016 .

accordingly , these statements are subject to certain risks , uncertainties and contingencies that could cause the company 's actual results , performance or achievements in 2015 and beyond to differ materially from those expressed in , or implied by , such statements . such statements , include , but are not limited to , statements contained in this annual report relating to the company 's business , financial performance , business strategy , recently announced transactions and capital outlook . important factors that could cause actual results to differ materially from those in the forward-looking statements include : a continued decline in general economic conditions nationally and internationally ; decreased demand for our products and services ; market acceptance of our products ; the impact of any litigation or infringement actions brought against us ; competition from other providers and products ; the inability to raise capital to fund continuing operations ; changes in government regulation ; the ability to complete customer transactions , and other factors relating to our industry , our operations and results of operations and any businesses that may be acquired by us . should one or more of these risks or uncertainties materialize , or should the underlying assumptions prove incorrect , actual results may differ significantly from those anticipated , believed , estimated , expected , intended or planned . readers of this annual report should not place undue reliance on any forward-looking statements . except as required by federal securities laws , the company undertakes no obligation to update or revise these forward-looking statements to reflect new events or uncertainties . you should read the following discussion and analysis of the financial condition and results of operations of the company together with the financial statements and the related notes presented herein . description and interpretation and clarification of business category on the consolidated results of the operations the company 's strategy is to manage and operate its businesses under five ( 5 ) business divisions or units on a standalone basis , namely : beef & organic fertilizer division ( marked 1. a. sjap & , qzh and b. hsa ) plantation division ( marked 2. jhst ) fishery division ( marked 3. a. ca engineer & technology and 3.b . seafood sales ) cattle farm division ( marked 4. meiji and jhmc ) corporate & others division ( marked 5. siaf ) each business division is summarized below : · 1. beef and organic fertilizer division refers to : ( a ) . the operation of sjap in manufacturing and sales of organic fertilizer , bulk livestock feed , concentrated livestock feed , and the sales of live cattle inclusive of : ( a ) cattle that are not being slaughtered in our own slaughter house operated by qinghai zhong he meat products co. , limited ( “ qzh ” ) are sold live to third party livestock wholesalers and , ( b ) cattle that are sold to qzh and slaughtered and deboned and packed by qzh ; and the sales of meats deboned and packed by qzh that are sold to various meat distributors , wholesalers and super market chains and our own retail butcher stores . qzh is a fully owned subsidiary of our partially owned subsidiary qinghai sanjiang a power agriculture co. , ltd. ( “ sjap ” ) ; as such , the financial statements of these three companies ( sjap , qzh and hsa ) are consolidated into our wholly owned subsidiary , a power agro agriculture development ( macau ) limited ( “ apwam ” ) , as one entity . sjap and qzh are both variable interest entities over which we exercise significant control . ( b ) . the operation of hunan shenghua a power agriculture co. ltd. ( “ hsa ” ) in manufacturing and sales of organic fertilizer . · 2. plantation division refers to the operations of jiangmen city heng sheng tai agriculture development co. ltd. ( “ jhst ” ) in the hu plantation business where dragon fruit flowers ( dried and fresh ) and immortal vegetables are sold to wholesale and retail markets . jhst 's financial statements are consolidated into the financial statements of macau eiji company ltd. ( “ meiji ” ) as one entity . · 3. fishery division refers to the operations of capital award inc. ( “ capital award ” or “ ca ” ) covering its engineering , technology and consulting service management of fishery farms and seafood sales operations and marketing , where ; capital award generates revenues from providing engineering consulting services as turnkey contractors to owners and developers of fishery projects that are being designed and engineered into turnkey contracts by capital award in china using its a power module technology systems ( “ apm ” ) as follows : - 53 - ( a ) . engineering and technology services ; via consulting and service contracts ( “ csc 's ” ) for the development , construction , and supply of plant and equipment , and management of fishery ( and prawn or shrimp ) farms and related business operations . ( b ) . seafood sales from ca 's projected farms capital award generates following sales revenues from : ( 1 ) . sales to jfd ( “ fish farm 1 ” or “ ff1 ” ) , which is a sino foreign joint venture company ( “ sfjvc ” ) , and sales derived from seafood sold by jfd ( currently , only the jfd subsidiary is a sfjvc ) , being consolidated into our wholly owned hong kong subsidiary tri-way industries ltd. ( “ trw ” ) as one entity . ff1 generates sales from its production of ( a ) its in-door apm farm with 16 apm production units and ( b ) its open dam farms producing fish and prawns from 310 mu ( 52 acres ) of land leased from zhongshan a power prawn culture farms development co. ltd. ( “ zsapp , ” “ prawn farm 2 ” or “ pf2 ” ) . ( 2 ) . story_separator_special_tag replace_table_token_14_th - 60 - revenue from our plantation increased by $ 2,588,619 or 23 % from $ 11,086,275 for the year ended december 31 , 2014 to $ 13,674,894 for the year ended december 31 , 2015 due mainly to better yields of flowers in our own farm this year compared to the 2014 season , however , this increase was not sufficient to reach the sales revenue of 2013 ( us $ 22.8 million ) , primarily due to this year 's wet season affecting the yields of the regional growers who supply fresh flowers for drying , in turn , lowering our overall sales of dried flowers . cost of goods sold from the plantation increased by $ 1,048,108 or 31 % from $ 3,334,857 for the year ended december 31 , 2014 to $ 4,382,965 for the year ended december 31 , 2015. the increase was primarily due to the corresponding increase in sales . gross profit from our plantation increased by $ 1,540,511 from $ 7,751,418 for the year 2014 to $ 9,291,929 for the year 2015. the increase was primarily due to greater production at our own farm after having resolved the plant disease problem encountered in 2014. replace_table_token_15_th · 3.b . fishery division refers to the operations of capital award covering its engineering , technology and consulting service management of fishery farms and seafood sales operations and marketing , where capital award generates revenues from providing engineering consulting services as turnkey contractors to owners and developers of fishery projects that are being designed and engineered into turnkey contracts by capital award in china using its apm technology and management systems as follows : ( a ) engineering and technology services ; via consulting and service contracts ( “ csc 's ” ) for the development , construction , and supply of plant and equipment , and management of fishery ( and prawn or shrimp ) farms and related business operations . ( please see later chapter for further details ) . ( b ) seafood sales from ca 's projected farms capital award generates sales revenues from the following : ( 1 ) sales to jfd ( or fish farm 1 or ff1 ) which is an sfjvc and sales derived from seafood brought from jfd ( currently , only the jfd subsidiary is a sfjvc ) , the financial statements of which are consolidated into trw as one entity . ff1 generates sales from its production of ( a ) its indoor apm farm with 16 apm production units and ( b ) its open dam farms producing fish and prawns from a 310 mu ( or 52 acres ) of land leased from pf2 . ( 2 ) sales to and sales derived from seafood brought from the un-incorporated companies , covering ebapcd ( or prawn farm 1 or pf1 ) and zsapp ( or prawn farm 2 or pf2 ) are accounted for independently as follows : - 61 - ca and ebapcd ( pf1 ) : ( a ) ca purchases prawn and or fish fingerling and feed stocks from third party suppliers and resells to pf1 at variable small or no profit margins and ( b ) ca purchases matured prawns and fish from pf1 and sells to third parties ( wholesale markets ) . pf1 generates sales from its production of ( a ) its indoor apm farm with 4 apm production units in 2014 and 16 apm production units from q3 2015 , onward and ( b ) its open dam farms producing fish and prawns from a 290 mu ( or 48 acres ) of land leased from pf2 . ca and zsapp ( pf2 ) : ( a ) ca earns commissions from the sale of prawn fingerlings that are sold by pf2 to third parties , and in this respect pf2 produces its own prawn fingerlings as compared to ca purchasing them from pf2 and resells them to pf1 or ff1 , as described above , and ( b ) ca purchases matured prawns and fish from pf2 and sells to third parties ( wholesale markets ) . pf2 has 6 indoor apm production nurseries producing prawn fingerling and open dam farms situated on about 400 mu ( about 66 acres ) producing prawns and fish . replace_table_token_16_th revenue from fishery decreased by $ 20,371,871 or 19 % from $ 105,775,887 for the year ended december 31 , 2014 to $ 85,404,016 for the year ended december 31 , 2015. the decrease in fishery was primarily due to the decrease in sales of eels ( from $ 58.9 million in 2014 to 2015 's $ 33.1 million ) and the decrease in sales of sleepy cod ( from 2014 's $ 20.3 million to 2015 's $ 3.5 million ) that has not been fully compensated for by the increase in prawn sales ( from 2014 's $ 26.6 million to 2015 's $ 40 million ) and the increase of sales of other mixed fish species ( from 2014 's $ 0 to 2015 's $ 8.7 million ) . cost of goods sold from fishery decreased by $ 9,772,057 or 13 % from $ 76,925,056 for the year ended december 31 , 2014 to $ 67,152,999 for the year ended december 31 , 2015. the decrease in cost of goods from fishery was primarily due to the decrease in in corresponding sales .

consolidated results of operations part a. audited income statements of consolidated results of operations for year ended december 31 201 , compared to the year ended december 31 , 2014 and a ( 1 ) income statements ( audited ) replace_table_token_9_th this part a discusses and analyzes certain items ( marked with notes ) that we believe assist stakeholders in obtaining a better understanding on the company 's results of operations and financial condition : - 55 - overview of full fiscal year 2015 compared to full fiscal 2014 ( as illustrated in table a ( 1 ) above ) : notes to table a.1 's 1 , 2 & 3 : ( a ) : information of note ( 1 , 2 & 3 ) sales , cost of sales and gross profit and analysis : the company 's revenues were generated from ( a ) sale of goods and ( b ) consulting and services provided in project and business developments covering technology transfers , engineering , construction , supervision , training , management and technology licensing fees etc . table ( a.2 ) . below shows segmental break-down figures of sales of goods sold , cost of goods sold , and related gross profits for the twelve months ended december 31 , 2015 and the twelve months ended december 31 , 2014 and 2013. replace_table_token_10_th - 56 - the company 's revenues generated from sale of goods increased by $ 14,132,473 or 4 % from $ 322,654,081 for the year ended december 31 , 2014 to $ 336,786,554 for the year ended december 31 , 2015. the increase was primarily due to the increase of revenues from the sector of organic fertilizer and cattle farms ( from $ 122 million in 2014 to $ 164.6 million in 2015 ) and the import of beef from the corporate sectors ( from $ 3.36 million in 2014 to $ 23.5 million in 2015 ) collectively .

net interest income increased in 2019 , compared to 2018 , primarily due to increases in average loan yields and volume , partially offset by increased average rates on interest-bearing deposits and higher average federal home loan bank advances . loan growth during 2019 was funded through increased interest-bearing deposits , noninterest-bearing deposits and federal home loan bank advances . during 2019 , the costs of interest-bearing deposits trended upward due to competitive stress on rates but remain a low-cost source of funds , as compared to other sources of funds such as debt . ​ ​ 52 table the following table presents for the periods indicated , average outstanding balances for each major category of interest-earning assets and interest-bearing liabilities , the interest income or interest expense and the average yield or rate for the periods indicated . replace_table_token_14_th ( 1 ) includes average outstanding balances of loans held for sale . ( 2 ) net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities . ( 3 ) net interest margin is equal to net interest income divided by average interest-earning assets . ( 4 ) tax equivalent adjustments of $ 1.0 million and $ 1.1 million for the years ended december 31 , 2019 and 2018 , respectively , were computed using a federal income tax rate of 21 % . ​ 53 table the following tables present information regarding changes in interest income and interest expense for the periods indicated for each major component of interest-earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and changes attributable to changes in interest rates . for purposes of these tables , changes attributable to both rate and volume that can not be segregated have been allocated to rate . replace_table_token_15_th ​ provision for credit losses the provision for credit losses is an income adjustment used to maintain the acl at a level deemed appropriate by management to absorb inherent losses on existing loans . the provision for credit loss was $ 2.4 million for 2019 , compared to a recapture of $ 1.8 million for 2018. the provision in 2019 resulted from increases in loans during that period . the recapture in 2018 resulted from strong credit quality , continuing low nonperforming and impaired loans , minimal charge-off history and an increase in recoveries during the year . noninterest income the following table presents components of noninterest income for the years ended december 31 , 2019 and 2018 and the period-over-period changes in the categories of noninterest income replace_table_token_16_th ​ during the year ended december 31 , 2019 , noninterest income increased $ 4.4 million , compared to the year ended december 31 , 2018 , primarily due to increased earnings on bank-owned life insurance and increased swap origination fees . the company has purchased life insurance policies on certain employees , that are carried at their cash surrender value on the consolidated balance sheet and changes in the cash surrender value of the policies are recorded in noninterest income . earnings on bank-owned life insurance increased $ 3.2 million , during the year ended december 31 , 2019 , compared to the year ended december 31 , 2018 , due to nontaxable death benefit proceeds of $ 4.7 million received under bank-owned life insurance policies . the company recorded a gain of $ 3.3 million over the carrying value during the year ended december 31 , 2019 . 54 table other interest income includes a variety of other income-producing activities , including partnership and investment fund income , other loan fees , swap origination charges , wire transfer fees , credit card program income and fee income . other noninterest income increased during the year ended december 31 , 2019 , compared to the year ended december 31 , 2018 , primarily due to an increase of $ 832,000 in swap origination fee income . noninterest expense generally , noninterest expense is composed of employee expenses and costs associated with operating facilities , obtaining and retaining customer relationships and providing bank services . for the year ended december 31 , 2019 , compared to the year ended december 31 , 2018 , noninterest expense increased $ 8.1 million , primarily due to increased salaries and employee benefits and professional and director fees , partially offset by decreased regulatory fees . see further analysis of these fluctuations in the related discussions that follow . replace_table_token_17_th ​ salaries and benefits increased $ 4.7 million during the year ended december 31 , 2019 , compared to the year ended december 31 , 2018 , as a result of annual salary increases in 2019 , increased bonus expense and increased stock compensation expense due to restricted stock grants . regulatory fees decreased $ 915,000 during 2019 , compared to 2018 , primarily due to an fdic deposit assessment credit received in 2019. professional and director fees include legal , audit , loan review and consulting fees . the increase in professional and director fees of $ 3.5 million during the year ended december 31 , 2019 , compared to the year ended december 31 , 2018 , was primarily due to increased legal fees incurred in the bank 's response and cooperation with an investigation by fincen regarding the bank 's compliance with the bsa and aml laws and regulations . the bank incurred legal fees related to this investigation of $ 3.7 million and $ 193,000 during the years ended december 31 , 2019 and 2018 , respectively . ​ income tax expense the amount of income tax expense is impacted by the amounts of pre-tax income , tax-exempt income and other nondeductible expenses . deferred tax assets and liabilities are reflected at current income tax rates in effect for the period in which the deferred tax assets and liabilities are expected to be realized or settled . as changes in tax laws or rates are enacted , deferred tax assets and liabilities are adjusted through the provision for income taxes . story_separator_special_tag in determining the acl for loans , the company estimates expected losses on specific loans , or groups of loans , where the probable loss can be identified and reasonably determined . the balance of the acl for loans is based on internally assigned risk classifications of loans , historical loan loss rates , changes in the loan portfolio , overall portfolio quality , industry concentrations , delinquency trends , current and forecasted economic factors and the estimated impact of current economic conditions on certain historical loan loss rates . 59 table the acl by loan category as of the dates shown was as follows : replace_table_token_26_th ​ the acl was $ 40.6 million , or 1.39 % of loans excluding loans held for sale , at december 31 , 2020 , compared to $ 25.3 million , or 0.96 % of loans excluding loans held for sale , at december 31 , 2019. the increase in the acl for loans of $ 15.3 million during 2020 was primarily due to the impact of the covid-19 pandemic , the sustained instability of the oil and gas industry and increased adversely graded loans and charge-offs . please see “ part ii—item 7.—management 's discussion and analysis of financial condition and results of operations—information regarding covid-19 and uncertain economic outlook ” and “ part i.—item 1a.—risk factors. ” the increase during the year ended december 31 , 2020 was also impacted by the adoption of accounting standards update , or asu , 2016-13 financial instruments—credit losses ( topic 326 ) : measurement of credit losses on financial instruments , or cecl , effective january 1 , 2020 , which resulted in an increase of $ 874,000 in the acl for loans . please refer to “ part ii—item 8.—financial statements and supplementary data—note 6. ” for a description of the model , factors and the methodology used by the company to determine the acl . also see “ part ii.—item 7.—management 's discussion and analysis—critical accounting policies—allowance for credit losses. ” ​ 60 table activity in the acl for loans for the periods indicated was as follows : replace_table_token_27_th ​ securities as of december 31 , 2020 , the fair value of the company 's securities totaled $ 237.3 million compared to $ 231.3 million as of december 31 , 2019 , an increase of $ 6.0 million , or 2.6 % . during 2020 , the amortized cost of the company 's securities portfolio increased $ 437,000 due to an increase in the amortized cost of the state and municipal securities primarily due to purchases outpacing maturities and the amortized cost of the company 's collateralized mortgage obligations and mortgage-backed securities decreased primarily due to repayments exceeding purchases . the net unrealized gain on the company 's securities increased $ 5.6 million due to increases in the net unrealized gains related to the company 's state and municipal securities and mortgage-backed securities . the fair value of the securities portfolio as of the dates indicated below was as follows : replace_table_token_28_th 61 table the company 's mortgage-backed securities at december 31 , 2020 and 2019 , were agency securities . the company does not hold any federal national mortgage loan association , or fannie mae , or federal home loan mortgage corporation , or freddie mac , preferred stock , corporate equity , collateralized debt obligations , collateralized loan obligations , structured investment vehicles , private label collateralized mortgage obligations , subprime , alt-a or second lien elements in the securities portfolio . contractual maturities and weighted-average yields by security type based on estimated annual income divided by the average amortized cost of the company 's available for sale securities portfolio as of the date indicated was as follows : replace_table_token_29_th ​ the contractual maturity of a collateralized mortgage obligation or mortgage-backed security is the date at which the last underlying mortgage matures and is not a reliable indicator of their expected life because borrowers have the right to prepay their obligations at any time . the weighted-average life of the securities portfolio was 3.9 years with an estimated modified duration of 3.6 years as of december 31 , 2020. a portion of the securities have contractual maturities extending beyond 10 years , bear fixed rates of interest and are collateralized by residential mortgages . repayment of principal on these bonds is primarily dependent on the cash flows received from payments on the underlying collateral to the bond issuer and therefore , the likelihood of prepayment is impacted by the economic environment . during a period of increasing interest rates , fixed rate mortgage-backed securities do not tend to experience heavy prepayments and as a result , the average lives of these securities are lengthened . if interest rates fall , prepayments tend to increase and as a result the lives of these securities are shortened . at december 31 , 2020 and 2019 , securities with a carrying amount of approximately $ 27.3 million and $ 50.8 million , respectively , were pledged to secure public deposits , repurchase agreements and for other purposes required or permitted by law . deposits total deposits as of december 31 , 2020 were $ 3.3 billion , an increase of $ 449.4 million , or 15.8 % , compared to december 31 , 2019. noninterest-bearing deposits as of december 31 , 2020 were $ 1.5 billion , an increase of $ 291.6 million , or 24.6 % , compared to december 31 , 2019. total interest-bearing account balances as of december 31 , 2020 were $ 1.8 billion , an increase of $ 157.8 million , or 9.5 % , from december 31 , 2019 , primarily due to increases in money market and savings accounts , partially offset by decreases in certificates and other time deposits .

results of operations year ended december 31 , 2020 vs year ended december 31 , 2019 net income was $ 26.4 million for the year ended december 31 , 2020 and $ 50.5 million for the year ended december 31 , 2019. the decrease of $ 24.1 million was primarily due to an increase of $ 16.5 million in the provision for credit losses during 2020 and a $ 7.4 million decrease in net interest income . see further analysis of these changes in the related discussions that follow . replace_table_token_7_th ​ net interest income net interest income was $ 128.6 million for the year ended december 31 , 2020 , compared to $ 136.0 million for the year ended december 31 , 2019. net interest income decreased $ 7.4 million during the year ended december 31 , 2020 , compared to the year ended december 31 , 2019 , primarily due to higher average interest-bearing deposits , lower rates on loans , securities and other interest-earning assets , partially offset by the impact of lower rates on deposits and increased average loans and other interest-earning assets . the yield on interest-earning assets was 3.98 % for the year ended december 31 , 2020 , compared to 4.95 % for the year ended december 31 , 2019. the cost of interest-bearing liabilities was 0.57 % for the year ended december 31 , 2020 and 1.07 % for the year ended december 31 , 2019. the company 's net interest margin on a tax equivalent basis was 3.73 % for the year ended december 31 , 2020 , compared to 4.42 % for the year ended december 31 , 2019. yields on interest-earning assets decreased and the costs of interest-bearing liabilities did not decrease to the same extent , which caused compression of the company 's net interest margin on a tax equivalent basis during 2020. the yield on loans for the year ended december 31 , 2020 was impacted by the company 's participation in ppp financing

overview organization on october 3 , 2005 , walter energy acquired all outstanding shares of capital stock representing the mueller co. and anvil businesses and contributed them to its u.s. pipe business to form the company . in june 2006 , we completed an initial public offering of 28,750,000 shares of series a common stock and in december 2006 , walter energy distributed to its shareholders all of its equity interests in the company , consisting of all of the company 's outstanding shares of series b common stock . on january 28 , 2009 , each share of series b common stock was converted into one share of series a common stock and the series a designation was discontinued . unless the context indicates otherwise , whenever we refer to a particular year , we mean our fiscal year ended or ending september 30 in that particular calendar year . we have recently revised our reporting segments , presenting in this annual report mueller co. , anvil and mueller technologies , a new segment , which includes mueller systems and echologics . mueller systems ' and echologics ' results were previously reported within the mueller co. segment . segment results previously presented have been recast to conform to the current presentation . business we expect our three primary end markets , repair and replacement of water infrastructure driven by municipal spending , new water infrastructure installation driven by residential construction and non-residential construction to grow in 2016. we expect the residential construction market to be the fastest growing , followed by municipal spending . mueller co. we estimate approximately 70 % of mueller co. 's 2015 net sales were for repair and replacement directly related to municipal water infrastructure spending , approximately 25 % were related to residential construction activity and approximately 5 % were related to natural gas utilities . municipal spending in 2015 was relatively strong compared with the prior year period and economic forecasts predict this trend will continue . according to the u.s. bureau of economic analysis , state and local tax receipts for the quarter ended september 30 , 2015 were up year-over-year and , according to the u.s. department of labor , the trailing twelve-month average consumer price index for water and sewerage rates at september 30 , 2015 increased 4.5 % . however , water conservation efforts , particularly in areas impacted by recent drought conditions , have resulted in lower overall receipts for some u.s. water utilities . the year-over-year percentage change in housing starts is a key indicator of demand for mueller co. 's products sold in the residential construction market . in september 2015 , zelman & associates forecasted a 13 % increase in housing starts for calendar 2016 compared to the prior year . in october 2015 , blue chip consensus also forecasted a 13 % increase in housing starts for calendar 2016 compared to the prior year . we expect mueller co. 's net sales percentage growth in 2016 to be in the mid-single digits , with growth in key markets offset by anticipated unfavorable impacts from changes in canadian currency exchange rates and the divestiture of the municipal castings business in december 2014 . 26 index to financial statements anvil in 2015 , approximately 85 % of anvil 's net sales were generated by non-residential construction spending . several leading indicators related to non-residential construction appear to be signaling growth in this market . for example , the architectural billings index for september 2015 remained above 50 , which indicates growth , and blue chip consensus forecasted a 4.8 % increase in non-residential fixed investment in calendar 2016. sales to the oil & gas market accounted for approximately 10 % of anvil 's net sales in 2015 , down from 20 % in 2014. the trend in rig counts correlates with the direction of demand for anvil 's products that are sold into this market . according to baker hughes incorporated , u.s. land-based rig counts in early october 2015 represent a decline of approximately 58 % year-over-year . we expect anvil 's net sales percentage growth in 2016 to be in the low single digits , driven by the non-residential construction market . we believe anvil 's overall growth will continue to be impacted by an expected decline in net sales to its addressed oil & gas market on a year-over-year basis during the first half of the year , especially in the first quarter . based on current market conditions , we expect anvil 's net sales into this market during the second half of the year to be flat on a year-over-year basis . mueller technologies the municipal market is the key end market for the mueller technologies companies . these businesses are project-oriented and depend on customer adoption of their technology-based products and services . for 2016 , we entered the year with significantly higher ami backlog and projects awarded for mueller systems and higher projects under contract at echologics . we expect mueller technologies ' net sales percentage growth in 2016 to be approximately 10 % to 15 % . we also expect operating income to improve by approximately $ 7 million to $ 10 million . consolidated overall in 2016 for mueller water products , we expect year-over-year net sales percentage growth in the mid-single digits with stronger growth at the mueller co. and mueller technologies segments . we expect higher operating income and operating margin , driven primarily by a favorable mix of our higher-margin products at mueller co. 27 index to financial statements story_separator_special_tag declined to 18.8 % in 2015 compared to 22.0 % in the prior year period due primarily to product mix . sg & a increased to $ 29.9 million in 2015 compared to $ 27.2 million in the prior year period . sg & a increased primarily due to additional research and development investments in echologics and expanding the number of sales and customer service representatives . story_separator_special_tag cash and cash equivalents decreased during 2015 as a result of cash used in financing of $ 99.0 million , primarily debt repayments , and cash used in investing of $ 31.6 million , primarily capital expenditures , partially offset by cash provided by operating activities of $ 87.8 million . cash and cash equivalents also decreased by $ 5.2 million during 2015 due to changes in currency exchange rates . receivables , net were $ 175.3 million at september 30 , 2015 compared to $ 182.1 million at september 30 , 2014 . receivables at september 30 , 2015 and september 30 , 2014 represented approximately 51 and 52 days net sales , respectively . inventories were $ 219.1 million at september 30 , 2015 compared to $ 198.0 million at september 30 , 2014 . inventories increased during 2015 due primarily to lower sales into the oil & gas market , lower sales due to adverse weather impacts at mueller co. and a build-up of certain meter components . estimated inventory turns in 2015 were approximately half a turn slower than 2014. property , plant and equipment , net was $ 148.9 million at september 30 , 2015 compared to $ 146.3 million at september 30 , 2014 , and depreciation expense was $ 28.7 million in 2015 . capital expenditures , including external-use software development costs capitalized , were $ 37.5 million in 2015 . intangible assets were $ 507.3 million at september 30 , 2015 compared to $ 533.6 million at september 30 , 2014 . finite-lived intangible assets , $ 202.3 million of net book value at september 30 , 2015 , are amortized over their estimated useful lives . this amortization expense was $ 29.4 million during 2015 and is expected to be $ 20 million to $ 25 million for each of the next five years . indefinite-lived intangible assets , $ 305.0 million at september 30 , 2015 , are not amortized , but tested at least annually for possible impairment . accounts payable and other current liabilities were $ 161.9 million at september 30 , 2015 compared to $ 198.2 million at september 30 , 2014 . decreased payables relate primarily to decreased purchasing activity in the 2015 fourth quarter compared to the 2014 fourth quarter . net outstanding borrowings were $ 489.0 million at september 30 , 2015 compared to $ 541.0 million at september 30 , 2014 . the $ 52.0 million decrease during 2015 reflects a reduction of principal related to the november 2014 refinancing . deferred income taxes were net liabilities of $ 117.0 million at september 30 , 2015 compared to net liabilities of $ 111.8 million at september 30 , 2014 . the $ 5.2 million increase was primarily related to utilization of federal and state net operating losses during 2015 , offset by changes in pension and valuation allowance . deferred tax liabilities related to intangible assets and other were $ 183.1 million and $ 191.6 million at september 30 , 2015 and 2014 , respectively . 33 index to financial statements liquidity and capital resources we refinanced our debt on november 25 , 2014 by repaying all of our senior subordinated notes and senior unsecured notes and entering into a $ 500.0 million term loan that matures on november 25 , 2021. we had cash and cash equivalents of $ 113.1 million at september 30 , 2015 and approximately $ 170 million of additional borrowing capacity under our abl agreement based on september 30 , 2015 data . undistributed earnings from our subsidiaries in canada and china are considered to be permanently invested outside of the united states . at september 30 , 2015 , cash and cash equivalents included $ 16.0 million and $ 6.3 million in canada and china , respectively . in 2014 , we used $ 10.0 million to acquire certain assets of lined valve company inc. , which was reduced by a purchase price adjustment of $ 0.3 million that we received in 2015. cash flows from operating activities are categorized below . replace_table_token_10_th increased disbursements , other than interest and income taxes , during 2015 reflect timing differences of purchases and disbursements . capital expenditures were $ 37.5 million during 2015 compared to $ 36.9 million during 2014 . we estimate 2016 capital expenditures will be $ 38 million to $ 40 million . we were not required to make , and we did not make , any contributions to our u.s. pension plan in 2015 . the proportion of the assets held by our u.s. pension plan invested in fixed income securities , instead of equity securities , has increased over historical levels . because of this shift in the strategic asset allocation , the estimated rate of return on pension plan assets has decreased , which could ultimately cause our pension expense and our required contributions to this plan to increase . income tax payments were higher during 2015 compared to the prior year period because we totally utilized our net operating loss carryforwards for u.s. federal income taxes during the year . we expect income tax payments in 2016 to be significantly higher than the amount of tax payments made in 2015 . tax payments in 2015 were impacted by certain non-recurring expenses , primarily a $ 31.3 million loss on early extinguishment of debt , an $ 11.6 million loss on the receivable from walter energy , inc. and $ 9.2 million of restructuring charges , as well as the use of our remaining u.s. federal operating loss carryforwards . we expect effective tax rates in 2016 to be comparable to 2015. on april 28 , 2015 , we announced the authorization of a stock repurchase program for up to $ 50.0 million of our common stock . the program does not commit us to any particular timing or quantity of purchases , and we may suspend or discontinue the program at any time . in may 2015 , we acquired 523,851 shares of our common stock through open market purchases .

results of operations year ended september 30 , 2015 compared to year ended september 30 , 2014 replace_table_token_4_th consolidated analysis net sales for 2015 declined to $ 1,164.5 million from $ 1,184.7 million in the prior year period due primarily to lower shipment volumes of $ 16.7 million and unfavorable changes in canadian currency exchange rates of $ 10.7 million offset by improved pricing of $ 7.2 million . gross profit for 2015 of $ 347.3 million was essentially flat compared to $ 347.9 million in the prior year period . gross margin increased 40 basis points to 29.8 % in 2015 from 29.4 % in the prior year period due primarily to improved sales pricing . selling , general and administrative expenses ( “ sg & a ” ) for 2015 decreased to $ 216.9 million from $ 220.7 million in the prior year period . sg & a as a percentage of net sales was 18.6 % in both 2015 and in the prior year period . we have a tax-related receivable from walter energy from prior to our spin-off from walter in december 2006. walter filed a petition for reorganization under chapter 11 of the u.s. bankruptcy code in july 2015. as a result of this petition , we recorded a provision for doubtful accounts of $ 11.6 million in 2015 . 28 index to financial statements interest expense , net declined $ 22.0 million in 2015 compared to the prior year period due primarily to the debt refinancing we completed in november 2014 , which replaced the senior subordinated notes and the senior unsecured notes with the lower-rate term loan . also , debt principal outstanding declined by $ 45.0 million due to the november 2014 refinancing . the components of interest expense , net are provided below . replace_table_token_5_th the components of income tax expense are provided below . replace_table_token_6_th segment analysis mueller co. net sales for 2015 increased to $ 702.2

these statements include , without limitation , statements about our anticipated expenditures , including those related to general and administrative expenses ; the potential size of the market for our services , future development and or expansion of our services in our markets , our ability to generate revenues , our ability to obtain regulatory clearance and expectations as to our future financial performance . our actual results will likely differ , perhaps materially , from those anticipated in these forward-looking statements as a result of various factors , including : our need and ability to raise additional cash .. the forward-looking statements included in this report are subject to a number of additional material risks and uncertainties , including but not limited to the risks described in our filings with the securities and exchange commission . the following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and the related notes to those statements included in this filing . in addition to historical financial information , this discussion may contain forward-looking statements reflecting our current plans , estimates , beliefs and expectations that involve risks and uncertainties . as a result of many important factors , particularly those set forth under `` special note regarding forward-looking statements '' , our actual results and the timing of events may differ materially from those anticipated in these forward-looking statements . 42 overview we were incorporated in delaware under the name cardigant medical inc. on april 17 , 2009. our initial business plan was to focus on the development of novel biologic and peptide based compounds and enhanced methods for local delivery for the treatment of vascular disease including peripheral artery disease and ischemic stroke . pursuant to the stock purchase agreement dated as of july 31 , 2014 , yong li , an individual purchased a total of 22,185,230 restricted shares of common stock of the company from a group of three former stockholders of the company . in consideration for the shares , mr. li paid the sellers $ 399,344 in cash which came from his own capital . the sellers were jerett a. creed , the company 's former chief executive officer , chief financial officer , director and formerly a controlling stockholder of the company , the creed family limited partnership and ralph sinibaldi . the shares represented approximately 95 % of the company 's then issued and outstanding common stock . the sale was consummated on august 28 , 2014. as a result of the transaction , there was a change in control of the company . on august 27 , 2014 , we entered into a contribution agreement with cardigant neurovascular . pursuant to the contribution agreement , we assigned all our assets , properties , rights , title and interest used or held for use by our business , ( except for certain excluded assets set forth therein ) which was the treatment of atherosclerosis and plaque stabilization in both the coronary and peripheral vasculature using systemic and local delivery of large molecule therapeutics and peptide mimetics based on high density lipoprotein targets ( “ cardigant business ” ) . in consideration for such contribution of capital , cardigant neurovascular agreed to assume all our liabilities raising from the business prior to the date of the contribution agreement and thereafter with regard to certain contributed contacts . we granted cardigant neurovascular an exclusive option for a period of 6 months to purchase the excluded assets for $ 1. cardigant neurovascular exercised this option october 20 , 2014 and the excluded assets were assigned to cardigant neurovascular on october 20 , 2014. also on october 20 , 2014 , we acquired the business of hongkong takung assets and equity of artworks exchange co. , ltd ( “ hong kong takung ” ) through the acquisition of all the share capital of hong kong takung under a share exchange agreement dated september 23 , 2014 in exchange for 209,976,000 ( pre-reverse stock split ) newly-issued restricted shares of our common stock to the shareholders of hong kong takung ( the “ reverse merger ” ) . hong kong takung is a limited liability company incorporated on september 17 , 2012 under the laws of hong kong , special administrative region , china . although takung was incorporated in 2012 , it did not commence business operations until late 2013. as a result of the transfer of the excluded assets pursuant to the contribution agreement and the acquisition of all the issued and outstanding shares of hong kong takung , we are no longer conducting the cardigant business and have now assumed hong kong takung 's business operations as it now our only operating wholly-owned subsidiary . hong kong takung operates an electronic online platform located at http : //eng.takungae.com for artists , art dealers and art investors to offer and trade in valuable artwork . through hong kong takung , we offer on-line listing and trading services that allow artists/art dealers/owners to access a much bigger art trading market where they can engage with a wide range of investors that they might not encounter without our platform . our platform also makes investment in high-end and expensive artwork more accessible to ordinary people without substantial financial resources . on november 5 , 2014 , we filed a certificate of amendment to our certificate of incorporation with the secretary of state of the state of delaware to change our name from “ cardigant medical inc. ” to “ takung art co. , ltd. ” 43 we generate revenue from our services in connection with the offering and trading of artwork ownership units on our system , primarily consisting of listing fees , trading commissions , and management fees . we conduct our business primarily in hong kong , special administrative region , people 's republic of china . our principal executive offices are located at flat/rm 03-04 , 20/f , hutchison house , 10 harcourt road , central hong kong . story_separator_special_tag liquidity and capital resources sources of liquidity the cash balance at december 31 , 2015 was $ 10,769,456. of the $ 10,769,456 , we had $ 1,849,010 denominated in hong kong dollars in hong kong banks , $ 1,457,247 and $ 953,186 denominated in us dollars deposited in banks in hong kong and china respectively , and $ 6,510,013 denominated in renminbi and deposited in a bank in china . during the year ended december 31 , 2015 , net cash provided by operating activities totaled $ 5,419,693. net cash used in investing activities totaled $ 512,144. net cash provided by financing activities totaled $ 3,510,853. the resulting change in cash for the period was an increase of $ 8,413,617 , which was primarily due to a net income of $ 5,436,109 and the collection from subscription proceeds from the issuance of shares . the cash balance at december 31 , 2014 was $ 2,355,839. during the year ended december 31 , 2014 , net cash provided by operating activities totaled $ 2,591,661. net cash used in investing activities totaled $ 497,942. no cash was generated from financing activities . the resulting change in cash for the period was an increase of $ 2,095,652 , which was primarily due to a net income of $ 1,369,537 and the increase in account payables and other accruals , offset by the increase in payment for the purchase of property and equipment . as of december 31 , 2015 , the company had $ 18,427,281 in total current liabilities , which included $ 667,622 in account payables and other accruals , $ 16,195,289 in customers ' deposits , and $ 1,564,370 tax payables . as of december 31 , 2014 , the company had $ 9,009,168 in total current liabilities , which included $ 1,891,525 in account payables and other accruals , and $ 6,865,821 in customers ' deposits . as of december 31 , 2015 and 2014 , the company had $ 45,037 and $ 66,555 in total non-current liabilities , which included deferred tax liabilities . the company 's total liabilities as of december 31 , 2015 and 2014 amounted to $ 18,472,318 and $ 9,075,723 , respectively . the company 's net assets amounted to $ 11,276,895 and $ 2,048,543 as of december 31 , 2015 and 2014 , respectively . the company is not aware of any known trends , events or uncertainties which may affect its future liquidity . we currently do not have grant applications outstanding , and we can make no guarantees that any grant money will be awarded from any future applications . our business is subject to risks inherent in the establishment of a new business enterprise , including limited capital resources and possible cost overruns . if our operating subsidiaries were to incur additional debt on their own behalf in the future , the instruments governing the debt may restrict the ability of our operating subsidiaries to transfer cash to our u.s. investors . 47 there is no foreign exchange control or restrictions on capital flows into and out of hong kong . hence , our hong kong operating subsidiary is able to transfer cash without any limitation to the u.s. under normal circumstances . in contrast , applicable prc law permits payment of dividends to us by our operating subsidiary in china only out of its net income , if any , determined in accordance with prc accounting standards and regulations . our operating subsidiary in china is also required to set aside a portion of its net income , if any , each year to fund general reserves for appropriations until such reserves have reached 50 % of the subsidiary 's registered capital . these reserves are not distributable as cash dividends . in addition , registered share capital and capital reserve accounts are also restricted from withdrawal in the prc , up to the amount of net assets held in each operating subsidiary . the renminbi is currently convertible under the `` current account , '' which includes dividends , trade and service-related foreign exchange transactions , but not under the `` capital account , '' which includes foreign direct investment and loans , including loans we may secure from our onshore subsidiaries or variable interest entities . currently , our prc subsidiary , which is a wholly-foreign owned enterprise , may purchase foreign currency for settlement of `` current account transactions , '' including payment of dividends to us , without the approval of state administration of foreign exchange ( “ safe ” ) by complying with certain procedural requirements . however , the relevant prc governmental authorities may limit or eliminate our ability to purchase foreign currencies in the future for current account transactions . the existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in renminbi to fund our business activities outside of the prc or pay dividends in foreign currencies to our stockholders , including holders of our shares of common stock . foreign exchange transactions under the capital account remain subject to limitations and require approvals from , or registration with , safe and other relevant prc governmental authorities . this could affect our ability to obtain foreign currency through debt or equity financing for our prc subsidiary . going concern consideration our operations and financial results are subject to numerous various risks and uncertainties that could adversely affect our business , financial condition , and results of operations . off-balance sheet arrangements we have no off-balance sheet arrangements , including arrangements that would affect our liquidity , capital resources , market risk support , and credit risk support or other benefits . future financings we will continue to rely on equity sales of our common shares in order to continue to fund our business operations . issuances of additional shares will result in dilution to existing stockholders .

results of operation of takung hong kong takung operates a platform for offering and trading artwork . we generate revenue from our services in connection with the offering and trading of artwork ownership units on our system , primarily consisting of listing fees , trading commissions , and management fees . for the years ended december 31 , 2015 and 2014 revenue listing fee revenues were $ 4,834,126 and $ 1,774,461 ; commission revenues were $ 6,145,261 and $ 2,832,158 ( net of applicable rebates and discounts ) ; gross management fee revenues were $ 115,542 and $ 113,243 for the years ended december 31 , 2015 and 2014 , respectively . during 2015 , the company has received revenue from two more revenue streams , with the contribution of $ 239,260 from authorized agent subscription revenue , and $ 1,752 from annual fee income . listing fee revenue and commission revenue are calculated based on a percentage of the listing value and transaction value of artworks , respectively . listing value is the total offering price of an artwork when the ownership units are initially listed on our trading platform . the company utilizes an appraised value as a basis to determine the appropriate listing value for each artwork , or portfolio of artworks . during the year ended december 31 , 2015 , 49 sets of artwork were listed for trade on our platform — nine sets of paintings and calligraphies from famous chinese artists ranging in listing value from $ 387,062 ( hk $ 3,000,000 ) to $ 1,548,247 ( hk $ 12,000,000 , four pieces of jewelry ranging in listing value from $ 335,454 ( hk $ 2,600,000 ) to $ 516,082 ( hk $ 4,000,000 ) twenty five pieces of precious stones ranging in listing value from $ 12,902 ( hk $ 100,000 ) to $ 645,103 ( hk $ 5,000,000 ) , and eleven pieces of amber ranging in listing value from $ 154,825 ( hk $ 1,200,000 ) to $ 903,144 ( hk $ 7,000,000 ) .

our strategy continues to be focused on providing quality customer service through our convenient branch network , supported by our call center , where customers can speak with a bank representative to answer questions and resolve issues during business and extended hours . we believe that our ability to close transactions and deliver our services in a timely manner is attractive to our customers and distinguishes us from other financial institutions that operate in our marketplace . our customers enjoy access to senior executives and decision makers and the value it brings to their businesses . we also offer convenient online and mobile banking tools for customers to transact business anytime and anywhere . we believe that many opportunities remain to deliver what our customers want in the form of exceptional service and convenience and we intend to continue to focus our operating strategy on taking advantage of these opportunities . 38 employing a stockholder-focused management of capital . we intend to manage our capital position through the growth of assets , as well as the utilization of appropriate capital management tools , consistent with applicable regulations and policies , and subject to market conditions . under federal reserve board regulations , we were prohibited from repurchasing shares of our common stock for one year following our minority public offering that was completed in april 2018. since june 2019 , we have announced three stock repurchase programs under which we have repurchased an aggregated of 11,130,942 shares of common stock as of december 31 , 2020. most recently , on february 1 , 2021 , we announced that our board of directors authorized a new stock repurchase program to acquire up to 5,000,000 shares , or approximately 4.5 % , of our then currently issued and outstanding common stock , commencing upon the completion of our existing stock repurchase program that was approved in september 2020. our board of directors has the authority to declare dividends on our shares of common stock , and may determine to pay dividends in the future , subject to statutory and regulatory requirements and other considerations such as the ability of columbia bank mhc to receive permission from the federal reserve board to waive receipt of any dividends we may determine to declare in the future . if columbia financial pays dividends to its stockholders , it also will be required to pay dividends to columbia bank mhc , unless columbia bank mhc is permitted by the federal reserve board to waive the receipt of dividends . the federal reserve board 's current position is to not permit a `` non-grandfathered '' mutual holding company to waive dividends declared by its subsidiary . columbia bank mhc may determine to apply to the federal reserve board for approval to waive dividends if we determine to pay dividends to our stockholders . given the federal reserve board 's current position on this issue , there is no assurance that any request by columbia bank mhc to waive dividends from columbia financial would be permitted . the denial by the federal reserve board of any such dividend waiver request , if sought , could determine whether the board of directors of columbia financial determines to declare a dividend , or if so declared , could significantly limit the amount of dividends columbia financial would pay in the future , if any . covid-19 to assist customers impacted by the covid-19 pandemic , through january 31 , 2021 , the company granted commercial loan modification requests with respect to multifamily , commercial , and construction real estate loans , with current balances of $ 734.7 million and granted consumer-related loan modification requests with respect to one-to-four family real estate loans and home equity loans and advances with current balances of $ 178.1 million . through december 31 , 2020 , the company granted commercial loan modification requests with respect to multifamily , commercial , and construction real estate loans with balances of $ 735.1 million and consumer-related loan modification requests with respect to one-to-four family real estate loans and home equity loans and advances with balances of $ 180.2 million to customers affected by the covid-19 pandemic . these short-term loan modifications are being treated in accordance with section 4013 of the cares act and will not be treated as troubled debt restructurings during the short-term modification period if the loan was not in arrears at december 31 , 2019. furthermore , based on current evaluations , generally , we have continued the accrual of interest on these loans during the short-term modification period . the consolidated appropriations act , 2021 , which was enacted in late december 2020 , extended certain provisions of the cares act , including provisions permitting loan deferral extension requests to not be treated as troubled debt restructurings . commercial loan modification requests include various industries and property types . critical accounting policies in the preparation of our consolidated financial statements , we have adopted various accounting policies that govern the application of u.s. generally accepted accounting principles ( “ gaap ” ) and general practices within the banking industry . our significant accounting policies are described in note 2 to the consolidated financial statements . certain accounting policies involve significant judgments and assumptions by us that have a material impact on the carrying value of certain assets and liabilities . we consider these accounting policies , which are discussed below , to be critical accounting policies . these assumptions , estimates and judgments we use can be influenced by a number of factors , including the general economic environment . story_separator_special_tag actual results could differ from these judgments and estimates under different conditions , resulting in a change that could have a material impact on the carrying values of our assets and liabilities and our results of operations . allowance for loan losses . the calculation of the allowance for loan losses is a critical accounting policy of the company because of the high degree of judgment involved , the subjectivity of the assumptions used , and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses . the allowance for loan losses is maintained at a level that management considers adequate to provide for estimated losses and impairment based upon an evaluation of known and inherent risk in the loan portfolio . the allowance consists of two elements : ( 1 ) identification of loans that must be reviewed individually for impairment and ( 2 ) establishment of an allowance for loan losses for loans collectively evaluated for impairment . we maintain a loan review system that provides a periodic review of the loan portfolio and the identification of impaired loans . the allowance for loan losses for loans individually evaluated for impairment is based on the fair value of collateral or 39 cash flows . while management uses the best information available to make such evaluations , future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluations . the allowance for loan losses for loans collectively evaluated for impairment consists of both quantitative and qualitative loss components established for estimated losses inherent in the portfolio . the evaluation of the allowance for loan losses for loans collectively evaluated for impairment excludes impaired loans which are individually evaluated for impairment . we estimate the quantitative component of the allowance for loan losses for loans collectively evaluated for impairment by applying loss factors based upon the loan type categorization and risk ratings assigned to real estate loans and commercial business loans and by applying qualitative adjustments at the portfolio level . quantitative loss factors give consideration to historical loss experience and migration experience by loan type over a look-back period , adjusted for a loss emergence period . qualitative adjustments give consideration to other qualitative or environmental factors such as trends and levels of delinquencies , impaired loans , charge-offs , recoveries and loan volumes , as well as national and local economic trends and conditions . qualitative adjustments reflect risks in the loan portfolio not captured by the quantitative loss factors and , as such , are evaluated relative to risk levels present over the look-back period . the reserves resulting from the application of both the quantitative experiences and qualitative factors are combined to arrive at the allowance for loan losses for loans collectability evaluated for impairment , the allowance for loan losses is established through provisions for loan losses charged to income , which is based upon past loan loss experience and an evaluation of estimated losses in the current loan portfolio , including the evaluation of impaired loans . although we believe that we have established and maintained the allowance for loan losses at appropriate levels , additional reserves may be necessary if future economic and other conditions differ substantially from the current operating environment . in addition , regulatory agencies periodically review the adequacy of our allowance for loan losses as an integral part of their examination process . such agencies may require us to recognize additions to the allowance or additional write-downs based on their judgments about information available to them at the time of their examination . our financial results are affected by the changes in and the level of the allowance for loan losses . this process involves our analysis of internal and external variables , and it requires that we exercise judgment to estimate an appropriate allowance for loan losses . as a result of the uncertainty associated with this subjectivity , we can not assure the precision of the amount reserved , should we experience sizable loan losses in any particular period . we believe the primary risks inherent in the portfolio are a general decline in the economy , a decline in real estate market values , rising unemployment , elevated unemployment , increasing vacancy rates , and increases in interest rates in the absence of economic improvement . any one or a combination of these events may adversely affect a borrower 's ability to repay its loan , resulting in increased delinquencies and loan losses . accordingly , we have recorded loan losses at a level which is estimated to represent the current risk in its loan portfolio . most of our non-performing assets are collateral dependent loans which are written down to their current appraised value less estimated costs to sell . we continue to assess the collateral of these loans and update our appraisals on these loans on an annual basis . to the extent the property values decline , there could be additional losses on these non-performing assets , which may be material . management considered these market conditions in deriving the estimated allowance for loan losses . should economic difficulties occur , the ultimate amount of loss could vary from that estimate . for additional discussion related to the determination of the allowance for loan losses , see “ risk management-analysis and determination of the allowance for loan losses ” and the notes to the consolidated financial statements . income taxes . we are subject to the income tax laws of the various jurisdictions where we conduct business and estimate income tax expense based on amounts expected to be owed to these various tax jurisdictions . the estimated income tax expense ( benefit ) is reported in the consolidated statements of income . deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in

financial highlights net income was $ 57.6 million for the year ended december 31 , 2020 as compared to $ 54.7 million for the year ended december 31 , 2019 , an increase of $ 2.9 million , or 5.3 % . the increase was attributable to an increase in net interest income of $ 49.2 51 million , or 28.5 % , partially offset by an increase in our provision for loan losses of $ 14.2 million , or 336.7 % , a decrease in non-interest income of $ 366,000 , or 1.2 % , an increase in non-interest expense of $ 29.4 million , or 22.9 % , and an increase in income tax expense of $ 2.3 million , or 14.0 % . in 2020 , the increase in net interest income was primarily attributable to a $ 34.6 million increase in interest income and a $ 14.6 million decrease in interest expense . the increase in interest income for the year ended december 31 , 2020 was largely due to increases in the average balances on loans , securities and other interest-earning assets , which was the result of internal growth and the acquisitions of stewardship financial and the roselle entities , partially offset by decreases in the average yields on these assets . net deferred fee acceleration of $ 2.9 million was recognized upon the forgiveness and settlement of $ 144.0 million of sba ppp loans for the year ended december 31 , 2020. the increase in provision for loan losses was primarily attributable to consideration of the deterioration of economic conditions and loan performance due to the ongoing covid-19 pandemic which resulted in increases to qualitative factors .

66 proto labs , inc. notes to consolidated financial statements the company 's 2012 employee stock purchase plan ( espp ) allows eligible employees to purchase a variable number of shares of the company 's common stock at a discount through payroll deductions of up to 15 percent of their eligible compensation , subject to plan limitations . the espp provides for six-month offering periods with a single purchase period , and at the end of each offering period , employees are able to purchase shares at 85 percent of the lower of the fair market value of the company 's common stock on the first trading day of the offering period or on the last trading day of the offering period . the company story_separator_special_tag the following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this annual report on form 10-k. this discussion and analysis contains forward-looking statements that involve risks and uncertainties . our actual results may differ materially from those anticipated in these forward- looking statements as a result of various factors , including those set forth under “ risk factors ” and elsewhere in this annual report on form 10-k. overview we are an e-commerce driven digital manufacturer of quick-turn , on-demand injection-molded , cnc-machined , 3d-printed and sheet metal-fabricated custom parts for prototyping and short-run production . we provide custom parts to product developers and engineers worldwide , who are under increasing pressure to bring their finished products to market faster than their competition . we believe custom parts manufacturing has historically been an underserved market due to the inefficiencies inherent in the quotation , equipment set-up and non-recurring engineering processes required to produce custom parts . our proprietary technology eliminates most of the time-consuming and expensive skilled labor conventionally required to quote and manufacture parts in low volumes , and our customers conduct nearly all of their business with us over the internet . we target our product lines to the millions of product developers and engineers who use 3d cad software to design products across a diverse range of end markets . our primary manufacturing product lines currently include injection molding , cnc machining , 3d printing and sheet metal . we have experienced significant growth since our inception . since we first introduced our injection molding product line in 1999 , we have steadily expanded the size and geometric complexity of the injection-molded parts we are able to manufacture , and we continue to extend the diversity of materials we are able to support . similarly , since first introducing our cnc machining product line in 2007 , we have expanded the range of part sizes , design geometries and materials we can support . in 2014 , we acquired fineline prototyping , inc. ( fineline ) to expand the number of process types we offer to include stereolithography ( sl ) , selective laser sintering ( sls ) and direct metal laser sintering ( dmls ) . in 2017 , we acquired rapid to expand the number of process types we offer to include sheet metal fabrication and expand our cnc machining capability . we also continually seek to enhance other aspects of our technology and manufacturing processes , including our interactive web-based and automated user interface and quoting system . we intend to continue to invest significantly to enhance our technology and manufacturing processes and expand the range of our existing capabilities with the aim of meeting the needs of a broader set of customers . as a result of the factors described above , many of our customers tend to return to proto labs to meet their ongoing needs , with approximately 91 % , 89 % and 86 % of our revenue in 2018 , 2017 and 2016 , respectively , derived from existing customers . we have established our operations in the united states , europe and japan , which we believe are three of the largest geographic markets where product developers and engineers are located . we entered the european market in 2005 , launched operations in japan in late 2009 and further expanded into europe through our acquisition of alphaform in 2015 and the united states through our acquisition of rapid in november 2017. as of december 31 , 2018 , we had sold products into approximately 60 countries . our revenue outside of the united states accounted for approximately 21 % , 24 % and 25 % of our consolidated revenue in the years ended december 31 , 2018 , 2017 and 2016 , respectively . we intend to continue to expand our international sales efforts and believe opportunities exist to serve the needs of product developers and engineers in select new geographic regions . we have grown our total revenue from $ 209.6 million in 2014 to $ 445.6 million in 2018. during this period , our operating expenses increased from $ 67.9 million in 2014 to $ 149.8 million in 2018. we have grown our income from operations from $ 60.5 million in 2014 to $ 88.9 million in 2018. our recent growth in revenue and income from operations has been accompanied by increased cost of revenues and operating expenses . we expect to increase investment in our operations to support anticipated future growth as discussed more fully below . in addition , we believe that a number of trends affecting our industry have affected our results of operations and may continue to do so . for example , we believe that many of our target product developer and engineer customers are facing three mega trends , which are disrupting product growth models . we believe our customers are facing increased pressure to shorten product life-cycles , to embed products with internet of things technology , and to deliver products that are personalized and customized to unique customer specifications . story_separator_special_tag costs for internal use software are evaluated by project and capitalized where appropriate under accounting standards codification ( asc ) 350-40 , intangibles — goodwill and other , internal-use software . we expect research and development expense to increase in the future as we seek to enhance and expand our product line offerings and supporting business systems . general and administrative . general and administrative expense consists primarily of employee compensation , benefits , stock-based compensation , professional service fees related to accounting , tax and legal and other related overhead . we expect general and administrative expense to increase in the future as we continue to grow and expand as a global organization . other income , net other income , net primarily consists of foreign currency-related gains and losses and interest income on cash balances and investments . our foreign currency-related gains and losses will vary depending upon movements in underlying exchange rates . our interest income will vary each reporting period depending on our average cash balances during the period , composition of our marketable security portfolio and the current level of interest rates . provision for income taxes provision for income taxes is comprised of federal , state , local and foreign taxes based on pre-tax income . on december 22 , 2017 , the tax cuts and jobs act was signed into law in the united states . as a result , many provisions will affect our tax rate in future years . some provisions , such as the reduction to the u.s. corporate tax rate from 35 % to 21 % , beginning in 2018 , will likely reduce our effective tax rate in future years . other provisions taken in isolation , such as the elimination of the domestic production activities deduction , will likely result in an increase to our tax rate . overall , we anticipate our effective tax rate will be lower in 2018 and beyond than in recent periods based on the current tax laws . 34 story_separator_special_tag those programs that have proven to be the most effective in growing our business . research and development . our research and development expense increased $ 5.2 million , or 22.0 % , for 2018 compared to 2017 due to an increase in headcount resulting in personnel and related cost increases of $ 4.9 million and professional services cost increases of $ 0.6 million , which were partially offset by a decrease in operating cost of $ 0.3 million . 36 general and administrative . our general and administrative expense increased $ 11.3 million , or 27.5 % , for 2018 compared to 2017 due to an increase in headcount resulting in personnel and related cost increases of $ 2.4 million , stock- based compensation cost increases of $ 0.9 million , administrative cost increases of $ 5.3 million and amortization cost increases of $ 2.7 million . other income , net and provision for income taxes other income , net . we recognized other income , net of $ 2.8 million in 2018 , an increase of $ 0.6 million compared to other income , net of $ 2.2 million for 2017. other income , net for 2018 primarily consisted of $ 1.7 million in interest income on investments , a $ 0.7 million gain on our sale of rapid wire & cable , llc and a $ 0.4 million gain on foreign currency . other income , net for 2017 primarily consisted of $ 1.5 million in interest income on investments , a $ 0.4 million favorable legal settlement and a $ 0.3 million gain on foreign currency . provision for income taxes . our income tax provision decreased by $ 7.6 million for 2018 compared to 2017. the decrease in the provision is primarily due to the tax cuts and jobs act that went into effect in 2018 and benefits from the vesting of restricted stock and the exercise of stock options . our effective tax rate of 16.4 % for 2018 decreased 14.0 % compared to 30.4 % for the same period in 2017. comparison of years ended december 31 , 2017 and 201 6 revenue revenue by reportable segment and the related changes for 2017 and 2016 is summarized as follows : replace_table_token_9_th our revenue increased $ 46.4 million , or 15.6 % , for 2017 compared with 2016. by reportable segment , revenue in the united states increased $ 39.2 million , or 17.5 % , for 2017 compared with 2016. revenue growth in the united states was partially attributable to the acquisition of rapid in november 2017 , which contributed $ 3.6 million in revenue . excluding rapid , revenue in the united states increased $ 35.6 million , or 15.9 % , for 2017 compared with 2016. revenue in europe increased $ 6.8 million , or 10.7 % , for 2017 compared with 2016. revenue in japan increased $ 0.5 million , or 4.6 % , for 2017 compared with 2016. our revenue growth in 2017 was the result of increased volume of the product developers and engineers we served . during 2017 , we served 37,538 unique product developers and engineers , an increase of 19.3 % over 2016. average revenue per product developer or engineer remained relatively consistent during 2017 as compared to 2016. our revenue increases were primarily driven by increases in sales personnel and marketing activities . our sales personnel focus on gaining new customer accounts and expanding the depth and breadth of existing customer accounts . our marketing personnel focus on marketing activities that have proven to result in the greatest number of customer leads to support sales activity . the impact on international revenue in 2017 compared to 2016 as a result of foreign currency movements was not material .

results of operations the following table summarizes our results of operations and the related changes for the periods indicated . the results below are not necessarily indicative of the results for future periods . replace_table_token_5_th stock-based compensation expense included in the statements of comprehensive income data above is as follows : replace_table_token_6_th comparison of years ended december 31 , 201 8 and 201 7 revenue revenue by reportable segment and the related changes for 2018 and 2017 is summarized as follows : replace_table_token_7_th our revenue increased $ 101.1 million , or 29.3 % , for 2018 compared with 2017. by reportable segment , revenue in the united states increased $ 87.4 million , or 33.2 % , for 2018 compared with 2017. revenue growth in the united states was partially attributable to the acquisition of rapid in november 2017. revenue in europe increased $ 10.7 million , or 15.3 % , for 2018 compared with 2017. revenue in japan increased $ 2.9 million , or 26.0 % , for 2018 compared with 2017 . 35 our revenue growth in 2018 was primarily driven by an increased volume of the product developers and engineers we served . during 2018 , we served 45,968 unique product developers and engineers , an increase of 22.5 % over 2017. average revenue per product developer or engineer increased 6 % during 2018 as compared to 2017 due to changes in the mix of products purchased by our customers . our revenue increases were primarily driven by increases in sales personnel and marketing activities . our sales personnel focus on gaining new customer accounts and expanding the depth and breadth of existing customer accounts . our marketing personnel focus on marketing activities that have proven to generate the greatest number of customer leads to support sales activity .

these forward-looking statements are not guarantees of future performance and are subject to risks , uncertainties , assumptions and other factors , some of which are beyond our control , which could cause actual results to differ materially from those expressed or implied by such forward-looking statements . these factors include the ability to satisfy the necessary conditions to consummate the proposed separation ( as defined below ) on a timely basis or at all ; the ability to successfully separate the water and electrical businesses and realize the anticipated benefits from the proposed separation ; adverse effects on the water and electrical business operations or financial results and the market price of our shares as a result of the announcement or consummation of the proposed separation ; unanticipated transaction expenses , such as litigation or legal settlement expenses ; failure to obtain tax rulings or changes in tax laws ; changes in capital market conditions ; the impact of the proposed separation on our employees , customers and suppliers ; overall global economic and business conditions impacting the water and electrical businesses ; future opportunities that our board may determine present greater potential to increase shareholder value ; the ability of the water and electrical businesses to operate independently following the proposed separation ; the ability to achieve the benefits of our restructuring plans ; the ability to successfully identify , finance , complete and integrate acquisitions ; competition and pricing pressures in the markets we serve ; the strength of housing and related markets ; volatility in currency exchange rates and commodity prices ; inability to generate savings from excellence in operations initiatives consisting of lean enterprise , supply management and cash flow practices ; increased risks associated with operating foreign businesses ; the ability to deliver backlog and win future project work ; failure of markets to accept new product introductions and enhancements ; the impact of changes in laws and regulations , including those that limit u.s. tax benefits ; the outcome of litigation and governmental proceedings ; and the ability to achieve our long-term strategic operating goals . additional information concerning these and other factors is contained in our filings with the u.s. securities and exchange commission ( the `` sec '' ) , including this annual report on form 10-k. all forward-looking statements speak only as of the date of this report . pentair plc assumes no obligation , and disclaims any obligation , to update the information contained in this report . overview pentair plc is a focused diversified industrial manufacturing company comprising two reporting segments : water and electrical . we classify our operations into business segments based primarily on types of products offered and markets served . for the year ended december 31 , 2017 , water and electrical accounted for 58 % and 42 % of total revenues , respectively . although our jurisdiction of organization is ireland , we manage our affairs so that we are centrally managed and controlled in the united kingdom ( the `` u.k. '' ) and therefore have our tax residency in the u.k. on september 18 , 2015 , we acquired , as part of electrical , all of the outstanding shares of capital stock of erico global company ( `` erico '' ) for approximately $ 1.8 billion in cash ( the `` erico acquisition '' ) . erico is a leading global manufacturer and marketer of engineered electrical and fastening products for electrical , mechanical and civil applications . erico has employees in 30 countries across the world with recognized brands including caddy fixing , fastening and support products ; erico electrical grounding , bonding and connectivity products and lenton engineered systems . on april 28 , 2017 we completed the sale of the valves & controls business to emerson electric co. for $ 3.15 billion in cash . the sale resulted in a gain of $ 181.1 million , net of tax . the results of the valves & controls business have been presented as discontinued operations and the related assets and liabilities have been reclassified as held for sale for all periods presented . the valves & controls business was previously disclosed as a stand-alone reporting segment . on may 9 , 2017 , we announced that our board of directors approved a plan to separate our water business and electrical business into two independent , publicly-traded companies ( the `` proposed separation '' ) . the proposed separation is expected to occur through a tax-free spin-off of the electrical business to pentair shareholders . completion of the proposed separation is subject to certain customary conditions , including , among other things , final approval of the transaction by pentair 's board of directors , receipt of tax opinions and rulings and effectiveness of appropriate filings with the sec . upon completion of the proposed separation , it is anticipated that electrical 's jurisdiction of organization will be ireland , but that it will manage its affairs so that it will be centrally managed and controlled in the u.k. and therefore will have its tax residency in the u.k. 22 we are targeting april 30 , 2018 for the completion of the proposed separation ; however , there can be no assurance regarding the ultimate timing of the proposed separation or that the proposed separation will be completed . key trends and uncertainties regarding our existing business the following trends and uncertainties affected our financial performance in 2017 and 2016 , and will likely impact our results in the future : during 2017 and 2016 , we continued execution of certain business restructuring initiatives aimed at reducing our fixed cost structure and , during 2017 , began realigning our business in contemplation of the proposed separation . we expect that these actions will contribute to margin growth in 2018. we have identified specific product and geographic market opportunities that we find attractive and continue to pursue , both within and outside the united states . story_separator_special_tag 27 segment income the components of the change in water segment income from the prior period were as follows : replace_table_token_10_th the 1.4 percentage point increase in segment income for water as a percentage of net sales in 2017 from 2016 was primarily the result of : favorable material savings for certain raw materials and product mix offsetting inflation ; selective increases in selling prices to mitigate inflationary cost increases ; and cost savings generated from pims initiatives including lean and supply management practices . these increase s were partially offset by : inflationary increases related to labor costs and certain raw materials ; and continued growth investments in research & development and sales & marketing . the 1.1 percentage point increase in segment income for water as a percentage of net sales in 2016 from 2015 was primarily the result of : price increases more than offsetting inflationary cost increases ; and cost savings generated from back-office consolidation , reduction in personnel and other lean initiatives . these increase s were partially offset by : inflationary increases related to labor costs and certain raw materials . electrical the net sales and segment income for electrical were as follows : replace_table_token_11_th net sales the components of the change in electrical net sales were as follows : replace_table_token_12_th the 0.9 percent decrease in electrical sales in 2017 from 2016 was primarily the result of : 28 lower project sales volume as a result of the impact of three large canadian oil sands projects in 2016 that did not recur in 2017. this decrease was partially offset by : sales volume growth in our industrial business primarily in the u.s. ; favorable foreign currency effect during 2017 ; selective increases in selling prices to mitigate inflationary cost increases ; and increased sales related to a business acquisition that occurred in the first quarter of 2017. the 17.0 percent increase in electrical sales in 2016 from 2015 was primarily the result of : sales of $ 516.1 million in 2016 as a result of the erico acquisition , compared to sales of $ 147.0 million in 2015 ; and core growth in our industrial and residential & commercial businesses . these increase s were partially offset by : continued slowdown in capital spending , particularly in the energy and infrastructure businesses , driving core sales declines ; and a strong u.s. dollar causing unfavorable foreign currency effects . segment income the components of the change in electrical segment income from the prior period were as follows : replace_table_token_13_th the 0.2 percentage point increase in segment income for electrical as a percentage of net sales in 2017 from 2016 was primarily the result of : favorable mix as a result of the decline in lower margin project sales and growth in higher margin product sales in 2017 , compared to 2016 ; higher core sales in our industrial business , which resulted in increased leverage on fixed operating expenses ; and cost control and savings generated from back-office consolidation , reduction in personnel and other lean initiatives . these increase s were partially offset by : inflationary increases related to labor costs and certain raw materials ; lower core sales volumes in our energy and infrastructure businesses , which resulted in decreased leverage on operating expenses ; and higher cost of sales during 2017 due to manufacturing footprint rationalization and a new u.s. distribution center . we expect these investments will result in increased productivity and operating leverage in future periods . the 0.7 percentage point decrease in segment income for electrical as a percentage of sales in 2016 from 2015 was primarily the result of : lower margin project sales not offsetting the decline in higher margin product sales ; and inflationary increases related to labor costs and certain raw materials . 29 these decrease s were partially offset by : higher core sales in our industrial and residential & commercial businesses , which resulted in increased leverage on fixed operating expenses ; and strong contribution and integration synergies as a result of the erico acquisition . liquidity and capital resources we generally fund cash requirements for working capital , capital expenditures , equity investments , acquisitions , debt repayments , dividend payments and share repurchases from cash generated from operations , availability under existing committed revolving credit facilities and in certain instances , public and private debt and equity offerings . our primary revolving credit facilities have generally been adequate for these purposes , although we have negotiated additional credit facilities or completed debt and equity offerings as needed to allow us to complete acquisitions . we generally issue commercial paper to fund our financing needs on a short-term basis and use our revolving credit facility as back-up liquidity to support commercial paper . we are focusing on increasing our cash flow and repaying existing debt , while continuing to fund our research and development , marketing and capital investment initiatives . our intent is to maintain investment grade credit ratings and a solid liquidity position . we experience seasonal cash flows primarily due to seasonal demand in a number of markets within both our water and electrical segments . we generally borrow in the first quarter of our fiscal year for operational purposes , which usage reverses in the second quarter as the seasonality of our businesses peaks . end-user demand for pool and certain pumping equipment follows warm weather trends and is at seasonal highs from april to august . the magnitude of the sales spike is partially mitigated by employing some advance sale `` early buy '' programs ( generally including extended payment terms and or additional discounts ) . demand for residential and agricultural water systems is also impacted by weather patterns , particularly by heavy flooding and droughts . additionally , electrical generally experiences increased demand for thermal protection products and services during the fall and winter months in the northern hemisphere and increased demand for electrical fastening products during the spring and summer months in the northern hemisphere .

consolidated results of operations the consolidated results of operations were as follows : replace_table_token_6_th n.m. not meaningful net sales the components of the consolidated net sales change were as follows : replace_table_token_7_th the 1.0 percent increase in consolidated net sales in 2017 from 2016 was primarily the result of : increased sales volume in our industrial business primarily in the u.s. ; increased sales related to business acquisitions that occurred in the fourth quarter of 2016 and the first quarter of 2017 ; and favorable foreign currency effects during the year ended december 31 , 2017. these increase s were partially offset by : continued lower project sales volume particularly in the energy and industrial businesses ; 24 large job adjustments to net sales of $ 9.7 million in 2017. the 5.9 percent increase in consolidated net sales in 2016 from 2015 was primarily the result of : sales of $ 516.1 million in 2016 as a result of the erico acquisition , compared to sales of $ 147.0 million in 2015 ; and increased volume driving core sales growth in our north america pool business . these increase s were partially offset by : continued slowdown in capital spending , driving core sales declines in our industrial and energy businesses ; slowing economic activity in certain developing regions , including china and brazil ; and a strong u.s. dollar causing unfavorable foreign currency effects . gross profit the 0.4 percentage point increase in gross profit as a percentage of sales in 2017 from 2016 was primarily the result of : selective increases in selling prices to mitigate inflationary cost increases ; favorable mix as a result of the decline in lower margin project sales and growth in higher margin product sales ; and higher contribution margin as a result of savings generated from our pentair integrated management system ( `` pims '' ) initiatives including lean and supply management practices .

those statements include statements regarding the intent , belief or current expectations of apricus biosciences , inc. and subsidiaries ( “we , ” “us , ” “our” or the “company” ) and our management team . any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties , and actual results may differ materially from those projected in the forward-looking statements . these risks and uncertainties include but are not limited to those risks and uncertainties set forth in item 1a of this report . in light of the significant risks and uncertainties inherent in the forward-looking statements included in this report , the inclusion of such statements should not be regarded as a representation by us or any other person that our objectives and plans will be achieved . further , these forward-looking statements reflect our view only as of the date of this report . except as required by law , we undertake no obligations to update any forward-looking statements and we disclaim any intent to update forward-looking statements after the date of this report to reflect subsequent developments . accordingly , you should also carefully consider the factors set forth in other reports or documents that we file from time to time with the securities and exchange commission . general we are a nevada corporation and have been in existence since 1987. on september 10 , 2010 , the company changed its name from “nexmed , inc.” to “apricus biosciences , inc.” we have operated in the pharmaceutical industry since 1995 , initially focusing on research and development in the area of drug delivery and are now primarily focused on product development in the area of sexual health . our proprietary drug delivery technology is called nexact ® and we have one approved drug using the nexact ® delivery system , vitaros ® , which is approved in canada for the treatment of erectile dysfunction , which we expect will be launched in the first half of 2013 by our partner abbott . also in the area of sexual health is our femprox ® product candidate for female sexual arousal disorder . additionally the company has mycova™ for onychomycosis excluding tinea pedis ( nail fungal infection ) , and rayva™ for raynaud 's syndrome as product candidates using the nexact ® permeation enhancer . we continue to enter into and are seeking additional commercialization partnerships for our existing pipeline of products and product candidates , including vitaros ® , and femprox ® and we are enhancing our business development efforts by offering potential partners clearly defined regulatory paths for our products under development . our lead product , vitaros ® , was approved for commercialization in canada in november , 2010 and is now partnered in the united states , canada , germany , the united kingdom , italy , certain countries in the middle east , the gulf countries and israel . our near term focus for vitaros ® is to commence sales in canada in the first half of 2013 through our commercial partner , abbott , and to continue to generate revenue from partnerships for the product with other commercial partners . we also expect payment from certain of our partners on the approval of vitaros ® in europe and other territories . typically , in our partnership arrangements we receive up-front payments in exchange for license rights to our products plus sales milestones and royalties to be paid upon commercialization of the product . we filed for marketing approval for vitaros ® in europe in the second quarter of 2011 and we expect to receive an approval decision in europe in the first half of 2013. the company operated in three segments during 2012 : pharmaceuticals —designs and develops pharmaceutical products including those with its nexact ® platform ; 34 diagnostic sales —sells diagnostic products and , prior to june 30 , 2011 , provided pre-clinical cro services through the company 's former subsidiary , bio-quant ; and contract sales —provides contract sales for third party pharmaceutical companies through the company 's subsidiary , finesco . as previously announced , we made the strategic decision in december 2012 to focus on our core product candidates associated with sexual health and the underlying nexact ® technology . as a result , we chose to divest our united states based oncology supportive care business which was aggregated into our pharmaceuticals segment and is presented as a discontinued operation at december 31 , 2012. additionally , we announced in march 2013 that we ceased funding finesco , which could result in the dissolution of these entities , in which case we will receive little or no return on our investment . these subsidiaries are presented in the contract sales segment during 2012. liquidity , capital resources and financial condition . we have experienced net losses and negative cash flows from operations each year since our inception . through december 31 , 2012 , we had an accumulated deficit of $ 251.1 million and our operations have principally been financed through public offerings of our common stock and other equity instruments , private placements of equity securities , debt financing and up-front license fees received from commercial partners . funds raised in 2012 from common stock transactions include approximately $ 18.4 million in net proceeds from our february 2012 follow-on public offering , approximately $ 2.0 million from the sale of common stock through our “at-the-market” stock sales facility and approximately $ 0.04 million from the exercise of warrants outstanding . the receipt of this cash during 2012 was offset by our cash used in operations . our net cash outflow from operations during the year was approximately $ 12.3 million , which resulted from the increase in expenditures for research and development activities while we commercialize our vitaros ® product for sale in canada and obtain market approval in other regions . story_separator_special_tag our most critical accounting estimates include the recognition of revenue , the assessment of recoverability of long-lived assets , which primarily impact operating expenses when we impair assets or accelerate depreciation , the assessment of contingent consideration , discontinued operations , stock-based compensation which impacts operating expenses ; and income taxes , which primarily impacts our net loss . we review our estimates , judgments , and assumptions used in our accounting practices periodically and reflect the effects of revisions in the period in which they are deemed to be necessary . we believe that these estimates are reasonable ; however , our actual results may differ from these estimates . revenue recognition : we have historically generated revenues from licensing of technology rights , product sales , performance of pre-clinical testing services , and contract sales services . payments received under commercial arrangements such as the licensing of technology rights , may include non-refundable fees at the inception of the arrangements , milestone payments for specific achievements designated in the agreements , royalties on sales of products , and payments for the sale of rights to future royalties . 36 license arrangements . license arrangements may consist of non-refundable upfront license fees , regulatory and sales milestones , royalties upon sales of product , and the delivery of product and or research services to the licensee . these arrangements are often multiple element arrangements . critical estimate : revenue from our license arrangements is determined by assessing the deliverables in the arrangement under the authoritative guidance for multiple element arrangements . analyzing the arrangement to identify deliverables requires the use of judgment . deliverables may include a right or license to use an asset , a performance obligation , or an obligation to deliver product and or research services . once we identify the deliverables under the arrangement , we determined whether or not the deliverables can be accounted for as separate units of accounting , and the appropriate method of revenue recognition for each element . revenue is recognized upon delivery of the elements within the arrangement based upon the consideration allocated to each deliverable . the value of the license and associated upfront payments is based upon similar arrangements . long-lived and intangible assets : we review for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable . an impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount . if such assets are considered impaired , the amount of the impairment loss recognized is measured as the amount by which the carrying value of the asset exceeds the fair value of the asset , fair value being determined based upon discounted cash flows or appraised values , depending on the nature of the asset . we recorded impairment charges related to our long-lived and intangible assets for the years ended december 31 , 2012 , 2011 and 2010 of $ 0.7 million , $ 0.0 million and $ 1.1 million , respectively . critical estimate : we evaluated our building in east windsor , new jersey and management committed to a plan to sell the land , building and related equipment . these assets are categorized as assets held for sale on the balance sheet at december 31 , 2012 and totaled $ 4.1 million . equipment held for sale is no longer subject to depreciation , and is recorded at the lower of depreciated carrying value or fair market value less costs to sell . we incurred an impairment charge of $ 0.5 million based upon the expected net selling price less the associated environmental remediation costs related to our building in east windsor , new jersey . in addition to the impairment on the assets held for sale , the building was leased to a non-related party with escalating rent over a ten year period . we record this rental income on a straight-line basis with the difference between rental income and payments received recorded as a deferred rental income asset . as a result of the sale we will not amortize the deferred rental income over the term of the lease and accordingly an impairment in the amount of $ 0.2 million was recorded in 2012. these impairment charges were recorded in the statement of operations and comprehensive loss in general and administrative expenses . we completed the sale of these assets in march 2013. critical estimate : in december 2012 , the company made the strategic decision to divest the oncology supportive care business and is currently seeking buyers for the business or the individual assets therein . the decision to sell the business was a triggering event that required us to evaluate our assets held for sale including our intangible assets for impairment by comparing the book values of the company 's co-promotion rights , technology licenses and trade names against their respective estimated fair value . we evaluated our oncology supportive care business with the assistance of a third party valuation firm , the estimated fair values of the company 's co-promotion rights , technology licenses and trade names were determined using a discounted cash flows model and a market approach based on multiple offers the company received for certain assets of the business . the discounted cash flows model requires certain assumptions and judgments including but not limited to estimation of future cash flows , which is dependent on internal forecasts , estimation of the long-term rate of growth for the businesses , the useful life over which cash flows will occur , and determination of the company 's weighted average cost of capital . we determined that estimated future cash flows expected to result from the use of the assets used in that business and their eventual disposition are less than their carrying amount . we recorded an impairment charge of $ 1.8 million to write down our intangible assets to $ 1.9 million .

segment results our revenues and loss from continuing operations by segment were as follows ( in thousands ) : replace_table_token_6_th the table above excludes the revenues and expenses associated with the discontinued operations . pharmaceuticals the $ 3.5 million increase in revenue from our pharmaceuticals segment during 2012 , when compared to 2011 , is primarily due to higher license fee revenue from the recognition of upfront fees during 2012 from sandoz , abbott and takeda for $ 0.8 million , $ 2.5 million and $ 1.0 million , respectively , compared to $ 0.9 million that was recognized during 2011 in aggregate from bracco , elis and neopharm . in addition , $ 0.5 million of warner chilcott service revenue was recognized in 2012. these increases were partially offset by $ 0.5 million in lower grant revenue resulting from federal grants awarded to us during 2011 under the qtdp program . we did not apply for any grants during 2012. the remaining $ 0.1 difference was due to other sources of revenue . the $ 1.5 million increase in revenue from our pharmaceuticals segment during 2011 , when compared to 2010 , is primarily due to $ 1.4 million in higher license fee and grant revenue related to $ 0.9 million that was recognized during 2011 in aggregate from bracco , elis and neopharm and $ 0.5 million in grants awarded to us during 2011 under the qtdp program . the remaining $ 0.1 difference was due to other sources of revenue .

as a result of the strategic decisions made at that time and in conjunction with the annual impairment review performed as of october 1 , 2019 , the company recognized non-cash pre-tax impairment charges totaling $ 122.1 million related to certain recently acquired indefinite-lived trademarks . these charges included impairments totaling $ 117.0 million in the performance coatings group and $ 5.1 million in the consumer brands group . in the performance coatings group , $ 75.6 million related to trademarks in north america directly associated with strategic decisions made to rebrand industrial products to the sherwin-williams® brand name , $ 25.7 million related to trademarks in the asia pacific region as a direct result of recent performance that reduced the long-term forecasted net sales and $ 15.7 story_separator_special_tag ( dollars in millions , except as noted and per share data ) company background the sherwin-williams company , founded in 1866 , and its consolidated wholly owned subsidiaries ( collectively , the company ) are engaged in the development , manufacture , distribution and sale of paint , coatings and related products to professional , industrial , commercial and retail customers primarily in north and south america with additional operations in the caribbean region and throughout europe , asia and australia . the company is structured into three reportable segments – the americas group , consumer brands group and performance coatings group ( collectively , the reportable segments ) – and an administrative segment in the same way it is internally organized for assessing performance and making decisions regarding allocation of resources . see notes 3 and 21 to the consolidated financial statements in item 8 for additional information regarding the valspar acquisition and the company 's reportable segments , respectively . story_separator_special_tag style= '' font-family : inherit ; font-size:10pt ; '' > other general expense - net , respectively . as required by the goodwill and other intangibles topic of the asc , management performed an annual impairment test of goodwill and indefinite-lived intangible assets as of october 1 , 2019 . during the fourth quarter of 2019 , the company recognized non-cash pre-tax impairment charges totaling $ 122.1 million related to recently acquired trademarks . these charges included impairments totaling $ 117.0 million in the performance coatings group and $ 5.1 million in the consumer brands group . in the performance coatings group , $ 75.6 million related to trademarks in north america directly associated with strategic decisions made to rebrand industrial products to the sherwin-williams® brand name , $ 25.7 million related to trademarks in the asia pacific region as a direct result of recent performance which reduced the long-term forecasted net sales and $ 15.7 million related to other recently acquired trademarks in various regions . the impairment tests in 2018 did not result in any impairment . see note 6 to the consolidated financial statements in item 8 for additional information . interest expense decreased $ 17.4 million in 2019 primarily due to lower average debt levels . interest and net investment income increased $ 20.7 million in 2019 including an $ 18.8 million gain recognized during the fourth quarter of 2019 after the company received a favorable court decision in brazil related to the recovery of certain indirect taxes previously paid over gross sales . see note 18 to the consolidated financial statements in item 8 for additional information on the brazil indirect tax matter . during 2019 , the company recognized a $ 34.7 million benefit from the resolution of the california public nuisance litigation as a result of the final court approved agreement issued during the third quarter of 2019. during the third quarter of 2018 , the company recognized expense of $ 136.3 million related to the california litigation . see note 11 to the consolidated financial statements in item 8 for additional information related to the litigation . other expense ( income ) - net decreased by $ 3.4 million in 2019 compared to 2018 . this change was primarily attributable to a $ 38.7 million gain related to the recognition of indirect tax credits partially offset by $ 14.8 million in losses related to the extinguishment of the 2.25 % and 2.75 % senior notes recorded in the administrative segment and an increase of $ 13.6 million related to pension plan settlement and other miscellaneous pension expenses . in addition , foreign currency related transaction losses increased $ 12.2 million in 2019 , primarily in the americas group and performance coatings group , which were offset by 23 other miscellaneous sources of income , including dividend and royalty income . there were no other items within other income or other expense that were individually significant at december 31 , 2019 . see notes 7 , 8 and 18 to the consolidated financial statements in item 8 for additional information related to debt , pensions and other expense ( income ) - net , respectively . replace_table_token_15_th consolidated income before income taxes in 2019 increased $ 622.1 million to $ 1.982 billion , or 11.1 % of net sales , compared to $ 1.360 billion , or 7.8 % of net sales in 2018 . income before income taxes increased $ 158.1 million and $ 112.1 million in the americas group and consumer brands group , and decreased $ 73.0 million in the performance coatings group when compared to 2018 . in 2019 , the administrative segment expenses favorably impacted income before income taxes by $ 424.9 million when compared to 2018 primarily due to lower expense recognized related to environmental matters , benefits from the resolution of the california litigation as well as a brazil indirect tax credit , and decreased acquisition-related expenses . the effective income tax rate for 2019 was 22.2 % compared to 18.5 % in 2018 . story_separator_special_tag see note 6 to the consolidated financial statements in item 8 for a description of goodwill , identifiable intangible assets and asset impairments recognized in accordance with the goodwill and other intangibles topic of the asc and summaries of the remaining carrying values of goodwill and intangible assets . deferred pension and other assets deferred pension assets of $ 43.0 million at december 31 , 2019 represent the excess of the fair value of assets over the actuarially determined projected benefit obligations . the decrease in deferred pension assets during 2019 of $ 227.7 million from $ 270.7 million last year was primarily due to the termination of the company 's domestic defined benefit pension plan . see note 8 to the consolidated financial statements in item 8 and the defined benefit pension and other postretirement benefit plans section below . other assets decreased $ 22.6 million to $ 561.4 million at december 31 , 2019 due primarily to a decrease in deferred tax assets . property , plant and equipment net property , plant and equipment increased $ 58.4 million to $ 1.835 billion at december 31 , 2019 due primarily to capital expenditures of $ 328.9 million and assets acquired through business combinations of $ 16.8 million , partially offset by depreciation expense of $ 262.1 million and sale or disposition of assets with remaining net book value of $ 37.5 million . the remaining change of $ 12.3 million is attributable to currency translation and other adjustments . capital expenditures during 2019 in the americas group were primarily attributable to the opening of new paint stores and renovation and improvements in existing stores . in the consumer brands group and the performance coatings group , capital expenditures during 2019 were primarily attributable to improvements and normal equipment replacements in manufacturing and distribution facilities . the administrative segment incurred capital expenditures primarily for information systems hardware . on february 6 , 2020 , the company announced that it is finalizing plans to build and occupy a new global headquarters ( new headquarters ) in downtown cleveland , ohio and a new research and development ( r & d ) center in the cleveland suburb of brecksville . preliminary plans require the company to invest a minimum of $ 600 million of capital expenditures to build both the new headquarters and r & d center . construction on the new headquarters and r & d center is not expected to commence before mid-2020 , with completion in 2023 at the earliest . the plans are contingent upon completion of standard due diligence , approvals of economic development incentives and other matters at the state , county and city levels , and resolution of business and legal matters that accompany such major real estate investment projects . the company has not made any decisions regarding the disposition of the company 's current cleveland-area headquarters and r & d centers , which are all owned by the company . due to the remaining contingencies and uncertainties listed above , an estimate of the impact on the financial statements can not be made at this time . in 2020 , the company expects to spend more than 2019 for capital expenditures . the predominant share of the capital expenditures in 2020 is expected to be for various productivity improvement and maintenance projects at existing manufacturing , distribution and research and development facilities , new store openings , new or upgraded information systems hardware and the new global headquarters and r & d center in ohio . the company does not anticipate the need for any specific long-term external financing to support these capital expenditures . 25 debt total debt including short-term borrowings decreased by $ 658.5 million to $ 8.685 billion in 2019 . this was primarily attributable to the company repurchasing $ 1.071 billion of its 2.25 % senior notes due may 2020 and $ 490.0 million of its 2.75 % senior notes due june 2022 , partially offset by the company issuing $ 800.0 million of 2.95 % senior notes due 2029 and $ 550.0 million of 3.80 % senior notes due 2049 ( collectively the `` new notes '' ) in a public offering during the third quarter of 2019. the net proceeds from the issuance of the new notes will be used for general corporate purposes . the repurchases of senior notes above resulted in a loss of $ 14.8 million recorded in other expense ( income ) - net . see note 18 to the consolidated financial statements in item 8 for additional information . on may 9 , 2019 , the company entered into a u.s. dollar to euro cross currency swap contract with a total notional amount of $ 400.0 million to hedge the company 's net investment in its european operations . this contract has been designated as a net investment hedge and will mature on january 15 , 2022. during the term of the contract , the company will pay fixed-rate interest in euros and receive fixed-rate interest in u.s. dollars , thereby effectively converting a portion of the company 's u.s. dollar denominated fixed-rate debt to euro denominated fixed-rate debt . the fair value of the contract is included in other assets on the balance sheet . the changes in fair value are recognized in the foreign currency translation adjustments component of accumulated other comprehensive loss . for the year ended december 31 , 2019 , an unrealized gain of $ 1.1 million , net of tax , was recognized in accumulated other comprehensive loss . on july 19 , 2018 , the company and three of its wholly-owned subsidiaries , sherwin-williams canada , inc. , sherwin-williams luxembourg s.à r.l and sherwin-williams uk holding limited ( all together with the company , the borrowers ) , entered into a new five-year $ 2.000 billion credit agreement .

results of operations the following discussion and analysis addresses comparisons of material changes in the consolidated financial statements for the years ended december 31 , 2019 and 2018 . for comparisons of the years ended december 31 , 2018 and 2017 , see management 's discussion and analysis of financial condition and results of operations in part ii , item 7 of the company 's annual report on form 10-k for the fiscal year ended december 31 , 2018 filed on february 22 , 2019. replace_table_token_14_th consolidated net sales for 2019 increased due primarily to higher paint sales volume in the americas group and selling price increases . currency translation rate changes decreased 2019 consolidated net sales by 1.4 % . net sales of all consolidated foreign subsidiaries decreased 8.7 % to $ 3.679 billion for 2019 versus $ 4.028 billion for 2018 due primarily to industrial market softness and macroeconomic pressures in china and australia . net sales of all operations other than consolidated foreign subsidiaries increased 5.3 % to $ 14.222 billion for 2019 versus $ 13.507 billion for 2018 . net sales in the americas group increased due primarily to higher paint sales volume across most end market segments and selling price increases . net sales from stores in u.s. and canada open for more than twelve calendar months increased 5.3 % in the year over last year 's comparable period . currency translation rate changes reduced net sales by 0.9 % compared to 2018 . during 2019 , the americas group opened 94 new stores and closed 32 redundant locations for a net increase of 62 stores , increasing the total number of stores in operation at december 31 , 2019 to 4,758 in the united states , canada , latin america and the caribbean . the americas group 's objective is to expand its store base an average of 2 % each year , primarily through internal growth .

other relevant entity-specific events , such as changes in management , key personnel , strategy , or customers ; contemplation of bankruptcy ; or litigation . events affecting a reporting unit , such as a change in story_separator_special_tag management 's discussion and analysis of financial condition and results of operations should be read in conjunction with the consolidated financial statements , the notes thereto , and other statistical information included in this annual report . executive summary the company offers a wide range of private banking and wealth management services to high net worth individuals , families , businesses and select institutions through its four reportable segments : private banking , wealth management and trust , investment management , and wealth advisory . this executive summary provides an overview of the most significant aspects of our operating segments and the company 's operations in 2017 . details of the matters addressed in this summary are provided elsewhere in this document and , in particular , in the sections immediately following . net income attributable to the company was $ 40.6 million for the year ended december 31 , 2017 , compared to net income attributable to the company of $ 71.6 million in 2016 and $ 64.9 million in 2015 . the company recognized diluted earnings per share of $ 0.42 for the year ended december 31 , 2017 , compared to diluted earnings per share of $ 0.81 in 2016 and $ 0.74 in 2015 . key items that affected the company 's 2017 story_separator_special_tag style= '' font-family : inherit ; font-size:8pt ; '' > deposits at the bank increased $ 0.4 billion , or 7 % , to $ 6.6 billion in 2017 from $ 6.2 billion in 2016 . a discussion of the company 's deposits can be found below in part ii . item 7 . “ management 's discussion and analysis of financial condition and results of operations - financial condition. ” wealth management and trust the following table presents a summary of selected financial data for the wealth management and trust segment for 2017 , 2016 , and 2015 . replace_table_token_9_th nm - not meaningful the company 's wealth management and trust segment reported a net loss attributable to the company of $ 3.0 million in the year ended december 31 , 2017 , compared to a net loss attributable to the company of $ 12.2 million in 2016 and a net loss attributable to the company of $ 0.8 million in 2015 . the 2017 improvement in operating results was due to an 8 % decrease in operating expenses , primarily salaries and benefits , before restructuring and impairment of goodwill as well as a 3 % increase in total revenues . the 2016 net loss attributable to the company was primarily due to a $ 9.5 million goodwill impairment charge and a $ 7.3 million decrease in wealth management and trust fee revenue due to the decrease in aum . additionally , there were increases in salaries and employee benefits , and occupancy and equipment expenses , partially offset by lower restructuring expense in 2016 as compared to 2015. aum increased $ 0.9 billion , or 12 % , to $ 7.9 billion at december 31 , 2017 from $ 7.0 billion at december 31 , 2016 . in 2017 , the increase in aum was primarily the result of market appreciation of $ 0.6 billion and net flows of $ 0.3 billion . in 2016 , the decrease in aum was primarily the result of net outflows of $ 0.7 billion and the disposition of $ 0.4 billion of certain accounts , partially offset by market appreciation of $ 0.1 billion . 33 investment management the following table presents a summary of selected financial data for the investment management segment for 2017 , 2016 , and 2015 . replace_table_token_10_th nm - not meaningful the company 's investment management segment reported a net loss attributable to the company of $ 19.2 million in the year ended december 31 , 2017 , compared to net income attributable to the company of $ 5.7 million in 2016 and $ 5.8 million in 2015 . the $ 25.0 million decrease in 2017 was due to the $ 24.9 million impairment of goodwill at anchor . in december 2017 , the company entered into an agreement to sell its interest in anchor and anchor 's assets and liabilities are classified as held for sale at december 31 , 2017. the final testing indicated goodwill impairment that resulted in anchor 's carrying value being reduced to the expected approximate sale price per the sale agreement . excluding the impairment of goodwill , the investment management segment reported a decrease in pre-tax income of $ 0.2 million , primarily due to a 4 % increase in operating expenses before impairment of goodwill , partially offset by a 2 % increase in investment management fee income . results presented in the table above include the results of anchor , except for the aum data noted as excluding anchor . aum , excluding anchor , increased $ 0.2 billion , or 11 % , to $ 2.0 billion at december 31 , 2017 from $ 1.8 billion at december 31 , 2016 . in 2017 , the increase in aum , excluding anchor , was primarily the result of market appreciation of $ 0.2 billion , with immaterial net flows . in 2016 , the decrease in aum , excluding anchor , was primarily the result of net outflows of $ 0.4 billion , offset by market appreciation of $ 0.4 billion . 34 wealth advisory the following table presents a summary of selected financial data for the wealth advisory segment for 2017 , 2016 , and 2015 . replace_table_token_11_th the company 's wealth advisory segment reported net income attributable to the company of $ 8.1 million in the year ended december 31 , 2017 , compared to net income attributable to the company of $ 7.7 million in 2016 and $ 7.2 million in 2015 . story_separator_special_tag impairment is measured based on the fair value of the loan , expected future cash flows discounted at the loan 's effective interest rate , or as a practical expedient , impairment may be determined based upon the observable market price of the loan , or the fair value of the collateral , less estimated costs to sell , if the loan is “ collateral dependent. ” a loan is collateral dependent if repayment of the loan is expected to be provided solely by the underlying collateral or sale of the underlying collateral . for collateral dependent loans , appraisals are generally used to determine the fair value . when a collateral dependent loan becomes impaired , an updated appraisal of the collateral is obtained , if appropriate . appraised values are generally discounted for factors such as the bank 's intention to liquidate the property quickly in a foreclosure sale or the date when the appraisal was performed if the bank believes that collateral values have declined since the date the appraisal was done . the bank may use a broker opinion of value in addition to an appraisal to validate the appraised value . in certain instances , the bank may consider broker opinions of value as well as other qualitative factors while an appraisal is being prepared . if the loan is deemed to be collateral dependent , generally the difference between the book balance ( client balance less any prior charge-offs or client interest payments applied to principal ) and the fair value of the collateral is taken as a partial charge-off through the allowance for loan losses in the current period . if the loan is not determined to be collateral dependent , then a specific allocation to the general reserve is established for the difference between the book balance of the loan and the expected future cash flows discounted at the loan 's effective interest rate . charge-offs for loans not considered to be collateral dependent are made when it is determined a loss has been incurred . impaired loans are removed from the general loan pools . there may be instances where the loan is considered impaired although based on the fair value of underlying collateral or the discounted expected future cash flows there is no impairment to be recognized . in addition , all loans which are classified as troubled debt restructurings ( “ tdrs ” ) are considered impaired . in addition to the three primary components of the allowance for loan losses discussed above ( general reserve , allocated reserves on non-impaired special mention and substandard loans , and the specific reserves on impaired loans ) , the bank may also maintain an insignificant amount of additional allowance for loan losses ( the unallocated allowance for loan 36 losses ) . the unallocated reserve reflects the fact that the allowance for loan losses is an estimate and contains a certain amount of imprecision risk . it represents risks identified by management that are not already captured in the qualitative factors discussed above . the unallocated allowance for loan losses is not considered significant by the company and will remain at zero unless additional risk is identified . while this evaluation process utilizes historical and other objective information , the classification of loans and the establishment of the allowance for loan losses rely to a great extent on the judgment and experience of management . while management evaluates currently available information in establishing the allowance for loan losses , future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluations . in addition , various regulatory agencies , as an integral part of their examination process , periodically review a financial institution 's allowance for loan losses as well as loan grades/classifications . such agencies may require the financial institution to recognize additions to the allowance for loan losses or increases to adversely graded loans based on their judgments about information available to them at the time of their examination . valuation of goodwill/intangible assets and analysis for impairment the company allocates the cost of an acquired entity to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition . other intangible assets identified in acquisitions generally consist of advisory contracts , trade names , and non-compete agreements . the value attributed to advisory contracts is based on the time period over which they are expected to generate economic benefits . the advisory contracts are generally amortized over 8-15 years , depending on the contract . trade names are not amortized . long-lived intangible assets are subject to the impairment provisions of asc 360-10 , property , plant , and equipment ( “ asc 360 ” ) . long-lived intangible assets are tested for recoverability by comparing the net carrying value of the asset or asset group to the undiscounted net cash flows to be generated from the use and eventual disposition of that asset ( asset group ) when events or changes in circumstances indicate that its carrying amount may not be recoverable . if the carrying amount of the asset exceeds its net undiscounted cash flows , then an impairment loss is recognized for the amount by which the carrying amount exceeds its fair value , determined based upon the discounted value of the expected cash flows generated by the asset . the intangible impairment test is performed at the reporting unit level , and each affiliate with goodwill and or intangible assets is considered a reporting unit for goodwill and intangible impairment testing purposes . the excess of the purchase price for acquisitions over the fair value of the net assets acquired , including other intangible assets , is recorded as goodwill .

results include : ▪ net interest income for the year ended december 31 , 2017 was $ 224.7 million , an increase of $ 24.2 million , or 12 % , compared to 2016 . the 2017 increase was due to higher volume in the loan portfolio , particularly commercial real estate and residential loans , higher yields on loans and investments , and higher volume of investments . this was partially offset by higher rates paid on deposits and borrowings , and an increase in the average volume of interest-bearing deposits and borrowings . net interest margin ( “ nim ” ) increased eleven basis points to 3.04 % in 2017 from 2.93 % in 2016 , after increasing one basis point from 2.92 % in 2015 . ▪ recurring fees and income , which includes investment management fees , wealth advisory fees , wealth management and trust fees , other banking fee income , and gain on sale of loans , net , for the year ended december 31 , 2017 were $ 152.8 million , an increase of $ 1.1 million , or 1 % , from 2016 . the 2017 increase was due to increases in wealth advisory fees , wealth management and trust fees , and investment management fees , partially offset by decreases in other banking fee income and lower gains on sale of loans . ▪ the company recorded a credit to the provision for loan losses of $ 7.7 million for the year ended december 31 , 2017 , compared to a credit to the provision for loan losses of $ 6.9 million in 2016 . the 2017 credit to the provision for loan losses was primarily due to net recoveries and an improvement in loss factors , partially offset by an increase in criticized loans and commercial and residential loan growth .

actual results and the timing of events may differ materially 27 from those contained in these forward-looking statements due to a number of factors , including those discussed in the section entitled “ risk factors ” and elsewhere in this annual report on form 10-k. overview we acquire , own and operate industrial real estate in six major coastal u.s. markets : los angeles , northern new jersey/new york city , san francisco bay area , seattle , miami , and washington , d.c. we invest in several types of industrial real estate , including warehouse/distribution buildings ( approximately 82.0 % of our total annualized base rent as of december 31 , 2020 ) , flex buildings ( including light industrial and r & d ) ( approximately 5.0 % ) , transshipment buildings ( approximately 5.3 % ) and improved land parcels ( approximately 7.7 % ) . we target functional properties in infill locations that may be shared by multiple tenants and that cater to customer demand within the various submarkets in which we operate . infill locations are geographic locations surrounded by high concentrations of already developed land and existing buildings . as of december 31 , 2020 , we owned a total of 222 buildings aggregating approximately 13.2 million square feet , 25 improved land parcels consisting of approximately 91.5 acres and one property under redevelopment expected to contain approximately 0.2 million square feet upon completion . as of december 31 , 2020 , our buildings and improved land parcels were approximately 97.8 % and 98.6 % leased , respectively , to 488 customers , the largest of which accounted for approximately 5.4 % of our total annualized base rent . we are an internally managed maryland corporation and elected to be taxed as a reit under sections 856 through 860 of the code , commencing with our taxable year ended december 31 , 2010. our investment strategy we acquire , own and operate industrial real estate in six major coastal u.s. markets : los angeles , northern new jersey/new york city , san francisco bay area , seattle , miami , and washington , d.c. we invest in several types of industrial real estate , including warehouse/distribution , flex ( including light industrial and r & d ) , transshipment and improved land . we target functional properties in infill locations that may be shared by multiple tenants and that cater to customer demand within the various submarkets in which we operate . we selected our target markets by drawing upon the experience of our executive management investing and operating in over 50 global industrial markets located in north america , europe and asia , the fundamentals of supply and demand , and in anticipation of trends in logistics patterns resulting from population changes , regulatory and physical constraints , changes in technology , e-commerce , the economic and environmental benefits of reducing vehicle miles traveled and other factors . we believe that our target markets have attractive long term investment attributes . we target assets with characteristics that include , but are not limited to , the following : located in high population coastal markets ; close proximity to transportation infrastructure ( such as sea ports , airports , highways and railways ) ; situated in supply-constrained submarkets with barriers to new industrial development , as a result of physical and or regulatory constraints ; functional and flexible layout that can be modified to accommodate single and multiple tenants ; acquisition price at a discount to the replacement cost of the property ; potential for enhanced return through re-tenanting or operational and physical improvements ; and opportunity for higher and better use of the property over time . in general , we prefer to utilize local third-party property managers for day-to-day property management and as a source of acquisition opportunities . we believe outsourcing property management is cost effective and provides us with operational flexibility . we may directly manage properties in the future if we determine such direct property management is in our best interest . we have no current intention to acquire undeveloped or unimproved industrial land or to pursue greenfield ground up development . nevertheless , we pursue redevelopment , renovation and expansion opportunities of properties that we own , acquire properties and improved land parcels with the intent to redevelop in the near-term , and acquire adjacent land to expand our existing facilities . we expect that we will continue to acquire the significant majority of our investments as equity interests in individual properties or portfolios of properties . we may acquire industrial properties through the acquisition of other corporations or entities that own industrial real estate . we will opportunistically make investments in debt secured by industrial real estate that would otherwise meet our investment criteria with the intention of ultimately acquiring the underlying real estate . we currently do not intend to target specific percentages of holdings of particular types of industrial properties . this expectation is based upon prevailing market conditions and may change over time in response to different prevailing market conditions . 28 the properties we acquire may be stabilized ( fully leased ) or unstabilized ( have near term lease expirations , be partially or fully vacant and may require physical repositioning ) . we sell properties from time to time when we believe the prospective total return from a property is particularly low relative to its market value and or the market value of the property is significantly greater than its estimated replacement cost . capital from such sales is reinvested into properties that are expected to provide better prospective returns or returned to shareholders . we have disposed of 23 properties since inception in 2010 for an aggregate sales price of approximately $ 364.7 million and a total gain of approximately $ 119.9 million . 2020 developments covid-19 the covid-19 pandemic , and mitigation measures put in place by governments to slow it , have caused significant economic disruption . story_separator_special_tag these estimated stabilized cap rates 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 , including risks related to our ability to meet our estimated forecasts related to stabilized cap rates and those risk factors contained in this annual report on form 10-k. 30 during the year ended december 31 , 2020 , we completed redevelopment of our kent 192 property in kent , washington and 6th avenue south property in seattle , washington , with estimated stabilized cap rates of 5.0 % and 5.1 % , respectively . the total aggregate investment was approximately $ 49.8 million consisting of approximately 0.3 million square feet . disposition activity during the year ended december 31 , 2020 , we sold three properties located in the washington , d.c. market for a total aggregate sales price of approximately $ 51.3 million , resulting in a gain of approximately $ 17.8 million , and one property located in the miami market for a sales price of approximately $ 22.2 million , resulting in a gain of approximately $ 9.0 million . the following summarizes the condensed results of operations of the properties sold during the year ended december 31 , 2020 for the years ended december 31 , 2020 , 2019 and 2018 ( in thousands ) : replace_table_token_8_th atm program we have an at-the-market equity offering program ( the “ $ 300 million atm program ” ) pursuant to which we may issue and sell shares of our common stock having an aggregate offering price of up to $ 300.0 million ( $ 84.1 million remaining as of december 31 , 2020 ) in amounts and at times as we determine from time to time . we intend to use the net proceeds from the offering of the shares under the $ 300 million atm program , if any , for general corporate purposes , which may include future acquisitions and repayment of indebtedness , including borrowings under our revolving credit facility . during 2020 , we issued an aggregate of 1,197,597 shares of common stock at a weighted average offering price of $ 54.08 per share under the $ 300 million atm program , resulting in net proceeds of approximately $ 63.8 million and paying total compensation to the applicable sales agents of approximately $ 0.9 million . senior secured loan we had a senior secured loan ( the “ senior secured loan ” ) outstanding to a borrower that bore interest at a fixed annual interest rate of 8.0 % and was fully repaid in may 2020. the senior secured loan was secured by a portfolio of six improved land parcels located primarily in newark , new jersey . share repurchase program we have a share repurchase program authorizing us to repurchase up to 3,000,000 shares of our outstanding common stock from time to time through december 31 , 2022 ( extended from december 31 , 2020 by our board of directors on november 3 , 2020 ) . purchases made pursuant to the program , if any , will be made in either the open market or in privately negotiated transactions as permitted by federal securities laws and other legal requirements . the timing , manner , price and amount of any repurchases will be determined by us in our discretion and will be subject to economic and market conditions , stock price , applicable legal requirements and other factors . the program may be suspended or discontinued at any time . as of december 31 , 2020 , we have not repurchased any shares of our common stock pursuant to our share repurchase program . dividend and distribution activity the following table sets forth the cash dividends paid or payable per share during the year ended december 31 , 2020 : replace_table_token_9_th 31 contractual commitments as of february 9 , 2021 , we have outstanding contracts with third-party sellers to acquire six industrial properties for a total aggregate purchase price of approximately $ 123.8 million , as further described under the heading “ contractual obligations ” in this annual report on form 10-k. there is no assurance that we will acquire the properties under contract because the proposed acquisitions are subject to the completion of satisfactory due diligence and various closing conditions . outlook current operating conditions in our six markets for our business are very good . we believe that on average , the rental rates we are likely to achieve on new or renewed leases for our 2021 expirations will be above the rates currently paid for the same space . however , new speculative development continues . this new development will slow potential rent growth from what it would be without such new development . we see attractive acquisition opportunities and expect our 2021 acquisition volume to exceed that of 2020 , perhaps significantly so . nevertheless , our acquisition volume will be dependent on both the quality and pricing of the opportunity set and the price of our stock relative to net asset value ( “ nav ” ) . those conditions , not knowable in advance , will determine our results . we will continue to sell assets and redeploy the capital to enhance nav or return the capital to shareholders . we entered 2021 with our balance sheet exceedingly well positioned for growth , as we have no balance outstanding on our $ 250 million revolving credit facility and a cash balance of approximately $ 107.2 million . eleven years ago , we completed our $ 175 million blind-pool ipo with a plan to invest in infill industrial real estate in the six best coastal u.s. markets . since then , we have grown to approximately $ 4.5 billion , with $ 4.0 billion of equity as of december 31 , 2020. within our six markets we have increasingly focused on urban infill locations .

financial condition and results of operations we derive substantially all of our revenues from rents received from tenants under existing leases on each of our properties . these revenues include fixed base rents and recoveries of certain property operating expenses that we have incurred and that we pass through to the individual tenants . approximately 92.4 % of our leased space includes fixed rental increases or consumer price index-based rental increases . lease terms typically range from three to ten years . our primary cash expenses consist of our property operating expenses , which include : real estate taxes , repairs and maintenance , management expenses , insurance , utilities , general and administrative expenses , which include compensation costs , office expenses , professional fees and other administrative expenses , acquisition costs , which include third-party costs paid to brokers and consultants , and interest expense , primarily on our mortgage loans , revolving credit facility , term loans and senior unsecured notes . 32 our consolidated results of operations often are not comparable from period to period due to the impact of property acquisitions at various times during the course of such periods . the results of operations of any acquired property are included in our financial statements as of the date of its acquisition . the following analysis of our results below for the years ended december 31 , 2020 and 2019 includes the changes attributable to same store properties .

accompanying notes to consolidated financial statements . 83 regency centers corporation and regency centers , l.p. notes to consolidated financial statements december 31 , 2017 1. summary of significant accounting policies ( a ) organization and principles of consolidation general regency centers corporation ( the “ parent company ” ) began its operations as a real estate investment trust ( “ reit ” ) in 1993 and is the general partner of regency centers , l.p. ( the “ operating partnership ” ) . the parent company engages in the ownership , management , leasing , acquisition , and development of retail shopping centers through the operating partnership , and has no other assets other than through its investment in the story_separator_special_tag executing on our strategy during the year ended 2017 , we completed the merger with equity one on march 1 , 2017 and acquired 121 properties representing 16.0 million sf of gla for $ 5.2 billion , further enhancing the quality of our operating portfolio of retail shopping centers . the consolidated net assets and results of operations of equity one are included in the consolidated financial statements from the closing date , march 1 , 2017. we had net income attributable to common stockholders of $ 159.9 million , net of $ 80.7 million of merger costs , as compared to $ 143.9 million of net income attributable to common stockholders during the year ended december 31 , 2016 . we sustained superior same property noi growth compared to the average of our shopping center peers : we achieved pro-rata same property noi growth , excluding termination fees , of 3.6 % . we executed 1,849 leasing transactions representing 6.3 million pro-rata sf of new and renewal leasing , with trailing twelve month rent spreads of 7.8 % on comparable retail operating property spaces . at december 31 , 2017 , our total property portfolio was 95.5 % leased , while our same property portfolio was 96.3 % leased . we developed and redeveloped high quality shopping centers at attractive returns on investment : we started five new developments representing a total investment of $ 197.5 million upon completion , with projected weighted average returns on investment of 7.3 % . including these new projects , a total of 23 properties were in the process of development or redevelopment at december 31 , 2017 , representing a pro-rata investment upon completion of $ 543.8 million . we maintained a conservative balance sheet providing financial flexibility to cost effectively fund investment opportunities and debt maturities : in january 2017 , we issued $ 300.0 million of 4.4 % senior unsecured notes due february 1 , 2047 , the proceeds of which were used to redeem all of the $ 250.0 million 6.625 % series 6 preferred stock and reduce the balance of our unsecured line of credit ( the `` line '' ) . on march 1 , 2017 in conjunction with the merger with equity one , we increased the commitment amount of our line to $ 1.0 billion . in june 2017 , we issued an additional $ 125.0 million of 4.4 % senior unsecured notes due february 1 , 2047 , the proceeds of which were used to redeem the $ 75.0 million of 6.0 % series 7 preferred stock on august 23 , 2017 , and to reduce the line balance . also in june 2017 , the company issued an additional $ 175.0 million of 3.6 % senior unsecured public notes due in 2027 , with proceeds used to retire $ 112.0 million of mortgage loans with interest rates ranging from 7.0 % to 7.8 % on various properties , and to reduce the line balance . at december 31 , 2017 , our annualized net debt-to-adjusted ebitda ratio on a pro-rata basis was 5.4x . leasing activity and significant tenants we believe our high-quality , grocery anchored shopping centers located in densely populated , desirable infill trade areas create attractive spaces for retail tenants . pro-rata occupancy the following table summarizes pro-rata occupancy rates of our combined consolidated and unconsolidated shopping center portfolio : 41 replace_table_token_16_th the decline in shop space percent leased is due to the merger with equity one , which had lower shop space occupancy than regency . pro-rata leasing activity the following table summarizes leasing activity , including our pro-rata share of activity within the portfolio of our co-investment partnerships : year ended december 31 , 2017 leasing transactions ( 1 ) ( 3 ) sf ( in thousands ) base rent psf ( 2 ) tenant improvements psf ( 2 ) leasing commissions psf ( 2 ) anchor leases new 39 895 $ 17.34 $ 9.71 $ 4.92 renewal 87 2,465 14.47 — 0.46 total anchor leases 126 3,360 $ 15.24 $ 2.59 $ 1.65 shop space new 548 952 $ 32.45 $ 12.06 $ 13.17 renewal 1,175 2,005 31.31 1.02 2.40 total shop space leases 1,723 2,957 $ 31.68 $ 4.57 $ 5.87 total leases 1,849 6,317 $ 22.93 $ 3.52 $ 3.62 ( 1 ) number of leasing transactions reported at 100 % ; all other statistics reported at pro-rata share . ( 2 ) totals for base rent , tenant improvements , and leasing commissions reflect the weighted average psf . ( 3 ) for the period ending december 31 , 2017 , amounts include leasing activity of properties acquired from equity one beginning march 1 , 2017. year ended december 31 , 2016 leasing transactions ( 1 ) sf ( in thousands ) base rent psf ( 2 ) tenant improvements psf ( 2 ) leasing commissions psf ( 2 ) anchor leases new 22 729 $ 16.99 $ 7.95 $ 2.42 renewal 84 1,610 14.00 0.50 0.54 total anchor leases ( 1 ) 106 2,339 $ 14.94 $ 2.83 $ 1.13 shop space new 443 774 $ 30.56 $ 12.29 $ 14.01 renewal 987 1,502 31.16 1.26 3.87 total shop space leases ( 1 ) 1,430 2,276 $ 30.95 $ 5.01 $ 7.32 total leases 1,536 4,615 $ 22.84 $ 3.90 $ 4.18 ( 1 story_separator_special_tag during 2017 , we sold six operating properties and nine land parcels resulting in gains of $ 27.4 million , compared to gains of $ 47.3 million from the sale of eleven operating properties and sixteen land parcels during 2016. during 2017 , we redeemed both our series 6 and series 7 preferred stock , resulting in a decrease to preferred stock dividends , offset by a charge upon writing off issuance costs . 47 comparison of the years ended december 31 , 2016 and 2015 : our total revenues increased as summarized in the following table : replace_table_token_22_th minimum rent changed as follows : $ 11.9 million increase from rent commencing at development properties ; $ 15.3 million increase from acquisitions of operating properties ; and $ 7.9 million increase at same properties , reflecting a $ 9.7 million increase from redevelopments and rental rate growth on new and renewal leases , offset by a $ 1.8 million charge to straight line rent primarily attributable to expected early terminations ; reduced by $ 5.9 million from the sale of operating properties . recoveries from tenants represent reimbursements to us for tenants ' pro-rata share of the operating , maintenance , and real estate tax expenses that we incur to operate our shopping centers . recoveries from tenants changed as follows : $ 3.9 million increase from rent commencing at development properties ; $ 4.2 million increase from acquisitions of operating properties ; and $ 5.6 million increase from same properties associated with higher recoverable costs ; reduced by $ 2.1 million from the sale of operating properties . other income , which consists of incidental income earned at our centers , increased $ 3.8 million as follows : $ 2.3 million in same properties primarily as a result of lease termination and easement fees ; and $ 1.5 million in parking income related to the acquisition of market common clarendon . changes in our operating expenses are summarized in the following table : replace_table_token_23_th depreciation and amortization costs changed as follows : $ 4.8 million increase as we began depreciating costs at development properties where tenant spaces were completed and became available for occupancy ; $ 8.8 million increase from acquisitions of operating properties ; and $ 5.8 million increase at same properties , attributable to recent capital improvements and redevelopments ; reduced by $ 3.9 million from the sale of operating properties and other corporate asset disposals . 48 operating and maintenance costs changed as follows : $ 2.6 million increase from operations commencing at development properties ; $ 6.2 million increase from acquisitions of operating properties ; and $ 4.8 million increase at same properties primarily attributable to recoverable costs ; reduced by $ 1.6 million from the sale of operating properties . real estate taxes changed as follows : $ 1.6 million increase from development properties where capitalization ceased as tenant spaces became available for occupancy ; $ 2.8 million increase from acquisitions of operating properties ; and $ 1.4 million increase at same properties from increased tax assessments ; reduced by $ 1.3 million from sold properties . other operating expenses increased $ 6.2 million primarily due to costs incurred from 2016 acquisition activities , including costs associated with the merger with equity one , inc. the following table presents the components of other expense ( income ) : replace_table_token_24_th the $ 11.9 million decrease in total interest expense is due to : $ 17.2 million decrease in interest on notes payable due to lower interest rates from refinancing and deleveraging activities during 2016 and the early redemption of our $ 300 million notes in august 2016 ; offset by $ 2.1 million increase in interest on unsecured credit facilities related to higher average balances on our line and a $ 100 million increase on our term loan during 2016 ; and $ 3.3 million increase due to lower interest capitalization on our development and redevelopment projects based on the status and cumulative spend on the projects in process . during 2016 , we recognized $ 4.2 million of impairment losses on two operating properties and two land parcels , all of which have since been sold . we did not recognize any impairments during 2015. we redeemed all of our outstanding $ 400 million notes in two tranches occurring in 2016 and 2015. during 2016 , we recognized a $ 14.2 million charge when redeeming the $ 300 million notes . during 2015 , we early redeemed $ 100 million of those same notes , which included an $ 8.2 million make-whole premium charge . net investment income increased $ 1.0 million , driven by realized and unrealized gains on investments held within the non-qualified deferred compensation plan during 2016 . 49 we recognized a $ 40.6 million charge to settle $ 220 million of forward starting interest rate swaps related to new debt previously expected to be issued in 2017. as a result of our july 2016 equity offering and the early redemption of the $ 300 million notes in august 2016 , the company believed that the issuance of new fixed rate debt within the remaining period of the forward starting swaps was probable to no longer occur . accordingly , we ceased hedge accounting and reclassified the $ 40.6 million paid to settle the forward starting swaps from accumulated other comprehensive loss to earnings . our equity in income of investments in real estate partnerships increased as follows : replace_table_token_25_th the $ 34.0 million increase in our equity in income in investments in real estate partnerships is largely attributed to ( i ) our share of gains on the sale of real estate within our grir , columbia i , columbia ii , and other investments in real estate partnerships ; ( ii ) interest expense savings within grir resulting from decreased debt balances and refinancing activity at lower interest rates ; and ( iii ) and a decrease in depreciation expense within grir from fully depreciated land improvement assets .

results from operations comparison of the years ended december 31 , 2017 and 2016 : results from operations for the twelve months ended december 31 , 2017 reflect the results of our merger with equity one on march 1 , 2017. our total revenues increased as summarized in the following table : replace_table_token_17_th minimum rent changed as follows : $ 7.2 million increase from development properties ; $ 5.2 million increase from acquisitions of operating properties ; $ 15.1 million increase at same properties reflecting an increase from rental rate growth on new and renewal leases , contractual rent steps , and our redevelopment properties ; and $ 261.4 million increase from properties acquired through the equity one merger ; reduced by $ 5.2 million from the sale of operating properties . percentage rent increased $ 2.5 million primarily as a result of properties acquired through the equity one merger . recoveries from tenants represent reimbursements to us for tenants ' pro-rata share of the operating , maintenance , and real estate tax expenses that we incur to operate our shopping centers . recoveries from tenants increased as follows : $ 1.7 million increase from rent commencing at development properties ; $ 1.9 million increase from acquisitions of operating properties ; $ 8.4 million increase from same properties associated with higher recoverable costs and an improvement in recovery rates ; and $ 68.6 million increase from properties acquired through the equity one merger ; reduced by $ 1.7 million from the sale of operating properties . other income , which consists of incidental income earned at our centers , increased $ 3.8 million as follows : $ 354,000 increase from development properties ; $ 1.0 million from acquisitions of operating properties ; and $ 3.9 million from properties acquired through the equity one merger ; reduced by $ 1.4 million in same properties primarily due to other fee income in 2016 .

overview plus therapeutics is committed to developing and delivering innovative treatments for rare and difficult to treat cancers , with a focus on cancers of the central nervous system . plus therapeutics ' mission is to transform the clinical care of cancer patients through its innovative drugs that have the potential to improve survival and quality of life . plus has a nanoscale drug development platform and the requisite expertise to innovate and produce new and better therapeutics for rare cancers . we believe that this approach will produce investigational drugs that provide unique benefits such as improved mechanism of action , better tumor targeting , improved pharmacokinetics and higher treatment doses to the tumor . benefits such as these may then improve the overall efficacy of drugs while reducing the side effects associated with more traditional drug delivery methods . to support this goal , plus therapeutics has an established , gmp-validated nanoscale drug r & d and commercial scale manufacturing facility in san antonio , tx . this facility is ideally suited to produce nanoliposomal drug candidates for research , development , clinical and commercial use . as part of our strategy to leverage our nanotechnology platform and expertise , we use a simple multi-step model that management believes allows plus to best address unmet market needs or underserved medical conditions while managing risks and minimizing development costs . this model includes : ( 1 ) market landscape mapping , ( 2 ) internal drug redesign , ( 3 ) in house drug manufacturing , ( 4 ) performance of critical non-clinical ( i.e . bench , animal ) analyses , ( 5 ) scale-up manufacturing for commercial purposes and performance of early-stage clinical trials , and ( 6 ) partnering for late-stage clinical trials , regulatory approval , and , ultimately , commercial launch . pipeline plus therapeutics currently has four investigational drugs , three of which are at the clinical stage for rare and difficult to treat cancers . the three clinical stage drugs in our pipeline are : 1 ) rhenium nanoliposomes ( rnl ) , a patented radiotherapy for patients with recurrent glioblastoma ( rgbm ) that is currently being evaluated in the u.s. nci-supported , multi-center respect phase 1 dose-finding clinical trial ; 2 ) doceplus , a patented chemotherapy for patients with solid tumors that has been evaluated in a completed u.s. single-center phase 1 clinical trial ; and 3 ) doxoplus , a generic chemotherapy that has been evaluated in a completed , bioequivalence clinical trial in the u.s. , canada , and ukraine versus janssen 's caelyx® in patients with ovarian cancer . in addition , plus has an early preclinical investigational drug which is a proprietary combination of rhenium nanpoliposomes and liposomal doxorubicin . theoretically , this combination could provide a synergistic combination of both chemotherapy and radiation in a single treatment . current business activities related to both doceplus and doxoplus are focused on identification of potential partners for these two drugs . plus ' rnl technology was a key part of the licensed radiotherapeutic portfolio that we acquired from nanotx , corp. ( “ nanotx ” ) on may 7 , 2020. the licensed radiolabeled nanoliposome platform can be applied toward several cancer targets and was developed by a multi-institutional consortium based in texas at the mays cancer center / ut health san antonio md anderson cancer center now led by dr. andrew brenner , md , phd , who is the kolitz chair in neuro-oncology research and co-leader of the experimental and developmental therapeutics program . the licensed technology was previously funded by both the national institutes of health/national cancer institute ( nih/nci ) and the cancer prevention and research institute of texas ( cprit ) . dr. 42 brenner 's rnl research program has an active $ 3m award from nih/nci which will financially support the continued clinical development of rnl for recurrent glioblastoma through the completion of a phase 2 clinical trial and enrollment of up to 55 patients . plus therapeutics ' lead investigational drug , rnl , is a novel injectable radiotherapy designed to deliver targeted high dose radiation directly into a brain tumor in a safe , effective , and convenient manner to optimize patient outcomes . rnl , which is composed of radionuclide rhenium-186 ( 186 re ) and a nanoliposomal carrier , is infused directly into the brain tumor via precision brain mapping and convection enhanced delivery . the rnl radiation dose delivered to patients may be up to 15-20x greater than what is possible with external beam radiation therapy ( ebrt ) . some additional potential benefits of rnl compared to ebrt include : - rnl can be visualized in real-time during administration , possibly giving doctors better control of radiation dosing and distribution . - potentially more effectively treats the bulk tumor and microscopic disease in surrounding healthy tissue . - using a small catheter , rnl is infused directly into the targeted tumor , which may reduce radiation exposure to healthy cells . by contrast , ebrt is less targeted and selective . - rnl is given during a single 3- to 4-day in-patient hospital visit , while ebrt requires out-patient visits 5 days a week for approximately 6 weeks . recurrent glioblastoma ( gbm ) affects approximately 12,000 patients annually in the u.s. and is the most common and lethal form of brain cancer . the average life expectancy with glioblastoma is less than 24 months , with a one-year survival rate of 40.8 % and a five-year survival rate of only 6.8 % . gbm can cause headaches , seizures , vision changes and other neurological complications . despite the best available medical treatments to eliminate the initial brain tumor , some microscopic disease frequently remains , with tumor regrowth within months . in fact , approximately 90 % of patients experience tumor recurrence . this tumor type is incredibly difficult to remove completely , and often is resistant or quickly develops resistance to most available therapies . story_separator_special_tag we may instruct canaccord not to sell the atm shares if the sales can not be effected at or above the price we designate from time to time and we may at any time suspend sales pursuant to the distribution agreement . during the year ended december 31 , 2020 , we issued 1,616,331 shares under the distribution agreement for net proceeds of approximately $ 3.2 million . during 2021 and through the date of filing of this form 10-k , the company issued 536,070 shares under the distribution agreement for net proceeds of $ 1.5 million . lincoln park purchase agreement on september 30 , 2020 , we entered into a purchase agreement ( the “ 2020 purchase agreement ” ) and registration rights agreement pursuant to which lincoln park capital fund , llc ( “ lincoln park ” ) has committed to purchase up to $ 25.0 million of our common stock . under the terms and subject to the conditions of the 2020 purchase agreement , we have the right , but not the obligation , to sell to lincoln park , and lincoln park is obligated to purchase up to $ 25.0 million of our common stock . such sales of common stock by us , if any , will be subject to certain limitations , and may occur from time to time , at our sole discretion , over the 36-month period commencing november 6 , 2020 , subject to the satisfaction of certain conditions . the number of shares we may sell to lincoln park on any single business day in a regular purchase is 50,000 , but that amount may be increased up to 100,000 shares , depending upon the market price of our common stock at the time of sale and subject to a maximum limit of $ 500,000 per regular purchase . the purchase price per share for each such regular purchase will be based on prevailing market prices of our common stock immediately preceding the time of sale as computed under the 2020 purchase agreement . in addition to regular purchases , we may also direct lincoln park to purchase other amounts as accelerated purchases or as additional accelerated purchases if the closing sale price of the common stock exceeds certain threshold prices as set forth in the 2020 purchase agreement . we issued 180,701 shares of common stock to lincoln park as a commitment fee in connection with entering into the 2020 purchase agreement . during the year ended december 31 , 2020 , we issued 353,113 shares , excluding 180,701 shares issued as commitment fee , under the 2020 purchase agreement for net proceeds of approximately $ 0.7 million . during 2021 and through the date of filing of this form 10-k , we issued 985,186 shares of our common stock under the 2020 purchase agreement for total proceeds of $ 2.9 million . recent exercise of warrants 44 in february 2021 , certain warrant holders exercised warrants to purchase 896,500 shares of our common stock for total exercise proceeds of $ 2.0 million . covid-19 impact a novel strain of coronavirus ( covid-19 ) was declared a global pandemic by the world health organization in march 2020. covid-19 has presented substantial public health and economic challenges and is affecting economies , financial markets , and business operations around the world . international and u.s. governmental authorities in impacted regions have taken action in an effort to slow the spread of covid-19 , including issuing varying forms of “ stay-at-home ” orders , and restricting business functions outside of one 's home . in response , we have put restrictions on employee travel and working from our executive offices with many employees continuing their work remotely . while we have implemented additional health and safety precautions and protocols in response to the pandemic and government guidelines , we have not experienced a significant impact on our business and operations . however , we may experience disruptions that could adversely impact our business operations as well as our preclinical studies and clinical trials . we are currently continuing the clinical trials we have underway in sites across the u.s. , and we expect that covid-19 precautions may directly or indirectly impact the timeline for some of our clinical trials . some of our clinical trial sites , including those located in areas severely impacted by the pandemic , have placed new patient enrollment into clinical trials on hold or , for patients traveling from out-of-state , have implemented a 14-day self-quarantine before appointments . in addition , some clinical trial sites have imposed limited accessibility to conduct clinical monitoring and training on-site . we considered the impacts of covid-19 on the assumptions and estimates used to prepare our financial statements and determined that there were no material adverse impacts on our results of operations and financial position at december 31 , 2020. the full impact of the covid-19 outbreak continues to evolve as of the date of this report . for example , as certain states and regions across the united states have relaxed various restrictions on businesses and other activities , it is uncertain whether and to what extent federal , state , or local governments may reinstate additional restrictions and safety protocols in response to any increases in covid-19 cases . although there are vaccines available , the ability to obtain a vaccine or know when herd immunity will be met , is difficult to anticipate as such , it is uncertain as to the full magnitude that the pandemic will have on our operations , including our preclinical studies and clinical trials , financial condition , liquidity , and future results of operations . management is actively monitoring the global situation and its impact on our clinical program and timeline , financial condition , liquidity , operations , suppliers , industry , and workforce .

results of operations development revenue we recognized a total of $ 0.3 million in revenue for the year ended december 31 , 2020 , as well as $ 0.3 million in qualified expenditures for those periods . our barda contract was terminated in december 2019 and the contract close out process was completed during 2020 , and we do not expect additional barda revenue in the future . development revenue for the year ended december 31 , 2019 was $ 7.0 million , which included $ 4.6 million of revenue recognized under the barda contract based on finalization of the indirect cost rates during fiscal years 2012 through 2019. research and development expenses research and development expenses include costs associated with the design , development , testing , and enhancement of our product candidates , payment of regulatory fees , laboratory supplies , pre-clinical studies , and clinical studies . 45 the following table summarizes the components of our research and development expenses for the years ended december 31 , 20 20 and 20 1 9 ( in thousands ) : replace_table_token_1_th the decrease in research and development expenses for the year ended december 31 , 2020 as compared to the same period in 2019 is due primarily to decreased professional services as a result of discontinuing manufacturing subsequent to sale of our former cell therapy business , as well as reduction in research and development expenses related to doceplus and doxoplus . we expect aggregate research and development expenditures to increase in absolute dollars during 2021 due to the expected costs of development of the rnl therapy acquired from nanotx . in process research and development acquired from nanotx in process research and development acquired from nanotx in the amount of $ 781,000 represents the upfront cash payment and fair value of 230,769 shares of common stock , with fair value of $ 1.65 per share , issued to nanotx in accordance with the terms of the license agreement .

the provision for loan losses is equal to the amount required to maintain the allowance for loan losses at a level that is adequate to absorb probable losses inherent in the loan portfolio . the provision ( credit ) for loan losses was $ ( 165,000 ) in 2019 compared to $ 14,000 in 2018 and $ 411,000 in 2017. the provision ( credit ) for loan losses for 2019 resulted primarily from net recoveries and change in the loan portfolio mix . the provision for 2018 resulted primarily from loan growth and change in loan portfolio mix . as a result of improvements in credit quality , decreased historical loss rates , and net recoveries for the year , the ratio of the allowance for loan losses to loans held for investment decreased to 1.19 % at december 31 , 2019 from 1.21 % at december 31 , 2018. additional information regarding improved credit quality can be found beginning on page 26 . 20 index the following table summarizes the provision ( credit ) , charge-offs ( recoveries ) by loan category for the year ended december 31 , 2019 , 2018 and 2017 : replace_table_token_9_th the percentage of net non-accrual loans ( net of government guarantees ) to the total loan portfolio has decreased to 0.31 % as of december 31 , 2019 from 0.44 % at december 31 , 2018 primarily due to commercial loan repayments . the allowance for loan losses compared to net non-accrual loans has increased to 365 % as of december 31 , 2019 from 257 % as of december 31 , 2018. total past due loans were $ 1.9 million as of december 31 , 2019 compared to $ 3.7 million as of december 31 , 2018. non-interest income the company earned non-interest income primarily through fees related to services provided to loan and deposit customers . the following tables present a summary of non-interest income for the periods presented : replace_table_token_10_th total non-interest income increased $ 1.0 million for 2019 compared to 2018. the increase was mostly from increased service charges and gains from loans sold . the increase was partially offset by a decrease in document processing fees . total non-interest income decreased $ 0.1 million for 2018 compared to 2017. the decrease was mostly from reduced document processing fees due to the competitive loan growth market . these decreases were partially offset by increased other loan fees . 21 index non-interest expenses the following tables present a summary of non-interest expenses for the periods presented : replace_table_token_11_th total non-interest expenses for the year ended december 31 , 2019 compared to 2018 increased by $ 0.7 million primarily due to additional salaries and employee benefits , professional services , and advertising as a result of the company 's expansions in the northern and southern regions , and addition of customer relationship and support positions . fdic assessment decreased $ 0.3 million in 2019 compared to 2018 due to a small bank assessment credit in the third quarter of 2019. total non-interest expenses for the year ended december 31 , 2018 compared to 2017 increased by $ 1.5 million primarily due to additional salaries and employee benefits , occupancy , and advertising as a result of the company 's expansions in the northern and southern regions , and addition of customer relationship and support positions . additionally , during the fourth quarter 2018 , the company opened a full-service branch in paso robles . fdic assessment increased $ 0.1 million in 2018 compared to 2017 due to a higher asset base for assessment and increased assessment factor . professional services for 2018 compared to 2017 increased by $ 0.3 million mostly due to increased consulting costs for operational training and project implementation . income taxes the income tax provision for 2019 was $ 3.4 million compared to $ 2.8 million in 2018 and $ 5.5 million in 2017. the effective income tax rate was 30.0 % , 27.5 % , and 53.0 % , respectively for 2019 , 2018 and 2017 , reflecting the federal corporate tax rate reduction implemented in 2018. deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts and their respective tax basis including operating losses and tax credit carryforwards . net deferred tax assets of $ 3.2 million at december 31 , 2019 are reported in the consolidated balance sheet as a component of total assets . on december 22 , 2017 , the president of the united states signed into law the tax cuts and jobs act tax reform legislation . this legislation makes significant change in u.s. tax law including a reduction in the corporate tax rates , changes to net operating loss carryforwards and carrybacks , and a repeal of the corporate alternative minimum tax . the legislation reduced the u.s. corporate tax rate from the current rate of 34 % to 21 % . as a result of the enacted law , the company was required to revalue deferred tax assets and liabilities at the 21 % rate . the revaluation resulted in $ 1.3 million income tax expense and a corresponding reduction in the net deferred tax asset . the other provisions of the tax cuts and jobs act did not have a material impact on the fiscal 2017 consolidated financial statements . accounting standards codification topic 740 , income taxes , requires that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence using a “ more likely than not ” standard . a valuation allowance is established for deferred tax assets if , based on weight of available evidence , it is more likely than not that some portion or all of the deferred tax assets may not be realized . management evaluates the company 's deferred tax assets for recoverability using a consistent approach which considers the relative impact of negative and positive evidence , including the company 's historical profitability and projections of future taxable income . story_separator_special_tag 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 75 % . 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 cwb 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. the sba 's maximum exposure amount is $ 3,750,000. the company may sell 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 60 % to 80 % depending on the size of the loan . 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 b & i loan program . the fsa loans typically have a 90 % guarantee up to $ 1,776,000 ( amount adjusted annually based on inflation ) for up to 40 years , but not always . the company had $ 69.8 million of commercial agriculture loans at december 31 , 2019 , of these loans $ 31.6 million had fsa guarantees . 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 of 25 basis points to 115 basis points for maintaining the relationship with the borrower and performing certain loan compliance monitoring , and other duties as directed by the central servicer . manufactured housing loans cwb originates loans secured by manufactured homes located in approved rental , co-operative ownership , condominium and planned unit development mobile home parks in santa barbara , ventura and san luis obispo counties as well as along the california coast from san diego to san francisco . the loans are made to borrowers for purchasing or refinancing new or existing manufactured homes . the loans are made under either fixed rate programs for terms of 10 to 20 years or adjustable rate programs with terms of 25 to 30 years . the adjustable rate loans have an initial fixed rate period of five years and then adjust annually subject to interest rate caps . heloc home equity lines of credit ( “ heloc ” ) held at the bank are lines of credit collateralized by residential real estate . typically , helocs are collateralized by a second deed of trust . the combined loan-to-value , first trust deed and second trust deed , are not to exceed 75 % on all helocs . the bank is not actively originating new helocs . other installment loans installment loans consist of automobile and general-purpose loans made to individuals . single family real estate loans until the third quarter of 2015 , the company originated loans that consisted of first and second mortgage loans secured by trust deeds on one-to-four family homes . these loans were made to borrowers for purposes such as purchasing a home , refinancing an existing home , interest rate reduction or home improvement . 26 index loan maturities and sensitivity to interest rates the following table sets forth the amount of loans outstanding by type of loan as of december 31 , 2019 that were contractually due in one year or less , more than one year and less than five years , and more than five years based on remaining scheduled repayments of principal . lines of credit or other loans having no stated final maturity and no stated schedule of repayments are reported as due in one year or less . the tables also present an analysis of the rate structure for loans within the same maturity time periods . actual cash flows from these loans may differ materially from contractual maturities due to prepayment , refinancing or other factors . replace_table_token_14_th at december 31 , 2019 , total loans consisted of 78.8 % with floating rates and 21.2 % with fixed rates . manufactured housing loans , which are generally fixed rate for the first five years are included in floating rate loans during the fixed period .

financial overview and highlights community west bancshares is a financial services company headquartered in goleta , california that provides full service banking and lending through its wholly-owned subsidiary community west bank ( “ cwb ” ) , which has eight california branch banking offices located in goleta , oxnard , san luis obispo , santa barbara , santa maria , ventura , paso robles and westlake village . financial result highlights of 2019 net income available to common stockholders was $ 8.0 million , or $ 0.93 per diluted share for 2019 , compared to $ 7.4 million , or $ 0.88 per diluted share for 2018 and $ 4.9 million or $ 0.57 per diluted share for 2017. the significant factors impacting the company during 2019 were : net income was $ 8.0 million , or $ 0.93 per diluted share for the year ended 2019 , compared to $ 7.4 million , or $ 0.88 per diluted share in 2018. net interest margin of 4.06 % at december 31 , 2019 compared to 4.07 % for the year ended 2018. total deposits were $ 750.9 million at december 31 , 2019 and increased by 4.9 % compared to $ 716.0 million at december 31 , 2018. total demand deposits represented 56.6 % of total deposits at december 31 , 2019 compared to 52.9 % at december 31 , 2018. book value per common share increased to $ 9.68 at december 31 , 2019 , compared to $ 8.92 at december 31 , 2018. provision ( credit ) for loan losses was ( $ 165,000 ) for the year , compared to a provision for loan losses of $ 14,000 for 2018. net recoveries were $ 0.2 million for the year ended 2019 compared to $ 0.3 million for 2018. total risk based capital improved to 11.73 % at december 31 , 2019 from 11.26 % at december 31 , 2018. net nonaccrual loans improved to $ 2.4 million at december 31 , 2019 compared to

the following discussion contains forward-looking statements based upon our current plans , expectations and beliefs that involve risks and uncertainties . our actual results may differ materially from those anticipated in these forward-looking statements . factors that could cause or contribute to these differences include those discussed below and elsewhere in this report , particularly in “ risk factors ” . we use a 52 or 53 week fiscal year ending on the last friday in december . the years ended december 29 , 2017 , december 30 , 2016 , and december 25 , 2015 were 52 weeks , 53 weeks , and 52 weeks , respectively . all references to 2017 , 2016 , and 2015 are references to fiscal years unless explicitly stated otherwise . 29 overview we are a leader in the design , engineering and manufacturing of critical fluid delivery subsystems for semiconductor capital equipment . our primary offerings include gas and chemical delivery subsystems , collectively known as fluid delivery subsystems , which are key elements of the process tools used in the manufacturing of semiconductor devices . our gas delivery subsystems deliver , monitor and control precise quantities of the specialized gases used in semiconductor manufacturing processes such as etch and deposition . our chemical delivery subsystems precisely blend and dispense the reactive liquid chemistries used in semiconductor manufacturing processes such as electroplating and cleaning . we also manufacture certain components such as weldments and precision machined components for use in fluid delivery systems for direct sales to our customers . this vertically integrated portion of our business is primarily focused on metal and plastic parts that are used in gas and chemical systems , respectively . fluid delivery subsystems ensure accurate measurement and uniform delivery of specialty gases and chemicals at critical steps in the semiconductor manufacturing process . any malfunction or material degradation in fluid delivery reduces yields and increases the likelihood of manufacturing defects in these processes . historically , semiconductor oems internally designed and manufactured the fluid delivery subsystems used in their process tools . currently , most oems outsource the design , engineering and manufacturing of their gas delivery subsystems to a few specialized suppliers , including us . additionally , many oems are also increasingly outsourcing the design , engineering and manufacturing of their chemical delivery subsystems due to the increased fluid expertise required to manufacture these subsystems . outsourcing these subsystems has allowed oems to leverage the suppliers ' highly specialized engineering , design and production skills while focusing their internal resources on their own value-added processes . we believe that this outsourcing trend has enabled oems to reduce their fixed costs and development time , as well as provided significant growth opportunities for specialized subsystems suppliers like us . we have a global footprint with volume production facilities in malaysia ; singapore ; and tualatin , oregon ; austin , texas ; union city , california ; fremont , california ; and sauk rapids , minnesota . in 2017 , 2016 , and 2015 , our two largest customers by revenue were lam research and applied materials . during 2017 , 2016 , and 2015 , respectively , we generated revenue of $ 655.9 million , $ 405.7 million , and $ 290.6 million , gross profit of $ 100.8 million , $ 65.4 million , and $ 48.6 million , net income from continuing operations of $ 56.9 million , $ 20.8 million , and $ 12.8 million , and adjusted net income from continuing operations of $ 65.1 million , $ 31.6 million , and $ 20.2 million . adjusted net income from continuing operations is a financial measure that is not calculated in accordance with gaap . see “ non‑gaap results ” for a discussion of adjusted net income from continuing operations , an accompanying presentation of the most directly comparable financial measure calculated in accordance with generally accepted accounting principles in the united states , net income from continuing operations , and a reconciliation of the differences between adjusted net income from continuing operations and net income from continuing operations . key factors affecting our business investment in semiconductor manufacturing equipment the design and manufacturing of semiconductor devices is constantly evolving and becoming more complex in order to achieve greater performance and efficiency . to keep pace with these changes , oems need to refine their existing products and invest in developing new products . in addition , semiconductor device manufacturers will continue to invest in new wafer fabrication equipment to expand their production capacity and to support new manufacturing processes . outsourcing of subsystems by semiconductor oems faced with increasing manufacturing complexities , more complex subsystems , shorter product lead times , shorter industry spend cycles , and significant capital requirements , outsourcing of subsystems and components by oems has continued to grow . in the past two decades , oems have outsourced most of their gas delivery systems to suppliers such as us . oems have also started to outsource their chemical delivery systems in recent years . our results will be affected by the degree to which outsourcing of these fluid delivery systems by oems continues to grow . cyclicality of semiconductor device industry our business is indirectly subject to the cyclicality of the semiconductor device industry . in 2017 , we derived approximately 93 % of our sales from the semiconductor device industry . demand for semiconductor devices can fluctuate significantly based on changes in general economic conditions , including consumer spending , demand for the products that include these devices and other factors . these fluctuations have in the past resulted in significant variations in our results of operations . the cyclicality of the semiconductor device industries will continue to impact our results of operations in the future . 30 customer concentration the number of capital equipment manufacturers for the semiconductor device industry has undergone significant consolidation in recent years , resulting in a small number of large manufacturers . story_separator_special_tag we expect selling expenses to increase in absolute dollars as we continue to invest in expanding our markets and as we expand our international operations . we expect general and administrative expenses to also increase in absolute dollars due to an increase in costs related to being a public company , including higher legal , corporate insurance and accounting expenses . amortization of intangibles – amortization of intangible assets is related to our finite-lived intangible assets and is computed using the straight-line method over the estimated economic life of the asset . interest expense , net interest expense , net consists of interest on our outstanding debt under our credit facilities and any other indebtedness we may incur in the future . other expense ( income ) , net the functional currency of our international subsidiaries located in the united kingdom , singapore and malaysia is the u.s. dollar . transactions denominated in currencies other than the functional currency generate foreign exchange gains and losses that are included in other expense , net on the accompanying consolidated statements of operations . substantially all of our sales and agreements with third party suppliers provide for pricing and payments in u.s. dollars and , therefore , are not subject to material exchange rate fluctuations . income tax benefit during 2017 , income tax benefit from continuing operations consists primarily of the impact of foreign operations , including withholding taxes , offset by a $ 7.6 million tax benefit as a result of our acquisitions ( see note 2 – acquisitions of our consolidated financial statements included elsewhere in this report ) , a $ 5.9 million tax benefit from revaluing our deferred taxes from 35 % to 21 % due to the tax cuts and jobs act , and a $ 1.6 million benefit from re-characterizing intercompany debt to equity between our u.s. and singapore entities related to the reversal of previously accrued withholding taxes . during 2016 and 2015 , income tax benefit from continuing operations consisted primarily of the impact of foreign operations , including withholding taxes , offset by a tax benefit in 2016 as a result of our acquisition . 32 results of operations the following table sets forth our results of operations for the periods presented . the period-to-period comparison of results is not necessarily indicative of results for future periods . replace_table_token_6_th the following table sets forth our results of operations as a percentage of our total sales for the periods presented . replace_table_token_7_th 33 comparison of fiscal years 2017 and 2016 sales year ended change december 29 , 2017 december 30 , 2016 amount % ( dollars in thousands ) sales $ 655,892 $ 405,747 $ 250,145 61.7 % the increase in sales from 2016 to 2017 was primarily related to an increase in volume resulting from industry growth , our acquisitions of cal‑weld and talon , and market share gains . the volume increase was due to an approximate 6.1 % , or approximately $ 77.8 million , increase in our market share at our two largest customers , which includes the acquisitions of cal‑weld and talon , and an approximately $ 172.3 million increase in the volume of purchases primarily by our two largest customers driven by overall industry growth . we refer to the volume of purchases from us by a customer of ours relative to its other suppliers as our market share of that customer . on a geographic basis , sales in the u.s. increased by $ 169.9 million in 2017 to $ 386.6 million . foreign sales increased by $ 80.2 million in 2017 to $ 269.3 million . cost of sales and gross margin replace_table_token_8_th the increase in cost of sales from 2016 to 2017 was primarily due to the increase in sales volume . the increase in absolute dollars of gross profit was driven primarily by an increase in sales volume . as part of our purchase of talon and cal‑weld , we recorded opening inventory at fair value which included a fair value adjustment to inventory of $ 6.2 million and $ 3.6 million , respectively . we released a combined $ 5.2 million of the fair value adjustment to cost of sales based on the sale of inventory during 2017. the impact of this charge accounts for a decrease to reported gross margin of 80 basis points for 2017. as discussed in note 1 – basis of presentation to the consolidated financial statements , we recorded a charge to cost of sales of $ 1.75 million in the second quarter of 2017 due to the correction of an error related to translating inventory balances at our singapore and malaysia subsidiaries . the impact of this charge accounts for a decrease to reported gross margin of 30 basis points in 2017. additionally , our gross margins for 2017 were favorably impacted by our acquisitions of cal‑weld and talon , with margins that were accretive to our historical business . research and development year ended change december 29 , 2017 december 30 , 2016 amount % ( dollars in thousands ) research and development $ 7,899 $ 6,383 $ 1,516 23.8 % the increase in research and development expenses from 2016 to 2017 was due to an increase in headcount and consulting expense to support additional projects and development programs . 34 selling , general and administrative year ended change december 29 , 2017 december 30 , 2016 amount % ( dollars in thousands ) selling , general , and administrative $ 37,802 $ 28,126 $ 9,676 34.4 % the increase in selling , general , and administrative expense from 2016 to 2017 was primarily due to increased acquisition‑related expenses from our acquisitions of cal‑weld and talon , incremental cal‑weld and talon operating expenses incurred subsequent to the acquisition , increased expenses resulting from the secondary offerings of our ordinary shares by francisco partners , increased public company costs , increased incentive compensation on improved performance to operating targets , and increased headcount expense to support increased sales volume .

unaudited quarterly financial results the following table set forth statement of operations data for the periods indicated . the information for each of these periods is unaudited and has been prepared on the same basis as our audited consolidated financial statements included herein and includes all adjustments , consisting only of normal recurring adjustments that we consider necessary for a fair presentation of our unaudited operations data for the periods presented . historical results are not necessarily indicative of the results to be expected in the future . replace_table_token_11_th ( 1 ) see note 14 – earnings per share of our consolidated financial statements included elsewhere in this report for a description of net income per share attributable to ordinary shareholders presented in conformity with the two-class method , required for participating securities . 40 the following table sets forth our unaudited quarterly consolidated statement of operations data as a percentage of sales for each of the last eight quarters in the period ended december 29 , 2017. replace_table_token_12_th seasonality we have not historically experienced meaningful seasonality with respect to our business or results of operations . liquidity and capital resources we had cash and restricted cash of $ 69.3 million as of december 29 , 2017 , compared to $ 52.6 million as of december 30 , 2016. our principal uses of liquidity are to fund our working capital needs , satisfy our debt obligations , and purchase new capital equipment . the increase in cash is primarily due to proceeds from the issuance of $ 150.0 million in long-term debt and cash from operations of $ 38.8 million , partially offset by cash paid for our acquisitions of cal‑weld and talon of $ 181.0 million and capital expenditures of $ 8.2 million .

level 3 inputs – based on unobservable inputs reflecting the company 's own assumptions about the assumptions that market participants would use in pricing the asset based on the best story_separator_special_tag . overview . we are a company that operates in one segment , heavy civil construction , through our subsidiaries and which specializes in the building and reconstruction of transportation and water infrastructure in texas , utah , nevada , colorado , arizona , california , hawaii and other states in which there are profitable construction opportunities . its transportation infrastructure projects include highways , roads , bridges , airfields , ports and light rail . its water infrastructure projects include water , wastewater and storm drainage systems . we have strategically expanded our operations , either by establishing an office in a new market , often after having successfully bid on and completed a project in that market , or by acquiring a company that gives us an immediate entry into a market . critical accounting policies . on an ongoing basis , the company evaluates the critical accounting policies used to prepare its consolidated financial statements , including , but not limited to , those related to : · revenue recognition · contracts receivable , including retainage · valuation of long-lived assets and goodwill · income taxes · segment reporting our significant accounting policies are described in note 1 to the consolidated financial statements , and conform to the financial accounting standards board 's accounting standards codification ( or gaap or asc ) . use of estimates . the preparation of financial statements in conformity with gaap requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities , the disclosure of contingent assets and liabilities at the date of the financial statements , and the reported amounts of revenues and expenses during the reporting period . certain of the company 's accounting policies require higher degrees of judgment than others in their application . these include the recognition of revenue and earnings from construction contracts under the percentage-of-completion method , the valuation of long-lived assets ( including goodwill ) , and income taxes . management continually evaluates all of its estimates and judgments based on available information and experience ; however , actual amounts could differ from those estimates . revenue recognition . the majority of our construction contracts with our customers are “ fixed unit price ” and “ lump sum ” contracts . under such contracts , we are committed to providing materials or services required by a contract at fixed unit prices ( for example , dollars per cubic yard of concrete poured or per cubic yard of earth excavated ) . most of our state and municipal contracts provide for termination of the contract for the convenience of the owner , with provisions to pay us only for work performed through the date of termination . revenue from these construction contracts is recognized using the percentage-of-completion accounting method . under this method , revenue is recognized as costs are incurred in an amount equal to cost plus the related expected profit based on the ratio of costs incurred to estimated final costs . this cost-to-cost measure is used because management considers it to be the best available measure of progress on these contracts . contract costs consist of direct costs on contracts , including labor , materials , amounts payable to subcontractors and those indirect costs related to contract performance , such as indirect salaries and wages , equipment maintenance , repairs , fuel and depreciation , insurance and payroll taxes . contract cost is recorded as incurred , and revisions in contract revenue and cost estimates are reflected in the accounting period when known . provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined . changes in job performance , job conditions and estimated profitability , including those changes arising from contract change orders , penalty provisions and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined . change orders are modifications of an original contract that effectively change the existing provisions of the contract without adding new provisions or terms . change orders may include changes in specifications or designs , manner of performance , facilities , equipment , materials , sites and period of completion of the work . either we or our customers may initiate change orders . the company considers unapproved change orders to be contract variations for which we have a change of scope for which we believe we are contractually entitled to additional price but a price change associated with the scope change has not yet been agreed upon with the customer . costs associated with unapproved change orders are included in the estimated cost to complete the contracts and are treated as project costs as incurred . the company recognizes revenue equal to costs incurred on unapproved change orders when realization of price approval is probable . unapproved change orders involve the use of estimates , and it is reasonably possible that revisions to the estimated costs and recoverable amounts may be required in future reporting periods to reflect changes in estimates or final agreements with customers . change orders that are unapproved as to both price and scope are evaluated as claims . 25 the company considers claims to be amounts in excess of agreed contract prices that we seek to collect from our customers or others for customer-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 . claims are included in the calculation of revenue when realization is probable and amounts can be reliably determined . story_separator_special_tag there was no bad debt expense recorded in 2016 and 2014 and a minimal amount recorded in 2015. based upon a review of outstanding contracts receivable , historical collection information and existing economic conditions , management has determined that all of contracts receivable at december 31 , 2016 are fully collectible and accordingly , no allowance for doubtful accounts against contracts receivable was recorded . valuation of long-lived assets and goodwill . long-lived assets , which include property , equipment and acquired intangible assets , including goodwill , are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable . impairment evaluations involve fair values and management estimates of useful asset lives and future cash flows . actual useful lives and cash flows could be different from those estimated by management , and this could have a material effect on operating results and financial position . for the years ended december 31 , 2016 and 2015 , there were no events or changes in circumstances that would indicate a material impairment of our long-lived assets . goodwill must be tested for impairment at least annually and we performed our most recent annual impairment test of historical goodwill on october 1 , 2016. based on our one reporting unit , our test indicated there was no impairment of goodwill . see “ segment reporting ” below for further information regarding the determination of our reporting unit . note 8 to the consolidated financial statements discusses the two valuation approaches used by the company to determine the fair value of the company 's equity for purposes of evaluating whether there is an indication of goodwill impairment . these valuation approaches are impacted by a number of factors but the key factors are the company 's stock price , the estimated control premium and our estimated forecast of future cash flows . the valuation approaches contain uncertainty regarding the estimates used . one of the largest uncertainties relates to local , state and government spending which management expects to increase in the upcoming years . there are a number of other uncertainties with respect to our future financial performance that could impact estimated future cash flows . these are discussed in a number of places including “ item 1a . risk factors. ” based on our valuation approaches , we determined that the fair value of the company 's equity was above the carrying value of the company 's equity at december 31 , 2016 and 2015. at december 31 , 2016 and 2015 , we had goodwill with a carrying amount of approximately $ 54.8 million . income taxes . deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities . we regularly review our deferred tax assets for recoverability and , where necessary , establish a valuation allowance . valuation allowances are established to reduce deferred tax assets if we determine that it is more likely than not ( e.g. , a likelihood of more than 50 % ) that some or all of the deferred tax assets will not be realized in future periods . to assess the likelihood , we use historical three-year accumulated losses , estimates and judgment regarding our future taxable income , as well as the jurisdiction in which this taxable income is generated , to determine whether a valuation allowance is required . such evidence can include our current financial position , our results of operations , both actual and forecasted results , the reversal of deferred tax liabilities , and tax planning strategies as well as the current and forecasted business economics of our industry . additionally , we record uncertain tax positions at their net recognizable amount , based on the amount that management deems is more likely than not to be sustained upon ultimate settlement with the tax authorities in the domestic and international tax jurisdictions in which we operate . on the basis of our evaluations , at december 31 , 2016 and 2015 , a full valuation allowance was recorded on our net deferred tax assets and we had no material uncertain tax positions . if our estimates or assumptions regarding our current and deferred tax items are inaccurate or are modified , these changes could have potentially material impacts on our earnings . 27 segment reporting . we operate in one operating segment and have only one reportable segment and one reporting unit component , which is heavy civil construction . in making this determination , the company considered the discrete financial information used by our chief operating decision maker ( “ codm ” ) . based on this approach , the company noted that the codm organizes , evaluates and manages the financial information around each heavy civil construction project when making operating decisions and assessing the company 's overall performance . the service provided by the company , in all instances of our construction projects , is heavy civil construction . furthermore , we considered that each heavy civil construction project has similar characteristics , includes similar services , has similar types of customers and is subject to similar economic and regulatory environments which would allow aggregation of individual operating segments into one reportable segment if multiple operating segments existed . in addition , the company noted that even if our local offices were to be considered separate components of our heavy civil construction operating segment , those components could be aggregated into a single reporting unit for purposes of testing goodwill for impairment because our local offices all have similar economic characteristics and are similar in all of the following areas : · the nature of the products and services — each of our local offices perform similar construction projects — they build , reconstruct and repair roads , highways , bridges , airfields , ports , light rail and water , waste water and storm drainage systems .

results of operations . backlog at december 31 , 2016. at december 31 , 2016 , our backlog of construction projects was $ 823 million , as compared to $ 761 million at december 31 , 2015. our contracts are typically completed in 12 to 36 months . at december 31 , 2016 and 2015 , there was approximately $ 226 million and $ 197 million , respectively , excluded from our consolidated backlog where we were the apparent low bidder , but had not yet been formally awarded the contract or the contract price had not been finalized . backlog included $ 53 million and $ 12 million attributable to our share of estimated revenues related to joint ventures where we are a noncontrolling joint venture partner at december 31 , 2016 and 2015 , respectively . we expect that our markets will continue to improve , driven by the conditions discussed in “ item 1. business. ” furthermore , we believe that the company is well-established in our particular markets and has the management depth and experience which gives us the ability to perform a broad range of work that will allow us to succeed in current market conditions and to continue to compete successfully for projects as they become available at acceptable profit margin levels . see “ item 1. business — our markets and customers ” for a more detailed discussion of our markets and their funding sources . 29 fiscal year ended december 31 , 2016 compared with fiscal year ended december 31 , 2015 replace_table_token_5_th nm – not meaningful . revenues . revenues for 2016 increased $ 66.5 million , or 10.7 % , compared with the prior year .

the company also records a story_separator_special_tag the following discussion and analysis of our financial condition and results of operations should be read together with “ item 1 – business , ” “ item 6 - selected financial data ” and the consolidated financial statements and the related notes thereto included in item 8 of this annual report on form 10-k. this discussion contains forward-looking statements , based on current expectations and related to future events and our future financial performance , that involve risks and uncertainties . our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors , including those set forth under “ item 1a - risk factors. ” overview we are a leading designer and manufacturer of a wide range of power generation equipment and other engine powered products serving the residential , light commercial , industrial , oil & gas , and construction markets . power generation is our primary focus , which differentiates us from our primary competitors that also have broad operations outside of the generator market . as the only significant market participant focused predominantly on these products , we have one of the leading market positions in the power equipment market in north america and an expanding presence internationally . we believe we have one of the widest range of products in the marketplace , including residential , commercial and industrial standby generators , as well as portable and mobile generators used in a variety of applications . other engine powered products that we design and manufacture include light towers which provide temporary lighting for various end markets ; commercial and industrial mobile heaters used in the oil & gas , construction and other industrial markets ; and a broad product line of power washers for residential and commercial use . over the past several years , we have executed a number of acquisitions that support our strategic plan . a summary of these acquisitions can be found in note 1 , “ description of business , ” to the consolidated financial statements included in item 8 of this annual report on form 10-k. business d rivers and operational factors in operating our business and monitoring its performance , we pay attention to a number of business drivers and trends as well as operational factors . the statements in this section are based on our current expectations . business drivers and trends our performance is affected by the demand for reliable power generation and other mobile product solutions by our customer base . this demand is influenced by several important drivers and trends affecting our industry , including the following : 24 increasing penetration opportunity . many potential customers are not aware of the costs and benefits of automatic backup power solutions . we estimate that penetration rates for home standby generators are only approximately 3.5 % of u.s. single-family detached , owner-occupied households with a home value of over $ 100,000 , as defined by the u.s. census bureau 's 2013 american housing survey for the united states . the decision to purchase backup power for many light-commercial buildings such as convenience stores , restaurants and gas stations is more return-on-investment ( roi ) driven and as a result these applications have relatively lower penetration rates as compared to buildings used in code-driven or mission critical applications such as hospitals , wastewater treatment facilities , 911 call centers , data centers and certain industrial locations . the emergence of lower cost , cleaner burning natural gas fueled generators has helped to accelerate the penetration of standby generators in the light-commercial market . in addition , the importance of backup power for telecommunications infrastructure is increasing due to the growing importance for uninterrupted voice and data services . also , in recent years , a more stringent regulatory environment around the flaring of natural gas at oil & gas drilling and production sites has been a catalyst for increased demand for natural gas fueled generators , including mobile solutions . we believe by expanding our distribution network , continuing to develop our product line , and targeting our marketing efforts , we can continue to build awareness and increase penetration for our standby and mobile generators for residential , commercial and industrial purposes . effect of large scale and baseline power disruptions . power disruptions are an important driver of customer awareness and have historically influenced demand for generators . increased frequency and duration of major power outage events , that have a broader impact beyond a localized level , increases product awareness and may drive consumers to accelerate their purchase of a standby or portable generator during the immediate and subsequent period , which we believe may last for six to twelve months for standby generators . for example , the multiple major outage events that occurred during the second half of both 2011 and 2012 drove strong demand for portable and home standby generators , and the increased awareness of these products contributed to substantial organic revenue growth in 2012 with strong growth continuing during 2013. major power disruptions are unpredictable by nature and , as a result , our sales levels and profitability may fluctuate from period to period . in addition , there are smaller , more localized power outages that occur frequently across the u.s. that drive the baseline level of demand for back-up power solutions . the level of baseline power outage activity occurring across the u.s. can also fluctuate , and may cause our financial results to fluctuate from year to year . impact of residential investment cycle . the market for residential generators is also affected by the residential investment cycle and overall consumer confidence and sentiment . when homeowners are confident of their household income , the value of their home and overall net worth , they are more likely to invest in their home . these trends can have an impact on demand for residential generators . story_separator_special_tag after considering the increased debt and related interest expense , the company believes it will still generate sufficient taxable income to fully utilize the tax attributes discussed above . transactions with ccmp in november 2006 , affiliates of ccmp , together with certain other investors and members of our management , purchased an aggregate of $ 689 million of our equity capital . in addition , on november 10 , 2006 , generac power systems borrowed an aggregate of $ 1.38 billion , consisting of an initial drawdown of $ 950 million under a $ 1.1 billion first lien secured credit facility and $ 430 million under a $ 430 million second lien secured credit facility . with the proceeds from these equity and debt financings , together with cash on hand at generac power systems , we ( 1 ) acquired all of the capital stock of generac power systems and repaid certain pre-transaction indebtedness of generac power systems for $ 2.0 billion , ( 2 ) paid $ 66 million in transaction costs related to the transaction and ( 3 ) retained $ 3 million for general corporate purposes . subsequently , during 2007 , 2008 and 2009 , affiliates of ccmp acquired approximately $ 249.2 million of second lien term loans and $ 9.9 million of first lien term loans for approximately $ 155.9 million . ccmp 's affiliates then exchanged this debt for additional shares of then-existing class b common stock and series a preferred stock , which were subsequently converted into the same class of our common stock through a corporate reorganization in conjunction with the ipo in february 2010. in august 2013 , ccmp completed the last of a series of sale transactions that began in november 2012 by which it sold substantially all of the shares of common stock that it owned as of the ipo . initial public o ffering on february 17 , 2010 , the company completed its ipo of 18,750,000 shares of its common stock at a price of $ 13.00 per share . in addition , the underwriters exercised their option and purchased an additional 1,950,500 shares of the company 's common stock from the company on march 18 , 2010. we received a total of approximately $ 247.9 million in net proceeds from the initial public offering and underwriters ' option exercise , after deducting the underwriting discounts and expenses . all shares sold in this offering were primary shares . immediately following the ipo and underwriters ' option exercise , we had 67,529,290 total shares of common stock outstanding . components of net sales and e xpenses net s ales substantially all of our net sales are generated through the sale of our generators and other engine powered products for the residential , light commercial , industrial , oil & gas , and construction markets . we also sell engines to certain customers and service parts to our dealer network . net sales , which include shipping and handling charges billed to customers , are generally recognized upon shipment of products to our customers . related freight costs are included in cost of sales . 26 during 2014 , our net sales were affected primarily by the u.s. market as sales outside of the united states represented approximately 16 % of total net sales . we are not dependent on any one channel or customer for our net sales , with no single customer representing more than 8 % of our sales for the year ended december 31 , 2014 and our top ten customers representing less than 26 % of our sales for the same period . costs of goods s old the principal elements of costs of goods sold in our manufacturing operations are component parts , raw materials , factory overhead and labor . component parts and raw materials comprised over 85 % of costs of goods sold for the year ended december 31 , 2014. the principal component parts are engines and alternators . we design and manufacture air-cooled engines for certain of our products up to 22kw . we source engines for certain of our smaller products and all of our products larger than 22kw . for natural gas engines , we are recognized as the oem . we design all the alternators for our units and manufacture alternators for certain of our units . we also manufacture other generator components where we believe we have a design and cost advantage . we source component parts from an extensive global network of reliable , high quality suppliers . in some cases , these relationships are proprietary . the principal raw materials used in the manufacturing process that are sourced are steel , copper and aluminum . we are susceptible to fluctuations in the cost of these commodities , impacting our costs of goods sold . we seek to mitigate the impact of commodity prices on our business through a continued focus on global sourcing , product design improvements , manufacturing efficiencies , price increases and select hedging transactions . however , there is typically a lag between raw material price fluctuations and their effect on our costs of goods sold . other sources of costs include our manufacturing and warehousing facilities , factory overhead , labor and shipping costs . factory overhead includes utilities , support personnel , depreciation , general supplies , support and maintenance . although we attempt to maintain a flexible manufacturing cost structure , our margins can be impacted when we can not timely adjust labor and manufacturing costs to match fluctuations in net sales . operating e xpenses our operating expenses consist of costs incurred to support our sales , marketing , distribution , service parts , engineering , information systems , human resources , finance , risk management , legal and tax functions . these expenses include personnel costs such as salaries , bonuses , employee benefit costs and taxes , and are classified into three categories : selling and service , research and development , and general and administrative .

results of o perations year ended december 31 , 201 4 compared to year ended december 31 , 2013 the following table sets forth our consolidated statement of operations data for the periods indicated : replace_table_token_9_th replace_table_token_10_th net sales . net sales decreased $ 24.9 million , or 1.7 % , to $ 1,460.9 million for the year ended december 31 , 2014 from $ 1,485.8 million for the year ended december 31 , 2013. residential product sales decreased 14.4 % to $ 722.2 million from $ 843.7 million for the comparable period in 2013. residential product sales declined on a year-over-year basis as the prior year benefited from approximately $ 140 million in incremental shipments as a result of satisfying the extended lead times that resulted from superstorm sandy in october 2012 , which did not repeat in 2014. excluding this benefit in the prior year , residential products increased approximately 3 % . c & i product sales increased 14.4 % to $ 652.2 million from $ 569.9 million for the comparable period in 2013 , primarily due to the contributions from recent acquisitions along with strength in the oil & gas markets , partially offset by reduced capital spending from certain telecom customers and overall softness within latin america . gross profit .

cash and cash equivalents we consider all highly liquid investments with an original maturity of three months or less to be cash equivalents . revenue recognition revenues from hotel operations are recognized when the goods or services are provided . revenues consist of room sales , food and beverage sales , and other hotel department revenues , such as telephone , parking , gift shop sales and resort fees . rooms revenue is recognized over the length of stay that the hotel room is occupied by the customer . food and beverage revenue is recognized at the point in time in which the goods and or services are rendered to the customer , such as for restaurant dining services or banquet services . other revenues are recognized at the story_separator_special_tag the following discussion should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this report . this discussion contains forward-looking statements about our business . these statements are based on current expectations and assumptions that are subject to risks and uncertainties . actual results could differ materially because of factors discussed in `` special note about forward-looking statements '' and `` risk factors '' contained in this annual report on form 10-k and in our other reports that we file from time to time with the sec . overview diamondrock hospitality company is a lodging-focused real estate company operating as a reit for federal income tax purposes that owns a portfolio of premium hotels and resorts . as of december 31 , 2019 , we owned a portfolio of 31 premium hotels and resorts that contain 10,102 guest rooms located in 21 different markets in north america and the u.s. virgin islands . our hotel in the u.s. virgin islands , frenchman 's reef , is currently closed due to damage incurred by hurricanes irma and maria in september 2017 and is scheduled to re-open at the end of 2020 as two separate hotels . as an owner , rather than an operator , of lodging properties , we receive all of the operating profits or losses generated by our hotels after the payment of fees due to hotel managers , which are calculated based on the revenues and profitability of each hotel . key indicators of financial condition and operating performance we use a variety of operating and other information to evaluate the financial condition and operating performance of our business . these key indicators include financial information that is prepared in accordance with u.s. generally accepted accounting principles ( “ u.s . gaap ” ) , as well as other financial information that is not prepared in accordance with u.s. gaap . in addition , we use other information that may not be financial in nature , including statistical information and comparative data . we use this information to measure the performance of individual hotels , groups of hotels and or our business as a whole . we periodically compare historical information to our internal budgets as well as industry-wide information . these key indicators include : occupancy percentage ; average daily rate ( or adr ) ; rooms revenue per available room ( or revpar ) ; earnings before interest , income taxes , depreciation and amortization ( or ebitda ) , ebitda re , and adjusted ebitda ; and funds from operations ( or ffo ) and adjusted ffo . occupancy , adr and revpar are commonly used measures within the hotel industry to evaluate operating performance . revpar , which is calculated as the product of adr and occupancy percentage , is an important statistic for monitoring operating performance at the individual hotel level and across our business as a whole . we evaluate individual hotel revpar performance on an absolute basis with comparisons to budget and prior periods , as well as on a company-wide basis . adr and revpar include only room revenue . room revenue comprised approximately 70 % of our total revenues for the year ended december 31 , 2019 and is dictated by demand , as measured by occupancy percentage , pricing , as measured by adr , and our available supply of hotel rooms . our adr , occupancy percentage and revpar performance may be impacted by macroeconomic factors such as u.s. economic conditions generally , regional and local employment growth , personal income and corporate earnings , office vacancy rates and business relocation decisions , airport and other business and leisure travel , new hotel construction and the pricing strategies of competitors . in addition , our adr , occupancy percentage and revpar performance is dependent on the continued success of our hotels ' global brands . we also use ebitda , ebitda re , adjusted ebitda , ffo and adjusted ffo as measures of the financial performance of our business . see “ non-gaap financial measures. ” overview of 2019 - 44 - key highlights for 2019 include the following : financing activity . on july 25 , 2019 , we entered into an amended and restated credit agreement that provides for a $ 400 million senior unsecured revolving credit facility and a five-year $ 350 million unsecured term loan . we used the proceeds from the new term loan to repay our previously existing $ 100 million and $ 200 million term loans . the senior unsecured credit facility matures in july 2023 , with a one-year extension option , and the term loan matures in july 2024. insurance settlement . frenchman 's reef is currently closed due to damage incurred by hurricanes irma and maria in september 2017 and is expected to re-open at the end of 2020 as two separate hotels . in december 2019 , the company and the insurers reached a definitive settlement of our outstanding insurance claim related to hurricane irma . story_separator_special_tag excluding the non-comparable amounts described above , hotel operating expenses increased $ 24.3 million , or 4.0 % , from the year ended december 31 , 2018 . depreciation and amortization . our depreciation and amortization expense increased $ 13.6 million from the year ended december 31 , 2018 . the increase is primarily due to incremental depreciation from our 2018 hotel acquisitions and capital expenditures from our recent hotel renovations . corporate expenses . corporate expenses principally consist of employee-related costs , including base payroll , bonus and restricted stock . corporate expenses also include corporate operating costs , professional fees and directors ' fees . our corporate expenses decreased $ 0.4 million , from $ 28.6 million for the year ended december 31 , 2018 to $ 28.2 million for the year ended december 31 , 2019 . the decrease is primarily due to a decrease in severance costs and employee compensation expenses . - 48 - business interruption insurance income . in september 2017 , hurricane irma caused significant damage to frenchman 's reef and the havana cabana key west . in october 2017 , the lodge at sonoma was closed for ten days due to nearby wildfires . these natural disasters resulted in lost revenue and additional expenses covered under our insurance policy . for the year ended december 31 , 2019 , we recognized $ 8.8 million of business interruption insurance income related to the frenchman 's reef insurance claim . for the year ended december 31 , 2018 , we recognized $ 19.4 million of business interruption insurance income , which is in addition to $ 2.9 million of expense reimbursements from insurance recorded within other hotel expenses on our accompanying consolidated statement of operations . the following table summarizes the business interruption insurance income by impacted hotel property ( in thousands ) : replace_table_token_10_th gain on property insurance settlement . in december 2019 , we settled our insurance claim for the property damage and business interruption related to frenchman 's reef . we recognized a gain on insurance settlement of $ 144.2 million , which represents the net proceeds received in excess of the carrying amount of the damaged property written off . in july 2018 , we settled our insurance claim for the property damage and business interruption related to the havana cabana key west . we recognized a gain on insurance settlement of $ 1.7 million , which represents the net proceeds received in excess of the carrying amount of the damaged property written off . interest expense . our interest expense was $ 46.6 million and $ 41.0 million for the years ended december 31 , 2019 and december 31 , 2018 , respectively , and is comprised of the following ( in millions ) : replace_table_token_11_th the increase in interest expense is primarily related to the $ 50 million unsecured term loan , funded in december 2018 , increased borrowings under our senior unsecured credit facility , higher term loan balances following refinancing in july 2019 and the mark-to-market of the interest rate swaps entered into in january 2019 and july 2019. the increase is partially offset by capitalized interest recognized related to the reconstruction of frenchman 's reef . loss on early extinguishment of debt . on july 25 , 2019 , we refinanced our senior unsecured credit facility and unsecured term loans . in connection with the refinancing we repaid our previously existing $ 100 million and $ 200 million term loans and recognized a $ 2.4 million loss on early extinguishment of debt related to the write-off of certain unamortized debt issuance costs . income taxes . we recorded income tax expense of $ 22.0 million in 2019 and $ 3.1 million in 2018 . the 2019 income tax expense includes $ 1.2 million of income tax expense incurred on the $ 5.7 million pre-tax income of our domestic trss and foreign income tax expense of $ 20.8 million incurred on the $ 132.6 million pre-tax income of the trs that owns frenchman 's reef . the 2018 income tax expense includes $ 2.6 million of income tax expense incurred on the $ 7.9 million pre-tax income of our domestic trss , foreign income tax expense of less than $ 0.1 million incurred on the $ 14.0 million pre-tax income of the trs that owns frenchman 's reef , and $ 0.5 million of corporate state income tax . liquidity and capital resources - 49 - our short-term liquidity requirements consist primarily of funds necessary to pay distributions to our stockholders to maintain our reit status as well as to pay for operating expenses and capital expenditures directly associated with our hotels , share repurchases under our share repurchase program , hotel acquisitions , costs to repair property damaged by natural disasters , and scheduled debt payments of interest and principal . we currently expect that our available cash flows , which are generally provided through net cash from hotel operations , existing cash balances , proceeds from new financings and refinancings of maturing debt , proceeds from potential property dispositions , and , if necessary , short-term borrowings under our senior unsecured credit facility , will be sufficient to meet our short-term liquidity requirements . some of our mortgage debt agreements contain “ cash trap ” provisions that are triggered when the hotel 's operating results fall below a certain debt service coverage ratio . when these provisions are triggered , all of the excess cash flow generated by the hotel is deposited directly into cash management accounts for the benefit of our lenders until a specified debt service coverage ratio is reached and maintained for a certain period of time . such provisions do not allow the lender the right to accelerate repayment of the underlying debt .

results of operations discussion of the comparison of the results of operations from the year ended december 31 , 2018 to the year ended december 31 , 2017 is found in our annual report on form 10-k for the year ended december 31 , 2018 under part ii , item 7 , which was filed with the sec on february 26 , 2019. the following table sets forth certain operating information for the year ended december 31 , 2019 for each of the hotels we owned during 2019 . - 45 - replace_table_token_6_th ( 1 ) frenchman 's reef closed on september 6 , 2017 due to hurricane irma and remains closed . accordingly , there is no operating information for the year ended december 31 , 2019 . ( 2 ) the percentage change from 2018 revpar reflects the comparable period in 2018 to our 2019 ownership period for all hotels . ( 3 ) havana cabana key west closed on september 6 , 2017 due to hurricane irma and reopened in april 2018. accordingly , there is no operating information for the period from january 1 , 2018 to march 31 , 2018. the revpar change from 2018 compares the period from april 1 , 2019 to december 31 , 2019 to the comparable period of 2018 . ( 4 ) hotel emblem closed on september 4 , 2018 for a comprehensive renovation . accordingly , there is no operating information for the period from september 4 , 2018 to december 31 , 2018. the revpar change from 2018 compares the period from january 1 , 2019 to september 4 , 2019 to the comparable period of 2018. comparison of the year ended december 31 , 2019 to the year ended december 31 , 2018 revenue .

the flight support group also manufactures and sells specialty parts as a subcontractor for aerospace and industrial original equipment manufacturers and the united states ( `` u.s. '' ) government . additionally , the flight support group is a leading supplier , distributor , and integrator of military aircraft parts and support services primarily to foreign military organizations allied with the u.s. and a leading manufacturer of advanced niche components and complex composite assemblies for commercial aviation , defense and space applications . further , the flight support group engineers , designs and manufactures thermal insulation blankets and parts as well as removable/reusable insulation systems for aerospace , defense , commercial and industrial applications as well as manufactures expanded foil mesh for lighting strike protection in fixed and rotary wing aircraft . the electronic technologies group consists of heico electronic technologies corp. ( “ heico electronic ” ) and its subsidiaries , which primarily : designs and manufactures electronic , microwave and electro-optical equipment , high-speed interface products , high voltage interconnection devices and high voltage advanced power electronics . the electronic technologies group designs , manufactures and sells various types of electronic , microwave and electro-optical equipment and components , including power supplies , laser rangefinder receivers , infrared simulation , calibration and testing equipment ; power conversion products serving the high-reliability military , space and commercial avionics end-markets ; underwater locator beacons used to locate data and voice recorders utilized on aircraft and marine vessels ; electromagnetic interference shielding for commercial and military aircraft operators , traveling wave tube amplifiers and microwave power modules used in radar , electronic warfare , on-board jamming and countermeasure systems , electronics companies and telecommunication equipment suppliers ; advanced high-technology interface products that link devices such as telemetry receivers , digital cameras , high resolution scanners , simulation systems and test systems to computers ; high voltage energy generators , high voltage interconnection devices , cable assemblies and wire for the medical equipment , defense and other industrial 30 index markets ; high voltage power supplies found in satellite communications , ct scanners and in medical and industrial x-ray systems ; three-dimensional microelectronic and stacked memory products that are principally integrated into larger subsystems equipping satellites and spacecraft ; harsh environment connectivity products and custom molded cable assemblies ; rf and microwave amplifiers , transmitters and receivers used to support military communications on unmanned aerial systems , other aircraft , helicopters and ground-based data/communications systems ; communications and electronic intercept receivers and tuners for military and intelligence applications ; wireless cabin control systems , solid state power distribution and management systems and fuel level sensing systems for business jets and for general aviation , as well as for the military/defense market ; microwave modules , units and integrated sub-systems for commercial and military satellites ; and crashworthy and ballistically self-sealing auxiliary fuel systems for military rotorcraft . our results of operations during each of the past three fiscal years have been affected by a number of transactions . this discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto included herein . for further information regarding the acquisitions discussed below , see note 2 , acquisitions , of the notes to consolidated financial statements . each acquisition was included in our results of operations from the effective acquisition date . in january 2016 , we acquired , through heico electronic , all of the limited liability company interests of robertson fuel systems , llc ( `` robertson '' ) . robertson designs and produces mission-extending , crashworthy and ballistically self-sealing auxiliary fuel systems for military rotorcraft . in december 2015 , we acquired , through a subsidiary of heico electronic , certain assets of a company that designs and manufactures underwater locator beacons used to locate aircraft cockpit voice recorders , flight data recorders , marine ship voyage recorders and other devices which have been submerged under water . in august 2015 , we acquired , through heico flight support corp. , all of the stock of astroseal products mfg . corporation ( “ astroseal ” ) . astroseal manufactures expanded foil mesh , which is integrated into composite aerospace structures for lighting strike protection in fixed and rotary wing aircraft . in august 2015 , we acquired , through heico electronic , 80.1 % of the equity of midwest microwave solutions , inc. ( “ mms ” ) . mms designs , manufactures and sells unique size , weight , power and cost ( swap-c ) optimized communications and electronic intercept receivers and tuners for military and intelligence applications . the remaining 19.9 % continues to be owned by certain members of mms ' management team . in august 2015 , we acquired , through heico flight support corp. , 80.1 % of the assets and assumed certain liabilities of aerospace & commercial technologies , llc ( “ act ” ) . act is a provider of products and services necessary to maintain up-to-date f-16 fighter aircraft 31 index operational capabilities . the remaining 19.9 % continues to be owned by certain members of act 's management team . in may 2015 , we acquired , through heico flight support corp , all of the stock of thermal energy products , inc. ( “ tep ” ) . tep engineers , designs and manufactures removable/reusable insulation systems for industrial , commercial , aerospace and defense applications . in january 2015 , we acquired , through heico flight support corp. , 80.1 % of the equity of harter aerospace , llc ( `` harter '' ) . harter is a globally recognized component and accessory maintenance , repair , and overhaul ( mro ) station specializing in commercial aircraft accessories , including thrust reverse actuation systems and pneumatics , and electromechanical components . the remaining 19.9 % interest continues to be owned by certain members of harter 's management team . story_separator_special_tag determining the fair value of assets acquired and liabilities and noncontrolling interests assumed requires management 's judgment and often involves the use of significant estimates and assumptions , including assumptions with respect to future cash inflows and outflows , discount rates , asset lives and market multiples , among other items . we determine the fair values of intangible assets acquired generally in consultation with third-party valuation advisors . as part of the agreement to acquire certain subsidiaries , we may be obligated to pay contingent consideration should the acquired entity meet certain earnings objectives subsequent to the date of acquisition . as of the acquisition date , contingent consideration is recorded at fair value as determined through the use of a probability-based scenario analysis approach . under this method , a set of discrete potential future subsidiary earnings is determined using internal estimates based on various revenue growth rate assumptions for each scenario . a probability of likelihood is then assigned to each discrete potential future earnings estimate and the resultant contingent consideration is calculated and discounted using a weighted average discount rate reflecting the credit risk of a market participant . subsequent to the acquisition date , the fair value of such contingent consideration is measured each reporting period and any changes are recorded to selling , general and administrative ( `` sg & a '' ) expenses within our consolidated statements of operations . changes in either the revenue growth rates , related earnings or the discount rate could result in a material change to the amount of contingent consideration accrued . as of october 31 , 2016 , 2015 and 2014 , $ 18.9 million , $ 21.4 million and $ 1.2 million of contingent consideration was accrued within our consolidated balance sheets , respectively . during fiscal 2016 , 2015 and 2014 , such fair value measurement adjustments resulted in net increases ( or decreases ) to sg & a expenses of $ 3.1 million , $ .3 million and ( $ 28.1 ) million , respectively . for further information regarding our contingent consideration arrangements , see note 7 , fair value measurements , of the notes to consolidated financial statements . 34 index valuation of goodwill and other intangible assets we test goodwill for impairment annually as of october 31 , or more frequently if events or changes in circumstances indicate that the carrying amount of goodwill may not be fully recoverable . in evaluating the recoverability of goodwill , we compare the fair value of each of our reporting units to its carrying value to determine potential impairment . if the carrying value of a reporting unit exceeds its fair value , the implied fair value of that reporting unit 's goodwill is to be calculated and an impairment loss is recognized in the amount by which the carrying value of the reporting unit 's goodwill exceeds its implied fair value , if any . the fair values of our reporting units were determined using a weighted average of a market approach and an income approach . under the market approach , fair values are estimated using published market multiples for comparable companies . we calculate fair values under the income approach by taking estimated future cash flows that are based on internal projections and other assumptions deemed reasonable by management and discounting them using an estimated weighted average cost of capital . based on the annual goodwill impairment test as of october 31 , 2016 , 2015 and 2014 , we determined there was no impairment of our goodwill . the fair value of each of our reporting units as of october 31 , 2016 significantly exceeded its carrying value . we test each non-amortizing intangible asset ( principally trade names ) for impairment annually as of october 31 , or more frequently if events or changes in circumstances indicate that the asset might be impaired . to derive the fair value of our trade names , we utilize an income approach , which relies upon management 's assumptions of royalty rates , projected revenues and discount rates . we also test each amortizing intangible asset for impairment if events or circumstances indicate that the asset might be impaired . the test consists of determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows . if the total of the undiscounted future cash flows is less than the carrying amount of those assets , we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets . the determination of fair value requires us to make a number of estimates , assumptions and judgments of underlying factors such as projected revenues and related earnings as well as discount rates . based on the intangible impairment tests conducted , we did not recognize any impairment losses in fiscal 2016 and 2015 ; however , we recognized pre-tax impairment losses within the etg during fiscal 2014 related to the write-down of certain customer relationships , non-amortizing trade names , and intellectual property of $ 11.2 million , $ 1.9 million and $ 1.9 million , respectively , to their estimated fair values . the impairment losses pertaining to customer relationships and non-amortizing trade names were recorded as a component of sg & a expenses in the company 's consolidated statement of operations and the impairment losses pertaining to intellectual property were recorded as a component of cost of sales . for additional information regarding the fiscal 2014 impairment losses , including the assumptions made when determining the asset 's fair value , see note 7 , fair value measurements , of the notes to consolidated financial statements . 35 index story_separator_special_tag million increase in corporate expenses principally reflecting higher performance-based compensation expense and the previously mentioned foreign currency transaction adjustments on borrowings denominated in euros .

results of operations the following table sets forth the results of our operations , net sales and operating income by segment and the percentage of net sales represented by the respective items in our consolidated statements of operations ( in thousands ) : replace_table_token_9_th 36 index comparison of fiscal 2016 to fiscal 2015 net sales our net sales in fiscal 2016 increased by 16 % to a record $ 1,376.3 million , as compared to net sales of $ 1,188.6 million in fiscal 2015. the increase in consolidated net sales reflects an increase of $ 120.3 million ( a 31 % increase ) to a record $ 511.3 million in net sales within the etg as well as an increase of $ 66.2 million ( an 8 % increase ) to a record $ 875.9 million in net sales within the fsg . the net sales increase in the etg reflects net sales of $ 107.3 million contributed by our fiscal 2016 and 2015 acquisitions as well as organic growth of 4 % . the etg 's organic growth resulted mainly from an aggregate net sales increase of $ 17.2 million attributed to higher demand from certain space , medical and other electronics products , partially offset by a $ 3.2 million net sales decrease from lower demand for certain defense products . the net sales increase in the fsg reflects net sales of $ 40.6 million contributed by our fiscal 2015 acquisitions as well as organic growth of 3 % . the fsg 's organic growth is principally attributed to increased demand and new product offerings within our aftermarket replacement parts and specialty products lines , resulting in net sales increases of $ 22.6 million and $ 10.9 million , respectively . these increases were partially offset by $ 7.9 million of lower organic net sales from our repair and overhaul parts and services product line .

overview we are an integrated communications services company that operates as both an incumbent local exchange carrier ( “ilec” ) and a competitive local exchange carrier ( “clec” ) , dependent upon the territory served . we provide services in consumer , commercial , and carrier channels to customers in 11 states , including local and long-distance service , high-speed broadband internet access , video , voice over internet protocol ( “voip” ) , private line , cloud services , carrier grade access services , network capacity services over our regional fiber optic networks , data center and managed services , directory publishing , and equipment sales . 2014 highlights : 1 ) in october 2014 , we completed a merger with enventis corporation , an advanced communications provider in the upper midwest . 2 ) we increased our consumer maximum broadband internet speeds to 1gbps in our kansas market . additional markets on our fiber network are scheduled to follow in early 2015 . 3 ) we launched consumer data speeds of up to 100 mbps over our fiber networks in pennsylvania and california . additional markets are expected to be launched in early 2015 . 4 ) our data and internet revenue remains a strategic growth area driven by both organic growth and acquisitive expansion of our footprint . 5 ) we continue to invest in and enrich our suite of commercial services through the introduction of cloud services and advanced voip solutions , creating a foundation for future product enhancements . we generate the majority of our consolidated operating revenues primarily from subscriptions to our video , data , and internet services ( collectively “broadband services” ) to residential and business customers . revenues increased $ 34.1 million during 2014 compared to 2013 , primarily from growth in our broadband services and the enventis acquisition . replace_table_token_7_th as noted in the table above , broadband services now constitute more than 45 % of our total operating revenue , an increase of 0.8 % and 21.4 % over 2013 and 2012 , respectively . data and internet connections have grown as a result of consumer trends toward increased internet usage and our enhanced product and service offerings , such as our progressively increasing consumer data speeds . in december 2014 , we introduced data speeds of up to 1 gbps to our fiber-to-the-home customers in our kansas market , with other markets following in early 2015. where 1 gbps speeds are not yet offered , the maximum broadband speed is100 mbps , depending on the geographic market availability . as of december 31 , 2014 , approximately 31 % of the homes in the areas we serve subscribe to our data service . 38 we expect our broadband service revenues to continue to grow as consumer and commercial demands for data based services increase . our exceptional maximum consumer broadband speed allows us to continue to meet the needs of our customers and the demand for higher speed resulting from the growing trend of over-the-top ( “ott” ) content viewing . the availability of 1gbps data speed also complements our wireless home networking ( “wi-fi” ) that supports our tv everywhere service which launched in 2013 , and allows our subscribers to watch their favorite programs at home or away on a computer , smartphone or tablet . as of december 31 , 2014 , our video service was available to approximately 579,000 homes in the markets we serve , with an approximate 21 % penetration rate . as of december 31 , 2014 , we had approximately 123,000 video subscribers , an 11 % increase from 2013 primarily as a result of the enventis acquisition . we are continually expanding our commercial product offerings for both small and large businesses to capitalize on industry technological advances . in 2014 , we gained strategic advantage through the acquisition of enventis , which earlier in the year launched a suite of cloud services that increases efficiency and reduces it costs for our customers . in addition , we launched an enhanced hosted voice product , which enables greater scalability and reliability for businesses . we anticipate future momentum in new business revenue as these new products gain traction . the increase in our operating revenues during 2014 was offset in part by an anticipated industry wide trend of a decline in access lines and related network access . many consumers are choosing to subscribe to alternative communications services and competition for these subscribers continues to increase . competition from wireless providers , competitive local exchange carriers and in some cases cable television providers has increased in recent years in the markets we serve . we have been able to mitigate some of the access line losses through marketing initiatives and product offerings , such as our voip service . in addition , our video connection growth is decelerating . excluding enventis subscribers of approximately 12,000 , our increase in connections was less than 1 % over 2013. this trend is driven by changing consumer viewing habits , which we believe will continue to impact our business model and strategy of providing consumers the necessary broadband speed to facilitate ott content viewing . as discussed in the “regulatory matters” section below , our operating revenues are also impacted by legislative or regulatory changes at the federal and state levels , which could reduce or eliminate the current subsidies revenue we receive . a number of proceedings and recent orders relate to universal service reform , intercarrier compensation and network access charges . there are various ongoing legal challenges to the orders that have been issued . as a result , it is not yet possible to determine fully the impact of the regulatory changes on our operations . story_separator_special_tag in 2013 , cost of services and products increased $ 46.6 million compared to 2012. the addition of the operations for surewest during the first six months of 2013 accounted for $ 50.0 million of the increase . video programming costs increased due to a growth in video connections and an increase in costs per program channel . during 2012 , the increase in video programming costs was offset by a reduction in access costs due to the decline in access lines and usage . selling , general and administrative costs selling , general and administrative costs increased $ 5.2 million during 2014 compared to 2013. the acquisition of enventis in 2014 contributed $ 7.2 million of the increase . excluding enventis , selling , general and administrative expense decreased $ 2.0 million due to a decline in professional fees for legal and billing services and a reduction in pension costs in the current year . these savings were offset in part by growth in our commercial sales force as a result of the expansion of our commercial services in the dallas market in 2014. bad debt expense also increased due to recoveries recognized in the prior year period . 44 selling , general and administrative costs increased $ 27.2 million during 2013 compared to 2012 primarily as a result of the addition of the operations for surewest for the first six months of 2013 , which accounted for $ 27.0 million of the annual increase . the remaining increase in selling , general and administrative costs was due to an increase in professional fees for audit and legal services , which was offset in part by a reduction in bad debt expense . transaction costs transaction costs increased $ 11.0 million during 2014 compared to 2013 as a result of the acquisition of enventis , which closed in the fourth quarter of 2014. in 2012 , we incurred $ 20.8 million in transaction related fees in connection with the acquisition of surewest . transaction costs consist primarily of legal , finance and other professional fees as well as expenses related to change-in-control payments to former employees of the acquired companies . depreciation and amortization depreciation and amortization expense increased $ 10.1 million during 2014 compared to 2013 , primarily as a result of the acquisition of enventis during 2014 which accounted for $ 8.0 million of the increase . the remaining increase was primarily associated with ongoing capital expenditures related to network enhancements and success based capital projects for consumer and commercial services . in 2013 , depreciation and amortization expense increased $ 19.0 million compared to 2012 , primarily as a result of the acquisition of surewest . excluding the addition of the operations for surewest for the first six months of 2013 , which accounted for $ 38.5 million of the current year increase , depreciation and amortization expense decreased $ 19.5 million in 2013 as a result of certain intangible assets and network and outside plant equipment becoming fully amortized or depreciated during 2012. regulatory matters our revenues are subject to broad federal and or state regulation , which include such telecommunications services as local telephone service , network access service and toll service and are derived from various sources , including : · business and residential subscribers of basic exchange services ; · surcharges mandated by state commissions ; · long distance carriers , for network access service ; · competitive access providers and commercial enterprises for network access service ; and · support payments from federal or state programs . the telecommunications industry is subject to extensive federal , state and local regulation . under the telecommunications act of 1996 , federal and state regulators share responsibility for implementing and enforcing statutes and regulations designed to encourage competition and to preserve and advance widely available , quality telephone service at affordable prices . at the federal level , the fcc generally exercises jurisdiction over facilities and services of local exchange carriers , such as our rural telephone companies , to the extent they are used to provide , originate , or terminate interstate or international communications . the fcc has the authority to condition , modify , cancel , terminate , or revoke our operating authority for failure to comply with applicable federal laws or fcc rules , regulations and policies . fines or penalties also may be imposed for any of these violations . state regulatory commissions generally exercise jurisdiction over carriers ' facilities and services to the extent they are used to provide , originate , or terminate intrastate communications . in particular , state regulatory agencies have substantial oversight over interconnection and network access by competitors of our rural telephone companies . in addition , municipalities and other local government agencies regulate the public rights-of-way necessary to install and operate networks . state regulators can sanction our rural telephone companies or revoke our certifications if we violate relevant laws or regulations . fcc matters in general , telecommunications service in rural areas is more costly to provide than service in urban areas . the lower customer density means that switching and other facilities serve fewer customers and loops are typically longer , requiring greater expenditures per customer to build and maintain . by supporting the high cost of operations in rural markets , universal service fund ( “usf” ) subsidies promote widely available , quality telephone service at affordable prices in rural areas . revenues from the federal and certain states ' universal service funds increased $ 1.2 million in 2014 compared to 2013 , primarily due to the acquisition of enventis in october 2014 .

results of operations the following tables reflect our financial results on a consolidated basis and key operating statistics as of and for the years ended december 31 , 2014 , 2013 and 2012. financial data replace_table_token_8_th ( 1 ) a non-gaap measure . see the non-gaap measures section below for additional information and reconciliation to the most directly comparable gaap measure . 41 key operating statistics replace_table_token_9_th ( 1 ) voice connections include voice lines outside the ilec service areas and voice-over-ip inside the ilec service areas . ( 2 ) these connections include both residential and business ( excluding surewest business metrics ) for services both inside and outside the ilec service areas . the comparability of our consolidated results of operations and key operating statistics was impacted by the surewest acquisition , which closed on july 2 , 2012 , and the enventis acquisition , which closed on october 16 , 2014 , as described above . surewest 's and enventis ' results are included in our consolidated financial statements as of the respective dates of the acquisitions . these acquisitions provide additional diversification of the company 's revenues and cash flows both geographically and by service type . the surewest operations accounted for $ 133.1 million of the 2012 consolidated operating revenues and for 296,459 of the total connections at december 31 , 2012. the enventis operations accounted for $ 37.6 million of the 2014 consolidated operating revenues and for 116,856 of the total connections at december 31 , 2014. operating revenues local calling services we offer several different basic local phone service packages for residential and business customers . the plans include options for voicemail and other custom calling features such as caller id , call forwarding and call waiting .

the following table sets forth the computation of historical basic and diluted net loss per share ( in thousands , story_separator_special_tag you should read the following discussion of our financial condition and results of operations in conjunction with our audited consolidated financial statements and the related notes included in part ii , item 8 , “ consolidated financial statements and supplementary data ” of this annual report on form 10-k . we have omitted discussion of the earliest of the three years of financial condition and results of operations and this information can be found in part i , item 7 , “ management 's discussion and analysis of financial condition and results of operations ” of our annual report on form 10-k for the fiscal year ended december 31 , 2018 , filed with the sec on february 25 , 2019 , which is available free of charge on the sec 's website at sec.gov and on our website at investor.chegg.com . in addition to historical consolidated financial information , the following discussion contains forward-looking statements that reflect our plans , estimates , and beliefs . our actual results could differ materially from those discussed in the forward-looking statements . see the section titled “ note about forward-looking statements ” for additional information . factors that could cause or contribute to these differences include those discussed below and elsewhere in this annual report on form 10-k , particularly in part i , item 1a , “ risk factors. ” overview chegg is a smarter way to student . as the leading direct-to-student learning platform , we strive to improve educational outcomes by putting the student first in all our decisions . we support students on their journey from high school to college and into their career with tools designed to help them pass their test , pass their class , and save money on required materials . our services are available online , anytime and anywhere , so we can reach students when they need us most . students subscribe to our subscription services , which we collectively refer to as chegg services . our primary chegg services include chegg study , chegg writing , chegg tutors , chegg math solver , and thinkful . our chegg study subscription service provides “ expert answers ” and step-by-step “ textbook solutions , ” helping students with their course work . when students need help creating citations for their papers , they can use one of our chegg writing properties , including easybib , citation machine , bibme , and citethisforme . when students need additional help on a subject , they can reach a live tutor online , anytime , anywhere through chegg tutors . our chegg math solver subscription service helps students understand math by providing a step-by-step math solver and calculator . we offer required materials , which includes an extensive print textbook and etextbook library for rent and sale , helping students save money compared to the cost of buying new . to deliver services to students , we partner with a variety of third parties . we source print textbooks , etextbooks , and supplemental materials directly or indirectly from publishers in the united states , including cengage learning , pearson , mcgraw hill , sage publications , and macmillan . in october 2019 , we acquired thinkful , a skills-based learning platform that offers professional courses directly to students across the united states to expand our existing offerings by adding affordable and high-quality courses focused on the most in-demand technology skills . during the years ended december 31 , 2019 , and 2018 , we generated net revenues of $ 410.9 million and $ 321.1 million , respectively , and in the same periods had net losses of $ 9.6 million and $ 14.9 million , respectively . we plan to continue to invest in our long-term growth , particularly further investment in the technology that powers our learning platform and the development of additional products and services that serve students . our strategy for achieving profitability is centered upon our ability to utilize chegg services to increase student engagement with our learning platform . we plan to continue to invest in the expansion of our chegg services to provide a more compelling and personalized solution and deepen engagement with students . in addition , we believe that the investments we have made to achieve our current scale will allow us to drive increased operating margins over time that , together with increased contributions of chegg services , will enable us to accomplish profitability and become cash-flow positive in the long-term . our ability to achieve these long-term objectives is subject to numerous risks and uncertainties , including our ability to attract , retain , and increasingly engage the student population , intense competition in our markets , the ability to achieve sufficient contributions to revenue from chegg services and other factors described in greater detail in part i , item 1a , “ risk factors. ” we have presented revenues for our two product lines , chegg services and required materials , based on how students view us and the utilization of our products by them . more detail on our two product lines is discussed in the next two sections titled `` chegg services '' and `` required materials . '' 40 chegg services our chegg services for students primarily includes chegg study , chegg writing , chegg tutors , chegg math solver , and thinkful , our skills-based learning platform . students typically pay to access chegg services such as chegg study on a monthly basis . we also work with leading brands to provide students with discounts , promotions , and other products that , based on student feedback , delight them . in the aggregate , chegg services revenues were 81 % and 79 % and of net revenues during the years ended december 31 , 2019 and 2018 , respectively . story_separator_special_tag changes in our cost of revenues may be disproportionate to changes in our revenues because unrecoverable costs , such as outbound shipping and other fulfillment and payment processing fees , are expensed in the period they are incurred while our revenues may be recognized ratably over the subscription or rental term . this effect is particularly pronounced in the first and third quarters , corresponding to the beginning of academic terms . operating expenses we classify our operating expenses into four categories : research and development , sales and marketing , general and administrative , and restructuring charges . one of the most significant components of our operating expenses is employee-related costs , which include share-based compensation expenses . we expect to continue to hire new employees in order to support our current and anticipated growth . in any particular period , the timing of additional hires could materially affect our operating expenses , both in absolute dollars and as a percentage of revenues . our operating expenses also contain information technology expenses such as technology costs to support our research and development , sales and marketing expenses , depreciation on our infrastructure systems , amortization of acquired intangible assets except content libraries , and outside services . we allocate certain costs to each expense category , including cost of revenues , research and development , sales and marketing and general and administrative . the allocation is primarily based on the headcount in each group at the end of a period . as our business grows , our operating expenses may increase over time to expand capacity and sustain our workforce . research and development our research and development expenses consist of salaries , benefits , and share-based compensation expense for employees on our product , engineering , and technical teams who are responsible for maintaining our website , developing new products , and improving existing products . research and development costs also include amortization of acquired intangible assets , depreciation expense , technology costs to support our research and development , outside services , and allocated information technology and facilities expenses . we expense substantially all of our research and development expenses as they are incurred . in the past three years , our research and development expenses have increased to support new products and services as well as to expand our infrastructure capabilities to support back-end processes associated with our revenue transactions and internal systems . we intend to continue making significant investments in developing new products and services and enhancing the functionality of existing products and services . 42 sales and marketing our sales and marketing expenses consist of user and advertiser-facing marketing and promotional expenditures through a number of targeted online marketing channels , sponsored search , display advertising , email marketing campaigns , and other initiatives . we incur salaries , benefits and share-based compensation expenses for our employees engaged in marketing , business development and sales and sales support functions , amortization of acquired intangible assets , and allocated information technology , and facilities costs . our marketing expenses are largely variable ; and we tend to incur these in the first and third quarters of the year due to our efforts to target students at the beginning of academic terms . to the extent there is increased or decreased competition for these traffic sources , or to the extent our mix of these channels shifts , we would expect to see a corresponding change in our marketing expense . general and administrative our general and administrative expenses consist of salaries , benefits and share-based compensation expense for certain executives as well as our finance , legal , human resources and other administrative employees . in addition , general and administrative expenses include outside services , legal and accounting services , depreciation expense , and allocated information technology and facilities costs . restructuring charges restructuring charges are primarily comprised of severance costs , contract and program termination costs , asset impairments and costs of facility consolidation and closure . restructuring charges are recorded upon approval of a formal management plan and are included in the results of operations of the period in which such plan is approved and the expense becomes estimable . interest expense , net and other income , net interest expense , net consists primarily of interest expense on the amortization of debt discount and issuance costs related to the notes . other income , net consists primarily of interest income on our cash and cash equivalents and investment balances . provision for income taxes provision for income taxes consists primarily of federal and state income taxes in the united states and income taxes in foreign jurisdictions in which we conduct business . due to the uncertainty as to the realization of the benefits of our domestic deferred tax assets , we have recorded a full valuation allowance against such assets . we intend to continue to maintain a full valuation allowance on our domestic deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances . 43 story_separator_special_tag style= '' font-family : inherit ; font-size:10pt ; '' > general and administrative expenses in the year ended december 31 , 2019 increased by $ 19.8 million , or 25 % , compared to the same period in 2018 . the increase was primarily attributable to higher employee-related expenses of $ 6.0 million , higher share-based compensation expense of $ 7.0 million , higher employer taxes driven by the increases in our stock price of $ 1.6 million , higher depreciation and amortization of $ 1.0 million , higher professional fees of $ 1.4 million , higher outside services of $ 0.2 million and higher technology expenses to support our operations of $ 1.0 million , compared to the same period in 2018 . general and administrative expenses as a percentage of net revenues were flat at 24 % during the years ended december 31 , 2019 and 2018 .

results of operations the following table summarizes our historical consolidated statements of operations ( in thousands , except percentage of total net revenues ) : replace_table_token_3_th 44 years ended december 31 , 2019 and 2018 net revenues net revenues during the year ended december 31 , 2019 increased $ 89.8 million , or 28 % , compared to the same period in 2018 . the following table sets forth our total net revenues for the periods shown for our chegg services and required materials product lines ( in thousands , except percentages ) : replace_table_token_4_th chegg services revenues increased by $ 78.2 million , or 31 % , during the year ended december 31 , 2019 , compared to the same period in 2018 due to growth in chegg study and chegg writing . chegg services revenues represented 81 % and 79 % of net revenues during the years ended december 31 , 2019 and 2018 , respectively . required materials revenues increased by $ 11.6 million , or 17 % , during the year ended december 31 , 2019 compared to the same period in 2018 , primarily due to better performance from our required materials print textbook partners as well as recognition of deferred variable consideration . required materials revenues represented 19 % and 21 % of net revenues during the years ended december 31 , 2019 and 2018 , respectively . beginning in 2020 , required materials will also include revenues from print textbooks that we will own , which will be recognized as the total transaction amount ratably over the term of a rental period , which is generally two to five months .

as of december 31 , 2018 , our asset portfolio consisted of : our refined products segment , comprised of our approximately 9,700 -mile refined products pipeline system with 53 terminals as well as 25 independent terminals not connected to our pipeline system and our 1,100 -mile ammonia pipeline system ; our crude oil segment , comprised of approximately 2,200 miles of crude oil pipelines , our condensate splitter and 33 million barrels of aggregate storage capacity , of which 21 million barrels are used for contract storage . approximately 1,000 miles of these pipelines and 28 million barrels of this storage capacity ( including 19 million barrels used for contract storage ) are wholly-owned and the remainder is owned through joint ventures ; and our marine storage segment , consisting of six marine terminals located along coastal waterways with an aggregate storage capacity of approximately 27 million barrels . five of these terminals and approximately 25 million barrels of this storage capacity are wholly-owned , and the remainder is owned through joint ventures . the following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included in this annual report on form 10-k for the year ended december 31 , 2018. see item 1. business for a detailed description of our business . overview our assets are an integral part of our nation 's energy infrastructure , and we provide essential services to the markets we serve . our straight-forward business model is primarily focused on fee-based transportation and terminal services , moving the fuel that moves america . our refined products pipeline system moved record diesel fuel shipments to meet growing demand in crude oil production regions , especially in west texas . based on u.s. government projections , demand for refined products is expected to remain relatively stable over the next decade in the markets we serve . our pipeline system runs through the heart of the u.s. , from texas to north dakota , serving both growing urban demand centers and important agricultural regions . the crude oil market continues to be dynamic , especially in the prolific permian basin region that serves as the origin for our wholly-owned longhorn and joint venture bridgetex pipelines . our 2018 results benefited from increased capacity on the bridgetex pipeline system due to a recent expansion and the favorable pricing differential between the permian basin and houston that encouraged shipments above contracted levels on both pipelines during much of the year , resulting in record annual shipments . dynamic markets provide both opportunities and challenges . because of increased production in the permian , more pipeline take-away capacity is being built , increasing competition in the basin . during late 2018 , the initial contract terms for our longhorn pipeline expired , and we successfully renewed or extended these contracts with all of our original customers , emphasizing the importance of this asset to the industry . however , due to the more competitive environment , our average longhorn tariff rates are now lower but still generate attractive returns . the dynamic environment has also brought interest from outside parties to invest in the region . as a result , we were presented with the opportunity to sell a 20 % interest in bridgetex during late 2018 at what we considered to be 47 an attractive valuation . we still own a 30 % interest in bridgetex and remain the operator of this pipeline system . this investment continues to play a strategic part in our texas crude oil business as it connects to our east houston terminal , which is becoming a significant trading hub for the u.s. gulf coast . further , we expect bridgetex to play an important role in our other growth initiatives in houston and beyond . ultimately , the $ 575 million of proceeds from the sale will be reinvested into additional growth projects to benefit our future . capital discipline we have become known for our disciplined approach to growth and management of our company . in addition to launching new projects for our future growth , we continue to analyze our asset portfolio to ensure capital discipline in all aspects of our business . as a result , we have decided to discontinue the operation of our ammonia pipeline system later this year due to its low profitability and challenging economic outlook . we are also no longer pursuing our delaware basin crude oil pipeline construction project on a stand-alone basis and are actively evaluating a lower cost solution to meet the needs of our customers . these decisions demonstrate our commitment to manage all aspects of our business in a disciplined manner . growth projects additional energy infrastructure to support our nation 's growing export needs remains an important theme for our industry . we have made significant progress to advance our strategy to grow our marine capabilities along the gulf coast for both crude oil and refined products . our seabrook joint venture initiated its first crude oil export in august 2018 , and we announced plans to further expand this terminal with additional storage and dock capabilities . we believe the export options provided through seabrook increases the attractiveness of our service offering to seamlessly deliver crude oil from the permian basin to the gulf coast waterway to meet our customers ' growing interest in crude exports . the first phase of our newly constructed mvp joint venture marine terminal in pasadena , texas became operational in january 2019 to meet our customers ' increasing desire for refined products storage and export solutions . we continue to make significant progress on the next phase of the terminal at pasadena , with an additional 4 million barrels of storage and additional dock capabilities expected to come online by the end of 2019. discussions with a number of industry participants continue for additional infrastructure needs at this new facility . we remain optimistic about future expansions at pasadena that could double the capacity of this new marine terminal . story_separator_special_tag g & a expense increased $ 18.5 million primarily due to higher compensation costs resulting from an increase in employee headcount as a result of the growth of our business and higher bonus accruals . 54 interest expense , net of interest income and interest capitalized , increased $ 28.3 million in 2017 primarily due to higher outstanding debt and lower capitalized interest in 2017 , partially offset by slightly lower average rates . our average outstanding debt increased from $ 3.9 billion in 2016 to $ 4.3 billion in 2017 primarily due to borrowings for expansion capital expenditures . our weighted-average interest rate of 4.8 % in 2017 was lower than the 4.9 % rate incurred in 2016. gain on disposition of assets was $ 9.6 million unfavorable due to higher gains recognized in 2016. in 2017 , we recognized an $ 18.5 million gain in connection with the sale of an inactive terminal along our refined products pipeline system . in 2016 , we recognized a $ 28.1 million gain related to the transfer of our 50 % membership interest in osage pipe line company , llc . other ( income ) expense was $ 10.6 million unfavorable due to higher pension-related costs in 2017 , including higher pension settlements , and a less favorable non-cash adjustment in 2017 for the change in the differential between the current spot price and forward price on fair value hedges . 55 distributable cash flow distributable cash flow ( “ dcf ” ) and adjusted ebitda are non-gaap measures . see item 6. selected financial data for a discussion of how management uses these non-gaap measures . a reconciliation of dcf and adjusted ebitda for the years ended december 31 , 2016 , 2017 and 2018 to net income , which is the nearest comparable gaap financial measure , is as follows ( in millions ) : replace_table_token_10_th ( 1 ) in 2018 , we recognized impairment costs of $ 49.1 million related to the ammonia pipeline system , of which $ 8.9 million represents cash requirements to decommission the pipeline and is deducted from dcf . ( 2 ) because we intend to satisfy vesting of unit awards under our equity-based long-term incentive compensation plan with the issuance of limited partner units , expenses related to this plan generally are deemed non-cash and added back for dcf purposes . the amounts above have been reduced by $ 14.4 million , $ 13.9 million and $ 9.3 million , respectively , for cash payments associated with the plan , which are primarily related to tax withholdings . ( 3 ) in 2018 , we recognized a $ 353.8 million gain in connection with the sale of a portion of our interest in bridgetex of which $ 351.2 has been deducted from the calculation of dcf , as it is not related to our ongoing operations . the remaining $ 2.6 million represents a purchase price adjustment related to operations , and as such is included in dcf . see note 5 – investments in non-controlled entities in item 8. financial statements and supplementary data for further details about this sale . in 2017 , we recognized an $ 18.5 million gain in connection with the sale of an inactive terminal along our refined products pipeline , which has been deducted from the calculation of dcf because it is not related to our ongoing operations . in 2016 , we transferred our 50 % membership interest in osage pipe line company , llc ( “ osage ” ) to an affiliate of hollyfrontier corporation ( “ hfc ” ) . in conjunction with this transaction we entered into several commercial agreements with affiliates of hfc , which were recorded as intangible assets and other receivables on our consolidated balance sheets . we recorded a $ 28.1 million non-cash gain in relation to this transaction . ( 4 ) certain derivatives we use as economic hedges have not been designated as hedges for accounting purposes and the mark-to-market changes of these derivatives are recognized currently in net income . we exclude the net impact of these hedges from our determination of dcf until the hedged products are physically sold . in the period in which these hedged products are physically sold , the net impact of the associated hedges is included in our determination of dcf . ( 5 ) we adjust dcf for lower of cost or net realizable value adjustments related to inventory and firm purchase commitments as well as market valuations of short positions recognized each period as these are non-cash items . in subsequent periods when we physically sell or purchase the related products , we adjust dcf for the valuation adjustments previously recognized . ( 6 ) other adjustments in 2018 include a $ 3.6 million adjustment recorded to partners ' capital as required by our adoption of accounting standards update 2014-09 , revenue from contracts with customers . the amount represents cash that we had previously received for 56 deficiency payments but did not yet recognize in net income under the previous revenue recognition standard . other adjustments in 2016 and 2017 include payments received from hfc in conjunction with the february 2016 osage exchange transaction . these payments replaced distributions we would have received had the osage transaction not occurred and are , therefore , included in our calculation of dcf . ( 7 ) maintenance capital expenditures maintain our existing assets and do not generate incremental dcf ( i.e . incremental returns to our unitholders ) . for this reason , we deduct maintenance capital expenditures to determine dcf . liquidity and capital resources cash flows and capital expenditures operating activities . net cash provided by operating activities was $ 973.3 million , $ 1,131.2 million and $ 1,353.0 million for the years ended december 31 , 2016 , 2017 and 2018 , respectively .

results of operations we believe that investors benefit from having access to the same financial measures utilized by management . operating margin , which is presented in the following tables , is an important measure used by management to evaluate the economic performance of our core operations . operating margin is not a generally accepted accounting principles ( “ gaap ” ) measure , but the components of operating margin are computed using amounts that are determined in accordance with gaap . a reconciliation of operating margin to operating profit , which is its nearest comparable gaap financial measure , is included in the following tables . operating profit includes expense items , such as depreciation , amortization and impairment expense and general and administrative ( “ g & a ” ) expenses , which management does not focus on when evaluating the core profitability of our separate operating segments . additionally , product margin , which management primarily uses to evaluate the profitability of our commodity-related activities , is provided in these tables . product margin is a non-gaap measure ; however , its components of product sales revenue and cost of product sales are determined in accordance with gaap . our butane blending , fractionation and other commodity-related activities generate significant revenue . we believe the product margin from these activities , which takes into account the related cost of product sales , better represents its importance to our results of operations . 49 year ended december 31 , 2017 compared to year ended december 31 , 2018 replace_table_token_8_th ( a ) these volumes reflect total shipments for the bridgetex pipeline which was owned 50 % by us through september 28 , 2018 and 30 % thereafter . ( b ) these volumes reflect total shipments for the saddlehorn pipeline , which is owned 40 % by us . 50 transportation and terminals revenue increased by $ 147.2 million , resulting from : an increase in refined products revenue of $ 56.0 million .

other information entry into a material definitive agreement story_separator_special_tag you should read the following discussion and analysis in conjunction with our consolidated financial statements and related notes contained elsewhere in this annual report on form 10-k. this discussion contains forward-looking statements that involve risks , uncertainties and assumptions . our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors , including those set forth under “risk factors” and elsewhere in this annual report on form 10-k and those discussed in other documents we file with the sec . in light of these risks , uncertainties , and assumptions , readers are cautioned not to place undue reliance on such forward-looking statements . these forward-looking statements represent beliefs and assumptions only as of the date of this annual report on form 10-k. except as required by applicable law , we do not intend to update or revise forward-looking statements contained in this annual report on form 10-k to reflect future events or circumstances . overview we are a biotechnology company focused on the discovery and development of lipidomic-based therapeutic antibodies , an emerging field of medical science that targets bioactive signaling lipids to treat a wide range of human diseases . we have two product candidates that are currently in clinical development , and one in pre-clinical evaluation . isonep™ is the ocular formulation of sonepcizumab , a humanized monoclonal antibody ( “mab” ) against sphingosine-1-phosphate ( “s1p” ) . sphingomab™ is the original mouse version of this monoclonal antibody . isonep is administered by intravitreal injection , and has demonstrated multiple mechanisms of action in ocular models of disease , including anti-angiogenesis , anti-inflammatory , anti-fibrotic and anti-vascular permeability . this combination of mechanisms would suggest : ( i ) isonep might have a comparative advantage over currently marketed products for “wet” age-related macular degeneration ( “wet amd” ) and ( ii ) isonep might demonstrate clinical efficacy in a broad range of retinal diseases where there is currently a significant unmet medical need , including diabetic retinopathy , dry amd , and glaucoma-related surgery . in december 2010 , we entered into an agreement with pfizer inc. ( the “pfizer agreement” ) , which provides pfizer with an exclusive option for a worldwide license to develop and commercialize isonep . under the original terms of the pfizer agreement , pfizer and the company planned to conduct two studies , including a phase 1b study in wet amd patients with pigment epithelial detachment ( ped ) , a complication of wet amd ( the ‘‘pedigree trial '' ) , and a larger phase 2a study in wet amd patients generally ( the ‘‘nexus trial '' ) . the company began enrolling patients in the pedigree and nexus trials in september 2011 and october 2011 , respectively . the food and drug administration ( fda ) placed the pedigree and nexus trials on clinical hold in january 2012 following a determination by the fda that the fill-and-finish contractor that had filled the isonep clinical trial vials was not in compliance with the fda 's current good manufacturing practice ( ‘‘cgmp '' ) standards during the time period it provided those services to the company . thereafter , we manufactured new isonep drug substance with an alternate fill-and-finish contractor and resumed dosing patients in the nexus trial in september 2012. as a result of the clinical hold and the requirement to manufacture new drug substance , the projected costs to complete the isonep trials increased significantly and pfizer requested the company to consider potential alternatives to reduce the increased costs of the isonep trials . in december 2012 , lpath and pfizer amended the pfizer agreement to among other things , reflect the parties ' agreement to discontinue the pedigree trial and to focus on the nexus trial . the parties agreed to continue to pursue and share the cost of the isonep trials , including any costs associated with discontinuing the pedigree trial . in october 2013 , lpath announced that it had received notice from pfizer that pfizer would be seeking to divest certain ophthalmology research and development assets , including pfizer 's rights and obligations under the pfizer agreement . lpath presented offers to pfizer to reacquire those rights . however , in december 2013 , pfizer informed lpath that its offers were not competitive with other offers . therefore , lpath believes that a number of third parties may have an interest in acquiring pfizer 's rights . acquisition of pfizer 's rights and obligations under the terms of the pfizer agreement by a third party would not affect the terms of the pfizer agreement , as the existing rights and obligations currently held by pfizer will be assumed by to the third party or remain with pfizer based on the terms of the agreement between pfizer and the third party . as of december 31 , 2013 , pfizer had paid the company $ 20.0 million pursuant to the terms of the pfizer agreement , including the $ 14 million upfront payment . the amendment to the pfizer agreement did not modify the company 's obligation to fund $ 6.0 million of nexus trial expenses , which it completed during 2013. the terms of the pfizer agreement specify that , since the company has fulfilled its funding obligation , pfizer ( or any third party who acquires pfizer 's rights ) will fund the remaining expenses necessary to complete the nexus trial . 30 as of march 14 , 2014 , 135 patients have been enrolled in the nexus trial , with 25 additional patients required to complete enrollment . story_separator_special_tag under the terms of the pfizer agreement , as amended , pfizer made a $ 14 million upfront payment to lpath in january 2011. in addition , pfizer agreed to share the cost of the planned clinical trials , including any costs associated with discontinuing the pedigree trial . following completion of the nexus trial , pfizer has the right to exercise its option for worldwide rights to isonep for an undisclosed option fee and , if pfizer exercises its option , lpath will be eligible to receive development , regulatory , and commercial milestone payments that could total up to $ 497.5 million . in addition , lpath will be entitled to receive tiered double-digit royalties based on sales of isonep . as part of the agreement , lpath granted to pfizer a time-limited right of first refusal for asonep , and pfizer specified that a designated portion of the upfront payment be used to fund the development of asonep™ . as of december 31 , 2013 , pfizer had paid the company $ 20.0 million pursuant to the terms of the pfizer agreement , including the $ 14 million upfront payment . from our inception through december 31 , 2013 , we have also generated $ 9.7 million in revenue from research grants awarded primarily by the national institutes of health , and $ 0.4 million in royalty revenue from a licensing agreement with a company that produces novel research assays . we expect to continue to receive small amounts of revenue from research grants and our existing source of royalty revenue . research and development expenses our research and development expenses consist primarily of salaries and related employee benefits ; research supplies and materials ; external costs associated with our drug discovery research ; and external drug development costs , including preclinical testing and regulatory expenses , manufacturing of material for clinical trials , and the costs of conducting clinical trials . our historical research and development expenses are principally related to the drug discovery and clinical development efforts in creating and developing our lead product candidates , isonep , asonep , and lpathomab . we charge all research and development expenses to operations as incurred . we expect our research and development expenses to increase significantly in the future as our product candidates move through pre-clinical testing and into clinical trials . due to the risks inherent in the drug discovery and clinical trial process and given the early stage of our product development programs , we are unable to estimate with any certainty the costs we will incur in the continued development of our product candidates for potential commercialization . clinical development timelines , the probabilities of success , and development costs vary widely . while we are currently focused on advancing each of our product development programs , we anticipate that we will periodically make determinations as to the scientific and clinical success of each product candidate , as well as ongoing assessments as to each product candidate 's commercial potential . in addition , we can not forecast with any degree of certainty which product candidates will be subject to future partnering , when such arrangements will be secured , if at all , and to what degree such arrangements would affect our development plans and capital requirements . as a result , we can not be certain when and to what extent we will receive cash inflows from the commercialization of our product candidates . general and administrative expenses our general and administrative expenses principally comprise salaries and benefits and professional fees related to our business development , intellectual property , finance , human resources , legal , and internal systems support functions . in addition , general and administrative expenses include insurance and an allocated portion of facilities and information technology costs . we anticipate increases in general and administrative expenses as we add personnel , increase our business development activities , become subject to the full sarbanes-oxley compliance obligations applicable to larger publicly-held companies , and continue to develop and prepare for the commercialization of our product candidates . application of critical accounting policies and estimates the preparation of financial statements in conformity with accounting principles generally accepted in the united states of america requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities , disclosure of contingent assets and liabilities at the date of the financial statements , and the reported amounts of revenues and expenses during the reporting period . actual results could differ from those estimates . research and development our sponsored research and development costs related to future products and redesign of present products are expensed as incurred . 32 patent expenses legal and filing costs directly associated with obtaining patents are capitalized . upon issuance of a patent , amortization is computed using the straight-line method over the estimated remaining useful life of the patent . revenue recognition research and development revenue under collaborative agreements . we have and may in the future enter into collaborations where we receive non-refundable upfront payments . generally , these payments are made to secure licenses or option rights to our drug candidates . non-refundable payments are recognized as revenue when we have a contractual right to receive such payment , the contract price is fixed or determinable , the collection of the resulting receivable is reasonably assured , and we have no further performance obligations under the agreement . multiple-element arrangements , such as license and development arrangements , are analyzed to determine whether the deliverables , which often include a license together with performance obligations such as research and development responsibilities and steering committee services , can be separated or whether they must be accounted for as a single unit of accounting . we recognize up-front license payments as revenue upon delivery of the license only if the license has stand-alone value and the fair value of the undelivered performance obligations , typically including research and or steering committee services , can be determined .

results of operations comparison of years ended december 31 , 2013 and 2012 grant and royalty revenue . grant and royalty revenue for 2013 increased to $ 1.5 million from $ 1.0 million in 2012. the increase of $ 0.5 million is principally due to the january 2012 suspension of the isonep clinical trials . the clinical trials were resumed in september 2012. the suspension resulted in reduced reimbursable costs for outside services in 2012 compared to 2013. research and development revenue under collaborative agreements . as described in note 2 to the consolidated financial statements , in december 2010 we entered into an agreement with pfizer , inc. , which agreement was amended in 2012 , that provides financial support for our isonep and asonep development programs . we recognized revenues as follows : replace_table_token_2_th the increase in revenue in 2013 is attributable principally to the suspension of the isonep clinical trials from january to september 2012. reduced expenditures during that time period resulted in lower amortization of deferred revenues . research and development expenses . research and development expenses for 2013 totaled $ 11.3 million compared to $ 8.2 million for 2012 , an increase of $ 3.1 million . in january 2012 , we temporarily suspended dosing patients in our isonep clinical trials . the increase in research and development costs in 2013 is due principally to the resumption of the clinical trials in september 2012. general and administrative expenses . general and administrative expenses were $ 4.2 million for the year ended december 31 , 2013 compared to $ 4.1 million for 2012 , an increase of $ 0.1 million . the increase in 2013 is principally to increases in legal and investor relations expenses . change in fair value of warrants .

management and property management businesses and certain joint venture interests of sam ( the “ self storage platform ” ) , along with certain other assets of sam . as a result of the self administration transaction , sam is no longer our sponsor , and the special limited partnership interest and limited partnership interest it held in our operating partnership through our former external advisor have been redeemed . additionally , we are now self-managed and succeed to the advisory , asset management and property management businesses and certain joint ventures previously in place for us , strategic storage trust iv , inc. ( “ sst iv ” ) , a public non-traded reit , and strategic storage growth trust ii , inc. ( “ ssgt ii ” ) ( collectively with sst iv the “ managed reits ” ) , a private non-traded reit , and now as a sponsor to the managed reits have the internal capability to originate , structure and manage additional investment products ( the “ managed reit platform ” ) which would be sponsored by smartstop reit advisors , llc ( “ sra ” ) , our indirect subsidiary . as a result of the self administration transaction , we indirectly own 100 % of the membership interests in strategic storage advisor ii , llc ( our “ former external advisor ” ) and each of strategic storage property management ii , llc and ss growth property management , llc ( together , our “ former external property managers ” ) . see note 4 of the notes to the consolidated financial statements contained in this report for additional information . on october 1 , 2018 , we , our operating partnership , and sst ii growth acquisition , llc , our wholly-owned subsidiary ( “ merger sub ” ) , entered into an agreement and plan of merger ( the “ ssgt merger agreement ” ) with strategic storage growth trust , inc. ( “ ssgt ” ) , a non-traded reit sponsored by our former sponsor , and ss growth operating partnership , l.p. ( “ ssgt op ” ) . pursuant to the terms and conditions set forth in the merger agreement , on january 24 , 2019 : ( i ) we acquired ssgt by way of a merger of ssgt with and into merger sub , with merger sub being the surviving entity ( the “ ssgt reit merger ” ) ; and ( ii ) immediately after the ssgt reit merger , ssgt op merged with and into our operating partnership , with the operating partnership continuing as the surviving entity and remaining a subsidiary of the company ( the “ ssgt partnership merger ” and , together with the ssgt reit merger , the “ ssgt mergers ” ) . ssgt was focused on opportunistic self storage properties , including development , and lease-up properties . see note 3 , real estate facilities—merger with strategic storage growth trust , inc. , for additional information related to the ssgt mergers . in our initial public offering , which commenced on january 10 , 2014 and ended on january 9 , 2017 , we offered a maximum of $ 1.0 billion in common shares for sale to the public ( the “ primary offering ” ) and $ 95.0 million in common shares for sale pursuant to our distribution reinvestment plan ( collectively , the “ offering ” ) and sold approximately 48.4 million class a shares and approximately 7.3 million class t shares for approximately $ 493 million and $ 73 million , respectively . 45 as of december 31 , 2019 , we owned 112 self storage properties located in 17 states ( alabama , arizona , california , colorado , florida , illinois , indiana , maryland , massachusetts , michigan , new jersey , nevada , north carolina , ohio , south carolina , texas and washington ) and ontario , canada ( the greater toronto area ) comprising of approximately 72,0 00 units and approximately 8.2 million rentable square feet . critical accounting policies we have established accounting policies which conform to generally accepted accounting principles ( “ gaap ” ) . preparing financial statements in conformity with gaap requires management to use judgment in the application of accounting policies , including making estimates and assumptions . following is a discussion of the estimates and assumptions used in setting accounting policies that we consider critical in the presentation of our financial statements . many estimates and assumptions involved in the application of gaap may have a material impact on our financial condition or operating performance , or on the comparability of such information to amounts reported for other periods , because of the subjectivity and judgment required to account for highly uncertain items or the susceptibility of such items to change . these estimates and assumptions affect our reported amounts of assets and liabilities , our disclosure of contingent assets and liabilities at the dates of the financial statements and our reported amounts of revenue and expenses during the period covered by this report . if management 's judgment or interpretation of the facts and circumstances relating to various transactions had been different , it is possible that different accounting policies would have been applied or different amounts of assets , liabilities , revenues and expenses would have been recorded , thus resulting in a materially different presentation of the financial statements or materially different amounts being reported in the financial statements . additionally , other companies may use different estimates and assumptions that may impact the comparability of our financial condition and results of operations to those companies . story_separator_special_tag if any change in circumstance or triggering event occurs , and results in a significant impact to our revenue and profitability projections , or any significant assumption in our valuations methods is adversely impacted , the impact could result in a material impairment charge in the future . estimated useful lives of long-lived assets we assess the useful lives of the assets underlying our properties based upon a subjective determination of the period of future benefit for each asset . we record depreciation expense with respect to these assets based upon the estimated useful lives we determine . our determinations of the useful lives of the assets could result in a materially different presentation of the financial statements or materially different amounts being reported in the financial statements , as such determinations , and the corresponding amount of depreciation expense , may vary dramatically based on the estimates and assumptions we use . consolidation of investments in joint ventures we evaluate the consolidation of our investments in joint ventures in accordance with relevant accounting guidance . this evaluation requires us to determine whether we have a controlling interest in a joint venture through a means other than voting rights , and , if so , such joint venture may be required to be consolidated in our financial statements . our evaluation of our joint ventures under such accounting guidance could result in a materially different presentation of the financial statements or materially different amounts being reported in the financial statements , as the joint venture entities included in our financial statements may vary based on the estimates and assumptions we use . reit qualification we made an election under section 856 ( c ) of the internal revenue code of 1986 ( the code ) to be taxed as a reit under the code , commencing with the taxable year ended december 31 , 2014. by qualifying as a reit for federal income tax purposes , we generally will not be subject to federal income tax on income that we distribute to our stockholders . if we fail to qualify as a reit in any taxable year , we will be subject to federal income tax on our taxable income at regular corporate rates and will not be permitted to qualify for treatment as a reit for federal income tax purposes for four years following the year in which our qualification is denied . such an event could materially and adversely affect our net income and could have a material adverse impact on our financial condition and results of operations . however , we believe that we are organized and operate in a manner that will enable us to continue to qualify for treatment as a reit for federal income tax purposes , and we intend to continue to operate as to remain qualified as a reit for federal income tax purposes . 47 recent market conditions in december 2019 , covid-19 emerged in wuhan , hubei province , china . while initially the outbreak was largely concentrated in china and caused significant disruptions to its economy , it has now spread to many other countries and infections have been reported globally , including in the united states and in the markets in which we operate . our rental revenue and operating results depend significantly on the demand for self storage space . while we have not seen a significant impact on the demand for self storage space resulting from the covid-19 outbreak as of the date of this report , if the outbreak causes weakness in national , regional and local economies that negatively impact the demand for self storage space and or increase bad debts , our business , financial condition , liquidity , results of operations and prospects could be adversely impacted . additionally , we typically conduct aspects of our leasing activity at our facilities , as well as the offering of various ancillary products , including moving and packing supplies , such as locks and boxes , and other services , such as tenant insurance or similar programs . accordingly , reductions in the ability and willingness of customers to visit our facilities due to the covid-19 outbreak could reduce rental revenue and ancillary operating revenue produced by our facilities . concerns relating to such an outbreak could also prevent our on-site personnel from reporting for work at our facilities , which could adversely affect our ability to adequately manage our facilities . in order to prevent the spread of covid-19 there have been , and may continue to be temporary shut downs or restrictions placed on businesses by cities , counties , states , or the federal government . these orders have impacted , and may continue to impact , our facilities and operations . the ultimate extent of the impact of the covid-19 outbreak on our business , financial condition , liquidity , results of operations and prospects will depend on future developments , which are highly uncertain and can not be predicted , including new information that may emerge concerning the breadth or severity of the covid-19 outbreak and the actions to contain or treat its impact , among others . story_separator_special_tag adjusted , for the current year was diluted as a result of the ssgt mergers and associated increase in debt and interest expense , the continued progress in metrics such as physical occupancy and total revenue , coupled with the acquisition of the gilbert property and the completion of the toronto development property , we believe will result in accretive cash flows and ffo , as adjusted , in the future . while we expect physical occupancy to continue to improve as the ssgt properties continue to approach stabilization , the acquisition of the gilbert property has caused a short term decline in portfolio physical occupancy as of december 31 , 2019 , and we expect a similar effect on physical occupancy upon the opening and inclusion of the toronto development in that metric .

results of operations overview we derive revenues principally from : ( i ) rents received from our self storage tenant leases ; ( ii ) fees generated from our managed reits ; ( iii ) our tenant programs ; and ( iv ) sales of packing- and storage-related supplies at our storage facilities . therefore , our operating results depend significantly on our ability to retain our existing tenants and lease our available self storage units to new tenants , while maintaining and , where possible , increasing the prices for our self storage units . additionally , our operating results depend on our tenants making their required rental payments to us , maintaining and increasing fees from our managed reits , and the success of our tenant programs . competition in the market areas in which we operate is significant and affects the occupancy levels , rental rates , rental revenues and operating expenses of our facilities . development of any new self storage facilities would intensify competition of self storage operators in markets in which we operate . as of december 31 , 2019 , 2018 , and 2017 , we owned 111 , 83 , and 83 operating self storage facilities , respectively .

on february 4 , 2011 , we amended our original complaint , filed on august 11 , 2010 , against aastra , apple , cisco and nec in the united states district court for the eastern district of texas , tyler division , to assert u.s. patent no . 7,418,504 against apple and aastra . on april 5 , 2011 , we again amended our complaint against aastra , apple , cisco and nec in the united states district court for the eastern district of texas , tyler division , to include apple 's ipad 2 in the list of apple products that are accused of infringing our patents . we also asserted our newly-issued patent , u.s. patent no . 7,921,211 against all of the defendants in that lawsuit . also on april 5 , 2011 , we amended our original complaint , filed on january 12 , 2011 , against siemens and mitel in the united states district court for the eastern district of texas , tyler division , to assert our newly-issued patent , u.s. patent no . 7,921,211 against all of the defendants in that lawsuit . on april 12 , 2011 , we again amended our complaint against siemens and mitel in the united states district court for the eastern district of texas , tyler division , to add avaya inc. as a defendant . on november 1 , 2011 , we filed a new complaint against apple inc. in the united states district court for the eastern district of texas , tyler division . the complaint includes allegations of patent infringement regarding our '181 patent . in our complaint , we seek both damages and injunctive relief . on november 4 , 2011 , we filed a complaint with the united states international trade commission ( itc ) alleging that apple inc. has engaged in unfair trade practices by the importation , sale for importation , and sale after importation of certain devices with secure communication capabilities that infringe one or more claims of our u.s. patent no . 8,051,181. the accused products include the latest iphones , ipads , ipods , and macintosh computers . we have requested that the itc institute an investigation into apple 's allegedly infringing imports and ultimately bar apple from importing those apple products or further selling the infringing apple products that have already been imported . patents on march 15 , 2011 , we updated our original patent declaration from december 2 , 2009 to etsi and atis , to include five additional specifications in the ( 3rd generation partnership project ) or 3gpp long-term evolution or ( lte ) project and we indicated that we are willing , upon request , to make available a non-exclusive license under what is commonly referred to as rand ( reasonable terms and conditions that are free of any unfair discrimination ) with respect to necessary claims that may issue from our identified patents and patent applications for the specifications indicated in our statement of patent holder , as updated , to the extent adopted as a final standard , and subject to the conditions set forth in the statement of patent holder . on april 5 , 2011 , we were granted a new patent by the uspto : u.s. patent # 7,921,211 , agile network protocol for secure communications using secure domain names . on april 26 , 2011 , we were granted a new patent by the uspto : u.s. patent # 7,933,990 , agile network protocol for secure communications with assured system availability . on april 28 , 2011 , at the request of the european telecommunications standards institute ( etsi ) , we agreed to update our licensing declaration and make available a non-exclusive patent license under frand ( fair , reasonable and non-discriminatory terms and conditions , with compensation ) , to 3gpp members desiring to implement the technical specifications identified by virnetx , as set forth in the updated licensing declaration under etsi 's ipr policy . on may 17 , 2011 , we were granted two patents by the united states patent and trademark office , or uspto : u.s. patent no. # 7,944,915 , third party vpn certification and u.s. patent # 7,945,654 , agile network protocol for secure communications using secure domain names . on july 08 , 2011 , cisco filed with the uspto a request for a reexamination of our us patent # 6,502,135. the uspto accepted this request and issued an order granting the reexamination on october 03 , 2011. this was followed by the first non-final office action on february 15 , 2012. our response is due on april 15 , 2012. on july 11 , 2011 , apple filed with the uspto a request for a reexamination of our us patent # 6,502,135. the uspto accepted this request and issued an order granting the reexamination on october 03 , 2011. this was followed by the first non-final office action on february 15 , 2012. our response is due on april 15 , 2012. on july 25 , 2011 , apple filed with the uspto a request for a reexamination of our us patent # 7,490,151. the uspto accepted this request and issued an order granting the reexamination on october 21 , 2011. the uspto has not issued the first non-final office action for this reexamination . on july 26 , 2011 , we were granted two patents by the united states patent and trademark office , or uspto : u.s. patent # 7,987,274 method for establishing secure communication link between computers of virtual private network and u.s. patent # 7,986,688 , third party virtual private network certification . on august 2 , 9011 , we were granted a new patent by the uspto : u.s. patent # 7,996,539 , agile network protocol for secure communications with assured system availability . story_separator_special_tag we refer to accounting estimates of this type as critical accounting policies and estimates , which we discuss further below . we have reviewed our critical accounting policies and estimates with the audit committee of our board of directors . reclassification of gain on settlement in june 2010 , we received $ 200,000 from microsoft corporation related to a licensing agreement and originally classified it as revenue . upon further analysis , we determined that we could not practically and objectively separate any settlement portion from the revenue element as discussed under the guidance of u.s. gaap accounting standards codification topic 605 : revenue recognition , or asc topic 605. as a result , we reclassified this amount in our 2010 financial statements to present it as a gain on settlement . this reclassification had no impact on our net income , financial position or cash flows for any period . revenue recognition we defer recognition of revenue in accordance with asc topic 605 until such time as all of the criteria below have been met : ● persuasive evidence of sales arrangements ; ● delivery has occurred or services have been rendered ; ● the buyer 's price is fixed or determinable ; and ● collection is reasonably assured . we expect that some or all of our future licensing agreements will provide for payments to us over an extended period of time . for a licensing agreement with fixed royalty payments , we expect to recognize revenue as amounts become due . for a licensing agreement with variable royalty payments we expect to recognize royalty revenue at the time that the licensees ' sales occur ; however , because we expect that a licensee may report sales information to us on a delayed basis , we expect our revenue recognition criterion may also be met on a delayed basis . complex revenue arrangements may require us to make significant judgments , assumptions and estimates about when substantial delivery of contract elements will occur , whether any significant ongoing obligations exist subsequent to contract execution , whether amounts due are collectible and the appropriate period in which the completion of the earning process occurs . if new information subsequently becomes known to us which causes us to make different judgments , assumptions or estimates regarding material contracts , our financial results may be materially affected . 23 index earnings per share basic earnings per share are computed by dividing earnings available to common stockholders by the weighted average number of outstanding common shares during the period . diluted earnings per share is computed by dividing net income by the weighted average number of shares outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued . during 2011 and 2009 , the company has incurred losses ; therefore , the effect of any common stock equivalent would be anti-dilutive during that period . concentration of credit risk and other risks and uncertainties our cash and cash equivalents are primarily maintained at two financial institutions in the united states . deposits held with these financial institutions may exceed the amount of insurance provided on such deposits . the balances are insured by the federal deposit insurance corporation , or fdic . during the year ended december 31 , 2011 , 2010 and 2009 , we had , at times , funds that were uninsured . the uninsured balance at december 31 , 2011 , was approximately $ 29,185 compared to $ 9,900 for 2010 and $ 1,310 for 2009. we do not believe that we are subject to any unusual financial risk beyond the normal risk associated with commercial banking relationships . we have not experienced any losses on our deposits of cash and cash equivalents . derivative instruments our series i warrants contain an anti-dilutive provision which causes it to not be considered indexed to our stock . as a result , the warrants are required to be accounted for as derivative instruments . we recognize derivative instruments as either assets or liabilities on the accompanying consolidated balance sheets at fair value . we record changes in the fair value ( i.e. , gains or losses ) of the derivatives in the accompanying consolidated statements of operations . impairment of long-lived assets we identify and record impairment losses on long-lived assets used in operations when events and changes in circumstances indicate that the carrying amount of an asset might not be recoverable , but not less than annually . recoverability is measured by comparison of the anticipated future net undiscounted cash flows to the related assets ' carrying value . if such assets are considered to be impaired , the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the projected discounted future net cash flows arising from the asset . income taxes because of our history of operating losses , we do not currently recognize the benefit of all of our deferred tax assets , including tax loss carry forwards , that may be used to offset future taxable income . we will , however , continue to assess our ability to generate sufficient taxable income during future periods in which our deferred tax assets may be realized . if and when we believe it is more likely than not that we will recover our deferred tax assets , we will reverse the valuation allowance as an income tax benefit in our statements of operations . stock-based compensation we account for share-based compensation in accordance with the fair value method , which requires the measurement and recognition of compensation expense in the statement of operations for all share-based payment awards made to employees and directors including employee stock options based on estimated fair values . using the modified retrospective transition method of adopting this standard , the financial statements presented herein reflect compensation expense for stock-based awards as if the provisions of this standard had been applied from the date of our inception .

company overview we develop software and technology solutions for securing real-time communications over the internet . our patented gabriel connection technology combines ndustry standard encryption protocols with our patented techniques for automated domain name system , or dns , lookup mechanisms , and enables users to create a secure communication link using secure domain names over wired or wireless ( 4g/lte ) networks . we are currently beta testing our gabriel connection technology as part of our secure domain name initiative , or ( sdni ) , on various platforms including pcs , smart phones and tablets . we also intend to establish the exclusive secure domain name registry in the united states and other key markets around the world . our portfolio of intellectual property is the foundation of our business model . we currently own 20 patents in the united states and 26 foreign patents , as well as several pending u.s. and foreign patent applications . our patent portfolio is primarily focused on securing real-time communications over the internet , as well as related services such as the establishment and maintenance of a secure domain name registry . our patented methods also have additional applications in operating systems and network security . on december 2 , 2009 , we submitted a licensing declaration to the 3rd generation partnership project , or 3gpp , identifying those of our u.s. and international patents which may be relevant to long term evolution , or lte . on march 14 , 2011 , we supplemented our licensing declaration to include five additional specifications . on april 28 , 2011 , at the request of the european telecommunications standards institute , or etsi , we agreed to update our licensing declaration to etsi under etsi 's intellectual property rights or ipr policy .

we provide products and services in over 170 countries , with approximately 120 facilities and 6,500 employees worldwide . in october 2014 , zebra acquired enterprise from msi , excluding its iden , or integrated digital enhanced network business , for $ 3.45 billion in cash . zebra financed the acquisition through a combination of cash on hand and borrowings of $ 3.25 billion ( the “ indebtedness ” ) , including the sale of 7.25 % senior notes due 2022 with an aggregate principal amount of $ 1.05 billion and a new credit agreement with various lenders that provided a term loan of $ 2.20 billion due 2021. the new credit agreement also included a $ 250 million revolving credit facility . see note 3 business combinations and divestitures for additional information . on september 13 , 2016 , the company entered into an asset purchase agreement with extreme networks , inc. to divest of its wireless lan ( “ wlan ” ) business ( “ divestiture group ” ) . wlan operating results are reported in the enterprise segment through the closing date of the wlan divestiture of october 28 , 2016. see note 3 business combinations and divestitures for additional information . segments the company 's operations consist of two reportable segments : legacy zebra and enterprise . legacy zebra the legacy zebra segment is an industry leader in barcode printing and asset tracking technologies . its major product lines include barcode and card printers , location solutions , supplies , and services . industries served include retail , transportation and logistics , manufacturing , healthcare , and other end markets within the following regions : north america ; europe , middle east , and africa ; asia-pacific ; and latin america . enterprise the enterprise segment is an industry leader in automatic information and data capture solutions . its major product lines include mobile computing , data capture , rfid , and services . industries served include retail , transportation and logistics , manufacturing , healthcare , and other end markets within the following regions : north america ; europe , middle east , and africa ; asia-pacific ; and latin america . geographic information . for the year ended december 31 , 2016 , the company recorded $ 3.6 billion of net sales in its consolidated statements of operations , of which approximately 48.7 % were attributable to north america ; approximately 31.8 % were attributable to europe , middle east , and africa ( “ emea ” ) ; and other foreign locations accounted for the remaining 19.5 % . net sales attributable from each region are relatively consistent with the prior year period . 26 results of operations : year ended 2016 versus 2015 and year ended 2015 versus 2014 consolidated results of operations ( amounts in millions , except percentages ) replace_table_token_4_th net sales by product category were as follows ( amounts in millions , except percentages ) : replace_table_token_5_th net sales to customers by geographic region were as follows ( in millions , except percentages ) : replace_table_token_6_th operating expenses are summarized below ( in millions , except percentages ) : replace_table_token_7_th 27 the company 's non-operating income and expense items are summarized in the following tables ( in millions , except percentages ) : replace_table_token_8_th ( 1 ) the businesses included in our enterprise segment were acquired as part of the acquisition . the consolidated results for the year ended december 31 , 2014 include only two months ( november and december 2014 ) of the enterprise segment . the increase in net sales , gross profit , operating expenses and operating income , for the year ended december 31 , 2014 was primarily related to the acquisition . 2016 compared to 2015 net sales decreased by $ 76 million or 2.1 % compared with the prior year period . the decline in net sales is due to lower hardware sales in north america , emea , and latin america , including the unfavorable impact of foreign currency changes , partially offset by higher hardware sales in asia-pacific . the decline in hardware sales is largely attributable to lower sales of barcode printer , data capture , wireless lan products , and location solutions . on a constant currency basis and excluding purchase accounting adjustments , overall net sales declined approximately 1 % compared to the prior year period , reflecting growth of approximately 4 % in asia-pacific , offset by declines of approximately 2 % , 1 % , and 3 % in north america , emea , and latin america , respectively . gross margin as a percent of sales was 45.9 % compared to the prior year period of 45.0 % . this improvement in gross margin reflects an increase in the enterprise segment gross margin primarily due to lower services and hardware product costs . legacy zebra segment gross margin decreased primarily due to lower sales demand and the impact of incentive programs , including the concessions to distributors of printer products imported into china , partially offset by product cost improvements . operating expenses for the year ended december 31 , 2016 and 2015 , were $ 1.6 billion , or 43.7 % and 44.0 % of net sales , respectively . the reduction in operating expenses as a percentage of net sales reflects the company 's continued focus on improving operating efficiency and controlling expenses . selling and marketing expenses were lower compared to the prior year due to the full-year impact of staff reductions implemented in 2015 and lower discretionary expenses and promotional spending . the decrease in research and development costs was primarily due to a reduction in headcount and other third-party resources , the impact from the divestiture of the wireless lan business , and shifting of headcount to lower cost engineering locations . story_separator_special_tag operating income for the year ended december 31 , 2015 , excluding the effect of the enterprise business , increased $ 12 million or 5.2 % compared to the prior year . the increase is primarily due to higher sales and gross profit , partially offset by higher operating expenses and the unfavorable foreign currency effects , net of hedges . the company recognized a foreign exchange loss of $ 23 million for 2015 as a result of changes in the value of non-us dollar assets and liabilities primarily related to the enterprise business that were not hedged during the period . interest expense was $ 194 million for the year ended december 31 , 2015 compared to $ 63 million for 2014 mainly reflecting the indebtedness incurred related to the acquisition of $ 3.2 billion borrowed in october of 2014. there was also $ 4 million of forward interest rate swap gains in 2015 included in interest expense compared to a $ 5 million loss in 2014 primarily due to the changes in market interest rates . in 2015 , the company recognized a tax benefit of $ 22 million compared to a tax benefit of $ 15 million for 2014. the company 's effective tax rates were 12.2 % and ( 95.0 ) % as of december 31 , 2015 and december 31 , 2014 , respectively . the company 's effective tax rate was lower than the federal statutory rate of 35 % primarily due to pre-tax losses in the united states and corporate structure realignment initiatives in various non-us jurisdictions . 29 since the date of the acquisition , as part of its corporate initiatives of integrating the enterprise business , the company has been executing its integration plan for the enterprise business ( the “ integration plan ” ) . the company anticipates completing the integration plan as soon as practicable and expects that the integration plan will allow the combined businesses to achieve further synergies and cost savings associated with the acquisition . as part of the integration plan , the company began realigning certain acquired assets of the enterprise business with and into the company 's corporate structure and business model . story_separator_special_tag style= '' font-family : inherit ; font-size:10pt ; '' > ( 1 ) the businesses included in our enterprise segment were acquired as part of the acquisition . the enterprise segment 's results , including the increases in net sales , gross profit , operating expenses and operating income , for the year ended december 31 , 2014 was primarily related to the acquisition . accordingly , the results for this segment for the year ended december 31 , 2014 include only two months ( november and december 2014 ) . 2016 compared to 2015 net sales for the period ending december 31 , 2016 within enterprise decreased $ 43 million or 1.8 % compared to prior year period . the decline in net sales was primarily driven by lower sales of wireless lan and data capture products and the unfavorable impact of foreign currency changes in emea , partially offset by higher sales of mobile computing products . the sales decline compared to the prior year period on a constant currency basis was approximately 1 % . gross profit margin for the year ended december 31 , 2016 was 44.2 % compared to 42.4 % in the prior year period . the improvement in gross margin was due primarily to lower service and hardware product costs , including lower excess and obsolescence expense . the prior year costs also included higher product rebranding expenses . this improvement was partially offset by product mix and the unfavorable impact of foreign currency changes . operating income increased 21.2 % primarily as a result of improvement in gross margin and lower operating expenses , partially offset by lower sales . 2015 compared to 2014 on october 27 , 2014 , the company acquired enterprise , an industry leader in mobile computing and data capture technologies and services , therefore 2014 only includes results since the acquisition date and is not directly comparable to the full fiscal year 2015. for the year ended december 31 , 2015 , net sales for enterprise were $ 2.4 billion compared to $ 482 million in 2014 , which includes net sales only for the period following the acquisition . mobile computing , data capture , and repair services generated the majority of enterprise net sales for the year in 2015 and 2014. the regions which accounted for the majority of 2015 and 2014 enterprise net sales included north america and emea . sales in the fourth quarter were $ 635 million , up 4.8 % compared to the third quarter due to higher net sales in emea . gross profit margin for the year ended december 31 , 2015 was 42.4 % compared to 44.5 % in the prior year period . gross margin of 44.5 % in 2014 reflects only the period following the acquisition on october 27 , 2014. gross margin in the fourth quarter was 42.4 % , comparable to the third quarter of 2015 , reflecting higher gross margin in services offset by unfavorable foreign currency effects . enterprise 's operating expenses for the year ended december 31 , 2015 were $ 774 million and operating income was $ 236 million . operating expenses in the fourth quarter were flat compared to third quarter ; however , the fourth quarter was 30.8 % of sales compared to 31.9 % in the third quarter of 2015 due to the improved operating leverage . critical accounting policies and estimates management prepared the consolidated financial statements of the company under accounting principles generally accepted in the united states of america . these principles require the use of estimates , judgments , and assumptions . we believe that the estimates , judgments , and assumptions we used are reasonable based upon the information available at that time . our estimates and assumptions affect the reported amounts in our consolidated financial statements .

results of operations by segment the following commentary should be read in conjunction with the financial results of each operating business segment as detailed in note 16 segment information and geographic data in the notes to the consolidated financial statements included in this form 10-k. the segment results exclude purchase accounting adjustments , amortization of intangible assets , acquisition and integration costs , impairment of goodwill and intangibles , and exit and restructuring costs . legacy zebra segment ( amounts in millions , except percentages ) replace_table_token_9_th 2016 compared to 2015 net sales for the period ending december 31 , 2016 within legacy zebra decreased $ 39 million or 3.0 % compared to prior year period . the decline in net sales was primarily due to lower net sales of barcode printers and location solutions , and the unfavorable impact of foreign currency changes , most notably in emea which was partially offset by an increase in sales of supplies . the barcode printer sales decline was primarily due to lower sales in north america and emea . legacy zebra sales declined compared to the prior year period on a constant currency basis by approximately 1 % . gross margin as a percentage of sales was 49.7 % compared to 50.9 % for comparable prior year period . the decrease in gross margin included impacts from lower sales of barcode printers , the impact of incentive programs , including the concession to distributors of printer products imported into china , costs associated with the relocation of north american distribution operations , and the unfavorable impact of foreign currency changes . these factors were partially offset by manufacturing cost improvements in supplies and lower hardware product costs . operating income declined 7.0 % as a result of lower net sales and gross margin , partially offset by lower operating expenses .

the amounts recognized in net income for these investments include : replace_table_token_71_th note 6 : goodwill and identifiable intangible assets the company has story_separator_special_tag of operations the following discussion addresses information pertaining to the financial condition and results of operations of westamerica bancorporation and subsidiaries ( the “ company ” ) that may not be otherwise apparent from a review of the consolidated financial statements and related footnotes . it should be read in conjunction with those statements and notes found on pages 48 through 89 , as well as with the other information presented throughout this report . critical accounting policies the company 's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the united states of america and follow general practices within the banking industry . application of these principles requires the company to make certain estimates , assumptions , and judgments that affect the amounts reported in the financial statements and accompanying notes . these estimates , assumptions , and judgments are based on information available as of the date of the financial statements ; accordingly , as this information changes , the financial statements could reflect different estimates , assumptions , and judgments . certain accounting policies inherently have a greater reliance on the use of estimates , assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported . estimates , assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value , when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment writedown or valuation reserve to be established , or when an asset or liability needs to be recorded contingent upon a future event . carrying assets and liabilities at fair value inherently results in more financial statement volatility . the fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources , when available . the most significant accounting policies followed by the company are presented in note 1 to the consolidated financial statements . these policies , along with the disclosures presented in the other financial statement notes and in this discussion , provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined . based on the valuation techniques used and the sensitivity of financial statement amounts to the methods , assumptions , and estimates underlying those amounts , management has identified the allowance for loan losses accounting to be the accounting area requiring the most subjective or complex judgments , and as such could be most subject to revision as new information becomes available . a discussion of the factors affecting accounting for the allowance for loan losses and purchased loans is included in the “ loan portfolio credit risk ” discussion below . net income in response to the “ great recession ” of 2008 and early 2009 , the federal reserve 's federal open market committee has maintained highly accommodative monetary policies to influence interest rates to low levels in order to provide stimulus to the economy following the “ financial crisis ” recession . the company 's principal source of revenue is net interest income , which represents interest earned on loans and investment securities ( “ earning assets ” ) reduced by interest paid on deposits and other borrowings ( “ interest-bearing liabilities ” ) . the relatively low level of market interest rates during the five years ended december 31 , 2015 has reduced the spread between interest rates on earning assets and interest bearing liabilities . the company 's net interest margin and net interest income declined as market interest rates on newly originated loans remain below the yields earned on older-dated loans and on the overall loan portfolio . the company has been reducing its exposure to rising interest rates by purchasing shorter-duration investment securities with lower yields than longer-duration securities . the company 's credit quality continued to improve , as nonperforming loans at december 31 , 2015 declined 15.5 percent compared with december 31 , 2014 and net loan losses have also declined from $ 3.0 million in 2014 to $ 1.7 million in 2015. the improvement in credit quality has resulted in management reducing the provision for loan losses to zero in 2015 from $ 2.8 million in 2014 and $ 8.0 million in 2013. management is focused on controlling all noninterest expense levels , particularly due to market interest rate pressure on net interest income . the company reported net income of $ 58.8 million or $ 2.30 diluted earnings per common share for the year ended december 31 , 2015 compared with net income of $ 60.6 million or $ 2.32 diluted earnings per common share for the year ended december 31 , 2014 and net income of $ 67.2 million or $ 2.50 diluted earnings per common share for the year ended december 31 , 2013 . - 19 - components of net income replace_table_token_5_th ( 1 ) fully taxable equivalent ( fte ) comparing 2015 with 2014 , net income decreased $ 1.9 million or 3.1 % , primarily due to lower net interest and loan fee income ( fte ) and lower noninterest income , partially offset by decreases in loan loss provision , noninterest expense and income tax provision ( fte ) . the lower net interest and loan fee income ( fte ) was primarily caused by a lower average volume of loans and lower yields on interest-earning assets , partially offset by higher average balances of investments and lower average balances of higher-costing interest-bearing liabilities . the provision for loan losses was reduced , reflecting management 's evaluation of losses inherent in the loan portfolio ; net loan losses and nonperforming loan volumes have declined relative to earlier periods . story_separator_special_tag ( 2 ) net interest spread represents the average yield earned on interest-earning assets less the average rate incurred on interest-bearing liabilities . ( 3 ) net interest margin is computed by calculating the difference between interest income and expense , divided by the average balance of interest-earning assets . the net interest margin is greater than the net interest spread due to the benefit of noninterest-bearing demand deposits . - 22 - distribution of assets , liabilities & shareholders ' equity and yields , rates & interest margin replace_table_token_8_th ( 1 ) amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate . ( 2 ) net interest spread represents the average yield earned on interest-earning assets less the average rate incurred on interest-bearing liabilities . ( 3 ) net interest margin is computed by calculating the difference between interest income and expense , divided by the average balance of interest-earning assets . the net interest margin is greater than the net interest spread due to the benefit of noninterest-bearing demand deposits . - 23 - distribution of assets , liabilities & shareholders ' equity and yields , rates & interest margin replace_table_token_9_th ( 1 ) amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate . ( 2 ) net interest spread represents the average yield earned on interest-earning assets less the average rate incurred on interest-bearing liabilities . ( 3 ) net interest margin is computed by calculating the difference between interest income and expense , divided by the average balance of interest-earning assets . the net interest margin is greater than the net interest spread due to the benefit of noninterest-bearing demand deposits . - 24 - summary of changes in interest income and expense due to changes in average asset & liability balances and yields earned & rates paid the following tables set forth a summary of the changes in interest income and interest expense due to changes in average assets and liability balances ( volume ) and changes in average interest yields/rates for the periods indicated . changes not solely attributable to volume or yields/rates have been allocated in proportion to the respective volume and yield/rate components . summary of changes in interest income and expense replace_table_token_10_th ( 1 ) amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate . [ the remainder of this page intentionally left blank ] - 25 - story_separator_special_tag jerry brown eliminated the net interest deduction for enterprise zone loans and the hiring credits were significantly altered . the company did not incur a significant change in its tax provision due to the new laws ; the state tax benefits recognized from the current enterprise zone tax incentive program for the years ended december 31 , 2014 and 2013 were $ 47 thousand and $ 121 thousand , net of federal income tax consequences , respectively . investment portfolio the company maintains a securities portfolio consisting of securities issued by u.s. treasury , u.s. government sponsored entities , agency and non-agency mortgage backed securities , state and political subdivisions , corporations , and asset-backed and other securities . investment securities are held in safekeeping by an independent custodian . management has increased the investment portfolio in response to deposit growth and loan volume declines . the carrying value of the company 's investment securities portfolio was $ 2.9 billion as of december 31 , 2015 , an increase of $ 247 million compared to december 31 , 2014 . - 28 - management continually evaluates the company 's investment securities portfolio in response to established asset/liability management objectives , changing market conditions that could affect profitability , liquidity , and the level of interest rate risk to which the company is exposed . these evaluations may cause management to change the level of funds the company deploys into investment securities , change the composition of the company 's investment securities portfolio , and change the proportion of investments allocated into the available for sale and held to maturity investment categories . the company 's positioning of the balance sheet for rising interest rates has resulted in the purchase of floating rate corporate bonds , federal agency bonds , mortgage-backed securities , and short-term state and municipal bonds . as of december 31 , 2015 , substantially all of the company 's investment securities continue to be investment grade rated by one or more major rating agencies . in addition to monitoring credit rating agency evaluations , management performs its own evaluations regarding the credit worthiness of the issuer or the securitized assets underlying asset-backed securities . the company 's procedures for evaluating investments in securities are in accordance with guidance issued by the board of governors of the federal reserve system , “ investing in securities without reliance on nationally recognized statistical rating agencies ” ( sr 12-15 ) and other regulatory guidance . credit ratings are considered in our analysis only as a guide to the historical default rate associated with similarly-rated bonds . there have been no significant differences in our internal analyses compared with the ratings assigned by the third party credit rating agencies . the following table shows the fair value carrying amount of the company 's investment securities available for sale as of the dates indicated : available for sale portfolio replace_table_token_14_th [ the remainder of this page intentionally left blank ] - 29 - the following table sets forth the relative maturities and contractual yields of the company 's available for sale securities ( stated at fair value ) at december 31 , 2015. yields on state and political subdivision securities have been calculated on a fully taxable equivalent basis using the current federal statutory rate . mortgage-backed securities are shown separately because they are typically paid in monthly installments over a number of years .

summary of changes in interest income and expense replace_table_token_11_th ( 1 ) amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate . provision for loan losses the company manages credit costs by consistently enforcing conservative underwriting and administration procedures and aggressively pursuing collection efforts with debtors experiencing financial difficulties . the provision for loan losses reflects management 's assessment of credit risk in the loan portfolio during each of the periods presented . the company provided no provision for loan losses in 2015 compared with $ 2.8 million in 2014 and $ 8.0 million in 2013. the provision for loan losses is determined based on management 's evaluation of credit quality for the loan portfolio . the reduction in the provision for loan losses in 2015 and 2014 reflects the decline in net losses and nonperforming loan volumes during the periods relative to earlier periods . the company recorded purchased county bank and sonoma valley bank loans at estimated fair value upon the acquisition dates , february 6 , 2009 and august 20 , 2010 , respectively . such estimated fair values were recognized for individual loans , although small balance homogenous loans were pooled for valuation purposes . the valuation discounts recorded for purchased loans included management 's assessment of the risk of principal loss under economic and borrower conditions prevailing on the dates of purchase . the purchased county bank loans secured by single-family residential real estate are “ covered ” through february 6 , 2019 by loss-sharing agreements the company entered with the fdic which mitigates losses during the term of the agreements . the fdic indemnification of purchased county bank non-single-family residential secured loans expired february 6 , 2014. any deterioration in estimated value related to principal loss subsequent to the acquisition dates requires additional loss recognition through a provision for loan losses .

use story_separator_special_tag overview bfc financial corporation ( “ bfc ” or , unless otherwise indicated or the context otherwise requires , “ we ” , “ us ” , “ our ” or the “ company ” ) is a holding company whose principal holdings include a 52 % equity interest in bbx capital corporation ( formerly bankatlantic bancorp , inc. ) and its subsidiaries ( “ bbx ” or “ bbx capital ” ) and a 54 % equity interest in woodbridge holdings , llc ( “ woodbridge ” ) , which owns 100 % of bluegreen corporation and its subsidiaries ( “ bluegreen ” ) . as described below , bbx capital owns the remaining 46 % equity interest in woodbridge . we hold shares of bbx capital 's class a common stock , which is listed for trading on the new york stock exchange ( “ nyse ” ) , and class b common stock representing an approximately 73 % voting interest and 52 % equity interest in bbx capital . bbx capital 's principal asset until july 31 , 2012 was its investment in bankatlantic , a federal savings bank headquartered in fort lauderdale , florida . on july 31 , 2012 , bbx capital completed its sale to bb & t corporation ( “ bb & t ” ) of all of the issued and outstanding shares of capital stock of bankatlantic . bbx capital 's current operations and business plans involve investments in income producing real estate , real estate developments and real estate joint ventures , and investments in middle market operating businesses . bbx capital also owns a 46 % equity interest in woodbridge . bluegreen is a sales , marketing and management company primarily focused on the hospitality and vacation ownership industries . bluegreen markets , sells and manages vacation ownership interests ( “ vois ” ) in resorts , which are generally located in popular , high-volume , “ drive-to ” vacation destinations , and were either developed or acquired by bluegreen or developed and owned by others in which case bluegreen earns fees for providing these services . bluegreen also provides other fee-based services , including property association management services , mortgage servicing , voi title services , reservation services , and construction design and development services . in addition , bluegreen provides financing to individual purchasers of its vois , which generates significant interest income . bfc also holds interests in other investments and subsidiaries as described herein . bfc held a significant investment in benihana inc. ( “ benihana ” ) until august 2012 when benihana was acquired by safflower holdings corp. ( “ safflower ” ) . as of december 31 , 2013 , we had total consolidated assets of approximately $ 1.4 billion and shareholders ' equity attributable to bfc of approximately $ 239.4 million . net income attributable to bfc for the years ended december 31 , 2013 and 2012 was approximately $ 29.1 million and $ 166.0 million , respectively . net income attributable to bfc for the year ended december 31 , 2012 included a gain on sale of bankatlantic of approximately $ 293.5 million . net loss attributable to bfc was approximately $ 11.3 million for the year ended december 31 , 2011. bfc 's business strategy has been to invest in and acquire businesses in diverse industries either directly or through controlled subsidiaries . in recent years , bfc has focused on providing strategic support to its existing investments with a view to the improved performance of the organization as a whole . initiatives in furtherance of this strategy include the april 2013 bluegreen merger and the currently proposed merger with bbx capital , as well as our investment with bbx capital in renin , in each case as described in further detail below . additionally , we may invest in operating businesses and real estate joint ventures for the development of residential and commercial real estate projects , including those in which our affiliates may participate . in furtherance of this goal , we expect to evaluate various financing transactions , including debt or equity financings as well as other alternative sources of new capital . bfc 's investments or acquisitions , and the business and investment strategies of bfc 's subsidiaries , may not prove to be successful or even if successful may not initially generate income , or may generate income on an irregular basis and may involve a long term investment , causing our results of operations to vary significantly on a quarterly basis . the following events had a significant financial impact on bfc during 2013 : · on april 2 , 2013 , woodbridge acquired all of the shares of bluegreen 's common stock not previously owned by woodbridge in a cash merger transaction . the aggregate merger consideration was approximately $ 149.2 million . bbx capital funded $ 60.0 million of the merger consideration through its investment in woodbridge . bbx capital also issued an $ 11.75 million promissory note in woodbridge 's favour . in exchange for its $ 71.75 million investment , bbx capital received a 46 % equity interest in woodbridge . as a result , woodbridge is currently owned 54 % by bfc and 46 % by bbx . · on october 30 , 2013 , renin holdings , llc , a newly formed joint venture entity currently beneficially owned 81 % by bbx and 19 % by bfc , through newly formed acquisition subsidiaries , a cquired substantially all of 70 the assets of renin corp. and its subsidiaries , manufacturers of interior closet doors , wall décor , hardware and fabricated glass products , for approximately $ 12.8 million in cash , net of $ 1.7 million which was distributed to renin holdings , llc during the first quarter of 2014 following finalization of the working capital adjustment and indemnification obligations of renin corp. and its subsidiaries under the terms of the purchase agreement . story_separator_special_tag it is not currently expected that the merger will be consummated prior to the first quarter of 2015. pursuant to the terms of the merger agreement , either bfc or bbx may terminate the merger agreement if the merger is not consummated by april 30 , 2014. a consolidated purported class action lawsuit is pending in the 17 th judicial circuit in and for broward county , florida , which seeks to enjoin the merger or , if it is completed , to recover relief as determined by the presiding court . bfc and bbx capital believe that the lawsuit is without merit and intend to vigorously defend the action . see “ legal proceedings ” and note 13 to the consolidated financial statements for additional information regarding this litigation . acquisition of renin corporation on october 30 , 2013 , renin holdings llc , a newly formed joint venture entity currently beneficially owned 81 % by bbx capital and 19 % by bfc , through newly formed acquisition subsidiaries ( renin holdings llc and its acquisition subsidiaries are collectively referred to herein as the “ purchasers ” ) acquired substantially all of the assets of renin corp. and its subsidiaries ( collectively , the “ sellers ” ) , manufacturers of interior closet doors , wall décor , hardware and fabricated glass products , for approximately $ 14 . 5 million ( the “ renin acquisition ” ) . the $ 14 . 5 million transaction consideration was subject to certain potential post-closing adjustments based on the sellers ' working capital as of the closing and certain contractually provided seller indemnities . at the closing , approximately $ 1.7 million of the transaction consideration was placed in escrow pending final determination of the working capital adjustment , if any , and final resolution of any indemnification obligations of the sellers . in january 2014 , renin corp 's working capital and indemnification obligations were finalized and the entire escrow balance of $ 1.7 million was distributed to the purchasers in february 2014. included in other assets in the company 's statement of financial condition was a $ 1.7 million receivable for the renin corp. working capital adjustment . the renin transaction consideration was adjusted to $ 12.8 million to reflect the renin corp working capital adjustment . renin revenues for the two months ended december 31 , 2013 were approximately $ 9.3 million . renin corp. had revenues of $ 56.3 million for the ten months ended october 30 , 2013. bluegreen specialty finance , llc , a subsidiary of bluegreen , funded approximately $ 9.4 million of the transaction consideration in a term loan and revolver facility ( the “ renin loan ” ) . the renin loan includes a $ 3.0 million term loan and provides for additional borrowings of up to $ 9 million on a revolving basis ( $ 6.4 million of which was drawn upon at the closing ) , subject to the terms of a borrowing base specified in the renin loan . amounts outstanding under the renin loan bear interest at a fixed rate of 7.25 % per annum and are collateralized by substantially all of the assets of the purchasers . all amounts outstanding under the renin loan will , unless extended , become due on april 30 , 2014. the balance of the transaction consideration of $ 5.2 million was funded approximately $ 4.2 million by bbx capital and approximately $ 1.0 million by bfc in accordance with their percentage equity interests in renin holdings llc . the transaction consideration was used to satisfy certain of the sellers ' outstanding debt and other liabilities , obligations and expenses . the acquired assets include , among other things , inventory , trade accounts receivable , property , plant and equipment , and intellectual property and other intangible assets with an estimated carrying value , subject to adjustment , of $ 23 million . in addition to acquiring the assets , approximately $ 9.0 million of certain trade accounts payable and accrued liabilities of the sellers , which represent ordinary course business obligations incurred by the sellers prior to the closing and certain accrued employee benefits , were assumed in the renin acquisition . additionally , the purchasers offered employment to the sellers ' current employees on substantially the same terms as in effect prior to the closing . woodbridge acquisition of bluegreen on april 2 , 2013 , bluegreen merged with a wholly-owned subsidiary of woodbridge in a cash merger transaction ( sometimes hereinafter referred to as the “ bluegreen merger ” or the “ bluegreen cash merger ” ) . pursuant to the terms of the merger agreement , bluegreen 's shareholders ( other than woodbridge ) received consideration of $ 10.00 in cash for each share of bluegreen 's common stock that they held at the effective time of the merger , including unvested restricted shares . in addition , each option to acquire shares of bluegreen 's common stock that was outstanding at the effective time of the merger , whether vested or unvested , was canceled in exchange for a cash payment to the holder in an amount equal to the excess , if any , of the $ 10.00 per share merger consideration over the exercise price per share of the option . the aggregate merger consideration was approximately $ 149.2 million . as a result of the merger , bluegreen , which was the surviving corporation of the merger , became a wholly-owned subsidiary of woodbridge . prior to the merger , the company indirectly through woodbridge owned approximately 54 % of bluegreen 's outstanding common stock . 72 in connection with the financing of the merger , bfc and woodbridge entered into a purchase agreement with bbx capital on april 2 , 2013 ( the “ purchase agreement ” ) . pursuant to the terms of the purchase agreement , bbx capital invested $ 71.75 million in woodbridge contemporaneously with the closing of the merger in exchange for a 46 % equity interest in woodbridge .

far results of operations far commenced operations on august1 , 2012. the following table is a condensed income statement summarizing the results of operations of the far business segment ( “ far ” ) for the year ended december 31 , 2013 and from august 1 , 2012 through december 31 , 2012 : replace_table_token_38_th interest income far 's interest income for the year ended december 31 , 2013 resulted primarily from $ 7.1 million and $ 1.2 million of commercial and residential loan interest income , respectively . the remaining interest income was from the small business , consumer and tax certificate portfolios and amounted to $ 0.9 million , $ 0.5 million and $ 0.1 million , respectively . included in commercial loan interest income were recoveries of $ 1.9 million from the payoff of two nonaccrual loans . far 's interest income during the five months ended december 31 , 2012 resulted primarily from $ 2.9 million of commercial loan interest income with the balance from small business , consumer and residential loans . net gains on the sales of assets net gains on sales of assets during the year ended december 31 , 2013 included $ 0.9 million of gains associated with the sale of tax certificates and a $ 1.0 million gain on the sale of a storage facility included in property and equipment . the remaining gains on sales of assets were associated with gains from the sales of real estate held-for-sale . net gains on sales of assets during the five month period ended december 31 , 2012 represents the gain on the sale of a $ 4.6 million loan . income from real estate operations income from real estate operations during the year ended december 31 , 2013 and the 2012 five month period consisted primarily of rental income from non-residential commercial properties .

results of operations for the periods included in this review are not necessarily indicative of results to be obtained during any future period . cautionary statement regarding forward-looking information a number of statements in this report may contain forward-looking statements within the meaning of the private securities litigation reform act of 1995 including our expectations relative to business and financial metrics , post-ydkn merger integration and conversion activities , our outlook regarding revenues , expenses , earnings . liquidity , asset quality and statements regarding the impact of technology enhancements and customer and business process improvements . all forward-looking statements speak only as of the date they are made and are based on information available at that time . we assume no obligation to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements were made or to reflect the occurrence of unanticipated events except as required by federal securities laws . as forward-looking statements involve significant risks and uncertainties , caution should be exercised against placing undue reliance on such statements . such forward-looking statements may be expressed in a variety of ways , including the use of future and present tense language expressing expectations or predictions of future financial or business performance or conditions based on current performance and trends . forward-looking statements are typically identified by words such as , `` believe , '' `` plan , '' `` expect , '' `` anticipate , '' `` intend , '' `` outlook , '' `` estimate , '' `` forecast , '' `` will , '' `` should , '' `` project , '' `` goal , '' and other similar words and expressions . these forward-looking statements involve certain risks and uncertainties . in addition to factors previously disclosed in our reports filed with the sec , the following factors among others , could cause actual results to differ materially from forward-looking statements or historical performance : changes in asset quality and credit risk ; the inability to sustain revenue and earnings growth ; changes in interest rates and capital markets ; inflation ; potential difficulties encountered in expanding into a new and remote geographic market ; customer borrowing , repayment , investment and deposit practices ; customer disintermediation ; the introduction , withdrawal , success and timing of business and technology initiatives ; competitive conditions ; the inability to realize cost savings or revenues or to implement integration plans and other consequences associated with ydkn merger , acquisitions and divestitures ; economic conditions ; and the impact , extent and timing of technological changes , capital management activities , and other actions of the office of the comptroller of the currency ( occ ) , the board of governors of the federal reserve system ( frb ) and legislative and regulatory actions and reforms . actual results may differ materially from those expressed or implied as a result of these risks and uncertainties , including , but not limited to , the risk factors and other uncertainties described in this annual report on form 10-k , our subsequent 2018 quarterly reports on form 10-q 's ( including the risk factors and risk management discussion ) and our other subsequent filings with the sec , which are available on our corporate website at https : //www.fnb-online.com/about-us/investor-relations-shareholder-services . we have included our web address as an inactive textual reference only . information on our website is not part of this report . application of critical accounting policies our consolidated financial statements are prepared in accordance with u.s. generally accepted accounting principles ( gaap ) . application of these principles requires management to make estimates , assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes . these estimates , assumptions and judgments are based on information available as of the date of the consolidated financial statements ; accordingly , as this information changes , the consolidated financial statements could reflect different estimates , assumptions and judgments . certain policies inherently are based to a greater extent on estimates , assumptions and judgments of management and , as such , have a greater possibility of producing results that could be materially different than originally reported . the most significant accounting policies followed by fnb are presented in note 1 , “ summary of significant accounting policies ” in the notes to consolidated financial statements , which is included in item 8 of this report . these policies , along with the disclosures presented in the notes to consolidated financial statements , provide information on how we value significant assets and liabilities in the consolidated financial statements , how we determine those values and how we record transactions in the consolidated financial statements . 41 management views critical accounting policies to be those which are highly dependent on subjective or complex judgments , estimates and assumptions , and where changes in those estimates and assumptions could have a significant impact on the consolidated financial statements . management currently views the determination of the allowance for credit losses , accounting for acquired loans , fair value of financial instruments , goodwill and other intangible assets , litigation , income taxes and deferred tax assets to be critical accounting policies . allowance for credit losses the allowance for credit losses addresses credit losses inherent in the existing loan portfolio and in unfunded loan commitments and standby letters of credit at the balance sheet date , and is presented as a reserve against loans and other liabilities , respectively , on the consolidated balance sheets . management 's assessment of the appropriateness of the allowance for credit losses considers individual impaired loans , pools of homogeneous loans with similar risk characteristics and other risk factors concerning the economic environment . story_separator_special_tag judgement is required to determine which level of the three-level hierarchy certain assets or liabilities measured at fair value are classified . fair value represents the price that would be received to sell a financial asset or paid to transfer a financial liability in an orderly transaction between market participants at the measurement date . we use significant and complex estimates , assumptions and judgements when assets and liabilities are required to be recorded at , or adjusted to reflect , fair value . where available , fair value and information used to record valuation adjustments for certain assets or liabilities is based on either quoted market prices or are provided by independent third-party sources , including appraisers and valuation specialists . when such third-party information is not available , we may estimate fair value by using cash flow and other financial modeling techniques . our assumptions about what a market participant would use in pricing an asset or liability is developed based on the best information available in the circumstances . these estimates are inherently subjective and can result in significant changes in the fair value estimates over the life of the asset or liability . assets and liabilities carried at fair value inherently result in a higher degree of financial statement volatility . see note 1 , “ summary of significant accounting policies ” and note 24 , “ fair value measurements ” in the notes to consolidated financial statements for further discussion of accounting for financial instruments . goodwill and other intangible assets as a result of acquisitions , we have recorded goodwill and other identifiable intangible assets on our balance sheet . goodwill represents the cost of acquired companies in excess of the fair value of net assets , including identifiable intangible assets , at the acquisition date . our recorded goodwill relates to value inherent in our community banking , wealth management , insurance and consumer finance segments . the value of goodwill and other identifiable intangibles is dependent upon our ability to provide quality , cost-effective services in the face of competition . as such , these values are supported ultimately by revenue that is driven by the volume of business transacted . a decline in earnings as a result of a lack of growth or our inability to deliver cost-effective services over sustained periods can lead to impairment in value which could result in additional expense and adversely impact earnings in future periods . in our assessment of goodwill we perform a quantitative assessment to determine whether it is more likely than not that the fair value of each reporting unit is less than its carrying amount . prior to 2017 , if , after assessing updated quantitative factors , we determined it was more likely than not that the fair value of a reporting unit was less than its carrying amount , we performed the two-step goodwill impairment test to measure a goodwill impairment charge . determining fair values of each reporting unit , of its individual assets and liabilities , and also of other identifiable intangible assets requires considering market information that is publicly available as well as the use of significant estimates and assumptions . these estimates and assumptions could have a significant impact on whether or not an impairment charge is 43 recognized and also the magnitude of any such charge . inputs used in determining fair values where significant estimates and assumptions are necessary include discounted cash flow calculations , market comparisons and recent transactions , projected future cash flows , discount rates reflecting the risk inherent in future cash flows , long-term growth rates and determination and evaluation of appropriate market comparables . see note 1 , “ summary of significant accounting policies , ” note 2 , “ new accounting standards ” and note 10 , “ goodwill and other intangible assets ” in the notes to consolidated financial statements for further discussion of accounting for goodwill and other intangible assets . income taxes and deferred tax assets we are subject to the income tax laws of the u.s. , the states and other jurisdictions where we conduct business . the laws are complex and subject to different interpretations by the taxpayer and various taxing authorities . in determining the provision for income taxes , management must make judgments and estimates about the application of these inherently complex tax statutes , related regulations and case law . in the process of preparing our tax returns , management attempts to make reasonable interpretations of the tax laws . these interpretations are subject to challenge by the taxing authorities or based on management 's ongoing assessment of the facts and evolving case law . we determine deferred income taxes using the balance sheet method . under this method , the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities , and recognizes the effect of enacted changes in tax rates and laws in the period in which they occur . that effect would be included in income from continuing operations in the reporting period that includes the enactment date of the change . see the results of operations , income taxes section later in this management 's discussion and analysis of financial condition for further tax-related discussion . on a quarterly basis , management assesses the reasonableness of our effective tax rate based on management 's current best estimate of net income and the applicable taxes for the full year . deferred tax assets and liabilities are assessed on an annual basis , or sooner , if business events or circumstances warrant . deferred income taxes represent amounts available to reduce income taxes payable on taxable income in future years . such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities , and from operating loss and tax credit carryforwards .

income statement highlights net income available to common stockholders was $ 191.2 million for 2017 , compared to $ 162.9 million for 2016 . operating net income available to common stockholders ( non-gaap ) was $ 281.2 million for 2017 , compared to $ 187.7 million for 2016 . earnings per diluted common share was $ 0.63 for 2017 , compared to $ 0.78 for 2016 . operating earnings per diluted common share ( non-gaap ) was $ 0.93 for 2017 , compared to $ 0.90 for 2016 . non-interest income was $ 252.4 million for 2017 , compared to $ 201.8 million for 2016 . net interest margin on an fte basis ( non-gaap ) was 3.43 % for 2017 , compared to 3.38 % for 2016 . non-interest expense , excluding merger-related costs , was $ 625.0 million for 2017 , compared to $ 473.7 million for 2016 . income tax expense for 2017 increased $ 81.6 million or 108.0 % from 2016 , primarily due to the impact of a reduction in the valuation of net deferred tax assets of $ 54.0 million due to the enactment of the tcja . the efficiency ratio ( non-gaap ) was 54.2 % for 2017 , compared to 55.4 % for 2016 . balance sheet highlights total assets were $ 31.4 billion at december 31 , 2017 , compared to $ 21.8 billion at december 31 , 2016 . total stockholders ' equity was $ 4.4 billion at december 31 , 2017 , compared to $ 2.6 billion at december 31 , 2016 . average loans grew 36.8 % for 2017 , compared to 2016 , through continued organic growth and the loans added through the ydkn acquisition . average deposits grew 32.9 % , compared to 2016 , through continued growth and the deposits added through the ydkn acquisition .