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the effect of the 77,020,686 story_separator_special_tag as discussed in part 1 , some of the information in this annual report on form 10-k includes “ forward-looking statements ” within the meaning of section 27a of the securities act of 1933 , as amended , and section 21e of the securities exchange act of 1934 ( the “ exchange act ” ) , as amended . all statements other than statements of historical facts included in this form 10-k , including , without limitation , certain statements under “ management 's discussion and analysis of financial condition and results of operations ” , may constitute forward-looking statements . in some cases , you can identify these “ forward-looking statements ” by the specific words , including but not limited to “ may , ” “ should , ” “ expects , ” “ plans , ” “ anticipates , ” “ believes , ” “ estimates , ” “ predicts , ” “ potential ” or “ continue ” or the negative of those words and other comparable words . these forward-looking statements involve risks and uncertainties . the following discussion and analysis should be read in conjunction with our historical financial statements and the related notes thereto included elsewhere in this document . in the following discussion and analysis , the term net income refers to net income attributable to ncm , inc. overview we are america 's movie network . as the # 1 weekend network for millennials ( age 18-34 ) in the u.s. , we are the connector between brands and movie audiences . we currently derive revenue principally from the sale of advertising to national , regional and local businesses in noovie , our cinema advertising and entertainment pre-show seen on movie screens across the u.s. we also sell advertising on our len , a series of strategically-placed screens located in movie theater lobbies , as well as other forms of advertising and promotions in theater lobbies . in addition , we sell online and mobile advertising through our cinema accelerator digital product to reach entertainment audiences beyond the theater . further , during 2018 , we launched our noovie arcade mobile app which brings augmented reality to our noovie pre-show and over 1.5 million movie goers have already downloaded the app as of december 27 , 2018. we have long-term esas ( over 18 years remaining as of december 27 , 2018 ) and multi-year agreements with network affiliates , which expire at various dates between march 15 , 2019 and july 22 , 2031 . the weighted average remaining term ( based on attendance ) of the esas and the network affiliate agreements is 15.8 years as of december 27 , 2018 . the esas and network affiliate agreements grant ncm llc exclusive rights in their theaters to sell advertising , subject to limited exceptions . our noovie pre-show and len programming are distributed predominantly via satellite through our proprietary dcn . approximately 98 % of the aggregate founding member and network affiliate theater attendance is generated by theaters connected to our dcn ( the remaining screens receive advertisements on usb drives ) and 100 % of the noovie pre-show is projected on digital projectors ( 95 % digital cinema projectors and 5 % lcd projectors ) . management focuses on several measurements that we believe provide us with the necessary ratios and key performance indicators to manage our business , determine how we are performing versus our internal goals and targets , and 31 against the performance of our competitors and other benchmarks in the marketplace in which we operate . we focus on many operating metrics including changes in revenue , oibda , adjusted oibda and adjusted oibda margin , as defined and discussed in “ notes to the selected historical financial and operating data ” above , as some of our primary measurement metrics . in addition , we monitor our monthly advertising performance measurements , including advertising inventory utilization , national and regional advertising pricing ( cpm ) , local advertising rate per screen per week , local and regional and total advertising revenue per attendee . we also monitor free cash flow , the dividend coverage ratio , financial leverage ( net debt divided by adjusted oibda plus integration and other encumbered theater payments ) , cash balances and revolving credit facility availability to ensure debt covenant compliance and that there is adequate cash availability to fund our working capital needs and debt obligations and current and future dividends declared by our board of directors . summary historical and operating data you should read this information in conjunction with the other information contained in this document , and our audited historical financial statements and the notes thereto included elsewhere in this document . the prior year balances have been adjusted to reflect the adoption of a change in accounting principle in the first quarter of 2018. refer to note 1 to the audited consolidated financial statements for discussion of the nature and impact of the change on the results of operations data for years ended december 28 , 2017 and december 29 , 2016. our operating data —the following table presents operating data and adjusted oibda ( dollars in millions , except share and margin data ) . refer to “ item 6. selected financial data—notes to the selected historical financial and operating data ” for a discussion of the calculation of adjusted oibda and reconciliation to operating income . replace_table_token_7_th nm = not meaningful . ( 1 ) represents the total attendance within ncm llc 's advertising network , excluding screens and attendance associated with certain amc rave , amc carmike and cinemark rave theaters that are currently part of another cinema advertising network for all periods presented . refer to note 5 to the audited consolidated financial statements included elsewhere in this document . our network —the net screens added to our network by the founding members and network affiliates during 2018 were as follows . story_separator_special_tag the $ 7.1 million , or 6.6 % , decrease in local and regional advertising revenue was driven by a 6.2 % decrease in the volume of contracts and a 2.8 % decrease in the average contract dollar amount , primarily related to a decrease in spending within the military and tourism category in 2017 , compared to 2016. additionally , local and regional advertising revenue was adversely impacted by hurricanes harvey and irma due to reduced advertising spending during the recovery from the storms as well as , by the transfer of amc theaters to another advertising provider in accordance with the final judgment with the doj ( which were partially offset by the addition of theaters from new affiliates ) . this decrease in local and regional advertising revenue was partially offset by an increase in online and mobile revenue of approximately $ 1.9 million in 2017 , compared to 2016. founding member beverage revenue . the $ 1.2 million , or 4.2 % , increase in national advertising revenue from the founding members ' beverage concessionaire agreements was due primarily to a 10.2 % increase in beverage revenue cpms , partially offset by a 6.9 % decrease in founding member attendance during 2017 , compared to 2016. the 2017 beverage revenue cpm is based on the change in cpm during segment one of our pre-show from 2015 to 2016 , which increased 10.2 % . operating expenses . total operating expenses decreased $ 2.4 million , or 0.9 % , from $ 274.6 million for 2016 to $ 272.2 million for 2017 . the following table shows the changes in operating expense for 2017 and 2016 ( in millions ) : replace_table_token_15_th advertising operating costs . advertising operating costs increased $ 2.4 million , or 8.0 % , from $ 30.0 million for 2016 to $ 32.4 million for 2017. this increase was primarily the result of a $ 2.6 million increase in affiliate advertising payments and a $ 0.8 million increase in personnel related expenses . the increase in affiliate advertising payments was primarily driven by a 37 13.8 % , or 477 screen , increase in the number of average affiliate screens due to the addition of affiliates to our network for 2017 , compared to 2016. the increase in personnel related expenses were primarily related to higher salary expense in 2017 , compared to 2016. these increases in advertising operating costs were partially offset by a $ 1.0 million decrease in production costs related to lower production revenue during 2017 , compared to 2016. network costs . network costs decreased $ 1.3 million , or 7.6 % , from $ 17.1 million for 2016 to $ 15.8 million for 2017. this decrease was primarily related to a $ 0.8 million decrease in personnel related expenses due to lower salaries and bonus expense ( related to lower performance against internal targets ) and a $ 0.2 million decrease in network maintenance costs related to our dcn in 2017 , compared to 2016. theater access fees—founding members . theater access fees increased $ 1.4 million , or 1.9 % , from $ 75.1 million for 2016 to $ 76.5 million for 2017. the increase was due to a $ 3.3 million increase due to a contractual 8 % rate increase on the fee per patron ( the fee per patron rate increases every five years with this increase taking place in 2017 ) and a $ 1.2 million increase in the expense associated with the founding member digital screens that are connected to the dcn related primarily to an annual 5 % increase specified in the esas on this fee . these increases were partially offset by a decrease of $ 3.1 million in theater access fees due to a 6.9 % decrease in founding member attendance in 2017 , compared to 2016. selling and marketing costs . selling and marketing costs decreased $ 0.8 million , or 1.1 % , from $ 72.8 million for 2016 to $ 72.0 million for 2017. this decrease was primarily due to a $ 2.8 million decrease in personnel related expenses due primarily to lower commission based expense and lower non-cash share-based compensation expense ( driven by lower revenue and lower performance against internal targets ) , partially offset by severance expense related to the elimination of certain sales leadership positions . further selling and marketing costs decreased due to a $ 1.0 million decrease in marketing research during 2017 , compared to 2016. these decreases in selling and marketing costs were partially offset by a $ 2.4 million increase in non-cash impairment expense recorded during 2017 , compared to 2016 , related to investments obtained in prior years in exchange for advertising services and a $ 0.9 million increase in online publisher expense driven by an increase in online and mobile revenue . administrative and other costs . administrative and other costs decreased $ 5.9 million , or 13.5 % , from $ 43.8 million for 2016 to $ 37.9 million for 2017 due primarily to 1 ) a $ 3.0 million decrease in ceo transition costs because of severance expense that occurred in 2016 and 2 ) $ 2.3 million of expense related to the modification of the former ceo 's equity awards that occurred during 2016. in addition , personnel related expenses decreased approximately $ 1.9 million due to lower bonus expense and non-cash share-based compensation expense ( related to lower performance against internal targets ) , partially offset by severance for senior executives recorded in 2017. these decreases to administrative and other costs were partially offset by a $ 1.8 million early lease termination charge recorded in 2017 for our corporate headquarters ( the payment of which was reimbursed by the new landlord ) . depreciation and amortization .
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results of operations fiscal years 2018 and 2017 revenue . total revenue increased $ 15.3 million , or 3.6 % , from $ 426.1 million for 2017 to $ 441.4 million for 2018 . the following is a summary of revenue by category ( in millions ) : replace_table_token_9_th the following table shows data on revenue per attendee for 2018 and 2017 : 33 replace_table_token_10_th ( 1 ) represents the total attendance within ncm llc 's advertising network , excluding screens and attendance associated with certain amc rave , amc carmike and cinemark rave theaters for all periods presented . refer to note 5 to the audited consolidated financial statements included elsewhere in this document . national advertising revenue . the $ 15.7 million , or 5.3 % , increase in national advertising revenue ( excluding beverage revenue from the founding members ) was due primarily to a 2.2 % increase in national advertising cpms ( excluding beverage ) and a 3.0 % increase in impressions sold . the increase in impressions sold was primarily related to a 7.5 % increase in network attendance , partially offset by a decrease in national inventory utilization , from 118.5 % in 2017 to 113.5 % in 2018. inventory utilization is calculated as utilized impressions divided by total advertising impressions , which is based on eleven 30-second salable national advertising units in our noovie pre-show , which can be expanded , should market demand dictate . the increase in national advertising cpms was due primarily to an increase in scatter market demand , which is inventory not included within an upfront or content partner commitment sold closer to the advertisement air date , typically at higher cpms . this increase was partially offset by a decrease in content partner revenue in 2018 , compared to 2017. local and regional advertising revenue .
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the company is generally not the primary obligor when we provide comprehensive administration of multiple vendors for customers that operate significant contingent workforces , referred to as managed service programs . the company is considered an agent in these transactions if it does not have responsibility for the fulfillment of the services by the vendors or contractors ( referred to as associate vendors ) . in such arrangements , the company is typically designated by its customers to be a facilitator of consolidated associate vendor billing and a processor of the payments to be made to the associate vendors on behalf of the customer . usually in these situations the contractual relationship is between the customers , the associate vendors and the company , with the associate vendors being the primary obligor and assuming the customer credit risk and the company generally earning negotiated fixed mark-ups and not having discretion in supplier selection . information technology infrastructure services revenue from hardware maintenance , computer and network operations infrastructure services under fixed-price contracts and stand-alone post-contract support was generally recognized ratably over the contract period , provided that all other revenue recognition criteria are met , and the cost associated with these contracts were recognized as incurred . for time and material contracts , the company recognized revenue and costs as services story_separator_special_tag the following discussion should be read in conjunction with the consolidated financial statements and notes thereto . note regarding the use of non-gaap financial measures we have provided certain non-gaap financial information , which includes adjustments for special items , as additional information for our consolidated income ( loss ) from continuing operations and segment operating income ( loss ) . these measures are not in accordance with , or an alternative for , measures prepared in accordance with generally accepted accounting principles ( “ gaap ” ) and may be different from non-gaap measures reported by other companies . we believe that the presentation of non-gaap measures eliminating special items provides useful information to management and investors regarding certain financial and business trends relating to our financial condition and results of operations because they permit evaluation of the results of our continuing operations without the effect of special items that management believes make it more difficult to understand and evaluate our results of operations . special items generally include impairments , restructuring and severance charges as well as certain income or expenses not indicative of our current or future period performance . in addition , as a result of our company 's strategic reorganization , which included changes to executive management and the board of directors as well as the ongoing execution of new strategic initiatives , certain charges were included as special items , in fiscal 2016 and fiscal 2015 , which were not historically common operational expenditures for us . these additional charges included professional search fees , certain board compensation and other professional service fees . while we believe that the inclusion of these charges as special items was useful in the evaluation of our results compared to prior periods , we do not anticipate that these items will be included in our non-gaap measures in the future . segments our current reportable segments are ( i ) north american staffing , ( ii ) international staffing and ( iii ) technology outsourcing services and solutions . the non-reportable businesses are combined and disclosed with corporate services under the category corporate and other . effective in the first quarter of fiscal 2017 , in an effort to simplify and refine its internal reporting , the company modified its intersegment sales structure between the north american staffing and technology outsourcing services and solutions segments . the resulting changes were as follows : intersegment revenue for north american staffing from technology outsourcing services and solutions is based on a set percentage of direct labor dollars for recruiting and administrative services ; and the direct labor costs associated with the contingent employees placed by north american staffing on behalf of technology outsourcing services and solutions ' customers are directly borne by the technology outsourcing services and solutions segment instead of by north american staffing . to provide period over period comparability , the company has reclassified the prior period segment data to conform to the current presentation . this change did not have any impact on the consolidated financial results for any period presented . we report our segment information in accordance with the provisions of fasb asc topic 280. the company is currently assessing potential changes to its reportable segments after the sale of the quality assurance business on october 27 , 2017 , and expects to complete this assessment in the first quarter of fiscal 2018 . 22 story_separator_special_tag style= '' line-height:120 % ; padding-top:13px ; text-align : left ; font-size:10pt ; '' > the international staffing segment revenue declined $ 11.7 million primarily driven by the impact of foreign exchange rate fluctuations of $ 7.9 million . on a constant currency basis and excluding the impact of countries in which we no longer have operations , international staffing declined $ 2.8 million , or 2.3 % , primarily due to lower demand in the united kingdom partially offset by increases in belgium and singapore . the technology outsourcing services and solutions segment revenue declined $ 5.8 million primarily due to lower volume from our quality assurance services prior to the sale of the quality assurance business , partially offset by increased volume in our customer care services . story_separator_special_tag net revenue net revenue in fiscal 2016 decreased $ 162.2 million , or 10.8 % , to $ 1,334.7 million from $ 1,496.9 million in fiscal 2015. the revenue decline was driven by decreases in our north american staffing segment of $ 65.5 million , technology outsourcing services and solutions segment of $ 29.3 million , international staffing segment of $ 16.2 million and corporate and other category of $ 53.7 million . the north american staffing segment revenue decline was primarily driven by lower demand from our customers in both our technical and to a lesser degree in our non-technical administrative and light industrial ( “ a & i ” ) skill sets . declines were most prevalent with our customers in the industrial and commercial manufacturing , utility and it software services/computers industries , partially offset by increases in transportation manufacturing and communications industries . the technology outsourcing services and solutions segment revenue declined $ 29.3 million primarily due to lower volume from a large customer in both our application testing and call center service offerings . the international staffing segment 27 revenue declined $ 16.2 million primarily as a result of foreign exchange rate fluctuations following brexit and the closure of several unprofitable locations . the corporate and other category revenue decline of $ 53.7 million was primarily attributable to a $ 25.3 million loss of revenue from non-core businesses which were sold during fiscal 2015 and a $ 27.9 million decline in our north american msp and our information technology infrastructure services businesses in part due to lower volume and a decision not to pursue continued business with a certain customer . cost of services and gross margin cost of services in fiscal 2016 decreased $ 136.1 million , or 10.7 % , to $ 1,132.3 million from $ 1,268.4 million in fiscal 2015. this decrease was primarily the result of fewer staff on assignment , consistent with the related decrease in revenues in all segments . gross margin as a percent of revenue in fiscal 2016 decreased slightly to 15.2 % from 15.3 % in fiscal 2015 primarily due to a decline in our technology outsourcing services and solutions segment offset by improved margins in the north american staffing segment . selling , administrative and other operating costs selling , administrative and other operating costs in fiscal 2016 decreased $ 27.1 million , or 11.7 % , to $ 203.9 million from $ 231.0 million in fiscal 2015 , primarily due to a reduction in headcount and facility consolidations resulting from a company-wide cost reduction plan implemented at the beginning of fiscal 2016. in addition , $ 6.6 million of the decline was attributable to non-core businesses sold during fiscal 2015. corporate , general and administrative costs in fiscal 2015 included non-cash stock-based compensation provided to our new members of the board of directors and costs incurred responding to activist shareholders and related board of directors search fees . as a percent of revenue , these costs were 15.3 % and 15.4 % in fiscal 2016 and 2015 , respectively . restructuring and severance costs in fiscal 2016 , the company-wide cost reduction plan resulted in restructuring and severance costs of $ 5.8 million . in fiscal 2015 , corporate restructuring and severance costs of $ 3.6 million included severance charges associated with the departure of our former chief executive officer and chief financial officer as well as operational restructuring and other cost reduction actions to streamline processes and manage costs throughout various functions within the company . gain from divestitures we closed on the sale of real property comprised of land and a building in san diego , california during the second quarter of fiscal 2016. there was no mortgage on the property and the gain recorded on the sale was $ 1.7 million . settlement and impairment charges we identified previously purchased software modules that we will no longer use , which resulted in an impairment charge of $ 0.4 million in fiscal 2016. in fiscal 2015 , the impairment charges primarily resulted from the initiative to exit certain non-core businesses and fully impairing the net assets of the telephone directory publishing and printing and staffing businesses in uruguay , as well as our goodwill related to our staffing reporting unit in uruguay . in addition , the $ 1.9 million impairment charge in fiscal 2015 in our north american staffing segment was attributable to previously capitalized internally developed software resulting from an approved plan to upgrade a certain portion of our front office technology . other income ( expense ) , net other expense in fiscal 2016 increased $ 4.1 million , or 173.4 % , to $ 6.5 million from $ 2.4 million in fiscal 2015 , primarily related to increased non-cash foreign exchange gains and losses on intercompany balances and the amortization of deferred financing fees . also , other expense in fiscal 2015 included the gain on the sale of non-core businesses . income tax provision income tax provision in fiscal 2016 amounted to $ 2.2 million compared to $ 4.6 million in fiscal 2015 , primarily related to locations outside of the united states . 28 discontinued operations in december 2014 , we completed the sale of our computer systems segment . the results of the computer systems segment are presented as discontinued operations and excluded from continuing operations and from segment results in fiscal 2015. liquidity and capital resources our primary sources of liquidity are cash flows from operations and proceeds from our financing arrangements . on january 8 , 2018 , the company executed a commitment letter on a new accounts receivable securitization arrangement and we expect to close on such securitization shortly which will improve our debt maturity profile , providing additional runway to execute our turnaround plan . borrowing capacity under our financing arrangements is directly impacted by the level of accounts receivable which fluctuates during the year due to seasonality and other factors .
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overview we are a global provider of staffing services ( traditional time and materials-based as well as project-based ) . our staffing services consist of workforce solutions that include providing contingent workers , personnel recruitment services , and managed staffing services programs supporting primarily administrative and light industrial ( “ commercial ” ) as well as technical , information technology and engineering ( “ professional ” ) positions . our managed service programs ( “ msp ” ) involves managing the procurement and on-boarding of contingent workers from multiple providers . our technology outsourcing services consisted primarily of customer care services and quality assurance services ; however only the call center services remain following the sale of the quality assurance business on october 27 , 2017. also , through the date of the sale of maintech , incorporated ( `` maintech '' ) in march 2017 , we provided information technology infrastructure services . our information technology infrastructure services provided server , storage , network and desktop it hardware maintenance , data center and network monitoring and operations . as of october 29 , 2017 , we employed approximately 21,300 people , including 19,800 contingent workers . contingent workers are on our payroll for the length of their assignment . we operate from 100 locations worldwide with approximately 87 % of our revenues generated in the united states . our principal international markets include europe , canada and several asia pacific locations . the industry is highly fragmented and very competitive in all of the markets we serve . recent developments financing program on january 8 , 2018 , the company executed a commitment letter on a new accounts receivable securitization arrangement and we expect to close on such securitization shortly which will improve our debt maturity profile , providing additional runway to execute our turnaround plan . on january 11 , 2018 , the company entered into amendment no .
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previously , accounting guidance required these costs story_separator_special_tag in connection with the `` safe harbor '' provisions of the private securities litigation reform act of 1995 , the following discussion contains trend analysis and other forward-looking statements . forward-looking statements can be identified by the use of words such as `` intends '' , `` anticipates '' , `` believes '' , `` estimates '' , `` projects '' , `` forecasts '' , `` expects '' , `` plans '' and `` proposes '' . although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions , there are a number of risks and uncertainties that could cause actual results to differ materially from these forward-looking statements . these include , among others , our ability to maximize value from our land and water resources and our ability to obtain new financings as needed to meet our ongoing working capital needs . see additional discussion under the heading `` risk factors '' above . overview we are a land and water resource development company with 45,000 acres of land in three areas of eastern san bernardino county , california . virtually all of this land is underlain by high-quality , naturally recharging groundwater resources , and is situated in proximity to the colorado river and the colorado river aqueduct ( `` cra '' ) , california 's primary mode of water transportation for imports from the colorado river into the state . our properties are suitable for various uses , including large-scale agricultural development , groundwater storage and water supply projects . our main objective is to realize the highest and best use of these land and water resources in an environmentally responsible way . we believe that the long-term highest and best use of our land and water assets can best be realized through the development of a combination of water supply and storage projects at our properties . therefore , the company has been primarily focused on the development of the cadiz valley water conservation , recovery and storage project ( `` water project '' or `` project '' ) , which will capture and conserve millions of acre-feet 2 of native groundwater currently being lost to evaporation from the aquifer system beneath our 34,000-acre property in the cadiz and fenner valleys of eastern san bernardino county ( the `` cadiz/fenner property '' ) , and deliver it to water providers throughout southern california ( see `` water resource development '' ) . a second phase of the water project would offer storage of up to one million acre-feet of imported water in the aquifer system . we believe that the ultimate implementation of this water project will provide a significant source of future cash flow . the primary factor driving the value of such projects is ongoing pressure on california 's traditional water supplies and the resulting demand for new , reliable supply solutions that can meet both immediate and long-term water needs . available supply is constrained by environmental and regulatory restrictions on each of the state 's three main water sources : the cra , the state water project , which provides water supplies from northern california to the central and southern parts of the state , and the los angeles aqueduct which delivers water from the eastern sierra nevada mountains to los angeles . southern california 's water providers rely on imports from these systems for a majority of their water supplies , but deliveries from all three into the region have been below capacity over the last several years . 2 one acre-foot is equal to approximately 326,000 gallons or the volume of water that will cover an area of one acre to a depth of one-foot . an acre-foot is generally considered to be enough water to meet the annual water needs of one average california household . 24 availability of supplies in california also differs greatly from year to year due to natural hydrological variability . over the last several years , california has struggled through an historic drought featuring record-low winter precipitation and reservoir storage levels . however , following a series of strong storms through the 2016-2017 winter , california has received record amounts of rain and snow , eliminating drought conditions in much of northern california and easing drought in the south . the rapid swing from drought to an extremely wet year has challenged california 's traditional infrastructure system , and deliveries into southern california from the state water project , colorado river aqueduct and los angeles aqueduct remain below capacity . the water project is a local supply option in southern california that could help address the region 's water supply challenges by providing new reliable supply and local groundwater storage opportunities ( see `` water resource development '' below ) in both dry and wet years . the project has received permits in accordance with the california environmental quality act ( `` ceqa '' ) which allow the capture and conservation of 2.5 million acre-feet of groundwater over 50 years under the terms of a groundwater management plan approved by san bernardino county , which is responsible for groundwater use at the project area . our 2017 working capital requirements relate largely to the final development activities associated with the water project and those activities consistent with the water project related to further development of our land and agricultural assets . while we continue to believe that the ultimate implementation of the water project will provide the primary source of our future cash flow , we also believe there is significant additional value in our underlying agricultural assets . demand for agricultural land with water rights is at an all-time high ; therefore , in addition to our water project proposal , we are engaged in agricultural joint ventures at the cadiz/fenner property that put some of the groundwater currently being lost to evaporation from the underlying aquifer system to immediate beneficial use . story_separator_special_tag this interpretation of the 1875 act was confirmed by memorandum opinion m-37025 issued by the solicitor of the us department of the interior on november 4 , 2011 ( `` 2011 m-opinion '' ) , which state in relevant part : `` within an 1875 act row , a railroad 's authority to undertake or authorize activities is limited to those activities that derive from or further a railroad purpose , which allows a railroad to undertake , or others to undertake , activities that have both railroad and commercial purposes , but does not permit a railroad to authorize activities that bear no relationship to the construction and operation of a railroad . '' ( emphasis added , m-37025 ) the project includes the following features , enabled by the conveyance pipeline , provided in furtherance of railroad purposes : · a new access road along the entire pipeline route to enable maintenance , emergency access and shorten routes for crew-changes , · remotely operated fire-suppression systems at each of the existing creosote-treated wooden trestles , · inline power generation for crossing operations and lighting , heating and cooling for existing railroad transloading operations , · fiber optic information transmission to convey track-speed and cameras in aid of emergency and to discourage vandalism ; and · the distribution of water for the operation of a steam powered locomotive , fire-suppression and other miscellaneous uses . in response to inquiries from the blm beginning in 2012 about these purposes , the company , the arzc and water project participants had numerous meetings with the blm and provided several documents over multiple years for background about the railroad purposes that would be furthered by the project over several years . in april 2015 blm california notified the company that it was analyzing the project 's proposed use of the arzc right-of-way and expected to provide the results of this evaluation to the blm washington d.c. office by the end of summer 2015 . 27 on october 2 , 2015 , the director of the california office of the blm signed a letter that would later be sent to arzc and the company summarizing that the project pipeline is outside the scope of the arzc right-of-way , because a water pipeline would not primarily further a railroad purpose or originate from a railroad purpose , and would therefore require a new federal right-of-way permit prior to construction . we believe this finding disregards federal law and policy and strays from the framework provided for in the binding 2011 m-opinion , and therefore we immediately pursued steps to rescind the october determination . several members of congress raised concerns about the 2015 guidance and its inconsistencies with existing federal policy governing third party railroad right-of-way use . as a result of inquiries from congress , blm california 's newly appointed director met with the company , the arzc and project participants in march 2016. however , blm representatives at the meeting were not prepared to discuss the framework utilized to evaluate the water project 's proposed use of the arzc right-of-way . following the production of documents produced via a freedom of information act request in ( june ) 2016 regarding blm 's evaluation of the project 's use of the railroad right-of-way , we have had no further formal consultation with blm california . the guidance letter is under investigation by the house of representatives oversight & government reform committee and the interior department inspector general . meanwhile , numerous united states congressional representatives have worked to clarify the scope of the congressionally granted 1875 act right-of-way ( row ) for all who rely on them for necessary infrastructure , including , for example , fiber optics and communications lines , energy , electricity , water , wastewater , sewer , and natural gas lines . in july 2016 , language that would clarify the scope of railroad row was included in the fiscal year 2017 ( fy17 ) house interior and environment appropriations bill ( h.r.5538 ) , an annual funding measure for the department of the interior , the environmental protection agency , the us forest service , and various related agencies , including the blm . hr 5538 passed the us house of representatives in july 2016 , but consideration of the bill has been continued until april 2017. if this language is not considered in april 2017 , it could be delayed until the fall of 2017. we believe that if signed into law , the language now contained in the house appropriations bill will enable third parties , including the company , to carry-on existing and future activities within existing railroad rows over federal lands without the need to secure a separate row grant from blm . northern pipeline we currently own a 96-mile existing idle natural gas pipeline from the cadiz/fenner property to barstow , california that we intend to convert for the transportation of water . the barstow area serves as a hub for water delivered from northern and central california to communities in southern california 's high desert . in addition , the company holds an option to purchase a further 124-mile segment of this pipeline from barstow to wheeler ridge , california for $ 20 million . this option expires in december 2018. initial feasibility studies indicated that , upon conversion , the 30-inch line could transport between 20,000 and 30,000 acre-feet of water per year between the water project area and various points along the central and northern california water transportation network . as a result this line could create significant opportunities for our water resource development efforts . 28 if this pipeline were to become operational , then the water project would link two major water delivery systems in california , providing flexible opportunities for both supply and storage . the northern pipeline could deliver phase i supplies , either directly or via exchange , to existing and potential customers of phase i of the project .
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results of operations ( a ) year ended december 31 , 2016 compared to year ended december 31 , 2015 we have not received significant revenues from our water resource and real estate development activity to date . our revenues have been limited to our agricultural operations . as a result , we have historically incurred a net loss from operations . we had revenues of $ 412 thousand for the year ended december 31 , 2016 , and $ 304 thousand for the year ended december 31 , 2015. the net loss totaled $ 26.3 million for the year ended december 31 , 2016 , compared with a net loss of $ 24.0 million for the year ended december 31 , 2015. the higher loss in 2016 was primarily related to a $ 2.25 million loss on extinguishment of debt . the higher 2016 loss was also related to higher interest expense on additional convertible debt issued and higher amortization expense , offset by a decrease in litigation costs related to the water project due to the timing of the appellate litigation . our primary expenses are our ongoing overhead costs associated with the development of the water project ( i.e. , general and administrative expense ) and our interest expense . we will continue to incur non-cash expense in connection with our management and director equity incentive compensation plans . revenues . revenue totaled $ 412 thousand during the year ended december 31 , 2016 , compared to $ 304 thousand during the year ended december 31 , 2015. the 2016 revenue is primarily related to rental income from the fvf lease ( see `` agricultural development '' , above ) . cost of sales . cost of sales were zero for the year ended december 31 , 2016 , compared with $ 334 thousand during the year ended december 31 , 2015 . 32 general and administrative expenses .
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the amortizing loan terminates in december 2022. the credit agreement allows rmr to prepay the loan when the outstanding balance falls below 20 % story_separator_special_tag the following discussion and analysis should be read in conjunction with , and is qualified in its entirety by reference to , our audited consolidated financial statements and the related notes that appear elsewhere in this annual report on form 10-k. these discussions contain forward-looking statements that reflect our current expectations and that include , but are not limited to , statements concerning our strategy , future operations , future financial position , future revenues , projected costs , expectations regarding demand and acceptance for our financial products , growth opportunities and trends in the market in which we operate , prospects , and plans and objectives of management . the words anticipates , believes , estimates , expects , intends , may , plans , projects , will , would , and similar expressions are intended to identify forward-looking statements , although not all forward-looking statements contain these identifying words . we may not actually achieve the plans , intentions , or expectations disclosed in our forward-looking statements , and you should not place undue reliance on our forward-looking statements . our forward-looking statements involve risks and uncertainties that could cause actual results or events to differ materially from the plans , intentions , and expectations disclosed in the forward-looking statements . such risks and uncertainties include , without limitation , the risks set forth elsewhere in this annual report on form 10-k. the forward-looking information we have provided in this annual report on form 10-k pursuant to the safe harbor established under the private securities litigation reform act of 1995 should be evaluated in the context of these factors . forward-looking statements speak only as of the date they were made , and we undertake no obligation to update or revise such statements , except as required by the federal securities laws . overview we are a diversified consumer finance company providing a broad array of loan products primarily to customers with limited access to consumer credit from banks , thrifts , credit card companies , and other traditional lenders . we began operations in 1987 with four branches in south carolina and have expanded our branch network to 339 locations in the states of alabama , georgia , new mexico , north carolina , oklahoma , south carolina , tennessee , texas , and virginia as of december 31 , 2016. most of our loan products are secured , and each is structured on a fixed rate , fixed term basis with fully amortizing equal monthly installment payments , repayable at any time without penalty . our loans are sourced through our multiple channel platform , which includes our branches , direct mail campaigns , automobile dealerships , retailers , and our consumer website . we operate an integrated branch model in which nearly all loans , regardless of origination channel , are serviced through our branch network , providing us with frequent in-person contact with our customers , which we believe improves our credit performance and customer loyalty . our goal is to consistently and soundly grow our finance receivables and manage our portfolio risk while providing our customers with attractive and easy-to-understand loan products that serve their varied financial needs . our diversified product offerings include : small loans ( £ $ 2,500 ) as of december 31 , 2016 , we had approximately 267.8 thousand small installment loans outstanding , representing $ 358.5 million in finance receivables . this included 84.9 thousand small loan convenience checks , representing $ 96.9 million in finance receivables as of december 31 , 2016. large loans ( > $ 2,500 ) as of december 31 , 2016 , we had approximately 56.6 thousand large installment loans outstanding , representing $ 235.3 million in finance receivables . this included 1.6 thousand large loan convenience checks , representing $ 4.5 million in finance receivables as of december 31 , 2016. automobile loans as of december 31 , 2016 , we had approximately 10.6 thousand automobile purchase loans outstanding , representing $ 90.4 million in finance receivables . this included 5.2 thousand indirect automobile loans and 5.4 thousand direct automobile loans , representing $ 46.1 million and $ 44.3 million in finance receivables , respectively . 52 retail loans as of december 31 , 2016 , we had approximately 22.8 thousand retail purchase loans outstanding , representing $ 33.5 million in finance receivables . insurance products we offer optional payment and collateral protection insurance to our direct loan customers . small and large installment loans are our core products and will be the drivers of our future growth . our primary sources of revenue are interest and fee income from our loan products , of which interest and fees relating to small and large installment loans are the largest component . in addition to interest and fee income from loans , we derive revenue from optional insurance products purchased by customers of our direct loan products . factors affecting our results of operations our business is driven by several factors affecting our revenues , costs , and results of operations , including the following : quarterly information and seasonality . our loan volume and contractual delinquency follow seasonal trends . demand for our small and large loans is typically highest during the second , third , and fourth quarters , which we believe is largely due to customers borrowing money for vacations , back-to-school , and holiday spending . with the exception of automobile and retail loans , loan demand has generally been the lowest during the first quarter , which we believe is largely due to the timing of income tax refunds . delinquencies generally reach their lowest point in the first quarter of the year and rise throughout the remainder of the fiscal year . consequently , we experience seasonal fluctuations in our operating results and cash needs . story_separator_special_tag loan fees are additional charges to the customer and are included in the annual percentage rate shown in the truth in lending disclosure we make to our customers . the fees may or may not be refundable to the customer in the event of an early payoff , depending on state law . fees are accrued to income over the life of the loan on the constant yield method . insurance income , net . our insurance income , net consists of revenue , net of expenses , from the sale of various optional payment and collateral protection insurance products offered to customers who obtain loans directly from us . we do not sell insurance to non-borrowers . we offer optional credit life insurance , credit accident and health insurance , involuntary unemployment insurance , and personal property insurance . the type and terms of our optional insurance products vary from state to state based on applicable laws and regulations . in addition , we require property insurance on any personal property securing loans and offer customers the option of providing proof of such insurance purchased from a third party in lieu of purchasing property insurance from us . we also collect a fee for collateral protection and purchase non-filing insurance in lieu of recording and perfecting our security interest in the assets pledged on certain loans . we require proof of insurance for any vehicles securing loans . in addition , in select markets , we offer vehicle single interest insurance and a guaranteed asset protection ( gap ) waiver product . vehicle single interest insurance provides coverage on automobiles used as collateral on small and large loans . this insurance affords the borrower flexibility regarding the requirement to maintain full coverage on the vehicle while also protecting the collateral used to secure the loan . the gap waiver product reduces or eliminates any loan balance remaining following payment by a primary insurance carrier . 54 during 2016 , we transitioned our insurance administration to a new unaffiliated third party provider , which resulted in variances in the premiums we charge for the products we offer . additionally , we continually assess the costs of our products for an equitable balance of costs and benefits . due to the transition to a new vendor and our ongoing assessment of costs , premiums may change , which may impact the revenue and or costs of our insurance operations . we issue insurance certificates as agents on behalf of an unaffiliated insurance company and then remit to the unaffiliated insurance company the premiums we collect ( net of refunds on prepaid loans and net of commission on new business ) . the unaffiliated insurance company cedes life insurance premiums to our wholly-owned insurance subsidiary , rmc reinsurance , ltd. ( rmc reinsurance ) , as written and non-life premiums as earned . we maintain cash reserves for life insurance claims in an amount determined by the unaffiliated insurance companies . as of december 31 , 2016 , the restricted cash balance for these cash reserves was $ 3.9 million . the unaffiliated insurance companies maintain the reserves for non-life claims . insurance income , net includes all of the above-described insurance premiums , claims , and expenses . other income . our other income consists primarily of late charges assessed on customers who fail to make a payment within a specified number of days following the due date of the payment . in addition , fees for extending the due date of a loan and returned check charges are included in other income . provision for credit losses . provisions for credit losses are charged to income in amounts that we estimate as sufficient to maintain an allowance for credit losses at an adequate level to provide for estimated losses on the related finance receivables portfolio . credit loss experience , delinquency of finance receivables , portfolio growth , the value of underlying collateral , and management 's judgment are factors used in assessing the overall adequacy of the allowance and the resulting provision for credit losses . our provision for credit losses fluctuates so that we maintain an adequate credit loss allowance that reflects our estimate of losses over the effective life of our loan portfolios . changes in our delinquency and credit loss rates may result in changes to our provision for credit losses . future adjustments to the allowance may be necessary if there are significant changes in economic conditions or portfolio performance . general and administrative expenses . our general and administrative expenses are comprised of four categories : personnel , occupancy , marketing , and other . we measure our general and administrative expenses as a percentage of average finance receivables , which we refer to as our receivable efficiency ratio . our personnel expenses are the largest component of our general and administrative expenses and consist primarily of the salaries and wages , bonuses , benefits , and related payroll taxes associated with all of our branch , field , and home office employees . our occupancy expenses consist primarily of the cost of renting our branches , all of which are leased , as well as the utility , depreciation of leasehold improvements and furniture and fixtures , telecommunication , data processing , and other non-personnel costs associated with operating our branches . our marketing expenses consist primarily of costs associated with our direct mail campaigns ( including postage and costs associated with selecting recipients ) and maintaining our consumer website , as well as telephone directory advertisements and some local marketing by branches . these costs are expensed as incurred . other expenses consist primarily of legal , compliance , audit , consulting , director compensation , amortization of software licenses and implementation costs , bank service charges , office supplies , and credit bureau charges .
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results of operations the following table summarizes our results of operations , both in dollars and as a percentage of average receivables : replace_table_token_15_th comparison of december 31 , 2016 , versus december 31 , 2015 the following discussion and table describe the changes in finance receivables by product type : small loans ( £ $ 2,500 ) small loans outstanding increased by $ 20.3 million , or 6.0 % , to $ 358.5 million at december 31 , 2016 , from $ 338.2 million at december 31 , 2015 , despite the cross-sell of many small loan customers to large loans . the growth in receivables in branches opened in 2015 and 2016 contributed to the growth in overall small loans outstanding . large loans ( > $ 2,500 ) large loans outstanding increased by $ 88.8 million , or 60.6 % , to $ 235.3 million at december 31 , 2016 from $ 146.6 million at december 31 , 2015. the increase was primarily 56 due to the addition of expertise in this product type , increased marketing , and the cross-sell of many small loan customers to large loans . automobile loans automobile loans outstanding decreased by $ 25.7 million , or 22.1 % , to $ 90.4 million at december 31 , 2016 , from $ 116.1 million at december 31 , 2015 , as we began restructuring our automobile loan business to a centralized model in the fourth quarter of 2015. we expect that the automobile loan portfolio will liquidate at a slower rate in 2017 compared to 2016 and that a majority of the restructuring will be complete by the second quarter of 2017. retail loans retail loans outstanding increased $ 5.9 million , or 21.4 % , to $ 33.5 million at december 31 , 2016 , from $ 27.6 million at december 31 , 2015. the increase in retail loans outstanding resulted from the additional relationships we established with new retailers , an increase in average loan amount
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on april 20 , 2017 mr. ben david was granted 20,000 shares of our common stock under our 2012 equity incentive plan , as a bonus for the 2016 achievements of the company ( 8 ) during 2017 , mr. ben david was granted 31,823 options to purchase shares of our common stock . the balance shall vest in twelve equal quarterly installments from the grant date during a three-year period . we may grant mr. ben david additional options to purchase shares of common stock from time to time at the discretion of our board of directors or the compensation committee thereof ( see further details in “ employment and related agreements ” below ) . ( 9 ) in addition to his salary , mr. ben david is entitled to receive a mobile phone during his employment as well as reimbursements for expenses accrued . these benefits as well as other social benefits under israeli law are included as part of his “ all other compensation ” . ( 10 ) in accordance with his second amendment to the employment agreement with our company effective april 2016 , mr. bacher was entitled to a monthly salary of nis 48,000 ( approximately $ 13,714 per month ) , commencing july 1 , 2017 , mr. dror was appointed as our chief operating officer and his monthly story_separator_special_tag readers are advised to review the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this annual report . 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 annual report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis . overview we are a global digital health ( mhealth ) company serving our users with dynamic mobile health solutions . we employ what we believe to be a revolutionary approach to health management . we have developed unique ways for people to analyze and personalize their chronic disease management as it relates to diabetes . we have accomplished this through the combination of wearable technology and health monitoring . in addition , our solution is changing the way people with diabetes can manage their condition as a result of us providing them with continuous , as opposed to periodic , data . our flagship product , dario , which we also refer to as our dario smart diabetes management solution , is a mobile , real-time , cloud-based , diabetes management solution based on an innovative , multi-feature software application to track and monitor all factets of diabetes , combined with a stylish , ‘ all-in-one ' , pocket-sized , blood glucose monitoring device , which we call the dario blood glucose monitoring system , that essentially turns a smartphone into a glucometer . our principal operating subsidiary , labstyle innovation ltd. , is an israeli company with its headquarters in caesarea , israel . we were formed on august 11 , 2011 as a delaware corporation . we commenced a commercial launch of our free application in the united kingdom in late 2013 and commenced an initial soft launch of the full dario solution ( including the app and the dario blood glucose monitoring system ) in selected jurisdictions in march 2014 and continued to scale up launch during 2014 in the united kingdom , the netherlands and new zealand , and during 2015 in australia , israel and canada , with the goal of collecting customer feedback to refine our longer-term roll-out strategy . we are consistently adding new additional features and functionality in making dario the new standard of care in diabetes data management . through our israeli subsidiary , labstyle innovation ltd. , our plan of operations is to continue the development of our software and hardware offerings and related technology . during 2015 , we successfully launched the dario smart diabetes management solution according to plan and are currently expanding the launch to other jurisdictions . in 2016 , we established our direct to consumer model in the u.s. to achieve higher and faster penetration into the market during the launch phase . we have invested in a robust digital marketing department with in-house platforms , experienced personnel and robust infrastructures to support expected growth of users and online subscribers in this market . during the third quarter of 2016 we expanded these effort to include australia as well . in 2017 , we expanded our direct to consumer marketing efforts in the united kingdom in cooperation with our local distributor and launched similar marketing efforts in germany . in support of these goals , we intend to utilize our funds for the following activities : · ramp up of mass production , marketing and distribution and sales efforts related to the dario smart diabetes management solution and the dario engage platform ; . 52 · develop our customer support and telemarketing services in order to support the expect growth of our revenues and the increase of user , and service provider who will use our platform to better serve people with diabetes and improve their clinical outcome ; · continued product and software development , and related activities ( including costs associated with application development and data storage capabilities as well as any necessary design modifications to the various elements of the dario smart diabetes management solution , the dario engage platform and the dario intelligence tools and capabilities ) ; · continued work on registration of our patents worldwide ; · regulatory and quality story_separator_special_tag inventories inventory write-down is also measured as the difference between the cost of the inventory and net realized value based upon assumptions about future demand , and is charged to the cost of sales . at the point of the loss recognition , a new , lower-cost basis for that inventory is established , and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis . if there were to be a sudden and significant decrease in demand for our products or if there were a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements , we could be required to increase our inventory write-downs and our gross margin could be adversely affected . inventory and supply chain management remain areas of focus as we balance the need to maintain supply chain flexibility , to help ensure competitive lead times with the risk of inventory obsolescence . during the year ended december 31 , 2017 , total inventory write-off expenses amounted to $ 190. production lines capitalization of costs . we capitalize direct incremental costs of third party manufacturers related to the equipment in our production lines . we cease construction cost capitalization relating to our production lines once they are ready for its intended use and held available for occupancy . all renovations and betterments that extend the economic useful lives of assets and or improve the performance of the production lines are capitalized . useful lives of assets . we are required to make subjective assessments as to the useful lives of our production lines for purposes of determining the amount of depreciation to record on an annual basis with respect to our construction of the production lines . these assessments have a direct impact on our net income ( loss ) . production lines are usually depreciated on a straight-line basis over a period of up to five years , except any renovations and betterments which are depreciated over the remaining life of the production lines . impairment of production lines . we are required to review our production lines for impairment in accordance with asc 360 , “ property , plant and equipment , ” whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable . recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the assets . 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 fair value of the assets . extended transition period for “ emerging growth companies ” we have elected to use the extended transition period for complying with new or revised accounting standards under section 102 ( b ) ( 1 ) of the jobs act . this election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies . as a result of this election , our financial statements may not be comparable to companies that comply with public company effective dates . because our financial statements may not be comparable to companies that comply with public company effective dates , investors may have difficulty evaluating or comparing our business , performance or prospects in comparison to other public companies , which may have a negative impact on the value and liquidity of our common stock . 55 story_separator_special_tag management 's estimates , based on our budget and the initial launch of our commercial sales , we believe that we will have sufficient resources to continue our activity into march 2019 without raising additional capital . this includes an amount of anticipated inflows from sales of dario through distribution partners and to direct customers . as such , we have a significant present need for capital . if we are unable to scale up our commercial launch of dario or meet our commercial sales targets ( or if we are unable to generate any revenue at all ) , and if we are unable to obtain additional capital resources in the near term , we may be unable to continue activities absent material alterations in our business plans and our business might fail . additionally , readers are advised that available resources may be consumed more rapidly than currently anticipated , resulting in the need for additional funding sooner than expected . should this occur , we will need to seek additional capital earlier than anticipated in order to fund ( 1 ) further development and , if needed , testing of our dario smart diabetes management solution , ( 2 ) our efforts to obtain regulatory clearances or approvals necessary to be able to commercially launch dario , dario engage and dario intelligence , ( 3 ) expenses which will be required in order to expand production of dario , ( 4 ) sales and marketing efforts and ( 5 ) general working capital . such funding may be unavailable to us on acceptable terms , or at all . our failure to obtain such funding when needed could create a negative impact on our stock price or could potentially lead to the failure of our company . this would particularly be the case if we are unable to commercially launch dario , dario engage and dario intelligence in the jurisdictions and in the timeframes we expect .
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results of operations comparison of the year ended december 31 , 2017 to year ended december 31 , 2016 revenues revenues for the year ended december 31 , 2017 amounted to $ 5,170,000 , compared to $ 2,803,000 during the year ended december 31 , 2016. revenues generated during the year ended december 31 , 2017 were derived mainly from the sales of the dario blood glucose monitoring system , through direct sales to consumers located mainly in the united states through our on-line store and through distributors . this increase in revenues is attributable to additional commercialization of sales in 2017. cost of revenues during the years ended december 31 , 2017 and 2016 , we recorded costs related to revenues in the amount of $ 3,859,000 and $ 3,633,000 , respectively . the increase in cost of revenues was mainly due to the increase in the quantities of products sold during 2017. cost of revenues consist mainly of cost of device production , employees ' salaries and related overhead costs , depreciation of production line and related cost of equipment used in production , shipping and handling costs and inventory write-downs . research and development expenses our research and development expenses increased by $ 1,143,000 to $ 3,297,000 for the year ended december 31 , 2017 compared to $ 2,154,000 for the year ended december 31 , 2016. this increase was mainly due to increase in salaries , stock-based compensation expenses , clinical trial costs , and other development costs .
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2013 overview during 2013 , mattel did not meet its growth expectations , primarily due to weakness in the us market . mattel 's innovation and in-market execution did not resonate enough with consumers to achieve its sales goals , and mattel 's products and marketing programs were not strong enough to drive growth in core categories such as dolls , infant and preschool , and vehicles . despite the challenging year , mattel delivered its fourth consecutive year of sales and earnings growth . mattel increased its gross margins and continued to see global strength in its girls portfolio . mattel also continued to invest in emerging markets , such as china and russia , which have experienced significant growth . mattel 's 2013 financial highlights include the following : net sales increased 1 % to $ 6.48 billion in 2013 from $ 6.42 billion in 2012. gross profit as a percentage of net sales increased to 53.6 % in 2013 from 53.1 % in 2012. the increase in gross profit as a percentage of net sales was primarily due to savings from operational excellence 3.0 programs , favorable product mix , and price increases offset by higher input costs , partially offset by unfavorable changes in foreign currency exchange rates . operating income was $ 1.17 billion in 2013 , or 18.0 % of net sales , compared to the prior year 's operating income of $ 1.02 billion in 2012 , or 15.9 % of net sales . mattel 's operational excellence 3.0 program resulted in gross cost savings before severance charges and investments of approximately $ 60 million , or approximately $ 39 million in net cost savings . mattel paid total annual dividends of $ 1.44 per share , an increase of 16 % from the prior year , and repurchased 11.0 million shares of its common stock . 2014 and beyond in 2014 , mattel will focus on expanding on its product and brand innovation , improving its advertising and promotion execution , and leveraging certain tailwinds from 2013 to help achieve its financial objectives . more specifically , mattel plans to expand its innovation through ( i ) entrance into the active-play lifestyle category , ( ii ) the global roll-out of mattel 's latest franchise , ever after high , and ( iii ) new products , packaging , and 27 marketing campaigns for its existing key brands . mattel will focus on optimizing its marketing and promotional spend across its brands , customers , and regions to take advantage of its scale across its entire business . mattel also seeks to leverage the strength of its brands , countries , and customers , which include growing its girls portfolio , continuing to invest in emerging and developing markets , and improving execution in both its e-commerce and brick and mortar channels . results of operations 2013 compared to 2012 consolidated results net sales for 2013 were $ 6.48 billion , a 1 % increase , as compared to $ 6.42 billion in 2012 , with an unfavorable impact from changes in currency exchange rates of 1 percentage point . net income for 2013 was $ 903.9 million , or $ 2.58 per diluted share , as compared to net income of $ 776.5 million , or $ 2.22 per diluted share , in 2012. as compared to 2012 , net income for 2013 was positively impacted by lower other selling and administrative expenses due to a 2012 litigation charge of $ 137.8 million , arising out of the litigation between mattel and mga entertainment , inc. ( the litigation charge ) , and higher gross margins . in 2012 , the litigation charge reduced net income by $ 87.1 million , or $ 0.25 per share . the following table provides a summary of mattel 's consolidated results for 2013 and 2012 ( in millions , except percentage and basis point information ) : replace_table_token_6_th sales net sales for 2013 were $ 6.48 billion , a 1 % increase , as compared to $ 6.42 billion in 2012 , with an unfavorable impact from changes in currency exchange rates of 1 percentage point . 28 the following table provides a summary of mattel 's consolidated gross sales by brand for 2013 and 2012 : replace_table_token_7_th gross sales were $ 7.12 billion in 2013 , up $ 65.2 million or 1 % , as compared to $ 7.05 billion in 2012 , with no impact from changes in currency exchange rates . the increase in gross sales was due to higher sales of other girls products , partially offset by lower sales of core fisher-price products . of the 25 % increase in other girls gross sales , 20 % was due to higher sales of monster high products , and 5 % was due to the initial launch of the ever after high product line . the 9 % decrease in core fisher-price gross sales reflected product innovation not being strong enough to drive growth , along with lower effectiveness of in-store , commercial , and promotional activities . cost of sales cost of sales as a percentage of net sales was 46.4 % in 2013 , as compared to 46.9 % in 2012. cost of sales was flat at $ 3.01 billion in 2013 and 2012 , as compared to a 1 % increase in net sales . story_separator_special_tag gross margins increased as a result of savings from operational excellence 3.0 programs , favorable product mix , and price increases partially offset by higher input costs , partially offset by unfavorable changes in foreign currency exchange rates . international segment income increased by 9 % to $ 622.9 million in 2013 , as compared to $ 571.4 million in 2012 , primarily due to higher gross profit , partially offset by higher other selling and administrative expenses and higher advertising and promotion expenses . american girl segment the following table provides a summary of mattel 's gross sales by brand for the american girl segment for 2013 and 2012 : replace_table_token_11_th gross sales for the american girl segment were $ 658.8 million in 2013 , up $ 62.5 million or 10 % , as compared to $ 596.3 million in 2012 , with an unfavorable impact from changes in currency exchange rates of 1 percentage point . of the 11 % increase in american girl brands gross sales , 6 % was due to higher sales of the 2013 girl of the year , saige ® , and 3 % was due to higher sales of my american girl products . cost of sales increased 8 % in 2013 , as compared to a 10 % increase in net sales , primarily due to higher product and other costs and higher freight and logistics expenses . gross margins increased as a result of favorable product mix and price increases partially offset by higher input costs . american girl segment income increased by 13 % to $ 138.0 million in 2013 , as compared to $ 121.6 million in 2012 , primarily due to higher gross profit , partially offset by higher other selling and administrative expenses . 2012 compared to 2011 story_separator_special_tag tion. north america segment the following table provides a summary of mattel 's gross sales by brand for the north america segment for 2012 and 2011 : replace_table_token_14_th gross sales for the north america segment were $ 3.33 billion in 2012 , up $ 33.2 million or 1 % , as compared to $ 3.30 billion in 2011 , with no impact from changes in currency exchange rates . the increase in the north america segment gross sales was due to higher sales of other girls and fisher-price friends products , partially offset by lower sales of entertainment products . of the 47 % increase in other girls gross sales , 45 % was due to higher sales of monster high products . of the 38 % increase in fisher-price friends gross sales , 25 % was due to the benefit of licensing revenues from the acquisition of hit entertainment , and 21 % was due to higher sales of disney jake and the never land pirates products . of the 24 % decrease in entertainment gross sales , 22 % was due to lower sales of cars 2 products resulting from the timing of the movie release during 2011. cost of sales decreased 4 % in 2012 , as compared to flat net sales , driven primarily by lower product and other costs and lower royalty expenses , partially offset by higher freight and logistics expenses . gross margins increased as a result of favorable product mix , including lower sales of royalty-related entertainment properties , savings from manufacturing efficiency and operational excellence 2.0 programs , and price increases partially offset by higher input costs and higher customer benefits . additionally , gross margins were positively impacted by the acquisition of hit entertainment . north america segment income increased 5 % to $ 810.3 million in 2012 , as compared to $ 770.3 million in 2011 , driven primarily by higher gross profit , partially offset by higher other selling and administrative expenses . 35 international segment the following table provides a summary of percentage changes in gross sales within the international segment in 2012 versus 2011 : replace_table_token_15_th the following table provides a summary of mattel 's gross sales by brand for the international segment for 2012 and 2011 : replace_table_token_16_th gross sales for the international segment were $ 3.13 billion in 2012 , up $ 124.4 million or 4 % , as compared to $ 3.0 billion in 2011 , with an unfavorable impact from changes in currency exchange rates of 6 percentage points . the increase in the international segment gross sales was due to higher sales of other girls and fisher-price friends products , partially offset by lower sales of entertainment products . of the 66 % increase in other girls gross sales , 62 % was due to higher sales of monster high products . of the 43 % increase in fisher-price friends gross sales , 36 % was due to the benefit of licensing revenues from the acquisition of hit entertainment , and 14 % was due to higher sales of disney jake and the never land pirates products . of the 18 % decrease in entertainment gross sales , 20 % was due to lower sales of cars 2 products resulting from the timing of the movie release during 2011. cost of sales decreased by 2 % in 2012 , as compared to a 4 % increase in net sales , primarily due to lower product and other costs , lower royalty expenses , and lower freight and logistics expenses . gross margins increased as a result of favorable product mix , savings from manufacturing efficiency and operational excellence 2.0 programs , favorable changes in currency exchange rates , and price increases partially offset by higher input costs , which were partially offset by higher customer benefits . additionally , gross margins were positively impacted by the acquisition of hit entertainment . international segment income increased 11 % to $ 571.4 million in 2012 , as compared to $ 513.4 million in 2011 , driven primarily by higher gross profit , partially offset by higher other selling and administrative expenses .
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consolidated results net sales for 2012 were $ 6.42 billion , a 2 % increase , as compared to $ 6.27 billion in 2011 , with an unfavorable impact from changes in currency exchange rates of 2 percentage points . net income for 2012 was $ 776.5 million , or $ 2.22 per diluted share , as compared to net income of $ 768.5 million , or $ 2.18 per diluted share , in 2011. as compared to 2011 , net income for 2012 was positively impacted by higher net sales , higher gross margins , and a lower effective tax rate , partially offset by higher other selling and administrative expenses , which includes the litigation charge of $ 137.8 million . 32 the following table provides a summary of mattel 's consolidated results for 2012 and 2011 ( in millions , except percentage and basis point information ) : replace_table_token_12_th sales net sales for 2012 were $ 6.42 billion , a 2 % increase , as compared to $ 6.27 billion in 2011 , with an unfavorable impact from changes in currency exchange rates of 2 percentage points . the following table provides a summary of mattel 's consolidated gross sales by brand for 2012 and 2011 : replace_table_token_13_th gross sales were $ 7.05 billion in 2012 , up $ 211.5 million or 3 % , as compared to $ 6.84 billion in 2011 , with an unfavorable impact from changes in currency exchange rates of 3 percentage points . the increase in gross sales was due to higher sales of other girls and fisher-price friends products , partially offset by lower sales of entertainment products . of the 57 % increase in other girls gross sales , 53 % was due to higher sales of monster high products . of the 40 % increase in fisher-price friends gross sales , 29 % was due to the benefit of licensing 33 revenues from the acquisition of hit entertainment , and 18 % was due to higher sales of disney jake and the never land pirates products .
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these statements are being made pursuant to the pslra , with the intention of obtaining the benefits of the “ safe harbor ” provisions of the pslra , and , other than as required by law , we assume no obligation to update or supplement such statements . forward-looking statements are those that do not relate solely to historical fact . they include , but are not limited to , any statement that may predict , forecast , indicate or imply future results , performance , achievements or events . you can identify these statements by the use of words such as “ may , ” “ will , ” “ could , ” “ anticipate , ” “ believe , ” “ estimate , ” “ expect , ” “ intend , ” “ predict , ” “ continue , ” “ further , ” “ seek , ” “ plan , ” or “ project ” and variations of these words or comparable words or phrases of similar meaning . these forward-looking statements reflect our current beliefs and expectations with respect to future events and are based on assumptions and are subject to risks and uncertainties and other factors outside our control that may cause actual results to differ materially from those projected . we undertake no obligation to update publicly or review any forward-looking statement , whether as a result of new information , future developments or otherwise . overview we are a delaware limited partnership formed on august 10 , 2012. our fund operates under a structure which we pool the capital invested by our partners . this pool of capital is then used to invest in business-essential , revenue-producing ( or cost-saving ) equipment and other physical assets with substantial economic lives and , in many cases , associated revenue streams and project financings . the pooled capital contributions are also used to pay fees and expenses associated with our organization and to fund a capital reserve . our principal investment strategy is to invest in business-essential , revenue-producing ( or cost-savings ) equipment with high in-place value and long , relative to the investment term , economic life and project financings . we expect to achieve our investment strategy by making investments in equipment already subject to lease or originating equipment leases in such equipment , which will include : ( i ) purchasing equipment and leasing it to third-party end users ; ( ii ) providing equipment and other asset financing ; ( iii ) acquiring equipment subject to lease and ( iv ) acquiring ownership rights ( residual value interests ) in leased equipment at lease expiration . from time to time , we may also purchase equipment and sell it directly to our leasing customers . many of our investments will be structured as full payout or operating leases . full payout leases generally are leases under which the rent over the initial term of the lease will return our invested capital plus an appropriate return without consideration of the residual value , and where the lessee may acquire the equipment or other assets at the expiration of the lease term . operating leases generally are leases under which the aggregate non-cancelable rental payments during the original term of the lease , on a net present value basis , are not sufficient to recover the purchase price of the equipment or other assets leased under the lease . 18 we also intend to invest by way of participation agreements and residual sharing agreements where we would acquire an interest in a pool of equipment or other assets , or rights to the equipment or other assets , at a future date . we also may structure investments as project financings that are secured by , among other things , essential use equipment and or assets . finally , we may use other investment structures that our investment manager believes will provide us with the appropriate level of security , collateralization , and flexibility to optimize our return on our investment while protecting against downside risk , such as vendor and rental programs . in many cases , the structure will include us holding title to or a priority or controlling position in the equipment or other asset . although the final composition of our portfolio can not be determined at this stage , we expect to invest in equipment and other assets that are considered essential use or core to a business or operation in the agricultural , energy , environmental , medical , manufacturing , technology , and transportation industries . our investment manager may identify other assets or industries that meet our investment objectives . we expect to invest in equipment , other assets and project financings located primarily within the united states of america and the european union but may also make investments in other parts of the world . we are currently in the liquidation period . the offering period concluded on april 2 , 2016 , which is three years from the date we were declared effective by the sec . during the operating period , we will invest most of the net proceeds from our offering in business-essential , revenue-producing ( or cost-saving ) equipment , other physical assets with substantial economic lives and , in many cases , associated revenue streams and project financings . the operating period began on the date of our initial closing , which occurred on may 29 , 2013 and concluded on may 29 , 2017. the liquidation period , which began on may 30 , 2017 , is the period in which we will sell our assets in the ordinary course of business and will last two years , unless it is extended , at the sole discretion of the general partner . story_separator_special_tag the loan is secured by all of the assets , including tax credits , of the borrower and all of the borrower 's rights to proceeds from the motion picture . the loan accrues interest at a rate of 12 % per annum and is scheduled to mature 24 months after the funding date . surplus loan note on march 31 , 2017 , the partnership entered into a loan participation agreement to purchase a 61.8 % interest in a 5 % surplus note receivable with principal of $ 2,225,000 maturing on february 25 , 2018. on march 31 , 2017 , the partnership funded $ 1,495,313 for the purchase of this participation . in connection with the loan participation agreement , on that same date , the partnership entered into a forward purchase agreement to sell this participation interest on july 7 , 2017 for the purchase price of the participation plus a 12 % rate of return . on june 30 , 2017 and on july 21 , 2017 , the partnership sold this forward purchase agreement for total cash proceeds of $ 1,515,985 . 20 critical accounting policies an understanding of our critical accounting policies is necessary to understand our financial results . the preparation of consolidated financial statements in accordance with accounting principles generally accepted in the united states of america requires our general partner and our investment manager to make estimates and assumptions that affect the reported amounts of assets and liabilities , the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period . significant estimates will primarily include the determination of allowance for notes and leases , depreciation and amortization , impairment losses and the estimated useful lives and residual values of the leased equipment we acquire . actual results could differ from those estimates . lease classification and revenue recognition each equipment lease we enter into is classified as either a finance lease or an operating lease , which is determined at lease inception , based upon the terms of each lease , or when there are significant changes to the lease terms . we capitalize initial direct costs associated with the origination and funding of lease assets . initial direct costs include both internal costs ( e.g. , labor and overhead ) , if any , and external broker fees incurred with the lease origination . costs related to leases that are not consummated are not eligible for capitalization as initial direct costs and are expensed as incurred as acquisition expense . for a finance lease , initial direct costs are capitalized and amortized over the lease term using the effective interest rate method . for an operating lease , the initial direct costs are included as a component of the cost of the equipment and depreciated over the lease term . for finance leases , we record , at lease inception , the total minimum lease payments receivable from the lessee , the estimated unguaranteed residual value of the equipment at lease termination , the initial direct costs related to the lease , if any , and the related unearned income . unearned income represents the difference between the sum of the minimum lease payments receivable , plus the estimated unguaranteed residual value , minus the cost of the leased equipment . unearned income is recognized as finance income over the term of the lease using the effective interest rate method . for operating leases , rental income is recognized on the straight-line basis over the lease term . billed operating lease receivables are included in accounts receivable until collected . accounts receivable is stated at its estimated net realizable value . deferred revenue is the difference between the timing of the receivables billed and the income recognized on the straight-line basis . our investment manager has an investment committee that approves each new equipment lease and other project financing transaction . as part of its process , the investment committee determines the residual value , if any , to be used once the investment has been approved . the factors considered in determining the residual value include , but are not limited to , the creditworthiness of the potential lessee , the type of equipment considered , how the equipment is integrated into the potential lessee 's business , the length of the lease and the industry in which the potential lessee operates . residual values are reviewed for impairment in accordance with our impairment review policy . the residual value assumes , among other things , that the asset will be utilized normally in an open , unrestricted and stable market . short-term fluctuations in the marketplace are disregarded and it is assumed that there is no necessity either to dispose of a significant number of the assets , if held in quantity , simultaneously or to dispose of the asset quickly . the residual value is calculated using information from various external sources , such as trade publications , auction data , equipment dealers , wholesalers and industry experts , as well as inspection of the physical asset and other economic indicators . asset impairments the significant assets in our investment portfolio are periodically reviewed , no less frequently than annually or when indicators of impairment exist , to determine whether events or changes in circumstances indicate that the carrying value of an asset may not be recoverable . an impairment loss will be recognized only if the carrying value of a long-lived asset is not recoverable and exceeds its fair value . if there is an indication of impairment , we will estimate the future cash flows ( undiscounted and without interest charges ) expected from the use of the asset and its eventual disposition . future cash flows are the future cash in-flows expected to be generated by an asset less the future out-flows expected to be necessary to obtain those in-flows .
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business overview we are currently in the liquidation period . the offering period concluded on april 2 , 2016 , which is three years from the date we were declared effective by the sec . during the operating period , we will invest most of the net proceeds from our offering in business-essential , revenue-producing ( or cost-saving ) equipment , other physical assets with substantial economic lives and , in many cases , associated revenue streams and project financings . the operating period began on the date of our initial closing , which occurred on may 29 , 2013 and concluded on may 29 , 2017. the liquidation period , which began on may 30 , 2017 , is the period in which we will sell our assets in the ordinary course of business and will last two years , unless it is extended , at the sole discretion of the general partner . 22 during our operating period , which began on may 29 , 2013 , the date of our initial closing , and concluded on may 29 , 2017 , we will use the majority of our net offering proceeds from limited partner capital contributions to acquire our initial investments . as our investments mature , we anticipate reinvesting the cash proceeds in additional investments in leased equipment and project financing transactions , to the extent that the cash will not be needed for expenses , reserves and distributions to our limited partners . during this time-frame we expect both rental income and finance income to increase substantially as well as related expenses such as depreciation and amortization . during the operating period , we believe the majority of our cash outflows will be from investing activities as we acquire additional investments and to a lesser extend from financing activities from our paying quarterly distributions to our limited partners . our cash flow from operations is expected to increase , primarily from the collection of rental and interest payments .
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this summary of the coo and general counsel employment agreement is qualified in its entirety story_separator_special_tag the following discussion and analysis of our results of operations , financial condition and liquidity and capital resources should be read in conjunction with our audited financial statements and related notes for the years ended december 31 , 2020 and 2019. certain statements made or incorporated by reference in this report and our other filings with the securities and exchange commission , in our press releases and in statements made by or with the approval of authorized personnel constitute forward looking statements within the meaning of section 27a of the securities act of 1933 , as amended , and section 21e of the securities exchange act of 1934 , as amended , or the exchange act , and are subject to the safe harbor created thereby . forward looking statements reflect intent , belief , current expectations , estimates or projections about , among other things , our industry , management 's beliefs , and future events and financial trends affecting us . words such as “ anticipates , ” “ expects , ” “ intends , ” “ plans , ” “ believes , ” “ seeks , ” “ estimates , ” “ may , ” “ will ” and variations of these words or similar expressions are intended to identify forward looking statements . in addition , any statements that refer to expectations , projections or other characterizations of future events or circumstances , including any underlying assumptions , are forward looking statements . although we believe the expectations reflected in any forward-looking statements are reasonable , such statements are not guarantees of future performance and are subject to certain risks , uncertainties and assumptions that are difficult to predict . therefore , our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors . these differences can arise as a result of the risks described above in the section entitled “ item 1a . risk factors ” and elsewhere in this report , as well as other factors that may affect our business , results of operations , or financial condition . forward looking statements in this report speak only as of the date hereof , and forward-looking statements in documents incorporated by reference speak only as of the date of those documents . unless otherwise required by law , we undertake no obligation to publicly update or revise these forward-looking statements , whether as a result of new information , future events or otherwise . in light of these risks and uncertainties , we can not assure you that the forward-looking statements contained in this report will , in fact , transpire . overview the management 's discussion and analysis is based on our financial statements , which have been prepared in accordance with accounting principles generally accepted in the united states of america . the preparation of these financial statements requires us to make certain estimates and judgments that affect the reported amounts of assets , liabilities and expenses and related disclosure of contingent assets and liabilities . management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances , the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources . actual results may differ from these estimates under different assumptions and conditions . our business overview genius brands international , inc. ( “ we , ” “ us , ” “ our , ” or the “ company ” ) is a global content and brand management company that creates and licenses multimedia content . led by experienced industry personnel , we distribute our content in all formats as well as a broad range of consumer products based on our characters . in the children 's media sector , our portfolio features “ content with a purpose ” for toddlers to tweens , which provides enrichment as well as entertainment . new intellectual property titles include the preschool property rainbow rangers , which debuted in november 2018 on nickelodeon and which was renewed for a second season and preschool property llama llama , which debuted on netflix in january 2018 and was renewed by netflix for a second season . our library titles include the award-winning baby genius , adventure comedy thomas edison 's secret lab ® and warren buffett 's secret millionaires club , created with and starring iconic investor warren buffett , which is distributed across our genius brands network on comcast 's xfinity on demand , appletv , roku , amazon fire , youtube , amazon prime , cox , dish , sling and zumo , as well as connected tv . we are also developing an all-new animated series , stan lee 's superhero kindergarten with stan lee 's pow ! entertainment , oak productions and alibaba . arnold schwarzenegger lends his voice as the lead and is also an executive producer on the series . the show will be broadcast in the united states on amazon prime and the company 's wholly owned distribution outlet , kartoon channel ! . in july 2020 , the company entered into a binding term sheet with pow , inc. ( “ pow ! ” ) in which we agreed to form an entity with pow ! to exploit certain rights in intellectual property created by stan lee , as well as the name and likeness of stan lee . the entity is called “ stan lee universe , llc ” and pow ! and the company are finalizing the details of the venture . story_separator_special_tag the original warrants were originally issued on october 3 , 2017 , to purchase an aggregate of 500,000 shares of the common stock ( as defined below ) at an exercise price of $ 3.90 per share and were to expire in october 2022. pursuant to the agreement , the holder of the original warrants and the company agreed that such original warrant holder would exercise its original warrants in full and the company would amend the original warrants to reduce the exercise price thereof to $ 0.34 ( the average closing price ( as reflected on nasdaq.com ) of the common stock ( as defined below ) for the five trading days immediately preceding the signing of the agreement ) . we received approximately $ 170,000 from the exercise of the original warrants . march 2020 secured convertible note and warrant private placement on march 11 , 2020 , we entered into a securities purchase agreement ( the “ spa ” ) with certain accredited investors ( each an “ investor ” and collectively , the “ investors ” ) pursuant to which we agreed to sell and issue ( 1 ) senior secured convertible notes to the investors in the aggregate principal amount of $ 13,750,000 ( each , a “ note ” and collectively , the “ 2020 convertible notes ” ) and $ 11,000,000 funding amount ( reflecting an original issue discount of $ 2,750,000 ) and ( 2 ) warrants to purchase 65,476,190 shares of our common stock , exercisable for a period of five years at an initial exercise price of $ 0.26 per share ( each a “ warrant ” and collectively , the “ warrants ” ) , for consideration consisting of ( i ) a cash payment of $ 7,000,000 , and ( ii ) full recourse cash secured promissory notes payable by the investors to the company ( each , an “ investor note ” and collectively , the “ investor notes ” ) in the principal amount of $ 4,000,000 ( the “ investor notes principal ” ) ( collectively , the “ financing ” ) . andy heyward , our chairman and chief executive officer , participated as an investor and invested $ 1,000,000 in connection with the financing , all of which was paid at the closing and not pursuant to an investor note . the special equities group , llc , a division of bradley woods & co. ltd , acted as placement agent and received warrants to purchase 6,547,619 shares at an exercise price of $ 0.26 per share ( the “ placement agent warrants ” ) . the closing of the sale and issuance of the 2020 convertible notes , the warrants and the placement agent warrants occurred on march 17 , 2020 ( the “ closing date ” ) . the maturity date of the 2020 convertible notes was september 30 , 2021 and the maturity date of the investor notes was march 11 , 2060. the company held a stockholder meeting ( the “ stockholder meeting ” ) to approve the issuance of shares of common stock issuable under the 2020 convertible notes and pursuant to the terms of the spa for the purposes of compliance with the stockholder approval rules of the nasdaq stock market ( “ stockholder approval ” ) . in addition , pursuant to the terms of the spa , the 2020 convertible notes and the warrants , the company agreed that the following will apply or become effective only following stockholder approval : ( 1 ) the conversion price of the 2020 convertible notes shall be reduced to $ 0.21 per share and may be further reduced to any amount and for any period of time deemed appropriate by the board of directors of the company ( the “ board of directors ” ) , ( 2 ) the exercise price of the warrants shall be immediately reduced to $ 0.21 per share and may be further reduced to any amount and for any period of time deemed appropriate by the board of directors , ( 3 ) the 2020 convertible notes and warrants shall each have full ratchet anti-dilution protection for subsequent financings ( subject to certain exceptions ) , ( 4 ) existing warrant holders that are participating in the financing ( representing warrants to purchase an aggregate of 8,715,229 shares of company common stock ) will have their existing warrants ' exercise prices reduced to $ 0.21 and ( 5 ) the investors shall have a most favored nations right which provides that if the company enters into a subsequent financing , then the investors ( together with their affiliates ) at their sole discretion shall have the ability to exchange their 2020 convertible notes on a $ 1 for $ 1 basis into securities issued in the new transaction . additionally , in the event that any warrants or options ( or any similar security or right ) issued in a subsequent financing include any terms more favorable to the holders thereof ( less favorable to the company ) than the terms of the warrants , the warrants shall be automatically amended to include such more favorable terms . on march 16 , 2020 , the holders of the august 2018 secured convertible notes were repaid in full including any outstanding interest . 20 on may 15 , 2020 , the company received the necessary stockholder approval in connection with the nasdaq proposals described above .
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results of operations years ended december 31 , 2020 and 2019 our summary results for the years ended december 31 , 2020 and 2019 are below . replace_table_token_1_th licensing and royalty revenue include items for which we license the rights to our copyrights and trademarks of our brands and those of the brands for which we act as a licensing agent . during the year ended december 31 , 2020 compared to december 31 , 2019 , this category decreased $ 102,373 , or 12 % , primarily due to decreases revenues generated from rainbow rangers and llama llama properties in 2019. television & home entertainment revenue is generated from distribution of our properties for broadcast on television , vod , or svod in domestic and international markets and the sale of dvds for home entertainment through our partners . fluctuations in television & home entertainment revenue occur period over period based on the achievement of revenue recognition criteria such as the start of a license period and the delivery of the content to the customer . during the year ended december 31 , 2020 compared to the year ended december 31 , 2019 , television & home entertainment revenue decreased $ 3,352,437 or 70 % . this decrease was primarily due to the revenue generated in 2019 from the delivery of the llama llama season 2 to netflix and rainbow rangers season 1 to nickelodeon and shanghai senyu media in china . the revenue generated in 2020 was due to the delivery of rainbow rangers season 2 to nickelodeon . advertising sales are generated on the kartoon channel in the form of either flat rate promotions or advertising impressions served .
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the company continues to engage in discussions with other plaintiffs ' law firms regarding potential resolution of unsettled women 's health product claims , which may include additional inventory settlements . starting in 2014 in the mdl , the court entered certain pre-trial orders requiring trial work up and remand of a significant number of women 's health product claims , including an order entered in the mdl on january 30 story_separator_special_tag the following commentary should be read in conjunction with the consolidated financial statements and accompanying notes presented in this report . within the tables presented throughout this discussion , certain columns may not add due to the use of rounded numbers for disclosure purposes . percentages and earnings per share amounts presented are calculated from the underlying amounts . references to years throughout this discussion relate to our fiscal years , which end on september 30. company overview description of the company and business segments becton , dickinson and company ( “ bd ” ) is a global medical technology company engaged in the development , manufacture and sale of a broad range of medical supplies , devices , laboratory equipment and diagnostic products used by healthcare institutions , physicians , life science researchers , clinical laboratories , the pharmaceutical industry and the general public . the company 's organizational structure is based upon three principal business segments , bd medical ( “ medical ” ) , bd life sciences ( “ life sciences ” ) and bd interventional ( “ interventional ” ) . bd 's products are manufactured and sold worldwide . our products are marketed in the united states and internationally through independent distribution channels and directly to end-users by bd and independent sales representatives . we organize our operations outside the united states as follows : europe , ema ( which includes the commonwealth of independent states , the middle east and africa ) ; greater asia ( which includes countries in greater china , japan , south asia , southeast asia , korea , and australia and new zealand ) ; latin america ( which includes mexico , central america , the caribbean and south america ) ; and canada . we continue to pursue growth opportunities in emerging markets , which include the following geographic regions : eastern europe , the middle east , africa , latin america and certain countries within greater asia . we are primarily focused on certain countries whose healthcare systems are expanding . strategic objectives bd remains focused on delivering durable growth and creating shareholder value , while making appropriate investments for the future . bd 2025 , our current phase of value creation , is anchored in three key pillars : grow , simplify and empower . bd 's management team aligns our operations and investments with these key strategic pillars through continuous focus on the following underlying objectives : grow developing and maintaining a strong portfolio of leading products and solutions that address significant unmet clinical needs , improve outcomes , and reduce costs ; focusing on our core products , services and solutions that deliver greater benefits to patients , healthcare workers and researchers ; investing in research and development that will result in category innovation and a robust product pipeline ; leveraging our global scale to expand our reach in providing access to affordable medical technologies around the world , including emerging markets ; supplementing our internal growth through strategic acquisitions ; driving an efficient capital structure and strong shareholder returns . simplify working across our supply chain to minimize environmental impacts ; creating more resilient operations based on an enterprise-wide renewable energy strategy ; reducing complexity across our manufacturing network and rationalizing our product portfolio ; enhancing our quality and risk management systems ; simplifying our internal business processes ; focusing on cash and expense management in order to improve operating effectiveness and balance sheet productivity . 23 empower fostering a purpose-driven culture with a focus on positive impact to all stakeholders–customers , patients , employees and communities ; improving our ability to serve customers and enhance customer experiences through the digitalization of internal processes and go-to-market approaches ; cultivating an inclusive work environment that welcomes and celebrates diverse talent and perspectives . in assessing the outcomes of these strategies as well as bd 's financial condition and operating performance , management generally reviews quarterly forecast data , monthly actual results , segment sales and other similar information . we also consider trends related to certain key financial data , including gross profit margin , selling and administrative expense , investment in research and development , return on invested capital , and cash flows . covid-19 pandemic impacts and response a novel strain of coronavirus disease ( “ covid-19 ” ) was officially declared a pandemic by the world health organization ( “ who ” ) in march 2020. in efforts to slow and control the spread of covid-19 , governments around the world issued stay at home orders , travel restrictions as well as recommendations or mandates to avoid large gatherings or to self-quarantine . many governments also instituted restrictions on certain businesses and their activities , particularly those that were deemed non-essential . these various measures led to a sudden and significant decline in economic activity within a number of countries worldwide . although the global economy has shown signs of recovery , current economic data indicates that full recovery has stalled in some major economies . as further discussed below , disruptions resulting from the ongoing covid-19 pandemic unfavorably impacted our results of operations in fiscal year 2020. while certain of our organizational units realized positive benefits to revenues from the pandemic , total consolidated revenues in 2020 were unfavorably impacted by an estimated net $ 600 million . our financial position has remained strong and we continue to generate operating cash flows that are sufficient to meet our short-term liquidity needs . story_separator_special_tag bard , inc. ( `` bard '' ) products within the medication delivery solutions unit in the first quarter of fiscal year 2019 but not in the first quarter of the prior-year period as operating activities of bard , which was acquired on december 29 , 2017 , were not included in our consolidated results of operations until january 1 , 2018. the medication delivery solution unit 's 2019 revenues also reflected strong growth in global sales of vascular access devices . the medication management solutions unit 's revenues in 2019 reflected sales growth attributable to the installations of infusion and dispensing systems , as well as growth in sales of disposables . the pharmaceutical systems unit 's 2019 revenue growth was driven by sales of prefillable products and self-injection systems . strength in the diabetes care unit 's sales of pen needles in emerging markets was partially offset by lower growth in u.s. sales . medical segment operating income was as follows : replace_table_token_5_th as discussed in greater detail below , the medical segment 's operating income in 2020 was primarily driven by a decline in gross profit margin . operating income in 2019 was driven by improved gross profit margin and operating expense performance . the medical segment 's gross profit margin in 2020 was lower compared with 2019 which reflected a charge to record a probable estimate of future costs associated with incremental remediation efforts relating to bd alaris tm infusion pumps . gross profit margin in 2020 also reflected unfavorable product mix and increased levels of manufacturing overhead costs that were recognized in the period , rather than capitalized within inventory , as a result of the covid-19 pandemic . unfavorable product mix in 2020 was also driven by the decline of sales in china due to the volume-based procurement process noted above . gross profit margin in 2020 was also lower due to charges of $ 41 million recorded to write down the carrying value of certain fixed assets , primarily within the medication delivery solutions and pharmaceutical systems units . these unfavorable impacts were partially offset by lower manufacturing costs resulting from continuous improvement projects which enhanced the efficiency of our operations . the medical segment 's gross profit margin in 2019 was higher as compared with 2018 primarily due to lower manufacturing costs resulting from continuous improvement projects which enhanced the efficiency of our operations . additionally , the comparison of gross profit margin in 2019 with gross profit margin in 2018 reflected the unfavorable impacts in 2018 of a fair value step-up adjustment relating to bard 's inventory on the acquisition date and charges to write down the value of fixed assets , primarily in the diabetes care unit . these favorable impacts to the medical segment 's gross margin in 2019 were partially offset by unfavorable foreign currency translation , higher raw material costs and pricing pressures . selling and administrative expense as a percentage of revenues in 2020 was slightly lower compared with 2019 primarily due to lower expenses resulting from cost containment measures . selling and administrative expense as a percentage of revenues in 2019 was relatively flat compared with 2018. research and development expense as a percentage of revenues was higher in 2020 which reflected the decline in revenues in 2020 , as well as our continued commitment to drive innovation with new products and platforms . research and development expense as a percentage of revenues was lower in 2019 compared with 2018 due to recent completion of projects and the timing of project spending . the medical segment 's income in 2019 additionally reflected the estimated cumulative costs of a product recall of $ 75 million recorded within other operating expense , net . the recall related to a product component , which generally pre-dated our acquisition of carefusion in fiscal year 2015 , within the medication management solutions unit 's infusion systems platform . 27 life sciences segment the following summarizes life sciences revenues by organizational unit : replace_table_token_6_th ( a ) effective october 1 , 2019 , the life sciences segment 's former preanalytical systems and diagnostic systems units were joined to create the new integrated diagnostic solutions unit . additional disclosures regarding this change are provided in note 7 to the consolidated financial statements contained in item 8. financial statements and supplementary data . the life sciences segment 's revenue growth in 2020 was driven by the integrated diagnostic solutions unit 's sales related to covid-19 diagnostic testing on the bd veritor tm plus and bd max tm systems . this growth in the integrated diagnostic solutions unit was partially offset by pandemic-related declines in routine diagnostic testing and specimen collections . the biosciences unit 's revenues in 2020 reflected a decline in demand for instruments and reagents as routine research and clinical lab activity slowed due to the covid-19 pandemic . the life sciences segment 's revenues in 2019 reflected continued strength in sales of the preanalytical systems unit 's sales of core products in emerging markets . the diagnostic systems unit 's 2019 revenues reflected growth in its bd max tm molecular platform as well as growth in sales of core microbiology products . this sales growth in the diagnostic systems unit was partially offset by an unfavorable comparison of the unit 's u.s. revenues in 2019 to revenues in 2018 , as the prior-year period benefited from a more severe influenza season . revenues in the biosciences unit in 2019 reflected growth in research reagent sales , as well as growth in u.s. research instrument sales , but were unfavorably impacted by the unit 's divestiture of the advanced bioprocessing business . the biosciences unit 's results for 2018 included revenues associated with the advanced bioprocessing business of $ 106 million . life sciences segment operating income was as follows : replace_table_token_7_th as discussed in greater detail below , the life sciences segment 's operating income in 2020 reflected improved operating expense performance , partially offset by a decline in gross profit margin .
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summary of financial results worldwide revenues in 2020 of $ 17.117 billion decreased 1.0 % from the prior-year period . this decrease reflected unfavorable impacts from foreign currency translation and price of approximately 1.0 % and 0.2 % , respectively . volume increased by approximately 0.2 % . we estimate that the covid-19 pandemic reduced volume growth in 2020 by approximately 3.3 % . volume in 2020 reflected the following : the medical segment 's revenues in 2020 reflected declines in the medication delivery solutions , medication management solutions and diabetes care units that were partially offset by growth in the pharmaceutical systems unit . the life sciences segment 's revenues in 2020 reflected growth that was driven by the integrated diagnostic solutions unit 's sales related to covid-19 diagnostic testing on the bd veritor tm plus and bd max tm systems . interventional segment revenues in 2020 were negatively impacted by decreased demand associated with the deferral of elective medical procedures as a result of the covid-19 pandemic . we continue to invest in research and development , geographic expansion , and new product market programs to drive further revenue and profit growth . our ability to sustain our long-term growth will depend on a number of factors , including our ability to expand our core business ( including geographical expansion ) , develop innovative new products , and continue to improve operating efficiency and organizational effectiveness . as discussed above , current global economic conditions are highly volatile due to the covid-19 pandemic . in addition , pricing pressure exists globally which could adversely impact our businesses . as noted above , our financial position remains strong , with cash flows from operating activities totaling $ 3.539 billion in 2020. at september 30 , 2020 , we had $ 2.937 billion in cash and equivalents and short-term investments , including restricted cash . we continued to return value to our shareholders in the form of 25 dividends .
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we view each operating property as an operating segment . for financial reporting purposes , we aggregate our wholly owned properties into the following three reportable segments : las vegas locals gold coast hotel and casino las vegas , nevada the orleans hotel and casino las vegas , nevada sam 's town hotel and gambling hall las vegas , nevada suncoast hotel and casino las vegas , nevada eastside cannery casino and hotel las vegas , nevada aliante casino + hotel + spa north las vegas , nevada cannery casino hotel north las vegas , nevada eldorado casino henderson , nevada jokers wild casino henderson , nevada downtown las vegas california hotel and casino las vegas , nevada fremont hotel and casino las vegas , nevada main street station casino , brewery and hotel las vegas , nevada midwest & south par-a-dice hotel and casino east peoria , illinois belterra casino resort florence , indiana blue chip casino , hotel & spa michigan city , indiana diamond jo dubuque dubuque , iowa diamond jo worth northwood , iowa kansas star casino mulvane , kansas amelia belle casino amelia , louisiana delta downs racetrack casino & hotel vinton , louisiana evangeline downs racetrack and casino opelousas , louisiana sam 's town hotel and casino shreveport , louisiana treasure chest casino kenner , louisiana ip casino resort spa biloxi , mississippi sam 's town hotel and gambling hall tunica , mississippi ameristar casino hotel kansas city kansas city , missouri ameristar casino report spa st. charles st. charles , missouri belterra park cincinnati , ohio valley forge casino resort king of prussia , pennsylvania we also own and operate a travel agency and a captive insurance company that underwrites travel-related insurance , each located in hawaii . financial results for these operations are included in our downtown las vegas segment , as our downtown las vegas properties concentrate their marketing efforts on gaming customers from hawaii . 30 results for lattner entertainment group illinois , llc ( `` lattner '' ) , our illinois distributed gaming operator , are included in our midwest & south segment . in may 2016 , we entered into an equity purchase agreement to sell our 50 % equity interest in the parent company of borgata hotel casino and spa ( `` borgata '' ) to mgm resorts . this transaction closed on august 1 , 2016. we account for our investment in borgata by applying the equity method and report its results as discontinued operations for all periods presented in this annual report on form 10-k. our midwest & south segment includes our wholly owned subsidiaries valley forge casino resort for the period following its september 17 , 2018 acquisition , and ameristar casino hotel kansas city , ameristar casino resort spa st. charles , belterra casino resort and belterra park ( together , the `` pinnacle properties '' ) for the period following their october 15 , 2018 acquisition . see note 2 , acquisitions and divestitures , to our consolidated financial statements presented in part ii , item 8. most of our gaming entertainment properties also include hotel , dining , retail and other amenities . our main business emphasis is on slot revenues , which are highly dependent upon the number of visits and spending levels of customers at our properties . our properties have historically generated significant operating cash flow , with the majority of our revenue being cash-based . while we do provide casino credit , subject to certain gaming regulations and jurisdictions , most of our customers wager with cash and pay for non-gaming services with cash or by credit card . our industry is capital intensive and we rely heavily on the ability of our properties to generate operating cash flow in order to fund maintenance capital expenditures , fund acquisitions , provide excess cash for future development , repay debt financing and associated interest costs , repurchase our debt or equity securities , and pay income taxes and dividends . our primary areas of focus are : ( i ) ensuring our existing operations are managed as efficiently as possible and remain positioned for growth ; ( ii ) improving our capital structure and strengthening our balance sheet , including paying down debt , increasing cash flow , improving operations and diversifying our asset base ; and ( iii ) successfully pursuing our growth strategy , which is built on identifying development opportunities and acquiring assets that are a good strategic fit and provide an appropriate return to our shareholders . our strategy our overriding strategy is to increase shareholder value by pursuing strategic initiatives that improve and grow our business . strengthening our balance sheet we are committed to finding opportunities to strengthen our balance sheet through diversifying and increasing our cash flows . we intend to take a balanced approach to our cash flows , with a current emphasis on debt repayment followed by investing in our business and returning capital to shareholders . operating efficiently we are committed to operating more efficiently . as we experience revenue growth in both our gaming and non-gaming operations , the efficiencies of our business position us to flow a substantial portion of the revenue growth directly to the bottom line . evaluating acquisition opportunities our evaluations of potential investments and growth opportunities are strategic , deliberate , and disciplined . our goal is to identify and pursue opportunities that grow our business and deliver a solid return for shareholders . these investments can take the form of expanding and enhancing offerings and amenities at existing properties , development of new properties , or acquisitions . currently , the company is primarily focused on enhancements to its existing properties . maintaining our brand the ability of our employees to deliver great customer service helps distinguish our company and our brands from our competitors . our employees are an important reason that our customers continue to choose our properties over the competition across the country . in addition , we have established a nationwide branding initiative and loyalty program . story_separator_special_tag ebitdar is a commonly used measure of performance in our industry that we believe , when considered with measures calculated in accordance with gaap , provides our investors a more complete understanding of our operating results before the impact of investing and financing transactions and income taxes and facilities comparisons between us and our competitors . management has historically adjusted ebitdar when evaluating operating performance because we believe that the inclusion or exclusion of certain recurring and non-recurring items is necessary to provide a full understanding of our core operating results and as a means to evaluate period-to-period results . the following table presents our total revenues and adjusted ebitdar by reportable segment : replace_table_token_6_th ( 1 ) refer to note 14 , segment information , in the notes to the consolidated financial statements for a reconciliation of total reportable segment adjusted ebitdar to operating income , as reported in accordance with gaap in our accompanying consolidated statements of operations . las vegas locals total revenues increased $ 7.4 million , or 0.9 % , during 2019 as compared to the prior year , primarily due to revenue increases in food & beverage and room revenue . food & beverage revenue increased $ 1.8 million due to an increase in average check of 7.8 % over prior year . in addition , room revenue increased $ 5.5 million , as discussed above . total revenues increased $ 5.1 million , or 0.6 % , during 2018 as compared to the prior year , reflecting revenue increases in all departmental categories . gaming revenue increased $ 1.8 million primarily due to a 3.7 % and 0.4 % increase in table game win and slot win , respectively . in addition , room revenue increased $ 1.7 million due to a 1.2 % increase in average daily rate and other revenue increased $ 1.0 million due to increased consumption of property amenities and visitor spending . adjusted ebitdar increased by $ 8.7 million , or 3.2 % , during 2019 as compared to the prior year , primarily due to revenue growth . downtown las vegas total revenues increased by $ 9.6 million , or 3.9 % , in 2019 as compared to the prior year , reflecting revenue increases in all departmental categories except other revenue . gaming revenue increased $ 5.8 million primarily due to a 6.8 % increase in slot win . food & beverage revenue increased $ 2.0 million primarily due to an increase in average check of 6.2 % and a 1.1 % increase in food covers . in addition , room revenue increased $ 1.8 million as the hotel occupancy rate increased 2.8 % over prior year . we continue to tailor our marketing programs in the downtown segment to cater to our hawaiian market . our hawaiian market represented approximately 53 % and 54 % of our occupied rooms in this segment in 2019 and 2018 , respectively . 35 total revenues increased by $ 3.7 million , or 1.5 % , in 2018 as compared to the prior year , reflecting revenue increases in all departmental categories except gaming revenue . food & beverage revenue increased by $ 1.3 million due to an increase in average check of 3.4 % over prior year . in addition , room revenue increased $ 2.3 million as the average daily rate increased 6.1 % over prior year . we continue to tailor our marketing programs in the downtown segment to cater to our hawaiian market . our hawaiian market represented approximately 54 % during both 2018 and 2017 of our occupied rooms in this segment . adjusted ebitdar increased by $ 5.9 million , or 10.4 % , during 2019 as compared to the prior year , primarily due to revenue growth . midwest & south total revenues increased $ 682.4 million , or 45.3 % , in 2019 as compared to 2018 , primarily due to the acquisitions . total revenues increased $ 217.1 million , or 16.9 % , in 2018 as compared to 2017 , primarily due to the acquisitions . in addition , the louisiana and mississippi properties experienced gaming revenue growth , particularly delta downs , amelia belle and ip . adjusted ebitdar increased by $ 202.8 million , or 46.9 % , during 2019 as compared to the prior year , primarily due to the acquisitions . other operating costs and expenses the following operating costs and expenses , as presented in our consolidated statements of operations , are further discussed below : replace_table_token_7_th selling , general and administrative selling , general and administrative expenses include marketing , technology , compliance and risk , surveillance and security . these costs , as a percentage of total revenues , were 13.8 % , 14.1 % and 15.1 % for 2019 , 2018 and 2017 , respectively . we continue to focus on disciplined and targeted marketing spend and on our cost containment efforts . master lease rent expense master lease rent expense represents rent expense incurred by those properties subject to a master lease agreement with a real estate investment trust . maintenance and utilities maintenance and utilities expenses , as a percentage of total revenues , were 4.7 % , 4.8 % and 4.6 % for 2019 , 2018 and 2017 , respectively . depreciation and amortization depreciation and amortization expense , as a percentage of total revenues , was 8.3 % , 8.8 % and 9.1 % for 2019 , 2018 and 2017 , respectively . the decline in the percentage versus the prior periods is attributable to there not being depreciation on the real property for three of the acquisition properties which are subject to the master lease agreement . corporate expense corporate expense represents unallocated payroll , professional fees , rent and various other administrative expenses that are not directly related to our casino and or hotel operations , in addition to the corporate portion of share-based compensation expense . corporate expense , represented 3.2 % , 4.0 % and 3.7 % , of total revenues , for 2019 , 2018 and 2017 , respectively .
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results of operations overview replace_table_token_4_th total revenues total revenues increased $ 699.4 million , or 26.6 % , for 2019 as compared to 2018 due primarily to the acquisitions of lattner on june 1 , 2018 , valley forge on september 17 , 2018 and ameristar kansas city , ameristar st. charles , belterra resort and belterra park on october 15 , 2018 ( collectively , the `` acquisitions '' ) . total revenues increased $ 225.9 million , or 9.4 % , for 2018 as compared to 2017 due primarily to the midwest & south segment increasing by $ 217.1 million over the prior period primarily attributable to the acquisitions . operating income in 2019 , our operating income increased $ 117.3 million as compared to 2018 due primarily to the acquisitions and cost control efforts surrounding our operating costs . in addition , project development , preopening and writedowns expense decreased $ 24.0 million from the prior year period , which included costs incurred related to the acquisitions . in 2018 , our operating income increased $ 11.5 million as compared to 2017 due primarily to the acquisitions , along with the favorable impact of our continuing cost control efforts . changes in operating margins are discussed further below . 32 income from continuing operations , net of tax income from continuing operations , net of tax was $ 157.6 million in 2019 , as compared to $ 114.7 million in 2018 , an increase of $ 42.9 million .
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except for the historical information contained herein , the matters discussed this md & a may be deemed to be forward-looking statements . forward-looking statement are only predictions based on management 's current views and assumptions and involve risks and uncertainties , and actual results could differ materially from those projected or implied . we make such forward-looking statements pursuant to the safe harbor provisions of the private securities litigation reform act of 1995 and other federal securities laws . words such as “ may , ” “ expect , ” “ anticipate , ” “ estimate , ” “ intend , ” and similar expressions ( as well as other words or expressions referencing future events , conditions or circumstances ) are intended to identify forward-looking statements . our actual results and the timing of certain events may differ materially from the results discussed , projected , anticipated , or indicated in any forward-looking statements . we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations , financial condition and liquidity , and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this md & a . in addition , even if our results of operations , financial condition and liquidity , and the development of the industry in which we operate are consistent with the forward-looking statements contained in this md & a , they may not be predictive of results or developments in future periods . we caution readers not to place undue reliance on any forward-looking statements made by us , which speak only as of the date they are made . we disclaim any obligation , except as specifically required by law and the rules of the sec , to publicly update or revise any such statements to reflect any change in our expectations or in events , conditions or circumstances on which any such statements may be based , or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements . overview we are a leader in the field of gene therapy , seeking to develop single treatments with potentially curative results for patients suffering from genetic and other devastating diseases . we are advancing a focused pipeline of innovative gene therapies , including product candidates for the treatment of hemophilia and huntington 's disease . we believe our validated technology platform and manufacturing capabilities provide us distinct competitive advantages , including the potential to reduce development risk , cost and time to market . we produce our aav-based gene therapies in our own facilities with a proprietary , commercial-scale , current good manufacturing practices ( “ cgmp ” ) -compliant , manufacturing process . we believe our lexington , massachusetts-based facility is one of the world 's leading , most versatile , gene therapy manufacturing facilities . business developments below is a summary of our recent significant business developments : hemophilia b program – etranacogene dezaparvovec ( amt-061 ) etranacogene dezaparvovec is our lead gene therapy candidate and includes an aav5 vector incorporating the fix-padua variant . we are currently conducting a pivotal study in patients with severe and moderately-severe hemophilia b. etranacogene dezaparvovec has been granted breakthrough therapy designation by the united states fda and access to the prime initiative by the ema . 63 in june 2018 , we initiated our phase iii hope-b pivotal trial of etranacogene dezaparvovec . the trial is a multinational , multi-center , open-label , single-arm study to evaluate the safety and efficacy of etranacogene dezaparvovec . after a six-month lead-in period , patients will receive a single intravenous administration of etranacogene dezaparvovec . the primary endpoint of the study will be based on the fix activity level achieved following the administration of etranacogene dezaparvovec , and the secondary endpoints will measure annualized fix replacement therapy usage , annualized bleed rates and safety . patients enrolled in the hope-b trial will be tested for the presence of pre-existing neutralizing antibodies to aav5 but will not be excluded from the trial based on their titers . in january 2019 , we dosed the first patient in our phase iii hope-b hemophilia b pivotal trial and in september 2019 , we completed the enrollment of approximately 60 patients in the lead-in phase of the trial . in august 2018 , we initiated a phase iib dose-confirmation study of etranacogene dezaparvovec . the phase iib study is an open-label , single-dose , single-arm , multi-center trial being conducted in the united states . the objective of the study was to evaluate the safety and tolerability of etranacogene dezaparvovec and confirm the dose based on fix activity at six weeks after administration . three patients with severe hemophilia were enrolled in this study and received a single intravenous infusion of 2x10 13 gc/kg . in february , may , july and december 2019 , we presented updated data from the phase iib dose-confirmation study of etranacogene dezaparvovec . data from the phase iib study of etranacogene dezaparvovec show that all three patients experienced increasing and sustained fix levels after a one-time administration of etranacogene dezaparvovec , with two of the three patients maintaining fix activity in the normal range . mean fix activity was 41 % of normal at 52 weeks of follow-up , exceeding threshold fix levels generally considered sufficient to significantly reduce the risk of bleeding events . the first patient achieved fix activity of 50 % of normal . fix activity in the second patient was 31 % of normal and in the third patient was 41 % of normal . the second and third patients previously screen-failed and were excluded from another gene therapy study due to pre-existing neutralizing antibodies to a different aav vector . based on the data obtained through october 24 , 2019 , no patient experienced a material loss of fix activity , reported any bleeding events or required any infusions of fix replacement therapy for bleeds . story_separator_special_tag 65 fabry disease program ( amt-190 ) amt-190 is our novel gene therapy candidate for the treatment of fabry disease that comprises of an aav vector incorporating a proprietary , exclusively licensed , modnaga variant . modnaga may have several advantages over other therapies for fabry disease , including higher stability in blood , circumvention of inhibitors , better biodistribution in the target organs , secondary toxic metabolite reduction and improved cross-correction of neighboring cells . at the asgct annual meeting in may 2019 , we presented data from in vitro and in vivo studies showing that amt-190 has the potential to become a one-time treatment option that could be an improvement upon the enzyme replacement standard of care with more efficient uptake in the kidney and heart and an improved immunogenicity profile . in particular , data from a study in wild-type mice showed a single intravenous administration of amt-190 resulted in a ten- to twenty-fold higher alpha-galactosidase ( “ gla ” ) activity in the plasma compared to the control group . additionally , in a study in a diseased mouse model , gla activity significantly increased in plasma , and globotriaosylsphingosine ( “ lyso-gb3 ” ) was significantly reduced in target organs after a single dose of amt-190 . based on the results of these in silico and in vitro studies , the modifications introduced into naga appear to pose a very low immunogenicity risk . we are currently conducting additional preclinical studies to identify a lead candidate for further safety testing . bms collaboration we entered into a collaboration and license agreement with bms in may 2015. we have been supporting bms in the discovery , non-clinical , analytical and process development efforts of collaboration targets . for any collaboration targets that are advanced , we will be responsible for manufacturing of clinical and commercial supplies using our vector technologies and industrial , proprietary insect-cell based manufacturing platform . bms has been reimbursing us for all our research and development costs in support of the collaboration during the initial research term . bms will lead the development , regulatory and commercial activities for all four currently active collaboration targets as well as additional collaboration targets that may be advanced . in february 2019 , bms requested a one-year extension of the research term . in april 2019 , following an assessment of the progress of this collaboration and our expanding proprietary programs , we notified bms that we did not intend to agree to an extension of the research term . accordingly , the initial four-year research term under the collaboration terminated on may 21 , 2019. we are currently in discussions with bms potentially to restructure or amend the collaboration and license agreement and other related agreements following the expiration of the research term . although such discussions are ongoing and may not result in any change to these arrangements , we believe that the final resolution of these discussions may result in material changes to our collaboration with bms . padua mutation in human factor ix patent family we own a patent family , including patents and patent applications , directed to the use of the padua mutation in human fix for gene therapy . a patent cooperation treaty application was filed on september 15 , 2009 , and patents have been issued in the united states , europe , and canada . further applications are pending in the united states , europe , and hong kong . the issued patents include claims directed to fix protein with a leucine at the r338 position of the protein sequence , nucleic acid sequences coding for this protein , and therapeutic applications , including gene therapy . the standard 20-year patent term of patents in this family will expire in 2029. on november 5 , 2019 , the uspto granted us a third patent , u.s. patent number 10,465,180 , which covers any aav comprising a nucleic acid encoding a fix-padua protein , and promoter sequences , transcription termination and control elements . the claims also cover fix-padua variants with at least 70 % sequence identity to fix-r338l . on june 13 , 2018 , we were granted european patent 2337849 directed to a fix polypeptide protein . the opposition period with respect to such patent expired on march 13 , 2019 , by which time five parties had filed an opposition . on july 25 , 2019 , we submitted responses to such oppositions with the european patent office , or epo , and expect that oral proceeding with respect to such oppositions will take place in june and july 2020. in addition , on may 15 , 2019 , a divisional european patent application in the fix-padua family , ep 3252157 , was refused . in september 2019 , we filed a notice of appeal with respect to such refusal . we are also pursuing a european divisional patent application that was filed on may 14 , 2019. on january 4 , 2020 , a petition seeking inter partes review of the ‘ 405 patent was filed by pfizer , inc. the petition seeks to invalidate claims 6 and 9-15 of the ‘ 405 patent . we are in the process of responding to the petition . 66 intellectual property portfolio in manufacturing we continue to strengthen the intellectual property related to our proprietary insect cell-based aav manufacturing process . in may 2018 , we announced that the uspto granted u.s. patent number 9,840,694 , which includes claims covering nanofiltration to selectively remove potential residual baculovirus from the product . we believe this nanofiltration step is important for product quality and safety and that nanofiltration generally may be required to comply with viral clearance standards established by global regulatory authorities . related patents were previously granted in europe , japan and several other jurisdictions . the 9,840,694 patent expands our intellectual property portfolio directed to large-scale manufacturing of aav in insect cells using baculovirus vectors .
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2019 financial highlights key components of our results of operations include the following : replace_table_token_3_th as of december 31 , 2019 , we had cash and cash equivalents of $ 377.8 million ( december 31 , 2018 : $ 234.9 million ) . we had a net loss of $ 124.2 million in 2019 , $ 83.3 million in 2018 and $ 79.3 million in 2017. as of december 31 , 2019 , we had an accumulated deficit of $ 659.7 million ( december 31 , 2018 : $ 535.5 million ) . we anticipate that our loss from operations will increase in the future as we : ● build-out our commercial infrastructure and seek marketing approval for any product candidates ( including etranacogene dezaparvovec ) that successfully complete clinical trials ; ● advance the clinical development of amt-130 for our huntington 's disease gene therapy program ; ● continue to build-out our clinical , medical and regulatory capabilities ; ● advance multiple research programs related to gene therapy candidates targeting liver-directed and cns diseases ; ● continue to expand , enhance and optimize our technology platform , including our manufacturing capabilities , next-generation viral vectors and promoters , and other enabling technologies ; ● acquire or in-license rights to new therapeutic targets or product candidates ; and ● maintain , expand and protect our intellectual property portfolio , including in-licensing additional intellectual property rights from third parties . see “ results of operations ” below for a discussion of the detailed components and analysis of the amounts above . 68 critical accounting policies and estimates in preparing our consolidated financial statements in accordance with u.s. gaap and pursuant to the rules and regulations promulgated by the securities and exchange commission ( “ sec ” ) we make assumptions , judgments and estimates that can have a significant impact on our net income/loss and affect the reported amounts of certain assets , liabilities , revenue and expenses , and related disclosures .
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the company rollins , inc. ( the “ company ” ) is an international service company with headquarters located in atlanta , georgia , providing pest and termite control services through its wholly-owned subsidiaries to both residential and commercial customers in the united states , canada , australia , europe , and asia with international franchises in canada , central and south america , the caribbean , the middle east , asia , europe , africa , and australia . services are performed through a contract that specifies the treatment and the pricing arrangement with the customer . 17 the company has one reportable segment , its pest and termite control business . the company 's results of operations and its financial condition are not reliant upon any single customer or a few customers or the company 's foreign operations . overview story_separator_special_tag style= '' font : 10pt times new roman , times , serif ; width : 100 % '' > 19 depreciation and amortization for the twelve months ended december 31 , 2020 , depreciation and amortization increased $ 7.2 million , or 8.9 % , compared to the twelve months ended december 31 , 2019. the dollar increase was primarily due to depreciation increasing $ 4.0 million , or 10.9 % , from the depreciation of acquired and purchased assets and depreciation from various it related projects . amortization of intangible assets increased $ 3.2 million , or 7.3 % , for 2020 due to the additional amortization of customer contracts from several acquisitions over the last year , including a full year of amortization for clark pest control acquired in april 2019 , as well as several smaller foreign and domestic companies . sales , general and administrative for the twelve months ended december 31 , 2020 , sales , general and administrative ( sg & a ) expenses increased $ 32.8 million , or 5.3 % , compared to the twelve months ended december 31 , 2019. sg & a decreased to 30.4 % of revenues for the year ended december 31 , 2020 compared to 30.9 % in 2019. the company eliminated any non-essential spending at the start of the pandemic which lowered expenses in several areas . travel restrictions reduced typical training , site visits and conference costs . conversely , we incurred higher than normal expenses in 2019 related to acquisition preparation and integration activities for clark pest control . gain / loss on sales of assets , net the company recorded a $ 1.6 million net loss on sales of assets for the year ended december 31 , 2020 compared to a net gain on sales of assets of $ 0.6 million in 2019. the company 's 2020 losses came primarily from liquidating the pension plan assets from the 2019 pension plan settlement . during 2019 , the company recorded gains from the sale of owned vehicles and other owned property . interest expense , net interest expense , net for the years ended december 31 , 2020 and 2019 was $ 5.1 million and $ 6.9 million respectively , driven largely by borrowings to fund acquisitions , among other things . taxes the company 's effective tax rate increased to 26.5 % in 2020 compared to 22.1 % in 2019 , due primarily to state and foreign income tax changes and limited tax deductibility for the accelerated stock vesting expense recognized in 2020. the 2019 rate was lower due to beneficial adjustments related to the 2019 pension settlement . liquidity and capital resources cash and cash flow cash from operating activities is the principal source of cash generation for our businesses . the most significant source of cash in rollins ' cash flow from operations is customer-related activities , the largest of which is collecting cash resulting from services sold . the most significant operating use of cash is to pay our suppliers , employees , tax authorities and others for a wide range of material and services . 20 the company 's cash and cash equivalents at december 31 , 2020 , 2019 , and 2018 were $ 98.5 million , $ 94.3 million , and $ 115.5 million , respectively . replace_table_token_10_th cash provided by operating activities the company 's operations generated cash of $ 435.8 million for the year ended december 31 , 2020 primarily from net income of $ 260.8 million , compared with cash provided by operating activities of $ 319.6 million in 2019 and $ 299.4 million in 2018. the company believes its current cash and cash equivalents balances , future cash flows expected to be generated from operating activities , available borrowings under its $ 175.0 million revolving credit facility and $ 250.0 million term loan facility will be sufficient to finance its current operations and obligations , and fund expansion of the business for the foreseeable future . the company settled its obligations under the rollins , inc. pension plan in 2019 without making any additional contributions during the years ended december 31 , 2019 or 2018. the plan was fully funded with a prepaid balance . the plan assets exceeded the plan benefit obligations , and $ 31.8 million remained after settlement . the company sold illiquid benefit plan asset investments during 2020 and used $ 18.0 million and $ 11.0 million of the $ 31.8 million during the years ended december 31 , 2020 and 2019 , respectively , to fund its 401 ( k ) match obligations . as of december 31 , 2020 , the company had approximately $ 1.2 million remaining of benefit plan assets which will likely be reverted to the company per erisa regulations in 2021. the company has one remaining pension in one of its wholly-owned subsidiaries . story_separator_special_tag factors that may impact future costs include termiticide life expectancy and government regulation . it is significant that the actual number of claims has decreased in recent years due to changes in the company 's business practices . however , it is not possible to precisely predict future significant claims . accruals for termite contracts are included in other current liabilities and long-term accrued liabilities on the company 's consolidated statements of financial position . accrued insurance— the company retains , up to specified limits , certain risks related to general liability , workers ' compensation and auto liability . risks are managed through either high deductible insurance or a non-affiliated group captive insurance member arrangement . the estimated costs of existing and future claims under the retained loss program are accrued based upon historical trends as incidents occur , whether reported or unreported ( although actual settlement of the claims may not be made until future periods ) and may be subsequently revised based on developments relating to such claims . the company contracts with an independent third-party actuary on a semi-annual basis to provide the company an estimated liability based upon historical claims information . the actuarial study is a major consideration in establishing the reserve , along with management 's knowledge of changes in business practice and existing claims compared to current balances . management 's judgment is inherently subjective as a number of factors are outside management 's knowledge and control . additionally , historical information is not always an accurate indication of future events . the company continues to be proactive in safety and risk management to develop and maintain ongoing programs to reduce and prevent claims . initiatives that have been implemented include required pre-employment screening and ongoing motor vehicle record review for all drivers , post-offer physicals for new employees , pre-hire , random and post incident drug testing , increased driver training and post-injury nurse triage for work-related injuries . the accruals and reserves we hold are based on estimates that involve a degree of judgment and are inherently variable and could be overestimated or insufficient . if actual claims exceed our estimates , our operating results could be materially affected , and our ability to take timely corrective actions to limit future costs may be limited . revenue recognition— the company 's revenue recognition policy is to recognize revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services . we enter into contracts that can include various combinations of products and services , each of which are distinct and accounted for as separate performance obligations . revenue is recognized net of allowances for refunds and any taxes collected from customers , which are subsequently remitted to governmental authorities . more on the company 's revenue recognition policy can be found in the company 's notes to the consolidated financial statements , note 1 - summary of significant accounting policies with the heading revenue recognition . contingency accruals —the company is a party to legal proceedings with respect to matters in the ordinary course of business . in accordance with the financial accounting standards board ( “ fasb ” ) accounting standards codification ( “ asc ” ) topic 450 “ contingencies , ” management estimates and accrues for its liability and costs associated with the litigation . estimates and accruals are determined in consultation with outside counsel . because it is not possible to accurately predict the ultimate result of the litigation , judgments concerning accruals for liabilities and costs associated with litigation are inherently uncertain and actual liabilities may vary from amounts estimated or accrued . however , in the opinion of management , the outcome of the litigation will not have a material adverse impact on the company 's financial condition or results of operations . contingency accruals are included in other current liabilities and long-term accrued liabilities on the company 's consolidated statements of financial position . recent accounting guidance see note 1 - summary of significant accounting policies of the notes to financial statements ( part ii , item 8 of this form 10-k ) for further discussion . 23 forward-looking statements this annual report contains forward-looking statements within the meaning of the private securities litigation reform act of 1995. such forward-looking statements include , but are not limited to , statements regarding : ( 1 ) the company continuing to expand its growth through the franchise program of its orkin brand ; ( 2 ) management 's belief that the company competes favorably with competitors as the world 's largest pest and termite control company ; ( 3 ) compliance with environmental and regulatory laws , legislative and regulatory requirements may have a material effect on the company 's capital expenditures , earnings , and competitive position and subject us to the possibility of regulatory and private actions or proceedings ; ( 4 ) failure to comply with consumer protection , privacy solicitation laws or regulations could subject us to involvement in lawsuits , enforcement actions and other claims by third parties or governmental authorities , losses to our reputation , business or licenses or substantial fines , damages or penalties that may affect how the business is operated , which , in turn , could have a material adverse effect on our financial position , results of operations and cash flows ; ( 5 ) franchise dispute could have a material adverse effect on our financial position , results of operations and cash flows ; ( 6 ) our belief that our maintenance of supplies is sufficient to fulfill our immediate needs and to alleviate any potential short-term shortage in availability of such supplies ; ( 7 ) the suitability and adequacy of our facilities to meet our current and reasonably anticipated future needs ; ( 8 ) our belief that the development and retention of high-quality talent leads to a better customer experience and better customer retention ; ( 9 ) our belief that if we make it a priority to
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results of operations replace_table_token_9_th general operating comments 2020 marked the company 's 23rd consecutive year of increased revenues . revenues for the year rose 7.2 percent to $ 2.161 billion compared to $ 2.015 billion for the prior year . income before income taxes increased 35.8 % to $ 354.7 million compared to $ 261.2 million the prior year . net income increased 28.3 % to $ 260.8 million , with earnings per diluted share of $ 0.53 compared to $ 203.3 million , or $ 0.41 per diluted share for the prior year . the drop in net income from 2018 to 2019 was primarily attributed to the pension settlement loss recorded in 2019. covid-19 pandemic impact as the pandemic challenges grew early in 2020 , the company made numerous operational adjustments to address the economic , health and safety challenges from the covid-19 pandemic . these included new covid-related procedures , modified customer service and related protocols , daily health screenings before entering shared offices , and a transition to remote work locations to reduce concentrations of personnel in offices where appropriate . cost containment efforts included furloughs , layoffs , elimination of non-essential travel , postponing capital expenditures , and temporary salary reductions for upper management , among other actions . customer retention during the pandemic is less predictable , and of greater immediate concern compared with our normal operations , however , our residential pest and termite control business has remained reasonably consistent with some growth over prior years . with many sheltering or working from home , we have experienced higher than normal demand for our residential services . our commercial pest control business has been more adversely impacted , as it crosses multiple industries such as healthcare , food processing , logistics , grocery , retail and hospitality . each of these industries is being impacted differently by the pandemic .
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our actual results and the timing of certain events may differ materially from those indicated in the forward looking statements . overview the goal of hanger , inc. ( the `` company '' ) is to be the world 's premier provider of services and products that enhance human physical capabilities . we provide orthotic and prosthetic patient care services , distribute o & p devices and components , manage o & p networks , and provide therapeutic solutions to the broader post-acute market . through our subsidiary , hanger prosthetics and orthotics , inc. , which we refer to as `` hanger clinic , '' we are the largest owner and operator of orthotic and prosthetic patient care clinics in the united states . we are also one of the largest distributors of o & p products in the united states through our distribution subsidiary , southern prosthetic supply , inc. ( `` sps '' ) . we operate in excess of 740 o & p patient care clinics located in 45 states and the district of columbia and six strategically located distribution facilities . in addition to providing o & p services and products we , through our subsidiary , linkia llc ( `` linkia '' ) , manage an o & p network and develop programs to manage all aspects of o & p patient care for insurance companies . we provide therapeutic solutions through our subsidiaries innovative neurotronics and accelerated care plus corp. innovative neurotronics ( `` in , inc. '' ) introduces emerging neuromuscular technologies developed through independent research in a collaborative effort with industry suppliers worldwide . accelerated care plus corp. ( `` acp '' ) is a developer of specialized rehabilitation technologies and a leading provider of evidence-based clinical programs for post-acute rehabilitation serving more than 4,550 long-term care facilities and other sub-acute rehabilitation providers throughout the u.s. we have increased our net sales during the past two years through organic growth , acquisitions and opening of new patient care clinics , increased distribution revenues though targeted sales efforts and increased product offerings , and continued growth in revenue associated with the linkia contracts . our operations include three reportable segmentspatient care , distribution , and therapeutic solutions . we are analyzing the current reporting structure and assessing whether we may change the way information is reported and analyzed internally . if we were to realign the way we report information and analyze our business internally , we will realign our business segments accordingly . patient care as of december 31 , 2012 , we provided o & p patient care services through over 740 patient care clinics and over 1,300 clinicians in 45 states and the district of columbia . for the years ended december 31 , 2012 and 2011 , net sales attributable to our patient care services were $ 813.6 million and $ 753.4 million , respectively . patients are referred to our local patient care clinics directly by physicians as a result of our reputation or through our agreements with managed care providers . in our orthotics business , we design , fabricate , fit and maintain a wide range of standard and custom-made braces and other devices ( such as spinal , knee and sports-medicine braces ) that provide external support to patients suffering from musculoskeletal disorders , such as ailments of the back , extremities or joints and injuries from sports or other activities . in our prosthetics business , we design , fabricate , fit and maintain custom-made artificial limbs for patients who are without limbs as a result of traumatic injuries , vascular diseases , diabetes , 25 cancer or congenital disorders . o & p devices are increasingly technologically advanced and are custom-designed to add functionality and comfort to patients ' lives , shorten the rehabilitation process and lower the cost of rehabilitation . our clinicians are also responsible for managing and operating our patient care clinics and are compensated , in part , based on their success in managing costs and collecting accounts receivable . we provide centralized administrative , marketing and materials management services to take advantage of economies of scale and to increase the time clinicians have to provide patient care . in areas where we have multiple patient care clinics , we also utilize shared fabrication facilities where technicians fabricate devices for clinicians in that region . distribution we distribute o & p products , components , devices and supplies to our customers and to our own patient care clinics through our wholly-owned subsidiary , sps . we are also a leading fabricator and distributor of therapeutic footwear for diabetic patients in the podiatric market . for the year ended december 31 , 2012 , 35.9 % or approximately $ 107.3 million of sps distribution sales were to third-party o & p services providers , and the balance of approximately $ 191.2 million represented intercompany sales to hanger clinic 's patient care clinics . sps maintains in inventory approximately 33,000 individual skus manufactured by more than 390 different companies . sps maintains distribution facilities in california , florida , georgia , illinois , pennsylvania , and texas , which allows us to deliver products via ground shipment anywhere in the contiguous united states typically within two business days . our distribution business enables us to : centralize our purchasing and thus lower our material costs by negotiating purchasing discounts from manufacturers ; reduce our patient care clinic inventory levels and improve inventory turns ; perform inventory quality control ; encourage our patient care clinics to use clinically appropriate products that enhance our profit margins ; and coordinate new product development efforts with key vendor `` partners '' . story_separator_special_tag we have chosen accounting policies within gaap that management believes are appropriate to accurately and fairly report our operating results and financial position in a consistent 27 manner . management regularly assesses these policies in light of current and forecasted economic conditions . our accounting policies are stated in note b to the consolidated financial statements included elsewhere in this annual report on form 10-k. we believe the following accounting policies are critical to understanding our results of operations and the more significant judgments and estimates used in the preparation of our consolidated financial statements . revenue recognition : revenues in our patient care segment are derived from the sale of o & p devices and the maintenance and repair of existing devices and are recorded net of all known contractual adjustments and discounts . the sale of o & p devices includes the design , fabrication , assembly , fitting and delivery of a wide range of braces , limbs and other devices . revenues from the sale of these devices are recorded when ( i ) acceptance by and delivery to the patient has occurred ; ( ii ) persuasive evidence of an arrangement exists and there are no further obligations to the patient ; ( iii ) the sales price is fixed or determinable ; and ( iv ) collectability is reasonably assured . revenues from maintenance and repairs are recognized when the service is provided . revenues on the sale of o & p devices to customers by the distribution segment are recorded upon the shipment of products , in accordance with the terms of the invoice , net of merchandise returns . discounted sales are recorded at net realizable value . revenues in our therapeutic solutions are primarily derived from leasing rehabilitation technology combined with clinical therapy programs and education and training . the revenue is recorded on a monthly basis according to terms of the contracts with our customers . certain accounts receivable may be uncollectible , even if properly pre-authorized and billed . regardless of the balance , accounts receivable amounts are periodically evaluated to assess collectability . in addition to the actual bad debt expense recognized during collection activities , we estimate the amount of potential bad debt expense that may occur in the future . this estimate is based upon our historical experience as well as a review of our receivable balances . on a quarterly basis , we evaluate cash collections , accounts receivable balances and write-off activity to assess the adequacy of our allowance for doubtful accounts . additionally , a company-wide evaluation of collectability of receivable balances older than 180 days is performed at least semi-annually , the results of which are used in the next allowance analysis . in these detailed reviews , the account 's net realizable value is estimated after considering the customer 's payment history , past efforts to collect on the balance and the outstanding balance , and a specific reserve is recorded if needed . from time to time , we may outsource the collection of such accounts to collection agencies after internal collection efforts are exhausted . in cases where valid accounts receivable can not be collected , the uncollectible account is written off to bad debt expense . the following represents the composition of our accounts receivable balance by payor : replace_table_token_9_th 28 replace_table_token_10_th inventories : inventories in the patient care segment consisting principally of raw materials and work-in-process , which amounted to $ 96.6 million and $ 81.0 million as of december 31 , 2012 and 2011 , respectively , are valued based on the gross profit method which approximates lower of cost or market using the first-in first-out method . we apply the gross profit method on a patient care clinic basis in this segment 's inventory to determine ending inventory at the end of each interim period except on october 31 st , which is the date of our physical inventory . the annual physical inventory for this segment values the inventory at lower of cost or market using the first-in first-out method and includes work-in-process consisting of materials , labor and overhead which is valued based on established standards for the stage of completion of each custom order . adjustments to reconcile the physical inventory to our books are treated as changes in accounting estimates and are recorded in the fourth quarter . we recorded fourth quarter adjustments of a decrease of $ 0.5 million , an increase of $ 2.3 million and a decrease of $ 1.0 million to inventory as of october 31 , 2012 , 2011 and 2010 , respectively . the october 31 st inventory is subsequently adjusted during interim periods to apply the gross profit method described above . inventories in the distribution and therapeutic solutions segments consist principally of finished goods which are stated at the lower of cost or market using the first-in , first-out method for all reporting periods and are valued based on perpetual records . fair value : the company follows the authoritative guidance for financial assets and liabilities , which establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements . the authoritative guidance requires disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy by which these assets and liabilities must be categorized , based on significant levels of inputs as follows : level 1 unadjusted quoted prices for identical assets or liabilities in active markets accessible by the company level 2 inputs that are observable in the marketplace other than those inputs classified as level 1 level 3 inputs that are unobservable in the marketplace and significant to the valuation the determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement .
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results of operations the following table sets forth , for the periods indicated , certain items from our consolidated statements of income and comprehensive income as a percentage of our net sales : replace_table_token_12_th year ended december 31 , 2012 compared with the year ended december 31 , 2011 net sales . net sales for the year ended december 31 , 2012 increased by $ 67.1 million , or 7.3 % , to $ 985.6 million from $ 918.5 million last year . the sales increase was principally the result of a $ 30.1 million , or 4.0 % , increase in same center sales ; a $ 30.2 million increase from acquired entities ; and a $ 6.8 million , or 6.8 % , increase in sales of the distribution segment . material costs . material costs for the year ended december 31 , 2012 were $ 296.2 million , an increase of $ 26.0 million , or 9.6 % , over $ 270.2 million for the same period in the prior year . the increase was the result of the growth in sales and change of product mix . material costs as a percentage of net sales increased to 30.1 % in 2012 from 29.4 % in 2011. personnel costs . personnel costs for the year ended december 31 , 2012 increased by $ 13.8 million to $ 335.3 million from $ 321.5 million for the year ended december 31 , 2011. the increase from prior year was primarily due to $ 10.2 million of personnel costs associated with acquired patient care clinics , and other increases in salary expense , commissions and benefits . other operating expenses . other operating expenses , which are comprised primarily of professional , office , bad debt , incentive compensation and reimbursable employee expenses , increased $ 11.0 million in 2012 to $ 188.9 million from $ 177.9 million for the year ended december 31 , 2011. the increase was attributable to $ 4.2 million related to acquisitions , $ 3.3
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the amortization of deferred 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 that appear elsewhere in this annual report on form 10-k. forward-looking statements this disclosure includes forward-looking statements ; and actual results and events may differ substantially from those discussed or highlighted in these forward-looking statements . see “ cautionary note regarding forward-looking statements . ” overview our business we market and sell vois , manage vacation resorts in top leisure and urban destinations and operate a point-based vacation club . as of december 31 , 2019 , we had 59 properties , representing 9,540 units , and approximately 326,000 hilton grand vacations club and hilton club ( collectively the “ club ” ) members . club members have the flexibility to exchange their vois for stays at any hilton grand vacations resort or any property in the hilton system of 18 industry-leading brands across approximately 6,000 properties , as well as numerous experiential vacation options , such as cruises and guided tours . on january 3 , 2017 , hilton completed a tax-free spin-off of hgv and park . as a result of the spin-off , hgv became an independent publicly-traded company and our common stock is listed on the new york stock exchange under the symbol “ hgv. ” following the spin-off , hilton did not retain any ownership in our company . in connection with the spin-off , we entered into agreements with hilton and other third parties , including licenses to use the hilton grand vacations brand . for more information regarding these agreements , see “ —key agreements related to the spin-off ” in this annual report on form 10-k. we operate our business across two segments : ( 1 ) real estate sales and financing ; and ( 2 ) resort operations and club management . real estate sales and financing our primary product is the marketing and selling of fee-simple vois deeded in perpetuity and right to use real estate interests , developed either by us or by third parties . this ownership interest is an interest in real estate generally equivalent to one week on an annual basis , at the timeshare resort where the voi was purchased . traditionally , timeshare operators have funded 100 percent of the investment necessary to acquire land and construct timeshare properties . in 2010 , we began sourcing vois through fee-for-service and just-in-time agreements with third-party developers and have focused our inventory strategy on developing an optimal inventory mix focused on developed properties as well as fee-for-service and just-in-time agreements . the fee-for-service agreements enable us to generate fees from the sales and marketing of the vois and club memberships and from the management of the timeshare properties without requiring us to fund acquisition and construction costs . the just-in-time agreements enable us to source voi inventory in a manner that allows us to correlate the timing of acquisition of the inventory with the sale to purchasers . sales of owned , including just-in-time inventory , generally result in greater adjusted ebitda contributions , while fee-for-service sales require less initial investment and allow us to accelerate our sales growth . both sales of owned inventory and fee-for-service sales generate long-term , predictable fee streams , by adding to the club membership base and properties under management , that generate strong returns on invested capital . for the year ended december 31 , 2019 , sales from fee-for-service , just-in-time and developed inventory sources were 54 percent , 20 percent and 26 percent , respectively , of contract sales . see “ —real estate sales metrics ” for additional discussion of contract sales . based on our 2019 sales pace , we have access to approximately seven years of future inventory , with capital efficient arrangements representing approximately 54 percent of that supply . we believe that the visibility into our long-term supply allows us to efficiently manage inventory to meet predicted sales , reduce capital investments , minimize our exposure to the cyclicality of the real estate market and mitigate the risks of entering into new markets . 44 we sell our vacation ownership products under the hilton grand vacations brand primarily through our distribution network of both in-market and off-site sales centers . our products are currently marketed for sale throughout the united states and the asia-pacific region . we operate sales distribution centers in major markets and popular leisure destinations with year-round demand and a history of being a friendly environment for vacation ownership . we have sales distribution centers in las vegas , orlando , oahu , japan , new york , myrtle beach , waikoloa , washington d.c. , hilton head , park city , chicago , korea and carlsba d . our marketing and sales activities are based on targeted direct marketing and a highly personalized sales approach . we use targeted direct marketing to reach potential members who are identified as having the financial ability to pay for our products and have an affinity with hilton and are frequent leisure travelers . tour flow quality impacts key metrics such as close rate and vpg , defined in “ key business and financial metric s and terms used by management— real estate sales metrics. ” additionally , the quality of tour flow impacts sales revenue and the collectability of our timeshare financing receivables . for the year ended december 31 , 2019 , 54 percent of our contract sales were to our existing owners . we provide financing for members purchasing our developed and acquired inventory and generate interest income . our timeshare financing receivables are collateralized by the underlying vois and are generally structured as 10-year , fully-amortizing loans that bear a fixed interest rate typically ranging from 9 percent to 18 percent per annum . financing propensity was 66.2 percent and 65.8 percent for the year ended december 31 , 2019 and 2018 , respectively . story_separator_special_tag the corresponding expenses are presented as cost reimbursements expense in our consolidated statements of operations resulting in no effect on net income . 46 factors affecting revenues relationships with developers . in recent years , we have entered into fee-for-service and just-in-time agreements to sell vois on behalf of or acquired from third-party developers . the success and sustainability of our capital-efficient business model depends on our ability to maintain good relationships with third-party developers . our relationships with these third parties also generate new relationships with developers and opportunities for property development that can support our growth . we believe that we have strong relationships with our third-party developers and are committed to the continued growth and development of these relationships . these relationships exist with a diverse group of developers and are not significantly concentrated with any particular third party . construction activities . in recent years , we have entered into agreements with third parties to acquire both completed vois and property . at the same time , we have increased our own development activities to construct new properties that we will own and from which we are selling , and will continue to sell , units and vois . these activities , and in particular the development of real property into inventory , are subject to construction risks including , construction delays , zoning and other local , state or governmental approvals and failure by third-party contractors to perform . the realization of these factors could result in the inability to source inventory and ultimately lead to sales declines . registration activities . the registration of vois for sale requires time and cost , and in many jurisdictions the exact date of registration approval can not be predicted accurately . the inability to register our products in a timely , cost-effective fashion could result in the inability to sell our products and ultimately lead to sales declines . relationship with hilton . following the spin-off , hilton retained ownership of the hilton-branded trademarks , tradenames and certain related intellectual property used in the operation of our business . we entered into a license agreement with hilton granting us the right to use the hilton-branded trademarks , trade names and related intellectual property in our business for the term of the agreement . the termination of the license agreement or exercise of other remedies would materially harm our business and results of operations and impair our ability to market and sell our products and maintain our competitive position . for example , if we are not able to rely on the strength of the hilton brands to attract prospective members and guest tours in the marketplace , our revenue would decline and our marketing and sales expenses would increase . consumer demand and global economic conditions . consumer demand for our products and services may be affected by the performance of the general economy , including the ability to generate high quality tours , and is sensitive to business and personal discretionary spending levels . declines in consumer demand due to adverse general economic conditions , risks affecting or reducing travel patterns , lower consumer confidence and adverse political conditions can subject and have subjected our revenues to significant volatility . marketing . we rely on call transfers from hilton , execution of a successful digital marketing strategy , vacation traffic at key locations , and other critical marketing elements to increase tour flow , vpg , and voi sales , thereby increasing our revenue . any significant changes to one or more factors that adversely affect our marketing activities , such as changes in consumer behavior and preference for vacations , decreases in call transfers from hilton due to increasing consumer reliance on digital tools , and declining quality and or volume of tour flow may adversely and materially impact our revenue . interest rates . we generate interest income from consumer loans we originate and declines in interest rates may cause us to lower our interest rates on our originated loans , which would adversely affect our income generated on future loans . conversely , if interest rates increase significantly , it would increase the cost of purchasing vois for any purchaser who is financing their acquisition and may deter potential purchasers from buying a voi , which could result in sales declines . competition . we compete with other hotel and resort timeshare operators for sales of vois based principally on location , quality of accommodations , price , service levels and amenities , financing terms , quality of service , terms of property use , reservation systems and flexibility for voi owners to exchange into time at other timeshare properties or other travel rewards . in addition , we compete based on brand name recognition and reputation . our primary branded competitors in the timeshare space include marriott vacations worldwide ( which includes marriott vacations worldwide , interval leisure group , vistana signature club and hyatt residence club brands ) , wyndham destinations , disney vacation club , holiday inn club vacations , bluegreen vacations and diamond resorts international . 47 principal components of expenses cost of voi sales represents the costs attributable to the sales of owned vois recognized , as well as charges incurred related to granting credit to customers for their existing ownership when upgrading into fee-for-service projects . sales and marketing represents costs incurred to sell and market vois , including costs incurred relating to marketing and incentive programs , costs for tours , rental expense and wages and sales commissions . financing represents consumer financing interest expense related to our debt securitized by gross timeshare financing receivables ( ‘ ‘ securitized debt ” ) and timeshare facility , amortization of the related deferred loan costs and other expenses incurred in providing consumer financing and servicing loans . resort and club management represents costs incurred to manage resorts and the club , including payroll and related costs and other administrative costs .
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results of operations year ended december 31 , 2019 compared with year ended december 31 , 2018 the following discussion and analysis of our financial condition and results of operations is for the year ended december 31 , 2019 compared with the year ended december 31 , 2018. for a discussion and analysis of our financial condition and results of operations for the year ended december 31 , 2018 compared to december 31 , 2017 , see part ii , item 7 , “ management 's discussion and analysis of financial condition and results of operations ” included in the 2018 annual report on form 10-k , filed with the securities and exchange commission on february 28 , 2019 , which is available on the sec website at www.sec.gov . segment results the following table presents our revenues by segment for the year ended december 31 2019 fiscal year compared the year ended december 31 , 2018. we do not include equity in earnings from unconsolidated affiliates in our measures of segment revenues . replace_table_token_4_th ( 1 ) refer to note 21 : business segments in our audited consolidated financial statements included in item 8 of this annual report on form 10-k for details on the intersegment eliminations . 51 we evaluate our business segment operating performance using segment adjusted ebitda , as described in note 21 : business segments in our audited consolidated financial statements included in item 8 of this annual report on form 10-k. for a discussion of our definition of ebitda and adjusted ebitda , how management uses them to manage our business and material limitations on their usefulness , refer to “ —key business and financial metrics and terms used by management—ebitda and adjusted ebitda. ” the following table reconciles net income , our most comparable u.s. gaap financial measure , to ebitda and adjusted ebitda : replace_table_token_5_th ( 1 ) fluctuation in terms of percentage change is not meaningful .
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you can identify these forward-looking statements by words such as “ may , ” “ will , ” “ should , ” “ expect , ” “ anticipate , ” “ believe , ” “ estimate , ” “ intend , ” “ plan ” and other similar expressions . you should consider our forward-looking statements in light of the risks discussed under the heading “ risk factors , ” as well as our consolidated financial statements , related notes , and the other financial information appearing elsewhere in this report and our other filings with the united states securities and exchange commission . the forward-looking statements contained in this report are made as of the date hereof and the company assumes no obligation to update or supplement any forward-looking statements . you should read the following management 's discussion and analysis of financial condition and results of operations in conjunction with the consolidated financial statements and the related notes that appear elsewhere in this report . business overview the company the first international house of pancakes restaurant opened in 1958 in toluca lake , california . shortly thereafter , the company 's predecessor began developing and franchising additional restaurants . the company was incorporated under the laws of the state of delaware in 1976 with the name ihop corp. in november 2007 , the company completed the acquisition of applebee 's international , inc. , which became a wholly-owned subsidiary of the company . effective june 2 , 2008 , the name of the company was changed to dineequity , inc. ( `` dineequity , '' `` we '' or `` our '' ) . through various subsidiaries ( see exhibit 21 , subsidiaries of dineequity , inc. ) we own , franchise and operate two restaurant concepts : applebee 's neighborhood grill & bar ® ( `` applebee 's '' ) , in the bar and grill segment of the casual dining category of the restaurant industry , and international house of pancakes ® ( `` ihop ® `` ) , in the family dining category of the restaurant industry . references herein to applebee 's and ihop restaurants are to these two restaurant concepts , whether operated by franchisees , area licensees or the company . domestically , ihop restaurants are located in all 50 states and the district of columbia , while applebee 's restaurants are located in every state except hawaii . internationally , ihop restaurants are located in two united states territories and five foreign countries ; applebee 's restaurants are located in one united states territory and 15 foreign countries . with over 3,600 restaurants combined , we believe we are the largest full-service restaurant company in the world . our vision to become the preferred franchisor of choice and deliver maximum franchisee and shareholder value . our mission to unite great franchisees , iconic brands and team members to create the world 's leading restaurant company - one guest at a time . to achieve this mission , our strategies are designed to ensure strong brands ; drive profitable , organic growth ; identify and exploit complementary concepts and extensions ; and create and monetize new value-added services . story_separator_special_tag style= '' width:60px ; '' > focused on late-night business through beverage and appetizer innovation and local restaurant marketing efforts . invest in process and product innovation we continue to invest in and drive innovation at applebee 's from both a product and process perspective . we maintain a significant test and implementation focus to both develop and discover new trends and opportunities within the casual dining segment and beyond . our history of innovation is readily apparent in our continual evolution of limited-time product offerings as well as core menu items . we take a similar approach to evaluation of media strategies and consumer touch points transform the business in june 2010 , we rolled out “ connections , ” the new comprehensive restaurant revitalization program involving people , place and promotional aspects . the people aspect involves re-training and re-certification for kitchen staff and team members . the place aspect involves exterior and interior modifications to the restaurant to signal change . the promotional aspect involves a local public relations and marketing plan to re-connect with the neighborhood . our franchisees have embraced this initiative and by year-end 2012 , over 50 % of the restaurants in the domestic system have been revitalized . the company achieved its strategy to transition to a 99 % franchise-operated applebee 's system in 2012 which includes buyers who are financially qualified , share our vision for revitalizing the applebee 's brand , are willing to invest in the business , and have 32 well-qualified management teams . during 2012 , we refranchised 154 company-operated restaurants . this highly franchised business model is expected to require less capital investment and general and administrative overhead , improve overall segment profit margins and reduce the volatility of cash flow performance . improve margins and restaurant level economics we have continued to build upon process and system improvements deployed in prior years by improving our operating metrics . food inventory management and labor efficiencies were realized during the first half of 2012 in company-operated restaurants . these operational improvements helped mitigate the impact of increasing commodity costs and higher payroll expense . we continued to reap the benefits of our supply chain co-op by leveraging our scale to manage through commodity cost inflation , which was also mitigated by the realignment of our distribution centers in 2010. with our transition to a 99 % franchised system , restaurant operating margin at the remaining 23 company-operated restaurants will become less impactful to our results of operations . given that the primary focus of these restaurants in the future will be to test new products and processes , their operating margin as a percentage of sales is expected to decline . story_separator_special_tag the unemployment rate declined from december 2011 to december 2012 , but the unemployment rate rose in january 2013. we believe uncertainty over the degree and duration of the economic recovery , the impact of the expiration of the 2 % payroll tax cut that had been in place for the last two years and possible deficit reduction measures may continue to temper consumer discretionary spending . a decline or lack of growth in disposable income for discretionary spending could cause our customers to change purchasing behavior and choose lower-cost dining options or alternatives to dining out . these factors could have an adverse effect on our business , results of operations and financial condition . sales trends replace_table_token_12_th applebee 's domestic system-wide same-restaurant sales increased 1.2 % for the year ended december 31 , 2012. this marked the third consecutive year of same-restaurant sales growth , with increases in nine of the last ten consecutive quarters . the increase in same-restaurant sales during 2012 was driven by an increase in average guest check offset by a decline in guest traffic . the higher average guest check came from an increase in menu pricing and an increase from favorable product mix changes . ihop 's domestic system-wide same-restaurant sales decreased 1.6 % for the year ended december 31 , 2012. the decrease was primarily due to a decline in guest traffic , partially offset by a higher average guest check compared to fiscal 2011. the decline in ihop 's domestic system-wide same-restaurant sales in 2012 reflects , in part , that the initiatives we are undertaking to improve our sales performance were not fully implemented for all of 2012. we expect that it will take several visitation and product promotion cycles for consumers to see , experience and taste the actions we have taken . 34 capital allocation strategy on february 26 , 2013 , our board of directors approved a capital allocation strategy that contemplates the return of a significant portion of our free cash flow to our stockholders . the board of directors approved the payment of a cash dividend of $ 0.75 per share of our common stock , payable at the close of business on march 29 , 2013 to the stockholders of record as of the close of business on march 15 , 2013. the board of directors also approved a stock repurchase authorization of up to $ 100 million of our common stock , replacing the previously announced $ 45 million authorization , pursuant to which $ 21.2 million of common stock was repurchased . debt modification and retirements on february 4 , 2013 , we entered into an amendment to our credit agreement . the amendment lowers the interest rate floor on our term loan borrowings under the credit agreement by 0.50 % , eliminates the interest rate floor on our revolving loans under the credit agreement , reduces the amount of required debt repayments from our excess cash flow and modifies the calculation of the permitted amount of restricted payments ( see `` liquidity and capital resources of the company - february 2013 amendment '' ) . we will recognize costs of approximately $ 1.2 million in our 2013 consolidated statements of operations related to this debt modification . during the year ended december 31 , 2012 , we repaid $ 210.5 million of outstanding borrowings under the credit agreement and we repurchased $ 5.0 million of our 9.5 % senior notes . including the write-off of the discount and deferred financing costs related to the debt retired and a $ 0.5 million premium paid on the senior notes , we recognized a loss on the retirement of debt of $ 5.6 million . additionally , as the result of refranchising 154 applebee 's company-operated restaurants , we were released from financing obligations of $ 111.5 million related to 66 of the properties refranchised . financial statement effect of refranchising company-operated restaurants as noted under “ 2012 highlights ” above , we have reached our goal of transitioning applebee 's to a 99 % franchised system . compared to amounts that have been reported historically since the applebee 's acquisition , the amounts reported in future periods for company-operated restaurant revenues and expenses will be considerably smaller , while franchise royalty revenues and expenses should increase . our segment profit margin percentage will increase but total segment profit will likely be smaller because royalties from franchised restaurants are a smaller percentage of restaurant revenues than the historic restaurant operating profit margin percentage of company-operated restaurants . however , changes in same-restaurant sales will create less of an impact on operating income now that the applebee 's system is 99 % franchised . additionally , our interest expense will be lower because the after-tax proceeds from the sale of restaurant assets were used to retire debt . the completed refranchising of the applebee 's company-operated restaurants also will result in a reduction of both general and administrative expenses and required capital investment in restaurant assets as compared to amounts reported prior to the completion of our refranchising strategy . significant gains and charges there were several significant gains and charges that affect the comparisons of fiscal year 2012 results with the previous periods presented herein , as shown in the following table : replace_table_token_13_th each transaction is discussed in further detail as to the activity that occurred in each year under paragraphs captioned with these descriptions elsewhere in item 7. our long-lived tangible and intangible assets ( including goodwill ) must be assessed continually for indicators of impairment . goodwill and intangible assets comprised 62 % of our total assets as of december 31 , 2012 . while there have been no impairments of goodwill or intangible assets over the past three years , given the uncertainty as to future economic and other assumptions used in assessing impairments , it is possible that significant impairment charges may occur in future periods .
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2012 highlights 2012 marked the fifth anniversary of bringing together two of the world 's most-iconic dining brands under one enterprise . the highlight of this anniversary year was the achievement of our vision of becoming a 99 % franchised company with the completion of refranchising the vast majority of the company-owned restaurants operated by applebee 's when we closed the acquisition five years ago . we believe a highly franchised business model requires less capital investment and general and administrative overhead , generates higher gross profit margins and reduces the volatility of free cash flow performance , as compared to a model based on operating a significant number of company-owned restaurants . 30 other highlights of our fiscal 2012 performance include : reducing our long-term debt by $ 332.6 million , which lowered our consolidated leverage ratio to 4.6:1 at december 31 , 2012 from 5.3:1 at december 31 , 2011. the reduction primarily came from a combination of after-tax cash proceeds and elimination of financing obligations from the refranchising of applebee 's company-operated restaurants and from our free cash flow ; increasing applebee 's domestic same-restaurant sales by 1.2 % during 2012 , the third consecutive year of same-restaurant sales growth . applebee 's same-restaurant sales have increased in nine of the last ten quarters ; opening 48 new restaurants worldwide by ihop franchisees and area licensees and 34 new restaurants by applebee 's franchisees . ihop 's international footprint was expanded with franchise openings in the middle east and the dominican republic ; remodeling over 560 restaurants system-wide during 2012. applebee 's and its franchisees remodeled 370 restaurants during 2012 , while ihop and its franchisees remodeled 191 restaurants . over the past two years , 51 % of applebee 's restaurants and approximately one-third of ihop restaurants have been remodeled ; executing a comprehensive restructuring of general and administrative functions that will reduce future costs .
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our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the exchange act is recorded , processed , summarized and reported within the time periods specified in the securities and exchange commission 's rules and forms , and that such information is accumulated and communicated to our management , including the chief executive officer and the chief financial officer , to allow timely decisions regarding required disclosures . any controls and procedures , no matter how well designed and operated , can provide only reasonable assurance of achieving the desired control objective and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures . based on this evaluation , our chief story_separator_special_tag some of the statements under in this “ management 's discussion and analysis of financial condition and results of operations ” are forward-looking statements . these forward-looking statements are based on management 's beliefs and assumptions and on information currently available to our management and involve significant elements of subjective judgment and analysis . words such as “ may , ” “ will , ” “ should , ” “ could , ” “ would , ” “ expect , ” “ plan , ” “ anticipate , ” “ believe , ” “ estimate , ” “ project , ” “ predict , ” “ potential , ” “ seek ” “ target , ” “ goals , ” “ intend , ” variations of such words , and similar expressions are intended to identify forward-looking statements . our actual results and the timing of events may differ significantly from the results discussed in the forward-looking statements . factors that might cause such a difference include those discussed under the caption “ special note regarding forward looking statements ” and in “ risk factors ” and elsewhere in this annual report on form 10-k. these and many other factors could affect our future financial and operating results . we undertake no obligation to update any forward-looking statement to reflect events after the date of this annual report . overview we are a clinical-stage pharmaceutical company focused on discovering and developing novel small molecule drugs directed against tumor metabolism and tumor immunology targets for the treatment of cancer . tumor metabolism and tumor immunology have emerged as promising new fields for cancer drug discovery , and recent clinical successes with therapeutic agents in each field have demonstrated the potential to create fundamentally new therapies for cancer patients . our lead product candidate , cb-839 , is an internally discovered , first-in-class inhibitor of glutaminase , a critical enzyme in tumor metabolism . we are currently evaluating cb-839 in three phase 1 clinical trials in solid and hematological tumors . our lead preclinical program in tumor immunology is directed at developing inhibitors of the enzyme arginase and may provide a first-in-class therapeutic agent for this novel target . our ongoing research efforts are focused on discovering additional product candidates against novel tumor metabolism and immunology targets . the field of tumor metabolism seeks to exploit the unique ways in which cancer cells take up and utilize nutrients in order to grow and survive . our lead product candidate in tumor metabolism , cb-839 , takes advantage of the pronounced dependency many cancers have on the nutrient glutamine for growth and survival . cb-839 inhibits glutaminase , an enzyme required by cancer cells to utilize glutamine effectively . we are currently conducting three phase 1 clinical trials of cb-839 in the united states in patients with solid tumors , leukemias , lymphomas and multiple myeloma . the purpose of these trials is to evaluate the safety of cb-839 both as a single agent and in combination with approved therapies and to seek preliminary evidence of efficacy . pending input from the fda on the results of our phase 1 trials and phase 2 trial protocols , we plan to initiate one or more phase 2 clinical trials of cb-839 in 2016. we currently hold all commercial rights to cb-839 . our second program in tumor metabolism is focused on the hexokinase ii enzyme . a defining characteristic of most cancer cells is their increased uptake of glucose . cancer cells use glucose in a different manner than normal cells , but an obligate first step in all glucose utilizing pathways is phosphorylation of glucose by the enzyme hexokinase . due to their higher glucose needs , cancer cells frequently increase the level of this critical enzyme , specifically the isoform hexokinase ii . we believe inhibitors of hexokinase ii will significantly impede the ability of cancer cells to survive and proliferate and may lead to new approaches in treating cancer . our new program in hexokinase ii inhibitors was in-licensed from transtech pharma and we seek to identify and advance a drug candidate into clinical development as quickly as possible . we will provide additional details on our development plans and timelines in the near future as we undertake pre-clinical studies to profile our portfolio of hexokinase ii inhibitors . the field of tumor immunology seeks to activate the body 's own immune system to attack and kill cancer cells . our preclinical program in tumor immunology is focused on developing selective inhibitors of the enzyme arginase . arginase depletes arginine , a nutrient that is critical for the activation , growth and survival of the body 's cancer-fighting immune cells . we believe that inhibitors of arginase can promote an anti-tumor immune response by restoring arginine levels , thereby allowing activation of the body 's cancer-fighting immune cells . we are currently optimizing arginase inhibitors with the aim of submitting an ind application to the fda in early 2016. since our inception in 2010 , we have devoted substantially all of our resources to identifying and developing cb-839 , advancing our preclinical programs , conducting clinical trials and providing general and administrative support for these operations . story_separator_special_tag we have never paid dividends on our common stock and have no plans to pay dividends on our common stock . therefore , we used an expected dividend yield of zero . in addition to the black-scholes assumptions , we estimate our forfeiture rate based on an analysis of our actual forfeitures and will continue to evaluate the adequacy of the forfeiture rate based on actual forfeiture experience , analysis of employee turnover behavior , and other factors . the impact from any forfeiture rate adjustment would be recognized in full in the period of adjustment and if the actual number of future forfeitures differs from our estimates , we might be required to record adjustments to stock-based compensation in future periods . prior to our ipo in october 2014 , the fair value of the shares of common stock underlying our share-based awards were estimated on each grant date by our board of directors . in order to determine the fair value of our common stock underlying option grants , our board of directors considered , among other things , timely valuations of our common stock prepared by an unrelated third-party valuation firm in accordance with the guidance provide by the american institute of certified public accountants practice guide , valuation of privately-held-company equity securities issued as compensation . given the absence of a public trading market for our common stock , our board of directors exercised reasonable judgment and considered a number of objective and subjective factors to determine the best estimate of the fair value of our common stock , including our stage of development ; progress of our research and development efforts ; the rights , preferences and privileges of our preferred stock relative to those of our common stock ; equity market conditions affecting comparable public companies and the lack of marketability of our common stock . after the closing of our ipo , our board of directors determines the fair value of each share of underlying common stock based on the closing price of our common stock as reported by the nasdaq global market on the date of grant . income taxes as of december 31 , 2014 , we had approximately $ 48.6 million and $ 48.0 million , respectively , of federal and state operating loss carryforwards available to reduce future taxable income that will begin to expire in 2030 for federal and state tax purposes . as of december 31 , 2014 , we also had research and development tax credit carryforwards of approximately $ 1.6 million and $ 1.4 million , respectively , for federal and state purposes available to offset future taxable income tax . if not utilized , the federal carryforwards will expire in various amounts beginning in 2030 , and the state credits can be carried forward indefinitely . utilization of the net operating loss carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the internal revenue code of 1986 , as amended , and similar state provisions . we have performed an analysis to determine whether an `` ownership change '' has occurred from inception to december 31 , 2014. based on this analysis , management has determined that there was an ownership change . the annual limitation may result in the expiration of net operating losses and credits before utilization , however , we do not believe any of our net operating losses and research and development credits are limited by this potential ownership change . financial operations overview research and development expenses research and development expenses represent costs incurred to conduct research , such as the discovery and development of our product candidates . we recognize all research and development costs as they are incurred . research and development expenses consist primarily of the following : · employee-related expenses , which include salaries , benefits and stock-based compensation ; · expenses incurred under agreements with clinical trial sites that conduct research and development activities on our behalf ; · laboratory and vendor expenses related to the execution of preclinical studies and clinical trials ; · contract manufacturing expenses , primarily for the production of clinical supplies ; · facilities and other allocated expenses , which include direct and allocated expenses for rent and maintenance of facilities , depreciation and amortization expense and other supplies . 51 the largest component of our total operating expenses has historically been our investment in research and development activities including the clinical development of our product candidates . we allocate to research and development expenses the salaries , benefits , stock-based compensation expense , and indirect costs of our clinical and preclinical programs on a program-specific basis , and we include these costs in the program-specific expenses . the following table shows our research and development expenses for 2014 , 2013 and 2012 : replace_table_token_4_th we expect our research and development expenses will increase during the next few years as we advance our product candidates into and through clinical trials , pursue regulatory approval of our product candidates , which will require a significant investment in contract manufacturing and inventory build-up related costs . in december 2014 , we entered into an exclusive license agreement with symbioscience to develop and commercialize their portfolio of arginase inhibitors and in march 2015 , we entered into an exclusive license agreement with transtech to develop and commercialize their hexokinase ii inhibitors . these license agreements will result in higher research and development expenses in the future . the process of conducting clinical trials necessary to obtain regulatory approval is costly and time consuming . we may never succeed in achieving marketing approval for our product candidates . the probability of success of our product candidates may be affected by numerous factors , including clinical data , competition , manufacturing capability and commercial viability .
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results of operations comparison of the years ended december 31 , 2014 and 2013 replace_table_token_5_th 52 * percentage not meaningful . research and development research and development expenses increased $ 6.5 million , or 65 % , from $ 9.9 million for 2013 to $ 16.4 million for 2014. the increase was due to an increase of $ 3.5 million in clinical trial related expenses in connection with our cb-839 phase 1 clinical trials which began enrolling patients in february 2014 , an increase of $ 1.9 million in personnel-related costs primarily as a result of higher headcount , an increase of $ 0.8 million in costs related to cb-839 development and manufacturing to support our phase 1 clinical trials , and $ 0.3 million related to our licensing arrangement for arginase inhibitors program . general and administrative general and administrative expenses increased $ 2.9 million , or 116 % , from $ 2.5 million for 2013 , to $ 5.4 million for 2014. the increase was due to an increase of $ 1.7 million in personnel-related costs as a result of higher headcount , salary increases and stock-based compensation expense , an increase of $ 0.6 million in professional services costs primarily related to audit fees and an increase of $ 0.5 million in facility costs due to our office expansion in the second half of 2013. comparison of the years ended december 31 , 2013 and 2012 replace_table_token_6_th * percentage not meaningful .
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some of the information contained in this discussion and analysis , including information with respect to our plans and strategy for our business and related financing , includes forward-looking statements that involve risks and uncertainties . you should read the risk factors section of this form 10-k for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis . story_separator_special_tag font-size:10pt ; font-family : times new roman '' > strut trial on june 30 , 2014 , we announced the beginning of a multiple injection study , the strut study , at a single site for patients with mostly severe or very severe osteoarthritis of the knee . the study is comprised of two phases ; phase i is an open-label , 7 patient , single center trial to analyze the safety of 4ml multiple injections ( baseline , week 2 and week 4 ) and phase ii is a randomized , 40 patient , single center trial to analyze the efficacy and safety of multiple injections ( baseline , week 2 and week 4 ) . phase ii of the strut study would only commence after safety review of the phase i trial results at 4 weeks . on august 5 , 2014 , we reported no serious drug related adverse events were reported in phase i of the strut study and a 65 % improvement in pain ( womac a pain subscore improved from 2.2 ( 0.55 ) to 0.8 ( 0.62 ) , mean difference 1.43 ( 0.406 ) p=0.001 ) was observed at one month post-injection . in addition , the function score of womac c improved by 74 % compared to baseline at 4 weeks . with these positive results , ampio proceeded with the randomized phase ii portion of the strut study . on october 16 , 2014 we announced that enrollment was complete for phase ii of the strut study . on december 1 , 2014 , we announced the results from the phase i open label portion of the study at 20 weeks . the primary endpoint , womac a pain score , improved by 91.2 % from baseline to 20 weeks in the phase i open label portion of the study . additionally , the womac a mean ( sd ) significantly improved from 2.27 ( 0.59 ) at baseline , to 0.20 ( 0.23 ) at week 20 , mean difference ( 95 % ci ) -2.03 ( -2.83 , -1.23 ) , p=0.001 . the secondary endpoint measurement of stiffness , also improved significantly by 87 % from baseline at week 20 from mean ( sd ) of 2.75 ( 0.82 ) to 0.36 ( 0.48 ) , mean difference ( 95 % ci ) 2.33 ( -3.51 , -1.15 ) p=0.004 . the secondary endpoint of a validated measure of simple daily physical functions improved by 91.3 % from baseline at week 20 .this improvement was statistically significant , going from 2.32 ( 0.60 ) at baseline to 0.20 ( 0.34 ) at week 20 ; mean ( 95 % ci ) improvement of 2.09 ( -2.96 , -1.21 ) , p=0.002 . the 20 week data collection point from the phase ii randomized portion of the strut study will be completed in the first quarter of 2015. stride trial on october 16 , 2014 , we announced treatment had begun in the randomized ( 1:1 ) , vehicle controlled , multiple injection ( 4ml at baseline , week 2 and week 4 ) , multi-center stride study with 320 patients . on november 12 , 2014 , we announced that 320 patients had been enrolled and received at least the first injection in the stride study . we expect that the 20 week end point of this study will occur early in the second quarter of 2015. optina clinical trials in support of a §505 ( b ) ( 2 ) new drug application ( nda ) the fda has indicated that , for §505 ( b ) ( 2 ) ndas , complete studies of the safety and effectiveness of a candidate product may not be necessary if appropriate bridging studies provide an adequate basis for reliance upon fda 's findings of safety and effectiveness for a previously approved product . on november 12 , 2014 we announced the clinical trial in support of a §505 ( b ) ( 2 ) application for optina , optimeyes , was complete and included 355 patients . the u.s. multicenter dose ranging trial was designed to evaluate the safety and efficacy of oral optina compared with placebo over 12 weeks in adult patients with dme . the active treatment duration of 12 weeks was the maximum time allowed to withdraw treatment in the ophthalmology community . patients were randomized ( 1:1:1 ) to receive one of two oral doses of optina , 0.5 mg per bmi and 1.0 mg per bmi per day , or placebo . the primary endpoint is improvement in best-corrected visual acuity in treated patients compared to a placebo . secondary endpoints are ( i ) measurements of changes in central macular thickness in treated patients compared to a placebo and ( ii ) safety and tolerability of the two optina doses . optina is a systemic therapy and the blood levels of danazol are affected by body composition . therefore , blood levels of danazol play an important role in the interpretation of results . an independent laboratory has been engaged and is working to analyze the blood samples gathered during the clinical study . at this same time , our scientific and regulatory staff and our cro were fully engaged in completing the ampion strut and stride clinical trials , it was decided to retain their focus on that effort rather than divide their attention . story_separator_special_tag we expect to generate operating losses for the foreseeable future , but intend to try to limit the extent of these losses by entering into co-development or collaboration agreements with one or more strategic partners . although we have raised capital in the past and with net proceeds of $ 63.4 million , $ 28.9 million and $ 15.4 million through the sale of common stock in 2014 , 2013 and 2012 , respectively , we can not assure you that we will be able to secure such additional financing , if needed , or that it will be adequate to execute our business strategy . even if we obtain additional financing , it may be costly and may require us to agree to covenants or other provisions that will favor new investors over existing shareholders . our primary focus is advancing the clinical development of our core assets : ampion and optina . in december 2013 , we entered into a ten-year lease of a multi-purpose facility containing approximately 19,000 square feet . this facility includes an fda compliant clean room to manufacture ampion and our corporate offices . significant accounting policies and estimates our consolidated financial statements have been prepared in accordance with accounting policies generally accepted in the united states of america . the preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of expenses during the reporting period . on an on-going basis , management evaluates its estimates and judgments , including those related to recoverability and useful lives of long-lived assets , fair value of our derivative instruments , allowances and contingencies . management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances , the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources . actual results may differ from these estimates under different assumptions or conditions . the methods , estimates , and judgments used by us in applying these most critical accounting policies have a significant impact on the results we report in our consolidated financial statements . below is a discussion of the policies and estimates that we believe involve a high degree of judgment and complexity . principals of consolidation these consolidated financial statements include the accounts of ampio and its wholly-owned and majority-owned subsidiaries . all material intercompany transactions and balances have been eliminated . cash and cash equivalents ampio considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents . cash equivalents consist primarily of money market fund investments . ampio 's investment policy is to preserve principal and maintain liquidity . ampio periodically monitors its positions with , and the credit quality of , the financial institutions with which it invests . periodically , throughout the year , ampio has maintained balances in excess of federally insured limits . revenue recognition/deferred revenue payments received upon signing of license agreements are for the right to use the license and are deferred and amortized over the lesser of the license term or patent life of the licensed drug . milestone payments relate to obtaining regulatory approval in the territory , cumulative sales targets , and other projected milestones and are recognized at the time the milestone requirements are achieved . royalties will be recognized as revenue when earned . fixed assets fixed assets are recorded at cost and after being placed in service , are depreciated using the straight-line method over estimated useful lives . in-process research and development in-process research and development ( iprd ) relates to the zertane product and clinical trial data acquired in connection with the march 2011 business combination of biosciences acquisition of dmi biosciences . the $ 7,500,000 recorded was based on an independent third party appraisal of the fair value of the assets acquired . iprd is considered an indefinite-lived intangible asset and its 41 fair value will be assessed annually and written down if impaired . once the zertane product obtains regulatory approval and commercial production begins , iprd will be reclassified to an intangible that will be amortized over its estimated useful life . if the company decided to abandon the zertane product , the iprd would be expensed . patents costs of establishing patents , consisting of legal and filing fees paid to third parties , are expensed as incurred . the fair value of the zertane patents , determined by an independent , third party appraisal to be $ 500,000 , acquired in connection with the 2011 acquisition of biosciences is being amortized over the remaining u.s. patent lives of approximately 11 years . the fair value of the luoxis patents was $ 380,000 when they were acquired in connection with the 2013 formation of luoxis and is being amortized over the remaining u.s. patent lives of approximately 15 years . use of estimates the preparation of consolidated financial statements in accordance with generally accepted accounting principles in the united states of america ( gaap ) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities , disclosures of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods . significant items subject to such estimates and assumptions include the fair value of warrant derivative liability , hybrid debt instruments , valuation allowances , stock-based compensation and assumptions in evaluating impairment of indefinite lived assets . actual results could differ from these estimates . derivatives ampio accounted for hybrid financial instruments ( debentures with embedded derivative features conversion options , down-round protection and mandatory conversion provisions ) and related warrants by recording the fair value of each hybrid instrument in its entirety and recording the fair value of the warrant derivative liability .
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overview ampio pharmaceuticals , inc. is a biopharmaceutical company focused primarily on the development of therapies to treat prevalent inflammatory conditions for which there are limited treatment options . ampio 's two lead product candidates in development are ampion for osteoarthritis of the knee and optina for diabetic macular edema . we are also focused on developing and monetizing our orp diagnostic device and sexual dysfunction portfolio . dose ranging spring pivotal trial results on august 14 , 2013 , we announced results of the spring study of ampion for the treatment of osteoarthritis of the knee . the spring study was a u.s. multicenter randomized ( 1:1:1:1 ) , double-blind , vehicle controlled trial designed to evaluate the safety and efficacy of ampion in osteoarthritis of the knee patients . 329 patients were randomized to receive one of two doses ( 4 ml or 10 ml ) 38 of ampion or corresponding saline control via intra-articular injection . the primary study objective was to evaluate the relative efficacy of ampion 4 ml versus ampion 10 ml . the primary endpoint was mean change in pain as measured on the womac a , from baseline for ampion compared to the same volume of saline . secondary endpoints included evaluating safety and disease severity , as well as stiffness and function . both ampion dose cohorts experienced statistically significant reductions in pain compared to control , and there were no significant differences between the efficacy of the two ampion doses , as such , the lowest required dose , 4ml , was selected as the optimal dose . a brief summary of the combined ampion topline results is as follows : patients receiving ampion achieved significantly greater reduction in pain , womac a , from baseline to 12 weeks compared to saline vehicle control ( p = 0.004 ) . patients receiving ampion experienced , on average , a greater than 40 % reduction in pain from baseline .
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· we purchased 278,655 shares for $ 6.5 million under a $ 25.0 million share repurchase plan announced in may 2011. in december 2010 , the uprr opted not to extend the supply agreement and lease for our grand island , ne tie facility . production for the remaining orders from this facility was completed during the first quarter of 2011. we wound down operations and dismantled the facility during the first half of 2011 and closed the plant in february 2012. as a result of this closure , we recorded within cost of goods sold approximately $ 4.4 million in charges consisting of a $ 3.0 million charge to fulfill a customer contractual obligation that could not be sourced from grand island , ne , a $ 0.8 million charge for unsalable concrete ties , and a $ 0.6 million charge for concrete ties supplied to a midwestern transit agency . sales from this facility were $ 2.2 million in 2011 compared to $ 20.4 million in 2010. in may 2011 , we entered into a new $ 125.0 million revolving credit and security agreement with a group of four banks . the agreement provides for a five-year , unsecured revolving credit facility that permits borrowing up to $ 125.0 million for the us borrowers , including a sublimit of the equivalent of $ 15.0 million us dollars that is available to the canadian borrowers . providing no event of default exists , the agreement contains a provision that provides for an increase in the revolver facility of $ 50.0 million that can be allocated to existing or new lenders if our borrowing requirements should grow . the agreement also includes a sublimit of $ 20.0 million for the issuance of trade and standby letters of credit . finally , during 2011 , we made substantial progress integrating portec into our existing businesses to leverage off of each company 's core competencies , merge certain administrative functions and reduce duplicative costs . 2011 developments union pacific railroad product warranty claim on july 12 , 2011 the union pacific railroad ( uprr ) notified us and our subsidiary , cxt incorporated ( cxt ) , of a warranty claim under cxt 's 2005 supply contract relating to the sale of prestressed concrete railroad ties for the uprr . the uprr has asserted that a significant percentage of concrete ties manufactured in 2006 through 2010 at cxt 's grand island , ne facility fail to meet contract specifications , have workmanship defects and are cracking and failing prematurely . approximately 1.6 million ties were sold from grand island to the uprr during the period the uprr has claimed nonconformance . the 2005 contract calls for each concrete tie which fails to conform to the specifications or has a material defect in workmanship to be replaced with 1.5 new concrete ties , provided , that uprr within five years of a concrete tie 's production , notifies cxt of such failure to conform or such defect in workmanship . the uprr 's notice does not specify how many ties manufactured during this period are defective nor which specifications it claims were not met or the nature of the alleged workmanship defects . cxt believes it uses sound workmanship processes in the manufacture of concrete ties and has not agreed with the assertions in the uprr 's warranty claim notice . the uprr has also notified cxt that ties have failed a certain test that is specified in the 2005 contract . 21 since late july 2011 , the company and cxt have been working with material scientists and prestressed concrete experts , who have been testing a representative sample of grand island concrete ties . while this testing is not complete , we have not identified any appreciable defects in workmanship . additionally , a customer of the uprr has claimed that a representative sample of ties manufactured by our grand island facility have failed a test contained in our product specification . as a result of this specific allegation , the uprr has informed the company that they currently intend to remove approximately 115,000 ties from track , which are a subset of ties subject to the july 12 , 2011 claim . we are reviewing this claim and , while our review is not complete , we continue to believe that these ties do not have a material deviation from our contractual specifications . we expect that the testing required to address this product specification issue will be completed sometime during the latter part of the second quarter of 2012 ; however , we expect that we will continue to work collaboratively with the uprr to address their overall product claim for some time to come . on january 11 , 2012 , cxt received a subpoena from the united states department of transportation inspector general ( “ ig ” ) requesting records related to its manufacture of concrete railroad ties in grand island , nebraska . we believe that this subpoena relates to the same set of circumstances giving rise to the uprr product claim . cxt and the company intend to cooperate fully with the ig . we can not predict what impact , if any , this investigation will have on the uprr 's product claim . based on the non-specific nature of the uprr 's assertion and our current inability to verify the claims , we are unable to determine a range of reasonably possible outcomes regarding this potential exposure matter . as a result , no accruals were made as a result of this claim as the impact , if any , can not be reasonably estimated at this time . no assurances can be given regarding the ultimate outcome of this matter . the ultimate resolution of this matter could have a material , adverse impact on our financial statements , results of operations , liquidity and capital resources . portec acquisition included in our 2011 rail products segment are the results of operations for our portec subsidiary . story_separator_special_tag the company has made all of its mandatory capital contributions under the joint venture agreement totaling $ 3.0 million . this venture commenced operations in 2010 and manufactures , markets and sells various products for the energy , utility and construction markets . critical accounting policies and estimates the company 's significant accounting policies are described in note 1 to the consolidated financial statements . the accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the united states . when more than one accounting principle , or the method of its application , is generally accepted , management selects the principle or method that is appropriate in the company 's specific circumstance . application of these accounting principles requires management to make estimates that affect the reported amount of assets , liabilities , revenues , and expenses , and the related disclosure of contingent assets and liabilities . the following critical accounting policies relate to the company 's more significant judgments and estimates used in the preparation of its consolidated financial statements . there can be no assurance that actual results will not differ from those estimates . goodwill – goodwill is required to be tested for impairment at least annually . the company performs its annual impairment test as of october 1 st and more frequently when indicators of impairment are present . the goodwill impairment test involves comparing the fair value of a reporting unit to its carrying value , including goodwill . if the carrying amount of the reporting unit exceeds its fair value , a second step is required to measure the goodwill impairment loss . this step compares the implied fair value of the reporting unit 's goodwill to the carrying amount of that goodwill . if the carrying amount of the goodwill exceeds the implied fair value of the goodwill , an impairment loss equal to the excess is recorded as a component of continuing operations . the company uses a combination of market approach and a discounted cash flow model ( dcf model ) to determine the current fair value of the business . a number of significant assumptions and estimates are involved in the application of the dcf model to forecast operating cash flows , including markets and market share , sales volume and pricing , costs to produce and working capital changes . the company considers historical experience and available information at the time the fair values of its business are estimated . however , actual amounts realized may differ from those used to evaluate the impairment of goodwill . if actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values , the company may be exposed to impairment losses that could be material to our results of operations . there were no goodwill impairments recorded during the three years ended december 31 , 2011. asset impairment – the company is required to test for asset impairment whenever events or changes in circumstances indicate that the carrying value of an asset might not be recoverable . the company applies the guidance in fasb asc 360-10-35 , and related guidance , in order to determine whether or not an asset is impaired . this guidance indicates that if the sum of the future expected cash flows associated with an asset , undiscounted and without interest charges , is less than the carrying value , an asset impairment must be recognized in the financial statements . the amount of the impairment is the difference between the fair value of the asset and the carrying value of the asset . the company believes that the accounting estimate related to asset impairment is a “ critical accounting estimate ” as it is highly susceptible to change from period to period and because it requires management to make assumptions about the existence of impairment indicators and cash flows over future years . these assumptions impact the amount of an impairment , which would have an impact on the income statement . there were no asset impairments recorded during the three years ended december 31 , 2011 . 24 allowance for bad debts – the company 's operating segments encounter risks associated with the collection of accounts receivable . as such , the company records a monthly provision for accounts receivable that are deemed uncollectible . in order to calculate the appropriate monthly provision , the company reviews its accounts receivable aging and calculates an allowance through application of historic reserve factors to overdue receivables . this calculation is supplemented by specific account reviews performed by the company 's credit department . as necessary , the application of the company 's allowance rates to specific customers is reviewed and adjusted to more accurately reflect the credit risk inherent within that customer relationship . the reserve is reviewed on a monthly basis . an account receivable is written off against the allowance when management determines it is uncollectible . the company believes that the accounting estimate related to the allowance for bad debts is a “ critical accounting estimate ” because the underlying assumptions used for the allowance can change from period to period and the allowance could potentially cause a material impact to the income statement . specific customer circumstances and general economic conditions may vary significantly from management 's assumptions and may impact expected earnings . at december 31 , 2011 and 2010 , the company maintained an allowance for bad debts of $ 1.8 million and $ 1.6 million , respectively . product warranty – the company maintains a current warranty for the repair or replacement of defective products . for certain manufactured products , an accrual is made on a monthly basis as a percentage of cost of sales . for long-term construction projects , a warranty is established when the claim is known and quantifiable . the product warranty accrual is periodically adjusted based on the identification or resolution of known individual product warranty claims .
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quarterly results of operations replace_table_token_9_th fourth quarter 2011 compared to fourth quarter 2010 – company analysis diluted earnings per share for the fourth quarter of 2011 were $ 0.60 , even with diluted earnings per share for the fourth quarter of 2010. both gross profit and gross profit margin increased due to the inclusion of portec 's results , partially offset by an unfavorable lifo charge to gross profit during the current period . this similar adjustment for lifo reserve requirements had a positive impact for the prior year period . 28 the addition of portec resulted in increased selling and administrative expenses of approximately $ 4.9 million . exclusive of the impact of portec , selling and administrative expenses in the 2011 period increased approximately $ 0.2 million due mainly to approximately $ 1.4 million in testing expenses for material scientists and prestressed concrete experts related to the uprr product warranty claim . as a result of the acquisition of portec , amortization expense increased by approximately $ 0.4 million and we recognized increased transactional foreign exchange losses for the three months ended december 31 , 2011 primarily related to fluctuations in the exchange rates between the canadian dollar and the united states dollar . also , we recognized more previously deferred gains associated with the early termination of a lease for our threaded products facility in houston , tx . finally , having a positive impact in the 2010 fourth quarter was the recognition of a $ 1.4 million pre-tax gain associated with the remeasurement of our holding of portec equity securities prior to our december 15 , 2010 acquisition . the effective income tax rate in the fourth quarter of 2011 was 36.0 % compared to 41.2 % in the prior year quarter . the decrease was primarily due to lower statutory tax rates related to the foreign operations acquired in the portec business combination .
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restricted stock awards are valued at the closing price on the date of grant . determining the grant date fair value for options requires management to make estimates regarding the variables used in the calculation of the grant date fair value . those variables are the future volatility of our common stock price , the length of time an optionee will hold their options until exercising them ( the “ expected term ” ) , and the number of options that will be forfeited before they are exercised ( the “ forfeiture rate ” ) . we utilize various mathematical models story_separator_special_tag overview we operate in two segments , marine technology products and equipment leasing . the marine technology products segment was previously referred to as our equipment manufacturing and sales segment . we have revised the name of this segment in order to more accurately describe the operations and focus of that part of our business . the change in name has no effect on the composition of the segment or its operations . revenue from the marine technology products segment includes sales of seamap equipment , sales of klein equipment and sales of oceanographic and hydrographic equipment by sap . this segment operates from locations near bristol , united kingdom , brisbane , australia , salem , new hampshire and in singapore . our equipment leasing operations include all leasing activity , sales of lease pool equipment and certain other equipment sales and services related to those operations . this business is conducted from our huntsville , texas headquarters and from our locations in calgary , canada ; brisbane , australia ; bogota , colombia ; budapest , hungary ; singapore and ufa , russia . this includes the operations of our subsidiaries mcl , mel , mml and mse , our branch in colombia and the leasing operations conducted by sap . we acquired klein effective december 31 , 2015 and , accordingly , our consolidated results of operations for the year ended fiscal 2016 included only one month of operations from klein , which amounts were not material . prior to the acquisition of klein in december 2015 , sales of oceanographic and hydrographic equipment by sap were included in our equipment leasing segment . segment operating results for all periods presented have been restated to reflect the revised segment structure . management believes that the performance of our marine technology products segment is indicated by revenues from equipment sales and by gross profit from those sales . management further believes that the performance of our equipment leasing segment is indicated by revenues from equipment leasing and by the level of our investment in lease pool equipment . management monitors ebitda and adjusted ebitda , both as defined in the following table , as key indicators of our overall performance and liquidity . the following table presents certain operating information by operating segment : 22 index to financial statements replace_table_token_5_th 23 index to financial statements replace_table_token_6_th _ ( 1 ) ebitda is defined as net income before ( a ) interest income and interest expense , ( b ) provision for ( or benefit from ) income taxes and ( c ) depreciation and amortization . adjusted ebitda excludes non-cash foreign exchange gains and losses , non-cash costs of lease pool equipment sales , certain non-recurring contract settlement costs , impairment of intangible assets and stock-based compensation . we consider ebitda and adjusted ebitda to be important indicators for the performance of our business , but not measures of performance or liquidity calculated in accordance with accounting principles generally accepted in the united states of america ( “ gaap ” ) . we have included these non-gaap financial measures because management utilizes this information for assessing our performance and liquidity , and as indicators of our ability to make capital expenditures , service debt and finance working capital requirements and we believe that ebitda and adjusted ebitda are measurements that are commonly used by analysts and some investors in evaluating the performance and liquidity of companies such as us . in particular , we believe that it is useful to our analysts and investors to understand this relationship because it excludes transactions not related to our core cash operating activities . we believe that excluding these transactions allows investors to meaningfully trend and analyze the performance of our core cash operations . ebitda and adjusted ebitda are not measures of financial performance or liquidity under gaap and should not be considered in isolation or as alternatives to cash flow from operating activities or as alternatives to net income as indicators of operating performance or any other measures of performance derived in accordance with gaap . in evaluating our performance as measured by ebitda , management recognizes and considers the limitations of this measurement . ebitda and adjusted ebitda do not reflect our obligations for the payment of income taxes , interest expense or other obligations such as capital expenditures . accordingly , ebitda 24 index to financial statements and adjusted ebitda are only two of the measurements that management utilizes . other companies in our industry may calculate ebitda or adjusted ebitda differently than we do and ebitda and adjusted ebitda may not be comparable with similarly titled measures reported by other companies . ( 2 ) non-recurring contract settlement costs of approximately $ 2.1 million in 2016 include approximately $ 1.8 million of deferred cash payments and approximately $ 300,000 of stock based compensation . within our marine technology products segment , we design , manufacture and sell a variety of products used primarily in oceanographic , hydrographic , defense , seismic and maritime security industries . seamap 's primary products include the ( i ) gunlink and digishot seismic source acquisition and control systems , which provide marine operators more precise control of exploration tools ; and ( ii ) the buoylink rgps tracking system used to provide precise positioning of seismic sources and streamers ( marine recording channels that are towed behind a vessel ) . story_separator_special_tag due to the required expansion of our existing facilities necessary to support the manufacture and repair of the streamer products , we do not expect a material contribution from these products until the second half of fiscal 2019. the overall decline in seismic exploration activity has had , and we expect will continue to have , an impact on the demand for seamap 's products and services . however , we believe the expansion of our product offerings and the desire for customers to upgrade to newer , more efficient technology will mitigate this impact to some extent . while seamap is not solely dependent on activity related to oil and gas exploration activity , a recovery of activity in marine exploration activity in the petroleum industry could have a materially beneficial effect on our results of operations . customers for klein 's products primarily consist of domestic and foreign governmental and military organizations and commercial entities involved in the hydrographic and oceanographic industries . revenue from the sale of klein products in fiscal 2018 and 2017 were significantly below our expectations . we believe we the following factors contributed to this shortfall : delays in project awards by domestic and foreign governmental agencies due to budget constraints and processes . an industry-wide decline in the purchase of sonar products . competitive pressures . delays in the introduction of new products in fiscal 2017. despite the disappointing results in fiscal 2018 and 2017 , we are optimistic that revenue from our sonar products will return to historical and anticipated levels . this belief is based on our current inventory of project pursuits , pending orders and independent projections of increased world-wide demand for sonar products . demand for the rental of land seismic exploration equipment varies by geographic region and has been very sporadic in recent periods . we expect continuing demand in europe and improving demand in south america during fiscal 2019. we do anticipate opportunities for projects in other parts of the world , including north africa and the middle east , some of which could be significant . however , competition for such projects is generally intense and there is no assurance that we will have the opportunity to provide equipment for such projects . land leasing activity is expected to remain well below historical levels in fiscal 2019. marine leasing activity increased in fiscal 2018 after having declined over the prior two years ; however , this activity remains well below historical levels . we believe this is due in large part to an excess of equipment in the marine seismic market . as marine contractors have sought to reduce costs by retiring older vessels an excess of used equipment has become available , thereby reducing the demand for rental equipment . while we have experienced an increase in inquiries for marine equipment in recent months , we believe this excess of available equipment will continue into fiscal 2019. we believe one of our key competitive advantages is our broad geographic footprint and ability to operate in a number of areas . we have accomplished this over the past several years by establishing subsidiaries and branch operations such that we now operate in a number of countries . in response to a decline in activity in some regions , we have taken steps to reduce costs such as by reducing personnel and expect to make further reductions in certain locations during fiscal 2019. however , we expect to expand our operations in singapore to facilitate the production of the newly-introduced towed streamer products . a significant portion of our revenues are generated from foreign sources . for fiscal 2018 , 2017 and 2016 , revenues from international customers totaled approximately $ 36.9 million , $ 34.7 million and $ 44.5 million , respectively . these amounts represent 76 % , 85 % and 86 % of consolidated revenues in those fiscal years , respectively . the majority of our transactions with foreign customers are denominated in united states dollars . we have not entered , nor do we intend to enter , into derivative financial instruments for hedging or speculative purposes . our revenues and results of operations have not been materially impacted by inflation or changing prices in the past three fiscal years , except as described above . story_separator_special_tag organizations , has generally been strong over the past three years ; however , revenues from year to year can vary significantly due to the timing of discrete orders . the gross profit from the sale of new seismic , hydrographic and oceanographic equipment by sap amounted to approximately $ 1.2 million in fiscal 2018 , $ 1.1 million in fiscal 2017 , and $ 650,000 in fiscal 2016 , representing gross profit margins of 20 % , 23 % and 26 % , respectively . the changes in gross profit margins between the years reflect changes in product mix from year to year . the effect of sales from klein to sap is eliminated in consolidation and in the table above as “ intra-segment sales ” . as of january 31 , 2018 the backlog of our marine technology products segment was approximately $ 2.7 million , as compared to approximately $ 12.5 million as of january 31 , 2017. we expect essentially all of these orders to be completed in fiscal 2019. based on our experience and the lead times for the production of our product , we do not believe backlog as of a particular date is necessarily indicative of future results . equipment leasing revenues and cost of sales from our equipment leasing segment were comprised of the following : replace_table_token_8_th equipment leasing revenues decreased approximately 23 % in fiscal 2018 compared to fiscal 2017 and 57 % in fiscal 2017 as compared to fiscal 2016. this downward trend reflects the dramatic decline in oil and gas exploration activity in essentially all geographic regions brought about by uncertainty in world-wide oil prices and a global surplus of oil .
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results of operations for fiscal 2018 , 2017 and 2016 , we recorded operating losses of approximately $ 19.7 million , $ 31.3 million and $ 26.8 million , respectively . the improvement in fiscal 2018 from fiscal 2017 was due primarily to higher sales of lease pool equipment and contribution from 26 index to financial statements the sale of marine technology products . the higher operating loss in fiscal 2017 as compared to fiscal 2016 was due primarily to lower equipment leasing activity . revenues and cost of sales marine technology products revenues and cost of sales for our marine technology products segment were as follows : replace_table_token_7_th historically , demand for seamap 's products was dependent to a large degree upon offshore oil and gas exploration activity . in recent periods however , such demand increasingly relates to activity within the hydrographic and geotechnical survey industry . accordingly , in fiscal 2018 seamap 's revenues increased from fiscal 2017 due , in part , to orders from research and hydrographic survey organizations . a large portion of seamap 's sales consist of large discrete orders , the timing of which is dictated by our customers . this timing generally relates to the availability of a vessel in port so that our equipment can be installed . accordingly , there can be significant variation in sales from one period to another which does not necessarily indicate a fundamental change in demand for these products . although recently there has been a softening of demand within the marine seismic industry in general , we believe that we have continued to experience demand for seamap 's products because operators of marine seismic vessels have been upgrading technology on remaining vessels in order to improve operating efficiency . furthermore , some hydrographic survey operators have continued to increase their capacity and upgrade technology .
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the company was in compliance with the financial covenants under the 2014 credit facility for the story_separator_special_tag and item 15. exhibits and financial statement schedules in this annual report . the following tables present selected financial data for the last five years . this selected financial data should be read in conjunction with the consolidated financial statements and related notes included in item 15. exhibits and financial statement schedules . replace_table_token_14_th ( a ) during the year ended december 31 , 2015 , the company had a decrease of $ 0.53 per diluted share due to unfavorable adjustments on various five star electric projects in the specialty contractors segment . in addition , there was a decrease of $ 0.28 per diluted share due to unfavorable adjustments to the estimated cost to complete a building segment project in new york . the company 's 2015 results were also impacted by an unfavorable adjustment for an adverse legal decision related to a long-standing litigation matter in the civil segment , which resulted in a decrease of $ 0.28 per diluted share . furthermore , the company recorded favorable adjustments for a civil segment runway reconstruction project , which resulted in an increase of $ 0.16 per diluted share in 2015 . the company 's results for the year ended december 31 , 2014 included a positive impact related to changes in the estimated recoveries for two civil segment projects and a building segment hospitality and gaming project , resulting in a $ 0.33 increase per diluted share . the company 's diluted eps during the years ended december 31 , 2013 and 2012 were positively impacted by $ 0.18 and $ 0.16 , respectively , because of changes in the estimated recovery for the same hospitality and gaming project . 19 replace_table_token_15_th we have changed the presentation of certain items in our consolidated financial statements as of and for the year ended december 31 , 2015 , 2014 , 2013 and 2012 for the following items : ( 1 ) subsequent to the issuance of our 2015 consolidated financial statements we identified that certain immaterial classification adjustments , related to the offsetting of deferred assets and liabilities by tax jurisdiction , were necessary to correct the error in the classification of deferred tax assets and liabilities . see note 6 of the notes to consolidated financial state ments for additional details . ( 2 ) we early adopted asu 2015-17 , balance sheet classification of deferred taxes ( subtopic 740-10 ) , which requires companies to retrospectively present all deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet . ( 3 ) during 2016 , we retrospectively adopted accounting standards update ( “ asu ” ) 2015-03 , interest – imputation of interest ( subtopic 835-30 ) , which requires companies to present in the balance sheet debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability , consistent with the presentation of debt discounts . in addition , the amortization of debt discounts is required to be presented as a c omponent of interest expense . the aggregate impact of the changes discussed above is as follows : replace_table_token_16_th 20 item 7. ma nagement 's discussion and analysis of financial condition and results of operations the following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the accompanying notes to consolidated financial statements included in item 15. exhibits and financial statement schedules in this annual report . this discussion contains forward-looking statements , which involve risks and uncertainties . for cautions about relying on such forward-looking statements , please refer to the section entitled “ forward-looking statements ” at the beginning of this annual report immediately prior to item 1. our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors , including but not limited to those discussed in item 1a . risk factors and elsewhere in this annual report . executive overview consolidated revenue for 2016 was $ 5.0 billion compared to $ 4.9 billion for 2015 . the modest improvement was attributable to higher volume in our building segment , driven by various building projects primarily in california . consolidated revenue for 2015 was $ 4.9 billion compared to $ 4.5 bi llion for 2014. the growth was driven by increased volume in our building and civil segments , with various building projects in california and two large mass-transit projects in new york being the largest contributors . income from construction operations for 2016 was $ 201.9 million compared to $ 105.4 million for 2015 . the strong increase was primarily due to significantly improved operating performance in all segments . the prior year included various unfavorable adjustments , as discussed in the next paragraph . income from construction operations for 2015 was $ 105.4 million compared to $ 241.7 million for 2014 . the decrease was primarily due to significant project charges recorded for various five star electric projects in new york in the specialty contractors segment , decreased activity on certain higher-margin civil projects , unfavorable adjustments related to the estimate of costs to complete an office building project in new york and the adverse brightwater litigation-related charge for a legacy civil project . the effective tax rate was 35.7 % , 38.7 % and 42.4 % for 2016 , 2015 and 2014 , respectively . the 2016 rate was favorably impacted by rate changes associated with a shift in revenue mix between states affecting state apportionment , as well as various return-to-provision and deferred tax adjustments related to depreciation . the 2015 rate was favorably impacted by the resolution of certain state tax matters . the 2014 rate was unfavorably impacted by increased activity in higher state tax jurisdiction s and higher non-deductible compensation expense . story_separator_special_tag the backlog decline in 2016 was due to strong revenue burn that outpaced new awards during the year . the building s egment continues to have a large pipeline of prospective projects , some of which have already been bid and are expected to be selected and awarded by customers during the first half of 2017. strong demand is expected to continue due to ongoing customer spending , supported by a low interest rate environment . t he building segment is well-positioned to capture its share of prospective projects based on its strong customer relationships and long-term reputation for excellence in delivering high-quality projects on time and within budget . specialty contractors segment revenue and income from construction operations for the specialty contractors segment are summarized as follows : replace_table_token_20_th revenue for 2016 increased slightly compared to 2015. increased activity on two electrical projects in the western united states and electrical projects in new york was mostly offset by decreased activity on various mechanical projects in new york . revenue for 2015 decreased 6 % compared to 2014 , primarily due to decreased activity on various smaller electrical projects in the southern united states that were impacted in 2015 by the low price of oil , electrical projects at the world trade center and mechanical projects at the united nations in new york . this decrease was partially offset by increased activity on various electrical projects at hudson yards , two large mass-transit projects and various other electrical , mechanical and concrete placement projects , all in new york . income from construction operations increased 141 % in 2016 compared to 2015 because 2015 included unfavorable adjustments totaling $ 45.6 million for various five star electric projects in new york , none of which were individually material . income from construction operations declined 69 % in 2015 compared to 2014 , primarily due to the aforementioned unfavorable adjustments related to five star electric . operating margin was 3.1 % in 2016 , compared to 1.3 % in 2015 and 3.9 % in 2014. the margin improvement in 2016 was due to the factors mentioned above that impacted income from construction operations . in addition , throughout 2016 , management focused on improving operational performance at its five star electric and wdf business units in new york and , as a result , considered it a transitional year for the specialty contractors segment . the operational improvement is reflected in the segment 's increased income from construction operations and operating margin . further operating margin improvement is anticipated for the segment in 2017. the margin decline in 2015 was principally due to the aforementioned unfavorable adjustments at five star electric . new awards in the specialty contractors segment totaled $ 867 million in 2016 , $ 1.1 billion in 2015 and $ 1.7 billion in 2014. new awards in 2016 included various mechanical projects in new york collectively valued at approximately $ 146 million , several electrical projects in the southern united states totaling approximately $ 93 million and an electrical subcontract for a mass-transit project in new york valued at $ 86 million . new awards in 2015 included an electrical subcontract valued at $ 90 million for a mass-transit project in new york and an electrical subcontract valued at $ 73 million for a hudson yards office tower in new york . new awards in 2014 included a $ 321 million electrical subcontract for a mass-transit project in new york and two contracts totaling $ 175 million for electrical work on other mass-transit projects in new york and california . backlog for the specialty contractors segment was $ 1.6 billion as of december 31 , 2016 , compared to $ 1.9 billion as of december 31 , 2015 and $ 2.1 billion as of december 31 , 2014. the specialty contractors segment has a significant pipeline of prospective projects , with demand for its services supported by strong continued spending on civil and building projects . the specialty contractors segment is well-positioned to capture its share of prospective projects based on the size and scale of our business units that operate in new york , texas , florida and california and the strong reputation held by these business units for high-quality work on larger , complex projects . 24 corporate , tax and other matters corporate general and administrative expense corporate general and administrative expenses were $ 60.2 million in 2016 , $ 54.2 million in 2015 and $ 54.6 million in 2014 . the higher corporate general and administrative expenses in 2016 were predominantly due to increased compensation expense attributable to improved financial results and the hiring of several key executives . in 2015 , there was lower performance-based compensation expense compared to 2014 . other income ( expense ) , interest expense and provision for income taxes replace_table_token_21_th other income , net , decreased by $ 6.6 million in 2016 compared to 2015 , and improved $ 21.8 million in 2015 compared to 2014 . other income in 2015 included adjustments to decrease contingent earn-out liabilities related to prior business acquisitions . other expense in 2014 included earn-out expense related to past business acquisitions . interest expense increased $ 14.7 million for the year ended december 31 , 2016 compared to the prior year . interest expense for the year ended december 31 , 2015 was comparable to 2014. the increase for the year ended december 31 , 2016 was primarily due to cash and non-cash interest expense related to the convertible notes issued in june 2016 , as well as an increase in non-cash interest expense associated with fees related to two amendments to the company 's 2014 credit facility . the year ended december 31 , 2016 was also impacted by higher net borrowing rates , which were 78 basis points higher compared to the same period in 2015 , partially offset by a $ 21.4 million reduction in the company 's average year-over-year borrowings .
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results of segment operations the company provides professional services consisting of construction management , including specialty construction services involving electrical , mechanical , hvac , plumbing and pneumatically placed concrete , to private and public customers primarily in the united states and its territories and in certain other international locations . the company 's three principal business segments are as follows : civil , building and specialty contractors . for more information on these business segments , see “ item 1 . – business ” above . civil segment revenue and income from construction operations for the civil segment are summarized as follows : replace_table_token_18_th revenue for 2016 decreased 12 % compared to 2015 , principally due to the prior-year completion of a large runway reconstruction project in new york and reduced activity in 2016 on a platform project at hudson yards in new york , which is nearing completion . the decrease was partially offset by increased activity on various projects , including a large tunnel project in seattle , washington and a large mass-transit project in california . revenue for 2015 increased 12 % compared to 2014 , principally due to progress on many 22 projects in the new york area , including the cm006 and cs179 mass-transit projects , and increased activity on various bridge projects in the midwest . this increase was partially offset by decreased activity on certain tunnel projects on the west coast . income from construction operations increased 19 % in 2016 compared to 2015 , due to improved operating performance and because the prior-year results included the brightwater litigation-related charge of $ 23.9 million . the increase was partially offset by the impact of the reduced volume discussed above .
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project assets primarily consist of costs related to solar power projects in various stages of development that are capitalized prior to the completion of the sale of the project story_separator_special_tag story_separator_special_tag style= '' text-align : center ; '' > 51 to-medium term demand for new solar installations relative to prior years , lower ppa pricing , and lower margins on module and system sales to such markets . however , we believe the effects of such imbalance can be mitigated by modern solar power plants that offer a flexible operating profile , thereby promoting greater grid stability and enabling a higher penetration of solar energy . we continue to address these uncertainties , in part , by executing on our module technology improvements , continuing the development of key markets , partnering with grid operators and utility companies , and implementing certain other cost reduction initiatives . we face intense competition from manufacturers of crystalline silicon solar modules and developers of solar power projects . solar module manufacturers compete with one another on price and on several module value attributes , including wattage ( or conversion efficiency ) , energy yield , and reliability , and developers of systems compete on various factors such as net present value , return on equity , and lcoe . many crystalline silicon cell and wafer manufacturers continue to transition from lower efficiency bsf multi-crystalline cells ( the legacy technology against which we have generally competed in our markets ) to higher efficiency perc mono-crystalline cells at competitive cost structures . additionally , while conventional solar modules , including the solar modules we produce , are monofacial , meaning their ability to produce energy is a function of direct and diffuse irradiance on their front side , certain manufacturers of mono-crystalline perc modules are promoting bifacial modules that also capture diffuse irradiance on the back side of a module . the cost effective manufacture of bifacial perc modules has been enabled , in part , by the expansion of inexpensive crystal growth and diamond wire saw capacity in china . bifaciality compromises nameplate efficiency , but by converting both front and rear side irradiance , such technology may improve the overall energy production of a module relative to nameplate efficiency when applied in certain applications , which , after considering the incremental bos and other costs , could potentially lower the overall lcoe of a system when compared to systems using conventional solar modules , including the modules we produce . we believe we are among the lowest cost module manufacturers in the solar industry on a module cost per watt basis , based on publicly available information . this cost competitiveness allows us to compete favorably in markets where pricing for modules and systems is highly competitive . our cost competitiveness is based in large part on our module wattage ( or conversion efficiency ) , proprietary manufacturing technology ( which enables us to produce a cdte module in a matter of hours using a continuous and highly automated industrial manufacturing process , as opposed to a batch process ) , and our focus on operational excellence . in addition , our cdte modules use approximately 1-2 % of the amount of semiconductor material that is used to manufacture conventional crystalline silicon solar modules . the cost of polysilicon is a significant driver of the manufacturing cost of crystalline silicon solar modules , and the timing and rate of change in the cost of silicon feedstock and polysilicon could lead to changes in solar module pricing levels . in recent years , polysilicon consumption per cell has been reduced through various initiatives , such as the adoption of diamond wire saw technology , which have contributed to declines in our relative manufacturing cost competitiveness over conventional crystalline silicon module manufacturers . in terms of energy yield , in many climates our cdte solar modules provide an energy production advantage over most monofacial crystalline silicon solar modules of equivalent efficiency rating . for example , our cdte solar modules provide a superior temperature coefficient , which results in stronger system performance in typical high insolation climates as the majority of a system 's generation , on average , occurs when module temperatures are well above 25°c ( standard test conditions ) . in addition , our cdte solar modules provide a superior spectral response in humid environments where atmospheric moisture alters the solar spectrum relative to laboratory standards . our cdte solar modules also provide a better shading response than conventional crystalline silicon solar modules , which may lose up to three times as much power as cdte solar modules when shading occurs . as a result of these and other factors , our pv solar modules typically produce more annual energy in real world field conditions than conventional modules with the same nameplate capacity . while our modules and systems are generally competitive in cost , reliability , and performance attributes , there can be no guarantee such competitiveness will continue to exist in the future to the same extent or at all . any declines in the competitiveness of our products could result in additional margin compression , further declines in the average selling prices of our modules and systems , erosion in our market share for modules and systems , and or declines in overall net 52 sales . we continue to focus on enhancing the competitiveness of our solar modules and systems by accelerating progress along our module technology and cost reduction roadmaps . certain trends and uncertainties we believe that our operations may be favorably or unfavorably impacted by the following trends and uncertainties that may affect our financial condition and results of operations . see item 1a . “ risk factors ” and elsewhere in this annual report on form 10-k for discussions of other risks that may affect our business , financial condition , results of operations , and cash flows . our long-term strategic plans are focused on our goal to create long-term shareholder value through a balance of growth , profitability , and liquidity . story_separator_special_tag furthermore , all system pricing is effected by the pricing of energy to be sold on an open contract basis following the termination of the ppa ( i.e. , merchant pricing curves ) , and changes in market assumptions regarding future open contract sales may also result in significant variability and uncertainty in the value of our systems projects . we continually evaluate forecasted global demand , competition , and our addressable market and seek to effectively balance manufacturing capacity with market demand and the nature and extent of our competition . during 2019 , we commenced commercial production of series 6 modules at our second manufacturing facility in ho chi minh city , vietnam and our manufacturing facility in lake township , ohio , a short distance from our plant in perrysburg , ohio . these additional manufacturing plants , and any other potential investments to add or otherwise modify our existing manufacturing capacity in response to market demand and competition , may require significant internal and possibly external sources of capital , and may be subject to certain risks and uncertainties described in item 1a . “ risk factors , ” including those described under the headings “ our future success depends on our ability to effectively balance manufacturing production with market demand , convert existing production facilities to support new product lines , decrease our manufacturing cost per watt , and , when necessary , continue to build new manufacturing plants over time in response to market demand , all of which are subject to risks and uncertainties ” and “ if any future production lines are not built in line with committed schedules , it may adversely affect our future growth plans . if any future production lines do not achieve operating metrics similar to our existing production lines , our solar modules could perform below expectations and cause us to lose customers . ” systems project pipeline the following tables summarize , as of february 20 , 2020 , our approximately 1.3 gw ac advanced-stage project pipeline . the actual volume of modules installed in our projects will be greater than the project size in mw ac as module volumes required for a project are based upon mw dc , which will be greater than the mw ac size pursuant to a dc-ac ratio typically ranging from 1.1 to 1.4. such ratio varies across different projects due to many factors , including ppa pricing and the location , design , and costs of the system . projects are typically removed from our advanced-stage project pipeline tables below once we substantially complete construction of the project and after substantially all of the associated project revenue is recognized . a project , or a portion of a project , may also be removed from the tables below in the event a project is not able to be sold due to the changing economics of the project or other factors or we decide to temporarily own and operate , or retain interests in , a project based on strategic opportunities or market factors . as part of our transition to an external epc service model in the united states , we no longer expect to provide epc services for the customer developed 51 mw ac troy solar project for which construction had not commenced . 54 accordingly , we removed such project from the tables below as our arrangement with the customer now represents a third-party module sale . projects under sales agreements the following table includes uncompleted sold projects , projects under sales contracts subject to conditions precedent , and epc agreements : replace_table_token_2_th projects with executed ppas not under sales agreements replace_table_token_3_th ( 1 ) edp renewables and connectgen ( 2 ) contracted but not specified ( 3 ) approximately 70 mw ac of the plant 's capacity is contracted under various ppas ( 4 ) chubu electric power company – 38 mw ac and hokuriku electric power company – 17 mw ac ( 5 ) gulbarga electricity supply co. – 20 mw ac and chamundeshwari electricity supply co. – 20 mw ac 55 results of operations the following table sets forth our consolidated statements of operations as a percentage of net sales for the years ended december 31 , 2019 , 2018 , and 2017 : replace_table_token_4_th segment overview we operate our business in two segments . our modules segment involves the design , manufacture , and sale of cdte solar modules to third parties , and our systems segment includes the development , construction , operation , maintenance , and sale of pv solar power systems , including any modules installed in such systems and any revenue from energy generated by such systems . net sales modules business we generally price and sell our solar modules on a per watt basis . during 2019 , cypress creek renewables , longroad energy , and nextera energy each accounted for more than 10 % of our modules business net sales , and the majority of our solar modules were sold to integrators and operators of systems in the united states and france . substantially all of our modules business net sales during 2019 were denominated in u.s. dollars and euro . we recognize revenue for module sales at a point in time following the transfer of control of the modules to the customer , which typically occurs upon shipment or delivery depending on the terms of the underlying contracts . the revenue recognition policies for module sales are further described in note 2 . “ summary of significant accounting policies ” to our consolidated financial statements . 56 systems business during 2019 , edp renewables , connectgen , and innergex renewable energy each accounted for more than 10 % of our systems business net sales , and the majority of our systems business net sales were in the united states and australia . substantially all of our systems business net sales during 2019 were denominated in u.s. dollars and australian dollars .
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results of operations the following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto included in this annual report on form 10-k. in addition to historical financial information , the following discussion and analysis contains forward-looking statements that involve risks , uncertainties , and assumptions as described under the “ note regarding forward-looking statements ” that appears earlier in this annual report on form 10-k. our actual results could differ materially from those anticipated by these forward-looking statements as a result of many factors , including those discussed under item 1a . “ risk factors , ” and elsewhere in this annual report on form 10-k. this discussion and analysis does not address certain items in respect of the year ended december 31 , 2017 in reliance on amendments to disclosure requirements adopted by the sec in 2019. see item 7 . “ management 's discussion and analysis of financial condition and results of operations ” in our annual report on form 10-k for the year ended december 31 , 2018 for comparative discussions of our results of operations and liquidity and capital resources for the years ended december 31 , 2018 and 2017. executive overview we are a leading global provider of comprehensive pv solar energy solutions . we design , manufacture , and sell pv solar modules with an advanced thin film semiconductor technology and also develop and sell pv solar power systems that primarily use the modules we manufacture . additionally , we provide o & m services to system owners . we have substantial , ongoing r & d efforts focused on various technology innovations . we are the world 's largest thin film pv solar module manufacturer and one of the world 's largest pv solar module manufacturers .
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in 2017 , we reported annual net sales of $ 3.4 billion compared to $ 3.2 billion in 2016. our company is comprised of three operating segments : commercial and industrial systems , climate solutions and power transmission solutions . a description of the three operating segments is as follows : commercial and industrial systems produces medium and large motors , commercial and industrial equipment , generator and custom drives and systems . these products serve markets including commercial heating , ventilation , and air conditioning ( `` hvac '' ) , pool and spa , standby and critical power and oil and gas systems . climate solutions produces small motors , controls and air moving solutions serving markets including residential and light commercial hvac , water heaters and commercial refrigeration . power transmission solutions manufactures , sells and services belt and chain drives , helical and worm gearing , mounted and unmounted bearings , couplings , modular plastic belts , conveying chains and components , hydraulic pump drives , large open gearing and specialty mechanical products serving markets including beverage , bulk handling , metals , special machinery , energy , aerospace and general industrial . on january 30 , 2015 , we closed the acquisition of the power transmission solutions ( “ pts ” ) business from emerson electric co. the purchase price for pts was $ 1.4 billion in cash and the assumption of $ 43.0 million of liabilities . pts had over 3,200 employees around the world , and effective on the closing date became part of the power transmission solutions segment . components of profit and loss net sales . we sell our products to a variety of manufacturers , distributors and end users . our customers consist of a large cross-section of businesses , ranging from fortune 100 companies to small businesses . a number of our products are sold to original equipment manufacturers , who incorporate our products , such as electric motors , into products they manufacture , and many of our products are built to the requirements of our customers . the majority of our sales derive from direct sales , but a significant portion derives from sales made by manufacturer 's representatives , who are paid exclusively on commission . our product sales are made via purchase order , long-term contract , and , in some instances , one-time purchases . many of our products have broad customer bases , with the levels of concentration of revenues varying from division to division . our level of net sales for any given period is dependent upon a number of factors , including ( i ) the demand for our products ; ( ii ) the strength of the economy generally and the end markets in which we compete ; ( iii ) our customers ' perceptions of our product quality at any given time ; ( iv ) our ability to timely meet customer demands ; ( v ) the selling price of our products ; and ( vi ) the weather . as a result , our total revenue has tended to experience quarterly variations and our total revenue for any particular quarter may not be indicative of future results . we use the term “ organic sales '' to refer to sales from existing operations excluding ( i ) sales from acquired businesses recorded prior to the first anniversary of the acquisition less the amount of sales attributable to any divested businesses ( “ acquisition sales ” ) , and ( ii ) the impact of foreign currency translation . the impact of foreign currency translation is determined by translating the respective period 's sales ( excluding acquisition sales ) using the same currency exchange rates that were in effect during the prior year periods . we use the term “ organic sales growth ” to refer to the increase in our sales between periods that is attributable to organic sales . we use the term “ acquisition growth ” to refer to the increase in our sales between periods that is attributable to acquisition sales . 25 gross profit . our gross profit is impacted by our levels of net sales and cost of sales . our cost of sales consists of costs for , among other things ( i ) raw materials , including copper , steel and aluminum ; ( ii ) components such as castings , bars , tools , bearings and electronics ; ( iii ) wages and related personnel expenses for fabrication , assembly and logistics personnel ; ( iv ) manufacturing facilities , including depreciation on our manufacturing facilities and equipment , taxes , insurance and utilities ; and ( v ) shipping . the majority of our cost of sales consists of raw materials and components . the price we pay for commodities and components can be subject to commodity price fluctuations . we attempt to mitigate this through fixed-price agreements with suppliers and our hedging strategies . we are currently reducing the number of our suppliers we use in order to leverage the better prices and terms that can be obtained with higher volume orders . a large amount of our suppliers are in north america . as we expand production and our geographic footprint , we expect it may be advantageous to increase our use of foreign suppliers . when we experience commodity price increases , we have tended to announce price increases to our customers who purchase via purchase order , with such increases generally taking effect a period of time after the public announcements . for those sales we make under long-term arrangements , we tend to include material price formulas that specify quarterly or semi-annual price adjustments based on a variety of factors , including commodity prices . outside of general economic cyclicality , our different business units experience different levels of variation in gross profit from quarter to quarter based on factors specific to each division . for example , a portion of our climate solutions segment manufactures products that are used in air conditioning applications . story_separator_special_tag gross profit decreased $ 61.9 million or 14.0 % primarily due to the impact of weaker demand in the industrial markets , and $ 8.4 million of lifo expense , that was partially offset by benefits from the simplification and cost control initiatives . gross profit in 2015 was impacted by an $ 8.0 million lifo benefit and a $ 0.9 million duty refund associated with the gsp tariff rebate noted above . gross profit as a percentage of sales in 2016 decreased 120 basis points from the prior year primarily due to the favorable non-recurring items that impacted 2015. operating expenses for 2016 decreased $ 111.4 million or 28.8 % from 2015 primarily due to reduced salaries , commissions , and travel expenses associated with lower sales volumes , along with cost controls . operating expenses in 2015 included a $ 79.9 million goodwill impairment and the $ 12.8 million impact of the venezuelan asset write down , both of which did not reoccur in 2016. net sales for the climate solutions segment for fiscal 2016 were $ 960.0 million , a 7.8 % decrease compared to fiscal 2015 net sales of $ 1.0 billion . the decrease consisted of an organic sales decline of 7.1 % , and a negative foreign currency translation impact of 0.7 % . organic sales declines were primarily driven by a downturn in the middle east hvac market and the effect of contractual two-way material price formulas that was partially offset by stronger demand in the last half of the year for north american residential hvac products . gross profit decreased $ 17.1 million primarily due to lower volume and a $ 6.3 million lifo expense , partially offset by benefits from the simplification and cost control initiatives and stronger north american residential hvac demand in the last six months of 2016. gross profit in 2015 benefited from a $ 9.8 million lifo benefit and a $ 3.8 million duty refund associated with the gsp tariff rebate noted above . gross profit as a percentage of sales in 2016 increased 30 basis points as compared to 2015. operating expenses for 2016 decreased $ 0.4 million as compared to the prior year with 2015 including a $ 3.4 million benefit from the sale of real estate . net sales for the power transmission solutions segment for fiscal 2016 were $ 733.6 million , a 5.1 % decrease compared to fiscal 2015 net sales of $ 773.6 million . the decrease consisted of an organic sales decline of 8.1 % and a negative foreign currency translation impact of 0.2 % . acquisitions net of divestitures benefited 2016 sales by 3.2 % as compared to 2015. organic sales declines were primarily driven by lower demand from the industrial distribution channel , and weak oil and gas , metals and agricultural end markets . gross profit for 2016 increased $ 11.0 million primarily due to the inventory step up in cost of goods sold of $ 20.7 million related to the acquired pts business included in the prior year , and $ 1.0 million of lifo benefit in 2015. lifo for 2016 was a slight benefit of $ 0.2 million . gross profit as a percent of sales increased 310 basis points as compared to the prior year . operating expenses for 2016 decreased $ 24.0 million due primarily to the $ 9.1 million of acquisition fees incurred in 2015 and the $ 11.6 million gain on the sale of the mastergear business in 2016 as compared to 2015. in addition , current year operating expenses included one month of incremental operating expenses associated with the acquired pts business . the effective tax rate for fiscal 2016 was 21.4 % compared to 24.6 % for fiscal 2015. the decrease in the effective tax rate was due primarily to the fiscal 2015 non-deductible goodwill impairment . the lower effective tax rate in fiscal 2016 as compared to the 35 % statutory us federal income tax rate is driven by the mix of earnings and lower foreign tax rates . 29 liquidity and capital resources general our principal source of liquidity is cash flow provided by operating activities . in addition to operating income , other significant factors affecting our cash flows include working capital levels , capital expenditures , dividends , share repurchases , acquisitions , and divestitures , availability of debt financing , and the ability to attract long-term capital at acceptable terms . cash flow provided by operating activities was $ 291.9 million for fiscal 2017 , a $ 150.4 million decrease from fiscal 2016. the decrease was primarily the result of the higher investment in inventory in fiscal 2017. cash flow provided by operating activities was $ 442.3 million for fiscal 2016 , a $ 58.0 million increase from fiscal 2015. the increase was primarily the result of the lower investment in net working capital driven by the planned reduction in inventory during fiscal 2016. cash flow used in investing activities was $ 57.8 million for fiscal 2017 , compared to $ 19.6 million used in fiscal 2016. the change was driven primarily by the $ 24.6 million received for the sale of our mastergear business in 2016. the proceeds from the sale of mastergear were used to reduce debt obligations . capital expenditures were $ 65.2 million both in fiscal 2017 and in fiscal 2016. cash flow used in investing activities was $ 19.6 million for fiscal 2016 , compared to $ 1.5 billion used in fiscal 2015. the change was driven by the purchase of pts for $ 1.4 billion , net of cash acquired , in fiscal 2015 versus the $ 24.6 million received for the sale of our mastergear business in 2016. the proceeds from the sale of mastergear were used to reduce debt obligations . capital expenditures were $ 65.2 million in fiscal 2016 compared to $ 92.2 million in fiscal 2015. our commitments for property , plant and equipment as of december 30 , 2017 were approximately $ 4.6 million .
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results of operations the following table sets forth selected information for the years indicated : replace_table_token_7_th 27 fiscal year ended 2017 compared to fiscal year ended 2016 net sales for fiscal 2017 were $ 3.4 billion , a 4.2 % increase as compared to fiscal 2016 net sales of $ 3.2 billion . the increase consisted of an organic sales increase of 4.3 % and a positive foreign currency translation impact of 0.1 % that was offset by a negative 0.3 % impact from sales of the divested mastergear worldwide ( “ mastergear ” ) business in fiscal 2016. gross profit increased $ 18.9 million or 2.2 % as compared to the prior year . the increase was largely driven by the increased sales volume that was partially offset by a $ 5.4 million charge from an increase in the last-in , first-out ( `` lifo '' ) reserve and an increase in restructuring and related charges . the prior year included a $ 14.5 million charge from an increase in the lifo reserve . total operating expenses were $ 554.0 million which was a $ 9.4 million increase from 2016 due primarily to increased compensation and benefits expenses resulting from both wage inflation and investments in the company 's commercial sales teams as well as increased variable expenses , such as commissions , on higher sales volume . these increases were partially offset with reductions in amortization expense as well as other discretionary spending . operating expenses for 2017 as a percent of sales was 16.5 % as compared to 16.9 % for the same period in the prior year . the prior year operating expenses contained a $ 11.6 million gain on the sale of the mastergear business . net sales for the commercial and industrial systems segment for fiscal 2017 were $ 1.6 billion , a 4.8 % increase compared to fiscal 2016 net sales of $ 1.5 billion .
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see cautionary note regarding forward-looking statements. this management 's discussion and analysis of financial condition and results of operations contains certain financial measures , in particular the presentation of income from operations , ebitda and adjusted ebitda , which are not presented in accordance with accounting principles generally accepted in the united states ( u.s . gaap ) . we are presenting these non-u.s. gaap financial measures because they provide us and readers of this form 10-k with additional insight into our operational performance relative to earlier periods and relative to our competitors . we do not intend for these non-u.s gaap financial measures to be a substitute for any u.s. gaap financial information . readers of these statements should use these non-u.s. gaap financial measures only in conjunction with the comparable u.s. gaap financial measures . a reconciliation of income from operations to income from continuing operations , the most comparable u.s. gaap measure is provided herein . a reconciliation of net income to ebitda and adjusted ebitda is also provided herein . executive overview we are a global leader in the production and marketing of titanium bearing mineral sands and titanium dioxide pigment ( tio 2 ) . we are the third largest global producer and marketer of tio 2 manufactured via chloride technology , as well as the second largest global producer of titanium feedstock and the second largest global producer of zircon . we have operations in north america , europe , south africa and the asia-pacific region . we operate three tio 2 facilities at the following locations : hamilton , mississippi ; botlek , the netherlands ; and kwinana , western australia representing approximately 465,000 tonnes of annual tio 2 production capacity . additionally , we operate three separate mining operations : kwazulu-natal ( kzn ) sands located in south africa , namakwa sands located in south africa and cooljarloo sands located in western australia , which have a combined annual production capacity of approximately 723,000 tonnes of titanium feedstock and approximately 265,000 tonnes of zircon . we have two reportable operating segments , mineral sands and pigment . corporate and other is comprised of our electrolytic manufacturing and marketing operations , as well as our corporate activities , including businesses that are no longer in operation . the mineral sands segment includes the exploration , mining and beneficiation of mineral sands deposits . these operations produce titanium feedstock , including ilmenite , chloride slag , slag fines and rutile , as well as zircon , pig iron and activated charcoal . titanium feedstock is used primarily to manufacture tio 2 . zircon is a mineral which is primarily used as an opacifier in ceramic glazes for tiles , plates , dishes and industrial products . the pigment segment primarily produces and markets tio 2 . tio 2 is used in a wide range of products due to its ability to impart whiteness , brightness and opacity . tio 2 is used extensively in the manufacture of paint and other coatings , plastics and paper and in a wide range of other applications , including inks , fibers , rubber , food , cosmetics and pharmaceuticals . tio 2 is a critical component of everyday consumer applications due to its superior ability to cover or mask other materials effectively and efficiently relative to alternative white pigments and extenders . we believe that , at present , tio 2 has no effective substitute because no other white pigment has the physical properties for achieving comparable opacity and brightness or can be incorporated in a cost-effective a manner . acquisition of mineral sands business because we believe that becoming vertically integrated would benefit us by assuring our access to critical supply , retaining cash and margin in the company and enabling general operating flexibility , we acquired a global producer of mineral sands with production facilities and sales and marketing presence strategically positioned throughout the world . specifically , we acquired 74 % of exxaro resources ltd 's ( exxaro ) south african mineral sands operations , including its namakwa and kzn sands mines , separation and slag furnaces , along with its 50 % share of the tiwest joint venture in western australia ( together the mineral sands business ) ( the transaction ) . on june 15 , 2012 , the date of the transaction ( the transaction date ) , the existing business of tronox incorporated was combined with the mineral sands business under tronox limited . the transaction was effectuated in two primary steps . in the first step , tronox incorporated became a subsidiary of tronox limited , with tronox incorporated shareholders receiving one class a ordinary share ( class a shares ) and $ 12.50 in cash ( merger consideration ) for each share of tronox incorporated . in the second step , tronox limited issued 9,950,856 class b ordinary shares ( class b shares ) to exxaro and one of its subsidiaries in consideration for the mineral sands business . upon completion of the 47 transaction , former tronox incorporated shareholders held 15,413,083 class a shares and exxaro held 9,950,856 class b shares , representing approximately 60.8 % and 39.2 % , respectively , of the voting power in tronox limited . exxaro retained a 26 % ownership interest in the south african operations that are part of the mineral sands business in order to comply with the black economic empowerment ( bee ) legislation of south africa . prior to the transaction date , tronox incorporated operated the tiwest joint venture with exxaro australia sands pty ltd. , a subsidiary of exxaro , which operated a chloride process tio 2 plant located in kwinana , western australia , a mining operation in cooljarloo , western australia , and a mineral separation plant and a synthetic rutile processing facility , both in chandala , western australia . story_separator_special_tag million class a shares , affected for the 5-for-1 share split , at an average price of $ 25.84 per share , inclusive of commissions , for a total cost of $ 326 million . on september 27 , 2012 , we announced the successful completion of our share repurchase program . see note 15 of notes to consolidated financial statements . senior notes on august 20 , 2012 , tronox limited 's wholly-owned subsidiary , tronox finance llc , issued $ 900 million aggregate principal amount of 6.375 % senior notes due 2020 ( the senior notes ) . the senior notes bear interest semiannually at a rate equal to 6.375 % and were sold at par value . see note 12 of notes to consolidated financial statements . share split declared on june 26 , 2012 , our board of directors approved a 5-to-1 share split for holders of our class a shares and class b shares at the close of business on july 20 , 2012 , by issuance of four additional shares for each share of the same class . see note 15 of notes to consolidated financial statements . ubs revolver on june 18 , 2012 , in connection with the closing of the transaction , we entered into a global senior secured asset-based revolving credit agreement with ubs ag ( the ubs revolver ) with a maturity date of june 18 , 2017. the ubs revolver provides us with a committed source of capital with a principal borrowing amount of up to $ 300 million , subject to a borrowing base . see note 12 of notes to consolidated financial statements . absa revolver in connection with the transaction , we entered into a r900 million ( approximately $ 106 million ) revolving credit facility with absa bank limited acting through its absa capital division with a maturity date of june 14 , 2017 ( the absa revolver ) . see note 12 of notes to consolidated financial statements . term loan draw down on june 14 , 2012 , in connection with the closing of the transaction , we drew down the $ 150 million on the senior secured delayed draw term loan ( as discussed in exit facility refinancing below ) . see note 12 of notes to consolidated financial statements . refinancing of the wells revolver on february 8 , 2012 , tronox incorporated amended the wells revolver to facilitate the transaction while keeping the revolver in force . on june 18 , 2012 , in connection with the transaction , we utilized the ubs revolver to refinance the $ 125 million senior secured credit agreement with wells fargo capital finance , llc ( the wells revolver ) . see note 12 of notes to consolidated financial statements . exit facility refinancing on february 8 , 2012 , tronox incorporated refinanced its $ 425 million exit facility due october 21 , 2015 ( the exit financing facility ) , and obtained a new goldman sachs facility comprised of a $ 550 million senior secured term loan and a $ 150 million senior secured delayed draw term loan ( together , the term facility ) . the term facility expressly permitted the transaction and , together with existing cash , funded the cash needs of the combined business , including cash needs in the transaction . see note 12 of notes to consolidated financial statements . 49 story_separator_special_tag market value , we recorded a tax benefit related to this market value basis adjustment . the overall tax benefit from this basis adjustment was partially offset by a valuation allowance established for the portion of the tax benefit which we believe will not be realized . because this basis change did not pertain to an entity acquired in the transaction , this net tax benefit was recorded through tax expense and did not impact our gain on bargain purchase . additionally , 2012 was impacted by continued valuation allowances in the united states and income in foreign jurisdictions taxed at rates lower than 30 % , and the gain on bargain purchase which was recorded net of the financial tax impact and is not subject to income tax in any jurisdiction . the effective tax rates for the eleven month period ended december 31 , 2011 differs from the u.s. statutory rate of 35 % primarily due to valuation allowances in the united states and income in foreign jurisdictions taxed at rates lower than 35 % . in the one month ended january 31 , 2011 , the effective tax rate for the period differs from the u.s. statutory rate of 35 % primarily due to fresh-start adjustments , which were recorded net of tax . additionally , the one month period effective tax rate was impacted by valuation allowances in multiple jurisdictions and income in foreign jurisdictions taxed at rates lower than 35 % . operations review of segment revenue and profit net sales replace_table_token_9_th mineral sands segment net sales increased $ 592 million during 2012 as compared to 2011. the increase is attributable to the acquired business which , on a segment basis , contributed $ 489 million in revenue for the period since the acquisition . the remaining increase was primarily comprised of a $ 125 million increase in sales prices , offset by a $ 22 million decrease in sales volumes . mineral products sales prices , primarily rutile used in the production of tio 2 , increased as a result of strong global demand during the period when forward pricing was negotiated .
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consolidated results of operations year ended december 31 , 2012 compared to the combined twelve month period ended december 31 , 2011 replace_table_token_8_th all references to 2011 refer to the combined twelve month period ended december 31 , 2011 , which includes the successor period and the predecessor period , unless otherwise indicated . we reported net sales for 2012 of $ 1,832 million , an increase of 11 % or $ 181 million . during 2012 and 2011 , 68 % and 86 % , respectively , of our net sales were generated from the sale of tio 2. the increase in net sales for 2012 reflects the impact of the acquired businesses , higher selling prices in all of our businesses partially offset by lower sales volumes . the acquired businesses contributed $ 524 million to consolidated net sales during 2012. higher prices resulted from a strong market in early-to-mid 2011 and the carryover of price increases from 2011. as market demand softened in late 2011 and early 2012 , we began to experience price erosion which accelerated in the latter half of 2012. during 2012 , sales volumes declined in both the mineral sands and pigment businesses due to simultaneous market weakness in china , europe , and north america . the impact of foreign currency exchange rates decreased net sales by $ 25 million during 2012 as compared to 2011. cost of goods sold for 2012 was $ 1,568 million , an increase of 32 % or $ 381 million . the increase reflects the inclusion of the acquired business , higher pigment production costs , primarily for raw materials and chemical products , as well as higher per unit costs due to lower capacity utilization during 2012 , partially offset by a decrease in sales volumes .
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following the appointment of jason hart as our new chief executive officer in september 2013 , during our quarterly close process for the third quarter of 2013 we performed an interim impairment analysis of goodwill and long-lived assets as part of a strategic review of underperforming p arts of our business . as a result of our interim and subsequent year-end analysis , we recorded impairment charges totaling $ 15.8 million for 2013 , primarily related to goodwill . during our quarterly close process for the second quarter of 2012 , we performed an interim impairment analysis of our goodwill and long-lived assets because of a significant decline in our stock price and market capitalization , as well as changes to our forecasted revenue , gross margin and operating profit . as a result of our interi m and subsequent year-end analysis , we recorded impairment charges totaling $ 30.4 million for 2012 , of which $ 17.0 million related to goodwill and $ 13.4 million related to long-lived assets . the impairment charges taken in 2013 and 2012 affected our financial condition and results of operation for the periods in which they are recorded ; however , they have no impact on our day-to-day operations or liquidity and will not result in any future cash expenditures . for more information about impairment charges , see note 8 of notes to consolidated financial statements , goodwill and intangible assets . 27 simplification and streamlining of our business following the appointment of jason hart as our new chief executive officer in september 2013 , we undertook a strategic review of our business and initiated a series of actions to simplify our business structure and streamline our operations . as a consequence of our strategic review , in late 2013 and early 2014 we disposed of non-core or under-performing businesses , including the multicard ag , payment solution ag , multicard nederland bv and multicard u.s. subsidiaries . additionally we ceased investment in th e tagtrail mobile services platform . we believe that these divestitures enhance our ability to focus our resources and investments on higher-growth and more profitable opportunities in the security market . to further simplify our business and streamline our operations , we have restructured our organization to operate as a single , unified company rather than as a group of individual businesses . this restructuring has included the realignment of our management team and our operational activities by function ( for example engineering , sales , marketing , customer service and information technology ) , which allows us to manage key activities on a global basis . with the centralization of various functions , we have also eliminated redundant positions . additionally , we are in the process of transferring various functions such as corporate financial accounting and reporting from germany to the u.s. we expect that these organizational changes will result in an aggregate headcount reduction of almost 25 % and yield significant operational cost savings , beginning in 2014. we will continue to evaluate opportunities to further reduce overhead costs and make more efficient use of our operational resources . restructuring and severance in 2013 , upon the departure of our former chief executive officer and chief financial officer , we paid out severance to these executives and we also executed a small amount of restructuring with the elimination of certain non-core functions , as part of our organizational streamlining , discussed ab ove . as a result , we recorded $ 1.8 million in restructuring and severance costs in our consolidated statements of operations for the year ended december 31 , 2013. in june 2012 , we announced a series of cost reduction measures designed to align our business operations with the then-current market and macroeconomic conditions . cost reduction measures targeted general and administrative spending and included acceleration of the elimination of duplicate expenses at newly acquired companies , reductions in other general and administrative expenses , the consolidation of facilities , a reduction in the company 's global workforce , and nearly $ 0.5 million of temporary reductions in executive and management salaries and board fees . all restructuring actions were completed in the fourth quarter of 2012 and we recorded restructuring charges of $ 0.3 million in our consolidated statements of operations for the year ended december 31 , 2012 . 28 story_separator_special_tag style= '' margin-bottom:0pt ; margin-top:18pt ; margin-left:2.27 % ; margin-right:0 % ; text-indent:0 % ; font-family : times new roman ; font-size:10pt ; '' > fiscal 2012 revenue compared with fiscal 2011 revenue total revenue in 2012 was $ 72.4 million , down 7 % compared with $ 77.6 million in 2011 , primarily as a result of decreased sales in our id products segment , while sales in our identity management segment remained relatively unchanged . sales within our identity management segment accounted for 44 % of total revenue in 2012 as compared to 40 % in 2011 and sales within our id products segment accounted for 56 % of total revenue in 2012 as compared to 60 % in 2011. revenue in our identity management segment was $ 31.9 million in 2012 , up 2 % from $ 31.4 million in 2011 , reflecting an 8 % increase in sales of our physical access control solutions , partially offset by lower sales of identity solutions in australia due to the completion of a large customer program deployment during 2011. physical access control solutions accounted for nearly 40 % of total sales in 2012. sales in our id products segment were $ 40.5 million in 2012 , down 13 % from sales of $ 46.2 million in 2011 , primarily due to lower sales of our smart card reader products . reader sales fell 16 % in 2012 as a result of decreased demand for smart card readers used in european e-government and national id programs , partially offset by increased reader sales to the u.s. government sector story_separator_special_tag following the appointment of jason hart as our new chief executive officer in september 2013 , during our quarterly close process for the third quarter of 2013 we performed an interim impairment analysis of goodwill and long-lived assets as part of a strategic review of underperforming p arts of our business . as a result of our interim and subsequent year-end analysis , we recorded impairment charges totaling $ 15.8 million for 2013 , primarily related to goodwill . during our quarterly close process for the second quarter of 2012 , we performed an interim impairment analysis of our goodwill and long-lived assets because of a significant decline in our stock price and market capitalization , as well as changes to our forecasted revenue , gross margin and operating profit . as a result of our interi m and subsequent year-end analysis , we recorded impairment charges totaling $ 30.4 million for 2012 , of which $ 17.0 million related to goodwill and $ 13.4 million related to long-lived assets . the impairment charges taken in 2013 and 2012 affected our financial condition and results of operation for the periods in which they are recorded ; however , they have no impact on our day-to-day operations or liquidity and will not result in any future cash expenditures . for more information about impairment charges , see note 8 of notes to consolidated financial statements , goodwill and intangible assets . 27 simplification and streamlining of our business following the appointment of jason hart as our new chief executive officer in september 2013 , we undertook a strategic review of our business and initiated a series of actions to simplify our business structure and streamline our operations . as a consequence of our strategic review , in late 2013 and early 2014 we disposed of non-core or under-performing businesses , including the multicard ag , payment solution ag , multicard nederland bv and multicard u.s. subsidiaries . additionally we ceased investment in th e tagtrail mobile services platform . we believe that these divestitures enhance our ability to focus our resources and investments on higher-growth and more profitable opportunities in the security market . to further simplify our business and streamline our operations , we have restructured our organization to operate as a single , unified company rather than as a group of individual businesses . this restructuring has included the realignment of our management team and our operational activities by function ( for example engineering , sales , marketing , customer service and information technology ) , which allows us to manage key activities on a global basis . with the centralization of various functions , we have also eliminated redundant positions . additionally , we are in the process of transferring various functions such as corporate financial accounting and reporting from germany to the u.s. we expect that these organizational changes will result in an aggregate headcount reduction of almost 25 % and yield significant operational cost savings , beginning in 2014. we will continue to evaluate opportunities to further reduce overhead costs and make more efficient use of our operational resources . restructuring and severance in 2013 , upon the departure of our former chief executive officer and chief financial officer , we paid out severance to these executives and we also executed a small amount of restructuring with the elimination of certain non-core functions , as part of our organizational streamlining , discussed ab ove . as a result , we recorded $ 1.8 million in restructuring and severance costs in our consolidated statements of operations for the year ended december 31 , 2013. in june 2012 , we announced a series of cost reduction measures designed to align our business operations with the then-current market and macroeconomic conditions . cost reduction measures targeted general and administrative spending and included acceleration of the elimination of duplicate expenses at newly acquired companies , reductions in other general and administrative expenses , the consolidation of facilities , a reduction in the company 's global workforce , and nearly $ 0.5 million of temporary reductions in executive and management salaries and board fees . all restructuring actions were completed in the fourth quarter of 2012 and we recorded restructuring charges of $ 0.3 million in our consolidated statements of operations for the year ended december 31 , 2012 . 28 story_separator_special_tag style= '' margin-bottom:0pt ; margin-top:18pt ; margin-left:2.27 % ; margin-right:0 % ; text-indent:0 % ; font-family : times new roman ; font-size:10pt ; '' > fiscal 2012 revenue compared with fiscal 2011 revenue total revenue in 2012 was $ 72.4 million , down 7 % compared with $ 77.6 million in 2011 , primarily as a result of decreased sales in our id products segment , while sales in our identity management segment remained relatively unchanged . sales within our identity management segment accounted for 44 % of total revenue in 2012 as compared to 40 % in 2011 and sales within our id products segment accounted for 56 % of total revenue in 2012 as compared to 60 % in 2011. revenue in our identity management segment was $ 31.9 million in 2012 , up 2 % from $ 31.4 million in 2011 , reflecting an 8 % increase in sales of our physical access control solutions , partially offset by lower sales of identity solutions in australia due to the completion of a large customer program deployment during 2011. physical access control solutions accounted for nearly 40 % of total sales in 2012. sales in our id products segment were $ 40.5 million in 2012 , down 13 % from sales of $ 46.2 million in 2011 , primarily due to lower sales of our smart card reader products . reader sales fell 16 % in 2012 as a result of decreased demand for smart card readers used in european e-government and national id programs , partially offset by increased reader sales to the u.s. government sector
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results of operations the following table sets forth our statements of operations as a percentage of net revenue for the periods indicated : replace_table_token_4_th comparability of results the comparability of our operating results for 2013 and 2012 with our operating results for 2011 is impacted by our acquisition of idondemand on may 2 , 2011. results of the idondemand business have been included since its acquisition date . in addition , the amounts for 2012 and 2011 have been adjusted for divested businesses as discussed in note 2 of notes to consolidated financial statements , discontinued operations . revenue summary information about our revenue by type and by business segment for the years ended december 31 , 2013 , 2012 and 2011 is shown below : replace_table_token_5_th fiscal 2013 revenue compared with fiscal 2012 revenue total revenue in 2013 was $ 75.6 million , up 4 % compared with $ 72.4 million in 2012 , reflecting higher sales in our id products segment , partially offset by lower sales in our identity management segment . sales within our identity management segment 29 accounted for 32 % of total revenue in 2013 as compared to 44 % in 2012 and sales within our id products segment accounted for 68 % of total revenue in 2013 as compared to 56 % in 2012. in our identity management segment we provide solutions and services that enable the issuance , management and use of secure identity credentials in diverse markets . these offerings include physical access control solutions , and cloud-based credential provisioning and management services . we sell our identity management solutions to customers in the government , enterprise and commercial markets to address vertical market segments including public services administration , military and defense , law enforcement , healthcare , education , banking , industrial , retail and critical infrastructure . because of the complex nature of the problems we address for our identity management customers , pricing pressure is not prevalent in this segment .
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effective february 27 , 2020 , seth goldman resigned as executive chair of the company . upon such resignation , mr. goldman will continue to serve in his capacity as a class i director and chairman of the board of the company story_separator_special_tag financial condition and results of operations . the following discussion contains forward-looking statements that involve risks and uncertainties . our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors , including those set forth in part i , item 1a , “ risk factors , ” and “ note regarding forward-looking statements ” included elsewhere in this report . the following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited financial statements and related notes included elsewhere in this report , as well as the information presented under “ selected financial data. ” overview beyond meat is one of the fastest growing food companies in the united states , offering a portfolio of revolutionary plant-based meats . we build meat directly from plants , an innovation that enables consumers to experience the taste , texture and other sensory attributes of popular animal-based meat products while enjoying the nutritional and environmental benefits of eating our plant-based meat products . our brand commitment , “ eat what you love , ” represents a strong belief that by eating our plant-based meats , consumers can enjoy more , not less , of their favorite meals , and by doing so help address concerns related to human health , climate change , resource conservation , and animal welfare . the success of our breakthrough innovation model and products has allowed us to appeal to a broad range of consumers , including those who typically eat animal-based meats , positioning us to compete directly in the $ 1.4 trillion global meat industry . we sell a range of plant-based products across the three main meat platforms of beef , pork and poultry . they are offered in ready-to-cook formats ( generally merchandised at retail in the meat case ) , which we refer to as our “ fresh ” platform , and ready-to-heat formats ( merchandised at retail in the freezer ) , which we refer to as our “ frozen ” platform . as of december 31 , 2019 , our products were available in approximately 77,000 retail and restaurant and foodservice outlets in more than 65 countries , across mainstream grocery , mass merchandiser , club and convenience store , and natural retailer channels , direct to consumer , and various food-away-from-home channels , including restaurants , foodservice outlets and schools . on may 6 , 2019 , we completed our ipo , in which we sold 11,068,750 shares of our common stock . the shares began trading on the nasdaq global select market on may 2 , 2019. the shares were sold at a public offering price of $ 25.00 per share for net proceeds of approximately $ 252.4 million , after deducting underwriting discounts and commissions of $ 19.4 million and issuance costs of approximately $ 4.9 million payable by us . upon the closing of the ipo , all outstanding shares of our convertible preferred stock automatically converted into 41,562,111 shares of common stock on a one-for-one basis , and warrants exercisable for convertible preferred stock were automatically converted into warrants exercisable for 160,767 shares of common stock . on august 5 , 2019 , we completed our secondary offering , in which we sold 250,000 shares . the shares were sold at a public offering price of $ 160.00 per share for net proceeds to the company of approximately $ 37.4 million , after deducting underwriting discounts and commissions of $ 1.5 million and issuance costs of approximately $ 1.1 million payable by us . total secondary offering costs paid in 2019 were approximately $ 2.2 million , of which approximately $ 1.1 million was capitalized to reflect the costs associated with the issuance of new shares and offset against proceeds from the secondary offering . we did not receive any proceeds from the sale of common stock by the selling stockholders in the secondary offering . we continue to experience strong sales growth over prior periods . net revenues increased to $ 297.9 million in 2019 from $ 87.9 million in 2018 and $ 32.6 million in 2017 , representing a 202 % compound annual growth rate . the beyond burger accounted for approximately 64 % , 70 % and 48 % of our gross revenues in 2019 , 2018 and 2017 , respectively . we believe that sales of the beyond burger will continue to constitute a significant portion of our revenues , income and cash flow for the foreseeable future . we have generated losses from inception . net loss in 2019 , 2018 , and 2017 was $ 12.4 million , $ 29.9 million , and $ 30.4 million , respectively , as we invested in innovation and growth of our business . we operate on a fiscal calendar year , and each interim quarter is comprised of one 5-week period and two 4-week periods , with each week ending on a saturday . our fiscal year always begins on january 1 and ends on 51 december 31. as a result , our first and fourth fiscal quarters may have more or fewer days included than a traditional 91-day fiscal quarter . components of our results of operations and trends and other factors affecting our business net revenues we generate net revenues primarily from sales of our products to our customers across mainstream grocery , mass merchandiser , club and convenience store , and natural retailer channels , direct to consumer , and various food-away-from-home channels , including restaurants , foodservice outlets and schools , mainly in the united states . we continue to experience strong sales growth over prior periods . story_separator_special_tag the extent of covid-19 's effect on our operational and financial performance will depend on future developments , including the duration , spread and intensity of the pandemic , all of which are uncertain and difficult to predict considering the rapidly evolving landscape . for example , the impact of covid-19 on any of our suppliers , co-manufacturers , distributors or transportation or logistics providers may negatively affect the price and availability of our ingredients and or packaging materials and impact our supply chain . additionally , if we are forced to scale back hours of production or close our production facilities or our manhattan beach project innovation center in response to the pandemic , we expect our business , financial condition and results of operations would be materially adversely affected . in addition , our growth strategy to expand our operations internationally may be impeded . we may also be impacted by decreased customer and consumer demand as a result of event cancellations and social distancing , government-imposed restrictions on public gatherings and businesses , shelter-in place orders and temporary restaurant , retail and grocery store closures . if the pandemic continues to evolve into a severe worldwide health crisis , the disease could have a material adverse effect on our business , results of operations , financial condition and cash flows and adversely impact the trading price of our common stock . 53 gross profit ( loss ) gross profit ( loss ) consists of our net revenues less cost of goods sold . our cost of goods sold primarily consists of the cost of raw materials and ingredients for our products , direct labor and certain supply costs , co-manufacturing fees , in-bound and internal shipping and handling costs incurred in manufacturing our products , plant and equipment overhead , depreciation and amortization expense , as well as the cost of packaging our products . in order to keep pace with demand , we have had to very quickly scale production and we have not always been able to meet all demand for our products . as a result , we have had to quickly expand our sources of supply for our core protein inputs such as pea protein . our growth has also significantly increased facility and warehouse utilization rates . we intend to continue to increase our production capabilities at our two in-house manufacturing facilities in columbia , missouri , while expanding our co-manufacturing capacity and exploring additional production facilities domestically and abroad . as a result , we expect our cost of goods sold in absolute dollars to increase to support our growth . however , we expect such expenses to decrease as a percentage of net revenues over time as we continue to scale our business . over the next several years , we continue to expect that gross profit improvements will be delivered primarily through improved volume leverage and throughput , greater internalization and geographic localization of our manufacturing footprint , materials and packaging input cost reductions , tolling fee efficiencies , and improved supply chain logistics and distribution costs . we intend to pass some of these cost savings on to the consumer as we pursue our goal to achieve price parity with animal protein in at least one of our product categories by 2024. gross margin improved by 1,350 basis points to 33.5 % in 2019 from 20.0 % in 2018 and by 26.7 basis points in 2018 from ( 6.7 ) % in 2017. gross margin benefited from an increase in the amount of products sold , improved production efficiencies and from a greater proportion of revenues from products in our fresh platform which have a higher net selling price per pound . we are also working to improve gross margin through ingredient cost savings achieved through scale of purchasing and through expanding our co-manufacturing network and negotiating lower tolling fees . however , in the near term , margin improvements may be impacted by our focus on growing our customer base , expanding into new geographies and markets , enhancing our production infrastructure , improving our innovation capabilities , enhancing our product offerings and increasing consumer engagement . operating expenses research and development expenses research and development expenses consist primarily of personnel and related expenses for our research and development staff , including salaries , benefits , bonuses , and share-based compensation , scale-up expenses , and depreciation and amortization expense on research and development assets . our research and development efforts are focused on enhancements to our product formulations and production processes in addition to the development of new products . we expect to continue to invest substantial amounts in research and development , as evidenced in the build-out of our state-of-the-art manhattan beach project innovation center in 2018. research and development and innovation are core elements of our business strategy , as we believe they represent a critical competitive advantage for us . we believe that we need to continue to rapidly innovate in order to be able to continue to capture a larger market share of consumers who typically eat animal-based meats . we expect these expenses to increase in absolute dollars , but to decrease as a percentage of net revenues as we continue to scale production . selling , general and administrative ( “ sg & a ” ) expenses sg & a expenses consist primarily of selling , marketing and administrative expenses , including personnel and related expenses , share-based compensation , outbound shipping and handling costs , non-manufacturing rent expense , depreciation and amortization expense on non-manufacturing assets and other non-production operating expenses . marketing and selling expenses include share-based compensation awards to brand ambassadors , advertising costs , costs associated with consumer promotions , product samples and sales aids incurred to acquire new customers , retain existing customers and build our brand awareness . administrative expenses include the expenses related to management , accounting , legal , it , and other office functions .
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results of operations the following table sets forth selected items in our statements of operations for the periods presented : replace_table_token_2_th 55 the following table presents selected items in our statements of operations as a percentage of net revenues for the respective periods presented : replace_table_token_3_th year ended december 31 , 2019 compared to year ended december 31 , 2018 net revenues replace_table_token_4_th replace_table_token_5_th net revenues increased by $ 210.0 million , or 238.8 % , in 2019 , as compared to the prior year primarily due to strong growth in sales volumes of products in our fresh platform across both our retail and our restaurant and foodservice channels , driven by expansion in the number of retail and restaurant and foodservice outlets , including new strategic customers , new international customers , higher sales velocities from our existing customers and contribution from new products introduced in 2019. net revenues from international customers ( excluding the canadian market ) are included in our retail and restaurant and foodservice channels and were approximately 16 % of net revenues in 2019 , as compared to approximately 8 % of net revenues in the prior year . gross revenues from sales of products in our fresh platform in 2019 increased $ 224.9 million , or 275.3 % , as compared to the prior year primarily due to increases in sales of all of our fresh platform products .
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as members , we are required to own stock of the fhlb and the frbsf , the amount of which is based primarily on the level of our borrowings from those institutions . we also have the right to acquire additional shares of stock in either or both of the fhlb and the frbsf . during the year ended december 31 , 2016 , we purchased $ 0 thousand in value of fhlb stock and no story_separator_special_tag overview the following discussion presents information about our consolidated results of operations , financial condition , liquidity and capital resources and should be read in conjunction with our consolidated financial statements and the notes thereto included in item 8 of this report . our principal operating subsidiary is pacific mercantile bank ( the “ bank ” ) , which is a california state chartered bank . the bank accounts for substantially all of our consolidated revenues , expenses and income and our consolidated assets and liabilities . accordingly , the following discussion focuses primarily on the bank 's results of operations and financial condition . as of december 31 , 2016 , our total assets , net loans and total deposits were $ 1.1 billion , $ 932 million and $ 1.0 billion , respectively . the bank , which is headquartered in orange county , california , approximately 40 miles south of los angeles , conducts a commercial banking business in orange , los angeles , san bernardino and san diego counties in southern california . the bank is also a member of the federal reserve system and its deposits are insured , to the maximum extent permitted by law , by the federal deposit insurance corporation ( the “ fdic ” ) . for the years ended december 31 , 2016 , 2015 and 2014 , we operated as one reportable segment , commercial banking , and one non-reportable segment , discontinued operations . unless the context otherwise requires , the “ company , ” “ we , ” “ our , ” “ ours , ” and “ us ” refer to pacific mercantile bancorp and its consolidated subsidiaries . current developments during the year ended december 31 , 2016 , the company recognized total charge-offs of $ 17.0 million , which primarily consisted of three credits that totaled $ 14.5 million , including a $ 12.0 million charge-off of the entire balance of a participated shared national credit . with respect to this credit , during the year ended december 31 , 2016 , the borrower experienced rapid deterioration , entered bankruptcy proceedings and faced unanticipated litigation that challenged the ownership of the underlying collateral . in light of these events , the company determined it was appropriate to charge-off the entire balance of the credit during the year . in addition , after a comprehensive credit review that our new chief credit officer commenced upon joining the bank on may 31 , 2016 , the bank has now reviewed all 679 commercial and commercial real estate credits representing approximately 87 % of our total outstanding loan portfolio balance as of december 31 , 2016 , assisted by three independent loan review firms . the remaining 13 % of the portfolio consists of consumer loans with low levels of delinquencies , which are monitored for signs of weakness including periodic sampling of loans which have been found to be satisfactory . during the third quarter of 2016 , approximately $ 48 million in loans were downgraded due to credit and collateral shortfalls , including portfolio management and loan servicing follow-up items such as lack of updated borrower financial information . as a result , the company recorded a provision for loan losses totaling $ 19.9 million during the year ended december 31 , 2016 , resulting from the elevated charge-offs and higher loss factor due to an increase in the amount of classified loans . during the second half of 2016 , the company instituted a number of changes to strengthen its overall credit administration . as a result , of the $ 48 million in loan downgrades during the three months ended september 30 , 2016 , $ 13.7 million in principal payments were received and $ 2.2 million in loan upgrades were made during the fourth quarter of 2016. this represents a 33 % reduction and improvement from september 30 , 2016 to december 31 , 2016 , leaving $ 32 million in loan downgrades taken in the third quarter of 2016 that we continue to manage and currently anticipate being paid down or upgraded by the middle of 2017. during the year ended december 31 , 2016 , the company recorded income tax expense of $ 16.8 million to reflect a full valuation allowance established against its deferred tax asset . see “ results of operations—provision for income tax ” below in this item 7 for additional information . while we believe the company will generate taxable income in future periods that will eventually enable the company to release all or a portion of the valuation allowance , we are not able to assert as to the timing of that event . until such time as we are able to release the valuation allowance on our deferred tax asset , there is a material impact to future periods in that management expects this to result in minimal income tax expense . as a result of the net loss we incurred during the year ended december 31 , 2016 , our regulatory capital ratios declined during the year . notwithstanding this , the company and the bank remain well capitalized under applicable regulatory standards . see “ capital resources—regulatory capital requirements applicable to banking institutions ” below in this item 7 for further information . 31 story_separator_special_tag style= '' font-family : inherit ; font-size:10pt ; text-decoration : underline ; '' > vs. 2015 . total interest expense increased 3.9 % to $ 5.5 million for the year ended december 31 , 2016 from $ 5.3 million for the year ended december 31 , 2015 . story_separator_special_tag increases in the alll are also recognized through the recovery of charged-off loans which are added back to the alll . as such , recoveries are a direct offset for a provision for loan and lease losses that would otherwise be needed to replenish or increase the alll . we employ economic models and data that conform to bank regulatory guidelines and reflect sound industry practices as well as our own historical loan loss experience to determine the sufficiency of the alll and any provisions needed to increase or replenish the alll . those determinations involve judgments and assumptions about current economic conditions and external events that can impact the ability of borrowers to meet their loan obligations . however , the duration and impact of these factors can not be determined with any certainty . as such , unanticipated changes in economic or market conditions , bank regulatory guidelines or the sound practices that are used to determine the sufficiency of the alll , could require us to record additional , and possibly significant , provisions to increase the alll . this would have the effect of reducing reportable income or , in the most extreme circumstance , creating a reportable loss . in addition , the federal reserve bank and the california department of business oversight ( “ cdbo ” ) , as an integral part of their regulatory oversight , periodically review the adequacy of our alll . these agencies may require us to make additional provisions for perceived potential loan losses , over and above the provisions that we have already made , the effect of which would be to reduce our income or increase any losses we might incur . we recorded a $ 19.9 million provision for loan and lease losses during the year ended december 31 , 2016 as compared to no provision for loan and lease losses recorded for the year ended december 31 , 2015 . we recorded a provision for loan and lease losses of $ 19.9 million for the year ended december 31 , 2016 primarily as a result of new loan growth and downgrades and charge offs on loans that exceeded recoveries during the year ended december 31 , 2016. approximately 60 % , or $ 12.0 million , of the $ 19.9 million provision for loan and lease losses was attributable to the full charge-off of one large shared national credit . see `` — financial condition—nonperforming loans and the allowance for loan and lease losses `` below in this item 7 for additional information regarding the alll . 35 noninterest income the following table identifies the components of and the percentage changes in noninterest income in the years ended december 31 , 2016 , 2015 and 2014 : replace_table_token_12_th 2016 vs. 2015 . noninterest income increased $ 251 thousand , or 9.3 % , for the year ended december 31 , 2016 as compared to the year ended december 31 , 2015 , primarily as a result of : an increase of $ 40 thousand in net gain on sale of small business administration ( “ sba ” ) loans for the year ended december 31 , 2016 as compared to the same period in 2015 ; an increase of $ 386 thousand in recoveries on charged off loans in excess of the amount previously charged off against the alll ; and an increase in loan servicing and referral fees during the year ended december 31 , 2016 as compared to the same period in 2015 ; partially offset by a net loss of $ 527 thousand on the sale of other assets in the fourth quarter of 2016 . 2015 vs. 2014 . during the year ended december 31 , 2015 , noninterest income decreased by $ 1.7 million , or 38.5 % , to $ 2.7 million from $ 4.4 million for the year ended december 31 , 2014 , primarily as a result of : a decrease of $ 2.1 million in net gain on sale of sba loans for the year ended december 31 , 2015 as compared to the same period in 2014 ; and a $ 200 thousand recovery during the year ended december 31 , 2015 on a charged off loan in excess of the amount previously charged off against the alll ; and an increase in loan servicing and referral fees during the year ended december 31 , 2015 as compared to the same period in 2014. noninterest expense the following table sets forth the principal components and the amounts of , and the percentage changes in , noninterest expense in the years ended december 31 , 2016 , 2015 and 2014 . 36 replace_table_token_13_th ( 1 ) other operating expenses primarily consist of telephone , investor relations , promotional , regulatory expenses , and correspondent bank fees . 2016 vs. 2015 . during the year ended december 31 , 2016 , noninterest expense increased by $ 1.1 million , or 3.0 % , to $ 36.4 million from $ 35.3 million for the year ended december 31 , 2015 , primarily as a result of : an increase of $ 1.5 million in our professional fees primarily related to an increase in accounting and legal fees during the year ended december 31 , 2016 ; and an increase in various expense accounts related to the normal course of operating , including expenses related to the conversion of some of our branches to loan production offices , as well as an increase in our data processing expense ; partially offset by a decrease of $ 185 thousand in salaries and employee benefits primarily related to the reversal of our incentive compensation accrual in the fourth quarter of 2016 ; a decrease of $ 300 thousand in our fdic insurance expense as a result of a decrease in our insurance premium rate ; and a decrease of $ 435 thousand in other real estate owned ( “ oreo ” ) as a result of lower carrying costs and other expenses related to oreo during the year ended december 31 , 2016
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results of operations discontinued operations in connection with our exit from the mortgage banking business in 2013 , the revenues and expenses of our mortgage banking division have been classified as discontinued operations for all periods presented . as a result , all comparisons below reflect results from continuing operations . income from discontinued operations was zero for the year s ended december 31 , 2016 and 2015 , while our income from discontinued operations was $ 1.2 million for the year ended december 31 , 2014 . we had no income from discontinued operations during the years ended december 31 , 2016 and 2015 as a result of the final wind down of the mortgage banking division during 2014. during the year ended december 31 , 2014 , we recorded a gain in the amount of $ 558 thousand on the sale of the mortgage servicing rights that we sold in april 2014 , which is included in income from discontinued operations in the consolidated statements of operations . operating results for the years ended december 31 , 2016 , 2015 , and 2014 our operating results for the year ended december 31 , 2016 , compared to december 31 , 2015 , and for the year ended december 31 , 2015 , compared to december 31 , 2014 , were as follows : replace_table_token_9_th interest income 2016 vs. 2015 . total interest income increased 5.7 % to $ 41.0 million for the year ended december 31 , 2016 from $ 38.8 million for the year ended december 31 , 2015 . this increase is primarily due to an increase in interest income on loans during the year ended december 31 , 2016 compared to the prior year due to an increase in average loan balances , as well as an increase in the average yield on loans . during the year ended december 31 , 2016 and 2015 , interest income on loans was $ 38.6
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for the fiscal years ended september 30 , 2013 and story_separator_special_tag you should read the following discussion and analysis of our financial condition and results of operations together with the consolidated financial statements and related notes that are included elsewhere in this report . this discussion contains forward-looking statements based upon current expectations 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 or in other parts of this report . overview we are a provider of revenue management solutions for the life science and technology industries . our solutions enable our customers to maximize revenues and reduce revenue compliance risk by transforming their revenue lifecycle from a series of tactical , disjointed operations into a strategic end-to-end process . we believe our solutions serve as the system of record for our customers ' revenue management processes and can provide a competitive advantage for them . our solutions are comprised of two complementary suites of software applications : revenue management enterprise and revenue management intelligence . sales of our solutions range from individual applications to complete suites , and deployments may vary from specific divisions or territories to enterprise-wide implementations . we derive revenues primarily from the sale of our on-premise and cloud-based solutions and related implementation services , as well as maintenance and support and application support . we price our solutions based on a number of factors , including revenues under management and number of users . our license and implementation revenues are comprised of sales of perpetual license and related implementation services , which revenues are recognized over the implementation period , which commences when implementation work begins and typically ranges from a few months to three years . maintenance and support revenues are recognized ratably over the support period , which is typically one year . saas revenues for cloud-based solutions are derived from subscription fees from customers accessing our cloud-based solutions , as well as from associated implementation services . the actual timing of revenue recognition may vary based on our customers ' implementation requirements and availability of our services personnel . we market and sell our solutions to customers in the life science and technology industries . while we have historically generated the substantial majority of our revenues from companies in the life science industry , we have also grown our base of technology customers and intend to continue to focus on increasing the revenues from customers in the technology industry . our most significant customers in any given period generally vary from period to period due to the timing of implementation and related revenue recognition over those periods of larger projects . during the fiscal year ended september 30 , 2013 , two customers , merck & co. , inc. and johnson & johnson health services , inc. , accounted for approximately 12 % each of our total revenues . during the fiscal year ended september 30 , 2012 , two customers accounted for approximately 14 % and 10 % of our total revenues , respectively . during the fiscal year ended september 30 , 2011 , two customers accounted for 15 % and 12 % of our total revenues , respectively . for the fiscal year ended september 30 , 2013 , approximately 14 % of our revenues were derived from customers located outside the united states . for the fiscal years ended september 30 , 2011 , 2012 and 2013 , our revenues were $ 65.2 million , $ 84.3 million and $ 101.9 million , respectively , representing year-over-year growth of approximately 21 % from 2012 to 2013 and year-over-year growth of approximately 29 % from 2011 to 2012. as announced in september 2013 , we recently experienced challenges in sales execution and do not anticipate maintaining this growth rate throughout our 2014 fiscal year . on september 30 , 2013 , the company commenced a plan to align its workforce with the company 's strategic initiatives . the company recorded a workforce reduction restructuring charge of $ 1.2 million in connection with the alignment . 42 key business metrics in addition to the measures of financial performance presented in our consolidated financial statements , we use certain key metrics to evaluate and manage our business , including four-quarter revenues from current customers and adjusted ebitda . we use these key metrics internally to manage the business , and we believe they are useful for investors to compare key financial data from various periods . four-quarter revenues from existing customers we derive a large majority of revenues from existing customers , which we define as customers from which we have generated revenues in each of the preceding four quarters , which would exclude historical customers of leapfrogrx . we measure four-quarter revenues from our existing license and subscription customers by calculating the sum of revenues recognized during the last four quarters from any customer that has contributed revenue in each of the preceding four quarters . we believe four-quarter revenues from existing customers provide us and investors with a metric to measure the historical revenue visibility in our business . we also use this metric internally to understand the proportion of revenues being generated in any period from existing customers as compared to entirely new customers or customers with whom we have not been recently engaged . this measure helps us guide our sales activities and establish budgets and operational goals for our sales function . our four-quarter revenues from existing customers for the periods presented were as follows : replace_table_token_6_th non-gaap financial measure adjusted ebitda adjusted ebitda is a financial measure that is not calculated in accordance with generally accepted accounting principles in the united states ( u.s. gaap ) . we define adjusted ebitda as net loss before leapfrogrx compensation charges , as discussed below , stock-based compensation , depreciation and amortization , interest expense , net , other income ( expenses ) , net , and provision for income taxes . story_separator_special_tag we expect our sales and marketing expenses to increase in absolute dollars as we increase the number of our sales and marketing employees to grow in our business . 45 general and administrative our general and administrative expenses consist primarily of personnel-related costs including salary , bonus , stock-based compensation , and overhead allocation , audit and legal fees as well as third-party contractors and travel-related expenses . we expect to continue to incur significant accounting and legal costs related to being a public company , as well as insurance , investor relations and other costs . in addition , we expect to continue to incur additional costs related to the implementation of a new erp system . leapfrogrx compensation charges in january 2012 , we acquired leapfrogrx for initial cash consideration of $ 3.0 million as well as potential additional payments to former leapfrogrx stockholders totaling up to $ 8.3 million , which are expected to be incurred through january 2015. these additional payments are , among other things , subject to future continued employment and are therefore considered compensatory in nature and are being recognized as compensation expense ( leapfrogrx compensation charges ) over the term of each component . as of september 30 , 2013 , we had expensed an aggregate of $ 5.7 million of leapfrogrx compensation charges . story_separator_special_tag employees primarily in research and development and sales and marketing to continue to support our strategic initiatives in the future . the company recorded a workforce reduction restructuring charge of $ 1.2 million primarily related to employee separation packages , which included severance pay , benefits continuation and outplacement costs to be fully paid through march 31 , 2014. there was no corresponding charge for the fiscal year ended september 30 , 2012 . 49 interest and other expense , net replace_table_token_14_th interest expense , net primarily relates to financing costs related to our term loan and capital leases . the decrease in interest expense , net in the fiscal year ended september 30 , 2013 as compared to same period the previous year was primarily due to the repayment of the term loan in full in may 2013. other expense , net increased primarily due to an increase of $ 0.3 million in changes in the fair value of a convertible preferred stock warrant during the fiscal year ended september 30 , 2013 as compared to the fiscal year ended september 30 , 2012. upon the closing of our ipo , the convertible preferred stock warrant automatically converted into a warrant to purchase 86,655 shares of our common stock . in may 2013 , the warrant was converted into 71,847 shares of our common stock , net of the warrant price . therefore , we do not expect to incur other expense , net related to these warrants . provision for income taxes replace_table_token_15_th provision for income taxes is primarily related to the state minimum tax and foreign tax on our profitable foreign operations . the change in income tax provision is primarily due to the change in income related to our foreign operations . for the fiscal year ended september 30 , 2013 , the tax expense computed using the statutory federal tax rate would have been a benefit of $ 0.2 million as compared to the income tax provision of $ 0.4 million . the difference was primarily due to permanent differences , partially offset by research and development tax credits . for the fiscal year ended september 30 , 2012 , the tax expense computed using the statutory federal tax rate would have been a benefit of $ 1.8 million as compared to the income tax provision of $ 0.3 million . the difference was primarily due to the valuation allowance , partially offset by research and development tax credits and state taxes net of federal benefit . 50 comparison of the fiscal years ended september 30 , 2012 and 2011 revenues replace_table_token_16_th license and implementation license and implementation revenues increased $ 8.3 million , or 20 % , to $ 49.8 million for the fiscal year ended september 30 , 2012 from $ 41.5 million for the fiscal year ended september 30 , 2011. our revenues from existing customers were $ 41.9 million for the fiscal year ended september 30 , 2012 and $ 34.1 million for the fiscal year ended september 30 , 2011. the increase was due to an increased volume of activity . saas and maintenance saas and maintenance revenues increased $ 10.8 million , or 46 % , to $ 34.5 million for the fiscal year ended september 30 , 2012 from $ 23.7 million for the fiscal year ended september 30 , 2011. the increase in saas and maintenance revenues was primarily driven by an increase of $ 8.2 million in saas revenues , of which $ 5.9 million was due to the acquisition of leapfrogrx and $ 2.3 million was due to sales to new customers . our maintenance and support and application support revenues increased $ 2.5 million primarily due to an increase in the number of service contracts . cost of revenues replace_table_token_17_th license and implementation cost of license and implementation revenues increased $ 4.4 million , or 24 % , to $ 22.5 million during the fiscal year ended september 30 , 2012 from $ 18.1 million for the fiscal year ended september 30 , 2011. the 51 increase in the cost of license and implementation revenues was primarily the result of an increase of $ 2.1 million in personnel costs due primarily to increased headcount and an increase of $ 2.5 million in third-party contractors , partially offset by a reduction in royalty fees paid to third parties .
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results of operations the following tables set forth our consolidated results of operations for the periods presented and as a percentage of our total revenues for those periods . the period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods . replace_table_token_8_th 46 ( 1 ) includes stock-based compensation as follows : replace_table_token_9_th replace_table_token_10_th comparison of the fiscal years ended september 30 , 2013 and 2012 revenues replace_table_token_11_th 47 license and implementation license and implementation revenues increased $ 9.4 million , or 19 % , to $ 59.1 million for the fiscal year ended september 30 , 2013 from $ 49.8 million for the fiscal year ended september 30 , 2012. our revenues from existing customers were $ 46.6 million for the fiscal year ended september 30 , 2013 and $ 41.9 million for the fiscal year ended september 30 , 2012. the increase was due to an increased volume of activity . saas and maintenance saas and maintenance revenues increased $ 8.3 million , or 24 % , to $ 42.8 million for the fiscal year ended september 30 , 2013 from $ 34.5 million for the fiscal year ended september 30 , 2012. the increase in saas and maintenance revenues was primarily driven by an increase of $ 4.6 million in saas revenues . our maintenance and support , application support and training revenues increased $ 3.7 million in the period primarily due to an increase in the number of service contracts .
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on december 22 , 2017 , an act to provide for reconciliation pursuant to titles ii and v of the concurrent resolution on the budget for fiscal year 2018 ( commonly known as the `` tax cuts and jobs act `` ) was enacted in the story_separator_special_tag the following discussion and analysis of our financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and the related notes thereto included elsewhere in this annual report on form 10-k. overview we are a clinical-stage company focused on developing innovative gene therapies for neurological diseases . we are developing a pipeline of innovative product candidates for the treatment of these debilitating diseases , including parkinson 's disease , gm1 gangliosidosis , and gm2 gangliosidosis ( including tay-sachs disease and sandhoff disease ) . we are dedicated to realizing the potential of gene therapies to offer transformative patient outcomes in areas of high unmet medical need . we have assembled a portfolio of gene therapies in partnership with leading scientific institutions and have built a team with extensive experience in the gene therapy space . we will continue to build integrated internal development capabilities from product development through commercialization , with a focus on accelerating the pace of product development in the clinic . as part of our ongoing business strategy we continue to explore potential opportunities to acquire or license new product candidates as well as opportunities for partnership or collaboration on our existing products in development . our vision is to build the world 's leading gene therapy company for the treatment of neurological diseases by progressing our current programs and identifying , developing and commercializing other novel gene therapy treatments for neurological diseases . see section `` our key agreements '' within `` item 1—business '' of this annual report on form 10-k for information regarding the our license agreement with oxford biomedica ( uk ) ltd. ( the `` oxford biomedica agreement '' and `` oxford biomedica '' , respectively ) , our license and collaboration agreement with benitec biopharma limited ( the `` benitec agreement '' and `` benitec '' , respectively ) , and our license agreement with the university of massachusetts medical school ( the `` umms agreement '' and `` umms '' , respectively ) . services agreements with roivant sciences , inc. and roivant sciences gmbh in october 2014 , we and our wholly owned subsidiary , asi , entered into a services agreement with rsi , a wholly owned subsidiary of rsl , pursuant to which rsi provides us with services in relation to the identification of potential product candidates and project management of clinical trials , as well as other services related to our development , administrative and financial functions . in february 2017 , in connection with the contribution and assignment of all of our intellectual property rights to asg , we amended and restated this services agreement effective as of december 13 , 2016 , as a result of which asg was added as a recipient of services from rsi . in addition , asg also entered into a separate services agreement with rsg , a wholly owned subsidiary of rsl , effective as of december 13 , 2016 , for the provision of services by rsg to asg in relation to the identification of potential product candidates and project management of clinical trials , as well as other services related to development , administrative and financial activities . both services agreements were further amended and restated in june 2019. under the terms of both services agreements , we are obligated to pay or reimburse rsi and rsg for the costs they , or third parties acting on their behalf , incur in providing services to us or asg , including administrative and support services as well as research and development services . in addition , we are obligated to pay to rsi and rsg at a predetermined mark-up on the costs incurred directly by rsi and rsg in connection with any general and administrative and research and development services provided directly by rsi and rsg . under the services agreement , rsi and rsg , respectively , as service providers , have agreed to indemnify us and each of our officers , employees and directors against all losses arising out of , due to or in connection with the provision of services ( or the failure to provide services ) under the applicable services agreement , subject to certain limitations set forth in the applicable services agreement . in addition , we have agreed to indemnify rsi and rsg , respectively , and their respective affiliates and officers , employees and directors against all losses arising out of , due to or in connection with the receipt of services under the applicable services agreement , subject to certain limitations set forth in the applicable services agreement . such indemnification obligations will not exceed the payments made by us under the applicable services agreement for the specific service that allegedly caused or was related to the losses during the period in which such alleged losses were incurred . the term of each of the services agreements will continue until terminated upon 90 days ' written notice by any party with respect to the services such party provides or receives thereunder . for the years ended march 31 , 2019 and 2018 , we incurred expenses of $ 5.1 million and $ 8.5 million , respectively , under the services agreements , inclusive of the mark-up , which includes a portion of the expenses incurred by rsi and rsl on behalf of us that have been treated as capital contributions . we have recorded these charges as research and development expense and general and administrative expense in our consolidated statements of operations . story_separator_special_tag the year ended march 31 , 2019 included income of $ 5.9 million associated with convertible preferred stock received as compensation for services provided and certain intangible assets , partially offset by a foreign exchange loss of $ 0.8 million . all other income for the year ended march 31 , 2018 was attributable to foreign exchange gains . liquidity and capital resources sources of liquidity since our initial public offering in june 2015 , our operations have been financed primarily through sales of common shares and borrowings under our credit facilities . as of march 31 , 2019 , we had $ 107.0 million of cash and cash equivalents available to us . capital requirements we are currently in the clinical stage of operations and have not yet achieved profitability . we expect to continue to incur significant operating and net losses , as well as negative cash flows , for the foreseeable future as we continue to develop our gene therapy product candidates and prepares for potential future regulatory approvals and commercialization of our products . we have not generated any revenue to date and do not expect to generate product revenue unless and until we successfully complete development and obtain regulatory approval for at least one of our gene therapy product candidates . our current cash and cash equivalents balance will also not be sufficient to complete all necessary development activities and commercially launch our products . we expect to spend substantial amounts to complete the development of , seek regulatory approvals for and commercialize our gene therapy product candidates . we will require cash to pay principal and interest on our term loan with hercules , of which a $ 40.2 million aggregate principal amount remains outstanding as of june 11 , 2019. we expect to pay $ 19.2 million in principal and interest under the term loan with hercules during the remainder of the year ended march 31 , 2020 and the principal amount outstanding at the end of the 2019 fiscal year will be $ 24.1 million unless we prepay some or all of the principal amount . in addition , as part of our business development strategy , we generally structure our license agreements and collaboration agreements so that a significant portion of the total license cost is contingent upon the successful achievement of specified development , regulatory or commercial milestones . as a result , we will require cash to make payments upon achievement of these milestones under these agreements . based on our anticipated timeline for the achievement of development , regulatory and commercial milestones , we expect we will make total milestone payments under our license agreements and collaboration agreements of approximately $ 17.0 million through march 31 , 2020 , including $ 1.0 million that was achieved in february 2019 under the umms agreement and $ 15.0 million that was achieved in april 2019 under the oxford biomedica agreement . to the extent we achieve additional development , regulatory and commercial milestones through march 31 , 2020 , we may pay additional milestone payments under our license agreements and collaboration agreements . because the length of time and activities associated with successful development of our gene therapy product candidates is highly uncertain , we are unable to estimate the actual funds we will require for development and any approved marketing and commercialization activities . our future funding requirements , both near and long-term , will depend on many factors , including , but not limited to : the progress , timing , costs and results of our clinical trials of our gene therapy product candidates ; the outcome , timing and cost of meeting regulatory requirements established by the fda , the ema , or the pmda , and other comparable foreign regulatory authorities ; the achievement of certain development , regulatory and commercialization milestones that give rise to milestone and royalty payments to licensors ; the cost of filing , prosecuting , defending and enforcing our patent claims and other intellectual property rights ; 85 the cost of obtaining necessary intellectual property and defending potential intellectual property disputes , including patent infringement actions brought by third parties against us or our gene therapy product candidates or any future gene therapy product candidates ; the effect of competing technological and market developments ; the cost and timing of completion of commercial-scale manufacturing activities ; the cost of establishing sales , marketing and distribution capabilities for our gene therapy product candidates in regions where we choose to commercialize our products on our own ; and the initiation , progress , timing and results of our commercialization of our gene therapy product candidates , if approved for commercial sale . as of march 31 , 2019 , our cash and cash equivalents totaled $ 107.0 million and our accumulated deficit was $ 686.0 million . for the years ended march 31 , 2019 and 2018 , we incurred net losses of $ 129.1 million and $ 221.6 million , respectively . as of march 31 , 2019 , we had aggregate net interest-bearing indebtedness of $ 44.2 million , of which $ 21.2 million was due within one year . we also had $ 22.3 million of other non-interest-bearing current liabilities due within one year . our loan agreement with hercules requires that we maintain a minimum cash balance equal to the lesser of $ 30.0 million or the outstanding amount due under the loan agreement . we anticipate that our current cash and cash equivalents balance will not be sufficient to maintain compliance with the minimum liquidity financial covenant under the loan agreement beyond the one-year period following the date that the accompanying consolidated financial statements were issued if the loan agreement is not amended or an additional financing is not completed . failure to meet this minimum covenant would be considered an event of default under the loan agreement and could result in the acceleration of our existing indebtedness .
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results of operations for the years ended march 31 , 2019 and march 31 , 2018 the following table summarizes our results of operations for the years ended march 31 , 2019 and march 31 , 2018 ( in thousands ) : years ended march 31 , 2019 2018 operating expenses : research and development expenses ( includes $ 4,758 and $ 16,597 of share-based compensation expense for the years ended march 31 , 2019 and 2018 , respectively ) $ 87,552 $ 141,412 general and administrative expenses ( includes $ 11,671 and $ 15,281 of share-based compensation expense for the years ended march 31 , 2019 and 2018 , respectively ) 39,466 71,906 total operating expenses 127,018 213,318 interest expense 7,530 7,545 other income ( 5,616 ) ( 211 ) income tax expense 133 921 net loss $ ( 129,065 ) $ ( 221,573 ) 83 research and development expenses for the years ended march 31 , 2019 and 2018 , our research and development expenses consisted of the following ( in thousands ) : replace_table_token_2_th research and development expenses were $ 87.6 million for the year ended march 31 , 2019 and consisted primarily of $ 30.3 million related to axo-lenti-pd , $ 14.6 million related to axo-aav-opmd , $ 11.2 million related to axo-aav-gm1 and axo-aav-gm2 , personnel-related expenses of $ 10.0 million , $ 8.1 million related to nelotanserin , share-based compensation of $ 4.8 million , and other unallocated costs of $ 5.1 million . the share-based compensation expense was net of a benefit of $ ( 2.8 ) million related to the rsl common share awards and rsl options issued by rsl to rsi and rsg employees . research and development expenses decreased by $ 53.9 million in the year ended march 31 , 2019 compared to the year ended march 31 , 2018 .
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58 advertising— we expense advertising costs as incurred , except for catalog costs , which are expensed once the catalog is mailed . advertising expenses are net of sponsorships and vendor reimbursements . advertising expense was $ 11.9 million , $ 11.3 million and $ 12.2 million for the fiscal years ended january 30 , 2021 , february 1 , 2020 and february 2 , 201 9 , respectively . stock-based compensation— we account for stock-based compensation by recording the estimated fair value of stock-based awards granted as compensation expense over the vesting period , net of estimated forfeitures . stock-based compensation expense 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 included elsewhere in this document . this discussion contains forward-looking statements that involve risks and uncertainties . our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors , including those discussed in “ item 1a risk factors. ” see the cautionary note regarding forward-looking statements set forth at the beginning of part i of the annual report on form 10-k. fiscal 2020—a review of this past year fiscal 2020 presented unprecedented challenges for retailers with significant impacts on customers and employees , long periods of store closures and operating restrictions related to the covid-19 pandemic . coming off of the strongest earnings in our history in fiscal 2019 , we had positive momentum entering the first quarter of 2020. in early march , however , we began to feel the impacts of covid-19 which resulted in significantly reduced traffic and ultimately store closures across virtually all of the geographies in which we operate . during this time our focus remained centered on the customer with our teams working diligently to drive digital volume and maximize our localized fulfillment platform , while also working across the business to minimize expenses , preserve financial liquidity and maintain financial flexibility . actions taken included suspending hiring , laying off the majority of our part time staff , lowering operating costs including travel and other non-essential items , reducing capital spend by delaying projects , reducing planned inventory receipts , suspending rent payments , extending payment terms with our vendors and pausing our share repurchase program . as we moved into the second quarter we started to open the majority of our stores and experienced higher than expected revenue driven by the efforts of our sales teams to connect with customers and take advantage of pent up demand from lockdowns . we also benefited from a reduction in competition for discretionary spending given that many options , such as travel and entertainment , were unavailable or significantly restricted . sales through the second quarter and ultimately back half of the year were in excess of expectations despite rolling store short-term closures , wide-spread operating restrictions , supply chain delays , a curtailed back to school as most students were attending virtually , capacity restrictions in peaks , lack of tourism and numerous other impacts to our business . overall , covid-19 did have a meaningful , negative impact on the business as total sales were down 4.2 % for the full year . all categories , other than hardgoods , were down in total sales . though total net sales were down for the year , operating margins increased 150 basis points from the fiscal 2019 on top of an improvement of 210 basis points in fiscal 2019. these gains translated to $ 3.00 of diluted earnings per share , up from $ 2.62 in the prior year and represented the most profitable year in the history of our company . overall fiscal 2020 earnings improvements were driven by significant gains in product margins , strong expense management , occupancy abatements and government credits primarily related to payroll that were able to offset the impacts of decreased sales . we added 3 new stores in north america in fiscal 2020 , down from 6 new stores added in fiscal 2019. during fiscal 2020 , we also added 7 new blue tomato stores in europe and 2 new fast times store in australia and continue to have meaningful expansion opportunities in these areas . as a leading global lifestyle retailer , we continue to differentiate ourselves through our distinctive brand offering and diverse product selection , as well as the unique customer experience across all of our platforms . we remain committed to serving the customer launching over 100 new brands in 2020. we have made investments over several years to integrate the digital and physical channels creating a seamless shopping experience for our customer and one channel expense structure which we believe was a critical asset in 2020 as more demand shifted to the digital channels in response to store closures . we are continuing to deliver almost all of our online orders in north america from our stores , which has provided significant improvements in the speed of delivery to our customers . internationally we continue to see deeper penetration of localized fulfillment and are in various stages of roll-out in different countries . in-store fulfillment is a key part of strategy that we believe will drive long term market share by leveraging the strengths of our store sales team , providing better and faster service to customers , improving product margins , maximizing the productivity of inventory , providing additional selling opportunities , and utilizing one cost structure to serve the customer . 26 the following table shows net sales , operating profit , operating margin and diluted earnings per share for fiscal 2020 compared to fiscal 2019 : replace_table_token_5_th ( 1 ) the decrease in net sales was primarily due to widespread short-term store closures globally throughout the fiscal year due to the covid-19 pandemic , partially offset by a 13.6 % comparable sales increase and the net addition of 3 stores ( 12 new stores offset by 9 store closures ) . story_separator_special_tag our cost of goods sold also includes shrinkage , buying , occupancy , ecommerce fulfillment , distribution and warehousing costs ( including associated depreciation ) and freight costs for store merchandise transfers . this may not be comparable to the way in which our competitors or other retailers compute their cost of goods sold . cash consideration received from vendors is reported as a reduction of cost of goods sold if the inventory has sold , a reduction of the carrying value of the inventory if the inventory is still on hand , or a reduction of selling , general and administrative expense if the amounts are reimbursements of specific , incremental and identifiable costs of selling the vendors ' products . with respect to the freight component of our ecommerce sales , amounts billed to our customers are included in net sales and the related freight cost is charged to cost of goods sold . selling , general and administrative expenses consist primarily of store personnel wages and benefits , administrative staff and infrastructure expenses , freight costs for merchandise shipments from the distribution centers to the stores , store supplies , depreciation on fixed assets at our home office and stores , facility expenses , training expenses and advertising and marketing costs . credit card fees , insurance , public company expenses , legal expenses , amortization of intangibles , and other miscellaneous operating costs are also included in selling , general and administrative expenses . this may not be comparable to the way in which our competitors or other retailers compute their selling , general and administrative expenses . key performance indicators our management evaluates the following items , which we consider key performance indicators , in assessing our performance : net sales . net sales constitute gross sales , net of sales returns and deductions for promotions , and shipping revenue . net sales includes comparable sales and new store sales for all our store and ecommerce businesses . we consider net sales to be an important indicator of our current performance . net sales results are important to achieve leveraging of our costs , including store payroll and store occupancy . net sales also have a direct impact on our operating profit , cash and working capital . gross profit . gross profit measures whether we are optimizing the price and inventory levels of our merchandise . gross profit is the difference between net sales and cost of goods sold . any inability to obtain acceptable levels of initial markups or any significant increase in our use of markdowns could have an adverse effect on our gross profit and results of operations . 28 operating profit . we view operating profit as a key indicator of our success . operating profit is the difference between gross profit and selling , general and administrative expenses . the key drivers of operating profit are net sales , gross profit , our ability to control selling , general and administrative expenses and our level of capital expenditures affecting depreciation expense . diluted earnings per share . diluted earnings per share is based on the weighted average number of common shares and common share equivalents outstanding during the period . we view diluted earnings per share as a key indicator of our success in increasing shareholder value . story_separator_special_tag driven by a 70 basis point decrease due to governmental credits , a 60 basis point decrease in store wages , a 30 basis point decrease in national training and recognition events and a 20 basis point decrease in corporate costs . net income net income for fiscal 2020 was $ 76.2 million , or $ 3.00 per diluted share , compared with net income of $ 66.9 million , or $ 2.62 per diluted share , for fiscal 2019. our effective income tax rate for fiscal 2020 was 25.6 % compared to 26.5 % for fiscal 2019. the decrease in the effective tax rate for fiscal 2020 compared to fiscal 2019 was primarily related to a reduction in net losses in certain jurisdictions where there is uncertainty as to the realization of deferred tax assets and the proportion of earnings or loss before income taxes across jurisdictions . fiscal 2019 results compared with fiscal 2018 net sales net sales were $ 1,034.1 million for fiscal 2019 compared to $ 978.6 million for fiscal 2018 , an increase of $ 55.5 million or 5.7 % . the increase reflected a $ 47.2 million increase due to comparable sales and a $ 10.8 million increase due to the net addition of 11 stores ( made up of 6 new stores in north america , 7 new stores in europe , and 3 new stores in australia offset by 5 store closures ) . by region , north america sales increased $ 44.9 million or 5.2 % and other international sales increased $ 10.6 million or 9.7 % during fiscal 2019 compared to fiscal 2018. net sales for the year ended february 1 , 2020 included $ 6.4 million decrease due to the change in foreign exchange rates , which consisted of $ 0.7 million in canada , $ 5.1 million in europe and $ 0.6 million in australia . the 4.9 % increase in comparable sales was primarily driven by an increase in comparable transactions and an increase in dollars per transaction . dollars per transaction increased due to an increase in average unit retail and units per transaction . comparable sales were primarily driven by an increase in hardgoods followed by footwear , and accessories partially offset by decreases in women 's and men 's clothing . for information as to how we define comparable sales , see “ general ” above . 30 gross profit gross profit was $ 366.6 million for fiscal 2019 compared to $ 335.9 million for fiscal 2018 , an increase of $ 30.7 million , or 9.1 % . as a percentage of net sales , gross profit increased 110 basis points in fiscal 2019 to 35.4 % .
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results of operations in december 2019 , a novel stain of coronavirus ( covid-19 ) was first identified , and in march 2020 , the world health organization categorized covid-19 as a pandemic . in the best interest of our customers and employees and in line with governmental regulations , all stores were closed by march 19 , 2020. we began gradually re-opening physical stores at the end of the first fiscal quarter and into the second fiscal quarter , with the majority of our stores open through the third and fourth quarter . the impacts of covid-19 have significantly impacted the financial results of our business during fiscal 2020 resulting in our stores being open approximately 78.4 % of the possible days during the year . by quarter , our stores were open , on an aggregate basis , approximately 50.2 % , 73.4 % , 94.7 % and 93.6 % , respectively , of the possible days during each fiscal quarter . the following table presents selected items on the consolidated statements of income as a percent of net sales : replace_table_token_6_th fiscal 2020 results compared with fiscal 2019 net sales net sales were $ 990.7 million for fiscal 2020 compared to $ 1,034.1 million for fiscal 2019 , a decrease of $ 43.4 million or 4.2 % . the decrease in sales was primarily driven by the closure of our physical retail globally due to the impact of covid-19 . for the year , our stores were open approximately 78.4 % of the possible days . this decrease was partially offset by a 13.6 % increase in comparable sales driven by the increase in ecommerce sales as well as the strong performance of our physical stores upon re-opening . the 13.6 % increase in comparable sales was primarily driven by an increase in comparable transactions and an increase in dollars per transaction . dollars per transaction increased due to an increase in average unit retail and units per transaction .
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this discussion contains forward-looking statements , which can be identified by the use of words such as expects , plans , will , may , anticipates , believes , should , intends , estimates and other words of similar meaning . these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied by these forward-looking statements . such risks and uncertainties include , without limitation , the risks described in part i on page 4 of this annual report , and the risks described in item 1a , page 7 above . the following discussion is presented on a consolidated basis , and analyzes our financial condition and results of operations for the years ended december 31 , 2011 and 2010. unless the context indicates or suggests otherwise reference to we , our , us and the company in this section refers to the consolidated operations of solar power , inc. overview we are a global turnkey developer and engineering , procurement and construction ( epc ) contractor of large-scale photovoltaic ( pv ) solar energy facilities ( sef ) . we design , engineer , construct , market and sell very high-quality pv sefs for commercial and utility applications to a global market . additionally , in the course of producing our systems , we manage a supply chain of solar modules , racking and balance of system components that includes our own uniquely designed racking systems , sky mount ® and peaq tm . we produce world-class sefs from concept through creation and ensure a lifetime of superior sef performance with our comprehensive operations and maintenance ( o & m ) services program spi guardian tm . 20 on january 5 , 2011 , we entered into a stock purchase agreement with ldk , a vertically integrated solar wafer , cell and solar module manufacturer . under the agreement , on an as-converted , fully diluted basis , ldk purchased 70 % of our common stock . the transaction complemented ldk 's vertical integration , effectively providing us with strategic capital by making us its downstream sef development platform and a member of the global ldk family . furthermore , the transaction enables us to leverage ldk 's supply chain and economies-of-scale to work as a vertically integrated turnkey solar developer and epc contractor . previously , we sold our manufactured products through three distinct sales channels : 1 ) direct product sales to international and domestic markets , 2 ) independent construction of commercial and residential solar systems in the u.s. , and 3 ) authorized dealer networks who sold our yes ! branded products in the u.s. , and to the european residential markets through both direct and dealer sales . subsequent to the january 2011 transaction with ldk , our business strategy and focus shifted solely to the development , design , engineering and construction of commercial and utility pv solar projects , and we ceased pv solar module manufacturing at our facility in shenzhen , china . we continue to manufacture balance of system components , including our proprietary racking systems sky mount ® and peaq tm through contract manufacturing and assembly relationships . we maintain a strategic office in shenzhen , china that is principally responsible for our ongoing procurement , logistics and design support for our products and data systems . it also provides monitoring and management services for those solar energy facilities we either own or maintain under operations and maintenance agreements through our spi guardian tm o & m services program . the ldk relationship has strengthened our position in the solar industry and provided broader strategic relationships that strengthen our business development position , allowing us to pursue the commercial and utility projects in our pipeline more aggressively . we now intend to grow our pipeline in the americas , europe , africa and the caribbean with equal aggression while we simultaneously accelerate the active development of multiple projects now under way . critical accounting policies and estimates revenue recognition the company 's two primary business segments include photovoltaic installation , integration and sales , and cable , wire and mechanical assemblies . photovoltaic installation , integration and sales in our photovoltaic systems installation , integration and sales segment , there are two revenue streams . revenue on product sales is recognized when there is evidence of an arrangement , title and risk of ownership have passed ( generally upon delivery ) , the price to the buyer is fixed or determinable and collectability is reasonably assured . customers do not have a general right of return on products shipped therefore we make no provisions for returns . revenue on photovoltaic system construction contracts is generally recognized using the percentage of completion method of accounting . at the end of each period , the company measures the cost incurred on each project and compares the result against its estimated total costs at completion . the percent of cost incurred determines the amount of revenue to be recognized . payment terms are generally defined by the contract and as a result may not match the timing of the costs incurred by the company and the related recognition of revenue . such differences are recorded as costs and estimated earnings in excess of billings on uncompleted contracts or billings in excess of costs and estimated earnings on uncompleted contracts . the company determines its customer 's credit worthiness at the time the order is accepted . sudden and unexpected changes in customer 's financial condition could put recoverability at risk . the percentage-of-completion method requires the use of various estimates including among others , the extent of progress towards completion , contract revenues and contract completion costs . story_separator_special_tag determining the appropriate fair value model and calculating the fair value of share-based payment awards require the input of highly subjective assumptions , including the expected life of the share-based payment awards and stock price volatility . the assumptions used in calculating the fair value of share-based payment awards represent management 's best estimates , but these estimates involve inherent uncertainties and the application of management judgment . as a result , if factors change and we use different assumptions , our stock-based compensation expense could be materially different in the future . in addition , we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest . if our actual forfeiture rate is materially different from our estimate , the stock-based compensation expense could be significantly different from what we have recorded in the current period . allowance for doubtful accounts the company regularly monitors and assesses the risk of not collecting amounts owed to the company by customers . this evaluation is based upon a variety of factors including an analysis of amounts current and past due along with relevant history and facts particular to the customer . it requires the company to make significant estimates and changes in facts and circumstances could result in material changes in the allowance for doubtful accounts . income taxes the company accounts for income taxes under the asset and liability method . under this method , deferred tax assets and liabilities are determined based on differences between financial reporting and tax reporting bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse . realization of deferred tax assets is dependent upon the weight of available evidence , including expected future earnings . a valuation allowance is recognized if it is more likely than not that some portion , or all , of a deferred tax asset will not be realized . should we determine that we would be able to realize deferred tax assets in the future in excess of the net recorded amount , we would record an adjustment to the deferred tax asset valuation allowance . this adjustment would increase income in the period such determination is made . profit from non-u.s. activities is subject to local country taxes but not subject to u.s. tax until repatriated to the u.s. it is our intention to permanently reinvest these earnings outside the u.s. the calculation of tax liabilities involves dealing with uncertainties in the application of complex global tax regulations . we recognize potential liabilities for anticipated tax audit issues in the u.s. and other tax jurisdictions based on our estimate of whether , and the extent to which , additional taxes will more likely than not be due . if payment of these amounts ultimately proves to be unnecessary , the reversal of the liabilities may result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary . if the estimate of tax liabilities proves to be less than the ultimate tax assessment , a further charge to expense may result . the company recognizes uncertain tax positions in its financial statements when it concludes that a tax position is more likely than not to be sustained upon examination based solely on its technical merits . only after a tax position passes the first step of recognition will measurement be required . under the measurement step , the tax benefit is measured as the largest amount of benefit that is more likely than not to be realized upon effective settlement . this is determined on a cumulative probability basis . 23 segment information the company 's two primary business segments include : ( 1 ) photovoltaic installation , integration , and sales and ( 2 ) cable , wire and mechanical assemblies the company 's reportable segments are strategic business units that offer different products and services . they are managed separately because each business requires different technology and marketing strategies . the accounting policies of the segments are the same as those described in the summary of significant accounting policies . recent accounting pronouncements in december 2010 , the fasb issued asu 2010-28 , intangibles goodwill and other ( topic 350 ) . asu 2010-28 modifies step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts . for those units , an entity is required to perform step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists . asu 2010-28 is effective for fiscal years , and interim periods within those years , beginning after december 15 , 2011. the company expects that the adoption of asu 2010-28 will have no material impact on results of operations , cash flows or financial position . in june 2011 , the fasb issued asu no . 2011-05 , presentation of comprehensive income . asu 2011-05 increases the prominence of other comprehensive income in financial statements . under this asu , an entity will have the option to present the components of net income and comprehensive income in either one or two consecutive financial statements . the asu eliminates the option in u.s. gaap to present other comprehensive income in the statement of changes in equity . asu 2011-05 is effective on a retrospective basis for fiscal years , and interim periods within those years , beginning after december 15 , 2011. the company expects that the adoption of asu 2011-05 will not have an impact on results of operations , cash flows or financial position . in september 2011 , the fasb issued asu no . 2011-08 , intangiblesgoodwill and other ( topic 350 ) : testing goodwill for impairment , which permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit 's fair value is less than its carrying amount before applying the two-step goodwill impairment test .
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results of operations comparison of the year ended december 31 , 2011 to the year ended december 31 , 2010 net sales net sales for the year ended december 31 , 2011 increased 191.6 % to $ 103,072,000 from $ 35,353,000 for the year ended december 31 , 2010. net sales in the photovoltaic installation , integration and sales segment increased 217.0 % to $ 101,550,000 from $ 32,036,000 for the year earlier comparative period . the increase in revenue was primarily due to larger system development projects in construction as the company concentrates on development of utility scale and larger distributive generation projects . included in photovoltaic installation , integration and sales were related party sales to ldk of $ 12,903,000. the company expects that its continued focus on larger system development projects and utility scale projects will result in increased revenues in fiscal 2012. net sales in the cable , wire and mechanical assemblies segment decreased 54.1 % to $ 1,522,000 from $ 3,317,000 for the year earlier comparative period . this is the legacy segment of the company 's business . the company 24 expects to continue to service the customers it has in this segment as it continues to concentrate on its solar segment , but is not actively seeking new customers . the decrease in revenue is attributed to a decrease in demand from existing customers and is expected to continue to fluctuate in fiscal 2012. cost of goods sold cost of goods sold were $ 90,237,000 ( 87.5 % of net sales ) and $ 30,066,000 ( 85.0 % of net sales ) for the years ended december 31 , 2011 and 2010 , respectively .
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the company will match 25 % of the employee 's contribution up to the first 6 % of pre-tax annual compensation . additionally , the company makes statutory 68 contributions to retirement plans as required by local foreign government regulations . our contributions to the plans , which vest immediately , were $ 1.1 million , $ 733,000 and $ 522,000 for the years ended december 31 , 2015 , 2014 and 2013 , respectively . note n selected story_separator_special_tag the following discussion and analysis of our financial condition and results of operations should be read together with the section titled selected financial data and our audited financial statements and related notes which are included elsewhere in this annual report on form 10-k. our actual results could differ materially from those anticipated in the forward-looking statements included in this discussion as a result of certain factors , including , but not limited to , those discussed in risk factors included elsewhere in this annual report on form 10-k. overview we are a leading provider of cloud-based supply chain management solutions , providing network-proven integrations and comprehensive retail performance analytics to thousands of customers worldwide . we provide our solutions through the sps commerce platform , a cloud-based product suite that improves the way suppliers , retailers , distributors and other customers manage and fulfill orders . we derive the majority of our revenues from thousands of monthly recurring subscriptions from businesses that utilize our solutions . we plan to continue to grow our business by further penetrating the supply chain management market , increasing revenues from our customers as their businesses grow , expanding our distribution channels , expanding our international presence and , from time to time , developing new solutions and applications . we also intend to selectively pursue acquisitions that will add customers , allow us to expand into new regions or allow us to offer new functionalities . for 2015 , 2014 and 2013 , we generated revenues of $ 158.5 million , $ 127.9 million and $ 104.4 million , respectively . our fiscal quarter ended december 31 , 2015 represented our 60th consecutive quarter of increased revenues . recurring revenues from recurring revenue customers accounted for 91 % , 90 % and 89 % of our total revenues for 2015 , 2014 and 2013 , respectively . our revenues are not concentrated with any customer , as our largest customer represented 2 % or less of total revenues in 2015 , 2014 and 2013 , respectively . key financial terms and metrics sources of revenues trading partner fulfillment . our revenues primarily consist of monthly revenues from our customers for our trading partner fulfillment solution . this solution consists of a monthly subscription fee and a transaction-based fee . we also receive set-up fees for initial integration services we provide to our customers . most of our customers have contracts with us that may be terminated by the customer by providing 30 to 90 days ' notice . trading partner enablement . our trading partner enablement solution helps organizations , typically large retailers , to implement new integrations with trading partners . this solution ranges from electronic data interchange testing and certification to more complex business workflow automation and results in a one-time payment to us . trading partner analytics . our trading partner analytics solution consists of data analytics applications which allow our customers to improve their visibility across , and analysis of , their supply chains . through interactive data analysis , our retailer customers improve their visibility into supplier performance and their understanding of product sell-through . our revenues for this solution primarily consist of a monthly subscription fee . other trading partner solutions . the remainder of our revenues are derived from solutions that allow our customers to perform tasks such as barcode labeling or picking-and-packaging information tracking as well as purchases of miscellaneous supplies . these revenues are primarily transaction-based . 34 cost of revenues and operating expenses cost of revenues . cost of revenues consist primarily of personnel costs for our customer success and implementation teams , customer support personnel and application support personnel . cost of revenues also includes our cost of network services , which is primarily data center costs for the locations where we keep the equipment that serves our customers , and connectivity costs that facilitate electronic data transmission between our customers and their trading partners . sales and marketing expenses . sales and marketing expenses consist primarily of personnel costs for our sales , marketing and product management teams , commissions earned by our sales personnel and marketing costs . in order to expand our business , we will continue to add resources to our sales and marketing efforts over time . research and development expenses . research and development expenses consist primarily of personnel costs for development of new and maintenance of existing solutions . our research and development group is also responsible for enhancing existing solutions and applications as well as internal tools and developing new information maps that integrate our customers to their trading partners in compliance with those trading partners ' requirements . general and administrative expenses . general and administrative expenses consist primarily of personnel costs for finance , human resources and internal information technology support , as well as legal , accounting and other fees , such as credit card processing fees . overhead allocation . we allocate overhead expenses such as rent , certain employee benefit costs , office supplies and depreciation of general office assets to cost of revenues and operating expenses categories based on headcount . other metrics recurring revenue customers . as of december 31 , 2015 , we had approximately 23,000 customers with contracts to pay us monthly fees , which we refer to as recurring revenue customers . we report recurring revenue customers at the end of a period . a small portion of our recurring revenue customers consist of separate units within a larger organization . story_separator_special_tag to the extent that our future collections differ from our assumptions based on historical experience , the amount of our bad debt and allowance recorded may be different . 36 income taxes we account for income taxes using the liability method , which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements . under this method , deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse . deferred tax assets are reduced by a valuation allowance when it is not more likely than not that the deferred tax asset will be utilized . we assess our ability to realize our deferred tax assets at the end of each reporting period . realization of our deferred tax assets is contingent upon future taxable earnings . accordingly , this assessment requires significant estimates and judgment . if the estimates of future taxable income vary from actual results , our assessment regarding the realization of these deferred tax assets could change . future changes in the estimated amount of deferred taxes expected to be realized will be reflected in our consolidated financial statements in the period the estimate is changed , with a corresponding adjustment to our operating results . we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit . for tax positions meeting the more likely than not threshold , the amount recognized in the financial statements is the largest benefit that has a greater than 50 % likelihood of being realized upon ultimate settlement with the relevant tax authority . we have elected to early adopt accounting standards update ( asu ) no . 2015-17 , balance sheet classification of deferred taxes , which requires deferred tax assets and liabilities to be classified as noncurrent on the classified statement of financial position . we adopted this updated accounting standard prospectively to simplify the presentation of our deferred tax assets and liabilities . stock-based compensation stock-based compensation is measured at the grant date , based on the fair value of the award , and is recognized ratably as an expense over the vesting period of the award . determining the appropriate fair value model and calculating the fair value of stock-based payment awards require the use of subjective assumptions , including the expected life of the stock-based payment awards and stock price volatility . we use the black-scholes option pricing model to value our award grants and determine the related compensation expense . the assumptions used in calculating the fair value of stock-based payment awards represent management 's best estimates , but the estimates involve inherent uncertainties and the application of management judgment . as a result , if factors change and we use different assumptions , our stock-based compensation expense could be materially different in the future . we expect to continue to grant stock-based awards in the future , and to the extent that we do , our actual stock-based compensation expense recognized in future periods will likely increase . prior to becoming a public entity in 2010 , historical volatility was not available for our common stock . as a result , we did not have sufficient data to rely solely on the historical volatility of our common stock . therefore , we estimated volatility based partially on the historical volatilities of the publicly traded shares of a selected peer group and partially on the historical volatility of our common stock , which collectively provided a reasonable basis for estimating volatility . beginning in 2015 , we relied solely on the historical volatility of our common stock . valuation of goodwill and purchased intangible assets goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in a business combination . assets acquired may include identifiable intangible assets , such as subscriber relationships , which are recognized separately from goodwill . 37 we test goodwill for impairment annually at december 31 , or more frequently if events or changes in circumstances indicate that the asset might be impaired . the impairment test is conducted by comparing the fair value of the net assets with the carrying value of the reporting unit . fair value is determined using the direct market observation of market price and outstanding equity of the reporting unit at december 31. if the carrying value were to exceed the fair value of the reporting unit , the goodwill may be impaired . if this were to occur , the fair value would then be allocated to assets and liabilities in a manner similar to a purchase price allocation in order to determine the implied fair value of the goodwill . this implied fair value would then be compared to the carrying amount of the goodwill and , if it were less , an impairment loss would be recognized . story_separator_special_tag impact of use tax refunds in 2015 and 2014 related to items previously expensed . the following table provides a reconciliation of net income to adjusted ebitda ( in thousands ) : replace_table_token_10_th non-gaap income per share . non-gaap income per share , which is also a non-gaap measure of financial performance , consists of net income plus stock-based compensation expense and amortization expense related to intangible assets divided by the weighted average number of shares of common stock outstanding during each period .
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results of operations year ended december 31 , 2015 compared to year ended december 31 , 2014 the following table presents our results of operations for the periods indicated ( dollars in thousands ) : replace_table_token_9_th due to rounding , totals may not equal the sum of the line items in the table above revenues . revenues for 2015 increased $ 30.6 million , or 24 % , to $ 158.5 million from $ 127.9 million for 2014. the increase in revenues resulted from two primary factors : the increase in recurring revenue customers and the increase in average recurring revenues per recurring revenue customer , which we also refer to as wallet share . the number of recurring revenue customers increased 6 % to 23,410 at december 31 , 2015 from 21,983 at december 31 , 2014. average recurring revenues per recurring revenue customer , or wallet share , increased 15 % to $ 6,343 for 2015 from $ 5,524 for 2014. this increase in wallet share was primarily attributable to increased fees resulting from increased usage of our solutions by our recurring revenue customers and growth in larger customers . 38 recurring revenues from recurring revenue customers increased 25 % in 2015 , as compared to 2014 , and accounted for 91 % of our total revenues for 2015 and 90 % for 2014. we anticipate that the number of recurring revenue customers and wallet share will continue to increase as we increase the number of solutions we offer and increase the penetration of those solutions across our customer base . cost of revenues .
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overview we are a commercial pharmaceutical company offering differentiated products to patients . our commercial portfolio of branded products focuses on three areas : neurology , hospital , and pain and inflammation . we have built our commercial portfolio through a combination of increased opportunities with existing products , as well as through the acquisition or licensing of additional approved products . our primary marketed products are : indocin ® ( indomethacin ) suppositories a suppository form and oral solution of indomethacin , a nonsteroidal anti-inflammatory drug ( nsaid ) , approved for : moderate to severe rheumatoid arthritis including acute flares of chronic disease moderate to severe ankylosing spondylitis indocin ® ( indomethacin ) oral suspension moderate to severe osteoarthritis acute painful shoulder ( bursitis and or tendinitis ) acute gouty arthritis cambia ® ( diclofenac potassium for oral solution ) a prescription medicine used to treat migraine attacks in adults . cambia does not prevent or lessen the number of migraines one has , and it is not for other types of headaches . it contains diclofenac potassium , a non-steriodal anti-inflammatory drug ( nsaid ) . sprix ® ( ketorolac tromethamine ) nasal spray a prescription nsaid indicated in adult patients for the short term ( up to five days ) management of moderate to moderately severe pain that requires analgesia at the opioid level . zipsor ® ( diclofenac potassium ) liquid filled capsules a prescription nsaid used for relief of mild-to-moderate pain in adults ( 18 years of age and older ) other commercially available products include oxaydo® ( oxycodone hci , usp ) tablets for oral use only —cii . the following are our full year 2020 and recent 2021 key events : on january 10 , 2020 , we completed the sale of gralise ® ( gabapentin ) to golf acquiror llc , an affiliate to alvogen , inc. ( alvogen ) , for cash proceeds of $ 130.3 million . the total value included $ 75.0 million in cash at closing , with the balance receivable as 75 % of alvogen 's first $ 70.0 million of gralise net sales after the closing ( consideration receivable ) . alvogen also paid for certain inventories relating to gralise . on june 3 , 2020 , we entered into an agreement with alvogen to settle the remaining balance of $ 39.7 million in consideration receivable , whereby we reduced the consideration receivable by $ 0.9 million and alvogen paid $ 38.8 million in cash . during the year ended december 31 , 2020 , we recognized a gain of $ 126.7 million on the sale of gralise . 42 on february 13 , 2020 , we completed the sale of our remaining rights , title and interest in and to the nucynta franchise to collegium pharmaceutical , inc. ( collegium ) for $ 375.0 million , less royalties , in cash at closing . collegium assumed certain contracts , liabilities and obligations relating to the nucynta products , including those related to manufacturing and supply , post-market commitments and clinical development costs . collegium also paid for certain inventories relating to the products . during the year ended december 31 , 2020 , we recognized a loss of $ 14.7 million on the sale of nucynta . on february 13 , 2020 , we repaid in full our outstanding aggregate principal amount of senior secured notes ( senior notes ) pursuant to a note purchase agreement dated march 12 , 2015 ( note purchase agreement ) and all subsequent amendments to the note purchase agreement . as a result , for the year ended december 31 , 2020 , we recognized a loss on debt extinguishment of the senior notes of $ 8.2 million composed of the $ 4.9 million prepayment fee and $ 3.3 million of unamortized debt discount and debt issuance costs . on february 19 , 2020 , we entered into separate , privately negotiated agreements with a limited number of holders of the 2021 notes and 2024 notes to repurchase approximately $ 188.0 million aggregate principal amount of the outstanding 2021 notes and 2024 notes . on april 8 , 2020 , we announced the completion of its cash tender offers , initiated on march 11 , 2020 , in which we settled approximately $ 76.7 million aggregate principal amount of the remaining $ 77.0 million of combined outstanding 2021 notes and 2024 notes . as a result of both transactions , for the year ended december 31 , 2020 , we recognized a $ 47.9 million loss on debt extinguishment of the convertible notes , which represented the difference between the carrying value and the fair value of the convertible notes just prior to the repurchase plus transaction costs . we also recognized reacquisition of $ 19.6 million in additional paid-in capital related to the equity component of the convertible notes based on the excess of the fair value of total considerations provided against the fair value of the convertible notes just prior to the repurchase . in may 2020 , we sold our collegium warrants investment for an aggregate purchase price of $ 6.0 million to armistice capital mater fund , ltd. as a result , we derecognized the remaining carrying value of $ 6.5 million of the financial asset and recognized a net loss of approximately $ 0.5 million , recorded within other gain ( loss ) on the condensed consolidated statement of comprehensive income , for the year ended december 31 , 2020. on may 20 , 2020 , we completed a merger ( the zyla merger ) with zyla life sciences ( zyla ) pursuant to an agreement and plan of merger ( merger agreement ) , dated as of march 16 , 2020. upon consummation of the zyla merger , each issued and outstanding share of zyla common stock converted into 2.5 shares of assertio holding 's common stock ( the exchange ratio ) , and each outstanding option or warrant to purchase zyla common stock converted into the right to purchase shares of assertio 's common story_separator_special_tag we only apply the five-step model to contracts when it is probable we will collect the consideration that we are entitled to in exchange for the goods or services transferred to our customer . at contract inception , once the contract is determined to be within the scope of asc 606 , we assess the goods or services promised within each contract and determine those that are performance obligations and assess whether each promised good or service is distinct . we then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation , when ( or as ) the performance obligation is satisfied . we assess the term of the contract based upon the contractual period in which we have enforceable rights and obligations . variable consideration arising from sales or usage-based royalties , promised in exchange for a license of the our intellectual property , is recognized at the later of ( i ) when the subsequent product sales occur or ( ii ) the performance obligation , to which some or all of the sales-based royalty has been allocated , has been satisfied . we recognize a contract asset relating to our conditional right to consideration for completed performance obligations . accounts receivable are recorded when the right to consideration becomes unconditional . a contract liability is recorded for payments received in advance of the related performance obligation being satisfied under the contract . product sales we sell commercial products to wholesale distributors and specialty pharmacies . product sales revenue is recognized when title has transferred to the customer and the customer has assumed the risks and rewards of ownership , which typically occurs on delivery to the customer . our performance obligation is to deliver product to the customer , and the performance obligation is completed upon delivery . the transaction price consists of a fixed invoice price and variable product sales allowances , which include rebates , discounts and returns . product sales revenues are recorded net of applicable sales tax and reserves for these product sales allowances ( gross-to-net sales allowances ) . receivables related to product sales are typically collected one to two months after delivery . 44 product sales allowances consist primarily of provisions for product returns , wholesaler and pharmacy discounts , prompt pay discounts , patient discount programs , chargebacks , managed care rebates , and government rebates . we consider products sales allowances to be variable consideration and estimate and recognize product sales allowances as a reduction of product sales in the same period the related revenue is recognized . product sales allowances are based on actual or estimated amounts owed on the related sales . these estimates take into consideration the terms of our agreements with customers , historical product returns , rebates or discounts taken , estimated levels of inventory in the distribution channel , the shelf life of the product and specific known market events , such as competitive pricing and new product introductions . we use the most likely method in estimating product sales allowances . if actual future results vary from our estimates , we may need to adjust the estimates , which could have an effect on product sales and earnings in the period of adjustment . our product sales allowances include : product return - we allow customers to return product for credit with respect to that product within 6 months before and up to 12 months after the product expiration date . we estimate product returns and associated credit on zipsor , cambia , nucynta , gralise , lazanda and products acquired from zyla , indocin products , zorvolex , vivlodex and oxaydo . estimates for returns are based on historical return trends by product or by return trends of similar products , taking into consideration the shelf life of the product at the time of shipment , shipment and prescription trends , estimated distribution channel inventory levels and consideration of the introduction of competitive products . we do not assume financial responsibility for returns of nucynta previously sold by janssen pharma or lazanda product previously sold by archimedes pharma us inc. under the commercialization agreement with collegium for nucynta , the divestiture of lazanda to slán and the divestiture of gralise to alvogen , we are only financially responsible for product returns for products that were sold by us , which are identified by specific lot numbers . shelf lives , from the respective manufacture dates , for our products range from 24 months to 48 months . because of the shelf life of our products and its return policy of issuing credits with respect to product that is returned within six months before and up to 12 months after its product expiration date , there may be a significant period of time between when the product is shipped and when we issue credit on a returned product . accordingly , we may have to adjust these estimates , which could have an effect on product sales and earnings in the period of adjustments . wholesaler and pharmacy discounts - we offer contractually determined discounts to certain wholesale distributors and specialty pharmacies that purchase directly from it . these discounts are either taken off invoice at the time of shipment or paid to the customer on a quarterly basis one to two months after the quarter in which product was shipped to the customer . prompt pay discounts - we offer cash discounts to its customers ( generally 2 % of the sales price ) as an incentive for prompt payment . based on our experience , we expect our customers to comply with the payment terms to earn the cash discount . patient discount programs - we offer patient discount co-pay assistance programs in which patients receive certain discounts off their prescriptions at participating retail and specialty pharmacies . the discounts are reimbursed by us approximately one month after the prescriptions subject to the discount are filled .
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results of operations the following table reflects our results of operations for the years ended december 31 , 2020 and 2019 ( in thousands ) : replace_table_token_2_th 48 revenues the following table reflects total revenues for the years ended december 31 , 2020 and 2019 ( in thousands ) : replace_table_token_3_th ( 1 ) products acquired in connection with zyla merger represent product sales , net for the period may 20 , 2020 through december 31 , 2020 . ( 2 ) includes product sales for gralise , which was divested in january 2020 ; product sales adjustments for previously divested products nucynta and lazanda ; and , product sales for non-promoted products oxaydo and solumatrix , which were acquired from zyla in may 2020. product sales , net for the year ended december 31 , 2020 , product sales primarily consisted of sales from indocin products , cambia , zipsor and sprix . we began shipping and recognizing product sales for indocin products , sprix , and non-promoted products , oxaydo and solumatrix , upon the zyla merger on may 20 , 2020. cambia net product sales for the year ended december 31 , 2020 decreased $ 4.1 million as compared to the same period in 2019 primarily due to lower volume and unfavorable payor mix . zipsor net product sales for the year ended december 31 , 2020 increased $ 0.8 million as compared to the same period in 2019 primarily due to the effect of prior year results being negatively impacted by short-dated product sales returns offset by increased patient discount programs in the current year . product sales for our non-promoted products , solumatrix and oxaydo , acquired upon the zyla merger were $ 7.7 million for the year ended december 31 , 2020. in september 2020 , we terminated our iceutica license and as a result will no longer manufacture products using solumatrix technology .
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the following table presents information regarding troubled debt restructurings as of december 31 , 2015 and 2014 ( dollars in thousands ) : replace_table_token_56_th - 70 - macatawa bank corporation notes to consolidated financial statements december 31 , 2015 and 2014 note 3 – loans ( continued ) the following table presents information related to accruing troubled debt restructurings as of december 31 , 2015 , 2014 , 2013 and 2012. the table presents the amount of accruing troubled debt restructurings that were on nonaccrual status prior to the restructuring , accruing at the time of restructuring and those that were upgraded to accruing status after receiving six consecutive monthly payments in accordance with the restructured terms as of december 31 , 2015 , 2014 , 2013 and 2012 ( dollars in thousands ) : replace_table_token_57_th the following tables present information regarding troubled debt restructurings executed during the years ended december 31 , 2015 , 2014 and 2013 ( dollars in thousands ) : replace_table_token_58_th replace_table_token_59_th replace_table_token_60_th according to the accounting standards , not all loan modifications are tdrs . tdrs are modifications or renewals where story_separator_special_tag management 's discussion and analysis of results of operations and financial condition contains forward-looking statements . please refer to the discussion of forward-looking statements at the beginning of this report . the following section presents additional information to assess our results of operations and financial condition . this section should be read in conjunction with the consolidated financial statements and the supplemental financial data contained elsewhere in this report . overview macatawa bank corporation is a michigan corporation and a registered bank holding company . it wholly-owns macatawa bank , macatawa statutory trust i and macatawa statutory trust ii . macatawa bank is a michigan chartered bank with depository accounts insured by the fdic . the bank operates twenty-six branch offices and a lending and operational service facility , providing a full range of commercial and consumer banking and trust services in kent county , ottawa county , and northern allegan county , michigan . macatawa statutory trusts i and ii are grantor trusts and have issued $ 20.0 million each of pooled trust preferred securities . these trusts are not consolidated in our consolidated financial statements . for further information regarding consolidation , see the notes to the consolidated financial statements . at december 31 , 2015 , we had total assets of $ 1.73 billion , total loans of $ 1.20 billion , total deposits of $ 1.44 billion and shareholders ' equity of $ 152.0 million . we recognized net income of $ 12.8 million in 2015 compared to net income of $ 10.5 million in 2014. as of december 31 , 2015 , the company 's and the bank 's risk-based regulatory capital ratios were significantly above those required under the regulatory standards and the bank continued to be categorized as “ well capitalized ” at december 31 , 2015. during 2013 , the company improved its capital structure by prepaying and redeeming its $ 1.7 million of 11 % unsecured subordinated debt , resuming interest payments on its trust preferred securities and completing an exchange of all of the company 's series a and series b preferred stock for company common stock and cash , at the election of the holder . each of these transactions are discussed in detail in item 7 and in our consolidated financial statements and related notes included in this report . this paved the way for the company to resume payment of quarterly cash dividends to common shareholders . beginning with the first quarter of 2014 , the company paid a cash dividend of $ 0.02 per share in each quarter of 2014 , after a hiatus of over five years . in the second quarter of 2015 , the company increased this cash dividend by 50 % , to $ 0.03 per share and continued to pay at this level for the third and fourth quarters of 2015. over the past five years , much progress has been made at reducing our nonperforming assets . the following table reflects period end balances of these nonperforming assets as well as total loan delinquencies . replace_table_token_13_th earnings in recent years have been impacted by high costs associated with administration and disposition of nonperforming assets . these costs , including losses on repossessed and foreclosed properties , were $ 3.0 million , $ 3.1 million and $ 5.5 million for the years ended december 31 , 2015 , 2014 and 2013 , respectively . we sold our largest remaining individual other real estate property late in the fourth quarter of 2015 , recognizing a loss of $ 1.1 million . even with this large recognized loss , our total nonperforming asset costs declined slightly in 2015 compared to 2014. going forward , as further reductions in nonperforming assets are accomplished , we expect the costs associated with these assets to continue to decline thereby allowing for improved earnings in future periods . our earnings in 2015 , 2014 and 2013 were favorably impacted by negative provision for loan losses of $ 3.5 million , $ 3.4 million and $ 4.3 million , respectively . as discussed in detail later in item 7 of this report under the heading `` allowance for loan losses '' , the large negative provision in 2015 was the result of the reversal of a portion of a specific reserve on an individual credit that was upgraded to accruing status in the fourth quarter of 2015 as well as the net loan recoveries for the year . the negative provision in each period was also impacted by other recoveries from our collection efforts and a continual decline in our historical charge-off levels from prior years . we do not expect a similar level of negative provision for loan losses in 2016 . story_separator_special_tag our net interest margin increased by 2 basis points compared to 2013. average interest earning assets decreased slightly from $ 1.36 billion in 2013 to $ 1.35 billion in 2014. the yield on earning assets decreased 12 basis points from 3.48 % for 2014 to 3.36 % for 2015 , and decreased 10 basis points to 3.48 % for 2014 from 3.58 % for 2013. the decreases were due to decreases in the yield on our commercial , residential and consumer loan portfolios , which repriced in the generally lower rate environment during 2014 and 2015. our margin was negatively impacted by our decision to hold significant balances in liquid and short-term investments in the past three years . in 2014 and 2015 , we began to see positive impact on our net interest margin from deploying some of these balances into higher yielding assets , including investment securities and portfolio loans . also , the federal reserve board increased the target federal funds rate by 25 basis points in december 2015 and is expected to follow a systematic process of slowly increasing this target rate in 2016 and beyond . with these developments , we expect our net interest margin to be positively impacted in 2016. our net interest margin for 2015 benefitted from a 7 basis point decrease in our cost of funds from 0.56 % for 2014 to 0.49 % for 2015. average interest bearing liabilities increased from $ 992.0 million in 2014 to $ 1.07 billion in 2015. our net interest margin for 2014 benefitted from a 13 basis point decrease in our cost of funds from 0.69 % for 2013 to 0.56 % for 2014. average interest bearing liabilities decreased from $ 1.05 billion in 2013 to $ 992.0 million in 2014. decreases in the rates paid on our deposit accounts in response to declining market rates and the rollover of time deposits and other borrowings at lower rates within the current rate environment caused the reduction in our cost of funds for each period . with the recent increase in the federal funds rate , we anticipate some increase in our funding costs , but with a lesser impact than on our interest earning assets . margin continued to be dampened by the impact of our elevated levels of nonperforming assets , including other real estate owned and nonaccrual loans . however , as we work to further reduce these levels , our margin is expected to continue to benefit . the estimated negative impact of these nonperforming assets on net interest margin decreased from 18 basis points in 2013 to 14 basis points in 2014 and 9 basis points in 2015. we are encouraged by the increase in higher yielding average earning assets in 2015 and expect these balances to continue to increase in 2016 , which should positively affect net interest income . - 27 - the following table shows an analysis of net interest margin for the years ended december 31 , 2015 , 2014 and 2013. replace_table_token_15_th ( 1 ) yields are presented on a tax equivalent basis using a 35 % tax rate . ( 2 ) loan fees of $ 550,000 , $ 583,000 and $ 548,000 for 2015 , 2014 and 2013 are included in interest income . includes average nonaccrual loans of approximately $ 5.2 million , $ 12.6 million and $ 14.7 million for 2015 , 2014 and 2013 . - 28 - the following table presents the dollar amount of changes in net interest income due to changes in volume and rate . replace_table_token_16_th provision for loan losses : the provision for loan losses for 2015 was a negative $ 3.5 million compared to a negative $ 3.4 million for 2014 and a negative $ 4.3 million for 2013. the negative provisions in each period were the result of continued significant declines in the level of net charge-offs , reduction in the balances and required reserves on nonperforming loans and stabilizing real estate values on problem credits . of the $ 3.5 million negative provision for loan losses in 2015 , $ 2.0 million was attributable to a reduction in specific reserve on our largest individual impaired loan relationship . this loan relationship was upgraded to accruing status in the fourth quarter of 2015 upon the sale of the company and multiple years of profitable operations and positive cash flows . as such , with the upgrade , we changed our method of estimating the specific reserve from one based on liquidation value to one based on expected cash flow from operations . this resulted in the $ 2.0 million reduction in the required reserve discussed above . net charge-offs were $ 58.0 million in 2009 , $ 29.7 million in 2010 , $ 11.1 million in 2011 , and $ 802,000 in 2012 , turning to net recoveries of $ 1.3 million in 2013 , $ 1.5 million in 2014 and $ 1.6 million in 2015. the lower level of net charge-offs was a result of a slowing in the rate of declines in real estate values , success at reducing our levels of nonperforming loans and positive results from our aggressive collection recovery efforts . we continue to see an increase in the quality of some credits within our loan portfolio resulting in an improved loan grade . over the past three years , we have experienced improvements in our weighted average loan grade . our weighted average commercial loan grade was 3.77 at december 31 , 2015 reflecting improvement compared to 3.78 at december 31 , 2014 , 3.88 at december 31 , 2013 and 4.01 at december 31 , 2012. we believe efforts that began in late 2009 and in early 2010 to improve loan administration and loan risk management practices have had a significant impact , ultimately allowing for the reduction in the level of the allowance for loan losses since then .
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summary : since the economic recession in 2008 and 2009 , we had been focused on improving our loan portfolio , reducing exposure in higher loan concentration types , building our investment portfolio , and improving our financial condition through diversification of credit risk , improved capital ratios , and reduced reliance on non-core funding . we experienced positive results in each of these areas over the past several years . with the success in strengthening our financial condition , we have turned our focus more recently to achieving high quality loan portfolio growth . total assets were $ 1.730 billion at december 31 , 2015 , an increase of $ 145.8 million from $ 1.584 billion at december 31 , 2014. this change reflected increases of $ 52.0 million in cash and cash equivalents , $ 4.9 million in securities available for sale , $ 20.3 million in securities held to maturity and $ 79.4 million in our loan portfolio , partially offset by decreases of $ 10.7 million in other real estate owned and $ 3.4 million in net deferred tax asset . total deposits increased by $ 129.2 million and other borrowed funds were up by $ 8.1 million at december 31 , 2015 compared to december 31 , 2014 . - 32 - total shareholders ' equity increased by $ 9.5 million from december 31 , 2014 to december 31 , 2015. shareholders ' equity was increased by $ 12.8 million of net income in 2015 , partially offset by cash dividends of $ 3.7 million , or $ 0.11 per share . shareholders ' equity was also increased by $ 286,000 in 2015 as a result of a swing in other comprehensive income due to the effect of interest rate movement on the fair value of our available for sale securities portfolio . as of december 31 , 2015 , the bank was categorized as “ well capitalized ” under applicable regulatory guidelines .
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you should review the “ cautionary note regarding forward-looking statements ” and item 1a . risk factors sections 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 the forward-looking statements contained in the following discussion and analysis . 36 overview we are a leading online platform for small business lending . we are seeking to transform small business lending by making it efficient and convenient for small businesses to access capital . enabled by our proprietary technology and analytics , we aggregate and analyze thousands of data points from dynamic , disparate data sources to assess the creditworthiness of small businesses rapidly and accurately . small businesses can apply for a term loan or line of credit on our website in minutes and , using our proprietary ondeck score , we can make a funding decision immediately and transfer funds as fast as the same day . we have originated more than $ 4 billion of loans since we made our first loan in 2007. our loan originations have increased at a compound annual growth rate of 60 % from 2013 to 2015 and had a year-over-year growth rate of 62 % for the year ended december 31 , 2015 . we generate the majority of our revenue through interest income and fees earned on the term loans we retain . our term loans are obligations of small businesses with fixed dollar repayments , which we offer in principal amounts ranging from $ 5,000 to $ 500,000 and with maturities of 3 to 36 months . our lines of credit , which we began offering in september 2013 , range from $ 6,000 to $ 100,000 , and are repayable within six months of the date of the latest funds draw . we earn interest on the balance outstanding and lines of credit are subject to a monthly fee unless the customer makes a qualifying minimum draw , in which case it is waived for the first six months . in september 2015 , in response to what we believe to be the unmet demand of larger , higher credit quality businesses , we began offering term loans up to $ 500,000 with terms as long as 36 months as compared to our previous limits of $ 250,000 and 24 months and we also increased the maximum size of our line of credit from $ 25,000 to $ 100,000. in october 2013 , we also began generating revenue by selling some of our term loans to third-party institutional investors through our ondeck marketplace . the balance of our revenue comes from our servicing and other fee income , which primarily consists of fees we receive for servicing loans we have sold to third-party institutional investors and marketing fees from issuing bank partners . in 2015 , 2014 and 2013 , loans originated via issuing bank partners constituted 12.4 % , 15.9 % and 16.1 % of our total loan originations , respectively . we rely on a diversified set of funding sources for the capital we lend to our customers . our primary source of this capital has historically been debt facilities with various financial institutions . as of december 31 , 2015 , we had $ 380.1 million of funding debt outstanding and $ 644.7 million total borrowing capacity under such debt facilities . during the years ended 2015 , 2014 and 2013 , we sold approximately $ 617.7 million , $ 145.2 million and $ 18.7 million , respectively , of loans to ondeck marketplace investors . in addition , we completed our first securitization transaction in may 2014 , pursuant to which we issued debt that is secured by a revolving pool of ondeck small business loans . we raised approximately $ 175.0 million from this securitization transaction . we have also used proceeds from our stock financings and operating cash flow to fund loans in the past and continue to finance a portion of our outstanding loans with these funds . of the total principal outstanding as of december 31 , 2015 , including our loans held for investment and loans held for sale , plus loans sold to ondeck marketplace investors which had a balance remaining as of december 31 , 2015 , 39 % were funded via ondeck marketplace investors , 26 % were funded via our debt warehouse facilities , 21 % were financed via proceeds raised from our securitization transaction and 14 % were funded via our own equity . we originate loans through direct marketing , including direct mail , social media , and other online marketing channels . we also originate loans through referrals from our strategic partners , including banks , payment processors and small business-focused service providers , and through funding advisors who advise small businesses on available funding options . we have grown rapidly over the three years ended december 31 , 2015 . we generated gross revenue of $ 254.8 million , $ 158.1 million and $ 65.2 million , during the years ended december 31 , 2015 , 2014 and 2013 , respectively . we currently make loans throughout the united states and in canada and australia , although , to date , substantially all of our revenue has been generated in the united states . our adjusted ebitda , a non-gaap measure which is described in further detail in the section below titled “ —key financial and operating metrics , ” improved to positive $ 16.2 million for the year ended december 31 , 2015 from negative $ 0.2 million and negative $ 16.3 million for the years ended december 31 , 2014 and 2013 , respectively . we incurred net losses of $ 2.2 million , $ 18.7 million and $ 24.4 million for the years ended december 31 , 2015 , 2014 and 2013 , respectively . initial public offering on december 22 , 2014 , we completed our initial public offering . story_separator_special_tag the provision rate is not directly comparable to the net cumulative lifetime charge-off ratio because ( i ) the provision rate reflects estimated losses at the time of origination while the net cumulative lifetime charge-off ratio reflects actual charge-offs , ( ii ) the provision rate includes provisions for losses on both term loans and lines of credit while the net cumulative lifetime charge-off ratio reflects only charge-offs related to term loans and ( iii ) the provision rate for a period reflects the provision for losses related to all loans held for investment while the net cumulative lifetime charge-off ratio reflects lifetime charge-offs of term loans related to a particular cohort of term loans . reserve ratio reserve ratio is our allowance for loan losses as of the end of the period divided by the unpaid principal balance as of the end of the period . 15+ day delinquency ratio 15+ day delinquency ratio equals the aggregate unpaid principal balance for our loans that are 15 or more calendar days past due as of the end of the period as a percentage of the unpaid principal balance for such period . the unpaid principal balance for our loans that are 15 or more calendar days past due includes loans that are paying and non-paying . the majority of our loans 39 require daily repayments , excluding weekends and holidays , and therefore may be deemed delinquent more quickly than loans from traditional lenders that require only monthly payments . 15+ day delinquency ratio is not annualized , but reflects balances as of the end of the period . non-gaap financial measures we believe that the provision of non-gaap metrics in this report can provide a useful measure for period-to-period comparisons of our core business and useful information to investors and others in understanding and evaluating our operating results . however , non-gaap metrics are not calculated in accordance with united states generally accepted accounting principles , or gaap , and should not be considered an alternative to any measures of financial performance calculated and presented in accordance with gaap . other companies may calculate these non-gaap metrics differently than we do . adjusted ebitda adjusted ebitda represents our net ( loss ) income , adjusted to exclude interest expense associated with debt used for corporate purposes ( rather than funding costs associated with lending activities ) , income tax expense , depreciation and amortization , stock-based compensation expense and warrant liability fair value adjustment . stock based compensation includes employee compensation as well as compensation to third-party service providers . ebitda is impacted by changes from period to period in the liability related to both common and preferred stock warrants which require fair value accounting . management believes that adjusting ebitda to eliminate the impact of the changes in fair value of these warrants is useful to analyze the operating performance of the business , unaffected by changes in the fair value of stock warrants which are not relevant to the ongoing operations of the business . all such preferred stock warrants converted to common stock warrants upon our initial public offering in december 2014. our use of adjusted ebitda has limitations as an analytical tool , and you should not consider it in isolation or as a substitute for analysis of our results as reported under gaap . some of these limitations are : although depreciation and amortization are non-cash charges , the assets being depreciated and amortized may have to be replaced in the future , and adjusted ebitda does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements ; adjusted ebitda does not reflect changes in , or cash requirements for , our working capital needs ; adjusted ebitda does not reflect the potentially dilutive impact of equity-based compensation ; adjusted ebitda does not reflect interest associated with debt used for corporate purposes or tax payments that may represent a reduction in cash available to us ; adjusted ebitda does not reflect the potential costs we would incur if certain of our warrants were settled in cash . the following table presents a reconciliation of net loss to adjusted ebitda for each of the periods indicated : replace_table_token_8_th 40 adjusted net ( loss ) income adjusted net ( loss ) income represents our net loss adjusted to exclude stock-based compensation expense and warrant liability fair value adjustment , each on the same basis and with the same limitations as described above for adjusted ebitda . the following table presents a reconciliation of net loss to adjusted net ( loss ) income for each of the periods indicated : replace_table_token_9_th 41 key factors affecting our performance investment in long-term growth the core elements of our growth strategy include acquiring new customers , broadening our distribution capabilities through strategic partners , enhancing our data and analytics capabilities , expanding our product offerings , extending customer lifetime value and expanding internationally . we plan to continue to invest significant resources to accomplish these goals , and we anticipate that our operating expense will continue to increase for the foreseeable future , particularly our sales and marketing and technology and analytics expenses . these investments are intended to contribute to our long-term growth , but they may affect our near-term operating performance . originations our revenues continued to grow during the year ended december 31 , 2015 , primarily as a result of growth in originations . growth in originations has been driven by the addition of new customers , increasing business from existing and previous customers , and increasing average loan size , as loan loss rates have remained relatively constant over this time . in addition , during 2015 we grew our line of credit product , and we expect this product to drive a larger percentage of our originations as adoption and use of this product continues to grow . for the years ended december 31 , 2015 , 2014 and 2013 , the number of loans originated were 37,141 , 26,921 and 13,059 , respectively .
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results of operations the following table sets forth our consolidated statements of operations data for each of the periods indicated . replace_table_token_19_th 53 the consolidated statements of operations data as a percentage of gross revenue for each of the periods indicated . replace_table_token_20_th 54 comparison of years ended december 31 , 2015 and 2014 replace_table_token_21_th revenue replace_table_token_22_th 55 gross revenue increased by $ 96.7 million , or 61 % , from $ 158.1 million in 2014 to $ 254.8 million in 2015 . this growth was in part attributable to a $ 49.8 million , or 34.3 % , increase in interest income , which was primarily driven by increases in the average loans in 2015 . during 2015 , our average loans increased 46.8 % to $ 527.9 million from $ 359.7 million during 2015 . the increase in originations was partially offset by a decline in our effective interest yield on loans outstanding from 40.4 % to 36.9 % over the same period . gain on sales of loans increased by $ 44.5 million , from $ 8.8 million in 2014 to $ 53.4 million in 2015 . this increase was primarily attributable to a $ 472.4 million increase in sales of loans through ondeck marketplace in 2015 as well as an increase in marketplace gain on sale rate from 6.1 % in 2014 to 8.6 % in 2015 . other revenue increased $ 2.4 million , or 60 % , in 2015 as compared to 2014 , primarily attributable to a $ 2.8 million increase related to servicing fees which was driven by the increase in ondeck marketplace loan sales . this increase was partially offset by a $ 1.0 million reduction in marketing fees from our issuing bank partners . cost of revenue replace_table_token_23_th provision for loan losses .
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at times , we protect our sell-through distributors against reductions in published list prices . at the time of shipment to sell-through distributors , we ( a ) record accounts receivable at published list price since there is a legally enforceable obligation from the distributor to pay us currently for product delivered , ( b ) relieve inventory for the carrying value of goods shipped since legal title has passed to the distributor , and ( c ) record deferred revenue and deferred cost of sales in deferred income and allowances on sales to sell-through distributors in the liability section of our consolidated balance sheets . revenue and cost of sales to sell-through distributors are deferred until either the product is resold by the distributor or , in certain cases , return privileges terminate , at which time revenue and cost of products sold are reflected in net ( loss ) income , and accounts receivable , net are adjusted to reflect the final selling price . we use estimates and apply judgment to reconcile sell-through distributors ' inventories . errors in our estimates or judgments could result in inaccurate reporting of our revenue , cost of products sold , deferred income and allowances on sales to sell-through distributors , and net ( loss ) income . licensing and services revenue our licensing and services revenue is comprised of revenue from our ip core licensing activity , patent monetization activities , and royalty and adopter fee revenue from our standards activities . these activities are complementary to our product sales and help us monetize our ip and accelerate market adoption curves associated with our technology and standards . from time to time we enter into patent sale and licensing agreements to monetize and license a broad portfolio of our patented inventions . such licensing agreements may include upfront license fees and ongoing royalties . the contractual terms of the agreements generally provide for payments of upfront license fees and or royalties over an extended period of time . revenue from such license fees is recognized when payments become due and payable as long as all other revenue recognition criteria are met , while revenue from royalties is recognized when reported to us by customers . we enter into ip licensing agreements that generally provide licensees the right to incorporate our ip components into their products pursuant to terms and conditions that vary by licensee . revenue earned under these agreements is classified as licensing and services revenue . our ip licensing agreements generally include multiple elements , which may include one or more off-the-shelf or customized ip licenses bundled with support services covering a fixed period of time , generally one year . if the different elements of a multiple-element arrangement qualify as separate units of accounting , we allocate the total arrangement consideration to each element based on relative selling price . amounts allocated to off-the-shelf ip licenses are recognized at the time of sale provided the other conditions for revenue recognition have been met . amounts allocated to the support services are deferred and recognized on a straight-line basis over the support period , generally one year . certain licensing agreements provide for royalty payments based on agreed-upon royalty rates , which may be fixed or variable depending on the terms of the agreement . the amount of revenue we recognize is based on a specified time period or on the agreed-upon royalty rate multiplied by the reported number of units shipped by the customer . from time to time , we enter into ip licensing agreements that involve significant modification , customization or engineering services . revenues derived from these contracts are accounted for using the percentage-of-completion method or completed contract method . the completed contract method is used for contracts where there is a risk associated with final acceptance by the customer or for short-term contracts . hdmi royalty revenue is determined by a contractual allocation formula agreed to by the founders of the hdmi consortium . evidence of an arrangement , as it relates to hdmi royalty revenue , is deemed complete when all of the founders agree on the royalty sharing formula . from time to time through december 31 , 2016 , as an agent of the hdmi consortium , we performed audits on our royalty reporting customers to ensure compliance . as a result of those compliance efforts , we entered into settlement agreements for the payment of unreported royalties . the contractual terms of those agreements provided for upfront payment of unreported royalties or payment over a period of time , generally not to exceed one year . revenue from those arrangements was recognized when the agreement was executed by both parties , as long as price was fixed and determinable and collection was reasonably assured . 31 fair value of financial instruments we invest in various financial instruments , which may include corporate and government bonds , notes , and commercial paper . we were also invested in auction rate securities until june 2014. we value these instruments at their fair value and monitor our portfolio for impairment on a periodic basis . in the event that the carrying value of an investment exceeds its fair value and the decline in value is determined to be other than temporary , we would record an impairment charge and establish a new carrying value . we assess other-than-temporary impairment of marketable securities in accordance with financial accounting standards board ( “ fasb ” ) accounting standards codification ( “ asc ” ) 820 , “ fair value measurements and disclosures. ” the framework under the provisions of asc 820 establishes three levels of inputs that may be used to measure fair value . each level of input has different levels of subjectivity and difficulty involved in determining fair value . level 1 instruments generally represent quoted prices for identical assets or liabilities in active markets . therefore , determining fair value for level 1 instruments generally does not require significant management judgment and the estimation is not difficult . story_separator_special_tag in fiscal 2015 only , we separately tested goodwill for impairment in qterics , a discrete software-as-a-service business unit in the lattice legal entity structure . we sold qterics to an unrelated third party in april 2016. although these two operating units constituted two reportable segments in fiscal 2015 , we combined qterics with our core business and reported them together as one reportable segment due to the immaterial nature of the qterics unit . restructuring charges expenses associated with exit or disposal activities are recognized when incurred under asc 420 , “ exit or disposal cost obligations ” for everything but severance . however , because we have a history of paying severance benefits , the cost of severance benefits associated with a restructuring plan is recorded when such costs are probable and the amount can be reasonably estimated in accordance with asc 712 , “ compensation - nonretirement postemployment benefits. ” when leased facilities are vacated , an amount equal to the total future lease obligations from the date of vacating the premises through the expiration of the lease , net of estimated sublease income , is recorded as a part of restructuring charges . accounting for income taxes our provision for income tax is comprised of our current tax liability and changes in deferred tax assets and liabilities . deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements using enacted tax rates and laws that will be in effect when the difference is expected to reverse . valuation allowances are provided to reduce deferred tax assets to an amount that in management 's judgment is more-likely-than-not to be recoverable against future taxable income . at december 31 , 2016 , u.s. income taxes were not provided on approximately $ 3.0 million of the undistributed earnings of our chinese subsidiary as we intend to reinvest these earnings indefinitely . if these earnings were distributed to the u.s. in the form of dividends or otherwise , these earnings would be subject to chinese withholding taxes and would be subject to additional u.s. income taxes but offset by net operating loss carryforwards which have been fully reserved . our income tax calculations are based on application of the respective u.s. federal , state or foreign tax law . our tax filings , however , are subject to audit by the relevant tax authorities . accordingly , we recognize tax liabilities based upon our estimate of whether , and the extent to which , additional taxes will be due when such estimates are more-likely-than-not to be sustained . an uncertain income tax position will not be recognized if it has less than a 50 % likelihood of being sustained . to the extent the final tax liabilities are different than the amounts originally accrued , the increases or decreases as well as any interest or penalties are recorded as income tax expense or benefit in the consolidated statements of operations . in assessing the realizability of deferred tax assets , we evaluate both positive and negative evidence that may exist and consider whether it is more-likely-than-not that some portion or all of the deferred tax assets will 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 . any adjustment to the net deferred tax asset valuation allowance is recorded in the consolidated statements of operations for the period that the adjustment is determined to be required . stock-based compensation we use the black-scholes option pricing model to estimate the fair value of substantially all share-based awards consistent with the provisions of asc 718 , “ compensation - stock compensation. ” option pricing models , including the black-scholes model , require the use of input assumptions , including expected volatility , expected term , expected dividend rate , and expected risk-free rate of return . the assumptions for expected volatility and expected term most significantly affect the grant date fair value . 33 we have also used a lattice-based option-pricing model to determine and fix the fair value of stock options with a market condition granted to certain executives . this valuation model incorporates a monte-carlo simulation , and considered the likelihood that we would achieve the market condition . the options have a two year vesting and vest between 0 % and 200 % of the target amount , based on the company 's relative total shareholder return ( `` tsr '' ) when compared to the tsr of a component of companies of the phlx semiconductor sector index over a two year period . tsr is a measure of stock price appreciation plus dividends paid , if any , in the performance period . results of operations * key elements of our consolidated statements of operations were as follows : replace_table_token_3_th * lattice acquired silicon image on march 10 , 2015. results of operations for fiscal 2015 include the financial results of silicon image for the approximately 10-month period from march 11 , 2015 through january 2 , 2016. silicon image 's revenue and net loss for that period were approximately $ 135.6 million and $ 77.0 million , respectively . silicon image 's acquisition related charges in that period , which were expensed as incurred , were approximately $ 8.2 million . * * the year ended january 3 , 2015 ( fiscal 2014 ) was a 53-week year as compared to the current and most recent previous years ( fiscal 2016 and fiscal 2015 , respectively ) which were based on our standard 52-week year .
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overview lattice semiconductor ( “ lattice , ” the “ company , ” “ we , ” “ us , ” or “ our ” ) engages in smart connectivity solutions , providing intellectual property ( `` ip '' ) and low-power , small form-factor devices that enable global customers to quickly deliver innovative and differentiated cost and power efficient products . our broad end-market exposure extends from mobile devices and consumer electronics to industrial and automotive equipment , communications and computing infrastructure , and licensing . lattice was founded in 1983 and is headquartered in portland , oregon . we acquired silicon image , inc. ( `` silicon image '' ) in march 2015. silicon image was engaged in setting industry standards including the hdmi® , dvi® , mhl® and wirelesshd® standards . our results for the year ended january 2 , 2016 include the results of silicon image for the approximately 10-month period from march 11 , 2015 through january 2 , 2016 . results presented for periods prior to fiscal 2015 are those historically reported for lattice only . our results for the year ended december 31 , 2016 fully include the results of silicon image . plan of merger and reorganization on november 3 , 2016 , we entered into an agreement and plan of merger ( the “ merger agreement ” ) with canyon bridge acquisition company , inc. , a delaware corporation ( “ parent ” ) , and canyon bridge merger sub , inc. , a delaware corporation and wholly owned subsidiary of parent ( “ merger sub ” ) , providing for the merger of merger sub with and into the company ( the “ merger ” ) , with the company surviving the merger as a wholly owned subsidiary of parent .
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the company has not recorded deferred income taxes applicable to undistributed earnings of foreign subsidiaries that are indefinitely reinvested outside the u.s. if the earnings of such foreign subsidiaries were not indefinitely reinvested , an additional deferred tax liability of approximately $ 93.0 million and $ 83.0 million would have been required as of june 30 , 2012 and 2011 , respectively . it is the company 's intention to permanently reinvest undistributed earnings of its foreign subsidiaries ; therefore , no provision has been made for future income taxes on the undistributed earnings of foreign subsidiaries , as they are considered indefinitely reinvested . the company 's vietnam subsidiary operated under a tax holiday and did not pay income taxes through fiscal year 2010. for the year ended june 30 , 2011 , vietnam 's income story_separator_special_tag forward-looking statements certain statements contained in this management 's discussion and analysis of financial condition and results of operations are forward-looking statements . forward-looking statements are also identified by words such as expects , anticipates , believes , intends , plans , projects or similar expressions . actual results could differ materially from those anticipated in these forward-looking statements for many reasons , including risk factors described in the risk factors set forth in item 1a of this annual report on form 10-k , which are incorporated herein by reference . overview the company generates revenues , earnings and cash flows from developing , manufacturing and marketing engineered materials and opto-electronic components for precision use in industrial , military , optical communications , photovoltaic , medical and consumer applications . we also generate revenue , earnings and cash flows from government funded research and development contracts relating to the development and manufacture of new technologies , materials and products . our customer base includes oems , laser end users , system integrators of high-power lasers , manufacturers of equipment and devices for the industrial , military , optical communications , photovoltaic and medical markets , and u.s. government prime contractors , various u.s. government agencies and thermoelectric integrators . on may 17 , 2011 , the company 's board of directors declared a two-for-one stock split , in the form of a stock dividend , of the company 's common stock for shareholders of record on june 3 , 2011. the stock split was distributed on june 24 , 2011 issuing one additional share of common stock for every share of common stock held . the applicable share and per share data for fiscal years 2010 and 2011 included herein have been adjusted to reflect the stock split . critical accounting estimates the preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the united states of america ( u.s . gaap ) and the company 's discussion and analysis of its financial condition and results of operations requires the company 's management to make judgments , assumptions and estimates that affect the amounts reported in its consolidated financial statements and accompanying notes . note 1 of the notes to our consolidated financial statements contained in item 8 of this annual report on form 10-k describes the significant accounting policies and accounting methods used in the preparation of the company 's consolidated financial statements . management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances , the results of which form the basis for making judgments about the carrying values of assets and liabilities . actual results may differ from these estimates . management believes the company 's critical accounting estimates are those related to revenue recognition , allowance for doubtful accounts , warranty reserves , inventory valuation , valuation of long-lived assets including acquired intangibles and goodwill , accrual of bonus and profit sharing estimates , accrual of income tax liability estimates and accounting for share-based compensation . management believes these estimates to be critical because they are both important to the portrayal of the company 's financial condition and results of operations , and they require management to make judgments and estimates about matters that are inherently uncertain . 30 management has discussed the development and selection of these critical accounting estimates with the audit committee of the board of directors and the audit committee has reviewed the foregoing disclosure . in addition , there are other items within our financial statements that require estimation , but are not deemed critical as defined above . changes in estimates used in these and other items could have a material impact on the financial statements . the company recognizes revenues in accordance with u.s. gaap . revenues for product shipments are realizable when we have persuasive evidence of a sales arrangement , the product has been shipped or delivered , the sale price is fixed or determinable and collectability is reasonably assured . title and risk of loss passes from the company to its customer at the time of shipment in most cases with the exception of certain customers . for these customers title does not pass and revenue is not recognized until the customer has received the product at its physical location . we establish an allowance for doubtful accounts and warranty reserves based on historical experience and believe the collection of revenues , net of these reserves , is reasonably assured . our allowance for doubtful accounts and warranty reserve balances at june 30 , 2012 was approximately $ 1.5 million and $ 1.2 million , respectively . our reserve estimates have historically been proven to be materially correct based upon actual charges incurred . the company 's revenue recognition policy is consistently applied across the company 's segments , product lines and geographical locations . further , we do not have post shipment obligations such as training or installation , customer acceptance provisions , credits and discounts , rebates and price protection or other similar privileges . our distributors and agents are not granted price protection . story_separator_special_tag for example , adjustments could result from significant amendments to existing tax law and the issuance of regulations or interpretations by the taxing authorities , new information obtained during a tax examination , or resolution of an examination . the company believes that its estimates for uncertain tax positions are appropriate and sufficient to pay assessments that may result from examinations of its tax returns . the company recognizes both accrued interest and penalties related to unrecognized tax benefits in income tax expense . the company has recorded valuation allowances against certain of its deferred tax assets , primarily those that have been generated from net operating losses in certain foreign taxing jurisdictions . in evaluating whether the company would more likely than not recover these deferred tax assets , it has not assumed any future taxable income or tax planning strategies in the jurisdictions associated with these carry-forwards where history does not support such an assumption . implementation of tax planning strategies to recover these deferred tax assets or future income generation in these jurisdictions could lead to the reversal of these valuation allowances and a reduction of income tax expense . in accordance with u.s. gaap , the company recognizes share-based compensation expense over the requisite service period of the individual grantees , which generally equals the vesting period . the company utilized the 32 black-scholes valuation model for estimating the fair value of stock option expense using assumptions such as the risk free interest rate , expected stock price volatility , expected stock option life and expected dividend yield . the risk-free interest rate is derived from the average u.s. treasury note rate during the period , which approximates the rate in effect at the time of grant related to the expected life of the options . expected volatility is based on the historical volatility of the company 's common stock over the period commensurate with the expected life of the options . the expected life calculation is based on the observed time to post-vesting exercise and or forfeitures of options by our employees . the dividend yield is zero and based on the fact the company has never paid cash dividends and has no intention to pay cash dividends in the future . fiscal year 2012 compared to fiscal year 2011 results of operations ( millions except per-share data ) the following table sets forth bookings and select items from our condensed consolidated statements of earnings for the years ended june 30 , 2012 and 2011. replace_table_token_5_th the above results include mla and aegis for the periods presented since their acquisition dates . story_separator_special_tag the company 's effective tax rate and the u.s. statutory rate of 35 % is primarily due to the company 's foreign operations which are subject to income taxes at lower statutory rates . the majority of the change in the company 's year-to-date effective tax rate from last fiscal year was the result of a shift in the mix of earnings from the company 's lower tax jurisdictions in the philippines and vietnam to its higher tax jurisdictions in the u.s. and europe . segment reporting bookings , revenues and segment earnings for the company 's reportable segments are discussed below . segment earnings differ from income from operations in that segment earnings exclude certain operational expenses included in other expense ( income ) net as reported . management believes segment earnings to be a useful measure as it reflects the results of segment performance over which management has direct control and is used by management in its evaluation of segment performance . see note 11. segment and geographic reporting , included in this annual report on form 10k for further information on the company 's reportable segments and for the reconciliation of segment earnings to net earnings . infrared optics ( millions ) replace_table_token_6_th the company 's infrared optics segment includes the combined operations of infrared optics and highyag . 35 bookings for the year ended june , 30 2012 for infrared optics increased 6 % to $ 206.1 million , compared to $ 193.8 million from the prior fiscal year . the increase in bookings for the year ended june 30 , 2012 compared to the prior fiscal year was primarily driven by increased demand across the majority of markets and geographic locations of the segment . increased order intake at the segment 's highyag business unit for one-micron beam delivery welding and laser cutting components , strengthening activity in the north american low-power and high-power co 2 laser markets , and an overall increase in world-wide laser utilization have contributed to the positive bookings trend . revenues for the year ended june 30 , 2012 for infrared optics increased 11 % to $ 201.6 million , compared to $ 180.8 million from the prior fiscal year . the increase in revenues for the year ended june 30 , 2012 compared to the prior fiscal year was primarily due to higher shipment volumes of laser optics used by aftermarket customers while the segment 's highyag business unit continued to experience increased revenues related to its one-micron beam remote welding heads as the product continues to gain traction in the automotive manufacturing industry . segment earnings for the year ended june 30 , 2012 for infrared optics increased 11 % to $ 51.1 million , compared to $ 46.2 million from the prior fiscal year . the increase in segment earnings for the year ended june 30 , 2012 compared to the prior fiscal year was primarily due to the segment 's higher revenue levels . near-infrared optics ( millions ) replace_table_token_7_th the company 's near-infrared optics segment includes the combined operations of photop , aegis and vloc .
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executive summary net earnings attributable to ii-vi incorporated for the year ended june 30 , 2012 decreased to $ 60.3 million ( $ 0.94 per-share diluted ) , compared to $ 82.7 million ( $ 1.30 per-share diluted ) for the last fiscal year . during the year ended june 30 , 2012 , the company 's results were affected by external events that were outside the operational control of the company . specifically , the company 's operating results were negatively impacted by an after-tax write-down of tellurium and selenium inventory of $ 8.3 million ( $ 0.13 per-share diluted ) at our prm business unit . these write-downs were the result of declines in global index pricing of these minor metals driven by weak photovoltaic market demand for tellurium as well as lower demand for selenium used in chinese metallurgical applications . in the event that the global index price of tellurium or selenium experiences a further decline from their current levels , the company would be required to record an additional write-down of its inventory in future periods . in addition , the company faced the challenge of investing time and resources in 33 restoring newly acquired aegis to full manufacturing capacity in wake of the october 2011 flooding in thailand that severely impacted aegis ' manufacturing capacity . although the external market and operational adversities had a negative impact on operating results , the company increased fiscal 2012 bookings and revenues by 2.8 % and 6.3 % , respectively , when compared to the prior fiscal year . this higher revenue level did not yield more favorable operating results mostly due to the aforementioned external events . in addition , the company increased its investment level of research and development activities during fiscal 2012 at aegis and photop in an effort to expand and improve current product offerings in the optical communications market for the ongoing transition of 40g and 100g applications .
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upon conversion , holders will receive cash up to the principal amount of story_separator_special_tag the following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the notes to those financial statements appearing elsewhere in this annual report on form 10-k. this discussion contains forward-looking statements that involve significant risks and uncertainties . as a result of many factors , such as those set forth under `` risk factors '' in part i , item 1a of this annual report on form 10-k , our actual results may differ materially from those anticipated in these forward-looking statements . overview we are a specialty pharmaceutical company focused on the development , commercialization and manufacture of proprietary pharmaceutical products , based on our proprietary depofoam drug delivery technology , for use in hospitals and ambulatory surgery centers . as of december 31 , 2013 , our commercial stage products are exparel and depocyt ( e ) . exparel is a liposome injection of bupivacaine , an amide-type local anesthetic , indicated for administration into the surgical site to produce postsurgical analgesia and was approved by the fda on october 28 , 2011. we commercially launched exparel in april 2012. we ship exparel directly to the end user based on orders placed to wholesalers or directly to us and have no product held by wholesalers . depocyt ( e ) is a sustained release liposomal formulation of the chemotherapeutic agent cytarabine and is indicated for the intrathecal treatment of lymphomatous meningitis . depocyt ( e ) was granted accelerated approval by the fda in 1999 and full approval in 2007. we sell depocyt ( e ) to our commercial partners located in the u.s. and europe . since inception , we have incurred significant operating losses . we expect to continue to incur significant expenses as we commercialize exparel ; advance the development of product candidates ; pursue the use of exparel in additional indications such as nerve block ; seek fda approval for our product candidates that successfully complete clinical trials ; and develop our sales force and marketing capabilities to prepare for their commercial launch . 2013 highlights and developments since the commercial launch of exparel in april 2012 through december 31 , 2013 , 2,106 accounts have ordered exparel , and during the year ended december 31 , 2013 , we added 1,287 new accounts . we believe the strong demand for exparel has continued due to major hospital formulary wins and orders from orthopedic centers . total revenues increased $ 46.5 million , or 119 % , in the year ended december 31 , 2013 , as compared to 2012 , primarily driven by product sales of exparel of $ 76.2 million , net of allowances for sales returns , prompt payment discounts , volume rebates and distribution service fees payable to wholesalers , for the year ended december 31 , 2013. in january 2013 , we completed a private placement of $ 120.0 million in aggregate principal amount of 3.25 % convertible senior notes , or notes . the net proceeds from the offering , including net proceeds from the exercise in full by the initial purchasers of their option to purchase an additional $ 10.0 million in aggregate principal amount of the notes , were $ 115.3 million , after deducting the initial purchasers ' discounts and commissions and the offering expenses payable by us . we internalized the approximately 60-person sales force previously employed by quintiles commercial us , inc. , or quintiles , and further developed a sales and marketing team entirely dedicated to commercializing exparel . in may 2013 , we reported positive findings from the first part of our femoral nerve block study comparing the effect of exparel versus placebo for total knee arthroplasty , which was initiated in 2012. the final part of this study is still ongoing and we expect to have final data in march 2014. in august 2013 , we reported that the intercostal nerve block study for posterolateral thoracotomy , which was also initiated in 2012 , did not achieve its primary endpoint . however , the fda has previously indicated to us at its end of phase 2 meeting that a single pivotal trial meeting its primary endpoint would be sufficient to gain approval for the nerve block indication , assuming demonstration of adequate safety . we plan to submit data from the ongoing 48 femoral nerve block study to demonstrate efficacy and safety , as well as safety data from the intercostal nerve block study , for an snda , which is anticipated in the second quarter of 2014. following a pilot program , effective october 1 , 2013 , we appointed crosslink bioscience , llc , or crosslink , for a term of five years as the exclusive third-party distributor to promote and sell exparel for orthopedic and spine surgeries in the united states , with the exception of certain geographical areas and accounts . we continued the expansion of our manufacturing facility located in san diego , california , and we anticipate receiving fda approval for our newly installed manufacturing facility , referred to as suite c , in the second quarter of 2014. combined with our current facility , we expect this facility to significantly increase our manufacturing capacity and ability to meet the growing demand for exparel . research and development expenses increased by $ 11.6 million , or 117 % , for the year ended december 31 , 2013 , as compared to 2012 , driven by , among other things , an increase in clinical development expenses relating to our nerve block trials , described above . we expect to incur additional research and development expenses as we accelerate the development of exparel in additional indications , including nerve block and the pediatric trials required by the fda for exparel . story_separator_special_tag we continue to run prospective outcome studies designed for commercial purposes , which do not have any regulatory endpoints and are included in selling , general and administrative expenses . we expect to continue to incur significant selling , general and administrative expenses as we continue to execute our marketing and sales strategies for exparel and implement a variety of programs to educate customers about exparel . interest income ( expense ) interest income consists of interest earned on our cash and cash equivalents and short-term investments . interest expense primarily consists of cash and non-cash interest costs related to our debt holdings . we capitalize interest based on the construction costs for our suite c manufacturing lines . during 2011 , we also incurred interest expense associated with our secured and unsecured notes issued to certain of our investors that converted into common stock upon completion of our initial public offering and negotiated rent deferral payments . 50 loss on early extinguishment of debt loss on early extinguishment of debt consists of any remaining unamortized debt issuance costs , warrants and end of term fee , as well as any prepayment penalties , resulting from the prepayment of debt . royalty interest obligation our royalty interest obligation is due under an amended and restated royalty interests assignment agreement , further discussed in `` liquidity and capital resources , '' which provides paul capital a right to receive an interest in end user sales relating to depocyt ( e ) and our previously-marketed product , depodur . the obligations under the agreement are composed of ( i ) the difference in the revaluation of our obligations between each reporting period and ( ii ) the actual royalty interest payments payable for such reporting period . we record our royalty interest obligation as a liability in our consolidated balance sheets in accordance with asc 470-10-25 , sales of future revenues . we impute interest expense associated with this liability using the effective interest rate method . the effective interest rate may vary during the term of the agreement depending on a number of factors including the actual sales of the products and a significant estimation , performed quarterly , of certain of our future cash flows related to these products during the remaining term of the amended and restated royalty interests assignment agreement which terminates on december 31 , 2014. the effect of the change in the estimates is reflected in our consolidated statements of operations as a royalty interest obligation . in addition , such cash flows are subject to foreign exchange movements related to sales of the products denominated in currencies other than u.s. dollars . income tax expense ( benefit ) our income tax expense , deferred tax assets and liabilities , and reserves for unrecognized tax benefits reflect management 's assessment of estimated future taxes to be paid . significant judgments and estimates are required in determining the consolidated income tax expense . as of december 31 , 2013 , we have significant federal and state income tax net operating loss and credit carry forwards , the use of which may be limited by historic and future ownership changes within the meaning of section 382 of the internal revenue code . based on the positive and negative evidence available , we believe that it is more likely than not that the benefit from deferred tax assets will not be realized . in recognition of this risk , we have provided a full valuation allowance against our deferred tax assets net of deferred tax liabilities that will generate taxable income during the reversal period . critical accounting policies and use of estimates we have based our management 's discussion and analysis of our financial condition and results of operations on our financial statements that have been prepared in accordance with generally accepted accounting principles , or gaap , in the united states . the preparation of these financial statements requires us to make estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during the reporting periods . on an ongoing basis , we evaluate our estimates and judgments , including those related to clinical trial expenses and stock-based compensation . we base our estimates on historical experience and on various other factors we believe to be appropriate under the circumstances . actual results may differ from these estimates under different assumptions or conditions . while our significant accounting policies are more fully discussed in note 2 to our audited consolidated financial statements included in this filing , we believe that the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our consolidated financial statements . revenue recognition our principal sources of revenue include ( i ) sales of exparel in the united states , ( ii ) sales of depocyt ( e ) in the united states and europe , ( iii ) royalties based on sales by commercial partners of depocyt ( e ) , and ( iv ) license fees , milestone payments and reimbursement for development work to third parties . we recognize revenue when there is persuasive evidence that an arrangement exists , title has passed , collection is reasonably assured and the price is fixed or determinable . net product sales we sell exparel through a drop-ship program under which orders are processed through wholesalers based on orders of the product placed by end users which include hospitals , ambulatory surgery centers and doctors . exparel is delivered directly to the end user with the wholesaler never taking physical possession of the product . we record revenue at the time the product is delivered to the end user . we also recognize revenue from products manufactured and supplied to commercial 51 partners , such as depocyt ( e ) upon shipment .
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results of operations comparison of years ended december 31 , 2013 , 2012 and 2011 revenues the following table provides information regarding our revenues during the periods indicated , including changes as a percentage ( dollar amounts in thousands ) : 53 replace_table_token_7_th total revenues increased $ 46.5 million , or 119 % , in the year ended december 31 , 2013 , as compared to 2012 , and net product sales increased $ 63.8 million , or 351 % , in the year ended december 31 , 2013 , as compared to 2012 . these increases were driven primarily from the increase in sales of exparel by $ 61.6 million , or 422 % , in 2013 , as compared to 2012 , resulting from both a full year of exparel sales in 2013 and continued penetration into the soft tissue and orthopedic markets . since the launch of exparel in april of 2012 through the year ended december 31 , 2013 , 2,106 accounts have ordered exparel . during the year ended december 31 , 2013 , we added 1,287 new accounts . the strong demand for exparel has continued as a result of major hospital system formulary wins due to rapid adoption in orthopedic procedures as well as continued adoption of infiltration into the transversus abdominis plane , or itap , for abdominal and genitourinary surgeries . there have also been positive indications of demand growth due to approval for use of exparel at major military institutions , as well as the completion of drug evaluations leading to a reduction of restrictions and thus improved physician access .
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you can find many of these statements by looking for words such as “ approximates , ” “ believes , ” “ expects , ” “ anticipates , ” “ estimates , ” “ intends , ” “ plans , ” “ would , ” “ may ” or other similar expressions in this annual report on form 10-k. many of the factors that will determine the outcome of these and our other forward-looking statements are beyond our ability to control or predict ; these factors include , among others , the impact of e-commerce ; the loss of or bankruptcy of major tenants ; general economic conditions and changes in the real estate market in particular ; adverse economic conditions in the areas in which our properties are located ; natural disasters ; potentially higher costs related to our development , redevelopment and anchor repositioning projects , and our ability to lease these projects at projected rates ; competition for acquisitions ; the loss of key personnel ; the availability of financing and changes in , and compliance with , tax law and reit qualifications . for further discussion of factors that could materially affect the outcome of our forward-looking statements , see “ risk factors ” in part i , item 1a , of this annual report on form 10-k for the year ended december 31 , 2019 . for these statements , we claim the protection of the safe harbor for forward-looking statements contained in the private securities litigation reform act of 1995. you are cautioned not to place undue reliance on our forward-looking statements , which speak only as of the date of this annual report on form 10-k. all subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section . we do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances occurring after the date of this annual report on form 10-k. the following discussion 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 section of this annual report on form 10-k generally discusses 2019 and 2018 items and provides a year-to-year comparison between 2019 and 2018. a discussion of 2017 items and year-to-year comparisons between 2018 and 2017 are not included in this annual report on form 10-k but can be found in “ management 's discussion and analysis of financial condition and results of operations ” in part ii , item 7 of the company 's annual report on form 10-k for the fiscal year ended december 31 , 2018. executive overview urban edge properties ( “ ue ” , “ urban edge ” , or the “ company ” ) ( nyse : ue ) is a maryland real estate investment trust that manages , develops , redevelops , and acquires retail real estate , primarily in the new york metropolitan area . urban edge properties lp ( “ uelp ” or the “ operating partnership ” ) is a delaware limited partnership formed to serve as ue 's majority-owned partnership subsidiary and to own , through affiliates , all of our real estate properties and other assets . unless the context otherwise requires , references to “ we ” , “ us ” and “ our ” refer to urban edge properties and uelp and their consolidated entities/subsidiaries . the operating partnership 's capital includes general and common limited partnership interests in the operating partnership ( “ op units ” ) . as of december 31 , 2019 , urban edge owned approximately 95.4 % of the outstanding common op units with the remaining limited op units held by members of management , urban edge 's board of trustees and contributors of property interests acquired . urban edge serves as the sole general partner of the operating partnership . the third party unitholders have limited rights over the operating partnership such that they do not have characteristics of a controlling financial interest . as such , the operating partnership is considered a variable interest entity ( “ vie ” ) , and the company is the primary beneficiary that consolidates it . the company 's only investment is the operating partnership . the vie 's assets can be used for purposes other than the settlement of the vie 's obligations and the company 's partnership interest is considered a majority voting interest . as of december 31 , 2019 , our portfolio comprised 74 shopping centers , four malls and a warehouse park totaling approximately 15.2 million square feet . operating strategy . our operating strategy is to maximize the value of our existing assets through proactive management encompassing continuous asset evaluation for highest-and-best-use ; efficient and cost-conscious operations that minimize retailer operating expense and enhance property quality ; and targeted leasing to desirable tenants . during 2019 we : reported a decline in same-property cash net operating income ( “ noi ” ) ( 1 ) by 1.8 % over the year ended december 31 , 2018 ; reported a decline of same-property portfolio occupancy ( 2 ) to 93.4 % from 94.2 % as of december 31 , 2018 ; 26 reported a decline of consolidated portfolio occupancy to 92.9 % from 93.6 % as of december 31 , 2018 due to anchor bankruptcies ; signed 39 new leases totaling 368,779 square feet , including 31 new leases on a same-space ( 3 ) basis totaling 348,760 square feet at an average rental rate of $ 24.12 per square foot on a gaap basis and $ 22.13 per square foot on a cash basis , and resulting in average rent spreads of 18.8 % on a gaap basis and 4.0 % on a cash basis ; and renewed or extended 78 leases totaling 1,118,810 square feet , all on a same-space basis , at an average rental rate of $ 20.25 story_separator_special_tag our significant accounting policies are more fully described in note 3 to the consolidated financial statements included in part ii , item 8 of this annual report on form 10-k ; however , the most critical accounting policies , which involve the use of estimates and assumptions as to future uncertainties and , therefore , may result in actual amounts that differ from estimates , are as follows : real estate — the nature of our business as an owner , redeveloper and operator of retail shopping centers means that we invest significant amounts of capital into our properties . depreciation , amortization and maintenance costs relating to our properties constitute substantial costs for us as well as the industry as a whole . real estate is capitalized and depreciated on a straight-line basis in accordance with gaap and consistent with industry standards based on our best estimates of the assets ' physical and economic useful lives which range from one to 40 years . we periodically review the estimated lives of our assets and implement changes , as necessary , to these estimates . these assessments have a direct impact on our net income . real estate is carried at cost , net of accumulated depreciation and amortization . expenditures for ordinary maintenance and repairs are expensed to operations as they are incurred . significant renovations that improve or extend the useful lives of assets are capitalized . real estate undergoing redevelopment activities is also carried at cost but no depreciation is recognized . all property operating expenses directly associated with and attributable to the redevelopment , including interest , are capitalized to the extent the capitalized costs of the property do not exceed the estimated fair value of the property when completed . if the cost of the redeveloped property , including the net book value of the existing property , exceeds the estimated fair value of redeveloped property , the excess is charged to impairment expense . the capitalization period begins when redevelopment activities are underway and ends when the project is substantially complete . generally , a redevelopment is considered substantially completed and ready for its intended use upon completion of tenant improvements , but no later than one year from completion of major construction activity . we make judgments as to the time period over which to capitalize such costs and these assumptions have a direct impact on net income because capitalized costs are not subtracted in calculating net income . upon the acquisition of real estate , we assess the fair value of acquired assets ( including land , buildings and improvements , identified intangibles , such as acquired above and below-market leases , acquired in-place leases and tenant relationships ) and acquired liabilities . we assess fair value based on estimated cash flow projections utilizing appropriate discount and capitalization rates and available market information . estimates of future cash flows are based on a number of factors including historical operating results , known trends , and market/economic conditions . based on these estimates , we allocate the purchase price to the applicable assets and liabilities based on their relative fair values at date of acquisition . in allocating the purchase price to identified intangible assets and liabilities of an acquired property , the value of above-market and below-market leases is estimated based on the present value of the difference between the contractual amounts , including fixed rate below-market renewal options , to be paid pursuant to the in-place leases and our estimate of the market lease rates and other lease provisions for comparable leases measured over a period equal to the estimated remaining term of the lease . tenant related intangibles and improvements are amortized on a straight-line basis over the related lease term , including any bargain renewal options . we amortize identified intangibles that have finite lives over the period they are expected to contribute directly or indirectly to the future cash flows of the property or business acquired . we consider qualitative and quantitative factors in evaluating the likelihood of a tenant exercising a below market renewal option and include such renewal options in the calculation of in-place leases . if the value of below-market lease intangibles includes renewal option periods , we include such renewal periods in the amortization period utilized . if a lease terminates prior to its stated expiration , all unamortized amounts relating to that lease are written off . our properties are individually reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable . an impairment exists when the carrying amount of an asset exceeds the aggregate projected future cash flows over the anticipated holding period on an undiscounted basis taking into account the appropriate capitalization rate . an impairment loss is measured based on the excess of the property 's carrying amount over its estimated fair value . estimated fair value may be based on discounted future cash flows utilizing appropriate discount and capitalization rates and available market 28 information , third-party appraisals , broker selling estimates or sale agreements under negotiation . impairment analyses are based on our current plans , intended holding periods and available market information at the time the analyses are prepared . if our estimates of the projected future cash flows , or market conditions change , our evaluation of impairment losses may be different and such differences could be material to our consolidated financial statements . the carrying value of a property may also be individually reassessed in the event a casualty occurs at that property . casualty events may include property damage from a natural disaster or fire . when such an event occurs , management estimates the net book value of assets damaged over the property 's total gross leasable area and adjusts the property 's carrying value to reflect the damages . estimates are subjective and may change if additional damage is later assessed or if future cash flows are revised .
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summary of cash flows cash and cash equivalents including restricted cash was $ 485.1 million at december 31 , 2019 , compared to $ 457.5 million as of december 31 , 2018 , an increase of $ 27.6 million . our cash flow activities are summarized as follows : replace_table_token_19_th operating activities net cash provided by operating activities primarily consists of cash inflows from rental revenue and cash outflows for property operating expenses , general and administrative expenses and interest expense . net cash provided by operating activities of $ 156.4 million for the year ended december 31 , 2019 , increased by $ 19.4 million from $ 137.0 million as of december 31 , 2018 . the increase was driven by $ 15.5 million of lease termination payments to acquire the toys “ r ” us leases at bruckner commons in the bronx , ny and hudson mall in jersey city , nj during the year ended 36 december 31 , 2018 , partially offset by a decrease in cash due to timing of cash receipts and payments related to tenant collections including the impact of recovery income . investing activities net cash flow used in investing activities is impacted by the timing and extent of our real estate development , capital improvements , and acquisition and disposition activities during the period .
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factors that could cause or contribute to these differences include those discussed below and elsewhere in this annual report , particularly in item 1a . “ risk factors ” and “ special note regarding forward‑looking statements. ” overview we are a biopharmaceutical company dedicated to developing and delivering treatments that restore and preserve vision for people with serious back of the eye diseases . our proprietary scs microinjector targeting the suprachoroidal space , or scs , offers unique access to the macula , retina and choroid where sight-threatening disease often occurs . our scs injection platform is an inherently flexible , in-office , non-surgical procedure intended to provide targeted delivery to the site of disease and to work with both established and new formulations of medications , as well as future therapeutic innovations . we are leveraging our scs injection platform by building an internal research and development pipeline targeting retinal diseases and by creating external collaborations with other companies . using our suprachoroidal injection technology in conjunction with proprietary formulations of existing drugs as well as novel therapies , we believe that we have created a broad therapeutic platform for developing product candidates to treat serious eye diseases . we have incurred net losses since our inception in may 2011. our operations to date have been limited to organizing and staffing our company , raising capital , conducting preclinical studies and clinical trials and undertaking other research and development initiatives . to date , we have not generated any revenue , other than license and other revenue generated from collaboration agreements , and we have primarily financed our operations through public offerings and private placements of our equity securities , issuances of convertible promissory notes and loan agreements . as of december 31 , 2020 , we had an accumulated deficit of $ 255.9 million . we recorded net losses of $ 18.2 million , $ 30.8 million and $ 82.8 million for the years ended december 31 , 2020 , 2019 and 2018 , respectively . we anticipate that a substantial portion of our capital resources and efforts in the foreseeable future will be focused on completing the necessary development for and obtaining regulatory approval of our product candidates , as well as discovering compounds and developing proprietary solutions to utilize with our scs microinjector . we expect to continue to incur significant and increasing operating losses at least for the next several years . we do not expect to generate significant product or license and other revenue unless and until we successfully complete necessary development of , obtain regulatory approval for and successfully commercialize one or more of our product candidates , either on our own or together with a third party . our net losses may fluctuate significantly from quarter to quarter and year to year , depending on the timing of our clinical trials and our expenditures on other research and development activities . our clinical trial expenses have decreased significantly following our decision to discontinue late-stage clinical trials of xipere for indications other than uveitis . however , we will continue our efforts to seek to discover , research and develop additional product candidates and seek regulatory approvals in additional regions for xipere for the treatment of macular edema associated with uveitis . we have advanced our proprietary suspension of axitinib , which we refer to as cls-ax , into clinical development , and if these trials are successful , we anticipate an increase in clinical trial expenses as we continue further development of that product candidate . story_separator_special_tag normal ; letter-spacing:0pt ; font-family : times new roman ; font-size:10pt ; '' > the costs associated with process development , scale-up and manufacturing of xipere and the scs microinjector for clinical trials and for requirements associated with regulatory filings associated with approval ; the number of trials required for approval and any requirement for extension trials ; per patient trial costs ; the number of patients that participate in the trials ; the number of sites included in the trials ; the countries in which the trials are conducted ; the length of time required to enroll eligible patients ; the number of doses that patients receive ; the potential impact of the covid-19 pandemic on the enrollment in , and timing of , our clinical trials ; the drop-out or discontinuation rates of patients ; potential additional safety monitoring or other studies requested by regulatory agencies ; the duration of patient follow-up ; and the efficacy and safety profiles of the product candidates . in addition , the probability of success for each product candidate will depend on numerous factors , including competition , manufacturing capability and commercial viability . we will determine which programs to pursue and how much to fund each program in response to the scientific and clinical success of each product candidate , as well as an assessment of each product candidate 's commercial potential . general and administrative general and administrative expenses consist primarily of salaries and other related costs , including share-based compensation , for personnel in executive , finance and administrative functions . general and administrative costs historically included commercial pre-launch preparations for xipere , and also include facility related costs not otherwise included in research and development expenses , as well as professional fees for legal , patent , consulting , and accounting and audit services . other income ( expense ) other income consists of interest income earned on our cash , cash equivalents and short-term investments . interest income is not currently significant to our financial statements . other expense consists of interest expense incurred under our loan agreements . critical accounting policies and significant judgments and estimates our management 's discussion and analysis of our financial condition and results of operations is based on our financial statements , which have been prepared in accordance with accounting principles generally accepted in the united states of america , or u.s. gaap . story_separator_special_tag this process involves reviewing open contracts and purchase orders , communicating with applicable vendor 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 . 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 . we periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary . examples of estimated accrued expenses include fees paid to cros and investigative sites in connection with clinical trials . we accrue our expenses related to clinical trials based on our estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and cros that conduct research activities or manage clinical trials on our behalf . the 61 financial terms of these agreements are subject to negotiation , vary from contract to contract and may result in uneven payment flows . payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones . in accruing service fees , we estimate the time period over which services will be performed and the level of effort to be expended in each period . if the level of effort varies from our estimate , we will adjust the accrual accordingly . if we underestimate or overestimate the level of services performed or the costs of these services , our actual expenses could differ from our estimates . although we do not currently anticipate the future settlement of existing accruals to differ materially from our estimates , our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and could result in us reporting amounts that are too high or too low for any period . share-based compensation compensation cost related to share-based awards granted to employees is measured based on the estimated fair value of the award at the grant date . we estimate the fair value of stock options using a black-scholes option pricing model . compensation expense for options granted to non-employees is determined as the fair value of consideration received or the fair value of the equity instruments issued , whichever is more reliably measured . share-based compensation costs are expensed on a straight-line basis over the relevant vesting period . the fair value of restricted stock units , or rsus , granted is measured based on the market value of our common stock on the date of grant and is recognized ratably over the requisite service period , which is generally the vesting period of the awards . all share-based compensation costs are recorded in general and administrative or research and development costs in the statements of operations based upon the underlying employees ' roles . significant factors , assumptions and methodologies used in determining fair value determining the appropriate fair value measurement of share-based awards requires the use of subjective assumptions . the determination of the fair value measurement of options using the black-scholes option pricing model is affected by our estimated common stock fair values as well as assumptions regarding a number of other subjective variables . these other variables include the expected term of the options , our expected stock price volatility over the expected term of the options , stock option exercise and cancellation behaviors , risk-free interest rates and expected dividends . we estimate the fair value of stock options at the grant date using black-scholes option pricing model with the following assumptions : fair value of our common stock . we estimate the fair value of our common stock by reference to the closing price of our common stock on the nasdaq global market on the date of grant . volatility . we calculate expected volatility based on the historical volatility of our common stock . expected term . we use the simplified method as prescribed by the sec staff accounting bulletin no . 107 , share-based payment , as we do not have sufficient historical exercise and post-vesting termination data to provide a reasonable basis upon which to estimate the expected term of stock options granted to employees . risk-free rate . the risk-free interest rate is based on the yields of u.s. treasury securities with maturities similar to the expected time to liquidity . forfeitures . forfeitures are accounted for as they occur . dividend yield . we have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future . we have an employee stock purchase plan that is considered a compensatory plan . the fair value of the discount and the look-back period of the employee stock purchase plan are estimated using the black-scholes option pricing model and expense is recognized over the six-month withholding period prior to the purchase date . share-based compensation expense related to stock options , the employee stock purchase plan and rsus aggregated $ 3.6 million , $ 4.6 million and $ 4.8 million for the years ended december 31 , 2020 , 2019 and 2018 , respectively . tax valuation allowance we recorded aggregate deferred tax assets of $ 63.4 million , primarily related to our net operating losses , as of december 31 , 2020 , which have been fully offset by a valuation allowance due to uncertainties surrounding our ability to realize these tax benefits . we record a valuation allowance if it is more likely than not that a deferred tax asset will not be realized . we provided a full valuation 62 allowance on our deferred tax assets that primarily consist of cumulative net operating losses , or nols for the period from our inception through december 31 , 20 20 . we incurred a net loss for tax purposes of $ 12.3 million for the year ended december 31 , 20 20 .
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components of operating results revenue we have not generated any revenue from the sale of any drugs , and we do not expect to generate any product revenue unless or until we obtain regulatory approval of and commercialize our product candidates , either on our own or with a third party . our revenue in recent years has been generated primarily from our license agreements . we are seeking to enter into additional license and other agreements with third parties to evaluate the potential use of our proprietary scs microinjector with the third party 's product candidates for the treatment of various eye diseases . these agreements may include payments to us for technology access , upfront license payments , regulatory and commercial milestone payments and royalties . 58 research and development since our inception , we have focused on our development programs . research and development expenses consist primarily of costs incurred for the research and development of our preclinical and clinical product candidates , which include : employee-related expenses , including salaries , benefits , travel and share-based compensation expense for research and development personnel ; expenses incurred under agreements with contract research organizations , or cros , as well as contract manufacturing organizations and consultants that conduct clinical trials and preclinical studies ; costs associated with preclinical activities and clinical trials ; costs associated with submitting regulatory approval applications for our product candidates ; costs associated with training physicians on the suprachoroidal injection procedure and educating and providing them with appropriate product candidate information ; costs associated with technology and intellectual property licenses ; costs for our research and development facility ; and depreciation expense for assets used in research and development activities . we expense research and development costs to operations as incurred . these costs include preclinical activities , such as manufacturing and stability and toxicology studies , that are supportive of a product candidate itself .
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our water production operations and activities , and those of our affiliate oc-bvi , are presently conducted at 13 plants in five countries : the cayman islands , the bahamas , belize , the british virgin islands and indonesia . the following table sets forth the comparative combined production capacity of our retail , bulk and affiliate operations as of december 31 of each year . replace_table_token_5_th ( 1 ) in millions of gallons per day . 28 cayman islands we have been operating our business on grand cayman since 1973 and have been using reverse osmosis technology to convert seawater to potable water since 1989. the cayman islands have a limited natural supply of fresh water . we currently have an exclusive license from the cayman islands government to process potable water from seawater and then sell and distribute that water by pipeline to the seven mile beach and west bay areas of grand cayman . our operations consist of three company owned and three government-owned reverse osmosis seawater conversion plants which provide water to approximately 6,100 retail residential and commercial customers within a government licensed area and bulk water sales to the water authority-cayman ( “ wac ” ) , respectively . our pipeline system in the cayman islands covers the seven mile beach and west bay areas of grand cayman and consists of approximately 90 miles of potable water pipe . our exclusive license from the cayman islands government was set to expire on july 30 , 2010 , however , we and the cayman islands government have extended the license several times in order to provide sufficient time to negotiate the terms of a new license . the most recent extension of the license expired on january 31 , 2018. we continue to provide water subsequent to january 31 , 2018 on the assumption that the license has been further extended to allow the parties to continue negotiations without interruption to an essential service . we have been informed during our retail license negotiations that the cayman islands government seeks to restructure the terms of our license in a manner that could significantly reduce the operating income and cash flows we have historically generated from our retail license . our retail license negotiations have also been impacted by the passage of new legislation and the establishment of a new water regulatory body in the cayman islands . see further discussion of this matter at item 7. management 's discussion and analysis of financial condition and results of operations - material commitments , expenditures and contingencies - renewal of retail license . the bahamas cw-bahamas produces potable water from three reverse osmosis seawater conversion plants . two of these plants , the windsor plant and the blue hills plant , are located in nassau , new providence and have a total installed capacity of 15.1 million gallons per day . cw-bahamas supplies water from these plants to the water and sewerage corporation of the bahamas ( “ wsc ” ) under long-term build , own and operate supply agreements . during 2017 , we supplied approximately 3.3 billion gallons ( 2016 : 3.8 billion gallons ) of water to the wsc from these plants . cw-bahamas ' third plant is located in bimini , has a capacity of 115,000 gallons per day , and provides potable water to the bimini sands resort . we have also sold water intermittently to the wsc from our bimini plant when their regular supply was unavailable . from time-to-time , cw-bahamas has experienced delays in collecting its accounts receivable . representatives of the bahamas government have informed us that their previous delays in paying our accounts receivables did not reflect any type of dispute with us with respect to the amounts owed . to date , we have not been required to provide an allowance for any delinquent cw-bahamas accounts receivable as such amounts were eventually paid in full . based upon our experience , we believe that the accounts receivable from the wsc are fully collectible and therefore have not provided any allowance for possible non-payment of these receivables . our accounts receivable balances due from the bahamas government amounted to $ 9.0 million and $ 11.0 million , at december 31 , 2017 and 2016 , respectively . belize cw-belize was acquired on july 21 , 2000 and consists of one reverse osmosis seawater conversion plant on ambergris caye , belize , capable of producing 600,000 gallons per day . we sell water to one customer , belize water services limited , which then distributes the water through its own distribution system to residential , commercial and tourist properties on ambergris caye . transfers of funds held by our subsidiary cw-belize to our parent company , which are accomplished by means of conversion of belize dollars into u.s. dollars , require the approval of the central bank of belize and are dependent on the amount of u.s. dollars available to belize banks to execute such transfers . weakness in the belize economy and other factors have reduced the amount of u.s. dollars that belize banks have available for transfer , which has limited the amount of funds we are presently able to transfer from cw-belize . our repatriations of funds from cw-belize to our parent company amounted to $ 458,000 and $ 400,000 in 2017 and 2016 , respectively , significantly less than the net income and net cash flows cw-belize generated for those years . as of december 31 , 2017 and 2016 , the equivalent u.s. dollar cash amounts for our bank account deposits in belize were approximately $ 6.3 million and $ 4.9 million , respectively . critical accounting estimates the preparation of consolidated financial statements in conformity with accounting principles generally accepted in the united states of america requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period . story_separator_special_tag for long-lived assets to be held and used , we recognize an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and measure the impairment loss based on the difference between the carrying amount and fair value . through our subsidiary , cw-bali , we have built and presently operate a seawater reverse osmosis plant with a productive capacity of approximately 264,000 gallons per day located in nusa dua , one of the primary tourist areas of bali , indonesia . since its inception , we have recorded operating losses for cw-bali as the sales volumes for its plant have not been sufficient to cover its operating costs . in 2017 and 2016 we determined , based upon probability-weighted scenarios for cw-bali 's future undiscounted cash flows , that the carrying values of cw-bali 's long-lived assets and our investment in cw-bali were not recoverable . we recorded impairment losses of $ 1.6 million and $ 2.0 million , in 2017 and 2016 , respectively , to reduce the carrying values of these assets to their fair values . see further discussion of cw-bali at item 7. management 's discussion and analysis of financial condition and results of operations – retail segment . quarterly results of operations the following table presents unaudited quarterly results of operations for the eight quarters ended december 31 , 2017. we believe that all adjustments , consisting only of normal recurring adjustments , necessary to present fairly such quarterly information have been included in the amounts reported below . replace_table_token_7_th replace_table_token_8_th ( 1 ) due to rounding , the sum of the quarterly earnings per share amounts may not equal the annual earnings per share amount . results of operations the following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and accompanying notes included under part ii , item 8. financial statements and supplementary data , of this annual report . year ended december 31 , 2017 compared to year ended december 31 , 2016 consolidated results net income attributable to consolidated water co. ltd. stockholders for 2017 was $ 6,144,062 ( $ 0.41 per share on a fully diluted basis ) , as compared to $ 3,960,501 ( $ 0.27 per share on a fully-diluted basis ) for 2016. total revenues for 2017 increased to $ 62,306,665 from $ 57,875,707 in 2016 due to higher revenues for our bulk and manufacturing segments . gross profit for 2017 was $ 25,434,500 ( 41 % of total revenues ) as compared to $ 24,250,886 ( 42 % of total revenues ) for 2016 as the gross profit for our bulk and manufacturing segments increased from 2016 to 2017. for further discussion of revenues and gross profit for 2017 see the “ results by segment ” analysis that follows . 31 g & a expenses on a consolidated basis were $ 19,072,979 and $ 18,677,584 for 2017 and 2016 , respectively . the rise in consolidated g & a expenses from 2016 to 2017 is primarily attributable to incremental employee costs of approximately $ 519,000 arising from an increase in the number of staff , pay raises and a statutory retirement payment . other income , net for 2017 was $ 1,522,233 , as compared to $ 103,573 for 2016. the improvement in 2017 in this net component of our consolidated statement of income reflects ( i ) an unrealized gain of $ 960,000 in 2017 on the net put/call option associated with the acquisition of aerex as compared to an unrealized loss in 2016 on this net put/call option of ( $ 297,000 ) ; ( ii ) the impairment loss of ( $ 925,000 ) recorded in 2016 for our investment in oc-bvi ; ( iii ) a reduction of approximately $ 289,000 in the equity in the earnings and profit sharing income of our investment in oc-bvi from 2016 to 2017 ; and ( iv ) interest income that was approximately $ 229,000 less in 2017 than 2016 due to a decrease in the average balances of interest earning deposits and loans receivable . results by segment retail segment the retail segment generated losses from operations of ( $ 922,274 ) and ( $ 202,787 ) in 2017 and 2016 , respectively . such losses were primarily attributable to impairment losses recorded for cw-bali , as discussed in paragraphs that follow . revenues generated by our retail water operations decreased slightly to $ 23,225,066 in 2017 from $ 23,505,619 in 2016 , while the volume of water sold increased by approximately 1 % from 2016 to 2017. the slight decrease in revenues for 2017 is attributable to the execution in mid-2017 of an amended contract with a high volume customer in grand cayman which expanded its ability to utilize a concessionary rate that was originally negotiated in 2002. retail segment gross profit remained relatively consistent at $ 12,852,867 ( 55 % of retail revenues ) and $ 13,211,321 ( 56 % of retail revenues ) for 2017 and 2016 , respectively . consistent with prior periods , we record all non-direct g & a expenses in our retail segment and do not allocate any of these non-direct costs to our other three business segments . retail g & a expenses were $ 12,134,983 and $ 11,460,165 for 2017 and 2016 , respectively . the increase in retail g & a expenses from 2016 to 2017 is primarily due to ( i ) incremental employee costs of approximately $ 493,000 arising from an increase in the number of staff , pay raises and a statutory retirement payment ; and ( ii ) incremental professional fees of approximately $ 338,000 that arose primarily as a result of the retail license negotiations and litigation initiated against cw-bali . through our subsidiary cw-bali , we built a seawater reverse osmosis plant with an initial production capacity of approximately 790,000 gallons per day located in nusa dua , one of the primary tourist areas of bali , indonesia .
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consolidated results net income attributable to consolidated water co. ltd. stockholders for 2016 was $ 3,960,501 , ( $ 0.27 per share on a fully-diluted basis ) , as compared to $ 7,518,701 ( $ 0.51 per share on a fully-diluted basis ) for 2015. total revenues for 2016 and 2015 were $ 57,875,707 and $ 57,116,202 , respectively . higher revenues for our retail and services segments in 2016 served to offset a decrease in the bulk segment revenues . gross profit for 2016 was $ 24,250,886 or 42 % of total revenues , as compared to $ 23,308,220 or 41 % of total revenues , for 2015. gross profit for the retail and services segments increased from 2015 to 2016 while bulk segment gross profit remained relatively consistent . for further discussion of revenues and gross profit for 2016 , see the “ results by segment ” analysis that follows . we recorded an impairment loss of ( $ 2.0 million ) in 2016 to reduce the carrying value of cw-bali 's long-lived assets to their estimated fair value . we recorded an impairment loss of ( $ 1.8 million ) in 2016 to reduce the carrying value of the goodwill associated with the aerex acquisition . g & a expenses on a consolidated basis were $ 18,677,584 and $ 14,840,156 for 2016 and 2015 , respectively . the increase in consolidated g & a expenses from 2015 to 2016 is primarily attributable to the addition of approximately $ 2,309,000 in expenses for aerex after our acquisition of a 51 % ownership interest in this company in february 2016 and an increase of approximately $ 1,036,000 in the expenses incurred in connection with the project development activities of our mexican subsidiaries .
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guaranteed portions , partially funded as of the valuation date are valued using level two inputs as disclosed in note 3 . ( 5 ) control investments are disclosed above as equity investments ( except as otherwise noted ) in those companies that are “ control investments story_separator_special_tag introduction and certain cautionary statements the following discussion and analysis of our financial condition and results of operations is intended to assist in the understanding and assessment of significant changes and trends related to the results of operations and financial position of the company together with its subsidiaries . this discussion and analysis should be read in conjunction with the consolidated financial statements and the accompanying notes . the statements in this annual report may contain forward-looking statements relating to such matters as anticipated future financial performance , business prospects , legislative developments and similar matters . we note that a variety of factors could cause our actual results to differ materially from the anticipated results expressed in the forward looking statements such as intensified competition and or operating problems in its operating business projects and their impact on revenues and profit margins or additional factors as described under “ risk factors ” above . we also need to point out that our capcos operate under a different set of rules in each of the six jurisdictions and that these place varying requirements on the structure of our investments . in some cases , particularly in louisiana , we do not control the equity or management of a qualified business . the discussion and analysis of our results of operations below are discussed on a `` pro forma '' basis . as previously discussed , the company completed it conversion to a business development company on november 12 , 2014. as a result the company will no longer have six reportable segments . previously consolidated subsidiaries are now recorded as controlled portfolio companies for which the company records its investment at fair value . for purposes of the 2014 discussion and analysis below , the financial information is presented as if the conversion to a business development company had not occurred . we believe this provides the most useful comparison of our year over year results . executive overview 55 we are a leading national lender and own and control certain portfolio companies ( our “ controlled portfolio companies , ” as defined below ) that provide a wide range of business and financial products to smbs . in particular , we and our controlled portfolio companies provide comprehensive lending , payment processing , managed technology , personal and commercial insurance and payroll solutions to over 100,000 smb accounts , across all industries . we have an established and reliable platform that is not limited by client size , industry type or location . as a result , we have a strong and diversified client base across every state in the u.s and across a variety of different industries . in addition , we have developed a financial and technology based business model that enables us and our controlled portfolio companies to acquire and process our smb clients in a very cost effective manner . this capability is supported in large part by newtracker® , our patented prospect management technology software , which is similar to but better than the system popularized by salesforce.com . we believe that this technology and business model distinguishes us from our competitors . consolidated pro forma results of operations before bdc election for the year ended december 31 , 2014 , the company recorded pro forma pretax income of $ 7,497,000 , a $ 3,572,000 decrease from $ 11,069,000 pretax income in 2013. total pro forma revenues increased by $ 5,171,000 , or 3.6 % , to $ 148,764,000 compared to $ 143,593,000 for the year ended december 31 , 2013 principally due to increased revenues in the small business finance and electronic payment processing segments . total expenses increased by $ 8,832,000 to $ 140,151,000 for the year ended 2014 from $ 131,319,000 for 2013 primarily due to increases in electronic payment processing costs , goodwill impairment , other general and administrative costs , and salaries and benefits . contributing to the decrease in pro forma pretax income from $ 11,069,000 in 2013 to $ 8,154,000 in 2014 were a goodwill impairment charge of $ 1,706,000 in the small business finance segment , a 19 % decrease in pro forma pretax net income in the electronic processing segment which included a charge related to a potential legal judgment against the segment of $ 1,735,000. decreases were offset by an increase in pro forma pretax net income in the small business finance segment related to an increase in servicing and interest income . one of the primary contributors to newtek 's continued profitability was the small business finance segment which generated pro forma pretax income of $ 12,873,000 in 2014 compared to $ 10,143,000 in 2013 , an increase of $ 2,730,000. the primary drivers were servicing fee income on nsbf and external portfolios which in 2014 increased by $ 3,630,000 , or 55 % and interest income which increased $ 1,927,000 or 40 % . total sba loans originated increased to $ 202,269,000 in 2014 compared with $ 177,941,000 for 2013. the weighted average sales price for the guaranteed portions of sba loans sold increased slightly to 112.49 % compared with 112.32 % for 2014 and 2013 , respectively . the electronic payment processing segment recorded a 19 % decrease in pro forma pretax net income , which decreased to $ 6,728,000 in 2014 from $ 8,304,000 compared with the 2013 period . pro forma revenue increased by $ 1,505,000 or 2 % to $ 91,160,000 during 2014 compared to 2013. the increase was related to growth in processing volumes and fee increases passed on to merchants . story_separator_special_tag processing revenues less electronic payment processing costs ( “ margin ” ) increased from 15.5 % in 2013 to 15.9 % in 2014. the increase in margin was primarily due to the implementation of a monthly non-compliance fee , implementation of an annual compliance service fee and an increase in rates to merchants .. this increase was partially offset by an increase in the provision for chargeback losses attributable to a specific merchant that experienced a high level of chargebacks . overall , the increase in margin dollars was $ 648,000 between years . salaries and benefits increased $ 516,000 or 14.8 % between years . this increase is due to the company hiring additional senior level staff , which resulted in overall higher salaries , payroll taxes , benefits and stock compensation for the year . salaries and benefits in the current year also include a severance payment of approximately $ 120,000 to a former senior executive . partially offsetting this increase was a reduction in health insurance costs of $ 48,000 and a $ 27,000 increase in capitalized salaries as compared to last year . salary costs related to the development of internally developed software is capitalized and as a result decreases salary expense and increases depreciation and amortization expense over the future service period . professional fees increased $ 1,919,000 or 419.0 % between years due to a reserve established in the amount of approximately $ 1,700,000 related to the ftc matter which is discussed in detail in item 3. legal proceedings . depreciation and amortization decreased $ 97,000 between periods as the result of previously acquired customer merchant portfolios becoming fully amortized between periods . remaining costs decreased $ 115 , 000 or 9.3 % between years largely due to a decrease in marketing expense of $ 212,000 as the result the discontinuation of a marketing cost allocation in early 2014. this decrease was partially offset by an increase of $ 56,000 in travel expenses and $ 42,000 in office expense . income before income taxes decreased $ 1,576,000 or 19.0 % to $ 6,728,000 in 2014 from $ 8,304,000 in 2013. the decrease in income before income taxes was due to the increase in margin of $ 648,000 , offset by a net increase in other operating expense between years principally due to the $ 1,700,000 ftc reserve in the 2014 period . 58 comparison of the years ended december 31 , 2013 and december 31 , 2012 epp revenue increased $ 4,168,000 or 5 % between years , primarily due to growth in processing volumes and the effect of card association fee increases passed through to merchants . processing volumes were favorably impacted by a 1 % increase in the average number of processing merchants under contract between periods and an increase of approximately 6 % in the average monthly processing volume per merchant . the increase in the average monthly processing volume per merchant is due in part to the addition of several larger volume processing merchants as well as year-over-year growth in processing volumes from existing merchants . this overall increase in revenue between years was partially offset by lower average pricing between years due to competitive pricing considerations , particularly for larger processing volume merchants with lower revenue per transaction , between periods . electronic payment processing ( “ epp ” ) costs increased $ 3,578,000 or 5 % between years . the increase in epp costs includes a provision for charge-back losses of $ 579,000 and $ 1,832,000 in 2013 and 2012 , respectively . the provision for charge-back losses in 2012 included losses of $ 1,312,000 related to a group of merchants affiliated with one of its independent sales agents , which were unilaterally approved by a former senior manager of the epp division and such charge-back losses resulted from violations of credit policy by such senior manager . epp revenue less epp costs , or “ margin ” decreased from 15.6 % in 2012 to 15.5 % in 2013. margin was favorably impacted by the reduction in provisions for chargebacks between years by 1.5 % . however , the favorable impact on margin of the aforementioned factors were slightly more than offset by lower average pricing between years due to both competitive pricing considerations , particularly for larger volume merchants , and the mix of merchant sales volumes realized between periods . overall , the increase in margin dollars was $ 590,000 between years . salaries and benefits decreased by $ 506,000 or 13 % between years principally as the result of a reduction in staffing levels and a reduction in accrued bonuses for the year . average fte 's for the twelve month period decreased from 67.5 to 61.2 between years . professional fees increased by $ 135,000 principally due to costs incurred in assessing the loss related to and the actions of the agent and the former senior management of epp related to the charge-back losses associated with a group of merchants discussed above . depreciation and amortization decreased $ 385,000 between periods as the result of previously acquired customer merchant portfolios becoming fully amortized between periods . other costs increased $ 81,000 or 6 % between years . during 2012 , office relocation costs of approximately $ 50,000 were incurred . income before income taxes increased $ 1,263,000 to $ 8,304,000 in 2013 from $ 7,041,000 in 2012. the increase in income before income taxes was principally due to the increase in margin of $ 590,000 due to the reasons noted above and the decreases in other costs , principally payroll and related costs and depreciation and amortization cost between years 59 small business finance replace_table_token_8_th business overview the small business finance segment is comprised of nsbf which is a non-bank sba lender that originates , sells and services loans for its own portfolio as well as portfolios of other institutions , and nbc which provides accounts receivable financing and billing services to businesses .
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small business finance summary replace_table_token_9_th ( 1 ) the premium income recognized and average sales price reflect that premiums greater than 110.00 % must be split 50/50 with the sba . comparison of the years ended december 31 , 2014 ( pro forma ) and december 31 , 2013 for the year ended december 31 , 2014 , the company recognized $ 19,493,000 of premium income from 163 guaranteed loans sold aggregating $ 130,356,000. during 2013 , the company recognized $ 19,456,000 of premium income from 167 guaranteed loans sold totaling $ 131,733,000. in december 2014 , the company made the decision to hold loans in the second half of the month in anticipation of better pricing in 2015. had these loans been sold in 2014 , they would have generated approximately $ 3,431,000 of premium income . sale prices on guaranteed loan sales averaged 112.49 % for the twelve months ended december 31 , 2014 compared with 112.32 % for the twelve months ended december 31 , 2013. servicing portfolios and related servicing fee income of loans funded and average sales price replace_table_token_10_th ( 1 ) of this amount , the total average nsbf originated portfolio earning servicing income was $ 421,001,000 , $ 314,486,000 , and $ 238,590,000 for the years ended december 31 , 2014 , 2013 and 2012 , respectively . we are the contractor managing and servicing portfolios of sba 7 ( a ) , usda and other loans acquired by the fdic from failed financial institutions , and we assist the fdic in the packaging of these loans for sale . our existing servicing facilities and personnel perform these activities supplemented by contract workers as needed .
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( 72 ) in 2017 , operating ebitda increased by approximately 36 % to $ 253.8 million from $ 187.1 million in 2016 primarily as a result of higher pulp sales realizations and , to a lesser degree , the inclusion of our wood products segment . pulp segment year ended december 31 , 2017 compared to year ended december 31 , 2016 selected financial information replace_table_token_24_th pulp revenues in 2017 increased by approximately 16 % to $ 979.6 million from $ 847.3 million in 2016 due to higher sales realizations and sales volumes . energy and chemical revenues increased by approximately 9 % to $ 92.1 million in 2017 compared to $ 84.3 million in 2016 primarily due to higher sales volumes . pulp production increased by approximately 6 % to 1,507,019 admts , being an annual production record , in 2017 from 1,428,384 admts in 2016. in 2017 , we had annual maintenance downtime of 35 days ( approximately 48,000 admts ) , compared to 43 days ( approximately 61,400 admts ) in 2016. we estimate that such maintenance downtime in 2017 adversely impacted our operating income by approximately $ 36.8 million , comprised of approximately $ 28.1 million in direct out-of-pocket expenses and the balance in reduced production . many of our competitors that report their financial results using ifrs capitalize their direct costs of maintenance downtime . pulp sales volumes increased by approximately 6 % to 1,515,084 admts in 2017 compared to 1,428,672 admts in 2016 primarily due to continued steady demand from both china and europe and record production . in 2017 , list prices for nbsk pulp increased from 2016 , largely as a result of continued steady demand . average list prices for nbsk pulp in europe were approximately $ 901 per admt in 2017 , compared to approximately $ 803 per admt in 2016. average list prices for nbsk pulp in china and north america were approximately $ 712 per admt and $ 1,105 per admt , respectively , in 2017 , compared to approximately $ 599 per admt and $ 978 per admt , respectively , in 2016. average pulp sales realizations increased by approximately 9 % to $ 640 per admt in 2017 from approximately $ 586 per admt in 2016 due to higher list prices . in 2017 , the dollar was 2 % weaker against the euro and canadian dollar compared to 2016 which increased the dollar cost of our euro and canadian dollar denominated costs and expenses and contributed to a negative foreign exchange impact on operating income of approximately $ 28.0 million when compared to 2016. costs and expenses in 2017 increased by approximately 12 % to $ 901.8 million from $ 807.0 million in 2016 primarily due to higher sales volumes , the negative impact of a weaker dollar on our euro and canadian dollar denominated costs and expenses and the reversal in 2016 of accruals for wastewater fees at our german mills of $ 20.8 million . ( 73 ) in 2017 , depreciation and amortization increased to $ 80.8 million from $ 71.5 million in 2016 due to the completion of several major capital projects . on average , in 2017 overall per unit fiber costs in germany and for our celgar mill were flat compared to 2016 primarily as a result of a balanced wood market in both germany and the celgar mill 's fiber basket . transportation costs increased by approximately 12 % to $ 76.4 million in 2017 from $ 68.1 million in 2016 primarily due to higher sales volumes . in 2017 , pulp segment operating income increased by approximately 37 % to $ 171.3 million from $ 124.6 million in 2016 primarily due to higher pulp sales realizations and sales volumes , partially offset by the negative impact of a weaker dollar and the reversal in 2016 of accruals for wastewater fees . wood products segment year ended december 31 , 2017 selected financial information year ended december 31 , 2017 ( in thousands ) lumber revenues $ 82,176 energy revenues $ 8,872 wood residual revenues $ 6,382 depreciation and amortization $ 4,060 operating income $ 5,610 in 2017 , we had lumber revenues of $ 82.2 million , the majority of which was in the european market . european lumber markets were generally strong and prices steady and near multi-year highs . we produced 281.3 mmfbm of lumber . lumber sales volumes were 213.5 mmfbm as we completed our inventory build-up to support sales to the u.s. market . average lumber sales realizations in 2017 were approximately $ 385 per mfbm . in 2017 , energy and other by-product revenues were approximately $ 15.3 million and we sold 73,698 mwh of electricity . our fiber costs were approximately 80 % of our cash production costs . the ramping up of production resulted in our purchasing large volumes of sawlogs in a short period . this resulted in our sawlog costs being marginally higher than our regional competitors . in 2017 we started realizing on identified fiber synergies between the friesau mill and our rosenthal pulp mill . during 2017 , the facility shipped approximately 738,300 cubic meters of chips to rosenthal , and rosenthal shipped approximately 70,100 cubic meters of waste wood to friesau . both volumes are in line with our forecasts and have begun to lower costs at both mills . as at december 31 , 2017 , we estimate we have realized approximately $ 6.9 million of our expected synergy savings . in 2017 , depreciation and amortization for our wood products segment was $ 4.1 million . in 2017 , our wood products segment operating income was $ 5.6 million . ( 74 ) sensitivities our earnings are sensitive to , among other things , fluctuations in : pulp price . pulp is a global commodity that is priced in dollars , whose markets are highly competitive and cyclical in nature story_separator_special_tag ( 72 ) in 2017 , operating ebitda increased by approximately 36 % to $ 253.8 million from $ 187.1 million in 2016 primarily as a result of higher pulp sales realizations and , to a lesser degree , the inclusion of our wood products segment . pulp segment year ended december 31 , 2017 compared to year ended december 31 , 2016 selected financial information replace_table_token_24_th pulp revenues in 2017 increased by approximately 16 % to $ 979.6 million from $ 847.3 million in 2016 due to higher sales realizations and sales volumes . energy and chemical revenues increased by approximately 9 % to $ 92.1 million in 2017 compared to $ 84.3 million in 2016 primarily due to higher sales volumes . pulp production increased by approximately 6 % to 1,507,019 admts , being an annual production record , in 2017 from 1,428,384 admts in 2016. in 2017 , we had annual maintenance downtime of 35 days ( approximately 48,000 admts ) , compared to 43 days ( approximately 61,400 admts ) in 2016. we estimate that such maintenance downtime in 2017 adversely impacted our operating income by approximately $ 36.8 million , comprised of approximately $ 28.1 million in direct out-of-pocket expenses and the balance in reduced production . many of our competitors that report their financial results using ifrs capitalize their direct costs of maintenance downtime . pulp sales volumes increased by approximately 6 % to 1,515,084 admts in 2017 compared to 1,428,672 admts in 2016 primarily due to continued steady demand from both china and europe and record production . in 2017 , list prices for nbsk pulp increased from 2016 , largely as a result of continued steady demand . average list prices for nbsk pulp in europe were approximately $ 901 per admt in 2017 , compared to approximately $ 803 per admt in 2016. average list prices for nbsk pulp in china and north america were approximately $ 712 per admt and $ 1,105 per admt , respectively , in 2017 , compared to approximately $ 599 per admt and $ 978 per admt , respectively , in 2016. average pulp sales realizations increased by approximately 9 % to $ 640 per admt in 2017 from approximately $ 586 per admt in 2016 due to higher list prices . in 2017 , the dollar was 2 % weaker against the euro and canadian dollar compared to 2016 which increased the dollar cost of our euro and canadian dollar denominated costs and expenses and contributed to a negative foreign exchange impact on operating income of approximately $ 28.0 million when compared to 2016. costs and expenses in 2017 increased by approximately 12 % to $ 901.8 million from $ 807.0 million in 2016 primarily due to higher sales volumes , the negative impact of a weaker dollar on our euro and canadian dollar denominated costs and expenses and the reversal in 2016 of accruals for wastewater fees at our german mills of $ 20.8 million . ( 73 ) in 2017 , depreciation and amortization increased to $ 80.8 million from $ 71.5 million in 2016 due to the completion of several major capital projects . on average , in 2017 overall per unit fiber costs in germany and for our celgar mill were flat compared to 2016 primarily as a result of a balanced wood market in both germany and the celgar mill 's fiber basket . transportation costs increased by approximately 12 % to $ 76.4 million in 2017 from $ 68.1 million in 2016 primarily due to higher sales volumes . in 2017 , pulp segment operating income increased by approximately 37 % to $ 171.3 million from $ 124.6 million in 2016 primarily due to higher pulp sales realizations and sales volumes , partially offset by the negative impact of a weaker dollar and the reversal in 2016 of accruals for wastewater fees . wood products segment year ended december 31 , 2017 selected financial information year ended december 31 , 2017 ( in thousands ) lumber revenues $ 82,176 energy revenues $ 8,872 wood residual revenues $ 6,382 depreciation and amortization $ 4,060 operating income $ 5,610 in 2017 , we had lumber revenues of $ 82.2 million , the majority of which was in the european market . european lumber markets were generally strong and prices steady and near multi-year highs . we produced 281.3 mmfbm of lumber . lumber sales volumes were 213.5 mmfbm as we completed our inventory build-up to support sales to the u.s. market . average lumber sales realizations in 2017 were approximately $ 385 per mfbm . in 2017 , energy and other by-product revenues were approximately $ 15.3 million and we sold 73,698 mwh of electricity . our fiber costs were approximately 80 % of our cash production costs . the ramping up of production resulted in our purchasing large volumes of sawlogs in a short period . this resulted in our sawlog costs being marginally higher than our regional competitors . in 2017 we started realizing on identified fiber synergies between the friesau mill and our rosenthal pulp mill . during 2017 , the facility shipped approximately 738,300 cubic meters of chips to rosenthal , and rosenthal shipped approximately 70,100 cubic meters of waste wood to friesau . both volumes are in line with our forecasts and have begun to lower costs at both mills . as at december 31 , 2017 , we estimate we have realized approximately $ 6.9 million of our expected synergy savings . in 2017 , depreciation and amortization for our wood products segment was $ 4.1 million . in 2017 , our wood products segment operating income was $ 5.6 million . ( 74 ) sensitivities our earnings are sensitive to , among other things , fluctuations in : pulp price . pulp is a global commodity that is priced in dollars , whose markets are highly competitive and cyclical in nature
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summary financial highlights replace_table_token_19_th ( 1 ) includes results of mpr since december 10 , 2018 . ( 2 ) adjusted as a result of our adoption of accounting standards update 2017-07 , improving the presentation of net periodic pension cost and net periodic post-retirement benefit cost , in the current year . see note 1 to our consolidated financial statements . ( 67 ) ( 3 ) see non-gaap financial measures for a description of operating ebitda and operating ebitda margin , their limitations and why we consider them to be useful measures . the following table provides a reconciliation of net income to operating income and operating ebitda for the years indicated : replace_table_token_20_th ( 4 ) redemption of $ 300.0 million of 2022 senior notes . ( 5 ) redemption of 2019 senior notes . selected production , sales and other data selected production , sales and exchange rate data for the periods indicated : replace_table_token_21_th ( 1 ) includes results of mpr since december 10 , 2018 . ( 2 ) source : risi pricing report . ( 3 ) sales realizations after customer discounts , rebates and other selling concessions . incorporates the effect of pulp price variations occurring between the order and shipment dates . ( 4 ) excludes energy production and sales relating to our 50 % joint venture interest in cpp , which is accounted for as an equity investment . ( 5 ) average federal reserve bank of new york noon buying rates over the reporting period . ( 68 ) year ended december 31 , 2018 compared to year ended december 31 , 2017 consolidated - year ended december 31 , 2018 compared to year ended december 31 , 2017 total revenues in 2018 increased by approximately 25 % to $ 1,457.7 million from $ 1,169.1 million in 2017 primarily due to higher pulp sales realizations and the inclusion of wood products segment revenues for the full year partially offset by lower pulp sales volumes .
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2015-11 , simplifying the measurement of inventory story_separator_special_tag f financial condition and results of operations the following information should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this form 10-k. in addition to historical information , this discussion and analysis contains forward-looking statements that involve risks , uncertainties , and assumptions , which could cause actual results to differ materially from management 's expectations . please see the “ cautionary statement regarding forward-looking statements ” section immediately preceding part i , item 1 of this form 10-k and the “ risk factors ” section in part i , item 1a of this form 10-k. overview we are a medical device company that develops , manufactures , markets , and sells laser systems in dentistry and medicine and also markets , sells , and distributes dental imaging equipment , including three-dimensional cad/cam intra-oral scanners and digital dentistry software . our products advance the practice of dentistry and medicine for patients and health care professionals . our proprietary dental laser systems allow dentists , periodontists , endodontists , oral surgeons , and other dental specialists to perform a broad range of minimally invasive dental procedures , including cosmetic , restorative , and complex surgical applications . our laser systems are designed to provide clinically superior results for many types of dental procedures compared to those achieved with drills , scalpels , and other conventional instruments . we have clearance from the fda to market and sell our laser systems in the united states and also have the necessary registration to market and sell our laser systems in canada , the european union , and many other countries outside the united states . additionally , our in-licensed imaging equipment and related products improve diagnoses , applications , and procedures in dentistry and medicine . we offer two categories of laser system products : waterlase ( all-tissue ) systems and diode ( soft-tissue ) systems . our flagship brand , the waterlase , uses a patented combination of water and laser energy to perform most procedures currently performed using drills , scalpels , and other traditional dental instruments for cutting soft and hard tissue . we also offer our diode laser systems to perform soft tissue , pain therapy , and cosmetic procedures , including teeth whitening . we have approximately 220 issued and 95 pending u.s. and international patents , the majority of which are related to waterlase technology . from 1998 through december 31 , 2017 , we sold over 36,200 laser systems in over 90 countries around the world . contained in this total are approximately 12,400 waterlase systems , including approximately 8,400 waterlase md , mdx , express and iplus systems . consistent with our goal to focus our energies on strengthening our leadership , and worldwide competitiveness and increasing the amount of attention we pay to our professional customers and their patients , we have made strategic personnel additions to our senior management team . in september 2017 , we named jonathan t. lord , m.d . as our new chairman of the board . dr. lord has served on our board since 2014 and also serves as chairman of the compensation committee and a member of the nominating and corporate governance committee . he is a board-certified forensic pathologist and fellow of the college of american pathologists . dr. lord brings extensive innovation , executive management and board experience to his new role of chairman . on october 1 , 2017 , we appointed a new senior vice president and chief financial officer with proven leadership and technical experience in finance and business management in both public and private companies . on november 1 , 2017 , we appointed richard b. lanman , m.d . to our board , a well-known healthcare innovator and entrepreneur who specializes in the development and adoption of novel healthcare technologies . in january , we promoted from within a new vice president of u.s. sales , with a wealth of experience and knowledge about our company and the industry . in december 2017 , we completed a rights offering with holders of our common stock as of the record date of 5:00 p.m. , eastern time on november 8 , 2017. gross proceeds from the sale were $ 12.0 million , and net proceeds , after offering expenses of approximately $ 0.6 million , were approximately $ 11.4 million . in april 2017 , we completed a private placement with several institutional and individual investors , and certain of our directors and officers . gross proceeds from the sale were $ 10.5 million , and net proceeds , after offering expenses of approximately $ 0.3 million , were approximately $ 10.2 million . in february 2017 , we launched the fifth-generation waterlase express all-tissue laser system . waterlase express represents the newest addition to our waterlase portfolio of er , cr : ysgg all-tissue lasers . waterlase express was exhibited at the chicago dental society 's mid-winter meeting in february 2017. designed for easy and intuitive operation , integrated learning , and portability , waterlase express is our next-generation waterlase system . waterlase express has regulatory clearance for commercial distribution from the fda , and is available for sale to dentists in the u.s. as well as select international markets in europe , the middle east , and asia . 37 in january 2017 , we received fda clearance and launched epic pro , a powerful and innovative dental diode laser system , making it available for sale in the u.s. , as well as in select countries in europe , the middle east , and asia . the epic pro , which offers more power than most diode laser s in dentistry , is the first product to be introduced resulting from our strategic development agreement with ipg medical . story_separator_special_tag 38 although all sales are final , we accept returns of products in certain , limited circumstances and record a provision for sales returns based on historical experience concurren t with the recognition of revenue . the sales returns allowance is recorded as a reduction of accounts receivable and revenue . extended warranty contracts , which are sold to our laser and certain imaging customers , are recorded as revenue on a straight-lin e basis over the period of the contracts , which is typically one year . for sales transactions involving used laser trade-ins , we record the purchased trade-ins as inventory at the fair value of the asset surrendered with the offset to accounts receivable . in determining the estimated fair value of used laser trade-ins , we assess usable parts and key components and consider the ultimate resale value of the certified pre-owned ( or “ cpo ” ) laser with applicable margins . we sell these cpo laser trade-ins as ref urbished lasers . trade-in rights are not established or negotiated with customers during the initial sales transaction of the original lasers . trade-in rights are promotional events used at our discretion to encourage existing laser customers to purchase n ew lasers . a customer is not required to trade in a laser nor are we required to accept a trade-in . however , the promotional value offered in exchange for the trade-in laser is not offered without a laser trade-in . the transaction is treated as a monetary transaction as each sale transaction involving a customer trade-in includes significant boot of greater than 25 % of the fair value of the exchange . as a monetary transaction , the sale is recognized following our laser system revenue recognition policy . there have been no sales transactions in which the cash consideration was less than 25 % of the total transaction value . we recognize revenue for royalties under licensing agreements for our patented technology when the product using our technology is sold . we estimate and recognize the amount earned based on historical performance and current knowledge about the business operations of our licensees . our estimates have been consistent with amounts historically reported by the licensees . licensing revenue related to exclusive licensing arrangements is recognized concurrent with the related exclusivity period . from time to time , we may offer sales incentives and promotions on our products . we record the cost of sales incentives at the date at which the related revenue is recognized as a reduction in revenue , an increase in cost of goods sold , or a selling expense , as applicable , or later , in the case of incentives offered after the initial sale has occurred . accounting for stock-based payments . we recognize compensation cost related to all stock-based payments based on the grant-date fair value using the black-scholes option valuation model , taking into consideration the probability of vesting and estimated forfeitures . valuation of accounts receivable . we maintain an allowance for uncollectible accounts receivable to estimate the risk of extending credit to customers . we evaluate our allowance for doubtful accounts based upon our knowledge of customers and their compliance with credit terms . the evaluatio n process includes a review of customers ' accounts on a regular basis , which incorporates input from sales , service , and finance personnel . the review process also evaluates all account balances with amounts past due and other specific amounts for which information obtained indicates that the balance may be uncollectible . the allowance for doubtful accounts is adjusted based on such evaluation , with a corresponding provision included in general and administrative expenses . account balances are charged off against the allowance when we believe it is probable the receivable will not be recovered . we do not have any off-balance-sheet credit exposure related to our customers . valuation of inventory . inventory is valued at the lower of cost or net realizable value , with cost determined using the first-in , first-out method . we periodically evaluate the carrying value of inventory and maintain an allowance for excess and obsolete inventory to adjust the carrying value as necessary to the lower of cost or market . we evaluate quantities on hand , physical condition , and technical functionality , as these characteristics may be impacted by anticipated customer demand for current products and new product introductions . unfavorable changes in estimates of excess and obsolete inventory would result in an increase in cost of revenue and a decrease in gross profit . valuation of long-lived assets . property , plant , and equipment and certain intangibles with finite lives are amortized over their estimated useful lives . useful lives are based on our estimate of the period that the assets will generate revenue or otherwise productively support our business goals . we monitor events and changes in circumstances that could indicate that the carrying balances of long-lived assets may exceed the undiscounted expected future cash flows from those assets . if such a condition were to exist , we would determine if an impairment loss should be recognized by comparing the carrying amount of the assets to their fair value . valuation of goodwill and other intangible assets . goodwill and other intangible assets with indefinite lives are not subject to amortization but are evaluated for impairment annually or whenever events or changes in circumstances indicate that the asset might be impaired . we conducted our annual impairment analysis of our goodwill as of june 30 , 2017 and concluded there had been no impairment in goodwill . we closely monitor our stock price and market capitalization and perform such analysis when events or circumstances indicate that there may have been a change to the carrying value of those assets . 39 warranty cost . we provide warranties against defects in materials and workmanship of our laser systems for specified periods of time .
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comparison of results of operations year ended december 31 , 2017 compared with year ended december 31 , 2016 net revenue . net revenue for the year ended december 31 , 2017 ( “ fiscal 2017 ” ) was $ 46.9 million , a decrease of $ 4.9 million , or 9 % , as compared with net revenue of $ 51.8 million for the year ended december 31 , 2016 ( “ fiscal 2016 ” ) . domestic revenues were $ 29.3 million , or 62 % of net revenue , for fiscal 2017 compared to $ 33.4 million , or 64 % of net revenue , for fiscal 2016. international revenues for fiscal 2017 were $ 17.6 million , or 38 % of net revenue , compared to $ 18.4 million , or 36 % of net revenue for fiscal 2016. the decrease in year-over-year net revenue resulted from decreases in worldwide laser system revenue , international imaging systems revenue , international consumables and other revenue , international services revenue and domestic license and royalties revenue , partially offset by increases in domestic imaging systems revenue , domestic consumables and other revenue and domestic services revenue . our goal has been to refocus on strengthening our leadership position in dental markets worldwide through increased focus on our professional customers and their patients . we have strengthened our management team with new key personnel and invested in our sales resources both domestically and internationally . laser system net revenues decreased by approximately $ 6.0 million , or 17 % , in fiscal 2017 compared to fiscal 2016. the laser systems revenue decrease was driven by a 28 % decline in domestic revenue and a 3 % decline in international revenue . imaging system net revenue increased by approximately $ 0.6 million , or 20 % , in fiscal 2017 compared to fiscal 2016. this increase was due to increased overall market interest in intra-oral scanning devices , and our favorable positioning as a distributor .
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001-32833 ) 3.108 certificate of formation , filed august 12 , 2008 , of new ilc mergeco , llc ( now known as ilc industries , llc ) incorporated by reference to transdigm group incorporated 's form 10-k filed november 15 , 2016 ( file no . 001-32833 ) 52 exhibit no . description filed herewith or incorporated by reference from 3.109 certificate of amendment to certificate of formation , filed story_separator_special_tag the following discussion of our financial condition and results of operations should be read together with “ selected financial data ” and td group 's consolidated financial statements and the related notes included elsewhere in this report . the following discussion may contain predictions , estimates and other forward-looking statements that involve a number of risks and uncertainties , including those discussed under the heading entitled “ risk factors ” included elsewhere in this report . these risks could cause our actual results to differ materially from any future performance suggested below . overview for fiscal year 2017 , we generated net sales of $ 3,504.3 million , gross profit of $ 1,984.6 million or 56.6 % of sales , and net income of $ 596.9 million . we believe we have achieved steady , long-term growth in sales and improvements in operating performance since our formation in 1993 due to our competitive strengths and through execution of our value-driven operating strategy . more specifically , focusing our businesses on our value-driven operating strategy of obtaining profitable new business , carefully controlling the cost structure and pricing our highly engineered value-added products to fairly reflect the value we provide and the resources required to do so has historically resulted in improvements in gross profit and income from operations over the long term . our selective acquisition strategy has also contributed to the growth of our business . the integration of certain acquisitions into our existing businesses combined with implementing our proven operating strategy has historically resulted in improvements of the financial performance of the acquired business . we believe our key competitive strengths include : large and growing installed product base with aftermarket revenue stream . we provide components to a large and growing installed base of aircraft to which we supply aftermarket products . we estimate that our products are installed on approximately 95,000 commercial transport , regional transport , military and general aviation fixed wing turbine aircraft and rotary wing aircraft . diversified revenue base . we believe that our diversified revenue base reduces our dependence on any particular product , platform or market channel and has been a significant factor in maintaining our financial performance . our products are installed on almost all of the major commercial aircraft platforms now in production . we expect to continue to develop new products for military and commercial applications . barriers to entry . we believe that the niche nature of our markets , the industry 's stringent regulatory and certification requirements , the large number of products that we sell and the investments necessary to develop and certify products create potential disincentives to competition for certain products . our business strategy is made up of two key elements : ( 1 ) a value-driven operating strategy focused around our three core value drivers and ( 2 ) a selective acquisition strategy . value-driven operating strategy . our three core value drivers are : obtaining profitable new business . we attempt to obtain profitable new business by using our technical expertise and application skill and our detailed knowledge of our customer base and the individual niche markets in which we operate . we have regularly been successful in identifying and developing both aftermarket and oem products to drive our growth . improving our cost structure . we are committed to maintaining and continuously improving our lean cost structure through detailed attention to the cost of each of the products that we offer and our organizational structure , with a focus on reducing the cost of each . providing highly engineered value-added products to customers . we focus on the engineering , manufacturing and marketing of a broad range of highly engineered niche products that we believe provide value to our customers . we believe we have been consistently successful in communicating to our customers the value of our products . this has generally enabled us to price our products to fairly reflect the value we provide and the resources required to do so . selective acquisition strategy . we selectively pursue the acquisition of proprietary aerospace component businesses when we see an opportunity to create value through the application of our three core value-driven operating strategies . the aerospace industry , in particular , remains highly fragmented , with many of the companies in the industry being small private businesses or small non-core operations of larger businesses . we have significant experience among our management team in executing acquisitions and integrating acquired businesses into our company and culture . as of the date of this report , we have successfully acquired approximately 60 businesses and or product lines since our formation in 1993. many of these acquisitions have been integrated into an existing transdigm production facility , which enables a higher production capacity utilization , which in turn improves gross profit levels due to the ability to spread the fixed manufacturing overhead costs over higher production volume . 25 acquisitions during the previous three fiscal years are more fully described in note 2 , “ acquisitions , ” in the notes to the consolidated financial statements included herein . critical accounting policies our consolidated financial statements have been prepared in conformity with gaap , which often requires the judgment of management in the selection and application of certain accounting principles and methods . management believes that the quality and reasonableness of our most critical policies enable the fair presentation of our financial position and results of operations . story_separator_special_tag at the time of goodwill impairment testing , the company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount , and whether it is necessary to perform the quantitative goodwill impairment test . the quantitative test is required only if the company concludes that it is more likely than not that a reporting unit 's fair value is less than its carrying amount , or if the company elects not to perform a qualitative assessment of a reporting unit . for the quantitative test , management determines the estimated fair value through the use of a discounted cash flow valuation model incorporating discount rates commensurate with the risks involved for each reporting unit . if the calculated estimated fair value is less than the current carrying value , impairment of goodwill of the reporting unit may exist . the use of a discounted cash flow valuation model to determine estimated fair value is common practice in impairment testing . the key assumptions used in the discounted cash flow valuation model for impairment testing includes discount rates , growth rates , cash flow projections and terminal value rates . discount rates are set by using the weighted average cost of capital ( “ wacc ” ) methodology . the wacc methodology considers market and industry data as well as company specific risk factors for each reporting unit in determining the appropriate discount rates to be used . the discount rate utilized for each reporting unit is indicative of the return an investor would expect to receive for investing in such a business . management , considering industry and company-specific historical and projected data , develops growth rates , sales projections and cash flow projections for each reporting unit . terminal value rate determination follows common methodology of capturing the present value of perpetual cash flow estimates beyond the last projected period assuming a constant wacc and low long-term growth rates . as an indicator that each reporting unit has been valued appropriately through the use of the discounted cash flow valuation model , the aggregate of all reporting unit 's estimated fair value is reconciled to the total market capitalization of the company . the company had 34 reporting units with goodwill as of the first day of the fourth quarter of fiscal 2017 , the date of the last annual impairment test . the estimated fair values of each of the reporting units was substantially in excess of their respective carrying values , and therefore , no goodwill impairment was recorded . the company performed a sensitivity analysis on the discount rate , which is a significant assumption in the calculation of fair values . with a one percentage point increase in the discount rate , nearly all of the reporting units would continue to have fair values substantially in excess of their respective carrying values . management tests indefinite-lived intangible assets for impairment at the asset level , as determined by appropriate asset valuation at the time of acquisition . the impairment test for indefinite-lived intangible assets consists of a comparison between the estimated fair values and carrying values . if the carrying amounts of intangible assets that have indefinite useful lives exceed their estimated fair values , an impairment loss will be recognized in an amount equal to the difference . management utilizes the royalty savings valuation method to determine the estimated fair value for each indefinite-lived intangible asset . in this method , management estimates the royalty savings arising from the ownership of the intangible asset . the key assumptions used in estimating the royalty savings for impairment testing include discount rates , royalty rates , growth rates , sales projections and terminal value rates . discount rates used are similar to the rates developed by the wacc methodology considering any differences in company-specific risk factors between reporting units and the indefinite-lived intangible assets . royalty rates are established by management with the advice of valuation experts and periodically substantiated by valuation experts . management , considering industry and company-specific historical and projected data , develops growth rates and sales projections for each significant intangible asset . terminal value rate determination follows common methodology of capturing the present value of perpetual sales estimates beyond the last projected period assuming a constant wacc and low long-term growth rates . the discounted cash flow and royalty savings valuation methodologies require management to make certain assumptions based upon information available at the time the valuations are performed . actual results could differ from these assumptions . management believes the assumptions used are reflective of what a market participant would have used in calculating fair value considering the current economic conditions . stock-based compensation : the cost of the company 's stock-based compensation is recorded in accordance with asc 718 , “ stock compensation. ” the company uses a black-scholes-merton option pricing model to estimate the grant-date fair value of the stock options awarded . the black-scholes-merton model requires assumptions regarding the expected volatility of the company 's common shares , the risk-free interest rate , the expected life of the stock options award and the company 's dividend yield . the company utilizes historical data in determining these assumptions . an increase or decrease in the assumptions or economic events outside of management 's control could have an impact on the black-scholes-merton model . income taxes : the company estimates income taxes in each jurisdiction in which it operates . this involves estimating taxable earnings , specific taxable and deductible items , the likelihood of generating sufficient future taxable income to utilize deferred tax assets and possible exposures related to future tax audits . to the extent these estimates change , adjustments to deferred and accrued income taxes are made in the period in which the changes occur . historically , such adjustments have not been significant .
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results of operations the following table sets forth , for the periods indicated , certain operating data of the company , including presentation of the amounts as a percentage of net sales ( amounts in thousands ) : replace_table_token_10_th fiscal year ended september 30 , 2017 compared with fiscal year ended september 30 , 2016 total company net sales . net organic sales and acquisition sales and the related dollar and percentage changes for the fiscal years ended september 30 , 2017 and 2016 were as follows ( amounts in millions ) : replace_table_token_11_th acquisition sales represent sales of acquired businesses for the period up to one year subsequent to their acquisition date . the amount of acquisition sales shown in the table above was attributable to the third quarter 2017 acquisitions in fiscal year 2017 and the acquisitions of y & f/tactair , ddc and breeze-eastern in fiscal year 2016. the increase in organic sales was primarily driven by commercial aftermarket organic sales increasing by $ 34.8 million , or 3.0 % and defense organic sales increasing by $ 41.5 million , or 4.4 % . slightly offsetting the increases was commercial oem organic sales decreasing by $ 2.8 million , or 0.3 % . cost of sales and gross profit . cost of sales increased by $ 76.4 million , or 5.3 % , to $ 1,519.7 million for the fiscal year ended september 30 , 2017 compared to $ 1,443.3 million for the fiscal year ended september 30 , 2016 . cost of sales and the related percentage of total sales for the fiscal years ended september 30 , 2017 and 2016 were as follows ( amounts in millions ) : replace_table_token_12_th 28 the increase in the dollar amount of cost of sales during the fiscal year ended september 30 , 2017 was primarily due to increased volume associated with the sales from acquisitions and organic sales growth .
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each member 's level of discount is determined by qualification based on volume of purchases . in cases where a member has qualified for less than the maximum discount , the remaining discount , which we also refer to as a wholesale commission , is received by their sponsoring members . therefore , product sales are recognized net of product returns and distributor allowances . net sales equal product sales plus shipping and handling revenues , and generally represents what we collect . during 2013 we simplified our pricing structure for most markets , increasing suggested retail prices and reducing total shipping and handling fees , eliminating a packaging and handling line item from our invoices to members , with no impact on total member cost . in conjunction , the method for distributor allowances and marketing plan payouts now generally utilizes 90 % to 95 % of suggested retail price , depending on the product and market , to which we apply discounts of up to 50 % for distributor allowances and payout rates of up to 15 % for royalty overrides , up to 7 % for production bonuses , and approximately 1 % for the mark hughes bonus . consequently , the revision to our pricing structure did not have a meaningful impact on the amounts of distributor allowance or payouts under our marketing plan and did not materially impact our consolidated net sales and profitability . we do not have visibility into all of the sales from our members to their customers , but such a figure would differ from our reported retail sales by factors including ( a ) the amount of product purchased by our members for their own personal consumption and ( b ) prices charged by our members to their customers other than our suggested retail prices . we discuss retail sales because of its fundamental role in our systems , internal controls and operations , and its correlation to member discounts and royalty overrides . in addition , retail sales is a component of the financial reports we use to analyze our financial results . however , such a measure is not in accordance with u.s. generally accepted accounting principles , or u.s. gaap . retail sales should not be considered in isolation from , nor as a substitute for , net sales and other consolidated income or cash flow statement data prepared in accordance with u.s. gaap , or as a measure of profitability or liquidity . a reconciliation of retail sales to net sales is presented below under results of operations . 46 our international operations have provided and will continue to provide a significant portion of our total net sales . as a result , total net sales will continue to be affected by fluctuations in the u.s. dollar against foreign currencies . in order to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency fluctuations , in addition to comparing the percent change in net sales from one period to another in u.s. dollars , we also compare the percent change in net sales from one period to another period using net sales in local currency . net sales in local currency is not a u.s. gaap financial measure . net sales in local currency removes from net sales in u.s. dollars the impact of changes in exchange rates between the u.s. dollar and the functional currencies of our foreign subsidiaries , by translating the current period net sales into u.s. dollars using the same foreign currency exchange rates that were used to translate the net sales for the previous comparable period . we believe presenting net sales in local currency is useful to investors because it allows a meaningful comparison of net sales of our foreign operations from period to period . however , net sales in local currency measures should not be considered in isolation or as an alternative to net sales in u.s. dollar measures that reflect current period exchange rates , or to other financial measures calculated and presented in accordance with u.s. gaap . our gross profit consists of net sales less cost of sales , which represents our manufacturing costs , the price we pay to our raw material suppliers and manufacturers of our products as well as shipping and handling costs including duties , tariffs , and similar expenses . while all members can potentially profit from their activities by reselling our products for amounts greater than the prices they pay us , members that develop , retain , and manage other members can earn additional compensation for those activities , which we refer to as royalty overrides. royalty overrides are our most significant operating expense and consist of : royalty overrides and production bonuses ; the mark hughes bonus payable to some of our most senior members ; and other discretionary incentive cash bonuses to qualifying members . during 2014 , 2013 , and 2012 , total royalty overrides were 29.7 % , 31.0 % , and 32.9 % of our net sales , respectively . royalty overrides are compensation to members for the development , retention and improved productivity of their sales organizations and are paid to several levels of members on each sale . royalty overrides are compensation for services rendered to us and as such are recorded as an operating expense . due to restrictions on direct selling in china , our independent service providers in china are compensated with service fees instead of the distributor allowances and royalty overrides utilized in our traditional marketing program . compensation to china independent service providers is included in selling , general and administrative expenses . because of local country regulatory constraints , we may be required to modify our member incentive plans as described above . story_separator_special_tag we also pay reduced royalty overrides with respect to certain products worldwide . consequently , the total royalty override percentage may vary over time and from the percentages noted above . our contribution margins consist of net sales less cost of sales and royalty overrides . selling , general and administrative expenses represent our operating expenses , which include labor and benefits , service fees to china service providers , sales events , professional fees , travel and entertainment , member promotions , occupancy costs , communication costs , bank fees , depreciation and amortization , foreign exchange gains and losses and other miscellaneous operating expenses . our other expense , net consists of non-operating expenses such as impairments of available-for-sale investments . most of our sales to members outside the united states are made in the respective local currencies . in preparing our financial statements , we translate revenues into u.s. dollars using average exchange rates . additionally , the majority of our purchases from our suppliers generally are made in u.s. dollars . consequently , a 47 strengthening of the u.s. dollar versus a foreign currency can have a negative impact on our reported sales and contribution margins and can generate foreign currency losses on intercompany transactions . foreign currency exchange rates can fluctuate significantly . from time to time , we enter into foreign currency derivatives to partially mitigate our foreign currency exchange risk as discussed in further detail in item 7a quantitative and qualitative disclosures about market risk . results of operations our results of operations for the periods below are not necessarily indicative of results of operations for future periods , which depend upon numerous factors , including our ability to recruit new members and retain sales leaders , further penetrate existing markets , introduce new products and programs that will help our members increase their retail efforts and develop niche market segments . the following table sets forth selected results of our operations expressed as a percentage of net sales for the periods indicated : replace_table_token_15_th ( 1 ) service fees to our independent service providers in china are included in selling , general and administrative expenses while member compensation for all other countries is included in royalty overrides . ( 2 ) during the year ended december 31 , 2014 , selling , general and administrative expenses as a percentage of net sales was significantly higher as compared to the same periods in 2013 and 2012 , primarily due to the foreign exchange losses relating to our venezuela business as discussed further below . changes in net sales are directly associated with the retailing of our products , recruitment of members , and retention of sales leaders . our strategies include providing quality products , improved dmos , including daily consumption approaches such as nutrition clubs , easier access to product , systemized training of members on our products and methods , and continued promotion and branding of herbalife products . management 's role , both in-country and at the region and corporate level , is to provide members with a competitive and broad product line , encourage strong teamwork and member leadership and offer leading edge business tools and technology services to make doing business with herbalife simple . management uses the member marketing program coupled with educational and motivational tools and promotions to encourage members to increase retailing , retention , and recruiting , which in turn affect net sales . such tools include company sponsored sales events such as extravaganzas , leadership development weekends and world team schools where large groups of members gather , thus allowing them to network with other members , learn retailing , retention , and recruiting techniques from our leading members and become more familiar with how to market and sell our products and business opportunities . accordingly , management believes that these development 48 and motivation programs increase the productivity of the sales leader network . the expenses for such programs are included in selling , general and administrative expenses . we also use event and non-event product promotions to motivate members to increase retailing , retention , and recruiting activities . these promotions have prizes ranging from qualifying for events to product prizes and vacations . the costs of these promotions are included in selling , general and administrative expenses . dmos are being generated in many of our markets and are globalized where applicable through the combined efforts of members and country , regional and corporate management . while we support a number of different dmos , one of the most popular dmos is the daily consumption dmo . under our traditional dmo , a member typically sells to its customers on a somewhat infrequent basis ( e.g. , monthly ) which provides fewer opportunities for interaction with their customers . under a daily consumption dmo , a member interacts with its customers on a more frequent basis which enables the member to better educate and advise customers about nutrition and the proper use of the products and helps promote daily usage as well , thereby helping the member grow his or her business . specific examples of dmos include the club concept in mexico , premium herbalife opportunity meetings in korea , the healthy breakfast concept in russia , and the internet/sampling and weight loss challenge in the u.s. management 's strategy is to review the applicability of expanding successful country initiatives throughout a region , and where appropriate , financially support the globalization of these initiatives . the factors described above have helped members increase their business , which in turn helps drive volume point growth in our business , and thus , net sales growth . the discussion below of net sales details some of the specific drivers of growth of our business and causes of sales fluctuations during the year ended december 31 , 2014 as compared to the same period in 2013 and during the year
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reporting segment results net sales by reporting segment the primary reporting segment reported net sales of $ 4,353.7 million for the year ended december 31 , 2013. net sales for the primary reporting segment increased $ 559.9 million , or 14.8 % , for the year ended december 31 , 2013 , as compared to the same period in 2012. china reported net sales of $ 471.6 million for the year ended december 31 , 2013. net sales for china increased $ 193.1 million , or 69.3 % , for the year ended december 31 , 2013 , as compared to the same period in 2012. see the discussion of net sales by geographic region below of the applicable region ( s ) comprising each segment for the underlying explanations of the increases in net sales for each reporting segment for the year ended december 31 , 2013 , as compared to the same period in 2012. contribution margin by reporting segment as discussed above under presentation , contribution margin consists of net sales less cost of sales and royalty overrides . the primary reporting segment reported contribution margin of $ 1,941.7 million for the year ended december 31 , 2013. contribution margin for the primary reporting segment increased $ 270.7 million , or 16.2 % , for the year ended december 31 , 2013 , as compared to the same period in 2012. china reported contribution margin of $ 422.7 million for the year ended december 31 , 2013. contribution margin for china increased $ 172.6 million , or 69.0 % , for the year ended december 31 , 2013 , as compared to the same period in 2012. the increases in contribution margin for the primary reporting segment and china for the year ended december 31 , 2013 as compared to the same period in 2012 was primarily due to the increases in net sales as described in the net sales by reporting segment section above .
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please read this discussion in conjunction with the consolidated financial statements and notes included in this form 10-k. cautionary statement regarding forward-looking statements our statements , trend analyses and other information contained in this report and elsewhere ( such as in filings by cno with the sec , press releases , presentations by cno or its management or oral statements ) relative to markets for cno 's products and trends in cno 's operations or financial results , as well as other statements , contain forward-looking statements within the meaning of the federal securities laws and the private securities litigation reform act of 1995. forward-looking statements typically are identified by the use of terms such as `` anticipate , '' `` believe , '' `` plan , '' `` estimate , '' `` expect , '' `` project , '' `` intend , '' `` may , '' `` will , '' `` would , '' `` contemplate , '' `` possible , '' `` attempt , '' `` seek , '' `` should , '' `` could , '' `` goal , '' `` target , '' `` on track , '' `` comfortable with , '' `` optimistic , '' `` guidance , '' `` outlook '' and similar words , although some forward-looking statements are expressed differently . you should consider statements that contain these words carefully because they describe our expectations , plans , strategies and goals and our beliefs concerning future business conditions , our results of operations , financial position , and our business outlook or they state other `` forward-looking '' information based on currently available information . the `` risk factors '' in item 1a provide examples of risks , uncertainties and events that could cause our actual results to differ materially from the expectations expressed in our forward-looking statements . assumptions and other important factors that could cause our actual results to differ materially from those anticipated in our forward-looking statements include , among other things : changes in or sustained low interest rates causing reductions in investment income , the margins of our fixed annuity and life insurance businesses , and sales of , and demand for , our products ; expectations of lower future investment earnings may cause us to accelerate amortization , write down the balance of insurance acquisition costs or establish additional liabilities for insurance products ; general economic , market and political conditions and uncertainties , including the performance and fluctuations of the financial markets which may affect the value of our investments as well as our ability to raise capital or refinance existing indebtedness and the cost of doing so ; the ultimate outcome of lawsuits filed against us and other legal and regulatory proceedings to which we are subject ; our ability to make anticipated changes to certain non-guaranteed elements of our life insurance products ; our ability to obtain adequate and timely rate increases on our health products , including our long-term care business ; the receipt of any required regulatory approvals for dividend and surplus debenture interest payments from our insurance subsidiaries ; mortality , morbidity , the increased cost and usage of health care services , persistency , the adequacy of our previous reserve estimates and other factors which may affect the profitability of our insurance products ; changes in our assumptions related to deferred acquisition costs or the present value of future profits ; the recoverability of our deferred tax assets and the effect of potential ownership changes and tax rate changes on their value ; changes to our estimates of the impact of comprehensive federal tax legislation related to the tax reform act ; our assumption that the positions we take on our tax return filings will not be successfully challenged by the irs ; changes in accounting principles and the interpretation thereof ; our ability to continue to satisfy the financial ratio and balance requirements and other covenants of our debt agreements ; 47 our ability to achieve anticipated expense reductions and levels of operational efficiencies including improvements in claims adjudication and continued automation and rationalization of operating systems ; performance and valuation of our investments , including the impact of realized losses ( including other-than-temporary impairment charges ) ; our ability to identify products and markets in which we can compete effectively against competitors with greater market share , higher ratings , greater financial resources and stronger brand recognition ; our ability to generate sufficient liquidity to meet our debt service obligations and other cash needs ; changes in capital deployment opportunities ; our ability to maintain effective controls over financial reporting ; our ability to continue to recruit and retain productive agents and distribution partners ; customer response to new products , distribution channels and marketing initiatives ; our ability to achieve additional upgrades of the financial strength ratings of cno and our insurance company subsidiaries as well as the impact of our ratings on our business , our ability to access capital , and the cost of capital ; regulatory changes or actions , including : those relating to regulation of the financial affairs of our insurance companies , such as the calculation of risk-based capital and minimum capital requirements , and payment of dividends and surplus debenture interest to us ; regulation of the sale , underwriting and pricing of products ; and health care regulation affecting health insurance products ; changes in the federal income tax laws and regulations which may affect or eliminate the relative tax advantages of some of our products or affect the value of our deferred tax assets ; availability and effectiveness of reinsurance arrangements , as well as the impact of any defaults or failure of reinsurers to perform ; the amount we may need to pay to a reinsurer and the earnings charge we may incur in connection with a long-term care reinsurance transaction ; the performance of third party service providers and potential difficulties arising from outsourcing arrangements ; the growth rate of sales , collected premiums , annuity deposits and assets ; interruption in telecommunication , information technology or other story_separator_special_tag 49 the following summarizes our earnings for the three years ending december 31 , 2017 ( dollars in millions , except per share data ) : replace_table_token_10_th 50 ( a ) management believes that an analysis of net operating income provides a clearer comparison of the operating results of the company from period to period because it excludes : ( i ) loss on reinsurance transaction , including impact of taxes ; ( ii ) net realized investment gains or losses , net of related amortization and taxes ; ( iii ) fair value changes due to fluctuations in the interest rates used to discount embedded derivative liabilities related to our fixed index annuities , net of related amortization and taxes ; ( iv ) fair value changes and amendment related to the agent deferred compensation plan , net of taxes ; ( v ) loss on extinguishment of debt , net of taxes ; ( vi ) changes in the valuation allowance for deferred tax assets and other tax items ; and ( vii ) other non-operating items consisting primarily of equity in earnings of certain non-strategic investments and earnings attributable to variable interest entities . net realized investment gains or losses include : ( i ) gains or losses on the sales of investments ; ( ii ) other-than-temporary impairments recognized through net income ; and ( iii ) changes in fair value of certain fixed maturity investments with embedded derivatives . adjusted ebit is presented as net operating income excluding corporate interest expense and income tax expense . the table above reconciles the non-gaap measure to the corresponding gaap measure . in addition , management uses these non-gaap financial measures in its budgeting process , financial analysis of segment performance and in assessing the allocation of resources . we believe these non-gaap financial measures enhance an investor 's understanding of our financial performance and allows them to make more informed judgments about the company as a whole . these measures also highlight operating trends that might not otherwise be apparent . however , adjusted ebit and net operating income are not measurements of financial performance under gaap and should not be considered as alternatives to cash flow from operating activities , as measures of liquidity , or as alternatives to net income as measures of our operating performance or any other measures of performance derived in accordance with gaap . in addition , adjusted ebit and net operating income should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items . adjusted ebit and net operating income have limitations as analytical tools , and you should not consider such measures either in isolation or as substitutes for analyzing our results as reported under gaap . our definitions and calculation of adjusted ebit and net operating income are not necessarily comparable to other similarly titled measures used by other companies due to different methods of calculation . ( b ) in september 2016 , we terminated the reinsurance agreements with bre and recaptured the ceded business as further described in `` management 's discussion and analysis of consolidated financial condition and results of operations - consolidated financial condition - termination of long-term care reinsurance agreements and recapture of related long-term care business in run-off '' . our mission remains unchanged : to enrich lives by providing insurance solutions that help protect the health and retirement needs of middle-income americans , while building enduring value for all our stakeholders . our corporate strategy is rooted in cno 's unique customer focus . our focus on the unique financial security needs of our middle-income customers is essential to our growth strategy . our diverse ability to connect with customers through captive agents , independent channels or direct marketing is a key strength of cno . we believe that our product portfolio mix is well-aligned to the retirement healthcare , supplemental health and income accumulation needs of working-age customers as well as those in and near retirement . unlike most insurers , we provide solutions for both health risks and wealth opportunities . as americans live longer into their retirement years , our customers need holistic retirement income planning , which includes both our insurance and annuity solutions , and the investments offered by our broker-dealer and growing force of registered investment advisors . specifically , we are focused on the following priorities : growth maximize our product portfolio to ensure it meets our customers ' needs for integrated products and advice covering a broad range of their financial needs position marketing and our distribution channels to respond effectively to evolving customer preferences expand and enhance elements of our broker-dealer and registered investment advisor program increase the speed-to-market for new products that are a good fit for our customers make strategic , measured changes to our business practices to improve our competitive advantage continue to invest in technology partnerships that will support our field force and relationships with our customers increase profitability and return on equity maintain our strong capital position and favorable financial metrics work to increase our return on equity maintain pricing discipline 51 effectively manage risk and deploy capital maintain an active enterprise risk management process utilize excess cash flow to maximize returns maintain a competitive dividend payout ratio reduce relative legacy long-term care exposure continue to invest in talent attract , retain and develop the best talent to help us drive sustainable growth , and provide them with development opportunities recruit , develop and retain our agent force critical accounting policies the preparation of financial statements in accordance with gaap requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period . management has made estimates in the past that we believed to be appropriate but were subsequently revised to reflect actual experience .
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results of operations the following tables and narratives summarize the operating results of our segments ( dollars in millions ) : replace_table_token_17_th 64 ( a ) these non-gaap measures as presented in the above table and in the following segment financial data and discussions of segment results exclude the loss on reinsurance transaction and transition expenses , net realized investment gains ( losses ) , fair value changes in embedded derivative liabilities , net of related amortization , fair value changes and amendment related to the agent deferred compensation plan , equity in earnings of certain non-strategic investments and earnings attributable to vies , transition expenses , loss on extinguishment of debt and before income taxes . these are considered non-gaap financial measures . a non-gaap measure is a numerical measure of a company 's performance , financial position , or cash flows that excludes or includes amounts that are normally excluded or included in the most directly comparable measure calculated and presented in accordance with gaap . these non-gaap financial measures of `` pre-tax operating earnings '' differ from `` income ( loss ) before income taxes '' as presented in our consolidated statement of operations prepared in accordance with gaap due to the exclusion of the loss on reinsurance transaction , realized investment gains ( losses ) , fair value changes in embedded derivative liabilities , net of related amortization , fair value changes and amendment related to the agent deferred compensation plan , equity in earnings of certain non-strategic investments and earnings attributable to vies , transition expenses and loss on extinguishment of debt . we measure segment performance excluding these items because we believe that this performance measure is a better indicator of the ongoing businesses and trends in our business .
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a valuation allowance for deferred tax assets is recorded when it is more likely than not that some or all of the benefit from the deferred tax asset will not be realized . we consider the undistributed earnings of our principal non-u.s. subsidiaries to be permanently reinvested . 68 it is our policy to provide for uncertain tax positions and the related interest and penalties based upon management 's assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities . at december 31 , 2013 , we believe we have appropriately accounted for any unrecognized tax benefits . to the extent we prevail in matters for which a liability for an unrecognized tax benefit is established or are required to pay amounts story_separator_special_tag results of operations the following management 's discussion and analysis should be read in conjunction with our historical consolidated financial statements located in item 8 . “ financial statements and supplementary data ” of this annual report . any reference to notes in the following management 's discussion and analysis refers to the notes to consolidated financial statements located in item 8 . “ financial statements and supplementary data ” of this annual report . the results of operations reported and summarized below are not necessarily indicative of future operating results . this discussion also contains forward-looking statements that reflect our current views with respect to future events and financial performance . our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors , such as those set forth under item 1a . “ risk factors ” and located earlier in this annual report . executive summary our business strategy we are an international offshore energy company that provides specialty services to the offshore energy industry , with a focus on well intervention and robotics operations . since 2008 we have focused on improving our balance sheet and increasing our liquidity through dispositions of non-core business assets and the related repayment of a significant portion of our indebtedness , as well as the reduction in our capital spending through 2011. we have substantially finalized this process with the sale of ert in february 2013 and the sale of our two remaining pipelay vessels in mid-2013 . as such , we believe that we are now positioned for growth and expansion . 33 our focus is on expanding our well intervention and robotics businesses . we believe that focusing on these services will deliver higher long-term financial returns to us than the businesses and assets that we have chosen to monetize . we are making strategic investments that expand our service capabilities or add capacity to existing services in our key operating regions . our well intervention fleet has expanded with the newly converted well intervention vessel , the helix 534 , being placed in service in february 2014 and the chartering of the skandi constructor , which has been fully equipped and integrated into our north sea well intervention operations . our well intervention fleet will expand following the completion of the two newbuild semisubmersible vessels currently under construction , the q5000 and the q7000 , and the delivery of two newbuild chartered monohull vessels in connection with the recently announced agreements with petrobras . in addition , we are expanding our robotics operations by acquiring additional rovs and trenchers as well as taking delivery of a newbuild chartered rov support vessel , the grand canyon . in 2013 , we entered into charter agreements for two similar vessels , the grand canyon ii and the grand canyon iii , which are expected to be delivered in 2014 and 2015 , respectively . we also chartered the rem installer , which was delivered to us in july 2013. economic outlook and industry influences demand for our services is primarily influenced by the condition of the oil and gas industry , and in particular , the willingness of oil and gas companies to make capital expenditures for offshore exploration , drilling and production operations . the performance of our business is also largely dependent on the prevailing market prices for oil and natural gas , which are impacted by global economic conditions , hydrocarbon production and capacity , geopolitical issues , weather , and several other factors , including but not limited to : worldwide economic activity , including available access to global capital and capital markets ; demand for oil and natural gas , especially in the united states , europe , china and india ; economic and political conditions in the middle east and other oil-producing regions ; the effect of regulations on offshore gulf of mexico oil and gas operations ; actions taken by opec ; the availability and discovery rate of new oil and natural gas reserves in offshore areas ; the exploration and production of shale oil and natural gas ; the cost of offshore exploration for and production and transportation of oil and gas ; the ability of oil and natural gas companies to generate funds or otherwise obtain external capital for exploration , development and production operations ; the sale and expiration dates of offshore leases in the united states and overseas ; technological advances affecting energy exploration production transportation and consumption ; weather conditions ; environmental and other governmental regulations ; and domestic and international tax policies . we have experienced slow but steady global economic growth during 2013. this global economic growth has been periodically interrupted with periods of strong volatility that tend to disrupt the global markets for a short duration before the markets and global economies resume their collective general slow upward trend . in the fourth quarter of 2013 , some of these market disruptions included the u.s. federal reserve 's announcement of the tapering of its multi-year “ quantitative easing ” program and more recently the disruptions in certain emerging market nations and the increasing concerns over the liquidity situation of the banking system within china . story_separator_special_tag intercompany segment revenues during the years ended december 31 , 2013 and 2012 are as follows ( in thousands ) : replace_table_token_13_th intercompany segment profit during the years ended december 31 , 2013 and 2012 is as follows ( in thousands ) : replace_table_token_14_th in reviewing the discussion below of our results of operations , please refer to the tables above and note 14 for supplemental information regarding our business segment results . this discussion specifically refers to our well intervention , robotics , subsea construction and production facilities segments . we recently sold our remaining subsea construction vessels and related equipment ( note 2 ) . information regarding our former oil and gas segment is presented under “ discontinued operations — oil and gas ” below and in note 3 . 37 revenues . our revenues increased by 4 % in 2013 as compared to 2012 reflecting year-over-year revenue increases in each of our well intervention , robotics and production facilities segments offset in part by the substantial decrease in our subsea construction revenues as a result of the sale of our two remaining subsea construction pipelay vessels in mid-2013 ( note 2 ) . our well intervention revenues increased by 20 % in 2013 as compared to 2012 primarily reflecting the addition of a chartered vessel , the skandi constructor , to our north sea fleet and increased utilization of our three other well intervention vessels . the higher utilization rates in 2013 primarily reflect fewer idle days associated with regulatory dry docks in 2013 ( the well enhancer for 24 days ) as compared to 2012 ( the q4000 for 70 days , the seawell for 52 days and the well enhancer for 52 days ) . in december 2013 , the well enhancer commenced an additional regulatory dry dock , which has been completed and the vessel returned to service in late january 2014. our well intervention vessels have a relatively full schedule of backlog work in 2014. the seawell and the skandi constructor are both expected to go into dry dock in december 2014. our robotics revenues increased by 1 % in 2013 as compared to 2012 primarily reflecting the greater number of rovs owned and higher rovdrill revenues . however , robotics revenues were adversely affected by a decrease in the number of spot vessel opportunities in 2013 as compared to those in 2012 , a reduction in utilization rates resulting from greater than usual seasonal declines in the north sea in early 2013 and lower year-over-year trenching activities associated with the deferral of many previously anticipated 2013 trenching projects in the north sea region to 2014 and beyond . although trenching revenues were disappointing in 2013 , we are beginning to contract such work in our 2014 schedule . our subsea construction revenues decreased by 63 % in 2013 as compared to 2012 reflecting the sale of both the caesar and the express in mid-2013 . our production facilities revenues increased by 10 % in 2013 as compared to 2012 , which reflects a substantial increase in our total revenues under the fee arrangement with ert for the use of the hp i to process production from the phoenix field , which was revised following our sale of ert to a third party in february 2013. revenues generated by the hp i were eliminated in consolidation prior to the sale of ert . the quarterly hfrs retainer fee also increased effective april 1 , 2013 as a result of a new set of four-year agreements . gross profit . our gross profit increased significantly in 2013 as compared to 2012. in 2012 , we recorded asset impairment charges of $ 177.1 million , including $ 157.8 million for the caesar and related mobile pipelay equipment , $ 14.6 million for the intrepid , and $ 4.6 million for well intervention assets associated with our former operations in australia ( note 2 ) . absent the effect of the related impairment charges , our gross profit increased by 15 % in 2013 as compared to 2012. our well intervention gross profit increased by 42 % in 2013 as compared to 2012 primarily reflecting revenue increases as a result of the addition of the skandi constructor and improved utilization rates in 2013. our robotics gross profit decreased by 14 % in 2013 as compared to 2012 reflecting the performance of a high volume of lower gross margin work in an effort to reduce the idle time of our robotics assets . the increased pressure of this business reflected a tight market in the north sea region in early 2013 and a light trenching market throughout 2013 following a good year of such activity in 2012. as noted previously , we are now beginning to contract trenching work for 2014 and thus we believe that such activity for 2014 will be more closely correlated with 2012 than the lower levels we achieved in 2013. the increase in subsea construction gross profit in 2013 as compared to 2012 primarily reflects the $ 172.4 million of impairment charges we recorded in 2012 , offset in part by our pipelay vessels only being in operation for the first half of 2013 prior to their sale as compared to a full year of operations in 2012. our production facilities gross profit increased by 25 % in 2013 as compared to 2012. the positive variance reflects both the increased processing fees under the revised contract with ert following the completion of its sale in february 2013 , and the higher retainer fee for the hfrs agreements which went into effect in april 2013. loss on commodity derivative contracts . in december 2012 , following the announcement of the sale of ert , we de-designated our oil and gas commodity derivative contracts and interest rate swap contracts as hedging instruments ( note 16 ) .
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business activity summary during the four year period between 2009 and 2012 , we enhanced our financial position via the generation of approximately $ 615 million in pre-tax proceeds primarily from dispositions of non-core business assets in order to strategically grow our core businesses . these dispositions include approximately $ 55 million from the sale of individual oil and gas properties , over $ 500 million from the sale of our stockholdings in cal dive and $ 25 million from the sale of our former reservoir consulting business . in october 2012 , we entered into an agreement to sell our two remaining pipelay vessels , the caesar and the express , and other related pipelay equipment for $ 238.3 million . in june 2013 , we completed the sale of the caesar and related equipment for $ 138.3 million , which amount included $ 30 million of funds deposited with us at the time the agreement was entered into by the parties . we used $ 80.1 million of the proceeds from the sale of the caesar to reduce our indebtedness under our former credit agreement and we are investing the remainder in our continuing operations , including supporting the growth of our well intervention and robotics operations . in july 2013 , we completed the sale of the express for $ 100 million , including the remaining $ 20 million of previously deposited funds . in february 2013 , we sold ert for $ 624 million plus additional consideration in the form of overriding royalty interests in ert 's wang well and certain exploration prospects . in january 2014 , we closed the sale of our spoolbase property located in ingleside , texas for $ 45 million to the same group of companies that acquired the caesar and the express .
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if left uncorrected , these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution 's credit position at some future date . special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification . substandard . loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged , if any . loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt . they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected . doubtful . loans classified as doubtful have all the weaknesses inherent in those classified as substandard , with the added characteristic that the weaknesses make collection or liquidation in full , on the basis of currently existing facts , conditions , and values , highly questionable and improbable . loans not meeting the criteria above that story_separator_special_tag the following presents a discussion and analysis of farmers ' financial condition and results of operations by its management . the review highlights the principal factors affecting earnings and the significant changes in balance sheet items for the years 20 13 , 2012 and 2011. financial information for prior years is presented when appropriate . the objective of this financial review is to enhance the reader 's understanding of the accompanying tables and charts , the consolidated financial statements , notes to financial statements , and financial statistics appearing elsewhere in this annual report on form 10-k. where applicable , this discussion also reflects management 's insights of known events and trends that have or may reasonably be expected to have a material effect on farmers ' business , financial condition or results of operations . cautionary note regarding forward looking statements discussions in this annual report on form 10-k that are not statements of historical fact ( including statements that include terms such as “ will , ” “ may , ” “ should , ” “ believe , ” “ expect , ” “ anticipate , ” “ estimate , ” “ project , ” intend , ” and “ plan ” ) are forward-looking statements that involve risks and uncertainties . any forward-looking statement is not a guarantee of future performance , and actual future results could differ materially from those contained in forward-looking in formation . factors that could cause or contribute to such differences include , without limitation , risks and uncertainties detailed from time to time in farmers ' filings with the securities and exchange commission , including without limitation the risk factors disclosed in item 1a , “ risk factors ” of this annual report on form 10-k. many of these factors are beyond the company 's ability to control or predict , and readers are cautioned not to put undue reliance on those forward-looking statements . the following list , which is not intended to be an all-encompassing list of risks and uncertainties affecting the company , summarizes several factors that could cause the company 's actual results to differ materially from those anticipated or expected in these forward-looking statements : general economic conditions in market areas where farmers conducts business , which could materially impact credit quality trends ; business conditions in the banking industry ; the regulatory environment ; 24 fluctuations in interest rates ; demand for loans in the market areas where farmers conducts business ; rapidly changing technology and evolving banking industry standards ; competitive factors , including increased competition with regional and national financial institutions ; new service and product offerings by competitors and price pressures ; and other similar items . other factors not currently anticipated may also materially and adversely affect farmers ' business , financial condition , results of operations or cash flows . there can be no assurance that future results will meet expectations . while the company believes that the forward-looking statements in this annual report on form 10-k are reasonable , the reader should not place undue reliance on any forward-looking statement . in addition , these statements speak only as of the date made . farmers does not undertake , and expressly disclaims , any obligation to update or alter any statements whether as a result of new information , future events or otherwise , except as may be required by applicable law . story_separator_special_tag roman ; font-weight : normal ; font-style : normal ; text-transform : none ; font-variant : normal ; '' > . the increase in noninterest income is due to several factors . retirement plan consulting fees increased to $ 477 thousand compared to none in 2012 reflecting the income earned from the newly acquired entity , national associates , inc. ( “ nai ” ) . service charges on deposit accounts increased from $ 2.0 million in 2012 to $ 2.4 million in 2013 as the company made adjustments to the service charge structure of its deposit accounts . bank owned life insurance income increased $ 170 thousand as the company received tax free death benefits , which are included in income . insurance agency commissions also increased $ 119 thousand and trust fees increased $ 86 thousand , as management continues to focus on diversifying revenue sources to decrease the reliance on net interest income as the main driver of revenue . other operating income also increased $ 406 thousand , which is primarily the result of a gain on the sale of land that was owned by the company . noninterest expenses noninterest expense for 2013 was $ 39.1 million , compar ed to $ 35.8 million in 2012 , representing an increase of $ 3.3 million , or 9.2 % . most of the increase was a result of an 11.7 % increase in salary and employee benefits , mainly due to $ 1.3 million recorded in severance costs . story_separator_special_tag most of the increase was a result of a $ 12.8 % increase in salary and employee benefits , resulting from a higher number of employees in current year and a $ 561 thousand or 34.6 % increase in health insurance costs . the higher employee count is attributed primarily to our secondary mortgage project expansion . occupancy and equipment expense also increased $ 578 thousand as a result of depreciation expense and small equipment costs related to new facilities . professional fees increased 10 % as a result of corporate legal and consulting fees related to compensation practices and other business advisory fees . there was also an $ 86 thousand or 1.6 % decrease in other operating expenses in 2012 compared to 2011 , mainly related to new facilities opened in 2012. these expense increases were offset by $ 1.2 million in prepayment penalties paid to federal home loan bank of cincinnati in the prior year , compared to none in 2012. state and local taxes also increased $ 248 thousand or 26.0 % as a result of an increase in intangible tax paid to the state of ohio due to higher levels of stockholders ' equity . core processing charges also increased $ 126 thousand due to a higher number accounts and new banking products for our customers . income taxes income tax expense totaled $ 3.1 million for 2012 and $ 2.5 million for 2011. the effective income tax rate was 23.5 % for 2012 and 21.6 % for 2011. liquidity farmers maintains , in the opinion of management , liquidity sufficient to satisfy depositors ' requirements and meet the credit needs of customers . the company depends on its ability to maintain its market share of deposits as well as acquiring new funds . the company 's abili ty to attract deposits and borrow funds depends in large measure on its profitability , capitalization and overall financial condition . principal sources of liquidity include assets considered relatively liquid , such as short-term investment securities , federal funds sold and cash and due from banks . 27 along with its liquid assets , farmers has additional sources of liquidity available which help to insure that adequate funds are available as needed . these other sources include , but are not limited to , loan repayments , the ability to obtain deposits through the adjustment of interest rates and the purchasing of federal funds and borrowings on approved lines of credit at two major dome stic banks . at december 31 , 2013 , farmers had borrowed $ 6 million against these lines of credit . management feels that its liquidity position is more than adequate and will continue to monitor the position on a monthly basis . the company also has additional borrowing capacity with the fhlb , as well as access to the federal reserve discount window , which provides an additional source of funds . the company views its membership in the fhlb as a solid source of liquidity . as of december 31 , 2013 , the bank is eligible to borrow an additional $ 84.6 million from the fhlb under various fixed rate and variable rate credit facilities . advances outstanding from the fhlb at december 31 , 2013 amounted to $ 19.8 million . farmers ' primary investing activities are originating loans and purchasing securities . during 2013 , net cash used in investing activities amounted to $ 28.0 million , compared to $ 82.3 million in 2012. net increases in loans were $ 45.5 million in 2013 , compared to $ 19.3 in 2012. the cash used by lending activities during 2013 can be attributed to the activity in the commercial real estate , residential real estate and indirect loan portfolios . purchases of securities available for sale were $ 149.9 million in 2013 , compared to $ 237.4 million in 2012. proceeds from maturities and sales of securities available for sale were $ 169.0 million in 2013 , compared to $ 175.7 million in 2012. there was $ 2.1 million used to purchase national associates inc. during the year ended december 31 , 2013. farmers ' primary financing activities are obtaining deposits , repurchase agreements and other borrowings . net cash from financ ing activities amounted to $ 3.5 million for 2013 , compared to $ 56.7 million in 2012. the majority of this change can be attributed to the change in deposits . deposits provided $ 78.9 million during 2012 and used $ 3.8 million during 2013. short-term borrowings increased $ 1.7 million in 2013 compared to an $ 18.2 million decrease in 2012. there was $ 10 million in new federal home loan bank long-term advances during 2013 compared to none last year . the company used $ 1.6 million for the acquisition of treasury shares during 2013 compared to none in 2012. loan portfolio maturities and sensitivities of loans to interest rates the following schedule shows the composition of loans and the percentage of loans in each category at the dates indicated . balances include unamortized loan origination fees and costs . replace_table_token_7_th the following schedule sets forth maturities based on remaining scheduled repayments of principal for commercial and commercial real estate loans listed above as of december 31 , 2013 : replace_table_token_8_th the amounts of commercial and commercial real estate loans as of december 31 , 2012 , based on remaining scheduled repayments of principal , are shown in the following table : replace_table_token_9_th total loans were $ 630.7 million at year-end 2013 , compared to $ 586.6 million at year-end 2012. this represents an increase of 7.52 % . the increase in loans has mainly occurred in the commercial real estate , residential real estate , and indirect loan portfolios .
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results of operations comparison of operating results for the years ended december 31 , 2013 and 2012. the company 's net income totaled $ 7.8 million during 2013 , compared to $ 9.9 million for 2012 . on a per share basis , diluted earnings per share were $ 0.41 as compared to $ 0.53 diluted earnings per share for 2012. common comparative ratios for results of operations include the return on average assets and return on average stockholders ' equity . for 2013 , the return on average equity was 6.66 % , compared to 8.42 % for 2012. the return on average assets was 0.68 % for 2013 and 0.89 % for 2012. the results for 2013 included $ 863 thousand in gains on sales of securities , compared to $ 1.1 million in 2012. during 2013 , the company completed the acquisition of all outstanding stock of the retirement planning consultancy national associates , inc. of cleveland , ohio . the company is a leading independent consultant to retirement plans and offers actuarial , plan design , compliance and administrative services . as a third party administrator , nai provides services to 401 ( k ) , defined benefit , profit sharing , flexible spending , 403 ( b ) , esop and other plans . in acquiring nai , the company assumes a professional staff that is highly qualified and credentialed . synergies and the cost savings resulting from the combining of the operations of the companies will help drive an increase of non-interest income . net interest income net interest income , the principal source of the company 's earnings , represents the difference between interest income on interest-earning assets and interest expense on intere st-bearing liabilities . for 2013 , taxable equivalent net interest income decreased $ 822 thousand , or 2.12 % , from 2012. interest-earning assets averaged $ 1.061 billion during 2013 , increasing $ 30.4 million , or 2.95 % , compared to 2012. the company 's interest-bearing liabilities decreased 0.34 % from $ 881.6
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each share of senior preferred stock was automatically convertible into common stock immediately upon the earlier of ( i ) the company 's sale of its common stock in a firm story_separator_special_tag story_separator_special_tag roman ; font-size:10pt ; font-style : normal ; text-transform : none ; font-variant : normal ; '' > key components of our results of operations and financial condition sales we primarily generate revenue from the sales of our products . as discussed further in “ critical accounting policies and significant judgments and estimates ” below , we recognize revenue when persuasive evidence of an arrangement exists , delivery has occurred , the fee is fixed or determinable , and collectability is reasonably assured . we generally recognize sales at the time of shipment to our customers , provided that all other revenue recognition criteria have been met . although currently insignificant , we may also generate service revenue derived from agreements to provide design , engineering , and testing to a customer . cost of goods sold the cost of goods sold reflects the cost of producing antenna products that are shipped for our customers ' devices . this primarily includes manufacturing costs of our products payable to our third-party contract manufacturers . the cost of goods sold that we generate from services provided to customers primarily includes personnel costs . operating expenses our operating expenses are classified into three categories : research and development , sales and marketing , and general and administrative . for each category , the largest component is personnel costs , which includes salaries , employee benefit costs , bonuses , and stock-based compensation . operating expenses also include allocated overhead costs for depreciation of equipment , facilities and information technology . allocated costs for facilities consist of leasehold improvements and rent . operating expenses are generally recognized as incurred . research and development . research and development expenses primarily consist of personnel and facility-related costs attributable to our engineering research and development personnel . these expenses include work related to the design , engineering and testing of antenna designs , and antenna integration , validation and testing of customer devices . these expenses include salaries , including stock-based compensation , benefits , bonuses , travel , communications , and similar costs , and depreciation and allocated operating expenses such as office supplies , 44 premises expenses , insurance and corporate legal expenses . we may also incur expenses from consultants and for prototyping new antenna solutions . we expect research and development expense to increase in absolute dollars as we inc rease our research and development headcount to further strengthen and enhance our antenna design and integration capabilities and invest in the development of new solutions and markets , although our research and development expense may fluctuate as a perc entage of total sales . sales and marketing . sales and marketing expenses primarily consist of personnel and facility-related costs for our sales , marketing , and business development personnel , stock-based compensation and bonuses earned by our sales personnel , and commissions earned by our third-party sales representative firms . sales and marketing expense also includes the costs of trade shows , marketing programs , promotional materials , demonstration equipment , travel , recruiting , and allocated costs for certain facilities . we expect sales and marketing expense to continue to increase in absolute dollars as we increase the size of our sales and marketing organizations in support of our investment in our growth opportunities , although our sales and marketing expense may fluctuate as a percentage of total sales . general and administrative . general and administrative expenses primarily consist of personnel and facility- related costs for our executive , finance , and administrative personnel , including stock-based compensation , as well as legal , accounting , and other professional services fees , depreciation , and other corporate expenses . we have recently incurred , and expect to continue to incur , additional expenses as we grow our operations and operate as a public company , including higher legal , corporate insurance and accounting expenses , and the additional costs of achieving and maintaining regulatory compliance . we expect general and administrative expense to increase in absolute dollars due to additional legal fees and accounting , insurance , investor relations , and other costs associated with being a public company , as well as , due to costs associated with growing our business , although our general and administrative expense may fluctuate as a percentage of total sales . other income interest income . interest income consists of interest from our cash and cash equivalents . interest expense . interest expense consists of interest on our outstanding debt and amortization of loan fees . fair market value adjustments—warrants . consists of the change in fair value of our convertible preferred stock warrant liability . the preferred stock warrants are classified as liabilities on our balance sheets and their estimated fair value is re-measured at each balance sheet date using a combination of an option-pricing model and current value model under the probability-weighted return method , with the corresponding change recorded within other expense ( income ) . in may 2016 , the warrants were amended such that they became immediately exercisable into shares of our common stock . concurrent with such amendment , the holders of the outstanding warrants elected to net exercise the warrants , and were granted an aggregate of 127,143 shares of our common stock . following such net exercise , there will be no future re-measurement of the warrant liability . provision for income taxes provision for income taxes consists of federal and state income taxes . in assessing the realizability of deferred tax assets , management considers 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 . story_separator_special_tag sales and marketing sales and marketing expense increased for the year ended december 31 , 2016 compared to the year ended december 31 , 2015 primarily due to a $ 1.1 million increase in personnel expenses associated with headcount increases , $ 0.2 million increase in travel and entertainment expenses , and $ 0.2 million increase in miscellaneous sales and marketing expenses . the increase for the year ended december 31 , 2015 compared to the year ended december 31 , 2014 was primarily due to an increase of $ 0.4 million in personnel expenses associated with headcount and bonus increases and an increase of $ 0.1 million in travel and entertainment expenses . general and administrative general and administrative expense increased for the year ended december 31 , 2016 compared to the year ended december 31 , 2015 , primarily due to an increase of $ 0.4 million due to the amortization of the intangible assets acquired with the acquisition of certain north american assets from skycross , an increase of $ 0.3 million in personnel expenses associated with headcount increases and bonus payouts and an increase of $ 0.2 million of indirect costs related to our public equity offerings . general and administrative expense increased for the year ended december 31 , 2015 compared to the year ended december 31 , 2014 primarily due to an increase of $ 0.4 million in personnel expenses associated with an increase in headcount and an increase in bonus expense and an increase of $ 0.1 million in costs related to the acquisition of certain north american assets from skycross . 48 other expense ( income ) replace_table_token_11_th replace_table_token_12_th other income increased $ 0.2 million from december 31 , 2015 to december 31 , 2016 primarily due to the conversion of warrants into common stock and related adjustments to record the warrants to their fair market value in 2016. this increase was offset by $ 0.1 million increase in interest expense on our outstanding loans . the decrease in other income of $ 2.7 million from december 31 , 2014 to december 31 , 2015 was primarily driven by $ 2.7 million in fair market value adjustments for the warrants in 2014 compared to only $ 0.1 million in fair market value adjustments in 2015. liquidity and capital resources we had cash and cash equivalents of $ 45.2 million at december 31 , 2016. cash and cash equivalents consist of cash . we did not have any short-term or long-term investments . in august 2016 , we completed our initial public offering , or ipo , and received net proceeds of approximately $ 10.8 million , including the sale of shares pursuant to the exercise of the underwriters ' over-allotment option and after deducting underwriting discounts and commissions and offering-related transaction costs . in december 2016 , we completed our public offering of common stock and received net proceeds of approximately $ 26.0 million , including the sale of shares pursuant to the exercise of the underwriters ' over-allotment option and after deducting underwriting discounts and commissions and estimated offering-related transaction costs . before 2013 , we had incurred net losses in each year since our inception . as a result , we had an accumulated deficit of $ 43.6 million at december 31 , 2016. since inception , we have primarily financed our operations and capital expenditures through private sales of preferred stock , convertible promissory notes and cash flows from our operations . we have raised an aggregate of $ 29.5 million in net proceeds from the issuance of our preferred stock and convertible promissory notes and $ 36.8 million from the sale of common stock in public offerings . as of december 31 , 2016 , we had approximately $ 2.7 million outstanding under a term loan and approximately $ 0.1 million outstanding under a growth capital term loan pursuant to our amended and restated loan and security agreement with silicon valley bank . in addition , under our amended and restated loan and security agreement with silicon valley bank , we have a revolving line of credit for $ 3.0 million . as of december 31 , 2016 , there was no balance owed on the line of credit . in december 2013 , we amended our amended and restated loan and security agreement with silicon valley bank to provide for growth capital term loans of $ 750,000. the growth capital term loan required interest only payments through june 30 , 2014 at which time it was to be repaid in 32 equal monthly installments of interest and 49 principal . the growth capital term loan matures on february 1 , 2017 , at which time all unpaid principal and accrued and unpaid interest is due . the growth capital term loan interest rate is 6.5 % . we must maintain a liquidity ratio of cash and cash equivalents plus accounts receivable to outstanding debt under the loan and security agreement of 1.00 to 1.00 or greater . the line of credit is available as long as we maintain a liquidity ratio of cash and cash equivalents plus accounts receivable to outstanding debt under the loan and security agreement of 1.25 to 1.00. if this liquidity ratio is not met , the line of credit will only allow for maximum advances of 80 % of the aggregate face amount of all eligible receivables . the line of credit bears interest at the u.s. prime rate ( 3.75 % as of december 31 , 2016 ) plus 1.25 % , and matures in april 2018 , subject to certain minimum ebitda requirements in each of september 2016 , december 2016 and march 2017. the lender has a first security interest in all our assets , excluding intellectual property , for which the lender has received a negative pledge . the amended and restated loan and security agreement contains customary affirmative and negative c ovenants and events of default applicable to us and any subsidiaries .
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of financial condition and results of operations you should read the following discussion and analysis of our financial condition and operating results together with our financial statements and related notes included elsewhere in this annual report . this discussion and analysis contains forward-looking statements based upon current beliefs , plans and expectations that involve risks , uncertainties and assumptions . 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 ” or in other parts of this annual report . overview we are a leading provider of embedded antenna technologies used to enable high performance wireless networking across a broad range of home , enterprise , and industrial devices . our innovative antenna systems open up exciting new possibilities in wireless services requiring high speed throughput , broad coverage footprint , and carrier grade quality of service . our antennas are found in devices deployed in carrier , enterprise , and residential wireless networks and systems , including set top boxes , access points , routers , gateways , media adapters , and digital televisions . through our pedigree in the design , integration , and testing of high performance embedded antenna technology , we have become a leading provider to the residential wireless local area networking , also known as wlan or wi-fi , antenna market , supplying to leading carriers , original equipment manufacturers , or oems , original design manufacturers , or odms , and system designers who depend on us to achieve their wireless performance goals . we also develop embedded antenna technology for adjacent markets , including enterprise wi-fi systems for on premises and cloud-based services , small cellular applications using long-term evolution , or lte , and digital enhanced cordless telecommunications , or dect , and internet of things , or iot , devices and automotive connectivity applications . we shipped approximately 159 million antenna products worldwide in 2016 used in approximately 54 million devices .
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overview of 2015 due to increased marketing , expansion of commercial banking officers and markets , and the introduction of new commercial loan and lease products , total commercial loans increased by 7.8 % in 2015 , with diversified growth in multifamily loans , commercial and industrial loans and commercial leases . since 2012 , the company has experienced an average 9.4 % annual net increase in commercial loan balances . the deposit portfolio remained stable during 2015 as we managed our deposit portfolio to retain and increase higher value core deposit relationships and maintain the lowest practicable cost of funds . we ended 2015 with our highest-ever core deposit ratio at 82 % of total deposits . our net interest margin remained stable during 2015 as our loan growth offset the impact of lower market yields on loan originations and loan renewals , and our decision not to renew certain higher yielding loans based on their risk characteristics . noninterest income from customer loan , deposit , wealth management and trust fees increased , while income from mortgage banking operations declined as planned . we reduced our noninterest expense by 5.6 % in 2015 , focusing principally on efficiencies related to staffing , facilities and our ongoing initiatives to utilize technology-based transaction processing and customer information delivery capabilities . at the same time , we increased advertising , marketing and staffing in all aspects of commercial lending to further accelerate commercial loan and lease growth . we successfully executed our plan to reduce nonperforming assets and future nonperforming asset expenses during 2015. nonperforming loans to total loans declined from 1.03 % at december 31 , 2014 to 0.29 % at december 31 , 2015 of total loans and our ratio of nonperforming assets to total assets declined to 0.70 % at december 31 , 2015. in addition , consistent with our practices in previous years , we actively managed our loan portfolio to exit $ 24.5 million of multi-family and commercial real estate relationships based on their risk characteristics . the company has a strong capital position , and is well-capitalized under all applicable current and anticipated regulatory standards . in particular , the company 's tier 1 risk-based capital ratio continues to benefit from the company 's emphasis on originating high-quality multifamily loans that are eligible for the 50 % risk-weight category under the risk-based capital rules , and selected commercial equipment leases to government entities that are eligible for the 20 % risk-weight category . the company 's tangible book value per share increased to $ 10.40 from $ 10.15 in 2014. we increased dividends paid to shareholders by $ 2.5 million and reduced the total shares outstanding by 804,649 during 2015. outlook for 2016 we begin 2016 in a strong financial condition and with positive momentum . the combined effect of continued low market interest rates and yields and competitive forces in the chicago metropolitan area and in our other business units is expected to maintain pressure on asset yields throughout 2016. the company 's interest rate risk position is neutral to slightly asset-sensitive , such that an increase in market interest rates will tend to be a positive factor in the company 's earnings . our focus in 2016 will be on balance sheet growth as we continue to deploy our available surplus capital . we will continue the evolution of our loan portfolio towards a configuration that permits better growth rates in multiple , independent segments with comparable risk-adjusted yields . we expect to expand our marketing of new deposit products to further improve deposit-related revenue in 2016 ; in addition , we may also be successful in further increasing revenues related to trust , non-deposit wealth management , and commercial property and casualty insurance sales due to new product capabilities and increased dedicated sales capacity . core noninterest expense is expected to hold steady or continue to decline slightly despite increases in advertising and marketing expenses related to loan and deposit growth initiatives . through these actions , we hope to further improve our core operating earnings in 2016 to a level consistent with , or in excess of , peer institutions in our market . 23 story_separator_special_tag style= '' line-height:120 % ; text-align : justify ; font-size:10pt ; '' > replace_table_token_4_th _ ( 1 ) net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities . ( 2 ) net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities . ( 3 ) net interest margin represents net interest income divided by average total interest-earning assets . 25 comparison of year 2015 to 2014 . net interest income decreased by $ 155,000 , or 0.3 % , to $ 46.1 million for the year ended december 31 , 2015 , from $ 46.3 million for the year ended december 31 , 2014 . our net interest rate spread increased one basis point to 3.36 % for the year ended december 31 , 2015 , from 3.35 % for 2014 . our net interest margin increased by three basis points to 3.43 % for the year ended december 31 , 2015 , from 3.40 % for 2014 . our average interest-earning assets decreased $ 16.8 million to $ 1.344 billion for the year ended december 31 , 2015 , from $ 1.361 billion for the year ended 2014 . our average interest-bearing liabilities decreased $ 89.8 million to $ 1.016 billion for the year ended december 31 , 2015 , from $ 1.106 billion for 2014 . comparison of year 2014 to 2013 . net interest income increased by $ 564,000 , or 1.2 % , to $ 46.3 million for the year ended december 31 , 2014 , from $ 45.7 million for the year ended december 31 , 2013 . our net interest rate spread increased seven basis points to 3.35 % for the year ended december 31 , 2014 , compared to 3.28 % for 2013 . story_separator_special_tag for the year ended december 31 , 2015 , noninterest expense decreased by $ 2.5 million , or 5.6 % , to $ 41.9 million , compared to $ 44.5 million for the year ended december 31 , 2014 . compensation and benefits expense decreased $ 652,000 , or 2.9 % , to $ 22.2 million for the year ended december 31 , 2015 , compared to $ 22.9 million in 2014 . the decrease was due in part to the reduction in full time equivalent employees to 251 at december 31 , 2015 from 269 at december 31 , 2014 , the impact of which was partially offset by a $ 600,000 increase in stock-based compensation to $ 1.7 million for the year ended december 31 , 2015 , from $ 1.1 million for 2014 . noninterest expense for 2015 included $ 1.7 million of nonperforming asset management and oreo expenses , compared to $ 2.2 million for 2014 . nonperforming asset management expenses decreased $ 157,000 , or 18.7 % , to $ 681,000 for the year ended december 31 , 2015 , compared to $ 838,000 in 2014 . the decrease was primarily due to a decline in nonperforming assets and a corresponding decline in expenses relating to resolutions and accelerated dispositions of nonperforming assets . the most significant decrease in nonperforming asset management expense related to real estate taxes , which totaled $ 247,000 for the year ended december 31 , 2015 , compared to $ 417,000 for 2014 . oreo expenses for the year ended december 31 , 2015 totaled $ 1.1 million , and included a $ 548,000 valuation adjustment to oreo properties , compared to a $ 438,000 valuation adjustment in 2014 . noninterest expense for the for the year ended december 31 , 2015 included a provision of $ 80,000 for mortgage representation and warranty reserve for mortgage loans sold , compared to a $ 73,000 provision for 2014 . comparison of year 2014 to 2013 . for the year ended december 31 , 2014 , noninterest expense decreased by $ 6.8 million , or 13.3 % , to $ 44.5 million from $ 51.3 million for 2013 . compensation and benefits expense decreased $ 3.3 million , or 12.7 % , to $ 22.9 million for the year ended december 31 , 2014 , compared to $ 26.2 million in 2013. the decrease was due in substantial part to the reduction in full time equivalent employees to 269 at december 31 , 2014 from 301 at december 31 , 2013. stock-based compensation for the year ended december 31 , 2014 was $ 1.1 million , compared to $ 933,000 for 2013. this increase was attributable to an increase in esop expense resulting from the $ 2.70 increase in the company 's stock price that occurred between december 31 , 2013 and december 31 , 2014. noninterest expense for 2014 included $ 2.2 million of nonperforming asset management and oreo expenses , compared to $ 4.3 million for 2013. nonperforming asset management expenses decreased $ 1.8 million , or 68.2 % , to $ 838,000 for the year ended december 31 , 2014 , compared to $ 2.6 million in 2013. the decrease was primarily due to a decline in nonperforming assets and a corresponding decline in expenses relating to resolutions and accelerated dispositions of nonperforming assets . the most significant decreases in nonperforming asset management expense related to legal expenses , receiver fees , and real estate taxes , which totaled $ 665,000 for the year ended december 31 , 2014 , compared to $ 2.5 million for 2013. oreo expenses for the year ended december 31 , 2014 totaled $ 1.4 million , and included a $ 438,000 valuation adjustment to oreo properties , compared to a $ 550,000 valuation adjustment in 2013. noninterest expense for the year ended december 31 , 2014 included a provision of $ 73,000 for mortgage representation and warranty reserve for mortgage loans sold , compared to a $ 118,000 provision for 2013 , and $ 53,000 in compensatory fees and final settlements of loans serviced for others . 28 noninterest expense for the year ended december 31 , 2013 included the payment of $ 203,000 of settlements concerning two sold mortgage loans . income taxes comparison of year 2015 to 2014 . for the year ended december 31 , 2015 we recorded income tax expense of $ 5.4 million , compared to an income tax benefit of $ 31.3 million recorded in 2014 , which included the full recovery of the valuation allowance of $ 35.1 million we established for deferred tax assets in 2011. the effective tax rate for the year ended december 31 , 2015 was 38.48 % . comparison of year 2014 to 2013 . for the year ended december 31 , 2014 we recorded an income tax benefit of $ 31.3 million , which included the full recovery of the valuation allowance of $ 35.1 million we established for deferred tax assets in 2011. we reversed the valuation allowance for deferred tax assets as of december 31 , 2014 based on management 's determination that it was more likely than not that the company would realize the tax attributes underlying the deferred tax assets before they expired . in making this determination , management considered all available negative and positive evidence . for the year ended december 31 , 2013 , we recorded no income tax expense or benefit due to the existence of a full valuation allowance for deferred tax assets . see note 12 of the `` notes to consolidated financial statements '' in item 8 of this form 10-k for further information . excluding the full recovery of the valuation allowance , the effective tax rate for the year ended december 31 , 2014 was 39.13 % .
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results of operation net income comparison of year 2015 to 2014 . we recorded net income of $ 8.7 million for the year ended december 31 , 2015 , compared to net income of $ 40.6 million for 2014 . net income for 2014 included a tax benefit of $ 35.1 million that we recorded to reflect the reversal of a valuation allowance that we established in 2011 for deferred tax assets . excluding this tax benefit , net income for the year ended december 31 , 2014 would have been $ 5.5 million . the $ 3.2 million , or 57.8 % , increase in year over year earnings exclusive of the 2014 tax benefit was primarily due to the combined effect of a $ 2.5 million increase in the recovery of provision for loan losses and a $ 2.5 million decrease in noninterest expense for the year ended december 31 , 2015 . our earnings per share of common stock was $ 0.44 for the year ended december 31 , 2015 , compared to $ 2.01 per share of common stock for the year ended december 31 , 2014 . excluding the tax benefit that we recorded for the recovery of the deferred tax assets valuation allowance , our earnings per share of common stock would have been $ 0.27 for the year ended december 31 , 2014. comparison of year 2014 to 2013 . we recorded net income of $ 40.6 million for the year ended december 31 , 2014 , compared to net income of $ 3.3 million for 2013. net income for 2014 included a tax benefit of $ 35.1 million that we recorded to reflect the reversal of a valuation allowance that we established in 2011 for deferred tax assets . excluding this tax benefit , net income for the year ended december 31 , 2014 would have been $ 5.5 million .
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the total consideration paid to acquire fh consisted of $ 542.0 in cash , 3,283,424 unregistered shares of our common stock and the assumption of net pension and post-retirement liabilities of fh . we financed the cash consideration through a combination of debt financing and cash on hand . 19 we expect the trend in lower capital expenditures , as well as deferred maintenance spending , by many national oil companies , oil majors and refineries to continue in 2018 and impact our project businesses including engineered and refinery valves . however , we expect to see modest growth in other markets we serve including the short-cycle on-shore north american distributed valves market and petrochemical processing market . we received a number of large orders in december 2017 for refinery valves , however , it is uncertain whether this trend will continue in 2018. capital expenditures in the industrial end markets that we serve is expected to grow modestly . we expect to experience lower demand for our products that serve the power generation markets . aerospace and defense end markets are expected to grow as demand for commercial air travel continues to increase and funding on military programs in the u.s. improves in 2018. we do not expect an improvement in the commercial marine sector as global shipbuilding continues to be constrained . we continue to implement actions to mitigate the impact on our earnings with the lower demand and increasingly competitive environment . in addition , we are investing in products and technologies that help solve our customers ' most difficult problems . we expect to further simplify circor by standardizing technology , reducing facilities , consolidating suppliers and achieving world class operational excellence , including working capital management . we believe our cash flow from operations and financing capacity is adequate to support these activities . finally , continuing to attract and retain talented personnel , including the enhancement of our global sales , operations , product management and engineering organizations , remains an important part of our strategy during 2018. basis of presentation all significant intercompany balances and transactions have been eliminated in consolidation . for 2017 , we managed our businesses in three segments : energy , advanced flow solutions and fluid handling . for 2018 , we expect to reorganize our segments by end market : energy , aerospace & defense and industrial . prior year financial statements will be adjusted to reflect this new organization basis beginning in the first quarter of 2018. we operate and report financial information using a 52-week fiscal year ending december 31. the data periods contained within our quarterly reports on form 10-q reflect the results of operations for the 13-week , 26-week and 39-week periods which generally end on the sunday nearest the calendar quarter-end date . critical accounting policies the company 's discussion and analysis of its financial condition and results of operations is based upon its financial statements , which have been prepared in accordance with accounting principles generally accepted in the united states of america . the preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets , liabilities , revenue and expenses and related disclosure of contingent liabilities . on an on-going basis , management evaluates its significant estimates , including those related to contracts accounted for under the percentage of completion method , bad debts , inventories , intangible assets and goodwill , purchase accounting , delivery penalties , income taxes , and contingencies including litigation . management believes the most complex and sensitive judgments , because of their significance to the consolidated financial statements , result primarily from the need to make estimates about the effects of matters that are inherently uncertain . management bases its estimates on historical experience , current market and economic conditions and other assumptions that management believes are reasonable . the results of these estimates form the basis for judgments about the carrying value of assets and liabilities where the values are not readily apparent from other sources . actual results may differ from these estimates under different assumptions or conditions . there have been no significant changes from the methodology applied by management for critical accounting estimates previously disclosed in our annual report on form 10-k for the fiscal year ended december 31 , 2016 . for goodwill , we perform an impairment assessment at the reporting unit level on an annual basis as of the end of our october month end or more frequently if circumstances warrant . in fiscal year 2017 when we performed our analysis , the fair value of each of our reporting units exceeded the respective carrying amount , and no goodwill impairments were recorded . the fair values utilized for our 2017 goodwill assessment exceeded the carrying amounts by more than 20 % for our energy , aerospace , and power , process , & industrial reporting units , respectively . the growth rate assumptions utilized were consistent with growth rates within the markets that we serve . if our results significantly vary from our estimates , related projections , or business assumptions in the future due to change in industry or market conditions , we may be required to record impairment charges . 20 results of operations 2017 compared with 2016 consolidated operations replace_table_token_4_th net revenues in 2017 were $ 661.7 million , an increase of $ 71.5 million from 2016 primarily driven by our october 2016 acquisition of critical flow solutions ( `` cfs '' ) ( $ 43.1 million ) and december 2017 acquisition of fluid handling ( $ 36.5 million ) , partially offset by an operating decline in our energy segment ( as described in detail below ) . segment results the chief operating decision maker ( `` codm '' ) is the function that allocates the resources of the enterprise and assesses the performance of the company 's reportable operating segments . circor has determined that the codm is solely comprised of its ceo , as the ceo has the ultimate responsibility for circor strategic decision-making and resource allocation . story_separator_special_tag these charges represent plant , property , and equipment depreciation related to the step-up in fair value as part of our fh acquisition , intangible amortization in connection with acquisitions subsequent to december 31 , 2011 , and step-up in fair value of inventory acquired as part of our fh acquisition . these charges are recorded in either selling , general , and administrative expenses or cost of revenues based upon the nature of the underlying asset . interest expense , net interest expense increased $ 7.5 million to $ 10.8 million for 2017 . this change in interest expense was primarily due to higher outstanding debt balances during the period as a result of the fh acquisition . we expect to incur higher interest costs in 2018 related to the increase in borrowing as part of the fh acquisition . other expense ( income ) , net other expense , net , was $ 3.7 million for 2017 compared to other income , net of $ 2.1 million in 2016 . the difference of $ 5.8 million was primarily due to the impact of foreign currency fluctuations . comprehensive ( loss ) income comprehensive income increased $ 51.5 million , from a comprehensive loss of $ 0.2 million for the year-ended december 31 , 2016 to comprehensive income of $ 51.3 million for the year-ended december 31 , 2017 , primarily driven by an increase of $ 47.6 million in favorable foreign currency balance sheet remeasurements . these favorable foreign currency balance sheet remeasurements were driven by the euro ( $ 40.6 million ) . as of december 31 , 2017 , we had a cumulative currency translation adjustment of $ 17.5 million regarding our brazil entity . if we were to cease to have a controlling financial interest in the brazil entity , we would incur a non-cash charge of $ 17.5 million , which would be included as a special charge within the results of operations . ( benefit from ) provision for income taxes on december 22 , 2017 , the u.s. government enacted the tax cuts and jobs act ( the “ tax act ” ) . the tax act includes significant changes to the u.s. corporate income tax system including : a federal corporate rate reduction from 35 % to 21 % ; limitations on the deductibility of interest expense and executive compensation ; creation of the base erosion anti-abuse tax ( “ beat ” ) , a new minimum tax ; and the transition of u.s. international taxation from a worldwide tax system to a modified territorial tax system . the change to a modified territorial tax system resulted in a one-time u.s. tax liability on those earnings which have not previously been repatriated to the u.s. ( the “ transition tax ” ) , with future distributions not subject to u.s. federal income tax when repatriated . a majority of the provisions in the tax act are effective january 1 , 2018. in response to the tax act , the sec staff issued guidance on accounting for the tax effects of the tax act . the guidance provides a one-year measurement period for companies to complete the accounting . we reflected the income tax effects of those aspects of the tax act for which the accounting is complete . to the extent our accounting for certain income tax effects of 24 the tax act is incomplete but we are able to determine a reasonable estimate , we recorded a provisional estimate in the financial statements . for items that we can not determine a provisional estimate to be included in the financial statements , we continued to apply the provisions of the tax laws that were in effect immediately before the enactment of the tax act . as the analysis is completed , the ultimate impact may differ from these provisional amounts . in connection with our initial analysis of the impact of the tax act , we have recorded a provisional estimate of $ 0.5 million net tax benefit for the period ended december 31 , 2017. this benefit consists of provisional estimates of zero net expense for the transition tax liability , and $ 0.5 million benefit from the remeasurement of our deferred tax assets/liabilities due to the corporate rate reduction . on a provisional basis , the company does not expect to owe the one-time transition tax liability , based on foreign tax pools that are in excess of u.s. tax rates . we are in process of determining the impact of the tax act on our u.s. foreign tax credit carryforwards ( deferred tax asset ) , and are unable to record a provisional estimate at this time . any adjustment , when determined , could have an adverse impact to our net deferred tax asset . we have not completed our accounting for the income tax effects of certain elements of the tax act . the tax act creates a new requirement that certain income , such as global intangible low-taxed income ( “ gilti ” ) , earned by a controlled foreign corporation must be included in the gross income of its u.s. shareholder . because of the complexity of the new gilti and beat tax rules , we are continuing to evaluate the impact of these provisions and whether taxes due on future u.s. inclusions related to gilti or beat should be recorded as a current period expense when incurred , or factored into the measurement of deferred taxes . as a result , we have not included an estimate of the tax expense or benefit related to these items for the period ended december 31 , 2017. the effective tax rate was - 93 % for 2017 compared to - 4 % for 2016 .
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results of operations 2016 compared with 2015 consolidated operations replace_table_token_10_th net revenues in 2016 were $ 590.3million , a decrease of $ 66.0 million from 2015. the unfavorable effects of currency translation resulted in a decrease in revenues of $ 3.6 million in 2016. sales increased $ 25.1 million due to our 2015 acquisition of schroedahl and 2016 acquisition of cfs . aside from the effects of currency translation and acquisitions , revenues decreased $ 87.5 million ( -13 % ) primarily due to decreased demand in our north american short-cycle energy business . segment results the company uses segment operating income because it helps management understand and evaluate the segments ' operating results and facilitates a comparison of performance for determining compensation . accordingly , the following segment data is reported on this basis . 26 ( in thousands ) 2016 2015 change net revenues energy $ 322,046 $ 383,655 $ ( 61,609 ) advanced flow solutions 268,213 272,612 ( 4,399 ) consolidated net revenues $ 590,259 $ 656,267 $ ( 66,008 ) $ — operating income — energy - segment operating income $ 34,619 $ 50,386 $ ( 15,767 ) afs - segment operating income 33,463 33,811 ( 348 ) corporate expenses ( 25,672 ) ( 21,710 ) ( 3,962 ) subtotal 42,410 62,487 ( 20,077 ) restructuring charges , net 8,975 4,634 4,341 special charges , net 8,196 9,720 ( 1,524 ) < td
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in addition , the company has included certain non-u.s. gaap financial measures and ratios , which it believes provide useful supplemental information to both management and readers of this report in measuring the financial performance and financial condition of the company . these measures do not have a standardized meaning prescribed by u.s. gaap and should not be construed as an alternative to other titled measures determined in accordance with u.s. gaap . two such non-u.s. gaap measures are “ organic revenue growth ” or “ organic revenue decline ” that refer to the positive or negative results , respectively , of subtracting both the foreign exchange and acquisition ( disposition ) components from total revenue growth . the acquisition ( disposition ) component is calculated by aggregating the prior period revenue for any acquired businesses , less the prior period revenue of any businesses that were disposed of in the current period . the organic revenue growth ( decline ) component reflects the constant currency impact of ( a ) the change in revenue of the partner firms which the company has held throughout each of the comparable periods presented and ( b ) for acquisitions during the current year , the revenue effect from such acquisition as if the acquisition had been owned during the equivalent period in the prior year and ( c ) for acquisitions during the previous year , the revenue effect from such acquisitions as if they had been owned during that entire year or same period as the current reportable period , taking into account their respective pre-acquisition revenues for the applicable periods and ( d ) for dispositions , the revenue effect from such disposition as if they had been disposed of during the equivalent period in the prior year . the company believes that isolating the impact of acquisition activity and foreign currency impacts is an important and informative component to understand the overall change in the company 's consolidated revenue . the change in the consolidated revenue that remains after these adjustments illustrates the underlying financial performance of the company 's businesses . specifically , it represents the impact of the company 's management oversight , investments and resources dedicated to supporting the businesses ' growth strategy and operations . in addition , it reflects the network benefit of inclusion in the broader portfolio of firms that includes , but is not limited to , cross-selling and sharing of best practices . this approach isolates changes in performance of the business that take place under the company 's stewardship , whether favorable or unfavorable , and thereby reflects the potential benefits and risks associated with owning and managing a talent-driven services business . accordingly , during the first twelve months of ownership by the company , the organic growth measure may credit the company with growth from an acquired business that is dependent on work performed prior to the acquisition date , and may include the impact of prior work in progress , existing contracts and backlog of the acquired businesses . it is the presumption of the company that positive developments that may have taken place at an acquired business during the period preceding the acquisition will continue to result in value creation in the post-acquisition period . while the company believes that the methodology used in the calculation of organic revenue change is entirely consistent with our closest u.s. competitors , the calculations may not be comparable to similarly titled measures presented by other publicly traded companies in other industries . additional information regarding the company 's acquisition activity as it relates to potential revenue growth is provided in item 7 “ management 's discussion and analysis of financial condition and results of operations ” under “ certain factors affecting our business. ” amounts reported in millions herein are computed based on the amounts in thousands . as a result , the sum of the components , and related calculations , reported in millions may not equal the total amounts due to rounding . executive summary the company 's objective is to create shareholder value by building , growing and acquiring market-leading partner firms that deliver innovative , value-added marketing , activation , communications and strategic consulting to their clients . management believes that shareholder value is maximized with an operating philosophy of “ perpetual partnership ” with proven committed industry leaders in marketing communications . mdc manages its business by monitoring several financial and non-financial performance indicators . the key indicators that we focus on are the areas of revenues and operating expenses and capital expenditures . revenue growth is analyzed by reviewing a mix of measurements , including ( i ) growth by major geographic location , ( ii ) existing growth by major discipline ( organic revenue growth ) , ( iii ) growth from currency changes and ( iv ) growth from acquisitions . in addition to monitoring the foregoing financial indicators , the company assesses and monitors several non-financial performance indicators relating to the business performance of our partner firms . these indicators may include a partner firm 's recent new client win/loss record ; the depth and scope of a pipeline of potential new client account activity ; the overall quality of the services provided to clients ; and the relative strength of the company 's next generation team that is in place as part of a potential succession plan to succeed the current senior executive team . 17 mdc conducts its businesses through its partner firm network , the advertising and communications group , providing value-added marketing , activation , and communications and strategic consulting services to clients throughout the world . story_separator_special_tag story_separator_special_tag for the year ended december 31 , 2016 organic revenue growth was $ 30.1 million or 2.3 % , of which $ 20.0 million pertained to partner firms which the company has held throughout each of the comparable periods presented , while the remaining $ 10.1 million were contributions from acquisitions . the increase in revenue was also a result of non-gaap acquisition ( disposition ) net adjustments of $ 42.0 million or 3.2 % , which was partially offset by a foreign exchange impact of $ 12.5 million or 0.9 % . the components of the change in revenues for the year ended december 31 , 2016 are as follows : replace_table_token_6_th the below is a reconciliation between the non-gaap acquisitions ( dispositions ) , net to revenue from acquired businesses in the statement of operations for the year ended december 31 , 2016 : replace_table_token_7_th ( 1 ) for the year ended december 31 , 2016 , revenue from acquisitions was comprised of $ 11.5 million from 2015 acquisitions and $ 39.6 million from 2016 acquisitions . ( 2 ) contributions to organic revenue growth ( decline ) represents the change in revenue , measured on a constant currency basis , relative to the comparable pre-acquisition period for acquired businesses that is included in the company 's organic revenue growth ( decline ) calculation . the geographic mix in revenues for the years ended december 31 , 2016 and 2015 is as follows : replace_table_token_8_th the company 's business outside of north america continued to be a driver of growth for the overall company , with organic revenue growth of 16.5 % . this growth was driven by new client wins and increased spend from existing clients as we extended the company 's capabilities into new markets throughout europe , asia , and south america . for the year ended december 31 , 22 2016 , 11.4 % of the company 's total revenue came from outside north america , up from 8.5 % for the year ended december 31 , 2015 . additional revenue growth came from acquisitions of firms that helped expand the company 's capabilities in mobile development and digital media buying , as well as expand the company 's global footprint . the adverse currency impact was primarily due to the weakening of the british pound and the canadian dollar against the u.s. dollar during the twelve months ended december 31 , 2016 , as compared to the twelve months ended december 31 , 2015 . the change in expenses as a percentage of revenue in the advertising and communications group for the years ended december 31 , 2016 and 2015 was as follows : replace_table_token_9_th the change in the categories of expenses as a percentage of revenue in the advertising and communications group for the years ended december 31 , 2016 and 2015 was as follows : replace_table_token_10_th ( 1 ) excludes staff costs . ( 2 ) excludes stock-based compensation and is comprised of amounts reported in both cost of services and office and general expenses . operating profit for the advertising and communications group for the year ended december 31 , 2016 was $ 92.5 million , compared to $ 137.3 million for the year ended december 31 , 2015 . operating margins decreased from 10.4 % in 2015 to 6.7 % in 2016 . the decrease in operating profit and margin was largely due to the goodwill impairment charge of $ 48.5 million , and increases in staff costs as a percentage of revenue , partially offset by decreased deferred acquisition consideration expense . direct costs increased by $ 17.0 million , or 8.7 % , and as a percentage of revenue increased from 14.7 % for the year ended december 31 , 2015 to 15.3 % for the year ended december 31 , 2016 . this increase was largely due to an acquisition during the year . staff costs increased by $ 49.5 million , or 6.8 % , and as a percentage of revenue increased from 55.2 % for the year ended december 31 , 2015 to 56.4 % for the year ended december 31 , 2016 . the increase in staff costs was due to increased headcount driven by certain partner firms to support the growth of their businesses , as well as additional increases from acquisitions . the increase in staff costs as a percentage of revenue , was due to an increase in staffing levels in advance of revenue at certain partner firms , as well as slower reductions in staffing at other partner firms . 23 administrative costs increased year over year and as a percentage of revenue primarily due to higher occupancy expenses and other general and administrative expenses . these increases were incurred to support the growth and expansion of certain partner firms , as well as some real estate consolidation initiatives . deferred acquisition consideration was an expense of $ 8.0 million for the year ended december 31 , 2016 , compared to expense of $ 36.3 million for the year ended december 31 , 2015 . the decrease in deferred acquisition consideration expense was due to the aggregate under-performance of certain partner firms in 2016 , as compared to forecasted expectations in comparison to 2015. this decrease was partially offset by expenses pertaining to amendments to purchase agreements of previously acquired incremental ownership interests entered into during 2016 , as well as increased estimated liability driven by the decrease in the company 's estimated future stock price , pertaining to an acquisition in which the company used its equity as purchase consideration . stock-based compensation remained consistent at approximately 1 % of revenue . depreciation and amortization expense decreased by $ 5.6 million primarily due to lower amortization from intangibles related to prior year acquisitions .
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fourth quarter results . revenues were $ 390.4 million for the fourth quarter of 2016 , representing an increase of $ 31.4 million or 8.8 % , compared to revenue of $ 359.0 million in fourth quarter of 2015 . revenue from acquisitions for the fourth quarter of 2016 was $ 24.7 million or 6.9 % , inclusive of a $ 3.3 million contribution to organic revenue growth . a negative impact $ 0.5 million is also included to reflect the effect of a disposition . excluding the effect of the acquisitions and disposition , revenue growth was $ 10.3 million or 2.9 % , partially offset by a foreign exchange impact of $ 3.0 million or 0.8 % . the increase in operating profits was attributable to a decrease in deferred acquisition consideration expense of $ 51.1 million due to certain partner firms under-performance in comparison to the company 's prior expectations , partially offset by a goodwill impairment expense increase of $ 18.9 million pertaining to a strategic communication unit . income from continuing operations for the fourth quarter of 2016 was $ 9.8 million , compared to a loss from continuing operations of $ 24.5 million in 2015 . other income , net decreased by $ 6.0 million or 88.9 % from $ 6.8 million in 2015 , to $ 0.8 million in 2016 . of this amount , $ 6.5 million was due to income from the sale of certain investments in 2015 . unrealized losses increased $ 0.6 million or 5.8 % due to foreign currency fluctuations . interest expense increased $ 1.6 million or 10.9 % from $ 14.8 million in 2015 , to $ 16.4 million in 2016 . income tax benefit increased $ 15.4 million from an expense of $ 6.2 million in 2015 , compared to a benefit of $ 9.2 million in 2016 .
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words such as “ may , ” “ will , ” “ could , ” “ would , ” “ should , ” “ anticipate , ” “ predict , ” “ potential , ” “ continue , ” “ expect , ” “ intend , ” “ plans , ” “ projects , ” “ believes , ” “ estimates , ” “ confident ” and similar expressions are used to identify these forward-looking statements . these uncertainties and factors could cause core molding technologies ' actual results to differ materially from those matters expressed in or implied by such forward-looking statements . core molding technologies believes that the following factors , among others , could affect its future performance and cause actual results to differ materially from those expressed or implied by forward-looking statements made in this annual report on form 10-k : business conditions in the plastics , transportation , marine and commercial product industries ( including slowdown in demand for truck production ) ; federal and state regulations ( including engine emission regulations ) ; general economic , social , regulatory ( including foreign trade policy ) and political environments in the countries in which core molding technologies operates ; safety and security conditions in mexico and canada ; dependence upon certain major customers as the primary source of core molding technologies ' sales revenues ; efforts of core molding technologies to expand its customer base ; the ability to develop new and innovative products and to diversify markets , materials and processes and increase operational enhancements ; the actions of competitors , customers , and suppliers ; failure of core molding technologies ' suppliers to perform their obligations ; the availability of raw materials ; inflationary pressures ; new technologies ; regulatory matters ; labor relations ; the loss or inability of core molding technologies to attract and retain key personnel ; the company 's ability to successfully identify , evaluate and manage potential acquisitions and to benefit from and properly integrate any completed acquisitions , including the recent acquisition of horizon plastics ; the risk that the integration of horizon plastics may be more difficult , time-consuming or costly than expected ; expected revenue synergies and cost savings from acquisition of horizon plastics may not be fully realized within the expected timeframe ; revenues following the acquisition of horizon plastics may be lower than expected ; customer and employee relationships and business operations may be disrupted by the acquisition of horizon plastics ; federal , state and local environmental laws and regulations ; the availability of capital ; the ability of core molding technologies to provide on-time delivery to customers , which may require additional shipping expenses to ensure on-time delivery or otherwise result in late fees ; risk of cancellation or rescheduling of orders ; management 's decision to pursue new products or businesses which involve additional costs , risks or capital expenditures ; inadequate insurance coverage to protect against potential hazards ; equipment and machinery failure ; product liability and warranty claims ; and other risks identified from time to time in core molding technologies ' other public documents on file with the securities and exchange commission , including those described in item 1a of this annual report on form 10-k. overview core molding technologies is a manufacturer of sheet molding compound ( `` smc '' ) and molder of fiberglass reinforced plastics . the company specializes in large-format moldings and offers a wide range of fiberglass processes , including compression molding of smc , glass mat thermoplastics ( `` gmt '' ) , bulk molding compounds ( `` bmc '' ) and direct long-fiber thermoplastics ( `` d-lft '' ) ; spray-up , hand lay-up , and resin transfer molding ( `` rtm '' ) . additionally , the company offers reaction injection molding ( `` rim '' ) , utilizing dicyclopentadiene technology . core molding technologies serves a wide variety of markets , including the medium and heavy-duty truck , marine , automotive , agriculture , construction and other commercial products . product sales to medium and heavy-duty truck markets accounted for 68 % , of the company 's sales for the years ended december 31 , 2017 , and 2016 , respectively , and 78 % for the year ended december 31 , 2015 . the demand for core molding technologies ' products is affected by economic conditions in the united states , mexico , and canada . core molding technologies ' manufacturing operations have a significant fixed cost component . accordingly , during periods of changing demand , the profitability of core molding technologies ' operations may change proportionately more than revenues from operations . in 1996 , core molding technologies acquired substantially all of the assets and assumed certain liabilities of columbus plastics , a wholly owned operating unit of navistar 's truck manufacturing division since its formation in late 1980. columbus plastics , located in columbus , ohio , was a compounder and compression molder of smc . in 1998 , core molding technologies began operations at its second facility in gaffney , south carolina , and in 2001 , core molding technologies added a production facility in matamoros , mexico by acquiring certain assets of airshield corporation . as a result of this acquisition , core molding technologies expanded its fiberglass molding capabilities to include the spray up , hand-lay-up open mold processes and rtm 24 closed molding . in 2004 , core molding technologies acquired substantially all the operating assets of keystone restyling products , inc. , a privately held manufacturer and distributor of fiberglass reinforced products for the automotive-aftermarket industry . in 2005 , core molding technologies acquired certain assets of the cincinnati fiberglass division of diversified glass , inc. , a batavia , ohio-based , privately held manufacturer and distributor of fiberglass reinforced plastic components supplied primarily to the heavy-duty truck market . in 2009 , the company completed construction of a new production facility in matamoros , mexico that replaced its leased facility . story_separator_special_tag product sales to other customers increased 5 % in 2016 as compared to 2015. in 2016 , product sales were positively impacted from the full year impact of cpi , which was acquired in march 2015 and other new business starting production in 2016. partially offsetting these increases were decreases to another customer in the heavy truck market , due to lower demand and lower sales to an automotive customer , due to products reaching the end of their production life . gross margin was approximately 16.0 % of sales in 2016 and 18.2 % in 2015. the gross margin decrease , as a percent of sales , was due to unfavorable product mix and production inefficiencies of 2.5 % and lower leverage of fixed costs of 0.9 % . these decreases were offset by favorable foreign currency exchange effects of 1.1 % and favorable net changes in selling price and material costs of 0.1 % . selling , general and administrative expense ( “ sg & a ” ) totaled $ 16,379,000 in 2016 , compared to $ 17,754,000 in 2015. the decrease in sg & a expense primarily resulted from lower profit sharing expense of $ 1,218,000 , and lower travel of $ 175,000. partially offsetting these costs were higher labor and benefit expenses of $ 357,000. the company also incurred acquisition related expenses of $ 303,000 in 2015 that were not incurred in 2016. net interest expense totaled $ 298,000 for the year ended december 31 , 2016 , compared to net interest expense of $ 330,000 for the year ended december 31 , 2015. the decrease in interest expense was primarily due to a lower average outstanding debt balance in 2016. income tax expense was approximately 34 % of total income before income taxes in 2016 and 2015. net income for 2016 was $ 7,411,000 or $ 0.97 per basic and diluted share , compared with net income of $ 12,050,000 or $ 1.59 per basic and $ 1.58 per diluted share for 2015. comprehensive income totaled $ 7,180,000 in 2016 , compared to $ 11,865,000 in 2015. the decrease was primarily related to lower net income of $ 4,639,000 and a net unrealized foreign currency hedge loss of $ 200,000. liquidity and capital resources the company 's primary sources of funds have been cash generated from operating activities and borrowings from third parties . primary cash requirements are for operating expenses , capital expenditures and acquisitions . on december 9 , 2008 , the company and its wholly owned subsidiary , corecomposites de mexico , s. de r.l . de c.v. , entered into a credit agreement , as amended from time to time ( the `` credit agreement '' ) , with a lender to provide various financing facilities . under this credit agreement , as amended from time to time , the company received certain loans , subject to the terms and conditions stated in the agreement , which included ( 1 ) a $ 12,000,000 capex loan ; ( 2 ) an $ 18,000,000 variable rate revolving line of credit ; ( 3 ) a term loan in an original amount of $ 15,500,000 ; and ( 4 ) a letter of credit commitment of up to $ 250,000 , of which $ 175,000 has been issued . the credit agreement is secured by a guarantee of each u.s. subsidiary of the company , and by a lien on substantially all of the present and future assets of the company and its u.s. subsidiaries , except that only 65 % of the stock issued by corecomposites de mexico , s. de r.l . de c.v. has been pledged . on august 4 , 2017 , the company and its wholly owned subsidiary , corecomposites de mexico , s. de r.l . de c.v. , entered into a twelfth amendment ( the `` twelfth amendment '' ) to the credit agreement . pursuant to the terms of the twelfth amendment , the parties agreed to modify certain terms of the credit agreement . these modifications included amending the definition of consolidated fixed charges to include only capital distributions made in an aggregate amount in excess of two million dollars ( $ 2,000,000 ) and amending the restricted payment covenant provisions . cash provided by operating activities totaled $ 6,912,000 for the year ended december 31 , 2017 . net income of $ 5,459,000 positively impacted operating cash flows . non-cash deductions of depreciation and amortization included in net income amounted to $ 6,240,000 . increased working capital resulted in decreased cash provided by operating activities by $ 5,148,000 . changes in working capital primarily related to prepaid and other assets , inventory , accrued and other liabilities , and accounts payable . cash used in investing activities totaled $ 4,259,000 for the year ended december 31 , 2017 , all of which related to new programs , equipment improvements and capacity expansion at the company 's production facilities . the company anticipates spending approximately $ 9,000,000 during 2018 on property , plant and equipment purchases for all of the company 's operations . the 27 company anticipates using cash from operations and its revolving line of credit to finance this capital investment . at december 31 , 2017 , purchase commitments for capital expenditures in progress were approximately $ 1,071,000 . cash used in financing activities totaled $ 4,158,000 for the year ended december 31 , 2017 . cash was used to repay scheduled principal on the company 's term loan totaling $ 3,000,000 , pay cash dividends of $ 786,000 and purchases of treasury stock to satisfy employee tax withholding requirements on vested restricted stock totaling $ 372,000 .
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results of operations 2017 compared with 2016 net sales for 2017 totaled $ 161,673,000 , which was a decrease from the $ 174,882,000 reported for 2016 . included in total sales were tooling project sales of $ 13,050,000 for 2017 and $ 28,258,000 for 2016 . tooling project sales result primarily from customer approval and acceptance of molds and assembly equipment specific to their products as well as other non-production services . these sales are sporadic in nature and fluctuate in regard to scope and related revenue on a period-to-period basis . total product sales for 2017 , excluding tooling project sales , totaled $ 148,623,000 , representing a 1 % increase from the $ 146,624,000 reported for 2016 . in 2017 , product sales were positively impacted by a change in demand from customers in the heavy truck and marine markets , partially offset by a change in demand from customers in the automotive market . sales to navistar in 2017 totaled $ 39,768,000 , compared to $ 41,750,000 reported for 2016 . included in total sales are tooling sales of $ 159,000 and $ 1,994,000 for 2017 and 2016 , respectively . product sales to navistar decreased slightly in 2017 as compared to 2016 , primarily due to a change in demand , partially offset by new business awards . sales to volvo in 2017 totaled $ 35,716,000 , compared to $ 49,970,000 reported for 2016 . included in total sales are tooling sales of $ 8,089,000 and $ 20,450,000 for 2017 and 2016 , respectively . product sales to volvo decreased by 6 % in 2017 as compared to 2016 , primarily due to a change in demand , partially offset by new business awards . sales to paccar in 2017 totaled $ 29,413,000 , compared to $ 27,716,000 reported for 2016 .
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the payment has story_separator_special_tag the following discussion and analysis should be read together with our financial statements and the related notes appearing elsewhere in this report . overview we are an animal health company focused on developing and commercializing first-in-class gastrointestinal products for companion and production animals , and horses . canalevia is our lead prescription drug product candidate , intended for the treatment of various forms of diarrhea in dogs . we achieved statistically significant results in a canine proof-of-concept study completed in february 2015 , supporting the conclusion that canalevia treatment is superior to placebo , with 91 % of the canalevia-treated dogs achieving a formed stool during the study versus 50 % of the placebo-treated dogs . we also completed submission of all required major technical sections for the conditional approval application for canalevia for chemotherapy-induced diarrhea , or cid , in dogs , to the fda for phased review . canalevia is a canine-specific formulation of crofelemer , an active pharmaceutical ingredient isolated and purified from the croton lechleri tree , which is sustainably harvested . a human-specific formulation of crofelemer , fulyzaq , was approved by the fda in 2012 for the symptomatic relief of noninfectious diarrhea in adults with hiv/aids on antiretroviral therapy . members of our management team developed crofelemer while at napo pharmaceuticals , inc. , which was jaguar 's parent company until may 13 , 2015. sb-300 is jaguar 's prescription drug product candidate for the treatment of gastrointestinal ulcers in horses . sb-300 contain ingredients isolated and purified from the croton lechleri tree . neonorm calf and neonorm foal are our lead non-prescription products . neonorm is a standardized botanical extract derived from the croton lechleri tree . neonorm is our lead non-prescription product to improve gut health and normalize fecal formation in animals suffering from watery diarrhea , or scours . we launched neonorm in the united states at the end of 2014 for preweaned dairy calves under the brand name neonorm calf , and in 2015 we launched neonorm in the united states for foals under the brand name neonorm foal . as of march 1 , 2016 , we have shipped $ 638,000 of neonorm calf to distributors . canalevia and neonorm are distinct products that are formulated to address specific species and market channels . we have filed nine investigational new animal drug applications , or inads , with the fda and intend to develop species-specific formulations of neonorm in six additional target species , and canalevia for both cats and dogs . since inception , we have been primarily focused on designing and conducting studies of canalevia to treat multiple preselected and distinct types of diarrhea in dogs and for neonorm to improve gut health and normalize stool formation in preweaned dairy calves and foals . we are also focused on developing a full suite of products to support and improve gastrointestinal health in foals and adult horses . gastrointestinal conditions such as acute diarrhea , ulcers and diarrhea associated with acute colitis can be extremely debilitating for horses , and present a significant economic and emotional burden for veterinarians and owners around the world . a portion of our activities has also been focused on other efforts associated with being a recently formed company , including securing necessary intellectual property , recruiting management and key employees and initial financing activities . in may 2015 , we completed the initial public offering of our common stock . in connection with our initial public offering , we issued 2,860,000 shares of our common stock at a price to the public of $ 7.00 per share . our shares of common stock began trading on the nasdaq capital market on may 13 , 2015. as a result of the initial public offering , we received approximately $ 15.9 million in net proceeds , after deducting underwriting discounts and commissions of $ 1.2 million and offering expenses of $ 3.3 million , including a $ 0.4 million non-cash expense . 63 in september 2015 , we entered into a four year manufacture and supply agreement , or supply agreement , with a contract manufacturer in india for the manufacture and supply of active pharmaceutical ingredient , or api . for each calendar year , we and the manufacturer will agree to a minimum annual quantity that we will purchase . in october 2015 , we entered into a formulation development and manufacturing contract with a manufacturer , whereby the manufacturer will provide enteric-coated tablets to us for use in animals . the total amount committed to be paid by the company during 2015 and 2016 under this contract is estimated to be approximately $ 850,000. in december 2015 , we hired a new chief financial officer and entered into an employment agreement . in december 2015 , we entered into an amendment to our technology transfer and commercial manufacturing agreement with our contract manufacturer in italy delaying a 150,000 payment which was originally due on december 31 , 2015. this payment is now due on march 31 , 2016. in december 2015 , we met benchmarks which reduced our restricted cash balance by $ 1.5 million from $ 4.5 million to $ 3.0 million as required by hercules technology growth capital , inc. , or hercules technology , pursuant to the loan and security agreement dated august 18 , 2015 , between us , certain of our subsidiaries , the several banks and other financial institutions or entities from time to time party thereto as lenders and hercules technology . in december 2015 , we paid a license fee of $ 500,000 to napo pharmaceuticals pursuant to the amended and restated license agreement , dated august 6 , 2014 as amended , between napo and us . in february 2016 , we hired a chief veterinary officer and entered into an employment agreement . in february 2016 , we completed a follow-on registration offering of our common stock . story_separator_special_tag this will include adding headcount , enhancing information systems and potentially expanding corporate facilities . interest expense interest expense consists primarily of interest on convertible promissory notes , the standby bridge financing commitment and the loan and security agreement . it also includes interest expense and the amortization of a beneficial conversion feature related to convertible promissory notes issued in june and december 2014. story_separator_special_tag ability to continue as a going concern . our financial statements do not include any adjustments that may result from the outcome of this uncertainty . 68 to date , we have funded our operations primarily through the issuance of equity securities , short-term convertible promissory notes , and long-term debt , in addition to sales of neonorm , our commercial product : in 2013 , we received $ 400 from the issuance of 2,666,666 shares of common stock to our parent napo pharmaceuticals , inc. we also received $ 519,000 of net cash from the issuance of convertible promissory notes in an aggregate principal amount of $ 525,000. these notes were all converted to common stock in 2014. in 2014 , we received $ 6.7 million in proceeds from the issuance of convertible preferred stock . effective as of the closing of our initial public offering , the 3,015,902 shares of outstanding convertible preferred stock were automatically converted into 2,010,596 shares of common stock . following our initial public offering , there were no shares of preferred stock outstanding . in 2014 , we received $ 1.1 million from the issuance of convertible promissory notes in an aggregate principal amount of $ 1.1 million . these notes were converted to common stock upon the effectiveness of the initial public offering in may of 2015. in august 2014 , we entered into a standby line of credit with an individual , who is an accredited investor , for up to $ 1.0 million . to date , we had not made any drawdowns under this facility . also , in october of 2014 , as amended and restated in december 2014 , we entered into a $ 1.0 million standby bridge loan which was repaid in 2015. in 2015 , we received $ 1.25 million in exchange for $ 1.25 million of convertible promissory notes , of which $ 1.0 million was converted to common stock in 2015 , and $ 100,000 was repaid in 2015. the remaining $ 150,000 remains outstanding . in may 2015 , we received net proceeds of $ 15.9 million upon the closing of our initial public offering , gross proceeds of $ 20.0 million ( 2,860,000 shares at $ 7.00 per share ) net of $ 1.2 million of underwriting discounts and commissions and $ 3.3 million of offering expenses , including $ 0.4 million of non-cash expense . these shares began trading on the nasdaq capital market on may 13 , 2015. in 2015 , we received net proceeds of $ 5.9 million from the issuance of long-term debt . we entered into a loan and security agreement with a lender for up to $ 8.0 million , which provided for an initial loan commitment of $ 6.0 million . under the loan agreement we are required to maintain $ 4.5 million of the proceeds in cash , which amount may be reduced or eliminated on the achievement of certain milestones . an additional $ 2.0 million is available contingent on the achievement of certain further milestones . the agreement has a term of three years , with interest only payments through february 29 , 2016. thereafter , principal and interest payments will be made with an interest rate of 9.9 % . additionally , there will be a balloon interest payment of $ 560,000 on august 1 , 2018. this amount is being recognized over the term of the loan agreement and the effective interest rate , considering the balloon payment , is 15.0 % . our proceeds are net of a $ 134,433 debt discount under the terms of such agreement . in 2014 and 2015 , we received $ 24,000 and $ 531,000 , respectively , in cash from sales of neonorm to distributors . in 2015 , we received approximately $ 13,000 in proceeds from the exercise of stock options . in 2016 , we received net proceeds of $ 4.1 million upon the closing of our follow-on public offering , reflecting gross proceeds of $ 5.0 million ( 2.0 million shares at $ 2.50 per share ) net of $ 373,000 of underwriting discounts and commissions and $ 540,500 of estimated offering expenses . we expect our expenditures will continue to increase as we continue our efforts to develop animal health products , expand our commercially available neonorm product and continue development of canalevia in the near term . we have agreed to pay indena s.p.a. fees of approximately 2.1 million under a memorandum of understanding relating to the establishment of our commercial api manufacturing arrangement in italy . as of december 2015 , we have paid 1.7 million of the 2.1 million and we will remit the remaining 400,000 in march of 2016 . 69 we do not believe our current capital is sufficient to fund our operating plan through december 2016. we will need to seek additional funds sooner than planned , through public or private equity or debt financings or other sources , such as strategic collaborations . such financing may result in dilution to stockholders , imposition of debt covenants and repayment obligations or other restrictions that may affect our business . in addition , we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans . we may also not be successful in entering into partnerships that include payment of upfront licensing fees for our products and product candidates for markets outside the united states , where appropriate .
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results of operations comparison of the years ended december 31 , 2015 and 2014 the following table summarizes the company 's results of operations with respect to the items set forth in such table for the years ended december 31 , 2015 and 2014 together with the change in such items in dollars and as a percentage : replace_table_token_3_th 66 revenue and cost of revenue revenue and related cost of revenue for the years ended december 31 , 2015 is for sales of neonorm to our distributors . we defer revenue and cost of revenue until products are sold by the distributor to the distributor 's end customers and recognition will depend on notification from the distributor that product has been sold to the distributor 's end customer . although we did sell neonorm to distributors in the year ended december 31 , 2014 , there was no distributor sell-through and consequently we did not recognize any revenue . research and development expense the following table presents the components of research and development expense for the years ended december 31 , 2015 and 2014 together with the change in such components in dollars and as a percentage : replace_table_token_4_th we plan to increase our research and development expense as we continue developing our drug candidates . we increased research and development expense $ 2.3 million , or 53 % from $ 4.2 million in 2014 to $ 6.5 million in 2015. we added headcount in 2015 to enable us to make significant progress in the development of certain drug candidates that resulted in the increase of $ 2.4 million in clinical and contract manufacturing expenses , $ 647,000 in personnel expense and $ 401,000 in stock-based compensation expense .
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on february 11 , 2015 , the company completed an underwritten offering of 4,444,444 shares of its common stock and warrants to purchase an aggregate of 3,333,333 shares of its common stock at a price to the public of $ 4.50 per share . the warrants will be exercisable for a period of 4 years at an exercise price of $ 6.50 per share and have a relative fair value of $ 3,540,659 on the issuance date . the company received net proceeds of approximately $ 18.5 million , after deducting underwriting discounts and commissions and estimated offering expenses payable by us , and excluding the underwriters ' over-allotment option . in addition , the company granted the underwriters a 30-day option to purchase up to an additional 666,666 shares of common stock and warrants to purchase 499,999 shares of common stock solely to cover over-allotments , if any . the underwriter did not exercise the over-allotment option . on june 9 , 2015 , the company closed a financing with certain investors in which it raised approximately $ 5,000,000 in gross proceeds or $ 4,480,000 in net proceeds , after deducting placement agent 's fees and other offering expenses . investors purchased 1,923,078 shares of the company 's common stock , at a price per share of $ 2.60 . during the year ended december 31 , 2015 , the company issued 1,532,124 common shares for the cashless exercise of warrants . during the year ended december 31 , 2015 , the company also issued 224,153 common shares for $ 173,620 cash received from the exercise of options and warrants . during the year ended december 31 , 2014 , the company issued 2,162,181 common shares for the cashless exercise of warrants . during the year ended december 31 , 2014 , the company also issued 484,877 common shares for $ 435,147 cash received from the exercise of options and warrants . during the year ended december 31 , 2013 , the company issued 235,158 common shares for cashless exercise of warrants . during the year ended december 31 , 2013 , the company also issued 2,118,480 common shares for $ 3,480,448 cash received from the exercise of options and warrants . approval of the 2013 amended and restated stock plan in september 2013 , the board of directors of the company approved the company 's 2013 stock plan . story_separator_special_tag the information and financial data discussed below is derived from the audited consolidated financial statements of actinium pharmaceuticals , inc. for its fiscal years ended december 31 , 2015 , 2014 and 2013. the consolidated financial statements of actinium pharmaceuticals , inc. were prepared and presented in accordance with generally accepted accounting principles in the united states . the information and financial data discussed below is only a summary and should be read in conjunction with the historical financial statements and related notes of actinium pharmaceuticals , inc. contained elsewhere in this report . the financial statements contained elsewhere in this report fully represent actinium pharmaceuticals , inc. 's financial condition and operations ; however , they are not indicative of the company 's future performance . see “ cautionary note regarding forward looking statements ” above for a discussion of forward-looking statements and the significance of such statements in the context of this report . overview actinium is a biotechnology company committed to developing breakthrough therapies for life threatening diseases using its alpha particle immunotherapy ( apit ) platform and other related and similar technologies . actinium , together with its wholly owned subsidiary , medactinium , inc. ( mai ) , ( hereinafter referred to collectively as “ actinium ” ) has initiated collaborative efforts with large institutions to establish the proof of concept of alpha particle immunotherapy and has supported one phase 1/2 clinical trial and one phase 1 clinical trial at memorial sloan-kettering cancer center ( “ mskcc ” ) under an mskcc physician ind application . in 2012 , actinium launched a multi-center corporate sponsored trial in acute myeloid leukemia ( aml ) patients . actinium 's objective , through research and development , is to produce reliable cancer fighting products which utilize monoclonal antibodies linked with alpha particle emitters or other appropriate payloads to provide very potent targeted therapies . the initial clinical trials of actinium 's compounds have been with patients having acute myeloid leukemia and it is believed that actinium 's apit platform will have wider applicability for different types of cancer where suitable monoclonal antibodies can be found . we were incorporated under the laws of the state of nevada on october 6 , 1997. we were a shell entity that was in the market for a merger with an appropriate operating company . on december 28 , 2012 , we entered into a transaction ( the “ share exchange ” ) , pursuant to which the company acquired 21 % of the issued and outstanding equity securities of actinium pharmaceuticals , inc. ( “ actinium ” ) , in exchange for the issuance of 4,333,489 shares of common stock , par value $ 0.001 per share , of the company ( the “ common stock ” ) , which were issued to the shareholders of actinium . as a result of the share exchange , the former shareholders of actinium became the controlling shareholders of the company . the share exchange was accounted for as a reverse takeover/recapitalization effected by a share exchange , wherein actinium is considered the acquirer for accounting and financial reporting purposes . as a result of the share exchange , the company assumed the business and operations of actinium . story_separator_special_tag iomab-b is used to condition the bone marrow of these patients by destroying blood cancer cells in their bone marrow and elsewhere thus allowing for a subsequent transplant containing healthy donor bone marrow stem cells . we have decided to develop this drug candidate by initially focusing on the patients over 50 with active acute myeloid leukemia in relapse and or refractory to existing treatments . on december 17 , 2015 , the fda cleared our ind filing for iomab-b , and that we will proceed with the pivotal , phase 3 clinical trial . we anticipate that the phase 3 , controlled , randomized , pivotal trial will begin enrolling patients in the first half of 2016. we estimate the direct costs of such a trial to completion anticipated in 2018 will be approximately $ 25 million . 41 we have primarily management position employees and consultants who direct , organize and monitor the activities described above through contractors . much of the in-vivo laboratory and clinical work contracted for by the company was conducted at mskcc in new york . we also made clinical trial arrangements with other well-known cancer centers . our actimab-a drug candidate and its components are contract manufactured and maintained under our supervision by specialized contract manufacturers and suppliers in the united states , including isotex diagnostics , oak ridge national laboratory , pacific gmp , fischer bioservices , bioreliance and others . we have never generated revenue . currently we do not have a recurring source of revenues to cover our operating costs . as of december 31 , 2015 and 2014 , our accumulated deficit was $ 112.2 million and $ 91.2 million , respectively . our net loss was $ 21.0 million , $ 24.7 million , and $ 10.8 million for the years ended december 31 , 2015 , 2014 , and 2013 , respectively . as of december 31 , 2015 , our cash balance was $ 25.6 million . we believe that we have enough cash on hand to fund our operations through the next 12 months . opportunities , challenges and risks the market for drugs for cancer treatment is a large market in need of novel products , in which successful products can command multibillion dollars in annual sales . a number of large pharmaceutical and biotechnology companies regularly acquire products in development , with preference given to products in phase 2 or later clinical trials . these transactions are typically structured to include an upfront payment that ranges from several million dollars to tens of million dollars or more and additional milestone payments tied to regulatory submissions and approvals and sales milestones . our goal is to develop our product candidates through phase 2 clinical trials and enter into partnership agreements with one or more large pharmaceutical and or biotechnology companies . we believe our future success will be heavily dependent upon our ability to successfully conduct clinical trials and preclinical development of our drug candidates . this will in turn depend on our ability to continue our collaboration with mskcc and our clinical advisory board members . in addition , we plan to continue and expand other research and clinical trial collaborations . moreover , we will have to maintain sufficient supply of actinium 225 and successfully maintain and if and when needed replenish or obtain our reserves of monoclonal antibodies . we will have to maintain and improve manufacturing procedures we have developed for production of our drug candidates from the components that include the iodine 131 and actinium 225 isotopes , monoclonal antibodies and other materials . it is possible that despite our best efforts our clinical trials results may not meet regulatory requirements for approval . if our efforts are successful , we will be able to partner our development stage products on commercially favorable terms only if they enjoy appropriate patent coverage and or considerable know-how and other protection that ensures market exclusivity . for that reason we intend to continue our efforts to maintain existing and generate new intellectual property . intellectual property is a key factor in the success of our business as well as market exclusivity . to achieve our goal we intend to continue to invest in research and development at high and constantly increasing rates thus incurring further losses until one or more of our products are sufficiently developed to partner them with a large pharmaceutical and or biotechnology company . results of operations – year ended december 31 , 2015 compared to the year ended december 31 , 2014 the following table sets forth , for the periods indicated , data derived from our statements of operations : replace_table_token_7_th 42 revenues we recorded no commercial revenues for the years ended december 31 , 2015 and 2014. research and development expense research and development expenses , net of reimbursements , increased by approximately $ 1.0 million to approximately $ 13.3 million for the year ended december 31 , 2015 compared to approximately $ 12.3 million for the year ended december 31 , 2014. the increase was primarily attributable to increase in compensation cost of approximately $ 1.3 million as a result of an increase in headcount and also an increase in stock-based compensation related to research and development personnel . in 2015 the company decreased its on-going actimab-a clinical costs of approximately $ 0.2 million . we expect to incur increased research and development costs in the future in connection with the planned phase 3 trial .
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general and administrative expenses overall , total general and administrative expenses increased by approximately $ 1.3 million to $ 11.5 million for the year ended december 31 , 2015 compared to approximately $ 10.2 million for the year ended december 31 , 2014. the increase was largely attributable to increase of approximately $ 0.9 million for financial consulting services , increases in stock-based compensation costs and salaries and benefits of approximately $ 0.2 million , and approximate increase of $ 0.2 million in directors and offices insurance and payments . we expect to incur increased general and administrative costs in the future in connection with the planned phase 3 trial . other income ( expense ) other income ( expense ) was $ 3.8 million and ( $ 2.2 million ) for the years ended december 31 , 2015 and 2014 , respectively . the year over year change is mainly attributable to the fluctuation of the company 's stock price and its impact on the derivative value of certain warrants the company issued in connection with the december 2012 financing . net loss net loss decreased by approximately $ 3.7 million to approximately $ 21.0 million for the year ended december 31 , 2015 compared to approximately $ 24.7 million for the year ended december 31 , 2014. the decrease was primarily due to a gain on the change in fair value of the company 's derivative warrant liability which was partially offset by additional costs incurred by the company in research and development expenses , non-cash stock-based compensation costs and professional fees .
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we do not anticipate that the amount of unrecognized tax benefits as of june 30 , 2015 will significantly increase or decrease within the next 12 months . 8. commitments and contingencies leases we lease office equipment and office and warehouse facilities under non-cancelable capital and operating leases . in january 2015 , we entered into a building lease agreement ( the “ lease ” ) with the irvine company , llc ( the “ landlord ” ) , in which we have leased approximately 27,000 square feet of office space for our corporate headquarters in irvine , california . the lease commenced in early july 2015 , when we took possession of the premises and commenced our regular business activities . the term of the lease is 65 months from the commencement date . the lease replaced our existing corporate headquarters lease with the landlord , which terminated effective as of the day preceding the commencement date of the lease , with no early termination fee . additionally , the landlord provided us a tenant improvement allowance of up to $ 242,600 for tenant improvements and other qualified expenses . f- 18 the following schedule represents minimum lease payments for all non-cancelable operating and capital leases as of june 30 , 2015 : replace_table_token_39_th the following table presents rent expense : replace_table_token_40_th 9. significant geographic , customer and supplier information the following table presents our sales within geographic regions as a percentage of net revenue : replace_table_token_41_th the following table presents sales to significant countries as a percentage of net revenue : replace_table_token_42_th f- 19 customers the following table presents sales to our significant customers and related parties as a percentage of net revenue : replace_table_token_43_th * less than 10 % ( 1 ) includes ingram micro and tech data ( 2 ) all top five customers are distributors , who are part of our product distribution system no other customer represented more than 10 % of our annual net revenue during these fiscal years . related party transactions we have historically reported net revenues from two international customers , lynx story_separator_special_tag you should read the following discussion and analysis in conjunction with our consolidated financial statements and the related notes included in item 8 of this report . this discussion and analysis contains forward-looking statements that are based on our management 's current beliefs and assumptions , which statements are subject to substantial risks and uncertainties . our actual results may differ materially from those expressed or implied by these forward-looking statements as a result of many factors , including those discussed in “ risk factors ” in item 1a of this report . please also see “ cautionary note regarding forward looking statements ” at the beginning of this report . story_separator_special_tag warranty periods for our products typically range from one to five years . we establish reserves for estimated product warranty costs at the time revenue is recognized based upon our historical warranty experience , and additionally for any known product warranty issues . although we engage in extensive product quality programs and processes , our warranty obligation is affected by product failure rates , use of materials or service delivery costs that differ from our estimates . as a result , increases or decreases to warranty reserves could be required , which could impact our gross margins . allowance for doubtful accounts we maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments . our evaluation of the collectability of customer accounts receivable is based on various factors . in cases where we are aware of circumstances that may impair a specific customer 's ability to meet its financial obligations subsequent to the original sale , we will record an allowance against amounts due . for all other customers , we estimate an allowance for doubtful accounts based on the length of time the receivables are past due , our history of bad debts and general industry conditions . if a major customer 's credit worthiness deteriorates , or our customers ' actual defaults exceed our estimates , our financial results could be impacted . inventory valuation we value inventories at the lower of cost ( on a first-in , first-out basis ) or market , whereby we make estimates regarding the market value of our inventories , including an assessment of excess and obsolete inventories . we determine excess and obsolete inventories based on an estimate of the future sales demand for our products within a specified time horizon , generally twelve months . the estimates we use for demand are also used for near-term capacity planning and inventory purchasing . in addition , specific reserves are recorded to cover risks in the area of end of life products , inventory located at our contract manufacturers , deferred inventory in our sales channel and warranty replacement stock . if actual product demand or market conditions are less favorable than our estimates , additional inventory write-downs could be required , which would increase our cost of revenue and reduce our gross margins . valuation of deferred income taxes we have recorded a valuation allowance to reduce our net deferred tax assets to zero , primarily due to historical net operating losses and uncertainty of generating future taxable income . we consider estimated future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance . if we determine that it is more likely than not that we will realize a deferred tax asset that currently has a valuation allowance , we would be required to reverse the valuation allowance , which would be reflected as an income tax benefit in our consolidated statements of operations at that time . story_separator_special_tag the decline in legacy products was partially offset by 48 % growth in new product revenue during fiscal 2015. our net loss was $ 2.8 million for fiscal 2015 compared to a net loss of $ 933,000 in fiscal 2014. the increase in net loss was driven by ( i ) the decrease in net revenue and ( ii ) the decrease in gross profit as a percent of revenue ( referred to as “ gross margin ” ) from 50.0 % to 47.3 % , primarily resulting from charges for excess inventories and changes in our product mix . results of operations - fiscal years ended june 30 , 2015 and 2014 net revenue the following tables present our net revenue by product line and geographic region : replace_table_token_2_th replace_table_token_3_th 22 iot modules fiscal 2015 net revenue from our iot modules product line decreased due primarily to a decline in legacy product sales , partially offset by an increase in new product sales . the decrease in legacy product sales were driven primarily by decreased unit sales of three of our product families : ( i ) micro in the americas and asia pacific regions , ( ii ) wiport in the asia pacific region and japan , ( iii ) xport in the emea region and japan . the overall decrease in net revenue in this product line was partially offset by increased unit sales of the xpico ( new ) and xport pro product families in the americas region and the xpico wifi ( new ) product family in the emea region . enterprise solutions fiscal 2015 net revenue from our enterprise solutions product line decreased primarily due to a decrease in our legacy products , such as the slc , eds , xpress and uds , as well as a decrease in sales of the xprintserver ( new ) product family . we also saw weakness in capital spending at a few large customers . the overall decrease in this product line 's net revenues was partially offset by growth in unit sales for many of our new products , including the new slb , eds-md , slc8000 and xdirect . gross profit gross profit represents net revenue less cost of revenue . cost of revenue consists of the cost of raw material components , subcontract labor assembly from contract manufacturers , manufacturing overhead , establishing or relieving inventory reserves for excess and obsolete products or raw materials , warranty costs , royalties and share-based compensation . the following table presents gross profit : replace_table_token_4_th gross margin for fiscal 2015 decreased compared to fiscal 2014 due to ( i ) charges for excess and obsolete inventories of approximately $ 600,000 and ( ii ) changes in our product mix , as our higher-margin enterprise solutions product line comprised a smaller percentage of our total net revenue in fiscal 2015 as compared to fiscal 2014. selling , general and administrative selling , general and administrative expenses consisted of personnel-related expenses including salaries and commissions , share-based compensation , facility expenses , information technology , trade show expenses , advertising and professional legal and accounting fees . the following table presents selling , general and administrative expenses : replace_table_token_5_th the decrease in selling , general and administrative expenses for fiscal 2015 was primarily due to ( i ) lower levels of spending on trade shows and outside marketing programs , ( ii ) lower variable compensation expenses and ( iii ) a decrease in legal fees . fiscal 2015 includes severance charges of $ 230,000 that were recorded in the fourth quarter of fiscal 2015 as part of a cost-cutting effort to reduce our ongoing operating expenses . 23 research and development research and development expenses consisted of personnel-related expenses including share-based compensation , as well as expenditures to third-party vendors for research and development activities , and product certification costs . the following table presents research and development expenses : replace_table_token_6_th fiscal 2015 research and development expenses increased due to ( i ) higher personnel-related expense from headcount and merit increases , which were partially offset by lower variable compensation expenses and ( ii ) increased product certification costs related to new product development . other expense , net other expense , net , is comprised primarily of foreign currency remeasurement and transaction adjustments related to our foreign subsidiaries whose functional currency is the u.s. dollar . provision for income taxes the following table presents the income tax provision : replace_table_token_7_th the following table presents our effective tax rate based upon our income tax provision : replace_table_token_8_th we utilize the liability method of accounting for income taxes . the difference between our effective tax rate and the federal statutory rate resulted primarily from the effect of our domestic losses recorded without a tax benefit , as well as the effect of foreign earnings taxed at rates differing from the federal statutory rate . we record net deferred tax assets to the extent we believe these assets will more likely than not be realized . as a result of our cumulative losses and uncertainty of generating future taxable income , we provided a full valuation allowance against our net deferred tax assets for fiscal 2015 and 2014 . 24 due to the “ change of ownership ” provision of the tax reform act of 1986 , utilization of our net operating loss ( “ nol ” ) carryforwards and tax credit carryforwards may be subject to an annual limitation against taxable income in future periods . as a result of the annual limitation , a portion of these carryforwards may expire before ultimately becoming available to reduce future income tax liabilities .
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overview lantronix , inc. ( the “ company , ” “ lantronix , ” “ we , ” “ our , ” or “ us ” ) is a specialized networking company providing machine to machine ( “ m2m ” ) and internet of things ( “ iot ” ) solutions . our products deliver secure connectivity , device management and mobility for today 's increasingly connected world . by networking and managing devices and machines that have never before been connected , we enable our customers to realize the possibilities of the iot . we provide a broad portfolio of products intended to enhance the value of electronic devices and machines . our products are typically used by enterprise and commercial businesses , government institutions , telecommunication and utility companies , financial institutions , healthcare providers and individual consumers . 19 we organize our solutions into two product lines based on how they are marketed , sold and deployed : iot modules ( previously referred to as oem modules ) and enterprise solutions . we conduct our business globally and manage our sales teams by geography , according to four regions : the americas ; europe , middle east , and africa ( “ emea ” ) ; asia pacific ; and japan . recent accounting pronouncements refer to note 1 of notes to consolidated financial statements included in item 8 of this report for a discussion of recent accounting pronouncements . critical accounting policies and estimates the preparation of financial statements and related disclosures in accordance with u.s. generally accepted accounting principles requires us to make judgments , estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses during the reporting period . we regularly evaluate our estimates and assumptions related to net revenue , allowances for doubtful accounts , sales returns and allowances , inventory valuation , valuation of deferred income taxes , goodwill valuation , warranty reserves , litigation and other contingencies .
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executive overview we are a global provider of business process , information technology ( it ) and professional services that are focused on digital enablement . we operate in two reporting segment : content services ( cs ) and innodata advanced data solutions ( iads ) . the following table sets forth , for the period indicated , certain financial data expressed for the three years ended december 31 , 2012 : ( dollars in millions ) replace_table_token_4_th revenues we price our services based on the quantity delivered or resources utilized , and we recognize revenue in the period in which the services are performed and delivered . revenues for contracts billed on a time-and-materials basis are recognized as services are performed . revenues under fixed-fee contracts , which are not significant to the overall revenues , are recognized on the percentage of completion method of accounting , as services are performed or milestones are achieved . we formed our iads segment in mid-2011 to design and develop new capabilities to enable clients in the financial services , insurance , medical and healthcare sectors to improve decision-support through digital technologies . iads operates through two subsidiaries : synodex and docgenix . synodex offers a range of data analysis services in the healthcare , medical and insurance areas . docgenix provides services to financial services institutions . as of december 31 , 2012 , we own 77 % of synodex , a limited liability company , and 94 % of docgenix , a limited liability company . the subsidiaries are at an early stage of development , and reported minimal revenues in 2012. there were no revenues in 2011 . 24 our top two clients generated approximately 41 % , 30 % and 17 % of the company 's total revenues in the fiscal years ended december 31 , 2012 , 2011 and 2010 , respectively . another client accounted for less than 10 % of our total revenues for the year ended december 31 , 2012 , but for 14 % and 10 % of our total revenues for the year ended december 31 , 2011 and 2010 , respectively . one other client accounted for less than 10 % of our total revenues for the years ended december 31 , 2012 and 2011 , but for 11 % of our total revenues for the year ended december 31 , 2010. no other client accounted for 10 % or more of revenues during these periods . further , in the years ended december 31 , 2012 , 2011 and 2010 , revenues from non-u.s. clients accounted for 24 % , 30 % and 33 % , respectively , of the company 's revenues . we may lose any of these , or our other major clients , as a result of our failure to meet or satisfy our clients ' requirements , the completion or termination of a project or engagement , or the client 's selection of another service provider . we may also experience significant volume fluctuation . our services are typically subject to client requirements , and in many cases are terminable upon 30 to 90 days ' notice . direct operating costs direct operating costs consist of direct payroll , occupancy costs , depreciation and amortization , travel , telecommunications , computer services and supplies , realized gains and losses on settlement of foreign currency forward contracts and other direct expenses that are incurred in providing services to our clients . selling and administrative expenses selling and administrative expenses consist of management and administrative salaries and incentives , sales and marketing costs , new services research and related software development , professional fees and consultant costs and other administrative overhead costs . story_separator_special_tag > restructuring costs in the second half of 2012 , we restructured our operations , and recorded a one-time charge of approximately $ 0.2 million ( $ 0.1 million in direct operating costs and $ 0.1 million in selling , general and administrative costs ) representing severance and other personnel-related expenses . we expect cost savings of approximately $ 3.0 million per year from this restructuring activity . 26 income taxes for the year ended december 31 , 2012 , our u.s. entity recorded a benefit from income tax on account of losses incurred by our u.s. entity . with respect to our foreign subsidiaries , we recorded a provision for income taxes in accordance with the local tax regulations . as some of our foreign subsidiaries are subject to tax holidays or preferential tax rates , our overall effective tax rate was lower compared to the u.s. statutory tax rate . in addition , the earnings of our foreign subsidiaries are not subject to tax in the u.s. unless the earnings are repatriated . for the year ended december 31 , 2011 , we recorded a provision for income taxes for the u.s. entity and certain , but not all of our foreign subsidiaries , as certain foreign subsidiaries are subject to tax holidays or preferential tax rates . in addition , the earnings of our foreign subsidiaries are not subject to tax in the u.s. unless the earnings are repatriated . the effective tax rate at 17 % was lower for the year ended december 31 , 2012 compared to 26 % for the year ended december 31 , 2011 as the income attributable to our higher tax jurisdictions was lower . beginning in 2002 , unremitted earnings of foreign subsidiaries have been included in the consolidated financial statements without giving effect to the united states taxes that may be payable on distribution to the united states , because such earnings are not anticipated to be remitted to the united states . if such earnings were to be distributed , we could be subject to united states income taxes that may not be fully offset by foreign tax credits . determination at this time , of the amount of unrecognized deferred tax liability related to these earnings is not practicable . story_separator_special_tag a lower provision for income taxes and higher losses attributable to non-controlling interests in the year ended december 31 , 2012 compared to year ended december 31 , 2011 also contributed to an increase in net income . net loss for the iads segment was $ 6.3 million for the year ended december 31 , 2012 compared to $ 2.2 million for the year ended december 31 , 2011 , net of intersegment profits . the increase in net loss was principally on account of new personnel hired for operations , and sales and marketing , increase in facility overhead costs and other administrative costs , and a $ 0.5 million impairment charge for our docgenix subsidiary . year ended december 31 , 2011 compared to the year ended december 31 , 2010 revenues revenues were $ 73.9 million for the year ended december 31 , 2011 compared to $ 61.5 million for the year ended december 31 , 2010 , an increase of $ 12.4 million or approximately 20 % . the $ 12.4 million increase in revenues is principally attributable to higher revenues from our e-book-related services that we perform for one of our larger clients and revenue from analytics services that we perform for a major accounting firm . our top three clients generated $ 32.6 million or 44 % and $ 17.2 million or 28 % of our revenues in the fiscal years ended december 31 , 2011 and 2010 , respectively . another client accounted for less than 10 % of our revenues for the year ended december 31 , 2011 , and for $ 6.6 million or 11 % of our revenues for the year ended december 31 , 2010. no other client accounted for 10 % or more of our total revenues in either period . 28 further , for the years ended december 31 , 2011 and 2010 , revenues from clients located in foreign countries ( principally in europe ) amounted to $ 22.3 million or 30 % and $ 20.5 million or 33 % , respectively , of our total revenues . there were no revenues for the year ended december 31 , 2011 from our recently formed iads segment . direct operating costs direct operating costs were approximately $ 50.2 million and $ 47.3 million for the years ended december 31 , 2011 and 2010 , respectively , an increase of $ 2.9 million or approximately 6 % . the increase in direct operating costs was attributable to an increase in production headcount and other operating costs in support of increased revenues . in addition , direct operating costs increased on account of foreign exchange rate fluctuations caused by a strengthening of the philippine peso and indian rupee against the u.s. dollar . the u.s. dollar depreciated against the asian currencies in the first three quarters of 2011 ; however , it surged significantly in the fourth quarter of 2011. this resulted in a net loss on the settlement of foreign currency forward contracts in the fourth quarter of 2011. the realized gain on the settlement of forward contracts in 2011 was $ 1.2 million as compared to $ 2.2 million in 2010. the increase in direct operating costs was partially offset by a decrease in direct labor costs achieved primarily from productivity gains . the productivity gains were principally the result of increased efficiency , improvements in our processes and innovation in our technology . included in total direct operating costs is approximately $ 1.1 million in start-up costs that we incurred for the iads segment during the year ended december 31 , 2011. the changes in revenues and direct operating expenses mentioned above resulted in a decline in direct operating costs as a percentage of revenues to 68 % for the year ended december 31 , 2011 , from 77 % for the year ended december 31 , 2010. excluding the start-up costs incurred for the iads segment from the total direct operating costs , direct operating costs would have increased by approximately 4 % in 2011 as compared to 2010 and , as a percentage of revenues , would have been 66 % in 2011 , compared to 77 % in 2010. selling and administrative expenses selling and administrative expenses were $ 19.1 million and $ 15.7 million for the years ended december 31 , 2011 and 2010 , respectively , an increase of $ 3.4 million or 22 % . selling and administrative expenses as a percentage of revenues was 26 % for the year ended december 31 , 2011 and 25 % for the year ended december 31 , 2010. the increase in selling and administrative expenses for the year ended december 31 , 2011 is principally attributable to compensation costs of new personnel hired for sales and marketing , severance costs of $ 0.4 million , increases in variable employee incentives and $ 1.6 million on account of our continued investments for the iads segment , which includes approximately $ 0.3 million incurred towards professional fees for creating best-in-class information and a data security environment for the iads segment . excluding the $ 1.6 million start-up costs incurred for the iads segment , selling and administrative expenses would have increased by approximately 11 % in 2011 as compared to 2010 and , as a percentage of revenues , would have been approximately 23 % in 2011 , compared to 25 % in 2010 . 29 income taxes for the year ended december 31 , 2011 , we recorded a provision for income taxes primarily for our foreign subsidiaries , which was partially offset by a tax benefit recorded for the u.s. entity . the benefit from income tax recorded by the u.s. entity resulted from losses incurred by the u.s. entity during the year ended december 31 , 2011. these losses were incurred primarily on account of start-up costs incurred for the iads segment , with no associated revenue in 2011. certain of the company 's foreign subsidiaries are subject to preferential tax rates .
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results of operations year ended december 31 , 2012 compared to the year ended december 31 , 2011 revenues total r evenues were $ 86.6 million for the year ended december 31 , 2012 , a 17 % increase from the $ 73.9 million for the year ended december 31 , 2011. revenues from the content services segment were $ 85.4 million and $ 73.9 million for the years ended december 31 , 2012 and 2011 , respectively . revenues from the iads segment were $ 1.2 million for the year ended december 31 , 2012. there were no revenues from the iads segment for the year ended december 31 , 2011. the $ 11.4 million increase in the content services segment is principally attributable to higher revenues from e-book related services that we performed for one of our significant clients . we experienced sequential declines in revenue from this client in the last three quarters of 2012. our top two clients generated $ 35 million or 41 % and $ 22.2 million or 30 % of our total revenues in the fiscal years ended december 31 , 2012 and 2011 , respectively . another client accounted for less than 10 % of our total revenues for the year ended december 31 , 2012 , but for 14 % of our total revenues for the year ended december 31 , 2011. no other client accounted for 10 % or more of revenues during these periods . further , in the years ended december 31 , 2012 and 2011 , revenues from non-u.s. clients accounted for 24 % and 30 % , respectively , of our total revenues . direct operating costs direct operating costs were approximately $ 57.4 million and $ 50.2 million for years ended december 31 , 2012 and 2011 , respectively , an increase of $ 7.2 million or approximately 14 % .
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the forward-looking statements are made pursuant to safe harbor provisions of the private securities litigation reform act of 1995. numerous factors could cause actual results to differ materially from those in the forward-looking statements , including the following : ( i ) the availability to ctg of qualified professional staff , ( ii ) domestic and foreign industry competition for clients and talent , including technical , sales and management personnel , ( iii ) increased bargaining power of large clients , ( iv ) the company 's ability to protect confidential client data , ( v ) the partial or complete loss of the revenue the company generates from international business machines corporation ( ibm ) and other significant clients , ( vi ) the uncertainty of clients ' implementations of cost reduction projects , ( vii ) the effect of healthcare reform and initiatives , ( viii ) the mix of revenue between staffing and solutions , ( ix ) currency exchange risks , ( x ) risks associated with operating in foreign jurisdictions , ( xi ) renegotiations , nullification , or breaches of contracts with clients , vendors , subcontractors or other parties , ( xii ) the impact of current and future laws and government regulation , as well as repeal or modification of such , affecting the information technology ( it ) solutions and staffing industry , taxes and the company 's operations in particular , ( xiii ) industry and economic conditions , including fluctuations in demand for it services , ( xiv ) consolidation among the company 's competitors or clients , ( xv ) the need to supplement or change our it services in response to new offerings in the industry or changes in client requirements for it products and solutions , ( xvi ) the risks associated with acquisitions , ( xvii ) actions of activist shareholders , and ( xviii ) the risks described in item 1a of this annual report on form 10-k and from time to time in the company 's reports filed with the securities and exchange commission ( sec ) . industry trends the market demand for the company 's services is heavily dependent on information and technology-related spending by major corporations , organizations and government entities in the markets and regions that we serve . the pace of technology advances and changes in business requirements and practices of our clients all have a significant impact on the demand for the services that we provide . competition for new engagements and pricing pressure has been strong . throughout 2017 , many of our healthcare clients did not begin new projects when existing projects ended due to their capital constraints . the demand for the company 's information and technology-related solutions business , primarily in our healthcare vertical market in north america improved in 2018 and 2019 as spending increased along with the improving economy . the company operates in one industry segment , providing information and technology-related services to its clients . these services include information and technology-related solutions , including supplemental staffing as a solution . with solutions services , we generally take responsibility for the deliverables and some level of project and staff management , and services may include high-end advisory or business related consulting . when providing staffing services , including managed staffing , staff augmentation , and volume staffing , we typically supply personnel to our clients who then , in turn , take their direction from the clients ' managers . it solutions and it and other staffing revenue as a percentage of consolidated revenue for the three years ended december 31 , 2019 , 2018 , and 2017 is as follows : replace_table_token_8_th the company promotes a majority of its services through five vertical market focus areas : technology service providers , manufacturing , healthcare ( which includes services provided to healthcare providers , health insurers ( payers ) , and life sciences companies ) , financial services , and energy . the remainder of ctg 's revenue is derived from general markets . 19 ctg 's revenue by vertical market as a percentage of consolidated revenue for the three years ended december 31 , 2019 , 2018 , and 2017 is as follows : replace_table_token_9_th the it services industry is extremely competitive and characterized by continuous changes in client requirements and improvements in technologies . our competition varies significantly by geographic region , as well as by the type of service provided . many of our competitors are larger than ctg , and have greater financial , technical , sales , and marketing resources . in addition , the company frequently competes with a client 's own internal it staff . our industry is impacted by the growing use of lower-cost offshore delivery capabilities ( primarily india and other parts of asia ) . there can be no assurance that we will be able to continue to compete successfully with existing or future competitors or that future competition will not have a material adverse effect on our results of operations and financial condition . revenue recognition the company recognizes revenue when control of the promised good or service is transferred to clients , in an amount that reflects the consideration the company expects to be entitled to in exchange for those goods or services . for time-and-material contracts , revenue is recognized as hours are incurred and costs are expended . for contracts with progress billing schedules , primarily monthly , revenue is recognized as services are rendered to the client . revenue for fixed-price contracts is recognized over time using an input-based approach . over time revenue recognition best portrays the company 's performance in transferring control of the goods or services to the client . on most fixed price contracts , revenue recognition is supported through contractual clauses that require the client to pay for work performed to date , including cost plus a reasonable profit margin , for goods or services that have no alternative use to the company . story_separator_special_tag % of revenue in 2018. operating income from the north american operations was $ 0.8 million in 2019 before allocations of $ 1.6 million to foreign operations , compared 22 with a loss of $ 2.4 million in 2018 before allocations of $ 0.9 million . the 2018 loss was impacted by investments in business development , recrui ting , and marketing , totaling approximately $ 3.5 million . operating income from our european operations was $ 6.1 million in 2019 before allocations of $ 1.6 million from our north american operations , compared with $ 6.3 million in 2018 before allocations of $ 0.9 million . other income ( expense ) was ( 0.2 ) % of revenue in 2019 and 0.1 % of revenue in 2018. in 2018 , the company recorded a non-taxable life insurance gain of approximately $ 0.8 million as one of its former executives passed away . the company 's effective tax rate ( etr ) is calculated based upon the full year 's operating results and various tax related items . the etr in 2019 was 34.4 % , while the 2018 etr was 224.2 % . the etr in 2019 was impacted as a large portion of the company 's profits result from the company 's european operations where the effective tax rates are generally higher than in the u.s. additionally , the etr was higher in 2019 primarily due to non-deductible acquisition costs related to the tech-it and soft company acquisitions . the etr was high in 2018 primarily due to the company recording a valuation allowance for its deferred tax assets in the u.s. totaling $ 3.8 million as the company had recurring pre-tax losses in recent years and uncertainty as to income in future years . the company also incurred approximately $ 0.7 million of tax associated with the gilti provisions of the 2017 tax cut and jobs act , and $ 0.3 million of tax from non-deductible acquisition-related costs in our european operations . these items , which caused additional tax expense , were offset by a non-taxable life insurance gain , the reversal of the valuation for deferred tax assets in the united kingdom , the tax cuts and jobs act which reduced the us federal corporate tax rate to 21 % , and tax benefits for the work opportunity tax credit ( wotc ) and research and development tax credit ( r & d ) . net income for 2019 was 1.0 % of revenue or $ 0.29 per diluted share , compared with net loss of ( 0.8 ) % of revenue or $ ( 0.20 ) per diluted share in 2018. diluted earnings per share were calculated using 14.0 million weighted-average equivalent shares outstanding in 2019 and 13.8 million in 2018 . 2018 as compared with 2017 the company recorded revenue in 2018 and 2017 as follows : replace_table_token_13_th reimbursable expenses billed to clients and included in revenue totaled $ 3.2 million and $ 3.3 million in 2018 and 2017 , respectively . the revenue increase in north america in 2018 as compared with 2017 was primarily due to a significant increase in demand for the company 's it solutions business , primarily in our healthcare vertical market , and a modest increase in demand for our it staffing business , primarily in our technology services provider vertical market . the revenue increase in europe was primarily due to strong demand for the company 's services in the european markets we serve , and the acquisition of soft company on february 15 , 2018 , which had an annual revenue of approximately $ 30 million . on a consolidated basis , it solutions revenue increased $ 21.7 million or 23.7 % in 2018 as compared with 2017. the increase was primarily due to an increase in it solutions services in europe and the addition of soft company , which was acquired on february 15 , 2018. soft company primarily specializes in providing it services to finance , insurance , telecom , and media services companies . the increase was also due in part to our strategy to shift to non-electronic health records ( ehr ) services in our healthcare vertical market . the company expanded its healthcare it business development team in 2018 with individuals who have experience selling healthcare it services such as advisory and technical services , outsourcing , and staff augmentation . this team was successful in driving revenue growth in this vertical market and expanding the non-ehr healthcare related services we provide . also on a consolidated basis , it and other staffing revenue increased $ 35.9 million or 17.1 % during 2018 as compared with 2017. the it staffing increase was primarily due to the addition of soft company in the 2018 first quarter , 23 growth in it staffing in north america , and in part due to a change in accounting related to the new revenue recognition standard which requires revenue we previously recorded on a net basis to now be recorded on a gross basis for billable subcontractors . the company recorded $ 4.6 million , or 1.3 % of our 2018 consolidated revenue on a gross basis , which would have been recorded on a net basis under the company 's historic accounting under topic 605. this accounting change solely related to the it and other staffing services . following the acquisition of soft company , which relies heavily on billable subcontractors , we have revised how we define and calculate headcount in order to report all billable consultants , including both employees and subcontractors . based on this new approach , the company 's headcount was approximately 4,150 at december 31 , 2018 , which was a 22.1 % increase from approximately 3,400 billable consultants at december 31 , 2017. approximately 92 % of this headcount was for technical resources and 8 % for support positions .
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results of operations the table below sets forth percentage information calculated as a percentage of consolidated revenue as reported on the company 's consolidated statements of operations as included in item 8 , “ financial statements and supplementary data ” in this report . replace_table_token_11_th 2019 as compared with 2018 the company recorded revenue in 2019 and 2018 as follows : replace_table_token_12_th the company 's focus , throughout its operations , is to expand the amount of it solutions services it provides to its clients , as compared with it staffing services , and to become a solutions-centric company . it solutions provide significant value to our clients , and drive higher bill rates and margins for the company . our existing solutions , such as application maintenance and outsourcing , data management and testing , combined with new or expanded solutions through acquisitions , will give the company a broader set of it solutions to provide to its clients . additionally , the company will continue to expand the capabilities of its existing solutions by adding elements such as robotic process automation and artificial intelligence . the revenue increase in north america in 2019 as compared with 2018 was primarily due to a significant increase in demand for the company 's it solutions business , primarily in our healthcare vertical market , and a modest increase in demand for our it staffing business , primarily in our technology services provider vertical market . the revenue increase in europe is primarily due to strong demand for the company 's services in the european markets we serve , and the acquisition of tech-it on february 6 , 2019 , which at the time of acquisition had estimated annual revenue of approximately $ 20 million . reimbursable expenses billed to clients and included in revenue totaled $ 2.6 million and $ 3.2 million in 2019 and 2018 , respectively .
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factors that could cause our actual results to differ materially from those anticipated include those discussed in business , information regarding forward-looking statements , and risk factors. material transaction on february 11 , 2015 , dawson geophysical company , which was formerly known as tgc industries , inc. ( legacy tgc or the company ) , completed its previously announced strategic business combination with dawson operating company , which was formerly known as dawson geophysical company ( legacy dawson ) , pursuant to which riptide acquisition corp. , a wholly-owned subsidiary of legacy tgc , merged with and into legacy dawson , with legacy dawson continuing after the merger as the surviving entity and a wholly-owned subsidiary of legacy tgc ( the merger ) . as a result of the merger , the former shareholders of legacy dawson received shares of legacy tgc common stock representing approximately 66 % of the outstanding common shares of the post-merger combined company , and legacy tgc 's shareholders retained approximately 34 % of the outstanding common shares of the post-merger combined company . in connection with the merger , legacy dawson changed its name to dawson operating company and legacy tgc changed its name to dawson geophysical company. this item 7 discusses the financial condition and results of operations of the company as of and for the year ended december 31 , 2014 , excluding legacy dawson except as otherwise specifically noted herein . where appropriate , however , management has included a discussion regarding how it believes the merger may impact various aspects of the combined company 's future financial condition and or results of operations . unless the context indicates otherwise , all references in this item 7 to legacy tgc , the company , we , us , or our refer to the company and its subsidiaries other than legacy dawson and its subsidiaries . executive overview we are a leading provider of seismic data acquisition services throughout the continental united states and canada . we supply seismic data to companies engaged in the exploration and development of oil and natural gas on land and in land-to-water transition areas . our customers rely on seismic data to identify areas where subsurface conditions are favorable for the accumulation of existing hydrocarbons , to optimize the development and production of hydrocarbon reservoirs , to better delineate existing oil and natural gas fields , and to augment reservoir management techniques . we acquire geophysical data using the latest in 3-d survey techniques . we introduce acoustic energy into the ground by using vibration equipment or dynamite detonation , depending on the surface terrain and subsurface requirements . the reflected energy , or echoes , is received through geophones , converted into a digital signal at a multi-channel recording unit , and then transmitted to a central recording vehicle . subsurface requirements dictate the number of channels necessary to perform our services . with our state-of-the-art seismic equipment , including computer technology and multiple channels , we acquire , on a cost-effective basis , immense volumes of seismic data that when processed and interpreted produce more precise images of the earth 's subsurface . our customers then use our seismic data to generate 3-d geologic models that help reduce finding costs and improve recovery rates from existing wells . currently , the seismic data acquisition industry is made up of a number of companies divided into two groups . the first group is made up of three publicly-traded companies with long operating histories that field numerous crews and work in a number of different regions and terrain . this group includes us , saexploration holdings , inc. , or sae , and cgg ( which recently sold its north american onshore seismic contract acquisition business to geokinetics , inc. , or geokinetics ) . the second group is made up of geokinetics , global geophysical services , inc. , or global geophysical , tesla exploration , ltd. , or tesla , breckenridge geophysical inc. , or breckenridge , paragon geophysical services , inc. , or paragon , lonestar geophysical surveys , or lonestar , and smaller companies which generally run one or two seismic crews and often specialize in specific regions or types of operations . 18 we provide our seismic data acquisition services primarily to onshore oil and natural gas exploration and development companies for use in the onshore drilling and production of oil and natural gas in the continental united states and canada . the main factors influencing demand for seismic data acquisition services in our industry are the level of drilling activity by oil and natural gas companies and the sizes of such companies ' exploration and development budgets , which , in turn , depend largely on current and anticipated future crude oil and natural gas prices and depletion rates . our customers are major and independent oil and natural gas exploration and development companies . the services we provide to our customers vary according to the size and needs of each customer . our services are marketed by supervisory and executive personnel who contact customers to determine their needs and respond to customer inquiries regarding the availability of crews . contacts are based principally upon professional relationships developed over a number of years . the acquisition of seismic data for the oil and natural gas industry is a highly competitive business . contracts for such services generally are awarded on the basis of price quotations , crew experience , and the availability of crews to perform in a timely manner , although factors other than price , such as crew safety , performance history , and technological and operational expertise , are often determinative . our competition includes publicly traded competitors , such as cgg ( which recently sold its north american onshore seismic contract acquisition business to geokinetics ) and sae . our other major competitors include geokinetics , global geophysical , tesla , breckenridge , paragon and lonestar . story_separator_special_tag we use ebitda as a supplemental financial measure to assess : · the financial performance of our assets without regard to financing methods , capital structures , taxes , or historical cost basis ; · our liquidity and operating performance over time and in relation to other companies that own similar assets and that we believe calculate ebitda in a manner similar to us ; and · the ability of our assets to generate cash sufficient for us to pay potential interest expenses . we also understand that such data is used by investors to assess our performance . however , ebitda is not a measure of operating income , operating performance , or liquidity presented in accordance with u.s. generally accepted accounting principles ( gaap ) . when assessing our operating performance or our liquidity , you should not consider this data in isolation or as a substitute for our net income , cash flow from operating activities , or other cash flow data calculated in accordance with gaap . ebitda excludes some , but not all , items that affect net income and operating income , and these measures may vary among other companies . therefore , ebitda as presented below may not be comparable to similarly titled measures of other companies . further , the results presented by ebitda can not be achieved without incurring the costs that the measure excludes : interest , taxes , depreciation , and amortization . the following table reconciles our ebitda to our net income ( loss ) : replace_table_token_2_th 21 liquidity and capital resources liquidity cash flows from operating activities . net cash provided by operating activities was $ 9,255,375 for the year ended december 31 , 2014 , compared to $ 22,969,342 for the same period of 2013. the $ 13,713,967 decrease was principally attributable to a higher net loss , decreases in depreciation expense and prepaid federal and state income taxes , which were partially offset by increases in trade accounts receivable , trade accounts payable , and billings in excess of cost and estimated earnings on uncompleted contracts . working capital decreased $ 5,226,142 to $ 12,482,021 as of december 31 , 2014 , from the december 31 , 2013 working capital of $ 17,708,163. this decrease was primarily due to decreases of $ 4,767,223 in cash , $ 3,909,198 in prepaid federal and state income taxes , increases of $ 3,666,450 in trade accounts payable and $ 3,797,882 in billings in excess of cost and estimated earnings on uncompleted contracts , partially offset by a $ 8,828,351 increase in trade accounts receivable and a $ 1,137,929 decrease in current maturities of notes payable . cash flows used in investing activities . net cash used in investing activities was $ 963,976 for the year ended december 31 , 2014 , and $ 667,498 for the year ended december 31 , 2013. this $ 296,478 increase was due to a decrease in proceeds from the sale of property and equipment of $ 765,761 partially offset by a decrease in capital expenditures of $ 469,283. cash flows used in financing activities . net cash used in financing activities was $ 13,039,683 for the year ended december 31 , 2014 , and $ 14,996,672 for the year ended december 31 , 2013. the $ 1,956,989 decrease was due primarily to a decrease in principal payments on notes payable of $ 1,684,600 and $ 533,286 in principal payments on capital lease obligations . capital expenditures . during the year ended december 31 , 2014 , we acquired $ 7,954,973 of vehicles and equipment including the purchase in september 2014 of a 10,500-channel inova hawk seismic data acquisition system and replacing and purchasing additional vehicles and equipment . we financed these acquisitions by using a $ 6,096,173 note payable to a commercial bank to finance the inova hawk system disclosed above , $ 1,379,395 of cash on hand and by incurring $ 479,405 in capital lease obligations from a vehicle leasing company . we do not budget for our capital expenditures . early during the year ended december 31 , 2013 we adopted a maintenance capital expenditures program and incurred capital expenditures of $ 2,474,865 , primarily to maintain existing equipment . during the year ended december 31 , 2012 , capital expenditures of $ 57,107,732 were used to acquire seismic equipment and vehicles , replace similar equipment and vehicles , and to purchase our fourth and fifth gsr systems consisting of a total of 14,200 channels and related equipment , our sixth gsr system with 13,000 channels , our first next-generation 3-channel gsx system with 8,000 stations , and seven new inova vibration vehicles . cash of $ 31,970,418 , notes of $ 22,201,800 from a commercial bank , and capital lease obligations from a vehicle leasing company of $ 2,935,514 were used to finance these acquisitions . this major investment has allowed us to benefit from new technology while primarily remaining in a maintenance capital expenditures policy since 2013. capital resources historically , we have relied on cash generated from operations , short-term borrowings from commercial banks and equipment lenders , and loans from directors to fund our working capital requirements and capital expenditures . the company has a revolving line of credit agreement with a commercial bank . the borrowing limit under the revolving line of credit agreement is $ 5,000,000 and was renewed on september 16 , 2013 , and again on september 16 , 2014. the revolving line of credit agreement expires on september 16 , 2015. our obligations under this agreement are secured by a security interest in our accounts receivable . interest on the outstanding amount under the line of credit loan agreement is payable monthly at the greater of the prime rate of interest or five percent . as of december 31 , 2014 , and since its inception , we have had no borrowings outstanding under the line of credit loan agreement . 22 at december 31 , 2014 , the company had four outstanding notes payable to commercial banks for equipment purchases .
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results of operations year ended december 31 , 2014 , compared to year ended december 31 , 2013 revenues . our revenues were $ 118,847,754 for the year ended december 31 , 2014 , compared to $ 134,534,540 for the same period of 2013 , a decrease of 11.7 % . this decrease was primarily due to the softening in the seismic market that began in early 2013 , our operation of fewer crews in the united states and canada during the twelve months ended december 31 , 2014 compared to the same period of 2013 , and the adverse winter weather conditions in parts of the united states and canada during the first quarter of 2014. we operated four crews in the united states during the first and second quarters of 2014 , added one crew during the third quarter ended september 30 , 2014 , and idled two crews during the fourth quarter , ending the quarter with three crews in the united states for the quarter ended december 31 , 2014. in canada , we operated six crews for most of this year 's first quarter and ended the first quarter with four crews . by late-april , all canadian crews had been shut down following the end of the winter season . we added one crew in canada in the beginning of june for summer work , but that crew worked intermittently during the third quarter . during the fourth quarter we added crews in canada for the winter season , ending the quarter with five crews . this compares with our operation of nine crews in the united states and six crews in canada during the first quarter of 2013. we began the second quarter of 2013 with eight crews operating in the united states and ended the quarter with two crews , and began the third quarter of 2013 with three crews operating in the united states and ended the quarter with five crews .
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medical segment medical revenues in 2012 of $ 4.1 billion increased 2.1 % over 2011 , which reflected an estimated impact of unfavorable foreign currency translation of 3.0 % . the following is a summary of medical revenues by organizational unit : replace_table_token_6_th * amounts may not add due to rounding . medical segment revenue growth , on a foreign currency-neutral basis , reflected solid growth in all units . medical surgical systems revenue reflected solid growth of international safety-engineered product sales and growth from sales of the bd phaseal product resulting from the carmel pharma , ab ( carmel ) acquisition that occurred in the fourth quarter of fiscal year 2011. diabetes care revenue growth reflected continued strong sales of pen needles , including sales of the bd ultra-fine nano . pharmaceutical systems revenue reflected the continued strong demand from companies producing biotech drugs and certain heparin products . global sales of safety-engineered products were $ 966 million , compared with $ 885 million in the prior year , and included an estimated $ 14 million unfavorable impact due to foreign currency translation . medical operating income in 2012 was $ 1.2 billion , or 28.4 % of medical revenues , as compared with $ 1.2 billion , or 29.5 % , of revenues in 2011. gross profit margin was lower in the current year than in 2011 primarily due to amortization of intangibles associated with the carmel acquisition , unfavorable pricing impacts on certain product lines and the unfavorable impact of decreased sales of products which have higher gross margins . these 21 unfavorable impacts on gross profit margin were partially offset by favorable foreign currency translation and lower manufacturing costs resulting from project reloco , a global , cross-functional business initiative to drive sustained low-cost capability , primarily benefitting medical surgical systems . see further discussion on gross profit margin below . selling and administrative expense as a percentage of medical revenues in 2012 increased to 17.7 % of revenues from 17.5 % of revenues in 2011 , primarily due to increased spending for expansion in emerging markets and higher expenses resulting from the carmel acquisition as compared with the prior year 's period , partially offset by continued spending controls and favorable foreign currency translation . research and development expenses in 2012 increased $ 11 million , or 8 % , and reflected continued investment in the development of new products and platforms , including new diabetes care and closed system transfer devices . diagnostics segment diagnostics revenues in 2012 of $ 2.5 billion increased 2.3 % over 2011 , which reflected an estimated impact of unfavorable foreign currency translation of 2.2 % . the following is a summary of diagnostics revenues by organizational unit : replace_table_token_7_th * amounts may not add due to rounding . revenue growth in the preanalytical systems unit , on a foreign currency-neutral basis , was driven by sales of safety-engineered products . sales of safety-engineered products grew 2 % in the united states , driven by bd vacutainer tm push button blood collection set sales , and 4 % internationally , which included an estimated unfavorable foreign exchange impact of 5 % . the diagnostic systems unit experienced growth in worldwide sales of its automated diagnostic platforms , including the molecular bd probetec tm , bd viper tm and bd affirm tm systems , along with solid growth of its bd bactec tm blood culture and tb systems and the bd phoenix tm id/ast platform and its surepath products . diagnostics revenues in 2012 also reflected a favorable comparison to the prior-year period due to new product launches and the kiestra acquisition . diagnostics operating income in 2012 was $ 653 million , or 25.7 % of diagnostics revenues , compared with $ 636 million , or 25.7 % of revenues , in 2011. gross profit margin in the diagnostics segment was down as compared to the prior year and reflected unfavorable foreign currency translation , higher raw material costs , and the unfavorable impact of decreased sales of products which have higher gross margins . see further discussion on gross profit margin below . selling and administrative expense as a percentage of diagnostics revenues increased by 10 basis points in 2012 to 21.6 % , primarily due to investments in emerging markets , partially offset by continued spending controls and favorable foreign currency translation . research and development expense decreased $ 9 million , or 5 % from 2011 reflecting a program termination in 2011. current year r & d spending reflected our continued investment in the development of new products and platforms , including the bd max and new bd viper platforms and menus . biosciences segment biosciences revenues , which include the cell analysis unit and the advanced bioprocessing platform , of $ 1.1 billion in 2012 decreased 1.5 % from 2011 , and reflected an estimated impact of unfavorable foreign currency translation of 2.2 % . biosciences revenue growth , on a foreign currency-neutral basis , was primarily driven by instrument and reagent sales in emerging markets , partially offset by declines in the u.s. due to constrained research spending . 22 biosciences operating income in 2012 was $ 262 million , or 24.2 % of biosciences revenues , compared with $ 278 million , or 25.4 % , in 2011. the segment 's operating income in 2012 reflected a lower gross profit margin than 2011 primarily due to the unfavorable impact of foreign currency translation and amortization of capitalized software as well as intangibles associated with the 2011 acquisition of accuri cytometers , inc. ( accuri ) . the segment 's gross profit margin was also unfavorably impacted by increases in certain raw material costs . see further discussion on gross profit margin below . selling and administrative expense as a percentage of biosciences revenues was 24.4 % in 2012 as compared with 24.5 % in 2011 and reflected continued spending controls partially offset by unfavorable foreign currency translation . story_separator_special_tag income from continuing operations and diluted earnings per share from continuing operations in 2011 were $ 1.2 billion and $ 5.31 , respectively . the charge related to the discontinuance of a research program decreased income from continuing operations in 2011 by $ 6 million , or $ 0.03 per share . financial instrument market risk we selectively use financial instruments to manage market risk , primarily foreign currency exchange risk and interest rate risk relating to our ongoing business operations . the counterparties to these contracts are highly rated financial institutions . we do not enter into financial instruments for trading or speculative purposes . foreign exchange risk bd and its subsidiaries transact business in various foreign currencies throughout europe , asia pacific , canada , japan and latin america . we face foreign currency exposure from the effect of fluctuating exchange rates on payables and receivables relating to transactions that are denominated in currencies other than our functional currency . these payables and receivables primarily arise from intercompany transactions . we hedge substantially all such exposures , primarily through the use of forward contracts . we also face currency exposure that arises from translating the results of our worldwide operations , including sales , to the u.s. dollar at exchange rates that have fluctuated from the beginning of a reporting period . from time to time , we purchase forward contracts and options to hedge certain forecasted sales that are denominated in foreign currencies in order to partially protect against a reduction in the value of future sales resulting from adverse foreign exchange rate movements . gains or losses on our derivative instruments are largely offset by the gains or losses on the underlying hedged transactions . we did not enter into contracts to hedge cash flows in fiscal year 2012 . 24 derivative financial instruments are recorded on our balance sheet at fair value . for foreign currency derivatives , market risk is determined by calculating the impact on fair value of an assumed change in foreign exchange rates relative to the u.s. dollar . fair values were estimated based upon observable inputs , specifically spot currency rates and foreign currency prices for similar assets and liabilities . with respect to the derivative instruments outstanding at september 30 , 2012 , a 10 % appreciation of the u.s. dollar over a one-year period would decrease pre-tax earnings by $ 8 million , while a 10 % depreciation of the u.s. dollar would increase pre-tax earnings by $ 8 million . comparatively , considering our derivative instruments outstanding at september 30 , 2011 , a 10 % appreciation of the u.s. dollar over a one-year period would have decreased pre-tax earnings by $ 23 million , while a 10 % depreciation of the u.s. dollar would have increased pre-tax earnings by $ 23 million . these calculations do not reflect the impact of exchange gains or losses on the underlying transactions that would substantially offset the results of the derivative instruments . interest rate risk our primary interest rate exposure results from changes in short-term u.s. dollar interest rates . our debt and interest-bearing investments at september 30 , 2012 are substantially all u.s. dollar-denominated . therefore , transaction and translation exposure relating to such instruments is minimal . when managing interest rate exposures , we strive to achieve an appropriate balance between fixed and floating rate instruments . we may enter into interest rate swaps to help maintain this balance and manage debt and interest-bearing investments in tandem , since these items have an offsetting impact on interest rate exposure . for interest rate derivative instruments , fair values are provided by the financial institutions that are counterparties to these arrangements . market risk for these instruments is determined by calculating the impact to fair value of an assumed change in interest rates across all maturities . a change in interest rates on short-term debt and interest-bearing investments impacts our earnings and cash flow , but not the fair value of these instruments because of their limited duration . a change in interest rates on long-term debt is assumed to impact the fair value of the debt , but not our earnings or cash flow because the interest on such obligations is fixed . based on our overall interest rate exposure at september 30 , 2012 and 2011 , a change of 10 % in interest rates would not have a material effect on our earnings or cash flows over a one-year period . an increase of 10 % in interest rates would decrease the aggregate fair value of our long-term debt and related fair value hedges at september 30 , 2012 and 2011 by approximately $ 109 million and $ 90 million , respectively . a 10 % decrease in interest rates would increase the aggregate fair value of these same financial instruments at september 30 , 2012 and 2011 by approximately $ 115 million and $ 96 million , respectively . liquidity and capital resources net cash flows from continuing operating activities net cash provided by continuing operating activities in 2012 was $ 1.7 billion , compared with $ 1.6 billion in 2011. the current year change in operating assets and liabilities resulted in a net use of cash and primarily reflected higher levels of inventory and accounts receivables , substantially offset by lower levels of prepaid expenses . net cash provided by continuing operating activities in 2012 was reduced by changes in the pension obligation resulting primarily from a discretionary cash contribution of $ 100 million . an additional discretionary contribution of $ 100 million was made to the u.s. pension plan in october 2012. net cash flows from continuing investing activities capital expenditures our investments in capital expenditures are focused on projects that enhance our cost structure and manufacturing capabilities , and support our strategy of geographic expansion with select investments in growing markets .
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financial review company overview description of the company and business segments becton , dickinson and company ( bd ) is a global medical technology company engaged principally in the development , manufacture and sale of medical devices , instrument systems and reagents used by healthcare institutions , life science researchers , clinical laboratories , the pharmaceutical industry and the general public . our business consists of three worldwide business segments bd medical ( medical ) , bd diagnostics ( diagnostics ) and bd biosciences ( biosciences ) . our products are marketed in the united states and internationally through independent distribution channels and directly to end-users by bd and independent sales representatives . references to years throughout this discussion relate to our fiscal years , which end on september 30. strategic objectives bd remains focused on delivering sustainable growth and shareholder value , while making appropriate investments for the future . bd management operates the business consistent with the following core strategies : to increase revenue growth by focusing on our core products that deliver greater benefits to patients , healthcare workers and researchers ; to increase investment in research and development for platform extensions and innovative new products ; to make significant investments in growing our operations in emerging markets ; to improve operating effectiveness and balance sheet productivity ; to drive an efficient capital structure and strong shareholder returns . our strategy focuses on four specific areas within healthcare and life sciences : enabling safer , simpler and more effective parenteral drug delivery ; improving clinical outcomes through new , accurate and faster diagnostics ; providing tools and technologies to the research community that facilitates the understanding of the cell , cellular diagnostics and cell therapy ; enhancing disease management in diabetes , women 's health and cancer , and infection control .
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pending or anticipated acquisitions ; any statements regarding expected restructuring costs ; any statements concerning the adequacy of our current liquidity and the availability of additional sources of liquidity ; any statements of expectation or belief ; and any statements of assumptions underlying any of the foregoing . generally , the words “ anticipate , ” “ believe , ” “ plan , ” “ expect , ” “ future , ” “ intend , ” “ may , ” “ will , ” “ should , ” “ estimate , ” “ predict , ” “ potential , ” “ continue ” and similar expressions identify forward-looking statements . our forward-looking statements are based on current expectations , forecasts and assumptions and are subject to risks and uncertainties , including those contained in part i , item 1a of this report . as a result , actual results could vary materially from those suggested by the forward looking statements . we undertake no obligation to publicly disclose any revisions to these forward-looking statements to reflect events or circumstances occurring subsequent to filing this report with the securities and exchange commission . overview we are a leading global provider of integrated manufacturing solutions , components , products and repair , logistics and after-market services . our revenue is generated from sales of our products and services primarily to original equipment manufacturers ( oems ) in the following industries : communications networks , storage , industrial , defense and aerospace , medical , energy and industries that include embedded computing technologies in products such as set-top boxes , point-of-sales devices , casino gaming machines and automotive components and systems . our operations are managed as two businesses : 1 ) integrated manufacturing solutions ( ims ) . our ims segment consists of printed circuit board assembly and test , final system assembly and test , and direct-order-fulfillment . 2 ) components , products and services ( cps ) . components include interconnect systems ( printed circuit board fabrication , backplane , cable assemblies and plastic injection molding ) and mechanical systems ( enclosures and precision machining ) . products include memory , rf , optical and microelectronics solutions from our viking technology division ; defense and aerospace products from sci technology ; storage solutions from our newisys division and cloud-based manufacturing execution software from our 42q division . services include design , engineering , logistics and repair services . our only reportable segment for financial reporting purposes is ims , which represented approximately 80 % of our total revenue in 2017 . our cps business consists of multiple operating segments which do not meet the quantitative thresholds for being presented as reportable segments . therefore , financial information for these operating segments is presented in a single category entitled “ components , products and services ” . all references in this section to years refer to our fiscal years ending on the last saturday of each year closest to september 30th . fiscal 2017 and 2016 were each 52 weeks and fiscal 2015 was a 53-week year , with the extra week occurring in the fourth fiscal quarter . the additional week in 2015 did not significantly affect our results of operations or financial position . our strategy is to leverage our comprehensive product and service offerings , advanced technologies and global capabilities to further penetrate diverse end markets that we believe offer significant growth opportunities and have complex products that require higher value-added services . we believe this strategy differentiates us from our competitors and will help drive more sustainable revenue growth and provide opportunities for us to ultimately achieve operating margins that exceed industry standards . there are many challenges to successfully executing our strategy . for example , we compete with a number of companies in each of our key end markets . this includes companies that are much larger than we are and smaller companies 35 that focus on a particular niche . although we believe we are well-positioned in each of our key end markets and seek to differentiate ourselves from our competitors , competition remains intense and profitably growing our revenues has been challenging . for example revenue from our cps segment in 2017 increased $ 49.9 million , or 3.6 % from 2016 , resulting in an increase in gross profit of $ 5.5 million in 2017. this increase in gross profit is significantly below our expectations based on the contribution margin of this segment . we believe this segment is capable of delivering much higher gross margins . we continue to address these challenges on both a short-term and long-term basis . a small number of customers have historically generated a significant portion of our net sales . sales to our ten largest customers typically represent approximately 50 % of our net sales . two customers represented 10 % or more of the company 's net sales in 2017 , one customer represented 10 % or more of the company 's net sales in 2016 and no customer represented 10 % or more of the company 's net sales in 2015. we typically generate about 80 % of our net sales from products manufactured in our foreign operations . the concentration of foreign operations has resulted primarily from a desire on the part of many of our customers to manufacture in lower cost locations in regions such as asia , latin america and eastern europe . historically , we have had substantial recurring sales to existing customers . we typically enter into supply agreements with our major oem customers . these agreements generally have terms ranging from three to five years and cover the manufacture of a range of products . under these agreements , a customer typically agrees to purchase its requirements for specific products in particular geographic areas from us . however , these agreements generally do not obligate the customer to purchase minimum quantities of products , which can have the effect of reducing revenue and profitability . story_separator_special_tag if an asset or asset group is considered impaired , the impairment to be recognized is measured by the amount by which the carrying amount of the asset or asset group exceeds its fair value . for asset groups for which a building is the primary asset , we estimate fair value primarily based on data provided by commercial real estate brokers . for other assets , we estimate fair value based on projected discounted future net cash flows , which requires significant judgment . as a result of our impairment analysis in 2017 , we concluded that the carrying value of certain of our asset groups may not be recoverable and recognized an impairment charge of $ 4.6 million for these asset groups . goodwill— we test goodwill for impairment on an annual basis and whenever events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable , as assessed at a reporting unit level . if , based on a qualitative assessment , we determine it is more-likely-than-not that goodwill is impaired , we perform a quantitative assessment to determine whether the fair value of our reporting unit is less than its carrying value and , if so , we perform a further analysis to determine the amount , if any , of the impairment . income taxes— we estimate our income tax provision or benefit in each of the jurisdictions in which we operate , including estimating exposures related to examinations by taxing authorities . we believe our accruals for tax liabilities are adequate for all open years based on our assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter . although we believe our accruals for tax liabilities are adequate , tax regulations are subject to interpretation and the tax controversy process is inherently lengthy and uncertain ; therefore , our assessments can involve a series of complex judgments about future events and rely heavily on estimates and assumptions . to the extent the probable tax outcome of these matters changes , such changes in estimate will impact our income tax provision in the period in which such determination is made . we only recognize or continue to recognize tax positions that meet a “ more likely than not ” threshold of being upheld . interest and penalties related to unrecognized tax benefits are recognized as a component of income tax expense . we must also make judgments regarding the realizability of deferred tax assets . the carrying value of our net deferred tax assets is based on our belief that it is more likely than not that we will generate sufficient future taxable income in certain jurisdictions to realize these deferred tax assets . we evaluate positive and negative evidence each reporting period when assessing the need for a valuation allowance . a valuation allowance is established for deferred tax assets if we believe realization of such assets is not more likely than not . our judgments regarding future taxable income may change due to changes in market conditions , new or modified tax laws , tax planning strategies or other factors . if our assumptions , and consequently our estimates , change in the future , the valuation allowances we have established may be increased or decreased , resulting in a respective increase or decrease in income tax expense . as a result of our analysis of the positive and negative evidence available at the end of 2016 and 2015 , we released $ 96.2 million and $ 288.7 million , respectively , of our valuation allowances against our u.s. and foreign deferred tax assets . we based this conclusion on continued improved operating results in recent prior years and our expectations about generating taxable income in future periods . we exercised significant judgment and utilized estimates about our ability to generate revenue , gross profit , operating income and jurisdictional taxable income in future periods before expiration of our net operating losses . we will continue to evaluate all positive and negative evidence in future periods to determine if an adjustment to our valuation allowances is necessary . however , as of september 30 , 2017 and october 1 , 2016 , we no longer had a valuation allowance against our u.s. federal deferred tax assets . our effective tax rate is highly dependent upon the amount and geographic distribution of our worldwide income or losses , the tax regulations , rates and holidays in each geographic region , the utilization of net operating losses , the availability of tax credits and carryforwards , and the effectiveness of our tax planning strategies . 38 story_separator_special_tag research and development expenses were $ 33.7 million , $ 37.7 million and $ 33.1 million in 2017 , 2016 and 2015 , respectively . as a percentage of net sales , research and development expenses were 0.5 % , 0.6 % and 0.5 % in 2017 , 2016 and 2015 , respectively . the decrease in absolute dollars from 2016 to 2017 was primarily due to lower research and development spending for projects in our embedded computing and storage end market . the increase in absolute dollars from 2015 to 2016 was primarily attributable to additional resources required to support new products and projects in our embedded computing and storage end market . 40 other other operating expenses consisted of the following : replace_table_token_9_th restructuring restructuring costs were $ 1.3 million , $ 2.7 million and $ 13.7 million in 2017 , 2016 and 2015 , respectively . restructuring costs in 2015 consisted primarily of costs associated with vacant facilities and former sites for which we are or may be liable for environmental investigation and remediation . costs incurred with respect to vacant facilities consisted primarily of costs to maintain vacant facilities until such facilities are sold . asset impairments during 2017 , 2016 and 2015 , we recorded asset impairment charges of $ 4.6 million , $ 1.0 million and $ 3.5 million , respectively .
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results of operations years ended september 30 , 2017 , october 1 , 2016 and october 3 , 2015 . the following table presents our key operating results . replace_table_token_7_th net sales net sales increased from $ 6.5 billion for 2016 to $ 6.9 billion for 2017 , an increase of 6.0 % . net sales increased from $ 6.4 billion for 2015 to $ 6.5 billion for 2016 , an increase of 1.7 % . sales by end market were as follows : replace_table_token_8_th comparison of 2017 to 2016 in 2017 , sales to customers in our industrial , medical and defense end market increased 10.4 % , primarily as a result of a customer program acquisition in february 2016. sales to customers in our communications networks end market increased 9.8 % , primarily as a result of program ramps with existing customers as well as increased demand from existing customers . sales to customers in our embedded computing and storage end market decreased 10.8 % , primarily due to decreased end-market demand for our customers ' point-of-sale equipment and set-top boxes . comparison of 2016 to 2015 in 2016 , sales to customers in our industrial , medical and defense end market increased 9.7 % , primarily as a result of customer program acquisitions , partially offset by reduced demand from customers in the oil and gas industry as a result of depressed market conditions in this industry . this increase was partially offset by decreased sales in each of our other two end markets . sales to customers in our communications networks end market decreased 2.8 % , primarily as a result of reduced demand from certain customer programs for wireless communications products , partially offset by increased demand for our customers ' optical products . sales to customers in our embedded computing and storage end market decreased 5.2 % , primarily due to decreased demand for our customers ' set-top boxes and point-of-sale equipment .
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our company we are a maryland corporation focused on investing in , acquiring and managing a diversified portfolio of residential mortgage assets , other real estate-related securities and financial assets , which we refer to as our target assets . we are externally managed by our manager , a wholly-owned subsidiary of angelo , gordon , pursuant to a management agreement . our manager , pursuant to the delegation agreement dated as of june 29 , 2011 , has delegated to angelo , gordon the overall responsibility of its day-to-day duties and obligations arising under the management agreement . we conduct our operations to qualify and be taxed as a real estate investment trust , or reit , for u.s. federal income tax purposes . accordingly , we generally will not be subject to u.s. federal income taxes on our taxable income that we distribute currently to our stockholders as long as we maintain our intended qualification as a reit . we also operate our business in a manner that permits us to maintain our exemption from registration under the investment company act of 1940 , as amended , or the investment company act . our common stock is traded on the new york stock exchange , or the nyse , under the symbol mitt . our 8.25 % series a cumulative redeemable preferred stock and our 8.00 % series b cumulative redeemable preferred stock trade on the nyse under the symbols mitt-pa and mitt-pb , respectively . market overview agency rmbs outperformed the selloff in benchmark rates during the fourth quarter as slowing prepayments , higher yields , reduced gross supply and a heavy federal reserve reinvestment schedule all served as tailwinds to the sector . foreign investor and bank demand slowed in response to post-election rate volatility , but fed buying surpassed the slowdown in gross issuance to more than offset the loss of yield based buying . agency rmbs derivatives , specifically interest only product , also experienced significant spread tightening in response to higher rates , slower projected prepayments and increased demand from hedge funds and money managers . the outcome of the u.s. presidential race during the fourth quarter resulted in a re-pricing of a broad array of financial instruments from risk assets to risk-free benchmark rates . the 10-year u.s. treasury rate moved 85bps higher in the fourth quarter . however , because this move followed a rally of similar magnitude earlier in the year in response to the first quarter growth scare and the brexit vote , the 10-year u.s. treasury rate moved only17bps higher over the course of 2016. our positive duration gap had a positive impact on book value and core for much of the year , but it resulted in a negative impact to book value during the fourth quarter . there has been a significant amount of speculation over the size , scope and potential impact of proposed fiscal stimulus measures and policy actions that may come from the new administration , but we feel there is too much uncertainty to gauge the economic impact at this time . given an increased distribution of possible economic outcomes and , as a result , ranges of possible interest rate scenarios , we chose to reduce our duration gap during the fourth quarter and to hedge the sizeable extension risk of our agency rmbs . we added pay-fixed swaps as well as sold agency rmbs , us treasuries and us treasury futures during the quarter . spreads for legacy mortgage assets ( securities issued in 2010 or earlier ) tightened through the end of the year following the u.s. election . persistently favorable fundamentals and strong net demand continue to support positive performance in the legacy mortgage sectors . spreads for the credit-risk transfer ( crt ) sector were relatively volatile during the fourth quarter as election uncertainty and a heavy new issue calendar weighed on the market . spreads reversed course following the year 's final crt deal which priced in early december . during the quarter , we chose to rotate out of a portion of our crt positions , rpl/npl securities , and residential loans . additionally , a consumer abs position was refinanced and called by the issuer in october . we made an equity investment in a seasoned pool of performing and re-performing loans through a securitization , which is included in our alt-a investment category , and purchased a commercial real estate loan during the quarter . fixed rate securities and cmbs interest only securities experienced unrealized fair value losses due to higher interest rates during the fourth quarter . those losses were partially offset by credit spread tightening and there was an overall decline in credit book value for the fourth quarter . housing , economic and interest rate trends inclusive of distressed sales , home prices nationwide increased by 7.2 % on a year-over-year basis in december 2016 as compared with december 2015 , according to data released by corelogic . this marks the 59th consecutive monthly increase year-over-year in national home prices . the housing market remains strong ; however , given the duration and strength of the recovery , we expect home price appreciation to moderate but remain positive over the course of 2017. the u.s. government agencies and the federal reserve ( the “ fed ” ) policy sponsorship of housing via lower mortgage rates and the further loosening of credit available to prospective homeowners , coupled with a stable broader domestic economy , have provided some support for the housing market recovery . 44 according to corelogic , the aggregate value of all residential properties with negative equity ( homes where the homeowner owes more on the home than the home is worth ) decreased to $ 281.9 billion in the third quarter of 2016 , from $ 306.9 billion in the third quarter of 2015 , a decrease of 8.2 % . for much of the country , the negative equity epidemic that developed during the 2008-2009 recession has lifted due to the rise in home prices over the past five years . story_separator_special_tag results of operations story_separator_special_tag 47 net realized gain/ ( loss ) net realized gain/ ( loss ) represents the net gain or loss recognized on any sales out of our gaap investment portfolio , other assets , derivatives , or other instruments as well as transfers from residential mortgage loans to other assets or other-than-temporary impairment ( “ otti ” ) charges recorded during the period . refer to footnote 2 , footnote 3 and footnote 4 of the “ notes to consolidated financial statements ” for further discussion on otti . year ended december 31 , 2016 during the year ended december 31 , 2016 , net realized gain/ ( loss ) was $ ( 10.4 ) million . we sold certain real estate securities and residential mortgage loans , realizing net gains of $ 6.9 million and $ 3.5 million , respectively . in addition , we recognized a $ 0.3 million realized gain on loans transferred to other assets and a $ 0.3 million realized gain on the sale of other assets . we also recognized $ 2.8 million of realized gains due to the settlement of tbas , $ 4.8 million of realized loss due to the settlement of certain derivatives and other instruments , and $ 19.4 million of realized loss due to otti charges on certain securities and loans . year ended december 31 , 2015 during the year ended december 31 , 2015 , net realized gain/ ( loss ) was $ ( 17.1 ) million . we sold certain real estate securities and residential mortgage loans , realizing net gains of $ 7.9 million and $ 1.9 million , respectively . in addition , we recognized $ 1.9 million of realized gains due to the settlement of tbas , $ 20.0 million of realized loss due to the settlement of certain derivatives and other instruments , and $ 8.8 million of realized loss due to otti charges on certain securities and loans . year ended december 31 , 2014 during the year ended december 31 , 2014 , net realized gain/ ( loss ) was $ 3.6 million . we sold certain real estate securities , including a reversal of related tax benefits , realizing a net gain of $ 10.0 million . in addition , we recognized $ 5.5 million of realized gains due to the settlement of tbas , $ 7.1 million of realized loss due to the settlement of certain derivatives and other instruments and $ 4.8 million of realized loss due to otti charges on certain securities . income/ ( loss ) from linked transactions , net on june 12 , 2014 , the financial accounting standards board ( the “ fasb ” ) issued asu no . 2014-11. this amendment requires separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty . if all derecognition criteria are met , the initial transferee will account for the initial transfer as a purchase and the related repurchase agreement component of the transaction will be accounted for as a secured borrowing . refer to note 7 of the “ notes to consolidated financial statements ” for further detail on the adoption of asu 2014-11 and its impact on our results of operations . realized loss on periodic interest settlement of derivative instruments , net realized loss on periodic interest settlement of derivative instruments , net represents the net interest expense paid on our interest rate swaps . year ended december 31 , 2016 compared to the year ended december 31 , 2015 realized loss on periodic interest settlement of derivative instruments , net decreased by $ 7.2 million from $ 13.2 million at december 31 , 2015 to $ 6.0 million at december 31 , 2016 due to a decrease in swap notional amount for the period , coupled with an increase in the 3 month libor rate . we net terminated $ 325.0 million notional amount of swaps from december 31 , 2015 to december 31 , 2016. in addition , 3 month libor increased from 0.613 % at december 31 , 2015 to 0.998 % at december 31 , 2016. year ended december 31 , 2015 compared to the year ended december 31 , 2014 realized loss on periodic interest settlement of derivative instruments , net decreased by $ 9.1 million from $ 22.3 million at december 31 , 2014 to $ 13.2 million at december 31 , 2015 due to a decrease in swap notional amount for the period , coupled with an increase in the 3 month libor rate . we net terminated $ 477.0 million notional amount of swaps from december 31 , 2014 to december 31 , 2015. in addition , 3 month libor increased from 0.256 % at december 31 , 2014 to 0.613 % at december 31 , 2015 . 48 unrealized gain/ ( loss ) on real estate securities and loans , net refer to the “ market overview ” section of this item 7 for a discussion of the changes in market pricing which drive our “ unrealized gain/ ( loss ) on real estate securities and loans , net ” and “ unrealized gain/ ( loss ) on derivatives and other instruments , net ” line items . realized gains and losses on sale generally impact unrealized gains and losses . year ended december 31 , 2016 for the year ended december 31 , 2016 , unrealized gain/ ( loss ) on real estate securities and loans , net was $ 2.7 million . the $ 2.7 million was comprised of unrealized gains on securities of $ 3.9 million , offset by unrealized losses on loans of $ 1.2 million during the year . year ended december 31 , 2015 for the year ended december 31 , 2015 , unrealized gain/ ( loss ) on real estate securities and loans , net was $ ( 32.5 ) million .
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factors impacting our operating results our operating results can be affected by a number of factors and primarily depend on the size and composition of our investment portfolio , the level of our net interest income , the market value of our assets and the supply of , and demand for , our target assets in the marketplace , which can be impacted by unanticipated credit events , such as defaults , liquidations or delinquencies , experienced by borrowers whose mortgage loans are included in our rmbs . our primary source of net income available to common stockholders is our net interest income , less our cost of hedging , which represents the difference between the interest earned on our investment portfolio and the costs of financing and hedging our investment portfolio . our net interest income varies primarily as a result of changes in market interest rates , prepayment speeds , as measured by the constant prepayment rate ( “ cpr ” ) on the agency rmbs in our investment portfolio , and our funding and hedging costs . the table below presents certain information from our consolidated statement of operations for the years ended december 31 , 2016 , december 31 , 2015 and december 31 , 2014 : replace_table_token_5_th 46 net income ( loss ) net income/ ( loss ) available to common stockholders increased $ 49.9 million from $ 0.3 million for the year ended december 31 , 2015 to $ 50.2 million for the year ended december 31 , 2016 primarily due to higher prices on our securities , which increased our “ unrealized gain/ ( loss ) on real estate securities and loans , net ” , coupled with higher derivative prices , which increased our “ unrealized gain/ ( loss ) on derivatives and other instruments , net ” .
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level 2 level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets ; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions ( less active markets ) ; or model-derived valuations in which significant inputs are observable or can be derived principally from , or corroborated by , observable market data . level 3 level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities . recent accounting pronouncements in june 2014 , the financial accounting standards board issued accounting standards update no . 2014-10 , which eliminated certain financial reporting requirements of companies previously identified as `` development stage entities '' ( topic 915 ) . the amendments in this asu simplify accounting guidance by removing all incremental financial reporting requirements for development stage entities . the amendments also reduce data maintenance and , for those entities subject to audit , audit costs by eliminating the requirement for development stage entities to present inception-to-date information in the statements of income , cash flows , and shareholder equity . early application of each of the amendments is permitted for any annual reporting period or interim period for which the entity 's financial statements have not yet been issued ( public business entities ) or made available for issuance ( other entities ) . upon adoption , entities will no longer present or disclose any information required by topic 915. the company has adopted this standard . in may 2014 , fasb issued accounting standards update ( asu ) no . 2014-09 , revenue from contracts with customers . the revenue recognition standard affects all entities that have contracts with customers , except for certain items . the new revenue recognition standard eliminates the transaction-and industry-specific revenue recognition guidance under current gaap and replaces it with a principle-based approach for determining revenue recognition . public entities are required to adopt the revenue recognition standard for reporting periods beginning after december 15 , 2016 , and interim and annual reporting periods thereafter . early adoption is not permitted for public entities . the company has reviewed the applicable asu and has not , at the current time , quantified the effects of this pronouncement , however it believes that there will be no material effect on the consolidated financial statements . in june 2014 , fasb issued accounting standards update ( asu ) no . 2014-12 compensation — stock compensation ( topic 718 ) , accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period . a performance target in a share-based payment that affects vesting and that could be achieved after the requisite service period should be accounted for as a performance condition under accounting standards codification ( asc ) 718 , compensation — stock compensation . as a result , the target is not reflected in the estimation of the award 's grant date fair value . compensation cost would be recognized over the required service period , if it is probable that the performance condition will be achieved . the guidance is effective for annual periods beginning after 15 december 2015 and interim periods within those annual periods . early adoption is permitted . management has reviewed the asu and believes that they currently account for these awards in a manner consistent with the new guidance , therefore there is no anticipation of any effect to the consolidated financial statements . 13 in august 2014 , fasb issued accounting standards update ( asu ) no . 2014-15 preparation of financial statements – going concern ( subtopic 205-40 ) , disclosure of uncertainties about an entity 's ability to continue as a going concern . under generally accepted accounting principles ( gaap ) , continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity 's liquidation becomes imminent . preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting . if and when an entity 's liquidation becomes imminent , financial statements should be prepared under the liquidation basis of accounting in accordance with subtopic 205-30 , presentation of financial statements—liquidation basis of accounting . even when an entity 's liquidation is not imminent , there may be conditions or events that raise substantial doubt about the entity 's ability to continue as a going concern . in those situations , financial statements should continue to be prepared under the going concern basis of accounting , but the amendments in this update should be followed to determine whether to disclose information about the relevant conditions and events . the amendments in this update are effective for the annual period ending after december 15 , 2016 , and for annual periods and interim periods thereafter . early application is permitted . the company will evaluate the going concern considerations in this asu , however , at the current period , management does not believe that it has met the conditions which would subject these financial statements for additional disclosure . management has considered all recent accounting pronouncements issued since the last audit of its financial statements . the company 's management believes that these recent pronouncements will not have a material effect on the company 's financial statements . off-balance sheet arrangements we do not have any off-balance sheet arrangements that have , or are reasonably likely to have , a current or future effect on our financial condition , changes in financial condition , revenues or expenses , results of operations , liquidity , capital expenditures or capital resources that are material to story_separator_special_tag level 2 level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets ; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions ( less active markets ) ; or model-derived valuations in which significant inputs are observable or can be derived principally from , or corroborated by , observable market data . level 3 level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities . recent accounting pronouncements in june 2014 , the financial accounting standards board issued accounting standards update no . 2014-10 , which eliminated certain financial reporting requirements of companies previously identified as `` development stage entities '' ( topic 915 ) . the amendments in this asu simplify accounting guidance by removing all incremental financial reporting requirements for development stage entities . the amendments also reduce data maintenance and , for those entities subject to audit , audit costs by eliminating the requirement for development stage entities to present inception-to-date information in the statements of income , cash flows , and shareholder equity . early application of each of the amendments is permitted for any annual reporting period or interim period for which the entity 's financial statements have not yet been issued ( public business entities ) or made available for issuance ( other entities ) . upon adoption , entities will no longer present or disclose any information required by topic 915. the company has adopted this standard . in may 2014 , fasb issued accounting standards update ( asu ) no . 2014-09 , revenue from contracts with customers . the revenue recognition standard affects all entities that have contracts with customers , except for certain items . the new revenue recognition standard eliminates the transaction-and industry-specific revenue recognition guidance under current gaap and replaces it with a principle-based approach for determining revenue recognition . public entities are required to adopt the revenue recognition standard for reporting periods beginning after december 15 , 2016 , and interim and annual reporting periods thereafter . early adoption is not permitted for public entities . the company has reviewed the applicable asu and has not , at the current time , quantified the effects of this pronouncement , however it believes that there will be no material effect on the consolidated financial statements . in june 2014 , fasb issued accounting standards update ( asu ) no . 2014-12 compensation — stock compensation ( topic 718 ) , accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period . a performance target in a share-based payment that affects vesting and that could be achieved after the requisite service period should be accounted for as a performance condition under accounting standards codification ( asc ) 718 , compensation — stock compensation . as a result , the target is not reflected in the estimation of the award 's grant date fair value . compensation cost would be recognized over the required service period , if it is probable that the performance condition will be achieved . the guidance is effective for annual periods beginning after 15 december 2015 and interim periods within those annual periods . early adoption is permitted . management has reviewed the asu and believes that they currently account for these awards in a manner consistent with the new guidance , therefore there is no anticipation of any effect to the consolidated financial statements . 13 in august 2014 , fasb issued accounting standards update ( asu ) no . 2014-15 preparation of financial statements – going concern ( subtopic 205-40 ) , disclosure of uncertainties about an entity 's ability to continue as a going concern . under generally accepted accounting principles ( gaap ) , continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity 's liquidation becomes imminent . preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting . if and when an entity 's liquidation becomes imminent , financial statements should be prepared under the liquidation basis of accounting in accordance with subtopic 205-30 , presentation of financial statements—liquidation basis of accounting . even when an entity 's liquidation is not imminent , there may be conditions or events that raise substantial doubt about the entity 's ability to continue as a going concern . in those situations , financial statements should continue to be prepared under the going concern basis of accounting , but the amendments in this update should be followed to determine whether to disclose information about the relevant conditions and events . the amendments in this update are effective for the annual period ending after december 15 , 2016 , and for annual periods and interim periods thereafter . early application is permitted . the company will evaluate the going concern considerations in this asu , however , at the current period , management does not believe that it has met the conditions which would subject these financial statements for additional disclosure . management has considered all recent accounting pronouncements issued since the last audit of its financial statements . the company 's management believes that these recent pronouncements will not have a material effect on the company 's financial statements . off-balance sheet arrangements we do not have any off-balance sheet arrangements that have , or are reasonably likely to have , a current or future effect on our financial condition , changes in financial condition , revenues or expenses , results of operations , liquidity , capital expenditures or capital resources that are material to
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results of operations the following table provides the results of operations for the following periods : replace_table_token_2_th during the year ended november 30 , 2014 , we incurred general and administrative and professional fees of approximately $ 90,951 , compared to general and administrative and professional fees of $ 39,975 during the year ended november 30 , 2013. the increase of $ 39,728 or 105 % , in professional fees incurred during the year ended november 30 , 2014 , as compared to the year ended november 30 , 2014 , were generally related to increased professional fees for our corporate reorganization and dtc application . the increase of $ 11,248 or 500 % , in general and administrative expenses during the year ended november 30 , 2014 as compared to the year ended november 30 , 2013 , were generally related to a management fee of $ 13,354 paid to our sole officer and offset by a reduction of marketing fees of $ 1,800 during the 2014 year end . 10 liquidity and financial condition working capital the following table provides selected financial data about our company as of november 30 , 2014 and 2013. replace_table_token_3_th our working capital decreased as of november 30 , 2014 as compared to november 30 , 2013 due to payment of management fees , increase in accounts payable , and funds due to shareholders , because of the recent corporate reorganization . cash flows replace_table_token_4_th cash flows from operating activities we have not generated positive cash flows from operating activities .
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those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement , whether due to error or fraud . the company is not required to have , nor were we engaged to perform , an audit of its internal control over financial reporting . as part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the company 's internal control over financial reporting . accordingly , we express no such opinion . our audits included performing procedures to assess the risks of material misstatement of the financial statements , whether due to error or fraud , and performing procedures that respond to those risks . such procedures included examining , on a test basis , evidence regarding the amounts and disclosures in the financial statements . our audits also included evaluating the accounting principles used and significant estimates made by management , as well as evaluating the overall presentation of the financial statements . we believe that our audits provide a reasonable basis for our opinion . eisneramper llp we have served as the company 's auditor since 2015. eisneramper llp iselin , new jersey march 12 , 2020 f- 2 creative realities , inc. consolidated balance sheets ( in thousands , except per share amounts ) replace_table_token_9_th see accompanying notes to consolidated financial statements . f- 3 creative realities , inc. consolidated statements of operations ( in thousands , except per share amounts ) replace_table_token_10_th see accompanying notes to consolidated financial statements . f- 4 creative realities , inc. consolidated statements of shareholders ' equity for the years ended december 31 , 2019 and 2018 ( in thousands , except shares ) replace_table_token_11_th see accompanying notes to consolidated financial statements . f- 5 creative realities , inc. consolidated statements of cash story_separator_special_tag ( all currency is rounded to the nearest thousands , except share and per share amounts . ) forward-looking statements the following discussion contains various forward-looking statements within the meaning of section 21e of the exchange act . although we believe that , in making any such statement , our expectations are based on reasonable assumptions , any such statement may be influenced by factors that could cause actual outcomes and results to be materially different from those projected . when used in the following discussion , the words “ anticipates , ” “ believes , ” “ expects , ” “ intends , ” “ plans , ” “ estimates ” and similar expressions , as they relate to us or our management , are intended to identify such forward-looking statements . these forward-looking statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from those anticipated . factors that could cause actual results to differ materially from those anticipated , certain of which are beyond our control , are set forth in item 1a under the caption “ risk factors. ” our actual results , performance or achievements could differ materially from those expressed in , or implied by , forward-looking statements . accordingly , we can not be certain that any of the events anticipated by forward-looking statements will occur or , if any of them do occur , what impact they will have on us . we caution you to keep in mind the cautions and risks described in this document and to refrain from attributing undue certainty to any forward-looking statements , which speak only as of the date of the document in which they appear . we do not undertake to update any forward-looking statement . 20 overview creative realities , inc. is a minnesota corporation that provides innovative digital marketing technology solutions to a broad range of companies , individual brands , enterprises , and organizations throughout the united states and in certain international markets . we have expertise in a broad range of existing and emerging digital marketing technologies across 18 vertical markets , as well as the related media management and distribution software platforms and networks , device and content management , product management , customized software service layers , systems , experiences , workflows , and integrated solutions . our technology and solutions include : digital merchandising systems and omni-channel customer engagement systems ; content creation , production and scheduling programs and systems ; a comprehensive series of recurring maintenance , support , and field service offerings ; interactive digital shopping assistants , advisors and kiosks ; and , other interactive marketing technologies such as mobile , social media , point-of-sale transactions , beaconing and web-based media that enable our customers to transform how they engage with consumers . our main operations are conducted directly through creative realities , inc. and our wholly owned subsidiaries allure global solutions , inc. , a georgia corporation , creative realities canada , inc. , a canadian corporation , and conexus world global , llc , a kentucky limited liability company . our other wholly owned subsidiary creative realities , llc , a delaware limited liability company , has been effectively dormant since october 2015 , the date of the merger with conexus world global , llc . we generate revenue in our business by : ● consulting with our customers to determine the technologies and solutions required to achieve their specific goals , strategies and objectives ; ● designing our customers ' digital marketing experiences , content and interfaces ; ● engineering the systems architecture delivering the digital marketing experiences we design – both software and hardware – and integrating those systems into a customized , reliable and effective digital marketing experience ; ● managing the efficient , timely and cost-effective deployment of our digital marketing technology solutions for our customers ; ● delivering and updating the content of our digital marketing technology solutions using a suite of advanced story_separator_special_tag in addition to the discounted cash flow analysis , we utilize a leveraged buy-out model , trading comps and market capitalization to ultimately determine an estimated fair value of our reporting unit based on weighted average calculations from these models . we base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain . if the carrying amount exceeds the fair value , further analysis is performed to measure the impairment loss . in addition , our market capitalization could fluctuate from time to time . such fluctuation may be an indicator of possible impairment of goodwill if our market capitalization falls below its book value . if this situation occurs , we will perform the required detailed analysis to determine if there is impairment . we have not made any material changes in our reporting units or the accounting methodology we used to assess impairment of goodwill since september 30 , 2019. we updated our goodwill analysis as of december 31 , 2019 using actual fourth quarter 2019 results and updated projected 2020 results and concluded no impairment exists . the valuation of goodwill and intangible assets is subject to a high degree of judgment , uncertainty and complexity . we do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to test for impairment losses on goodwill . however , if actual results are not consistent with our estimates or assumptions , we may be exposed to an impairment charge that could be material . intangible assets include the following and are being amortized over their estimated useful lives as follows : acquired intangible asset : amortization period : ( years ) technology platform and patents 4 - 7 trademark 3-5 customer relationships 15 23 intangible assets are evaluated for impairment if events and circumstances warrant by comparing the fair value of the intangible asset with its carrying amount . the impairment evaluation involves testing the recoverability of the asset on an undiscounted cash-flow basis , and , if the asset is not recoverable , recognizing impairment charge , if necessary , to reduce the asset 's carrying amount to its fair value . there were no indicators of impairment identified in 2019 and no impairments were recorded for the years ended december 31 , 2019 or 2018. income taxes accounting for income taxes requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns . under this method , deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities . these deferred taxes are measured by applying the provisions of tax laws in effect at the balance sheet date , including the impact of the tax cuts and jobs act ( the “ tax act ” ) enacted on december 22 , 2017. the tax act made broad and significant changes to the u.s. tax code that affects the year ended december 31 , 2017 , including , but not limited to , a change in the federal rate from 35 % to 21 % effective january 1 , 2018. we recognize in income the effect of a change in tax rates on deferred tax assets and liabilities in the period that includes the enactment date . as of december 31 , 2019 and 2018 , a full valuation allowance is recorded against our deferred tax assets to reduce the consolidated deferred tax asset to zero , with the exception of those deferred tax assets generated by net operating losses post-tax act . the valuation allowance is based , in part , on our estimate of future taxable income , the expected utilization of federal and state tax loss carryforwards , and credits and the expiration dates of such tax loss carryforwards . significant assumptions are used in developing the analysis of future taxable income for purposes of determining the valuation allowance for deferred tax assets which , in our opinion , are reasonable under the circumstances . impact of recently issued accounting pronouncements refer to note 3 recently issued accounting pronouncements in our consolidated financial statements included in part ii , item 8 of this report , for a full description of recent accounting pronouncements , including the expected dates of adoption and estimated effects on results of operations and financial condition , which is incorporated herein by reference . story_separator_special_tag 2019. preferred stock conversion expense the company recorded preferred stock conversion expense of $ 3,932 , which is reflected as a loss to common shareholders , in connection with issuance of incentive shares issued upon conversion of the series a preferred stock into common stock on november 19 , 2018 in conjunction with the public offering . see note 13 convertible preferred stock to the consolidated financial statements . there was no such corresponding activity and expense in 2019. summary unaudited quarterly financial information the following represents unaudited financial information derived from the company 's annual and quarterly financial statements : replace_table_token_2_th replace_table_token_3_th supplemental operating results on a non-gaap basis the following non-gaap data , which adjusts for the categories of expenses described below , is a non-gaap financial measure . our management believes that this non-gaap financial measure is useful information for investors , shareholders and other stakeholders of our company in gauging our results of operations on an ongoing basis . we believe that ebitda is a performance measure and not a liquidity measure , and therefore a reconciliation between net loss/income and ebitda and adjusted ebitda has been provided .
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results of operations note : all dollar amounts reported in results of operations are in thousands , except per-share information . 24 year ended december 31 , 2019 compared to year ended december 31 , 2018 the tables presented below compare our results of operations from one period to another , and present the results for each period and the change in those results from one period to another in both dollars and percentage change . replace_table_token_1_th sales sales increased by $ 9,123 , or 41 % in 2019 compared to 2018 driven by ( 1 ) $ 3,458 from new customers in 2019 , ( 2 ) $ 5,290 contributed by legacy allure customers , and ( 3 ) expansion of revenue within pre-existing customer base . organic growth accounted for approximately $ 4,434 of the increase , representing an organic growth rate of approximately 20 % as compared to 2018. the remaining growth of approximately $ 4,689 year-over-year represents the revenue growth contributed by the inclusion of allure in our consolidated results for a full year in 2019 , which contributed approximately $ 601 revenue to our consolidated 2018 results . gross profit gross profit increased $ 3,516 in absolute dollars to $ 13,739 in 2019 from $ 10,223 in 2018 , or 34 % driven by an increase in sales , partially offset by a reduction in gross margin . gross margin decreased from 45.5 % for the year-ended december 31 , 2018 to 43.5 % in 2019 during the same period , primarily driven by product mix . 25 sales and marketing expenses sales and marketing expenses generally include the salaries , taxes , and benefits of our sales and marketing personnel , as well as trade show activities , travel , and other related sales and marketing costs .
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” references in this discussion and analysis to “ us , ” “ we , ” “ our , ” or our “ company ” refer to pulmatrix , inc. , a delaware corporation . overview we are a clinical stage biotechnology company focused on the discovery and development of novel inhaled therapeutic products intended to prevent and treat respiratory diseases and infections with significant unmet medical needs . we design and develop inhaled therapeutic products based on our proprietary dry powder delivery technology , isperse ( inhaled small particles easily respirable and emitted ) , which enables delivery of small or large molecule drugs to the lungs by inhalation for local or systemic applications . the isperse powders are engineered to be small , dense particles with highly efficient dispersibility and delivery to airways . isperse powders can be used with an array of dry powder inhaler technologies and can be formulated with a broad range of drug substances including small molecules and biologics . we believe the isperse dry powder technology offers enhanced drug loading and delivery efficiency that outperforms traditional lactose-blend inhaled dry powder therapies . we believe the advantages of using the isperse technology include reduced total inhaled powder mass , enhanced dosing efficiency , reduced cost of goods and improved safety and tolerability profiles . we are developing isperse-based therapeutic candidates targeted at the prevention and treatment of a range of diseases , including allergic bronchopulmonary aspergillosis ( “ abpa ” ) in patients with asthma , and in patients with cystic fibrosis ( “ cf ” ) , lung cancer , and in patients suffering from neurological diseases such as acute migraine . 29 our goal is to develop breakthrough therapeutic products that are safe , convenient , and more efficient than the existing therapeutic products for respiratory and other diseases where isperse properties are advantageous . the isperse technology may potentially improve upon the known efficacy and safety profile of currently available therapies . our current pipeline is aligned to this goal with the pulmazole program for inhaled antifungal therapy to treat abpa in patients with asthma , the pur3100 program for treatment of acute migraine , and the pur1800 program , which has potential application in both lung cancer and chronic obstructive pulmonary disease ( “ copd ” ) . all of these programs leverage improvements provided by isperse . we intend to capitalize on our isperse technology platform and our expertise in inhaled therapeutics to identify new product candidates for the prevention and treatment of diseases with significant unmet medical needs and to build our product pipeline beyond our existing candidates . in order to advance our clinical trials for our therapeutic candidates for respiratory and neurological diseases and leverage the isperse platform to enable delivery of partnered compounds , we intend to form strategic alliances with third parties , including pharmaceutical and biotechnology companies or academic or private research institutes . we do not have any products approved for sale and have not generated any revenue from our product sales . we fund our operations through proceeds from issuances of common stock , licensing agreements , collaborations with third parties and non-dilutive grants . we expect to continue to incur significant expenses and increasing operating losses for at least the next several years based on our drug development plans . we expect our expenses and capital requirements will increase substantially in connection with our ongoing activities , as we : ● initiate and expand clinical trials for pulmazole for abpa , and other indications for immunocompromised at-risk patients ; ● expand clinical trials for pur1800 focused on copd and lung cancer prevention ; ● continue preclinical studies of pur3100 for treatment of acute migraine to enable a phase 2 study start in early 2022 ● seek regulatory approval for our product candidates ; ● hire personnel to support our product development , commercialization and administrative efforts ; and ● advance the research and development related activities for inhaled therapeutic products in our pipeline . we will not generate product sales unless and until we successfully complete clinical developments and obtain regulatory approvals for our product candidates . additionally , we currently utilize third-party contract research organizations ( “ cros ” ) to carry out our clinical development activities and third-party contract manufacturing organizations ( “ cmos ” ) to carry out our clinical manufacturing activities as we do not yet have a commercial organization . if we obtain regulatory approval for any of our product candidates , we expect to incur significant expenses related to developing our internal commercialization capability to support product sales , marketing and distribution . accordingly , we anticipate that we will seek to fund our operations through public or private equity or debt financings or other sources , potentially including collaborative commercial arrangements . likewise , we intend to seek to limit our commercialization costs by partnering with other companies with complementary capabilities or larger infrastructure including sales and marketing . because of the numerous risks and uncertainties associated with product development , we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability . even if we are able to generate product sales , we may not become profitable . if we fail to become profitable or are unable to sustain profitability on a continuing basis , we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations . recent developments license , development and commercialization agreement with jjei on december 26 , 2019 , we entered into a license , development and commercialization agreement ( the “ jjei license agreement ” ) with johnson & johnson enterprise innovation , inc. ( “ jjei ” ) . story_separator_special_tag the longer dosing regimen of the planned new phase 2b study is supported by the 6-month inhalation toxicology study in dogs completed in april 2020. in addition to the planned new phase 2b study , as part of the contemplated amendments to the cipla agreement , we may assign to cipla the exclusive rights to develop and commercialize pulmazole in india , south africa and other regional markets where cipla has strong clinical development and business capabilities . we have not agreed to any amendments to the cipla agreement as of filing date of this annual report . however , we expect that discussions regarding amendments to the cipla agreement will continue . no assurance can be given that we will be able to reach a mutually acceptable arrangement with cipla for the conduct of the phase 2b clinical study in the future . accordingly , if we are unable to agree with cipla on such matters such as cost sharing for the new study , we may be forced to suspend further development of pulmazole . 31 collaboration and license agreement with sensory cloud on april 9 , 2020 , we entered into a collaboration and license agreement ( the “ sensory cloud agreement ” ) with sensory cloud , inc. ( “ sensory cloud ” ) . under the terms of the sensory cloud agreement , we granted sensory cloud an exclusive , worldwide , royalty bearing license to pur003 and pur006 , the company 's proprietary aerosol salt solution for delivery or administration to or through the nasal passages also known as nasocalm , as well as related patents and know-how , for use in the field . pur003 and pur006 , was originally developed by the company as a potential anti-infective biodefense medical countermeasure product . however , we decided to no longer develop these products and instead prioritized the development of other programs . sensory cloud will be using nasocalm , now integral in their product fend , a hypertonic calcium chloride salt solution with a nasal mister . for purposes of the sensory cloud agreement , the field means the formulation and commercialization of over-the-counter products for the prophylaxis , prevention and treatment of upper and lower respiratory disease that are delivered or administered to or through the nasal passages . the license granted to sensory cloud does not cover the development or commercialization of any prescription products . under the sensory cloud agreement , we are entitled to royalties on net sales of licensed products in each country in which there is a valid claim of a patent within the licensed intellectual property covering the licensed product . the royalty rates are as follows : ( 1 ) 7 % of net sales during calendar year 2020 , ( 2 ) 14 % of net sales during calendar year 2021 , and ( 3 ) 17 % of net sales during calendar year 2022 and each calendar year thereafter during the royalty term . in addition , we are entitled to a milestone payment of $ 1.0 million following the achievement of aggregate net sales of all licensed products of $ 20.0 million . sensory cloud launched product sales of fend during the fourth quarter 2020 and minimal royalties have been recorded during the period ending december 31 , 2020. financial overview to date , we have not generated any product sales . our 2020 revenue was primarily generated through the recognition of revenue from both the cipla agreement and the jjei agreement and includes minimal royalties generated by sales of fend by sensory cloud . our 2019 recognized revenue resulted from the cipla agreement . research and development expenses research and development expenses consist primarily of costs incurred for the research and development of our preclinical and clinical candidates , and include : ● employee-related expenses , including salaries , benefits and share-based compensation expense ; ● expenses incurred under agreements with cros or cmos , and consultants that conduct our clinical trials and preclinical activities ; ● the cost of acquiring , developing and manufacturing clinical trial materials and lab supplies ; ● facility , depreciation and other expenses , which include direct and allocated expenses for rent , maintenance of our facility , insurance and other supplies ; and ● costs associated with preclinical activities and clinical regulatory operations ● consulting and professional fees associated with research and development activities we expense research and development costs to operations 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 . research and development activities are central to our business model . we utilize a combination of internal and external efforts to advance product development from early-stage work to clinical trial manufacturing and clinical trial support . external efforts include work with consultants and substantial work at cros and cmos . we support an internal research and development team and facility for our pipeline programs . to move these programs forward along our development timelines , a large portion , approximately 85 % , of our staff are research and development employees . in addition , we maintain a 22,119 square foot research and development facility which includes laboratory space and capital equipment to promote our isperse powders for our pipeline programs . as we identify opportunities for isperse in additional indications , we anticipate additional head count , capital , and development costs will be incurred to support these programs . because of the numerous risks and uncertainties associated with product development , however , we can not determine with certainty the duration and completion costs of these or other current or future preclinical studies and clinical trials .
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results of operations comparison of the years ended december 31 , 2020 and 2019 the following table sets forth our results of operations for each of the periods set forth below ( in thousands ) : replace_table_token_1_th revenue — revenue was $ 12.6 million for the year ended december 31 , 2020 as compared to $ 7.9 million for the year ended december 31 , 2019 , an increase of $ 4.7 million . the increase resulted from an increase in revenue recorded of $ 6.9 million as a result of the jjei license agreement which was executed in late 2019 and includes reimbursement of pass-through expenses , partially offset by a decrease in revenue recorded of $ 2.2 million as a result of the cipla agreement . research and development expenses — research and development expense was $ 15.6 million for the year ended december 31 , 2020 as compared to $ 12.8 million for the year ended december 31 , 2019 an increase of $ 2.8 million . the increase was primarily due to increased spending on manufacturing , clinical , and preclinical study costs of $ 4.4 million and $ 0.3 million , on the pur1800 and pur3100 programs , respectively , $ 1.1 million on employment costs in support of our programs , $ 0.6 million in allocated fixed expenses and lab services which were partially offset by a decrease of $ 3.6 million on the phase 2 pulmazole clinical trial costs .
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loans classified as special mention have a potential weakness that deserves management 's close attention . if left uncorrected , story_separator_special_tag overview the company is headquartered in lexington , south carolina and the bank holding company for the bank . we operate from our main office in lexington , south carolina , and our 18 full-service offices located in the south carolina counties of lexington county ( 6 ) , richland county ( 4 ) , newberry county ( 2 ) , kershaw county ( 1 ) , aiken county ( 1 ) , greenville county ( 1 ) , anderson county ( 1 ) , and pickens county ( 1 ) , and in richmond county , georgia ( 1 ) . in addition , we operate a mortgage loan production office in richland county , south carolina and a loan production office in greenville county , south carolina . we engage in a general commercial and retail banking business characterized by personalized service and local decision making , emphasizing the banking needs of small to medium-sized businesses , professional concerns and individuals . the following discussion describes our results of operations for 2017 , as compared to 2016 and 2015 , and also analyzes our financial condition as of december 31 , 2017 , as compared to december 31 , 2016. like most community banks , we derive most of our income from interest we receive on our loans and investments . a primary source of funds for making these loans and investments is our deposits , on which we pay interest . consequently , one of the key measures of our success is our amount of net interest income , or the difference between the income on our interest-earning assets , such as loans and investments , and the expense on our interest-bearing liabilities , such as deposits . we have included a number of tables to assist in our description of these measures . for example , the “ average balances ” table shows the average balance during 2017 , 2016 and 2015 of each category of our assets and liabilities , as well as the yield we earned or the rate we paid with respect to each category . a review of this table shows that our loans typically provide higher interest yields than do other types of interest earning assets , which is why we intend to channel a substantial percentage of our earning assets into our loan portfolio . similarly , the “ rate/volume analysis ” table helps demonstrate the impact of changing interest rates and changing volume of assets and liabilities during the years shown . we also track the sensitivity of our various categories of assets and liabilities to changes in interest rates , and we have included a “ sensitivity analysis table ” to help explain this . finally , we have included a number of tables that provide detail about our investment securities , our loans , and our deposits and other borrowings . there are risks inherent in all loans , so we maintain an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible . we establish and maintain this allowance by charging a provision for loan losses against our operating earnings . in the following section we have included a detailed discussion of this process , as well as several tables describing our allowance for loan losses and the allocation of this allowance among our various categories of loans . in addition to earning interest on our loans and investments , we earn income through fees and other expenses we charge to our customers . we describe the various components of this noninterest income , as well as our noninterest expense , in the following discussion . the discussion and analysis also identifies significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements . we encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other statistical information also included in this report . 37 recent developments on october 20 , 2017 , we completed our acquisition of cornerstone bancorp ( “ cornerstone ” ) and its wholly-owned subsidiary , cornerstone national bank . under the terms of the merger agreement , cornerstone shareholders received either $ 11.00 in cash or 0.54 shares of the company 's common stock , or a combination thereof , for each share of cornerstone common stock they owned immediately prior to the merger , subject to the limitation that 30 % of the outstanding shares of cornerstone common stock were exchanged for cash and 70 % of the outstanding shares of cornerstone common stock were exchanged for shares of the company 's common stock . the company issued 877,318 shares of common stock in the merger . critical accounting policies we have adopted various accounting policies that govern the application of accounting principles generally accepted in the united states and with general practices within the banking industry in the preparation of our financial statements . our significant accounting policies are described in the notes to our consolidated financial statements in this report . 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 to be critical accounting policies . the judgment and assumptions we use are based on historical experience and other factors , which we believe to be reasonable under the circumstances . because of the nature of the judgment and assumptions we make , actual results could differ from these judgments and estimates that could have a material impact on the carrying values of our assets and liabilities and our results of operations . allowance for loan losses we believe the allowance for loan losses is the critical accounting policy that requires the most significant judgment and estimates used in preparation of our consolidated financial statements . story_separator_special_tag consideration is given to ( 1 ) the length of time and the extent to which the fair value has been less than cost , ( 2 ) the financial condition and near-term prospects of the issuer , ( 3 ) the outlook for receiving the contractual cash flows of the investments , ( 4 ) the anticipated outlook for changes in the general level of interest rates , and ( 5 ) our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is more-likely-than-not that the company will be required to sell the debt security prior to recovering its fair value ( see note 4 to the consolidated financial statements ) . business combinations , method of accounting for loans acquired we account for acquisitions under fasb asc topic 805 , business combinations , which requires the use of the acquisition method of accounting . all identifiable assets acquired , including loans , are recorded at fair value . no allowance for loan losses related to the acquired loans is recorded on the acquisition date because the fair value of the loans acquired incorporates assumptions regarding credit risk . acquired credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality , found in fasb asc topic 310-30 , receivables—loans and debt securities acquired with deteriorated credit quality and initially measured at fair value , which includes estimated future credit losses expected to be incurred over the life of the loans . loans acquired in business combinations with evidence of credit deterioration are considered impaired . loans acquired through business combinations that do not meet the specific criteria of fasb asc topic 310-30 , but for which a discount is attributable , at least in part to credit quality , are also accounted for under this guidance . certain acquired loans , including performing loans and revolving lines of credit ( consumer and commercial ) , are accounted for in accordance with fasb asc topic 310-20 , where the discount is accreted through earnings based on estimated cash flows over the estimated life of the loan . 39 story_separator_special_tag historic lows . the shift in our funding mix as well as our efforts to shift earning assets to the loan portfolio helped in offsetting some of the net interest margin compression resulting from the continued historically low interest rate environment . 41 average balances , income expenses and rates . the following table depicts , for the periods indicated , certain information related to our average balance sheet and our average yields on assets and average costs of liabilities . such yields are derived by dividing income or expense by the average balance of the corresponding assets or liabilities . average balances have been derived from daily averages . replace_table_token_5_th ( 1 ) all loans and deposits are domestic . average loan balances include non-accrual loans and loans held for sale . ( 2 ) the computation includes federal funds sold , securities purchased under agreement to resell and interest bearing deposits . ( 3 ) based on 32.5 % marginal tax rate . 42 the following table presents the dollar amount of changes in interest income and interest expense attributable to changes in volume and the amount attributable to changes in rate . the combined effect related to volume and rate which can not be separately identified , has been allocated proportionately , to the change due to volume and the change due to rate . replace_table_token_6_th market risk and interest rate sensitivity market risk reflects the risk of economic loss resulting from adverse changes in market prices and interest rates . the risk of loss can be measured in either diminished current market values or reduced current and potential net income . our primary market risk is interest rate risk . we have established an asset/liability management committee ( “ alco ” ) to monitor and manage interest rate risk . the alco monitors and manages the pricing and maturity of its assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on our net interest income . the alco has established policy guidelines and strategies with respect to interest rate risk exposure and liquidity . a monitoring technique employed by us is the measurement of our interest sensitivity “ gap , ” which is the positive or negative dollar difference between assets and liabilities that are subject to interest rate repricing within a given period of time . simulation modeling is performed to assess the impact varying interest rates and balance sheet mix assumptions will have on net interest income . we model the impact on net interest income for several different changes , to include a flattening , steepening and parallel shift in the yield curve . for each of these scenarios , we model the impact on net interest income in an increasing and decreasing rate environment of 100 and 200 basis points . we also periodically stress certain assumptions such as prepayment and interest rate betas to evaluate our overall sensitivity to changes in interest rates . policies have been established in an effort to maintain the maximum anticipated negative impact of these modeled changes in net interest income at no more than 10 % and 15 % , respectively , in a 100 and 200 basis point change in interest rates over a twelve month period . interest rate sensitivity can be managed by repricing assets or liabilities , selling securities available-for-sale , replacing an asset or liability at maturity or by adjusting the interest rate during the life of an asset or liability . managing the amount of assets and liabilities repricing in the same time interval helps to hedge the risk and minimize the impact on net interest income of rising or falling interest rates .
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results of operations as noted above , on october 20 , 2017 , we completed the acquisition of cornerstone . therefore , the results for the year ended december 31 , 2017 include the impact of this acquisition from october 20 , 2017 through december 31 , 2017. see note 3 to the consolidated financial statements for additional information related to the cornerstone acquisition . net income was $ 5.8 million , or $ 0.85 diluted earnings per common share , for the year ended december 31 , 2017 , as compared to net income $ 6.7 million , or $ 0.98 diluted earnings per common share , for the year ended december 31 , 2016. the primary reason for the decrease in net income is the tax expense adjustment resulting from the change in corporate tax rates enacted in the tax cuts and jobs act passed on december 22 , 2017. the lowering of the corporate tax rate to 21 % required that we make an approximate $ 1.2 million tax expense charge to adjust the value of our deferred tax asset . however , as a result of the enacted lower tax rates , it is estimated that the company will recover this charge through a lower effective tax rate over a period of approximately twelve months and , thereafter , the company will continue to benefit from the lower effective corporate tax rate . another factor contributing to lower net income during 2017 as compared to 2016 included expenses of approximately $ 300 thousand related to our conversion to a new operating system and $ 903 thousand in expenses related to the acquisition of cornerstone . the impact of these increases in non-recurring expenses were partially offset by an increase in net interest income of $ 2.9 million , as a result of an improvement in net interest margin and a higher level of earning assets .
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the difference between the contractual rental rates and our estimate of market rental rates is measured over a period equal to the remaining non-cancelable term of the leases , including significantly below-market renewal options for which exercise of the renewal option appears to be reasonably assured . the remaining term of leases with renewal options at terms significantly below market reflect the assumed exercise of such below-market renewal options and assume the amortization period would coincide with the extended lease term . the gross asset balances of the in-place value of tenant leases are included in buildings and equipment in our consolidated balance sheets . replace_table_token_34_th the above-market tenant leases and below-market ground leases are included in prepaid expenses and other assets ( note 15 ) ; the below-market tenant leases , above-market ground leases and above-market story_separator_special_tag all references to numbered notes are to specific footnotes to our consolidated financial statements included in this annual report and whose descriptions are incorporated into the applicable response by reference . the following discussion should be read in conjunction with such consolidated financial statements and related notes . capitalized terms used , but not defined , in this management 's discussion and analysis of financial condition and results of operations have the same meanings as in such notes . overview—introduction we own a property portfolio comprised primarily of class a retail properties ( defined primarily by sales per square foot ) . as of december 31 , 2018 , we own , either entirely or with joint venture partners , 124 retail properties located throughout the united states comprising approximately 121 million square feet of gross leasable area or gla . our primary objective is to be an owner and operator of best-in-class retail properties that provide an outstanding environment and experience for our communities , retailers and consumers . our strategy includes : increasing the permanent occupancy of our regional mall portfolio by converting temporary leases to permanent leases and leasing vacant space ; renewing or replacing expiring leases at greater rental rates ; actively recycling capital through the disposition of assets and investing in whole or partial interests in high-quality regional malls , anchor pads , our development pipeline and repaying debt ; and continuing to execute on our existing redevelopment projects and seeking additional opportunities within our portfolio for redevelopment . as of december 31 , 2018 , the portfolio was 96.5 % leased , compared to 96.7 % leased at december 31 , 2017 . on a suite-to-suite basis , the leases commencing occupancy in the trailing 12 months exhibited initial rents that were 10.6 % higher than the final rents paid on expiring leases . in 2018 , our retail properties reported an average of $ 746 in tenant sales per square foot . during this same period , the spread between the rent paid on expiring leases and the rent commencing under new leases on a suite-to-suite basis in our retail portfolio increased by 10.6 % , demonstrating our strong same-property growth potential . 31 overview net income attributable to bpr increased 522.3 % from $ 0.7 billion for the year ended december 31 , 2017 to $ 4.1 billion for the year ended december 31 , 2018 primarily due to gains and deferred taxes related to the sale of partial interests in properties related to joint ventures formed in conjunction with the bpy transaction ( note 3 ) . operating income decreased 49.0 % from $ 838.3 million for the year ended december 31 , 2017 to $ 427.7 million for the year ended december 31 , 2018 . operating metrics the following table summarizes selected operating metrics for our portfolio . replace_table_token_17_th ( 1 ) metrics exclude properties acquired in the year ended december 31 , 2018 and the december 31 , 2017 , reductions in ownership as a result of sales or other transactions , and certain redevelopments and other properties . ( 2 ) rent is presented on a cash basis and consists of base minimum rent and common area costs . lease spread metrics the following table summarizes signed leases compared to expiring leases in the same suite , for leases where ( 1 ) the downtime between new and previous tenant was less than 24 months , ( 2 ) the occupied space between the previous tenant and new tenant did not change by more than 10,000 square feet and ( 3 ) the new lease term is at least a year . replace_table_token_18_th _ ( 1 ) represents initial annual rent over the lease consisting of base minimum rent and common area maintenance . ( 2 ) represents expiring rent at end of lease consisting of base minimum rent and common area maintenance . year ended december 31 , 2018 and 2017 the following table is a breakout of the components of minimum rents : replace_table_token_19_th base minimum rents decreased $ 175.5 million primarily due to the joint ventures formed in conjunction with the bpy transaction in the third quarter of 2018. the joint ventures resulted in a $ 158.3 million decrease in permanent base minimum rents during 2018 compared to 2017 . in addition , the disposition of three operating properties during 2017 resulted in a $ 9.0 million decrease in base minimum rents . tenant recoveries decreased $ 103.2 million primarily due to the joint ventures formed in conjunction with the bpy transaction in the third quarter 2018. the joint ventures resulted in $ 85.6 million decrease in tenant recoveries during 2018 compared to 2017 . 32 in addition , the disposition of three operating properties during 2017 resulted in a $ 6.0 million decrease in tenant recoveries during 2018 compared to 2017 . management fees and other corporate revenues increased $ 20.6 million primarily due to the joint ventures formed in conjunction with the bpy transaction in the third quarter of 2018. the joint ventures resulted in a $ 13.4 million increase in property management fees . story_separator_special_tag this is partially offset by the divestiture of our investment in seritage growth properties stock in 2016 , which resulted in a $ 13.1 million gain ( note 2 ) . real estate taxes increased $ 7.6 million primarily due to the acquisition of the 50 % interest in riverchase galleria from our joint venture partner , the acquisition of 605 n. michigan avenue during the fourth quarter of 2016 and the acquisition of our joint venture partner 's interest in neshaminy during the second quarter of 2017. this resulted in a $ 4.7 million increase in real estate taxes during 2017 compared to 2016. in addition , the transaction at 218 west 57th street , 530 fifth avenue , and 685 fifth avenue during the third quarter of 2017 resulted in a $ 2.1 million increase in real estate taxes . our sale of a 50 % interest in fashion show during the third quarter of 2016 resulted in offsetting $ 1.5 million reduction in real estate taxes as the property is now accounted for as an unconsolidated real estate affiliate . property maintenance costs decreased $ 5.2 million primarily due to continued efforts to manage operating expenses . in addition , our sale of a 50 % interest in fashion show during the third quarter of 2016 resulted in a $ 1.2 million reduction in property maintenance costs as the property is now accounted for as an unconsolidated real estate affiliate . marketing costs decreased $ 2.1 million primarily due to a change in corporate strategy that resulted in a net reduction in spending . provision for loan loss of $ 29.6 million relates to the settlement of the rique note receivable during 2016 . 34 property management and other costs increased $ 6.6 million primarily due to bonus savings in the prior year . provision for impairment of $ 73.0 million is related to impairment charges recorded on three operating properties during 2016 ( note 2 ) . depreciation and amortization increased by $ 32.6 million primarily due to tenant write offs . interest expense decreased by $ 29.3 million primarily due to the sale of a 50 % interest in fashion show during the third quarter of 2016. this resulted in $ 20.1 million less interest expense during 2017 compared to 2016 as the property is now accounted for as unconsolidated real estate affiliates . in addition , we paid down a mortgage note at one of our operating properties during 2016 resulting in a $ 5.5 million decrease in interest expense ( note 6 ) and conveyed one property to the lender in full satisfaction of the debt during the second quarter of 2017 , resulting in a $ 5.8 million decrease in interest expense . we also sold two operating properties during 2016 , resulting in a $ 2.7 million decrease in interest expense ( note 3 ) . the decreases were partially offset by an increase in the libor rate over the prior year . in addition , the transaction at 218 west 57th street , 530 fifth avenue and 685 fifth avenue resulted in a $ 5.6 million increase in interest expense over the period . the loss on foreign currency during 2017 is related to the impact of changes in the exchange rate on the proceeds from the settlement of a note receivable denominated in brazilian reais and received in conjunction with the sale of aliansce in the third quarter of 2013. the gain from changes in control of investment properties and other of $ 79.1 million during 2017 relates to the transaction at 218 west 57th street , 530 fifth avenue and 685 fifth avenue , the acquisition of the remaining 50 % interest in 8 of the 12 anchor boxes included in the gsph joint venture with seritage growth properties , the acquisition of the remaining interest in neshaminy mall and our sale of our interests in two properties ( note 3 ) . the gain on extinguishment of debt during 2017 relates to one property which was conveyed to the lender in full satisfaction of the debt ( note 3 ) . benefit from income taxes increased $ 11.8 million primarily due to the one-time benefit resulting from the change in future federal statutory tax rates due to the passing of the tcja on december 22 , 2017. equity in income of unconsolidated real estate affiliates decreased by $ 78.9 million primarily due to the acquisition of the 50 % interest in riverchase galleria from our joint venture partner during the fourth quarter of 2016. this resulted in $ 55.6 million less equity in income of unconsolidated real estate affiliates during 2017 compared to 2016 . in addition , income recognition on condominiums decreased by $ 26.3 million during the period ( note 5 ) . our sale of a 50 % interest in fashion show during the third quarter of 2016 resulted in offsetting $ 8.7 million increase in equity in income of unconsolidated real estate affiliates . unconsolidated real estate affiliates - gain on investment of $ 12.0 million during 2017 is related to the sale of a portion of our interest in aeropostale ( note 3 ) . liquidity and capital resources our primary source of cash is from the ownership and management of our properties and strategic dispositions . we may generate cash from refinancings or borrowings under our revolving credit facility . our primary uses of cash include payment of operating expenses , debt service , reinvestment in and redevelopment of properties , tenant allowances , dividends and acquisitions . we anticipate maintaining financial flexibility by managing our future maturities , amortization of debt , and minimizing cross collateralizations and corporate guarantees .
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summary of cash flows cash flows from operating activities net cash provided by operating activities was $ 584.5 million for the year ended december 31 , 2018 , $ 1,294.6 million for the year ended december 31 , 2017 , and $ 1,136.2 million for the year ended december 31 , 2016 . significant components of net cash provided by operating activities include : in 2018 , an increase in cash outflows from transaction expenses ; in 2017 , increase in distributions received from unconsolidated real estate affiliates ; and in 2017 , an increase in cash inflows from tenant recoveries . cash flows from investing activities net cash provided by ( used in ) investing activities was $ 2.7 billion for the year ended december 31 , 2018 , $ ( 855.3 ) million for the year ended december 31 , 2017 , and $ 521.4 million for the year ended december 31 , 2016 . significant components of net cash provided by ( used in ) investing activities include : 2018 activity proceeds from sales of investments properties and unconsolidated real estate affiliates , $ 3,050.3 million ; development of real estate and property improvements , $ ( 674.5 ) million ; net proceeds from distributions received from unconsolidated real estate in excess of income , $ 410.6 million ; contributions to unconsolidated real estate affiliates , $ ( 218.0 ) million ; and proceeds from repayment of loans to joint ventures and joint venture partners , $ 204.9 million .
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as part of the settlement agreement , our obligation to pay a $ 500 thousand special fee and a $ 500 thousand convertible promissory note including interest of $ 92 thousand were cancelled in their entirety . additionally , story_separator_special_tag operations the following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements ( “ financial statements ” ) and related notes thereto , included in item 8 of this annual report . overview energy focus , inc. and its subsidiaries engage in the design , development , manufacturing , marketing , and installation of energy-efficient lighting systems . we operate in a single industry segment , developing and selling our energy-efficient light-emitting diode ( `` led '' ) lighting products into the military maritime market , and general commercial and industrial markets . recently , we have aligned our resources and focused our efforts on the sale of our led lighting products , in particular our military and commercial tubular led ( `` tled '' ) lines of products , into targeted vertical markets . our goal is to become a leader in the led lighting retrofit market by replacing fluorescent lamps in general purpose and high-intensity discharge ( `` hid '' ) lighting in low-bay and high-bay applications with our innovative , high-quality tled products . in order to focus on this business opportunity , we have recently exited non-core businesses . in 2013 , we sold our pool lighting products business . during 2014 , we shifted our focus away from the turnkey solutions business operated by our subsidiary , energy focus led solutions , llc ( “ efls ” ) , which had historically incurred lower gross margins . we completed all outstanding solutions-based projects in the first quarter of 2015 , are no longer accepting new projects , and , as of september 30 , 2015 , had fully exited the solutions business . in august 2015 , we exited our united kingdom business through the sale of crescent lighting limited ( `` cll '' ) , our wholly-owned subsidiary . as a result of exiting the turnkey solutions and cll businesses , we have eliminated all net sales and expenses associated with both businesses from the consolidated statements of operations and have reported the net income ( loss ) as discontinued operations . please refer to note 3 , `` discontinued operations , '' for more information on our disposition of these businesses . during 2015 , a substantial portion of our sales continued to be for military maritime products for the u.s. navy . we had significant growth in our commercial sales versus the prior year , but still remain in the early stages of our efforts to diversify our customer base . we also continued to invest in our direct sales force and marketing personnel , and the other talent and infrastructure necessary to support the increasing scale of our operations across a variety of other functions . as a result , our financial results continue to be subject to fluctuations in the timing and magnitude of our military and maritime product sales and the impact of our growth initiatives , since we may dedicate significant resources to a targeted customer or industry before we achieve meaningful results or are able to effectively evaluate our success . story_separator_special_tag style= '' font-family : inherit ; font-size:10pt ; font-style : italic ; '' > loss on impairment due to the sale of our pool products business in november 2013 and the closing of our facilities in pleasanton , california , we performed an evaluation of property and equipment located in california . in performing this review , we sought a buyer for the assets which we no longer had use , and recorded an impairment loss of $ 608 thousand . the impairment loss represented the difference between the fair value and the carrying value of the asset group . these assets were subsequently sold in 2014 for $ 130 thousand ; the carrying value of the assets after the impairment charge . change in estimate of contingent liabilities in connection with the acquisition of efls in december 2009 , we recorded a performance-related contingent obligation related to a 2.5 percent payout payable over 42 months commencing january 1 , 2010. the payout was based on the fair value of projected annual billings of the acquired business . we accrued for this contingent liability at its estimated fair value at the time of the acquisition . as a provision of the settlement agreement between us and the former owners of efls , a net receivable due of $ 78 thousand was forgiven in june 2013. additionally , we recognized a $ 66 thousand favorable adjustment related to the change in the estimate of the performance-related contingent obligation , resulting in a net expense of $ 12 thousand charged to operations in 2013. see note 10 , `` commitments and contingencies , '' included in item 8 for further information . restructuring during the third quarter of 2013 , we relocated our manufacturing operations from a contract manufacturing facility located in mexico to our facilities located in pleasanton , california and solon , ohio . the consolidated statements of operations include $ 80 thousand of “ restructuring ” costs for severance paid to mexican contract employees as required by the production share agreement , as amended , between us and the contract manufacturer . see note 8 , `` restructuring , '' for more information on these charges . as a result of the sale of the pool products business , we relocated our manufacturing operations in pleasanton , california to solon , ohio . this activity was completed by march 2014 , and the cost was negligible . story_separator_special_tag there were no assets disposed as a result of the disposition , and we did not recognize a gain or loss on disposal or record an income tax expense or benefit . we do not anticipate any significant continuing involvement related to this discontinued operation . 25 cll in august 2015 , we sold our wholly-owned united kingdom subsidiary , cll . the sale was for nominal consideration under the terms of the agreement . as a result of the transaction and the elimination of this foreign subsidiary consolidated under the equity method of accounting , we recorded a one-time loss of $ 44 thousand , which included a $ 469 thousand accumulated other comprehensive income reclassification adjustment for foreign currency translation adjustments . the loss was recorded in the consolidated statements of operations under the caption `` loss on disposal of discontinued operations . '' we do not anticipate any significant continuing involvement related to this discontinued operation . pool products business in november 2013 , we sold our pool products business . in connection with the sale , we eliminated all net sales and expenses associated with this business from the consolidated statements of operations and have reported the net ( loss ) income from those activities as “ discontinued operations. ” revenues from discontinued operations in 2015 , 2014 , and 2013 were $ 1.1 million , $ 6.3 million , and $ 16.6 million , respectively . see note 3 , `` discontinued operations , '' included in item 8 of this annual report for more information . net income ( loss ) net income ( loss ) includes the results from continuing operations , as well as the results from discontinued operations . net income was $ 8.8 million in 2015 , an increase of $ 14.6 million compared to a net loss of $ 5.8 million in 2014 . net loss increased by $ 3.5 million in 2014 compared to a net loss of $ 2.4 million in 2013 , primarily due to the one-time charges of $ 2.4 million noted above . liquidity and capital resources while we generated net income of $ 8.8 million in 2015 , we have incurred substantial losses in the past , and as of december 31 , 2015 , we had an accumulated deficit of $ 80.1 million . in the third quarter of 2015 , we raised approximately $ 23.6 million , net of fees , from a follow-on public offering of 1,500,000 shares of our common stock . we also raised approximately $ 18 million between 2012 and 2014 through the issuance of common stock and debt , including $ 5.15 million in cash , net of related expenses , from a public offering and sale of our common stock in august 2014. additionally , we received $ 4.8 million in cash , net of related expenses , through the sale of our pool products business in 2013. while we were profitable in 2015 , in order for us to continue to grow our business profitably , we will need to continue executing our marketing and sales plans for our energy-efficient led lighting products to expand our customer base , and develop new technologies into sustainable product lines . there is a risk that our business may not be as successful as we envision as we work to expand our customer base and grow net sales from commercial clients in our targeted vertical markets . additionally , there is no guarantee that the u.s. navy will continue on its current pace with the adoption of our led lighting products for its fighting fleet . we terminated our revolving credit facility effective december 31 , 2015 , and are not actively pursuing securing a new line of credit at this time . there can be no assurance that we will generate sufficient cash flows to sustain and grow our operations or , if necessary , obtain funding on acceptable terms or in a timely fashion or at all . as such , we may continue to review and pursue selected external funding sources to execute these objectives including , but not limited to , the following : obtain financing from traditional or non-traditional investment capital organizations or individuals ; and obtain funding from the sale of our common stock or other equity or debt instruments . obtaining financing through the above-mentioned mechanisms contains risks , including : additional equity financing may not be available to us on satisfactory terms and any equity that we are able to issue could lead to dilution of stockholder value for current stockholders ; loans or other debt instruments may have terms and or conditions , such as interest rate , restrictive covenants and control or revocation provisions , which are not acceptable to management or our board of directors or would restrict our growth opportunities ; and the current environment in capital markets combined with our capital constraints may prevent us from being able to obtain adequate debt financing . 26 if we fail to generate cash to grow our business , we would need to delay or scale back our business plan , reduce our operating costs , or reduce our headcount , each of which would have a material adverse effect on our business , future prospects , and financial condition . cash and cash equivalents and debt at december 31 , 2015 , our cash and cash equivalents balance was $ 34.6 million , compared to $ 7.4 million at december 31 , 2014 . the balance at december 31 , 2015 included restricted cash of $ 113 thousand , compared to $ 105 thousand at december 31 , 2014 . the restricted cash balance relates to funds to be used exclusively for a research and development project with the national shipbuilding research program . additionally , our cash balance at december 31 , 2014 included $ 300 thousand of the purchase price from the sale of our pool products business held in escrow to secure our obligations of the sale .
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results of operations the following table sets forth the percentage of net sales represented by certain items reflected on our consolidated statements of operations for the following periods : 21 replace_table_token_3_th net sales a further breakdown of our net sales by product line is as follows ( in thousands ) : replace_table_token_4_th net sales of $ 64.4 million in 2015 increased 183.7 percent compared to 2014 . commercial sales increased 147.8 percent as we continued to penetrate our targeted vertical markets of k-12 schools , industrial manufacturers , national retailers , and hospitals . military maritime sales increased 196.4 percent as a result of continued high-volume sales to distributors for the u.s. navy . 22 r & d services sales increased 58.7 percent as we worked to complete existing research contracts and grants to focus our resources exclusively on projects and contracts that support led technologies . net sales of $ 22.7 million in 2014 increased 140.9 percent in comparison to $ 9.4 million in 2013 , primarily due to a $ 13.2 million increase in military maritime sales as a result of high-volume sales to a distributor for the u.s. navy . commercial sales increased $ 2.0 million , or 54.3 percent , in 2014 compared to 2013 , as we built our pipeline and began to penetrate our targeted commercial and industrial markets . the increase in commercial sales was offset by a decrease of $ 2.0 million in r & d services , as we shifted our focus away from research contracts and grants . international sales with the sale of cll , our subsidiary in the united kingdom , we no longer generate significant sales from customers outside the united states . international net sales accounted for less than 1.0 percent of net sales in 2015 and in 2014 , respectively . international net sales accounted for approximately 1.4 percent of net sales in 2013 .
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overview zion oil and gas is an oil and gas exploration company with a history of 18 years of oil and gas exploration in israel . we were incorporated in florida on april 6 , 2000 and reincorporated in delaware on july 9 , 2003. we completed our initial public offering in january 2007. our common stock currently trades on the nasdaq global market under the symbol “ zn. ” the company currently holds one active petroleum exploration license onshore israel , the megiddo-jezreel license , comprising approximately 99,000 acres . the megiddo jezreel # 1 ( “ mj # 1 ” ) exploratory well was spud on june 5 , 2017 and drilled to a total depth ( “ td ” ) of 5,060 meters ( approximately 16,600 feet ) . thereafter , the company obtained three open-hole wireline log suites ( including a formation image log ) and the well was successfully cased and cemented . the ministry of energy approved the well testing protocol on april 29 , 2018. during the fourth quarter of 2018 , the company testing protocol was concluded at the mj # 1 well . the test results confirmed that the mj # 1 well did not contain hydrocarbons in commercial quantities in the zones tested . as a result of the above determination , in the year ended december 31 , 2018 , the company recorded a non-cash impairment charge to its unproved oil and gas properties of $ 30,906,000. the mj # 1 well provided zion with information zion believes is important for potential future exploration efforts within its license area . as with many frontier wildcat wells , the mj # 1 also left several questions unanswered . while not meant to be an exhaustive list , a summary of what zion believes to be key information learned in the mj # 1 well is as follows : 1. the mj # 1 encountered much higher subsurface temperatures at a depth shallower than expected before drilling the well . in our opinion , this is significant because reaching a minimum temperature threshold is necessary for the generation of hydrocarbons from an organic-rich source rock . 2. the known organic rich ( potentially hydrocarbon bearing ) senonian age source rocks that are typically present in this part of israel were not encountered as expected . zion expected these source rocks to be encountered at approximately 1,000 meters in the mj # 1 well . 3. mj # 1 had natural fractures , permeability ( the ability of fluid to move through the rock ) and porosity ( pore space in rock ) that allowed the sustained flow of formation fluid in the shallower jurassic and lower cretaceous age formations between approximately 1,200 and 1,800 meters . while no hydrocarbons were encountered , zion believes this fact is nonetheless significant because it provides important information about possible reservoir pressures and the ability of fluids to move within the formation and to the surface . 4. mj # 1 encountered oil in the triassic mohilla formation which zion believes suggests an active deep petroleum system is in zion 's license area . there was no natural permeability or porosity in the triassic mohilla formation to allow formation fluid to reach the surface naturally during testing and thus the mj # 1 was not producible or commercial . 5. the depths and thickness of the formations we encountered varied greatly from pre-drill estimates . this required the mj # 1 to be drilled to a much greater depth than previously expected . zion has tied these revised formation depths to seismic data which will allow for more accurate interpretation and mapping in the future . a summary of what zion believes to be some key questions left to be answered are : 1. is the missing shallow senonian age source rock a result of regional erosion , or is it missing because of a fault that cut the well-bore and could be reasonably expected to be encountered in the vicinity of the mj # 1 drill site ? zion believes this is an important question to answer because if the senonian source rocks do exist in this area , the high temperatures encountered are sufficient to mature these source rocks and generate oil . 2. do the unusually high shallow subsurface temperatures extend regionally beyond the mj # 1 well , which could allow for the generation of hydrocarbons in the senonian age source rock within our license area ? 3. as a consequence of seismic remapping , where does the mj # 1 well lie relative to the potential traps at the jurassic and triassic levels and was the well location too low on the structures and deeper than the potential hydrocarbons within those traps ? 26 as a result of these unanswered questions and with the information gained drilling the mj # 1 well , zion now believes it is prudent and consistent with good industry practice to try and answer some of these questions with a focused 3d seismic imaging shoot of approximately 50 square kilometers surrounding the mj # 1 well . zion received a multi-year license extension through december 2 , 2020. zion made its annual license fee payment on december 31 , 2018 , thereby confirming the company 's commitment to further exploration in the license area . the company has commenced preliminary scouting and survey design to help identify the geologic boundaries of the proposed 3d seismic survey . additionally , zion held initial meetings with potential vendors to aid in the 3d seismic planning and acquisition process . once the survey design and surface layout are completed , zion intends to acquire the necessary government permits and negotiate potential surface damages to crops , irrigation piping , and other surface features . zion believes it will be necessary to import seismic source equipment and autonomous wireless geophones ( to record the signal ) to acquire the 3d data . story_separator_special_tag the recoverability of amounts capitalized for oil and gas properties is dependent upon the identification of economically recoverable reserves , together with obtaining the necessary financing to exploit such reserves and the achievement of profitable operations . during the fourth quarter of 2018 , the company 's testing protocol was concluded at the mj # 1 well . the test results confirmed that the mj # 1 well did not contain hydrocarbons in commercial quantities in the zones tested . as a result of the above determination , in the year ended december 31 , 2018 , the company recorded a non-cash impairment charge to its unproved oil and gas properties of $ 30,906,000. no impairment charges were recorded in 2016 and 2017 ( see note 4 ) . following the impairment charge noted above , the total net book value of our unproved oil and gas properties under the full cost method is $ 6,714,000 at december 31 , 2018. currency utilized although our oil & gas properties and our principal operations are in israel , we report all our transactions in united states dollars . certain dollar amounts in the financial statements may represent the dollar equivalent of other currencies . valuation of deferred taxes we record a valuation allowance to reduce our deferred tax asset to the amount that we believe is likely to be realized in the future . in assessing the need for the valuation allowance , we have considered not only future taxable income but also feasible and prudent tax planning strategies . in the event that we were to determine that it would be likely that we would , in the future , realize our deferred tax assets in excess of the net recorded amount , an adjustment to the deferred tax asset would be made . in the period that such a determination was made , the adjustment to the deferred tax asset would produce an increase in our net income . 28 asset retirement obligation we record a liability for asset retirement obligation at fair value in the period in which it is incurred and a corresponding increase in the carrying amount of the related long lived assets . fair value considerations we follow asc 820 , “ fair value measurements and disclosures , ” as amended by financial accounting standards board ( fasb ) financial staff position ( fsp ) no . 157 and related guidance . those provisions relate to the company 's financial assets and liabilities carried at fair value and the fair value disclosures related to financial assets and liabilities . asc 820 defines fair value , expands related disclosure requirements , and specifies a hierarchy of valuation techniques based on the nature of the inputs used to develop the fair value measures . fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date , assuming the transaction occurs in the principal or most advantageous market for that asset or liability . there are three levels of inputs to fair value measurements - level 1 , meaning the use of quoted prices for identical instruments in active markets ; level 2 , meaning the use of quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or are directly or indirectly observable ; and level 3 , meaning the use of unobservable inputs . we use level 1 inputs for fair value measurements whenever there is an active market , with actual quotes , market prices , and observable inputs on the measurement date . we use level 2 inputs for fair value measurements whenever there are quoted prices for similar securities in an active market or quoted prices for identical securities in an inactive market . we use observable market data whenever available . we use level 3 inputs in the binomial model used for the valuation of the derivative liability . derivative liabilities in accordance with asc 815-40-25 and asc 815-10-15 derivatives and hedging and asc 480-10-25 liabilities-distinguishing liabilities from equity , the embedded derivatives associated with the convertible bonds are accounted for as liabilities during the term of the related convertible bonds . story_separator_special_tag adequacy of our current assets to meet our current expenditure requirements and the accuracy of management 's estimates of those requirements . should those estimates be materially incorrect , our ability to continue as a going concern will be impaired . our financial statements for the year ended december 31 , 2018 have been prepared on a going concern basis , which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business . we have incurred a history of operating losses and negative cash flows from operations . therefore , there is substantial doubt about our ability to continue as a going concern . at december 31 , 2018 , we had approximately $ 2,791,000 in cash and cash equivalents compared to $ 6,892,000 at december 31 , 2017. our working capital ( current assets minus current liabilities ) was $ 537,000 at december 31 , 2018 and $ 3,646,000 at december 31 , 2017. the derivative liability at december 31 , 2018 was $ 345,000 , and this non-cash liability negatively impacts the working capital figure .
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results of operations the following table sets forth our statements of operations data for the years ended december 31 ( all data is in thousands of usd ) : replace_table_token_5_th 29 for the year ended december 31 , 2018 compared to december 31 , 2017 revenue . we currently have no revenue generating operations . operating costs and expenses . operating costs and expenses for the year ended december 31 , 2018 were $ 39,480,000 compared to $ 8,787,000 for the year ended december 31 , 2017. the increase in operating costs and expenses during the year ended december 31 , 2018 is primarily attributable to the recognition of an impairment charge of $ 30,906,000 during q4 2018. general and administrative expenses . general and administrative expenses for the year ended december 31 , 2018 were $ 6,360,000 compared to $ 6,043,000 for the year ended december 31 , 2017. the increase in general and administrative expenses during the year ended december 31 , 2018 is primarily attributable to higher legal expenses stemming from the sec investigation and related derivative lawsuits . this increase was partially offset by lower non-cash expenses recognized and recorded in connection with stock option grants during 2018 compared to the corresponding period in 2017. other expenses . other expenses during the year ended december 31 , 2018 were $ 2,214,000 compared to $ 2,744,000 for the year ended december 31 , 2017. other general and administrative expenses are comprised of non-compensation and non-professional expenses incurred . the decrease in other general and administrative expenses during the year ended december 31 , 2018 compared to the corresponding period in 2017 is primarily attributable to less marketing expenses associated with investor relations activities . impairment of unproved oil and gas properties .
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f-10 american tower story_separator_special_tag the discussion and analysis of our financial condition and results of operations that follow are based upon our consolidated financial statements , which have been prepared in accordance with gaap . the preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities , revenues and expenses , and the related disclosure of contingent assets and liabilities at the date of our financial statements . actual results may differ significantly from these estimates under different assumptions or conditions . this discussion should be read in conjunction with our consolidated financial statements herein and the accompanying notes thereto , and the information set forth under the caption critical accounting policies and estimates below . our continuing operations are reported in three segments , domestic rental and management , international rental and management and network and development services . among other factors , management uses segment gross margin and segment operating profit in its assessment of operating performance in each business segment . we define segment gross margin as segment revenue less segment operating expenses , excluding stock-based compensation recorded in costs of operations ; depreciation , amortization and accretion ; selling , general , administrative and development expense ; and other operating expense . we define segment operating profit as segment gross margin less selling , general , administrative and development expense attributable to the segment , excluding stock-based compensation expense and corporate expenses . segment gross margin and segment operating profit for the international rental and management segment also include interest income , tv azteca , net ( see note 20 to our consolidated financial statements included herein ) . these measures of segment gross margin and segment operating profit are also before interest income , interest expense , loss on retirement of long-term obligations , other income ( expense ) , net income ( loss ) attributable to noncontrolling interest , income ( loss ) on equity method investments , income taxes and discontinued operations . executive overview our primary business is leasing antenna space on multi-tenant communications sites to wireless service providers , radio and television broadcast companies , wireless data providers , government agencies and municipalities and tenants in a number of other industries . in addition to the communications sites in our portfolio , we manage rooftop and tower sites for property owners under various contractual arrangements . we also hold property interests that we lease to communications service providers and third-party tower operators . we refer to this business as our rental and management operations , which accounted for approximately 97 % of our total revenues for the year ended december 31 , 2012 and includes our domestic rental and management segment and our international rental and management segment . through our network development services segment , we offer tower-related services domestically , including site acquisition , zoning and permitting services and structural analysis services , which primarily support our site leasing business and the addition of new tenants and equipment on our sites . we began operating as a reit for federal income tax purposes effective january 1 , 2012 . 29 the following table details the number of communications sites we own or operate in the countries in which we operate as of december 31 , 2012 : replace_table_token_8_th ( 1 ) all of the sites we operate are held pursuant to long-term capital leases , including those subject to purchase options . the majority of our tenant leases with wireless carriers are typically for an initial non-cancellable term of five to ten years , with multiple five-year renewal terms thereafter . accordingly , nearly all of the revenue generated by our rental and management operations during the year ended december 31 , 2012 is recurring revenue that we should continue to receive in future periods . based upon foreign currency exchange rates and the tenant leases in place as of december 31 , 2012 , we expect to generate approximately $ 20 billion of non-cancellable tenant lease revenue over future periods , excluding the impact of straight-line lease accounting . in addition , most of our tenant leases have provisions that periodically increase the rent due under the lease , typically annually based on a fixed percentage ( on average approximately 3.5 % in the united states ) , inflation , or inflation with a fixed minimum or maximum escalation for the year . revenue generated by rent increases based on fixed escalation clauses is recognized on a straight line basis over the non-cancellable term of the applicable agreement . we also routinely seek to extend our leases with our tenants , which increases the non-cancellable term of the lease and creates incremental growth in our revenues . the revenues generated by our rental and management operations may also be affected by cancellations of existing tenant leases . as discussed above , most of our tenant leases with wireless carriers and broadcasters are multi-year contracts , which typically are non-cancellable ; however in some instances , a lease may be cancelled upon the payment of a termination fee . revenue lost from either cancellations of leases at the end of their terms or rent negotiations historically have not had a material adverse effect on the revenues generated by our rental and management operations . during the year ended december 31 , 2012 , loss of annual revenue from tenant lease cancellations or renegotiations represented less than 1.3 % of our rental and management operations revenues . rental and management operations revenue growth . story_separator_special_tag we believe incremental demand for our tower sites will continue in our international markets as wireless service providers seek to remain competitive by increasing the coverage of their networks while also investing in next generation data networks . rental and management operations new site revenue growth . during the year ended december 31 , 2012 , we grew our portfolio of communications real estate through acquisitions and construction activities , including the acquisition and construction of approximately 8,810 sites . in a majority of our international markets , the acquisition or construction of new sites results in increased pass-through revenues and expenses . we continue to evaluate opportunities to acquire larger communications real estate portfolios , both domestically and internationally , to determine whether they meet our risk adjusted hurdle rates and whether we believe we can effectively integrate them into our existing portfolio . replace_table_token_9_th ( 1 ) the majority of sites acquired or constructed in 2012 were in brazil , germany , india and uganda ; in 2011 were in brazil , colombia , ghana , india , mexico and south africa ; and in 2010 were in chile , colombia , india and peru . network development services segment revenue growth . as we continue to focus on growing our rental and management operations , we anticipate that our network development services revenue will continue to represent a relatively small percentage of our total revenues . through our network development services segment , we offer tower-related services , including site acquisition , zoning and permitting services and structural analysis services , which primarily support our site leasing business and the addition of new tenants and equipment on our sites , including in connection with provider network upgrades . rental and management operations expenses . direct operating expenses incurred by our domestic and international rental and management segments include direct site level expenses and consist primarily of ground rent , property taxes , repairs and maintenance , security and power and fuel costs , some of which may be passed through to our tenants . these segment direct operating expenses exclude all segment and corporate selling , general , administrative and development expenses , which are aggregated into one line item entitled selling , general , administrative and development expense in our consolidated statements of operations . in general , our domestic and international rental and management segments selling , general , administrative and development expenses do not significantly increase as a result of adding incremental tenants to our legacy sites and typically increase only modestly year-over-year . as a result , leasing additional space to new tenants on our legacy sites provides significant incremental cash flow . we may incur additional segment selling , general , administrative and development expenses as we increase our presence in geographic areas where we have recently launched operations or are focused on expanding our portfolio . our profit margin growth is therefore positively impacted by the addition of new tenants to our legacy sites and can be temporarily diluted by our development activities . 32 reit conversion . we began operating as a reit effective january 1 , 2012. the reit tax rules require that we derive most of our income , other than income generated by a trs , from investments in real estate , which for us primarily consists of income from the leasing of our communications sites . under the code , maintaining reit status generally requires that no more than 25 % of the value of the reit 's assets be represented by securities of one or more trss and other non-qualifying assets . a reit must annually distribute to its stockholders an amount equal to at least 90 % of its reit taxable income ( determined before the deduction for distributed earnings and excluding any net capital gain ) . during the year ended december 31 , 2012 , we paid an aggregate of approximately $ 355.6 million in regular cash distributions to our stockholders . we intend to continue paying regular distributions in 2013. the amount , timing and frequency of future distributions will be at the sole discretion of our board of directors and will be declared based upon various factors , a number of which may be beyond our control , including our financial condition and operating cash flows , the amount required to maintain reit status and reduce any income and excise taxes that we otherwise would be required to pay , limitations on distributions in our existing and future debt instruments , our ability to utilize nols to offset , in whole or in part , our distribution requirements , limitations on our ability to fund distributions using cash generated through our trss and other factors that our board of directors may deem relevant . for more information on the requirements to qualify as a reit , see item 1 of this annual report under the caption businessoverview , and item 1a of this annual report under the caption risk factorsif we fail to qualify as a reit or fail to remain qualified as a reit , we would be subject to tax at corporate income tax rates , which would substantially reduce funds otherwise available and certain of our business activities may be subject to corporate level income tax and foreign taxes , which reduce our cash flows , and may have deferred and contingent tax liabilities. non-gaap financial measures included in our analysis of our results of operations are discussions regarding earnings before interest , taxes , depreciation , amortization and accretion , as adjusted ( adjusted ebitda ) . we define adjusted ebitda as net income before : income ( loss ) on discontinued operations , net ; income ( loss ) from equity method investments ; income tax provision ( benefit ) ; other income ( expense ) ; loss on retirement of long-term obligations ; interest expense ; interest income ; other operating expenses ; depreciation , amortization and accretion ; and stock-based compensation expense .
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results of operations years ended december 31 , 2012 and 2011 ( in thousands , except percentages ) revenue replace_table_token_10_th total revenues for the year ended december 31 , 2012 increased 18 % to $ 2,876.0 million . the increase was primarily attributable to an increase in both of our rental and management segments , including organic revenue growth attributable to our legacy sites and revenue growth attributable to the approximately 19,280 new sites that we have constructed or acquired since january 1 , 2011. domestic rental and management segment revenue for the year ended december 31 , 2012 increased 11 % to $ 1,940.7 million . this growth was comprised of : revenue growth from legacy sites of approximately 8 % , which includes approximately 2 % attributable to contractual rent escalations , net of tenant lease cancellations , and approximately 6 % due to incremental revenue primarily generated from new tenant leases and amendments to existing tenant leases on our legacy sites , which includes the positive impact of approximately 1 % due to customer settlements during the first quarter of 2012 ; revenue growth from new sites of approximately 2 % , resulting from the construction or acquisition of approximately 1,430 new sites , as well as land interests under third-party sites since january 1 , 2011 ; and an increase of over 1 % from the impact of straight-line lease accounting . international rental and management segment revenue for the year ended december 31 , 2012 increased 34 % to $ 862.8 million .
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the major classes of assets and liabilities to which we have preliminarily allocated the purchase price are as follows : ( in thousands ) consideration cash $ 59,632 acquisition-related costs ( included in the company 's consolidated statement of income for the year ended september 30 , 2015 as a component of restructuring and acquisition-related expenses ) $ 763 recognized amounts of identifiable assets acquired and liabilities assumed cash and cash equivalents $ 2,640 accounts receivable , net 5,331 prepaid expenses and other current assets 209 intangible assets : completed technology 2,700 customer relationships 11,600 trade names 600 other assets 112 accounts payable ( 1,118 ) accrued compensation and employee benefits ( 1,514 ) other accrued liabilities ( 2,728 ) deferred income taxes ( 4,349 ) total identifiable net assets 13,483 goodwill 46,149 total $ 59,632 60 fair isaac corporation notes to consolidated financial statements years ended september 30 , 2015 , 2014 and 2013 the acquired identifiable intangible assets have a weighted average useful life of approximately 4.9 years and are being amortized using the straight-line method over their estimated useful lives as follows : completed technology , five years ; customer relationships , five years ; and trade names , three years . the goodwill of $ 46.1 million arising from the acquisition consists largely of the revenue synergies related to market expansion and more rapid innovation for our solutions . the goodwill was allocated to our applications segment and is not deductible for tax purposes . the final purchase price allocation is subject to the completion of the final valuation of the accounts receivables acquired , which is expected to be completed as soon as is practicable but no later than january 12 , 2016 , and will not have a material impact on the preliminary purchase price allocation disclosed above . tonbeller has been included in our operating results since the acquisition date . the pro forma impact of this acquisition was not deemed material to our story_separator_special_tag our management 's discussion and analysis of financial condition and results of operations ( “ md & a ” ) includes the following : a business overview that provides a high level summary of our strategies and initiatives , financial results and bookings trends that affect our business ; a more detailed analysis of our results of operations ; our liquidity and capital resources , which discusses key aspects of our statements of cash flows , changes in our balance sheets and our financial commitments ; and a summary of our critical accounting policies and estimates we believe are important to understanding the assumptions and judgments incorporated in our reported financial results . our md & a should be read in conjunction with item 8 , financial statements and supplementary data , of this annual report on form 10-k. the following discussion contains forward-looking statements that are subject to risks and uncertainties . actual results may differ from those referred to herein due to a number of factors , including but not limited to risks described in item 1a , risk factors , in this annual report on form 10-k. business overview strategies and initiatives during fiscal 2015 , we continued to generate significant free cash flow used to enhance shareholder value through investments in long-term growth initiatives ; acquisitions of relevant technologies and products that strengthen our portfolio and competitive position ; and our share repurchase program . we continued to invest in our growth initiatives that expand our addressable markets . our full suite of applications available through the fico ® analytic cloud provide product offerings in our applications and tools segments to provide growth opportunities with customers that can benefit from the affordability and simplicity of cloud-based solutions . for our scores segment , the fico ® score open access program continued its expansion during the current year . we have more than 100 million consumers with access to their free score through the fico ® score open access program , which allows our participating clients to provide their customers with a free fico ® score along with materials to help them understand what affects their score . in addition , during fiscal 2015 , we launched a partnership program with experian , a leading global information services provider , making the fico ® score available to consumers , who can now go to experian.com to access the credit score lenders use most when determining applicant eligibility for new credit cards , car loans , mortgages or other lines of credit . we continued to make acquisitions that deliver solutions to the financial services industry and adjacent vertical industries . our acquisition of tonbeller addresses the rapidly growing demand for integrated , enterprise-class financial crime and compliance solutions . we leveraged the financial crime and compliance technology to integrate with our existing fraud detection and analytics to provide broader , more responsive fraud solutions for our customers . with our strong portfolio of products now in place , we are shifting some of our resources to distribution of our expanded market . this fiscal year , we incurred severance charges to reallocate expenses from building out products to our distribution and go-to-market for both the applications and tools segments , which includes significant sales training and increasing sales resources to reach new market segments . we also returned significant cash to shareholders through our stock repurchase program . during fiscal 2015 , we repurchased approximately 1.7 million shares for a total cost of $ 130.7 million . as of september 30 , 2015 , we had $ 119.3 million remaining under our current stock repurchase program . overview of financial results total revenues for fiscal 2015 were $ 838.8 million , an increase of 6 % from $ 789.0 million in fiscal 2014 . revenue in each of our segments increased , with applications , scores and tools increasing by 4 % , 11 % and 7 % in fiscal 2015 compared to fiscal 2014 , respectively . story_separator_special_tag although we sell solutions and services into a large number of end user product and industry markets , our reportable business segments reflect the primary method in which management organizes and evaluates internal financial information to make operating decisions and assess performance . comparative segment revenues , operating income , and related financial information for the years ended september 30 , 2015 , 2014 and 2013 are set forth in note 17 to the accompanying consolidated financial statements . revenues the following tables set forth certain summary information on a segment basis related to our revenues for fiscal 2015 , 2014 and 2013 : replace_table_token_5_th replace_table_token_6_th 29 applications replace_table_token_7_th applications segment revenues increased $ 22.0 million in fiscal 2015 from fiscal 2014 primarily due to an $ 11.1 million increase in our compliance solutions , a $ 10.0 million increase in our fraud solutions , and a $ 4.1 million increase in our customer communication services , partially offset by a $ 3.3 million decrease in our marketing solutions . the increase in compliance solutions was attributable to our acquisition of tonbeller in january 2015. the increase in fraud solutions was primarily attributable to a large multi-year license transaction during fiscal 2015 , as well as an increase in transactional revenues driven by increased volumes . the increase in customer communication services was primarily attributable to an increase in transactional revenues as a result of our growth in the mobile communication market . the decrease in marketing solutions was primarily attributable to terminations of several customers in fiscal 2015. applications segment revenues increased $ 28.2 million in fiscal 2014 from fiscal 2013 due to a $ 17.3 million increase in our fraud solutions , a $ 9.6 million increase in our customer communication solutions , a $ 5.0 million increase in our originations solutions , and a $ 4.8 million increase in our collections & recovery solutions . the increase was partially offset by a $ 5.3 million decrease in our marketing solutions and a $ 3.2 million decrease in our customer management solutions . the increase in fraud solutions was primarily attributable to two large multi-year license transactions during fiscal 2014. the increase in customer communication solutions was primarily attributable to an increase in transactional revenues as a result of our growth in the mobile communication market . the increase in originations solutions was primarily attributable to an increase in license and services revenues . the increase in collections & recovery solutions was primarily attributable to an increase in services revenues . the decrease in marketing solutions was primarily attributable to the early termination of a large customer in fiscal 2013 , partially offset by a large deal entered into in fiscal 2014 to develop customized software solutions for a new customer . the decrease in customer management solutions was primarily attributable to a decrease in license revenue . scores replace_table_token_8_th scores segment revenues increased $ 20.5 million in fiscal 2015 from 2014 due to a $ 20.6 million increase in our business-to-consumer services revenues , partially offset by a decrease of $ 0.1 million in our business-to-business scores revenue . the increase in business-to-consumer services was primarily attributable to revenue generated from the agreement with experian that launched in december 2014 and made fico ® score available to consumers on experian.com . the decrease in our business-to-business scores was primarily attributable to decreased software revenue related to our global fico ® score , and a royalty true-up during fiscal 2014 , partially offset by an increase in our transactional scores driven by new originations and prescreen . 30 scores segment revenues increased $ 5.7 million in fiscal 2014 from 2013 due to a $ 3.5 million increase in our business-to-consumer services revenues and a $ 2.2 million increase in our business-to-business scores revenues . the increase in our business-to-consumer services was attributable to a $ 4.2 million increase in direct sales generated from the myfico.com website , partially offset by a $ 0.7 million decrease in royalties derived from scores sold indirectly to consumers through credit reporting agencies . the increase in our business-to-business scores revenues was primarily attributable to increased software revenue related to our global fico ® score . during fiscal 2015 , 2014 and 2013 , revenues generated from our agreements with equifax , transunion and experian , collectively accounted for approximately 16 % , 15 % and 16 % , respectively , of our total revenues , including revenues from these customers recorded in our other segments . tools replace_table_token_9_th tools segment revenues increased $ 7.2 million in fiscal 2015 from 2014 primarily due to an increase in our fico ® decision management platform license sales as well as related services and transactional revenues , a one-time settlement with a customer related to under-reported royalties from a multi-year period , as well as increased transactional revenues from our infocentricity acquisition in april 2014. the increase was partially offset by a decrease in optimization tools primarily attributable to decreased license sales on our fico ® decision optimizer and fico ® xpress optimization products . tools segment revenues increased $ 11.7 million in fiscal 2014 from 2013 primarily due to an $ 8.5 million increase in our optimization tools and a $ 2.2 million increase in our predictive modeling tools . the increase in optimization tools was primarily attributable to increased license sales on our fico ® decision optimizer and fico ® xpress optimization products . the increase in predictive modeling tools was primarily attributable to increased services revenue related to our fico ® model central product .
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summary of cash flows replace_table_token_17_th cash flows from operating activities our primary method for funding operations and growth has been through cash flows generated from operating activities . net cash provided by operating activities totaled $ 133.0 million in fiscal 2015 compared to $ 175.0 million in fiscal 2014. the $ 42.0 million decrease was mainly attributable to a $ 27.6 million decrease caused by timing of receipts and payments in our ordinary course of business , a $ 15.2 million increase in payment associated with our accrued incentive from prior year and an $ 11.4 million increase in our income tax payments . net cash provided by operating activities totaled $ 175.0 million in fiscal 2014 compared to $ 136.1 million in fiscal 2013. the $ 38.9 million increase was mainly attributable to a $ 40.4 million increase caused by the timing of receipts and payments in our ordinary course of business , including a $ 29.2 million increase caused by timing of payment on accrued compensation and employee benefits . cash flows from investing activities net cash used in investing activities totaled $ 81.9 million in fiscal 2015 compared to $ 19.8 million in fiscal 2014. the $ 62.1 million increase was attributable to a $ 49.7 million increase in net cash used for acquisitions and a $ 12.4 million increase in net cash used for purchases of property and equipment . net cash used in investing activities totaled $ 19.8 million in fiscal 2014 compared to $ 35.0 million in fiscal 2013. the $ 15.2 million decrease was attributable to a $ 25.6 million decrease in net cash used for acquisitions and an $ 11.6 million decrease in net cash used for purchases of property and equipment , partially offset by a $ 22.0 million decrease in proceeds from maturities of marketable securities .
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in our opinion , the financial statements present fairly , in all material respects , the financial position of the company story_separator_special_tag the following discussion and analysis of our financial condition and results of operations for the years ended december 31 , 2018 and december 31 , 2017 should be read in conjunction with the accompanying consolidated financial statements and the related notes included in item 8 in this annual report . 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 . overview effective february 11 , 2019 , xg technology , inc. changed its name to vislink technologies , inc. the overarching strategy of vislink technologies , inc. ( “ vislink technologies ” , the “ company ” , “ we ” , “ our ” , “ us ” ) is to design , develop and deliver advanced wireless communications solutions that provide customers in our target markets with enhanced levels of reliability , mobility , performance and efficiency in their business operations and missions . vislink technologies business lines include the main brands integrated microwave technologies ( “ imt ” ) and vislink ( “ vislink ” ) . the vislink technologies name serves as the corporate umbrella for its current brands , as well as any new ones that might be added to its portfolio in the future . there is considerable brand interaction , owing to complementary market focus , compatible product and technology development roadmaps , and solution integration opportunities . imt the imt business develops , manufactures and sells microwave communications equipment utilizing cofdm ( coded orthogonal frequency division multiplexing ) technology . cofdm is a transmission technique that combines encoding technology with ofdm ( orthogonal frequency division multiplexing ) modulation to provide the low latency and high image clarity required for real-time live broadcasting video transmissions . imt has extensive experience in ultra-compact cofdm wireless technology , which has allowed imt to develop integrated solutions over the past 20 years that deliver reliable video footage captured from both aerial and ground-based sources to fixed and mobile receiver locations . imt provides product and service solutions marketed under the well-established brand names nucomm , rf central and imt . its video transmission products primarily address three major market areas : broadcasting , sports and entertainment , and surveillance ( for military and government ) . the broadcasting market consists of electronic news gathering , wireless camera systems , portable microwave , and fixed point to point systems . customers within this market are blue-chip , tier-1 major network tv stations that include over-the-air broadcasters and cable and satellite news providers . for this market , imt designs , develops and markets solutions for use in news helicopters , ground-based news vehicles , camera operations , central receive sites , remote onsite and studio newscasts and live television events . in this market , imt 's nucomm line is recognized as a premium brand of digital broadcast microwave video systems . the sports and entertainment market consists of key segments , including sports production , sports venue entertainment systems , movie director video assist , and the non-professional user segment . generally , this market is focused on more agile wireless video systems . drivers in this market include small , lightweight , easy to use equipment , low-latency video systems , reliability of the wireless links , and the ability to use licensed and unlicensed bands . current trends within the market are to further reduce the size and improve agility of the wireless video systems as users are demanding higher link reliabilities at longer ranges . there is also an increased desire to provide audiences with new points of view and camera angles to enhance the viewing experience . customers within this market are professional sports teams , movie production companies , live video production service providers , system integrators and a growing segment of drone and unmanned ground vehicle providers . among the new subsections of the sports and entertainment market , the company has identified the burgeoning e-sports market as one where our solutions have applicability . the government/surveillance market consists of key segments that include state and local law enforcement agencies , federal agencies and military system integrators . customers within the government/surveillance market include recognizable state police forces , sheriff 's departments , fire departments , first responders , the department of justice and the department of homeland security . the key solutions imt provides to this market are mission-critical wireless video solutions for applications , including manned and unmanned aerial and ground systems , mobile and handheld receive systems and transmitters for concealed video surveillance . imt 's products in this market are sold under the brand name imt . 17 vislink the company originally announced the acquisition of vislink on october 20 , 2016 in a $ 16 million binding asset purchase agreement . on february 2 , 2017 , the company completed the acquisition of the net assets that constituted the business of vislink , pursuant to an asset purchase agreement by and among the company , vislink plc , an england and wales registered limited company , vislink international limited , an england and wales registered limited liability company , and vislink inc. , a delaware corporation , dated december 16 , 2016 , as amended on january 13 , 2017. vislink specializes in the wireless capture , delivery and management of secure , high-quality , live video from the field to the point of usage . vislink designs and manufactures products encompassing microwave radio components , satellite communication , cellular and wireless camera systems , and associated amplifier items . vislink serves two core markets : ( i ) broadcast and media and ( ii ) law enforcement , public safety and surveillance . in the broadcast and media market , vislink provides broadcast communication links for the collection of live news and sports and entertainment events . story_separator_special_tag 21 liquidity and capital resources cost reduction initiatives the company completed a cost reduction plan announced in april 2018 that resulted in approximately $ 8.2 million in annual savings . savings were realized through immediate cost reductions by eliminating certain personnel costs , associated benefits and reduction in facilities and other expenses . specifically , the company eliminated 65 full-time and contracted positions from the business , with salary and benefits savings totaling $ 7.3 million . the company also removed $ 900,000 in non-labor costs from the business . the company has also identified an additional $ 1.3 million in additional savings , primary related to facilities consolidation and severance . this includes consolidating the two sites in colchester , u.k. into one , expected to be completed by april , 2019 and the expected savings are approximately $ 0.5 million through june 2020. although no assurance can be provided the company will successfully consolidate these two locations . as part of cost cutting measures , the company will not be renewing office or warehouse space it currently leases in sunrise , florida with the lease expiring may 13 , 2019. our operations primarily have been funded through cash generated by debt and equity financing . cash consists of cash on hand and demand deposits . our cash balances were as follows ( in thousands ) : replace_table_token_2_th cash flows the following table sets forth the major components of our consolidated statements of cash flows data for the periods presented ( in thousands ) . replace_table_token_3_th operating activities net cash used in operating activities for the year ended december 31 , 2018 totaled $ 6.4 million as compared to $ 4.5 million for the year ended december 31 , 2017 , an increase of $ 1.9 million or 42.22 % . the increase of $ 1.9 million is attributable to an increase in net loss of $ 4.5 million ; a decrease of $ 6.4 million in accounts payable ; an increase of $ 3.1 million in the change in fair value of derivative liabilities ; a decrease of $ 1.8 million in due to related parties ; a decrease of $ 1.5 million of accrued expense and interest expense ; a decrease of $ 1.2 million of inventory ; a decrease of $ 1.4 million of depreciation and amortization ; a decrease of $ 1.3 million of inventory valuation adjustments ; a decrease of $ 1.2 million of stock-based compensation payroll and consultants ; a decrease of $ 0.7 million of prepaid expenses and other current assets ; a decrease of $ 0.4 million of guaranteed interest and debt issuance costs ; a decrease of $ 0.3 million of a line of credit commitment fee ; a decrease of $ 0.2 million each for stock issuance commitments and provision for bad debts , respectively ; and an increase of $ 0.1 million for the gain on sale of property and equipment . these changes were offset by the $ 10.9 million decrease of gain on bargain purchase ; a $ 2.9 million decrease in the gain on debt and payables extinguishment ; a $ 2.9 million increase in accounts receivable ; an increase of $ 2.3 million of non-cash interest costs ; an increase of $ 1.5 million in stock-based compensation option awards ; an increase of $ 1.1 million in the loss of extinguishment of debt ; a $ 0.6 million in deferred revenue and customer deposits ; and an increase of $ 0.4 million of impairment charge . investing activities net cash provided by investing activities for the year ended december 31 , 2018 was $ 0.2 million compared $ 6.9 million net cash used by investing activities for the year ended december 31 , 2017 , an increase of $ 7.10 million or 102.9 % . the increase of $ 7.1 million was attributable to the increase $ 0.3 million of proceeds from the sale of a property and equipment ; the decrease of $ 0.3 million for cash disbursed the acquisition for property and equipment in fiscal 2017 ; and a decrease of $ 6.5 million in connection with the acquisition of vislink . financing activities our net cash provided by financing activities for the year ended december 31 , 2018 , was $ 5.4 million . the $ 5.4 million in 2018 primarily consisted of net proceeds of $ 5.6 million from the issuance of convertible promissory notes . this amount was offset by the principal payments made towards capital lease obligations and convertible promissory notes in the amounts of $ 0.05 million and $ 0.08 million , respectively . our net cash provided by financing activities for the year ended december 31 , 2017 , was $ 5.0 million as compared to $ 16.8 million for 2016. the $ 5.0 million in 2017 primarily consisted of net proceeds from the issuance of common stock and warrants in two underwritten public offerings in february 2017 and august 2017 in addition to the exercise of warrants totaling $ 7.9 million . this amount was offset by the company 's repayment of $ 2.0 million in principal regarding notes issued as part of the acquisition of vislink and $ 0.9 million of other convertible promissory notes . our cash used in financing activities would have been more significant if it were not for the exchange of the debt outstanding to the sellers of vislink for the accrued expenses we assumed . 22 going concern and liquidity under asu 2014-15 presentation of financial statements—going concern ( subtopic 205-40 ) ( “ asc 205-40 ” ) , the company has the responsibility to evaluate whether conditions and or events raise substantial doubt about its ability to meet its future financial obligations as they become due within one year after the date that the financial statements are issued . as required by asc 205-40 , this evaluation shall initially not take into consideration the potential mitigating effects of plans that have not been fully implemented as of the date the financial statements are issued .
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results of operations the following table sets forth the items contained in the consolidated statements of operations of the financial statements included herewith for the fiscal years ended december 31 , 2018 , and 2017. vislink technologies , inc. ( f/k/a xg technology , inc. ) and subsidiaries consolidated statements of operations and comprehensive loss ( in thousands ) replace_table_token_1_th revenue revenues for the year ended december 31 , 2018 were $ 38.3 million compared to $ 47.8 million for the year ended december 31 , 2017 , representing a decrease of $ 9.5 million or 20 % . the decrease can be attributed to one-time sales being recorded in the second quarter of 2017 which included a $ 2.4 million government sale in south america to upgrade their systems from analog to digital . the company experienced a decline in revenue for the north american , europe , asia and rest of world markets in the amount of approximately $ 3.8 million for the year ended december 31 , 2018. part of the decrease in sales was the result of the cost reduction programs implemented in the second through fourth quarters of 2018 which led to specific actions to also rationalize our best revenue opportunities and eliminate low value sales . efforts were also focused on relieving supply chain shortages in order to be able to deliver backorders to customers on a timely basis . 19 cost of revenue and operating expenses cost of components and personnel cost of components and personnel for the year ended december 31 , 2018 were $ 19.2 million compared to $ 28.2 million for the year ended december 31 , 2017 , representing a decrease of $ 9.0 million or 32 % . the decrease is primarily due to a decline in revenue resulting in less cost of components .
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in 2009 , management determined otti on nine cdos resulting in a write-down of $ 3.9 million ( $ 2.6 million after tax ) on impaired investments . the company held nine collateralized debt obligations ( cdos ) at december 31 , 2010. four of those cdos were written down in full prior to january 1 , 2010. the remaining five cdos have a total amortized cost of $ 3.8 million at december 31 , 2010. of these , two , with a total amortized cost of $ 862,000 , were identified as otti in prior periods and one with an amortized cost of $ 902,000 was identified as otti during 2010. the final two cdos , with a total amortized cost of $ 2.0 million , continue to pay principal and interest payments in accordance with the contractual terms of the story_separator_special_tag forward-looking statements and factors that could affect future results certain statements contained in this annual report on form 10-k that are not statements of historical fact constitute forward-looking statements within the meaning of the private securities litigation reform act of 1995 ( act ) , notwithstanding that such statements are not specifically identified as such . in addition , certain statements may be contained in the company 's future filings with the sec , in press releases , and in oral and written statements made by or with the approval of the corporation that are not statements of historical fact and constitute forward-looking statements within the meaning of the act . examples of forward-looking statements include , but are not limited to : ( i ) projections of revenues , expenses , income or loss , earnings or loss per common share , the payment or nonpayment of dividends , capital structure and other financial items ; ( ii ) statements of plans , objectives and expectations of first defiance or its management or board of directors , including those relating to products or services ; ( iii ) statements of future economic performance ; and ( iv ) statements of assumptions underlying such statements . words such as believes , anticipates , expects , intends , targeted , continue , remain , will , should , may and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements . forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements . factors that could cause actual results to differ from those discussed in the forward-looking statements include , but are not limited to : local , regional , national and international economic conditions and the impact they may have on the company and its customers and the company 's assessment of that impact . volatility and disruption in national and international financial markets . government intervention in the u.s. financial system . changes in the level of non-performing assets and charge-offs . changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements . the effects of and changes in trade and monetary and fiscal policies and laws , including the interest rate policies of the federal reserve board . inflation , interest rate , securities market and monetary fluctuations . political instability . acts of god or of war or terrorism . the timely development and acceptance of new products and services and perceived overall value of these products and services by users . changes in consumer spending , borrowing and saving habits . changes in the financial performance and or condition of the company 's borrowers . technological changes including core system conversions . acquisitions and integration of acquired businesses . the ability to increase market share and control expenses . changes in the competitive environment among financial holding companies and other financial service providers . the effect of changes in laws and regulations ( including laws and regulations concerning taxes , banking , securities and insurance ) with which the company and the subsidiaries must comply . -39- the effect of changes in accounting policies and practices , as may be adopted by the regulatory agencies , as well as the public company accounting oversight board , the financial accounting standards board and other accounting standard setters . the costs and effects of legal and regulatory developments including the resolution of legal proceedings or regulatory or other governmental inquiries and the results of regulatory examinations or reviews . greater than expected costs or difficulties related to the integration of new products and lines of business . the company 's success at managing the risks involved in the foregoing items . forward-looking statements speak only as of the date on which such statements are made . the company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events . recent market developments the dodd-frank act was signed into law on july 21 , 2010. this new law has and will continue to significantly change the current bank regulatory structure and affect the lending , deposit , investment , trading and operating activities of financial institutions and their holding companies , and will fundamentally change the system of regulatory oversight of the company , including through the creation of the financial stability oversight council . the dodd-frank act requires various federal agencies to adopt a broad range of new implementing rules and regulations , and to prepare numerous studies and reports for congress . the federal agencies are given significant discretion in drafting the implementing rules and regulations , and , as a result , many of the details and much of the impact of the dodd-frank act is not yet known . the dodd-frank act , however , could have a material adverse impact either on the financial services industry as a whole , or on first defiance 's business , results of operations , financial condition and liquidity . story_separator_special_tag business strategy first defiance 's primary objective is to be a high performing community banking organization , well regarded in its market areas . first defiance accomplishes this through emphasis on local decision making and empowering its employees with tools and knowledge to serve its customers ' needs . first defiance believes in a customer first philosophy that is strengthened by its trusted advisor initiative . first defiance also has a tagline of bank with the people you know and trust as an indication of its commitment to local , responsive , personalized service . first defiance believes this strategy results in greater customer loyalty and profitability through core relationships . first defiance is focused on diversification of revenue sources and increased market penetration in areas where the growth potential exists for a balance between acquisition and organic growth . the primary segments of first defiance 's business strategy is commercial banking , consumer banking , including the origination and sale of single family residential loans , enhancement of fee income , wealth management and insurance sales , each united by a strong customer service culture throughout the organization . commercial and commercial real estate lending commercial and commercial real estate lending have been an ongoing focus and a major component of first federal 's success . first federal provides primarily commercial real estate and commercial business loans with an emphasis on owner occupied commercial real estate and commercial business lending with a focus on the deposit balances that accompany these relationships . first federal 's client base tends to be small to middle market customers with annual gross revenues generally between $ 1 million and $ 50 million . first federal 's focus is also on securing multiple guarantors in addition to collateral were possible . these customers require first federal to have a high degree of knowledge and understanding of their business in order to provide them with solutions to their financial needs . first federal 's customer first philosophy and culture complements this need of its clients . first federal believes this personal service model differentiates first federal from its competitors , particularly the larger regional institutions . first federal offers a wide variety of products to support commercial clients including remote deposit capture and other cash management services . first federal also believes that the small business customer is a strong market for first federal . first federal participates in many of the small business administration lending programs . maintaining a diversified portfolio with an emphasis on monitoring industry concentrations and reacting to changes in the credit characteristics of industries is an ongoing focus . consumer banking first federal offers customers a full range of deposit and investment products including demand , now , money market , certificates of deposits , cdars and savings accounts . first federal offers a full range of investment products through the wealth management department and a wide variety of consumer loan products , including residential mortgage loans , home equity loans , -42- installment loans and education loans . first federal also offers online banking services , which include online bill pay along with debit cards . fee income development generation of fee income and the diversification of revenue sources are accomplished through the mortgage banking operation , insurance subsidiary and the wealth management department as first defiance seeks to reduce reliance on retail transaction fee income . deposit growth first federal 's focus has been to grow core deposits with an emphasis on total relationship banking with both our retail and commercial customers . first federal has initiated a pricing strategy that considers the whole relationship of the customer . first federal will continue to focus on increasing its market share in the communities it serves by providing quality products with extraordinary customer service , business development strategies and branch expansion . first federal will look to grow its footprint in areas believed to further compliment its overall market share and compliment its strategy of being a high performing community bank . asset quality maintaining a strong credit culture is of the utmost importance to first federal . first federal has maintained a strong credit approval and review process that has allowed the company to maintain a credit quality standard that balances the return with the risks of industry concentrations and loan types . first federal is primarily a collateral lender with an emphasis on cash flow performance , while obtaining additional support from personal guarantees and secondary sources of repayment . first federal has directed its attention on loan types and markets that it knows well and in which its has historically been successful in . first federal strives to have loan relationships that are well diversified in both size and industry , and monitor the overall trends in the portfolio to maintain its industry and loan type concentration targets . first federal maintains a problem loan remediation process that focuses on detection and resolution . first federal maintains a strong process of internal control that subjects the loan portfolio to periodic internal reviews as well as independent third party loan review . expansion opportunities first defiance believes it is well positioned to take advantage of acquisitions or other business opportunities in its market areas , including fdic-assisted transactions . first defiance believes it has a track record of successfully accomplishing both acquisitions and de novo branching in its market area . this track record puts the company in a solid position to enter or expand its business . first defiance has successfully integrated acquired institutions in the past with the most recent acquisition completed in 2008. first defiance will continue to be disciplined as well as opportunistic in its approach to future acquisitions and de novo branching with a focus on its primary geographic market area , which it knows well and has been competing in for a long period of time . financial condition assets at december 31 , 2010 totaled $ 2.04 billion compared to $ 2.06 billion at december 31 , 2009 , a decrease of $ 22.0
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results of operations summary first defiance reported net income of $ 8.1 million for the year ended december 31 , 2010 compared to $ 7.2 million and $ 7.4 million for the years ended december 31 , 2009 and 2008 , respectively . net income applicable to common shares was $ 6.1 million in 2010 compared with $ 5.2 million in 2009 and $ 7.2 million in 2008. on a diluted per common share basis , first defiance earned $ 0.75 in 2010 , $ 0.63 in 2009 and $ 0.91 in 2008. first defiance 's 2010 net income of $ 8.1 million included $ 63,000 of acquisition related costs resulting from the andres o'neil & lowe insurance agency ( aol ) acquisition earlier in 2010. the 2009 net income did not include any acquisition related costs . the 2008 net income amount includes $ 1.1 million of acquisition related costs that were incurred as part of the pavilion acquisition . these costs included such items as the expense to terminate certain contracts , retention bonuses with key employees and other costs resulting from the acquisition or related transition efforts . after tax , these costs amounted to $ 726,000 , or $ 0.09 per diluted common share . excluding these items , core earnings were $ 8.1 million , $ 7.2 million and $ 8.1 million for the years ended december 31 , 2010 , 2009 and 2008 respectively . on a diluted per share basis , core earnings amounted to $ 0.75 , $ 0.63 and $ 1.00 for those same three periods . management believes that the presentation of the non-gaap financial measures assists when comparing results period-to-period in a meaningful and consistent manner and provides a better measure of results for first defiance 's ongoing operations . a reconciliation of gaap earnings to core earnings is as follows : replace_table_token_30_th net interest income first defiance 's net interest income is determined by its interest rate spread ( i.e .
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when used in the filings , the words “ may ” , “ will ” , “ should ” , “ would ” , “ anticipate ” , “ believe ” , “ estimate ” , “ expect ” , “ future ” , “ intend ” , “ plan ” , or the negative of these terms and similar expressions as they relate to company or company 's management identify forward-looking statements . such statements reflect the current view of company with respect to future events and are subject to risks , uncertainties , assumptions , and other factors ( including the statements in the section “ results of operations ” below ) , and any businesses that company may acquire . 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 . although the company believes the expectations reflected in the forward-looking statements are based on reasonable assumptions , the company can not guarantee future results , levels of activity , performance , or achievements . except as required by applicable law , including the securities laws of the united states , the company does not intend to update any of the forward-looking statements to conform these statements to actual results . readers are urged to carefully review and consider the various disclosures made throughout the entirety of annual report , which attempts to advise interested parties of the risks and factors that may affect our business , financial condition , results of operations , and prospects . our financial statements are prepared in us dollars and in accordance with accounting principles generally accepted in the united states . see “ foreign currency translation and comprehensive income ( loss ) ” below for information concerning the exchange rates at which renminbi ( “ rmb ” ) were translated into us dollars ( “ usd ” ) at various pertinent dates and for pertinent periods . 32 overview of business background china recycling energy corporation ( the “ company ” or “ creg ” ) was incorporated on may 8 , 1980 as boulder brewing company under the laws of the state of colorado . on september 6 , 2001 , the company changed its state of incorporation to nevada . in 2004 , the company changed its name from boulder brewing company to china digital wireless , inc. and on march 8 , 2007 , the company again changed its name from china digital wireless , inc. to its current name , china recycling energy corporation . the company , through its subsidiaries , sells and leases energy saving systems and equipment to its customers in the people 's republic of china ( “ prc ” ) . typically , the company transfers ownership of the waste energy recycling power generating projects to its customers at the end of each sales-type lease and provides financing to its customers for the cost of the projects as described below . the company is in the process of transforming and expanding into an energy storage integrated solution provider . we plan to pursue disciplined and targeted expansion strategies for market areas we currently do not serve . we actively seek and explore opportunities to apply energy storage technologies to new industries or segments with high growth potential , including industrial and commercial complexes , large scale photovoltaic ( pv ) and wind power stations , remote islands without electricity , and smart energy cities with multi-energy supplies . by supporting and motivating all kinds of the electric power market to participate in resource development and utilization of demand response , we plan to provide services including peak shaving with compensation and frequency modulation . we intend to gradually form motor load performance for peak and low-hours , which will account for about 3 % of the annual maximum power load on the demand side and to ensure the electricity supply and demand balance for situations of non-severe power shortages . in december 2019 , a novel strain of coronavirus ( covid-19 ) was reported in wuhan , china . the world health organization has declared the outbreak to constitute a “ public health emergency of international concern. ” this pandemic , which continues to spread to additional countries , and is disrupting supply chains and affecting production and sales across a range of industries as a result of quarantines , facility closures , and travel and logistics restrictions in connection with the outbreak . therefore , the company expects this matter to negatively impact its operating results even though china is opening up most of the cities and industries as of this report date . however , the related financial impact can not be reasonably estimated at this time . for the years ended december 31 , 2019 and 2018 , the company had a net loss of $ 8.77 million and $ 66.00 million , respectively . the company has an accumulated deficit of $ 46.45 million as of december 31 , 2019. the company is in the process of transforming and expanding into an energy storage integrated solution provider as described above . the historical operating results indicate substantial doubt exists related to the company 's ability to continue as a going concern . however , the company had $ 16.22 million cash on hand at december 31 , 2019 and has collected rmb 327.60 million ( $ 46.96 million ) in 2020 up to this report date , this also satisfies the company 's estimated liquidity needs 12 months from the issuance of the financial statements . the company believes that the actions discussed above are probable of occurring and the occurrence , as well as the cash flow discussed , mitigate the substantial doubt raised by its historical operating results . management also intends to raise additional funds by way of a private or public offering , or by obtaining loans from banks or others . story_separator_special_tag on december 29 , 2018 , xi'an tch entered into a share transfer agreement with hongyuan huifu , pursuant to which xi'an tch transferred its 40 % ownership in the fund management company to hongyuan huifu for rmb 3,453,867 ( $ 0.53 million ) . the transfer was completed january 22 , 2019. the company recorded approximately $ 46,500 loss from the sale of a 40 % equity interest in fund management company . the company has no ownership in the fund management company after this transaction . erdos tch – joint venture on april 14 , 2009 , the company formed erdos tch as a joint venture ( the “ jv ” or “ erdos tch ” ) with erdos metallurgy co. , ltd. ( “ erdos ” ) to recycle waste heat from erdos ' metal refining plants to generate power and steam to be sold back to erdos . the jv has a term of 20 years with a total investment for the project estimated at $ 79 million ( rmb 500 million ) and an initial investment of $ 17.55 million ( rmb 120 million ) . erdos contributed 7 % of the total investment for the project , and xi'an tch contributed 93 % . according to xi'an tch and erdos ' agreement on profit distribution , xi'an tch and erdos will receive 80 % and 20 % , respectively , of the profit from the jv until xi'an tch receives the complete return of its investment . xi'an tch and erdos will then receive 60 % and 40 % , respectively , of the profit from the jv . on june 15 , 2013 , xi'an tch and erdos entered into a share transfer agreement , pursuant to which erdos transferred and sold its 7 % ownership interest in the jv to xi'an tch for $ 1.29 million ( rmb 8 million ) , plus certain accumulated profits as described below . xi'an tch paid the $ 1.29 million in july 2013 and , as a result , became the sole stockholder of erdos tch . in addition , xi'an tch is required to pay erdos accumulated profits from inception up to june 30 , 2013 in accordance with the supplementary agreement entered on august 6 , 2013. in august 2013 , xi'an tch paid 20 % of the accumulated profit ( calculated under prc gaap ) of $ 226,000 to erdos . erdos tch currently has two power generation systems in phase i with a total of 18 mw power capacity , and three power generation systems in phase ii with a total of 27 mw power capacity . with the current economic conditions in china , the government limited over-capacity and production in the iron and steel industry , which resulted in a decrease of erdos metallurgy co. , ltd 's production of ferrosilicon and its revenue and cash flows , and made it difficult for erdos to make the monthly minimum lease payment . after considering the challenging economic conditions facing erdos , and to maintain the long-term cooperative relationship between the parties , which we believe will continue to produce long-term benefits , on april 28 , 2016 , erdos tch and erdos entered into a supplemental agreement , effective may 1 , 2016. under the supplemental agreement , erdos tch cancelled monthly minimum lease payments from erdos , and agreed to charge erdos based on actual electricity sold at rmb 0.30 / kwh , which price will be adjusted annually based on prevailing market conditions . since may 2019 , erdos tch has ceased its operations due to renovations and furnace safety upgrades of erdos , and the company expects the resumption of operations in july 2020. during this period , erdos will compensate erdos tch rmb 1 million ( $ 145,460 ) per month , until operations resume . the company evaluated the modified terms for payments based on actual electricity sold as minimum lease payments as defined in asc 840-10-25-4 , since lease payments that depend on a factor directly related to the future use of the leased property are contingent rentals and , accordingly , are excluded from minimum lease payments in their entirety . the company wrote off the net investment receivables of these leases at the lease modification date . 35 in addition , erdos tch has 30 % ownership in datangshidai ( binzhou ) energy savings technology co. , ltd. ( “ binzhou energy savings ” ) , 30 % ownership in datangshidai datong recycling energy technology co. , ltd. ( “ datong recycling energy ” ) , and 40 % ownership in datang shidai tianyu xuzhou recycling energy technology co , ltd. ( “ tianyu xuzhou recycling energy ” ) . these companies were incorporated in 2012 but had no operations since then nor any registered capital contribution was made . shenqiu yuneng biomass power generation projects on may 25 , 2011 , xi'an tch entered into a letter of intent ( “ loi ” ) with shenqiu yuneng thermal power co. , ltd. ( “ shenqiu ” ) to reconstruct and transform a thermal power generation system owned by shenqiu into a 75t/h bmpg system for $ 3.57 million ( rmb 22.5 million ) . the project commenced in june 2011 and was completed in the third quarter of 2011. on september 28 , 2011 , xi'an tch entered into a biomass power generation asset transfer agreement with shenqiu ( the “ shenqiu transfer agreement ” ) . pursuant to the shenqiu transfer agreement , shenqiu sold xi'an tch a set of 12 mw bmpg systems ( after xi'an tch converted the system for bmpg purposes ) . as consideration for the bmpg systems , xi'an tch paid shenqiu $ 10.94 million ( rmb 70 million ) in cash in three installments within six months upon the transfer of ownership of the systems . by the end of 2012 , all the consideration was paid . on september 28 , 2011 , xi'an tch and shenqiu also entered into a biomass power generation project lease agreement ( the “ 2011 shenqiu lease ” ) .
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results of operations comparison of years ended december 31 , 2019 and 2018 the following table sets forth the results of our operations for the periods indicated as a percentage of net sales . certain columns may not add due to rounding . replace_table_token_1_th sales . total sales for the years ended december 31 , 2019 and 2018 were $ 697,028 and $ 4,888,016 , respectively . the sales were from the electricity sold by erdos tch . however , since may 2019 , erdos tch has ceased its operations due to renovations and furnace safety upgrades of erdos . during this period , erdos will compensate erdos tch rmb 1 million ( $ 145,460 ) per month , until operations resume . the company expects the resumption of operations of erdos tch in july 2020. cost of sales . cost of sales ( “ cos ” ) for the years ended december 31 , 2019 and 2018 were $ 0. gross profit . gross income for the years ended december 31 , 2019 and 2018 were $ 697,028 and $ 4,888,016 , a gross margin of 100 % . interest income on sales-type leases . interest income on sales-type leases for the year ended december 31 , 2019 was $ 0.17 million , a $ 3.14 million decrease from $ 3.14 million for the year ended december 31 , 2018. in february 2019 , the shenqiu phase i and ii systems were transferred to mr. bai , and the company only had pucheng phase i and ii systems since then , which the company has ceased to accrue interest income since april 2018 because pucheng power generation systems were suspended due to strict environmental protection policies and lack of supply of biomass waste raw materials . on september 29 , 2019 , xi'an tch entered into a termination agreement of the lease agreement of biomass power generation project with pucheng .
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if the company proposes to out-license or enters into substantive negotiations to out-license , any clinical candidate or existing candidate ( as such terms are defined in the rnai purchase agreement ) , the company must give notice of the story_separator_special_tag description of business unless otherwise noted , ( 1 ) the term “ arrowhead ” refers to arrowhead research corporation , a delaware corporation , ( 2 ) the terms the “ company , ” “ we , ” “ us , ” and “ our , ” refer to the ongoing business operations of arrowhead and its subsidiaries , whether conducted through arrowhead or a subsidiary of arrowhead , ( 3 ) the term “ subsidiaries ” refers collectively to arrowhead madison inc. ( “ madison ” ) , and ablaris therapeutics , inc. ( “ ablaris ” ) , as well as our former subsidiary calando pharmaceuticals , inc. ( “ calando ” ) , which was deconsolidated during 2014 , ( 4 ) the term “ common stock ” refers to arrowhead 's common stock , ( 5 ) the term “ preferred stock ” refers to arrowhead 's preferred stock and the term “ stockholder ( s ) ” refers to the holders of arrowhead common stock . overview arrowhead research develops novel drugs to treat intractable diseases by silencing the genes that cause them . using the broadest portfolio of rna chemistries and efficient modes of delivery , arrowhead therapies trigger the rna interference mechanism to induce rapid , deep and durable knockdown of target genes . arrowhead 's most advanced drug candidate in clinical development is arc-520 , which is designed to treat chronic hepatitis b infection by inhibiting the production of all hbv gene products . the goal is to reverse the immune suppression that prevents the body from controlling the virus and clearing the disease . arrowhead 's second clinical candidate is arc-aat , a treatment for a rare liver disease associated with a genetic disorder that causes alpha-1 antitrypsin deficiency . arrowhead operates a lab facility in madison , wisconsin , where the company 's research and development activities , including the development of rnai therapeutics , are based . the company 's principal executive offices are located in pasadena , california . during 2014 , the company made substantial progress with its lead clinical candidate , arc-520 , for the treatment of chronic hepatitis b. in july 2013 , the company began a phase 1 clinical trial in australia in healthy volunteers to characterize the safety profile of arc-520 . the company evalulated four dose levels , and no dose-limiting toxicities or serious adverse events have been observed . the company began a phase 2a pilot efficacy study in hong kong for chronically infected hbv patients in march 2014. the study is ongoing . in june 2014 , the company announced its next clinical candidate , arc-aat , an rnai therapeutic designed to treat liver disease associated with alpha-1 antitrypsin deficiency ( aatd ) . the company expects to begin a phase 1 clinical trial in the first quarter of 2015. the company continues to develop other clinical candidates for future clinical trials , focusing on intravenously-administered therapeutics targeting gene knockdown in the liver , as well as formulations for administering rnai-based therapeutics by subcutaneous administration . clinical candidates are tested through glp toxicology studies at outside laboratories , and drug materials for such studies , and for clinical trials , are contracted to third-party manufactures when cgmp production is required . the company engages third-party contract research organizations ( cros ) to manage clinical trials and works cooperatively with such organizations on all aspects of clinical trial management , including plan design , patient recruiting , and follow up . these outside costs , relating to the preparation for and administration of clinical trials , are referred to as program costs , and if the clinical candidates progress through human testing , program costs will increase . net losses were $ 58.7 million , $ 31.7 million and $ 22.1 million during the years ended september 30 , 2014 , 2013 and 2012 , respectively . diluted losses per share were $ 1.25 , $ 1.30 and $ 1.90 during the years ended september 30 , 2014 , 2013 and 2012 , respectively . during 2014 the company also substantially strengthened its liquidity and financial position through two securities offerings completed in october 2013 and february 2014 which generated approximately $ 172.6 million of cash proceeds for the company . these cash proceeds secured the funding needed to advance both arc-520 and arc-aat through future clinical trials and will also assist as the company expands its pipeline of other clinical candidates . the company had $ 132.5 million of cash and cash equivalents and $ 182.8 million of total assets as of september 30 , 2014 as compared to $ 19.1 million and $ 37.3 million as of september 30 , 2013 , respectively . 46 critical accounting policies and estimates management makes certain judgments and uses certain estimates and assumptions when applying accounting principles generally accepted in the united states in the preparation of our consolidated financial statements . we evaluate our estimates and judgments on an ongoing basis and base our estimates on historical experience and on assumptions that we believe to be reasonable under the circumstances . our experience and assumptions form the basis for our judgments about the carrying value of assets and liabilities that are not readily apparent from other sources . actual results may vary from what we anticipate and different assumptions or estimates about the future could change our reported results . we believe the following accounting policies are the most critical to us , in that they are important to the portrayal of our consolidated financial statements and require our most difficult , subjective or complex judgments in the preparation of our consolidated financial statements . story_separator_special_tag contingent consideration the consideration for our acquisitions often includes future payments that are contingent upon the occurrence of a particular event . for example , milestone payments might be based on the achievement of various regulatory approvals or future sales milestones , and royalty payments might be based on drug product sales levels . the company records a contingent consideration obligation for such contingent payments at fair value on the acquisition date . the company estimates the fair value of contingent consideration obligations through valuation models designed to estimate the probability of the occurrence of such contingent payments based on various assumptions and incorporating estimated success rates . estimated payments are discounted using present value techniques to arrive at estimated fair value at the balance sheet date . changes in the fair value of our contingent consideration obligations are recognized within our consolidated statements of operations . changes in the fair value of the contingent consideration obligations can result from changes to one or multiple inputs , including adjustments to the discount rates , changes in the amount or timing of expected expenditures associated with product development , changes in the amount or timing of cash flows from products upon commercialization , changes in the assumed achievement or timing of any development milestones , changes in the probability of certain clinical events and changes in the assumed probability associated with regulatory approval . these fair value measurements are based on significant inputs not observable in the market . substantial judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period . accordingly , changes in assumptions could have a material impact on the amount of contingent consideration expense the company records in any given period . story_separator_special_tag milestone payments can vary from period to period depending on the nature of our various license agreements , and the timing of reaching various development milestones requiring payment . facilities expense increased $ 149,000 from $ 732,000 during the year ended september 30 , 2013 to $ 881,000 during the current period . facilities expenses were higher in the current period primarily due to repairs and maintenance costs on lab equipment . other research expense decreased $ 140,000 from $ 240,000 during the year ended september 30 , 2013 to $ 100,000 during the current period . other research expense in the prior period relates to work at the university of cincinnati related to our obesity program , which studies have been completed , and no further studies are planned . the current period expenses primarily relate to medical and hazardous waste removal costs . salary and payroll-related expenses the company employs scientific , technical and administrative staff at its corporate offices and its research facility . salaries and payroll-related expense consists of salary , bonuses , payroll taxes and related benefits . salary and payroll-related expenses include two major categories : general and administrative ( g & a ) compensation expense , and research and development ( r & d ) compensation expense , based on the primary activities of each employee . the following table provides detail of salary and payroll-related expenses for the periods indicated : ( in thousands ) replace_table_token_8_th r & d compensation expense increased $ 3,701,000 from $ 4,127,000 during the year ended september 30 , 2013 to $ 7,828,000 during the current period . increased headcount and salary increases accounted for the majority of the change in compensation-related expense . additionally , expenses related to annual performance bonuses were accrued during the year ended september 30 , 2014 totaling $ 1,602,000 in expense ; no performance bonuses were paid in the prior period . g & a compensation expense increased $ 2,460,000 from $ 2,541,000 during the year ended september 30 , 2013 to $ 5,001,000 during the current period . the majority of this change relates to expense recorded for annual performance bonuses in the current period . additionally , a portion of the increase is due to salary increases . g & a headcount remained fairly consistent during the past twelve months . 50 general & administrative expenses the following table provides details of our general and administrative expenses for the periods indicated : ( in thousands ) replace_table_token_9_th professional/outside services include legal , accounting , consulting and other outside services retained by the company . all periods include normally recurring legal and audit expenses related to sec compliance and other corporate matters . professional/outside services expense increased $ 1,147,000 from $ 1,319,000 during the year ended september 30 , 2013 to $ 2,466,000 during the current period . the increase in professional fees primarily related to professional recruiting fees for the hiring of additional r & d personnel to support and expand its clinical pipeline . additionally , the company incurred higher sec filing fees associated with financing in february 2014 and higher nasdaq fees based on a higher number of shares outstanding . patent expense decreased $ 309,000 from $ 941,000 during the year ended september 30 , 2013 to $ 632,000 during the current period . patent expenses related to calando declined by $ 215,000 in the current period as calando terminated its license agreement with caltech in august 2013 , which had obligated calando to pay certain related patent costs , and by curtailing prosecution of other non-strategic patents . during the year ended september 30 , 2014 , arrowhead deconsolidated calando , thus no further calando patent expense will be incurred . the company continues to invest in patent protection for its dpc technology , related product candidates and other rnai technology through patent filings in multiple countries . the company expects to extend and maintain protection for its current portfolios , as appropriate , and file new patent applications as technologies are developed and improved . facilities-related expense increased $ 23,000 from $ 170,000 during the year ended september 30 , 2013 to $ 193,000 in the current period .
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results of operations the following data summarizes our results of operations for the following periods indicated : replace_table_token_6_th the increase in our operating expenses during the year ended september 30 , 2014 is primarily due to the progress achieved on our lead clinical candidate for hbv , arc-520 . the primary costs incurred during fiscal 2014 related to manufacturing of clinical supplies for its clinical trials , toxicology studies , and the cost associated with the administration of clinical trials . in addition , the company is incurring costs , primarily manufacturing costs , as we prepare for a phase 2b clinical trial anticipated to begin in the first quarter of 2015 . 48 results of operations comparison for 2014 and 2013 revenues total revenue was $ 175,000 for the year ended september 30 , 2014 and $ 290,000 for the year ended september 30 , 2013. revenue is primarily related to licensed technology . in addition , the company had collaboration revenue of $ 115,000 during the year ended september 30 , 2013. operating expenses the analysis below details the operating expenses and discusses the expenditures of the company within the major expense categories . certain reclassifications have been made to prior period operating expense categories to conform to the current period presentation . for purposes of comparison , the amounts for the years ended september 30 , 2014 and 2013 are shown in the tables below . research and development expenses r & d expenses are related to the company 's on-going research and development efforts , primarily related to program costs , composed primarily of outsourced costs related to the manufacturing of clinical supplies , toxicity/efficacy studies and clinical trial expenses . internal costs primarily relate to operations at our research facility in madison , wisconsin , including facility costs and laboratory-related expenses .
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operating revenues , which consist of base distribution revenues and tracked revenues further described below , increased/ ( decreased ) in 2017 , as compared to 2016 as follows : ( millions of dollars ) cl & p nstar electric psnh operating revenues $ 81.4 $ ( 61.0 ) $ 22.1 51 base distribution revenues , with changes that impact earnings : nstar electric 's base distribution revenues , excluding lbr , decreased $ 10.8 million in 2017 , as compared to 2016 , as a result of lower sales volumes driven by the mild summer weather in 2017. lbr increased $ 13.0 million in 2017 , as compared to 2016. effective february 1 , 2018 , nstar electric no longer has an lbr mechanism . psnh 's base distribution revenues decreased $ 1.5 million in 2017 , as compared to 2016 , as a result of lower sales volumes driven by the mild summer weather in 2017. tracked revenues : fluctuations in the overall level of operating revenues are primarily related to tracked revenues . tracked revenues consist of certain costs that are recovered from customers in rates through commission-approved cost tracking mechanisms and therefore have no impact on earnings . costs recovered through cost tracking mechanisms include energy supply procurement and other energy-related costs , retail transmission charges , energy efficiency program costs , net metering for distributed generation and restructuring and stranded cost recovery revenues . in addition , tracked revenues include certain incentives earned and carrying charges . tracked revenues increased/ ( decreased ) in 2017 , as compared to 2016 , due primarily to the following : ( millions of dollars ) cl & p nstar electric psnh energy supply procurement $ 18.8 $ ( 50.8 ) $ 10.3 all other distribution tracking mechanisms 35.0 ( 33.7 ) ( 12.7 ) transmission revenues : transmission revenues increased by $ 34.2 million , $ 31.0 million and $ 26.5 million at cl & p , nstar electric and psnh , respectively , due primarily to higher revenue requirements associated with ongoing investments in our transmission infrastructure . purchased power , fuel and transmission expense includes costs associated with purchasing electricity on behalf of cl & p , nstar electric and psnh 's customers . for psnh , these costs also include psnh 's generation of electricity . these energy supply costs are recovered from customers in commission-approved cost tracking mechanisms , which have no impact on earnings ( tracked costs ) . purchased power , fuel and transmission expense increased/ ( decreased ) in 2017 , as compared to 2016 , due primarily to the following : replace_table_token_37_th purchased power costs : included in purchased power costs are the costs associated with certain energy supply tracking mechanisms and deferred energy supply costs . energy supply tracking mechanisms recover energy-related costs incurred as a result of providing electric generation service supply to all customers who have not migrated to third party suppliers . in order to meet the demand of customers who have not migrated to third party suppliers , psnh procures power through power supply contracts and spot purchases in the competitive new england wholesale power market and or produces power through its own generation . the increase/ ( decrease ) in purchased power costs in 2017 , as compared to 2016 , was due primarily to the following : the decrease at cl & p was due primarily to a decrease in the price of standard offer supply associated with the gsc . the decrease at nstar electric was due primarily to lower prices associated with the procurement of energy supply , lower sales volumes and the expiration of certain purchase power agreements . the increase at psnh was due primarily to higher purchased power energy expenses that are recovered as a component of the energy service rate , and regional greenhouse gas initiative related expenses recovered in the scrc . transmission costs : included in transmission costs are charges that recover the cost of transporting electricity over high-voltage lines from generating plants to substations , including costs allocated by iso-ne to maintain the wholesale electric market . the increase/ ( decrease ) in transmission costs in 2017 , as compared to 2016 , was due primarily to the following : the increase at cl & p was primarily the result of an increase in costs billed by iso-ne that support regional grid investment , local network service charges , which reflect the cost of transmission service , and the retail transmission cost deferral , which reflects the actual costs of transmission service compared to estimated amounts billed to customers . the decrease at nstar electric was primarily the result of a decrease in the retail transmission cost deferral . this was partially offset by an increase in costs billed by iso-ne . the increase at psnh was primarily the result of increases in costs billed by iso-ne , local network service charges , and the retail transmission cost deferral . 52 operations and maintenance expense includes tracked costs and costs that are part of base distribution rates with changes impacting earnings ( non-tracked costs ) . operations and maintenance expense increased/ ( decreased ) in 2017 , as compared to 2016 , due primarily to the following : replace_table_token_38_th depreciation increased at cl & p , nstar electric and psnh in 2017 , as compared to 2016 , due primarily to higher utility plant in service balances . amortization of regulatory assets/ ( liabilities ) , net expense includes the deferral of energy supply and energy-related costs and the amortization of storm and other costs . amortization of regulatory assets/ ( liabilities ) , net increased at cl & p and decreased for both nstar electric and psnh in 2017 , as compared to 2016 , due primarily to the deferral adjustment of energy supply and energy-related costs , which can fluctuate from period to period based on the timing of costs incurred and related rate changes to recover these costs . the deferral adjusts expense to match the corresponding revenues . story_separator_special_tag 55 results of operations – eversource energy and subsidiaries the following provides the amounts and variances in operating revenues and expense line items in the statements of income for eversource for the years ended december 31 , 2016 and 2015 included in this annual report on form 10-k : replace_table_token_39_th ( a ) percent greater than 100 not shown as it is not meaningful . operating revenues a summary of our operating revenues by segment was as follows : replace_table_token_40_th a summary of our retail electric gwh sales volumes and our firm natural gas sales volumes in mmcf were as follows : replace_table_token_41_th operating revenues , which primarily consist of base electric and natural gas distribution revenues and tracked revenues further described below , decreased by $ 315.7 million in 2016 , as compared to 2015. base electric and natural gas distribution revenues : base electric distribution segment revenues increased by $ 19.9 million due primarily to a higher rate base resulting from the 2015 pura adit settlement agreement that is being collected from customers in distribution rates at cl & p ( $ 26.1 million ) and the absence of a required roe reduction in 2015 , as stipulated in the pura 2014 rate case decision , at cl & p ( $ 4 million ) . this increase was partially offset by the absence of the benefit recognized in 2015 in operating revenues due to the pura adit settlement agreement . in addition , traditional electric base distribution revenues decreased $ 10.1 million due to a 1.7 percent decrease in non-decoupled retail electric sales volumes due primarily to increased customer energy conservation efforts , partly offset by psnh distribution rate increases effective july 1 , 2015 and july 1 , 2016 . 56 contributing to the decrease in operating revenues in 2016 was the absence of an $ 11 million benefit related to the comprehensive settlement agreement associated with the recovery of lbr related to 2009 through 2011 energy efficiency programs recorded at nstar electric in 2015. firm natural gas base distribution segment revenues increased $ 11.7 million due primarily to the impact of the nstar gas base distribution rate increase effective january 1 , 2016 , partially offset by a 4.8 percent decrease in traditional firm natural gas sales volumes as a result of warmer than normal weather experienced in the first quarter of 2016 , as compared to much colder than normal temperatures in 2015. fluctuations in cl & p 's , nstar electric 's and nstar gas ' sales volumes do not impact the level of base distribution revenue realized or earnings due to their respective regulatory commission approved revenue decoupling mechanisms . the revenue decoupling mechanisms permit recovery of a base amount of distribution revenues and break the relationship between sales volumes and revenues recognized . revenue decoupling mechanisms result in the recovery of our approved base distribution revenue requirements . tracked distribution revenues : tracked revenues consist of certain costs that are recovered from customers in rates through regulatory commission-approved cost tracking mechanisms and therefore have no impact on earnings . costs recovered through cost tracking mechanisms include energy supply procurement costs and other energy-related costs for our electric and natural gas customers , retail transmission charges , energy efficiency program costs , and restructuring and stranded cost recovery revenues . in addition , tracked revenues include certain incentives earned and carrying charges . tracked electric distribution segment revenues decreased as a result of decreases in energy supply costs ( $ 625.2 million ) , driven by decreased average retail rates and lower sales volumes , partially offset by an increase in retail electric transmission charges ( $ 84.6 million ) , an increase in federally mandated congestion charges ( $ 103.0 million ) , an increase in energy efficiency program revenues ( $ 51.7 million ) , an increase in stranded cost recovery charges ( $ 39.2 million ) and an increase in net metering for distributed generation revenues ( $ 34.0 million ) . in addition , as a result of a change to the amounts collected in the system benefits charge , cl & p 's calculated rate base increased , providing an increase to distribution revenues that positively impacted earnings by $ 23.2 million . in 2016 , tracked natural gas distribution segment revenues decreased as a result of decreases in natural gas supply costs ( $ 128.2 million ) driven by decreased average rates and lower sales volumes , and a decrease in energy efficiency program revenues ( $ 22.7 million ) . electric transmission revenues : the electric transmission segment revenues increased by $ 140.9 million due primarily to the recovery of higher revenue requirements associated with ongoing investments in our transmission infrastructure and the absence in 2016 of a $ 20 million reserve charge recorded in 2015 associated with the march 2015 ferc roe order . other : other revenues decreased due primarily to the sale of eversource 's unregulated contracting business on april 13 , 2015 ( $ 11.4 million ) . purchased power , fuel and transmission expense includes costs associated with purchasing electricity and natural gas on behalf of our customers . these energy supply costs are recovered from customers in rates through cost tracking mechanisms , which have no impact on earnings ( tracked costs ) . purchased power , fuel and transmission expense decreased in 2016 , as compared to 2015 , due primarily to the following : ( millions of dollars ) ( decrease ) /increase electric distribution $ ( 625.9 ) natural gas distribution ( 130.3 ) transmission 170.1 total purchased power , fuel and transmission $ ( 586.1 ) the decrease in purchased power expense at the electric distribution business was driven by lower prices associated with the procurement of energy supply , lower sales volumes , and a decrease in the amount of electricity generated by psnh facilities in 2016 , as compared to 2015. the decrease in purchased power expense at the natural gas distribution business was due to lower sales volumes and lower average natural gas prices .
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earnings summary cl & p 's earnings increased $ 42.4 million in 2017 , as compared to 2016 , due primarily to a lower effective tax rate , an increase in transmission earnings driven by a higher transmission rate base , and higher distribution revenues due in part to a higher rate base for the system resiliency program . these favorable earnings impacts were partially offset by higher depreciation expense , higher operations and maintenance expense , and higher property tax expense . nstar electric 's earnings increased $ 23.9 million in 2017 , as compared to 2016 , due primarily to higher distribution revenues related to lost base revenues , net metering and the pam , lower operations and maintenance expense , lower interest expense as a result of the november 30 , 2017 nstar electric distribution rate case decision , and an increase in transmission earnings driven by a higher transmission rate base . these favorable earnings impacts were partially offset by lower sales volumes driven by the mild summer weather in 2017 , higher depreciation expense , and higher property tax expense . psnh 's earnings increased $ 4.0 million in 2017 , as compared to 2016 , due primarily to an increase in transmission earnings driven by a higher transmission rate base and lower operations and maintenance expense . these favorable earnings impacts were partially offset by lower generation earnings , higher depreciation expense , higher property tax expense , lower sales volumes driven by the mild summer weather in 2017 , and a higher effective tax rate .
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the selling price for support of a functional subscription software license is calculated as a percentage of functional subscription software license value which is derived by analyzing internal pricing practice , customer expectations , and industry practice . variable consideration revenue from story_separator_special_tag the following discussion and analysis of our financial condition and results of operations should be read in conjunction with our “ selected consolidated financial data ” and our consolidated financial statements and related notes included elsewhere in this annual report on form 10-k. this discussion contains forward-looking statements that involve risks and uncertainties . our actual results could differ materially from those forward-looking statements below . factors that could cause or contribute to those differences include , but are not limited to , those identified below and those discussed in the section entitled “ risk factors ” included elsewhere in this annual report on form 10-k. this annual report on form 10-k contains “ forward-looking statements ” within the meaning of section 21e of the securities exchange act of 1934 , as amended ( the “ exchange act ” ) . these statements are often identified by the use of words such as “ may , ” “ will , ” “ expect , ” “ believe , ” “ anticipate , ” “ intend , ” “ could , ” “ estimate , ” or “ continue , ” and similar expressions or variations . 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 herein , and those discussed in the section titled “ risk factors ” , set forth in part i , item 1a of this form 10-k. except as required by law , we disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements . overview proofpoint is a leading next generation cybersecurity company that enables large and mid-sized organizations worldwide to protect their employees from advanced threats and compliance risks . our security and compliance platform is comprised of an integrated suite of advanced threat protection , information protection , and brand protection solutions . these capabilities include email protection and authentication , advanced threat protection , data loss prevention , email encryption , saas application protection , response orchestration and automation , digital risk , security training , web browser isolation , archiving , ediscovery , supervision , and secure communication . our solutions are built on a flexible , cloud-based platform and leverage a number of proprietary technologies - including big data analytics , machine learning , deep content inspection , secure storage , advanced encryption , intelligent message routing , dynamic malware analysis , threat correlation , and virtual execution environments to address today 's rapidly changing threat and compliance landscape . our platform addresses this growing challenge by not only protecting data as it flows into and out of the enterprise via on-premises and cloud-based email , social media and other cloud applications , but also by keeping track of this information as it is modified and distributed throughout the enterprise for compliance and data loss prevention , and securely archiving these communications for compliance and discovery . we help organizations reduce their critical risk in five major ways : protecting users from the advanced attacks that target them via email , web , networks , social media , and cloud apps ; preventing the theft or inadvertent loss of sensitive information and , in turn , ensuring compliance with regulatory data protection mandates ; improving the resilience of end users to the threats that target them and training them to be better caretakers of their organizations ' critical data ; collecting , retaining , supervising and discovering communications and sensitive data for compliance and litigation support ; and enabling organizations to respond quickly to security issues , providing both the intelligence and the context to prioritize incidents and orchestrate remediation actions . our platform and its associated solutions are sold to customers on a subscription basis and can be deployed through our unique cloud-based architecture that leverages both our global data centers as well as optional points-of-presence behind our customers ' firewalls . our flexible deployment model enables us to deliver superior security and compliance while maintaining the favorable economics afforded by cloud computing , creating a competitive advantage for us over legacy on-premises and cloud-only offerings . 35 we were founded in 2002 to provide a unified solution to help enterprises address their growing data security requirements . our first solution was commercially released in 2003 to combat the burgeoning problem of spam and viruses and their impact on corporate email systems . to address the evolving threat landscape and the adoption of communication and collaboration systems beyond corporate email and networks , we have broadened our solutions to defend against a wide range of threats , including email , mobile apps and social media , to protect the information people create from both compromise and compliance risks , and to archive and govern corporate information . today , our solutions are used worldwide to protect well over 100 million end users at enterprise customers , and millions more via service providers through our cloudmark division . as the threat environment has continued to evolve , we have dedicated significant resources to meet the ongoing challenges that this highly dynamic environment creates for our customers such as investing significantly to expand the breadth of our data protection platform as these expenditures are primarily in connection with the replacement and upgrade of equipment to lower the cost of deployment as well as to improve the efficiency for our cloud-based architecture . our business is based on a recurring revenue model . story_separator_special_tag to date , our customers have primarily used our solutions in conjunction with email messaging content . we have developed solutions to address new and evolving messaging solutions such as social media and file sharing applications , but these solutions are relatively nascent . if customers increase their use of these new messaging solutions in the future , we anticipate that our growth in revenue associated with older email messaging solutions may slow over time . although revenue associated with our social media and file sharing applications has not been material to date , we believe that our ability to provide security , archiving , governance and discovery for these new solutions will be viewed as valuable by our existing customers , enabling us to derive revenue from these new forms of messaging and communication . with the majority of our business , we invoice our customers for the entire contract amount at the start of the term and these amounts are recorded as deferred revenue on our balance sheet , with the dollar weighted average duration of these contracts for any given period over the past three years typically ranging from 14 to 20 months . as a result , while our practice of invoicing customers for the entire amount of the contract at the start of the term provides us with a relatively immediate contribution to cash flow , the revenue is recognized ratably over the term of the contract , and hence contributions toward operating income are realized over an extended period . as such , our efforts to improve our profitability require us to invest far less in operating expenses than the cash flow generated by our business might otherwise allow . as we strive to invest in an effort to continue to increase the size and scale of our business , we expect that the level of investment afforded by our growth in revenue should be sufficient to fund the investments needed to drive revenue growth and broaden our product line . considering all of these factors , we do not expect to be profitable on a gaap basis in the near term and in order to achieve profitability we will need to grow revenue at a rate faster than our investments in operating expenses and cost of revenue . we intend to grow our revenue through acquiring new customers by investing in our sales and marketing activities . we believe that an increase in new customers in the near term will result in a larger base of renewal customers , which , over time , we expect to be more profitable for us . sales and marketing is our largest expense and hence a significant contributing factor to our operating losses . we believe that our opportunity to improve our return on investment on sales and marketing costs relies primarily on our ongoing ability to cost-effectively renew our business with existing customers , thereby lowering our overall sales and marketing costs as a percentage of revenue as the mix of revenue derived from this more profitable renewal activity increases over time . therefore , we anticipate that our initial significant investments in sales and marketing activities will , over time , generate a larger base of more profitable customers . cost of subscription revenue is also a significant expense for us , and we expect to continue to build on the improvements over the past years , such as in replacing third-party technology with our proprietary technology and improving the utilization of our fixed investments in equipment and infrastructure , in order to provide the opportunity for improved subscription gross margins over time . although we plan to continue enhancing our solutions , we intend to lower our rate of investment in research and development as a percentage of revenue over time by deriving additional revenue from our existing solutions rather than by adding entirely new categories of solutions . in addition , as personnel costs are one of the primary drivers of the increases in our operating expenses , we plan to reduce our historical rate of headcount growth over time . 37 key metrics we regularly review a number of metrics , including the following key metrics presented in the table below , to evaluate our business , measure our performance , identify trends in our business , prepare financial projections and make strategic decisions . many of these key metrics , such as non-gaap gross margin , billings and free cash flow , are non-gaap measures . this non-gaap information is not necessarily comparable to non-gaap information of other companies . users of this financial information should consider the types of events and transactions for which adjustments have been made . replace_table_token_5_th non-gaap gross margin we define non-gaap gross margin as non-gaap gross profit divided by gaap revenue . we define non-gaap gross profit as gaap gross profit , adjusted to exclude stock-based compensation expense and the amortization of intangibles associated with acquisitions . we consider this non-gaap financial measure to be a useful metric for management and investors because it excludes the effect of stock-based compensation expense and the amortization of intangibles associated with acquisitions so that our management and investors can compare our business operating results over multiple periods , and compare our financial results with other companies in its industry , many of which present similar non-gaap financial measure . however , there are a number of limitations related to the use of non-gaap gross margin versus gross margin calculated in accordance with gaap . for example , stock-based compensation has been and will continue to be for the foreseeable future a significant recurring expense in our business . stock-based compensation is an important part of our employees ' compensation and impacts their performance . in addition , the components of the costs that we exclude in our calculation of non-gaap gross margin may differ from the components that our peer companies exclude when they report their non-gaap results .
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results of operations the following table is a summary of our consolidated statements of operations . replace_table_token_9_th the following table sets forth our consolidated results of operations for the specified periods as a percentage of our total revenue for those periods . replace_table_token_10_th ( 1 ) includes stock-based compensation and amortization of intangible assets as follows : 42 replace_table_token_11_th revenue replace_table_token_12_th subscription revenue increased $ 170.6 million and $ 198.0 million , or 24 % and 39 % , respectively , for 2019 and 2018. these increases were due to a $ 128.6 million and $ 153.1 million increase in revenue from the united states and a $ 42.0 million and $ 44.9 million increase from international customers for 2019 and 2018 , respectively . the increases in subscription revenue for 2019 and 2018 were due to the ongoing demand for our solutions , increase in add-on activity and renewal rate being higher than 90 % . our enterprise customer count , which consists of customers that generate more than $ 10,000 in annual recurring revenue , increased from approximately 6,100 at the end of 2018 to approximately 7,100 , or 16 % , at the end of 2019. in addition , the number of customers with three or more products increased 38 % in 2019 as compared to 2018. our enterprise customer count increased from approximately 4,400 at the end of 2017 to approximately 6,100 , or 39 % , at the end of 2018. the revenue recognized from acquired deferred revenue related to the acquisitions we made was $ 5.8 million , $ 20.8 million and $ 3.2 million in 2019 , 2018 and 2017 , respectively . the change in subscription revenue due to pricing was not significant for either period . hardware and services revenue for 2019 increased $ 0.6 million or 5 % , as compared to 2018 , primarily due to higher professional service revenue . the decrease in hardware and services revenue in 2018 as compared to 2017 was $ 0.7
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for additional information about excalibur , including the assets and liabilities thereof included in gray 's consolidated balance sheet as of december 31 , 2013 , see note 1 “ description of business and summary of significant accounting policies ” in the accompanying notes to our audited consolidated financial statements included elsewhere herein . business overview we are a television broadcast company headquartered in atlanta , georgia , that owns and operates television stations and leading digital assets in markets throughout the united states . as of february 1 , 2015 , we owned and operated television stations in 44 television markets broadcasting a total of 140 programming streams , including 26 affiliates of the cbs network ( “ cbs ” ) , 24 affiliates of the nbc network ( “ nbc ” ) , 16 affiliates of the abc network ( “ abc ” ) and ten affiliates of the fox network ( “ fox ” ) . within a market , we broadcast secondary digital channels that are in addition to our primary broadcast channels . our secondary broadcast channels are generally affiliated with networks different from those affiliated with our primary broadcast channels , and are operated by us to make better use of our broadcast spectrum by providing supplemental and or alternative programming to our primary channels . certain of our secondary channels are affiliated with more than one network simultaneously . in addition to affiliations with abc , cbs and fox , our secondary channels are affiliated with the following networks : the cw network or the cw plus network ( collectively , “ cw ” ) , mynetworktv , the metv network , this tv network , antenna tv , telemudo , heros and icons , and movies ! network . we also broadcast ten local news/weather channels in certain of our existing markets . our combined tv station group reaches approximately 8.0 % of total united states television households . as of february 1 , 2015 , we have the # 1 ranking in overall audience in 31 of the 44 markets in which we own stations and we have the # 1 ranking in local news audience in 28 of our markets . in addition , we have the # 1 and # 2 ranking in both overall audience and news audience in 41 of those 44 markets . for further information please refer to our markets and stations table in item 1. recent acquisitions during 2014 , we completed a number of acquisitions described in detail in note 2 “ acquisitions ” of our audited consolidated financial statements as of and for the year ended december 31 , 2014 , including the following : the kndx acquisition , the kevn acquisition , the wqcw acquisition , the hoak acquisition , the sjl acquisition , the parker acquisition and the helena acquisition ( collectively , the “ 2014 acquisitions ” ) . furthermore , in november 2013 we began providing services to one new full-power and associated low-power stations ( “ kjct-tv ” ) , and we acquired the programming streams of all of those stations in december 2014. in addition , on november 1 , 2013 we acquired five stations in three new markets ( the “ yellowstone acquisition ” ) . the stations acquired in the 2014 acquisitions , kjct-tv and the yellowstone acquisition are collectively referred to as the “ acquired stations. ” 36 revenues , operations , cyclicality , seasonality and financing our operating revenues are derived primarily from broadcast and internet advertising and retransmission consent fees and , to a lesser extent , from other sources such as production of commercials , tower rentals and management fees . broadcast advertising is sold for placement either preceding or following a television station 's network programming and within local and syndicated programming . broadcast advertising is sold in time increments and is priced primarily on the basis of a program 's popularity among the specific audience an advertiser desires to reach , as measured by nielsen . in addition , broadcast advertising rates are affected by the number of advertisers competing for the available time , the size and demographic makeup of the market served by the station and the availability of alternative advertising media in the market area . broadcast advertising rates are generally the highest during the most desirable viewing hours , with corresponding reductions during other hours . the ratings of a local station affiliated with a major network can be affected by ratings of network programming . we also sell internet advertising on our stations ' websites . these advertisements may be sold as banner advertisements , pre-roll advertisements or video and other types of advertisements or sponsorships . most advertising contracts are short-term , and generally run only for a few weeks . approximately 65 % of the net revenues of our television stations for the year ended december 31 , 2014 were generated from local advertising ( including political advertising revenues ) , which is sold primarily by a station 's sales staff directly to local accounts , and the remainder was represented primarily by national advertising , which is sold by a station 's national advertising sales representative . the stations generally pay commissions to advertising agencies on local , regional and national advertising and the stations also pay commissions to the national sales representative on national advertising , including certain political advertising . broadcast advertising revenue is generally highest in the second and fourth quarters each year . this seasonality results partly from increases in advertising in the spring and in the period leading up to and including the holiday season . broadcast advertising revenue is also generally higher in even-numbered years , due to spending by political candidates , political parties and special interest groups during the “ on year ” of the two-year political advertising cycle . this political spending typically is heaviest during the fourth quarter of such years . our primary broadcasting operating expenses are employee compensation , related benefits and programming costs . story_separator_special_tag this amendment and restatement was determined to be a significant modification and , as a result , we recorded a related loss from early extinguishment of debt of $ 4.9 million in 2014. also , on december 15 , 2014 we exercised an option to acquire the assets of excalibur , which at that time was treated as a vie . in connection with this transaction , excalibur repaid the outstanding balance of their debt and as a result the unamortized portion of their deferred loan costs was written off as a loss from early extinguishment of debt of $ 0.2 million . income tax expense our effective income tax rate decreased to 39.8 % for 2014 from 41.8 % for 2013. our effective income tax rates differed from the statutory rate due to the following items : replace_table_token_8_th year ended december 31 , 2013 ( “ 2013 ” ) compared to year ended december 31 , 2012 ( “ 2012 ” ) revenue total revenue decreased $ 58.5 million , or 14 % , to $ 346.3 million for 2013 compared to 2012. local advertising revenue increased approximately $ 11.7 million , or 6 % , to $ 203.1 million . national advertising revenue increased approximately $ 1.5 million , or 3 % , to $ 58.3 million . local and national advertising revenue for 2013 was positively influenced by the broadcast of the 2013 super bowl on our then 20 cbs channels , earning us approximately $ 1.1 million , an increase of approximately $ 0.3 million compared to the broadcast of the 2012 super bowl on our then 10 nbc channels that earned us approximately $ 0.8 million . local and national advertising revenue in 2012 included benefits from advertising during the 2012 olympic games . our local and national advertising revenue benefited significantly from increased sales to our customers in the automotive and legal industries . retransmission consent revenue increased $ 6.0 million , or 18 % , to $ 39.8 million in 2013 compared to 2012 primarily due to increased rates . political advertising revenue decreased $ 81.4 million , or 95 % , to $ 4.6 million , reflecting decreased advertising from political candidates and special interest groups during the “ off year ” of the two-year political advertising cycle . other revenue decreased $ 1.5 million , or 16 % , to $ 8.0 million in 2013 compared to 2012 due primarily to the receipt of certain copyright royalty payments in 2012 . 41 during 2013 , we recognized a one-time payment of $ 7.1 million as incentive consulting revenue associated with a now-expired consulting agreement for services rendered prior to the expiration thereof . we did not recognize any further revenue from this agreement . in 2013 , our five largest nonpolitical advertising customer categories on a combined local and national basis , by customer type , demonstrated the following changes in revenue compared to 2012 : automotive increased 8 % ; medical decreased 1 % ; restaurant decreased less than 1 % ; communications increased 3 % ; and furniture and appliances increased 3 % . broadcast expenses broadcast expenses ( before depreciation , amortization and loss ( gain ) on disposal of assets ) increased $ 5.1 million , or 2 % , to $ 217.4 million for 2013 compared to 2012 due primarily to an increase in compensation expense of $ 5.7 million offset , in part , by a decrease in non-compensation expense of $ 0.6 million . compensation expense increased primarily due to increases in salaries , healthcare expense , pension expense and payroll taxes , offset in part by a decrease in incentive compensation . salary expense , including related payroll taxes , increased primarily due to routine increases in base compensation . health care expense increased due to increased claims activity . pension expense increased primarily due to a decrease in the discount rate used to calculate pension expense . incentive compensation decreased as our stations ' operating income decreased due primarily to the decrease in political advertising in 2013. non-compensation expense decreased primarily due to decreases in national sales commissions , legal expense and repairs and maintenance expense offset , in part , by increased programming costs , software license fees , data circuit fees and bad debt expense . national sales commission expense decreased primarily due to decreased political advertising revenue . we pay a percentage of certain national advertising revenue to third parties as a commission . as this revenue increases or decreases so does our national sales commission expense . legal fees decreased due to lower levels of litigation at certain of our stations . programming costs increased primarily due to an increase in affiliation fees charged by certain networks . consulting fees increased due to the increased use of consultants as well as increased market research . software license fees and data circuit expenses increased primarily due to additional products offered for the internet and mobile devices . bad debt expense decreased as the quality of our accounts receivable balance improved . corporate and administrative expenses corporate and administrative expenses ( before depreciation , amortization and loss ( gain ) on disposal of assets ) increased $ 3.9 million , or 24 % , to $ 19.8 million for 2013 compared to 2012. the increase was due primarily to increases in compensation expense of $ 2.2 million and non-compensation expense of $ 1.7 million . compensation expense increased primarily due to an increase in stock-based compensation expense and severance expense resulting from the resignation of a former employee in 2013. compensation also increased due to routine increases in salaries and increases in bonuses and incentive compensation . we recorded non-cash stock-based compensation expense during 2013 and 2012 of $ 2.0 million and $ 0.9 million , respectively . non-compensation expense increased primarily due to the incurrence of transaction expenses of approximately $ 1.0 million in 2013 related to completed and then pending acquisitions . 42 depreciation depreciation of property and equipment totaled $ 24.1 million and $ 23.1 million for 2013 and 2012 , respectively .
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results of operations year ended december 31 , 2014 ( “ 2014 ” ) compared to year ended december 31 , 2013 ( “ 2013 ” ) revenue total revenue increased $ 161.8 million , or 47 % , to $ 508.1 million for 2014 compared to 2013. local advertising revenue increased approximately $ 42.7 million , or 21 % , to $ 245.8 million . national advertising revenue increased approximately $ 6.7 million , or 11 % , to $ 65.0 million . the acquired stations accounted for approximately $ 88.2 million and $ 2.9 million of our total revenue in 2014 and 2013 , respectively . local and national advertising revenue included the broadcast of the 2014 super bowl on our then five fox channels , from which we earned approximately $ 0.2 million , a decrease of approximately $ 0.9 million compared to the broadcast of the 2013 super bowl on our then 20 cbs channels from which we earned approximately $ 1.1 million . local and national advertising revenue benefited from the broadcast of the 2014 winter olympic games on our then 14 nbc affiliated stations . retransmission consent revenue increased $ 35.1 million , or 88 % , to $ 74.9 million in 2014 compared to 2013 primarily due to increased subscriber rates . political advertising revenue increased $ 77.4 million , or 1683 % , to $ 82.0 million , reflecting increased advertising from political candidates and special interest groups during the “ on year ” of the two-year political advertising cycle . other revenue increased $ 4.3 million , or 53 % , to $ 12.3 million in 2014 compared to 2013. we did not recognize any consulting revenue in 2014 . 39 strong demand for our advertising inventory from political advertisers required significant use of available inventory , which in turn lowered our advertising revenue from our non-political advertising revenue categories in the even numbered “ on-year ” of the two year political advertising cycle .
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diluted eps is calculated to reflect the potential dilution that would occur if stock options or other contracts to issue common stock were exercised and resulted in additional common shares outstanding . business overview we are a leading global provider of information solutions , employment and income verifications and human resources business process outsourcing services . we leverage some of the largest sources of consumer and commercial data , along with advanced analytics and proprietary technology , to create customized insights which enable our business customers to grow faster , more efficiently and more profitably , and to inform and empower consumers . businesses rely on us for consumer and business credit intelligence , credit portfolio management , fraud detection , decisioning technology , marketing tools , and human resources-related services . we also offer a portfolio of products that enable individual consumers to manage their financial affairs and protect their identity . beginning in 2014 , we also provide information , technology and services to support the debt collections and recovery management . our revenue stream is diversified among businesses across a wide range of industries , international geographies and individual consumers . segment and geographic information segments . the u.s. information solutions , or usis , segment , the largest of our four segments , consists of three product and service lines : online information solutions ; mortgage solutions ; and financial marketing services . online information solutions and mortgage solutions revenue is principally transaction-based and is derived from our sales of products such as consumer and commercial credit reporting and scoring , identity management and authentication , fraud detection and modeling services . usis also markets certain of our decisioning products which facilitate and automate a variety of consumer and commercial credit-oriented decisions . financial marketing services revenue is principally project- and subscription-based and is derived from our sales of batch credit , consumer wealth or demographic information such as those that assist clients in acquiring new customers , cross-selling to existing customers and managing portfolio risk . on july 1 , 2014 the north america commerical solutions ( “ nacs ” ) operating segment was consolidated into the u.s. consumer information solutions and international operating segments . the change was driven by an enterprise wide distribution marketing strategy to maximize the penetration of our products and services in our targeted markets . in an effort to accelerate our penetration and simplify how our commercial information customers interact with us , we have reorganized our operating segments . the u.s. portion of the nacs operating segment was consolidated into the u.s. consumer information solutions operating segment . the combined operating segment was renamed u.s. information solutions ( “ usis ” ) . the canadian portion of the nacs operating segment was consolidated into the canada operations of the international operating segment . the international segment consists of latin america , europe and canada . canada 's products and services are similar to our usis offerings , while europe and latin america are made up of varying mixes of product lines that are in our usis and north america personal solutions reportable segments , as well as information , technology and services for debt collections and recovery management . the workforce solutions segment consists of the verification services and employer services business units . verification services revenue is transaction based and is derived primarily from employment , income and social security number verifications . employer services revenues are derived from our provision of certain human resources business process outsourcing services that include both transaction- and subscription-based product offerings . these services assist our clients with the administration of unemployment claims and employer-based tax credits and the handling of certain payroll-related transaction processing . north america personal solutions revenue is both transaction- and subscription-based and is derived from the sale of credit monitoring and identity theft protection products , which we deliver electronically to consumers primarily via the internet and to a lesser extent through mail . 29 geographic information . we currently operate in the following countries : argentina , brazil , canada , chile , costa rica , ecuador , el salvador , honduras , mexico , paraguay , peru , portugal , the republic of ireland , spain , the u.k. , uruguay , and the u.s. our operations in the republic of ireland focus on data handling and customer support activities . we have an investment in the second largest consumer and commercial credit information company in brazil and offer consumer credit services in india and russia through joint ventures . of the countries we operate in , 74 % of our revenue was generated in the u.s. during the twelve months ended december 31 , 2014 . key performance indicators . management focuses on a variety of key indicators to monitor operating and financial performance . these performance indicators include measurements of operating revenue , change in operating revenue , operating income , operating margin , net income , diluted earnings per share , cash provided by operating activities and capital expenditures . key performance indicators for the twelve months ended december 31 , 2014 , 2013 and 2012 , include the following : replace_table_token_6_th business environment and company outlook demand for our services tends to be correlated to general levels of economic activity , to consumer credit activity , to a lesser extent small commercial credit and marketing activity , in addition to our initiatives to expand our product offering and markets served . in 2014 , the united states experienced modest growth in overall economic activity and a year-over-year decline in consumer mortgage activity . in this environment , equifax revenue growth continued to benefit from our product development and market initiatives which more than offset the declines in mortgage related revenues . in 2015 , we continue to expect modest growth in overall economic activity and consumer credit . we expect mortgage market origination activity to grow modestly for the year , largely in the first half , due to continued low interest rates . story_separator_special_tag the csc credit services acquisition amortization is partially offset by certain purchased intangible assets related to the talx acquisition in 2007 that became fully amortized during the second quarter of 2013 as well as other miscellaneous purchased intangible assets that fully depreciated during 2013. operating income and operating margin replace_table_token_9_th total company margin decreased slightly in 2014 due to a third quarter 2014 settlement of a legal dispute over certain software license agreements and increased cost of services and acquisition-related amortization expense related to the acquisition of tdx . the decrease was partially offset by a reduction in amortization of certain purchased intangible assets related to our talx corporation acquisition in 2007 that became fully amortized during the second quarter of 2013. in 2013 , operating income increased faster than revenue due to margin improvements in our workforce solutions and north america personal solutions businesses , reflecting rapid revenue growth and the ability to leverage our existing cost base . operating income in 2012 was also negatively impacted by the $ 38.7 million pension settlement recorded during the fourth quarter of 2012 . 32 interest expense and other income ( expense ) , net replace_table_token_10_th interest expense decreased slightly in 2014 , when compared to 2013 , due to the pay-off of our 7.34 % notes and 4.45 % senior notes during 2014. our consolidated debt balance increased , as compared to the prior year , as a result of commercial paper issued to fund the majority of the acquisition price of tdx . the decrease in the average cost of debt for 2014 is due to the pay-off of our 7.34 % notes and 4.45 % senior notes and additional low rate commercial paper outstanding on average , which caused the average cost of debt to decrease as compared to the prior year . interest expense increased in 2013 , when compared to 2012 , due to the issuance of $ 500 million of 3.30 % ten-year senior notes in december 2012 to fund the csc credit services acquisition . our consolidated debt balance decreased , as compared to the prior year , as a result of paying down $ 265.0 million of commercial paper during 2013 that was used to partially fund the csc credit services acquisition . the decrease in the average cost of debt for 2013 is due to the issuance of the $ 500 million senior notes at a low interest rate and additional low rate commercial paper outstanding on average , which caused the average cost of debt to decrease as compared to the prior year . the increase in other income ( expense ) , net , in 2014 is due to the impairment of our cost method investment representing a 15 % equity interest in boa vista servicos s.a. ( “ bvs ” ) recorded in 2013 , which did not recur in 2014. other income ( expense ) , net in 2014 also includes $ 7.0 million in foreign exchange losses related to dividends declared by our subsidiary in argentina and losses incurred in repatriating these funds . these losses were partially offset by an increase in our equity in the earnings of our russian joint venture . the decrease in other income ( expense ) , net , in 2013 is due to the impairment of our cost method investment representing a 15 % equity interest in bvs recorded in 2013. during the fourth quarter of 2013 , the management of bvs revised its near-term outlook and its operating plans to reflect reduced near-term market expectations for credit information services in brazil and increased investment needed to achieve its strategic objectives . as a result of these changes , and the associated near-term changes in cash flow expected from the business , we recorded a 40 million brazilian reais ( $ 17.0 million ) impairment of our original investment of 130 million brazilian reais . if the economic growth in brazil remains at lower than trend levels for an extended period or if bvs is unsuccessful in effectively implementing its strategy , further write-downs could be recognized in future periods . other income ( expense ) , net in 2013 also includes $ 6.5 million in foreign exchange losses related to dividends declared by our subsidiary in argentina and losses incurred in repatriating these funds . these losses were partially offset by an increase in our equity in the earnings of our russian joint venture . 33 income taxes replace_table_token_11_th overall , our effective tax rate was 34.9 % for 2014 , down from 35.6 % for the same period in 2013. the 2014 rate benefited by 1.1 % as compared to the 2013 rate due to the favorable impact of 2014 international , permanent and discrete items . the 2014 effective rate increased by 0.4 % as compared to 2013 due to increases in state income tax rates , which became effective or enacted in 2014. we expect our effective tax rate in 2015 to be in the range of 35 % to 36 % . our effective tax rate was 35.6 % for 2013 , down from 36.2 % for the same period in 2012. the 2013 rate benefited by 3.7 % as compared to the 2012 rate due to the unfavorable impact in 2012 of certain one-time effects caused by certain international tax planning implemented during 2012. this was offset by a one-time 2.8 % benefit in 2012 associated with a tax method change approved by tax authorities in 2012. the 2013 effective rate increased by 0.6 % as compared to 2012 due to increases in state income tax rates , which became effective in 2013. net income replace_table_token_12_th 34 consolidated net income from continuing operations increased by $ 32.5 million , or 10 % , in 2014 compared to 2013 due to increased operating income in our usis , workforce solutions and north america personal solutions operating segments , and a lower effective income tax rate , partially offset by declines in the international operating segment .
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segment financial results u.s. information solutions replace_table_token_13_th u.s. information solutions revenue increased 2 % in 2014 as compared to the prior year . solid growth from strategic product and market penetration as well as pricing initiatives were partially offset by the expected decline in mortgage market activity compared to the first half of 2013 when mortgage refinancing activity was still high . u.s. information solutions revenue increased 16 % in 2013 as compared to the prior year . the csc credit services acquisition contributed to 14 % of the revenue growth in 2013. the remaining growth resulted from strategic product and market penetration as well as pricing initiatives in the mortgage market more than offseting the decline from lower mortgage market activity in 2013. online information solutions . revenue for 2014 increased 4 % when compared to the prior year . core credit report transaction volume increased 12 % in 2014 compared to the prior year due to increased volumes to customers in the financial services market , auto industry and our key client program . the period also benefited from growth in our identity and fraud solutions business . these increases were partially offset by lower average unit revenue due to a less favorable mix of business and a lower proportion of reports sold into the mortgage resale market . revenue for 2013 increased 14 % when compared to the prior year . this increase was driven primarily by the incremental revenue from the csc credit services acquisition as compared to the prior year . excluding the csc credit services acquisition , revenue increased 1 % in 2013 as compared to a year ago .
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due to uncertainties surrounding the realization of some of the company 's deferred tax assets , primarily including state r & e income tax credits generated during the prior years and current year , the company established a valuation allowance against its deferred tax assets . when recognized , the tax benefits story_separator_special_tag the following discussion should be read in conjunction with the consolidated financial statements and the related notes that appear elsewhere in this document . overview we develop and manufacture a broad line of pre-programmed universal remote control products , av accessories , and software that are marketed to enhance home entertainment systems . our customers operate in the consumer electronics market and include subscription broadcasters , oems , international retailers , private labels , and companies in the computing industry . we also sell integrated circuits , on which our software and ir code database , or library , is embedded , to oems that manufacture wireless control devices , cable converters or satellite receivers for resale in their products . since our beginning in 1986 , we have compiled an extensive ir code library that covers over 863,000 individual device functions and approximately 6,900 individual consumer electronic equipment brand names . our library is regularly updated with ir codes used in newly introduced av devices . these ir codes are captured directly from the remote control devices or the manufacturer 's written specifications to ensure the accuracy and integrity of the database . we believe that our universal remote control library contains device codes that are capable of controlling virtually all ir controlled set-top boxes , televisions , audio components , dvd players , blu-ray players , and cd players , as well as most other remote controlled home entertainment devices and home automation control modules worldwide . we operate as one business segment . we have twenty-two subsidiaries located in argentina , brazil , british virgin islands ( 3 ) , cayman islands , france , germany , hong kong ( 4 ) , india , italy , the netherlands , people 's republic of china ( 4 ) , singapore , spain , and the united kingdom . to recap our results for 2014 : net sales increased 6.2 % to $ 562.3 million in 2014 from $ 529.4 million in 2013 . our gross margin percentage increased from 28.6 % in 2013 to 29.7 % in 2014 . operating expenses , as a percent of sales , decreased from 22.5 % in 2013 to 22.4 % in 2014 operating income increased 28.4 % to $ 41.3 million in 2014 from $ 32.2 million in 2013 , and our operating margin percentage increased to 7.3 % in 2014 , compared to 6.1 % in 2013 . our effective tax rate decreased to 19.6 % in 2014 from 20.9 % in 2013 . our strategic business objectives for 2015 include the following : continue to develop industry-leading technologies and products with attractive gross margins in order to improve profitability ; continue to increase our market share in newer product categories , such as smart devices and game consoles ; further penetrate the growing asian and latin american subscription broadcasting markets ; acquire new customers in historically strong regions ; increase our share with existing customers ; and continue to seek acquisitions or strategic partners that complement and strengthen our existing business . we intend for the following discussion of our financial condition and results of operations to provide information that will assist in understanding our consolidated financial statements , the changes in certain key items in those financial statements from period to period , and the primary factors that accounted for those changes , as well as how certain accounting principles , policies and estimates affect our consolidated financial statements . critical accounting policies and estimates the preparation of financial statements in conformity with accounting principles generally accepted in the united states of america requires us to make estimates and judgments 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 . on an on-going basis , we evaluate our estimates and judgments , including those related to revenue recognition , allowances for sales returns and doubtful accounts , inventory valuation , our review for impairment of long-lived assets , intangible assets and goodwill , income taxes and stock-based compensation expense . actual results may differ from these judgments and estimates , and they may be adjusted as more information becomes available . any adjustment may be significant and may have a material impact on our consolidated financial position or results of operations . 25 an accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made , if different estimates reasonably may have been used , or if changes in the estimate that are reasonably likely to occur may materially impact the financial statements . management believes the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements . in addition to the accounting policies mentioned below , see `` item 8. financial statements and supplementary data — notes to consolidated financial statements — note 2 '' for other significant accounting policies . revenue recognition we recognize revenue on the sale of products when title of the goods has transferred , there is persuasive evidence of an arrangement ( such as a purchase order from the customer ) , the sales price is fixed or determinable and collectability is reasonably assured . a provision is recorded for estimated sales returns and allowances and is deducted from gross sales to arrive at net sales in the period the related revenue is recorded . these estimates are based on historical sales returns and allowances , analysis of credit memo data and other known factors . story_separator_special_tag such circumstances may include , but are not limited to : ( 1 ) a significant adverse change in legal factors or in business climate , ( 2 ) unanticipated competition or ( 3 ) an adverse action or assessment by a regulator . when performing the impairment review , we determine the carrying amount of each reporting unit by assigning assets and liabilities , including the existing goodwill , to those reporting units . a reporting unit is defined as an operating segment or one level below an operating segment ( referred to as a component ) . a component of an operating segment is deemed a reporting unit if the component constitutes a business for which discrete financial information is available , and segment management regularly reviews the operating results of that component . we have a single reporting unit . to evaluate whether goodwill is impaired , we conduct a two-step quantitative goodwill impairment test . in the first step we compare the estimated fair value of the reporting unit to which the goodwill is assigned to the reporting unit 's carrying amount , including goodwill . we estimate the fair value of our reporting unit based on income and market approaches . under the income approach , we calculate the fair value of a reporting unit based on the present value of estimated future cash flows . under the market approach , we estimate the fair value based on market multiples of enterprise value to ebitda for comparable companies . if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit , then we perform the second step of the impairment test in order to determine the implied fair value of the reporting unit 's goodwill . to calculate the implied fair value of the reporting unit 's goodwill , the fair value of the reporting unit is first allocated to all of the other assets and liabilities of that unit based on their fair values . the excess of the reporting unit 's fair value over the amount assigned to its other assets and liabilities is the implied fair value of goodwill . an impairment loss would be recognized equal to the amount by which the carrying value of goodwill exceeds its implied fair value . determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions . these estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows , risk-adjusted discount rates , future economic and market conditions and the determination of appropriate market comparables . in addition , we make certain judgments and assumptions in determining our reporting units . we base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain . actual future results may differ from those estimates . income taxes we calculate our current and deferred tax provisions based on estimates and assumptions that may differ from the actual results reflected in our income tax returns filed during the subsequent year . we record adjustments based on filed returns when we have identified and finalized them , which is in the third and fourth quarters of the subsequent year for u.s. federal and state provisions , respectively . 27 we recognize deferred tax assets and liabilities for the expected tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts using enacted tax rates in effect for the year in which we expect the differences to reverse . we record a valuation allowance to reduce the deferred tax assets to the amount that we are more likely than not to realize . we have considered future market growth , forecasted earnings , future taxable income , the mix of earnings in the jurisdictions in which we operate and prudent tax planning strategies in determining the need for a valuation allowance . in the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future , we would increase the valuation allowance and make a corresponding charge to earnings in the period in which we make such determination . likewise , if we later determine that we are more likely than not to realize the net deferred tax assets , we would reverse the applicable portion of the previously provided valuation allowance . in order for us to realize our deferred tax assets we must be able to generate sufficient taxable income in the tax jurisdictions in which the deferred tax assets are located . our effective tax rate includes the impact of certain undistributed foreign earnings for which we have not provided u.s. taxes because we plan to reinvest such earnings indefinitely outside the united states . the decision to reinvest our foreign earnings indefinitely outside the united states is based on our projected cash flow needs as well as the working capital and long-term investment requirements of our foreign subsidiaries and our domestic operations . material changes in our estimates of cash , working capital and long-term investment requirements in the various jurisdictions in which we do business may impact our effective tax rate . we are subject to income taxes in the united states and foreign countries , and we are subject to routine corporate income tax audits in many of these jurisdictions . we believe that our tax return positions are fully supported , but tax authorities are likely to challenge certain positions , which may not be fully sustained . however , our income tax expense includes amounts intended to satisfy income tax assessments that result from these challenges in accordance with the accounting for uncertainty in income taxes prescribed by u.s. gaap . determining the income tax expense for these potential assessments and recording the related assets and liabilities requires management judgments and estimates .
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results of operations the following table sets forth our results of operations expressed as a percentage of net sales for the periods indicated . replace_table_token_5_th year ended december 31 , 2014 ( `` 2014 '' ) compared to year ended december 31 , 2013 ( `` 2013 '' ) net sales . net sales for 2014 were $ 562.3 million , an increase of 6.2 % compared to $ 529.4 million in 2013 . net sales by our business and consumer lines were as follows : replace_table_token_6_th net sales in our business lines ( subscription broadcasting , oem , and computing companies ) were 90.2 % of net sales in 2014 compared to 89.9 % in 2013 . net sales in our business lines in 2014 increased by 6.6 % to $ 507.1 million from $ 475.7 million in 2013 . the increase was primarily due to an increase in remote control sales to consumer electronics companies in asia , an increase in licensing revenue , growth in sales of our embedded chip solutions to smart device manufacturers , and increased market share in european subscription broadcasting . net sales in our consumer lines ( one for all ® retail and private label ) were 9.8 % of net sales in 2014 compared to 10.1 % in 2013 . net sales in our consumer lines in 2014 increased by 2.8 % to $ 55.2 million from $ 53.7 million in 2013 . international retail sales increased 3.8 % from $ 49.6 million in 2013 to $ 51.5 million in 2014 due primarily to increased distribution in southern european countries and latin america as well as increased demand resulting from the 2014 fifa world cup . gross profit . gross profit in 2014 was $ 166.9 million compared to $ 151.5 million in 2013 . gross profit as a percent of sales increased to 29.7 % in 2014 from 28.6 % in 2013 .
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( iii ) interest expense has been included at a rate of approximately 3 % which is consistent with the borrowing rate on the company 's current line of credit . ( iv ) the tax effects of the pro forma adjustments at an estimated statutory rate of 25.6 % . ( v ) earnings per share amounts are calculated using the company 's historical weighted average shares outstanding plus the 429,291 shares issued in the merger . story_separator_special_tag forward-looking statements in this form 10-k and in other documents incorporated herein , as well as in oral statements made by the company , statements that are prefaced with the words “ may , ” “ will , ” “ expect , ” “ anticipate , ” “ continue , ” “ estimate , ” “ project , ” “ intend , ” “ designed , ” and similar expressions , are intended to identify forward-looking statements regarding events , conditions , and financial trends that may affect the company 's future plans of operations , business strategy , results of operations , and financial position . these statements are based on the company 's current expectations and estimates as to prospective events and circumstances about which the company can give no firm assurance . further , any forward-looking statement speaks only as of the date on which such statement is made , and the company undertakes no obligation to update any forward-looking statement to reflect future events or circumstances . forward-looking statements should not be relied upon as a prediction of actual future financial condition or results . these forward-looking statements , like any forward-looking statements , involve risks and uncertainties that could cause actual results to differ materially from those projected or anticipated . such risks and uncertainties include the factors set forth above and the other information set forth in this form 10-k. introduction and covid-19 pandemic the boston beer company is engaged in the business of producing and selling alcohol beverages primarily in the domestic market and , to a lesser extent , in selected international markets . the company 's revenues are primarily derived by selling its hard seltzers , beers and hard ciders to distributors , who in turn sell the products to retailers and drinkers . the company 's hard seltzers , beers and hard ciders are primarily positioned in the market for high end beer occasions . the high end category has seen high single-digit compounded annual growth over the past ten years . the company believes that the high end category is positioned to increase market share in the total beer category , as drinkers continue to trade up in taste and quality . boston beer is one of the largest suppliers in the high end category in the united states . in measured off-premise channels , the company estimates that in 2020 the high end category percentage volume growth was approximately 25 % with the craft beer category volume growth approximately 13 % and total beer category volume growth approximately 10 % . the company believes that the high end category volume is over 35 % of the united states beer market . depletions or distributor sales to retailers of the company 's hard seltzers , beers and hard ciders for the 52 week fiscal period ended december 26 , 2020 , increased approximately 37 % from the comparable 52 week fiscal period in the prior year , of which 35 % is from boston beer legacy brands and 2 % is from the addition of dogfish head brands beginning july 3 , 2019. the company began seeing the impact of the covid-19 pandemic on its business in early march 2020. the direct financial impact of the pandemic has primarily shown in significantly reduced keg demand from the on-premise channel and higher labor and safety-related costs at the company 's breweries . in the 52-week period ended december 26 , 2020 , the company recorded covid-19 related pre-tax reductions in net revenue and increases in other costs that total $ 16.0 million , of which $ 1.8 million was recorded in the fourth quarter . the total amount consists of a $ 3.3 million reduction in net revenue for estimated keg returns from distributors and retailers and $ 12.7 million of other covid-19 related direct costs , of which $ 8.2 million are recorded in cost of goods sold and $ 4.5 million are recorded in operating expenses . in addition to these direct financial impacts , covid-19 related safety measures resulted in a reduction of brewery productivity . this has shifted more volume to third-party breweries , which increased production costs and negatively impacted gross margins . the company will continue to assess and manage this situation and will provide a further update in each quarterly earnings release , to the extent that the effects of the covid-19 pandemic are then known more clearly . outlook year-to-date depletions reported to the company for the 6 weeks ended february 6 , 2021 are estimated by the company to have increased approximately 53 % from the comparable weeks in 2020. the company is targeting non-gaap earnings per diluted share for 2021 of between $ 20.00 and $ 24.00 , excluding the impact of asu 2016-09 , stock compensation ( topic 718 ) , improvements to employee share-based payment accounting , but actual results could vary significantly from this target . the company is forecasting 2021 depletions and shipments percentage increases of between 35 % and 45 % . the company is targeting national price increases of between 1 % and 2 % . full-year 2021 gross margins are currently expected to be between 45 % and 47 % , a decrease from the previously communicated estimate of between 46 % and 48 % . story_separator_special_tag critical accounting policies the discussion and analysis of the company 's financial condition and results of operations is based upon its consolidated financial statements , which have been prepared in accordance with u.s. generally accepted accounting principles . the preparation of these financial statements requires the company to make significant estimates and judgments that affect the reported amounts of assets , liabilities , revenues and expenses , and related disclosure of contingent assets and liabilities . these items are monitored and analyzed by management for changes in facts and circumstances , and material changes in these estimates could occur in the future . the more judgmental estimates are summarized below . changes in estimates are recorded in the period in which they become known . the company bases its estimates on historical experience and various other assumptions that the company believes to be reasonable under the circumstances . actual results may differ from the company 's estimates if past experience or other assumptions do not turn out to be substantially accurate . provision for excess or expired inventory the provisions for excess or expired inventory are based on management 's estimates of forecasted usage of inventories on hand and under contract . forecasting usage involves significant judgments regarding future demand for the company 's various existing products and products under development as well as the potency and shelf-life of various ingredients . a 32 significant change in the timing or level of demand for certain products as compared to forecasted amounts may result in recording additional provisions for excess or expired inventory in the future . provisions for excess inventory are included in cost of goods sold and have historically been adequate to provide for losses on its inventory . provision for excess or expired inventory included in cost of goods sold was $ 11.3 million , $ 8.1 million and $ 4.2 million in fiscal years 2020 , 2019 and 2018 , respectively . valuation of property , plant and equipment the carrying value of property , plant and equipment , net of accumulated depreciation , at december 26 , 2020 was $ 623.1 million . for purposes of determining whether there are any impairment losses , as further discussed below , management has historically examined the carrying value of the company 's identifiable long-lived assets , including their useful lives , semi-annually , or more frequently when indicators of impairment are present . evaluations of whether indicators of impairment exist involve judgments regarding the current and future business environment and the length of time the company intends to use the asset . if an impairment loss is identified based on the fair value of the asset , as compared to the carrying value of the asset , such loss would be charged to expense in the period the impairment is identified . furthermore , if the review of the carrying values of the long-lived assets indicates impairment of such assets , the company may determine that shorter estimated useful lives are more appropriate . in that event , the company will be required to record additional depreciation in future periods , which will reduce earnings . estimating the amount of impairment , if any , requires significant judgments including identification of potential impairments , market comparison to similar assets , estimated cash flows to be generated by the asset , discount rates , and the remaining useful life of the asset . impairment of assets included in operating expenses was $ 4.4 million , $ 0.9 million and $ 0.7 million in fiscal years 2020 , 2019 and 2018 , respectively . factors generally considered important which could trigger an impairment review on the carrying value of long-lived assets include the following : ( 1 ) significant underperformance relative to historical or projected future operating results ; ( 2 ) significant changes in the manner of use of acquired assets or the strategy for the company 's overall business ; ( 3 ) underutilization of assets ; and ( 4 ) discontinuance of products by the company or its customers . the company believes that the carrying value of its long-lived assets was realizable as of december 26 , 2020 and december 28 , 2019. valuation of goodwill and indefinite lived intangible assets the company has recorded intangible assets with indefinite lives and goodwill for which impairment testing is required at least annually or more frequently if events or circumstances indicate that these assets might be impaired . the company performs its annual impairment tests and re-evaluates the useful lives of other intangible assets with indefinite lives at the annual impairment test measurement date in the third quarter of each fiscal year or when circumstances arise that indicate a possible impairment or change in useful life might exist . the company 's annual goodwill impairment evaluation analysis indicated that the fair value of the company 's goodwill was substantially greater than the carrying value and there was no impairment to record during 2020. the guidance for goodwill impairment testing allows an entity to assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a reporting unit , of which the company has one , is less than its carrying amount or to proceed directly to performing a quantitative impairment test . under the quantitative assessment , the estimated fair value of the company 's reporting unit is compared to its carrying value , including goodwill . the estimate of fair value of the company 's reporting unit is generally calculated based on an income approach using the discounted cash flow method supplemented by the market approach which considers the company 's market capitalization and enterprise value . if the estimated fair value of the company 's reporting unit is less than the carrying value of its reporting unit , a goodwill impairment will be recognized .
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results of operations year ended december 26 , 2020 compared to year ended december 28 , 2019 replace_table_token_4_th net revenue . net revenue increased by $ 486.6 million , or 38.9 % , to $ 1,736.4 million for the year ended december 26 , 2020 , as compared to $ 1,249.8 million for the year ended december 28 , 2019 , due primarily to increased shipments . volume . total shipment volume of 7,368,000 barrels for the year ended december 26 , 2020 increased by 38.8 % over 2019 levels of 5,307,000 barrels , due primarily to increases in shipments of truly hard seltzer and twisted tea and the addition of the dogfish head brands , partially offset by decreases in its samuel adamas and angry orchard brands . 30 depletions , or sales by distributors to retailers , of the company 's products for the year ended december 28 , 2019 increased by approximately 3 7 % compared to the prior year , primarily due to increases in depletions of truly hard seltzer and twisted tea brands and the addition of the dogfish head brands , partially offset by decreases in its samuel adams and angry orchard brands . net revenue per barrel . the net revenue per barrel increased by 0.1 % to $ 235.67 per barrel for the year ended december 26 , 2020 , as compared to $ 235.51 per barrel for the year ended december 28 , 2019 , primarily due price increases partially offset by unfavorable package mix . cost of goods sold .
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the company has not experienced any losses in such accounts as of december 31 , story_separator_special_tag the following discussion and analysis should be read together with our consolidated financial statements and related notes thereto included elsewhere in this annual report on form 10-k , as well as the disclosures about forward-looking statements in item 1 and the section “ risk factors ” contained in item 1a . this discussion summarizes the significant factors affecting our consolidated operating results , financial condition and liquidity and cash flows for the fiscal year ended december 31 , 2016. except for historical information , the matters discussed in this management 's discussion and analysis of financial condition and results of operations are forward-looking statements that involve risks and uncertainties and are based upon judgments concerning various factors that are beyond our control . licensing and brand management business we own a portfolio of consumer brands in the fashion , home , athletic and lifestyle categories , including martha stewart , jessica simpson , and1 , avia and joe 's jeans , heelys and gaiam . we aim to maximize the value of our brands by promoting , marketing and licensing the brands through various distribution channels , including to retailers , wholesalers and distributors in the united states and in certain international territories . our core strategy is to enhance and monetize the global reach of our existing brands , and to pursue additional strategic acquisitions to grow the scope of and diversify our portfolio of brands . we aim to acquire well-known consumer brands with high potential for growth and strong brand awareness . we additionally seek to diversify our portfolio by evaluating the strength of targeted brands and the expected viability and sustainability of future royalty streams . upon the acquisition of a brand , we partner with leading wholesalers and retailers to drive incremental value and maximize brand equity . we focus on certain key initiatives in our licensing and brand management business . these initiatives include : · maximizing the value of our existing brands by creating efficiencies , adding additional product categories , expanding distribution and retail presence and optimizing sales through innovative marketing that increases consumer brand awareness and loyalty ; · developing international expansion through additional licenses , partnerships and other arrangements with leading retailers and wholesalers outside the united states ; and · acquiring consumer brands ( or the rights to such brands ) with high consumer awareness , broad appeal and applicability to a wide range of product categories . our business is designed to maximize the value of our brands through license agreements with partners that are responsible for manufacturing and distributing our licensed products and , with the exception of our martha stewart brand , primarily responsible for the design of such licensed products . our brands are licensed for a broad range of product categories , including apparel , footwear , eyewear , fashion accessories and home goods , as well as , with respect to our martha stewart brand , food , wine , pet supplies and a variety of media related assets , such as magazines , books and other print and digital content . we seek to select licensees who have demonstrated the ability to produce and sell quality products in their respective licensed categories and have the capability to meet or exceed the minimum sales thresholds and guaranteed minimum royalty payments that we generally require . we license our brands to both wholesale and direct-to-retail licensees . in a wholesale license , a wholesale supplier is granted rights ( typically on an exclusive basis ) to a single or small group of related product categories for a particular brand for sale to multiple accounts within an approved channel of distribution and territory . in a direct-to-retail license , a single retailer is granted the right ( typically on an exclusive basis ) to sell branded products in a broad range of product categories through its brick and mortar stores and e-commerce sites . as of december 31 , 2016 , we had more than one-hundred fifty licensees , with wholesale licensees comprising a significant majority . our license agreements typically require a licensee to pay us royalties based upon net sales and , in most cases , contain guaranteed minimum royalties . our license agreements also require licensees to support the brands by either paying or spending contractually guaranteed minimum amounts for the marketing and advertising of the respective licensed brands . as of march 7 , 2017 we had contractual rights to receive an aggregate of $ 462.0 million in minimum royalty and marketing and advertising revenue from our licensees through the balance of the current terms of such licenses , excluding any renewals . items affecting comparability of periods presented we were formed on june 5 , 2015 , for the purpose of effecting the merger of singer merger sub , inc. with and into sqbg , inc. ( previously known as sequential brands group , inc. ) ( sec file no . 001-36082 ) ( “ old sequential ” ) and the merger of madeline merger sub , inc. with and into mslo ( sec file no . 001-15395 ) , with old sequential and mslo each surviving the merger as wholly owned subsidiaries of us ( the “ mergers ” ) . prior to the mergers , we did not conduct any activities other than those incidental to its formation and the matters contemplated in the agreement and plan of merger , dated as of june 22 , 2015 , as amended , by and among mslo , old sequential , us , singer merger sub , inc. , and madeline merger sub , inc. ( the “ merger agreement ” ) . on december 4 , 2015 , pursuant to the merger agreement , old sequential and mslo completed the strategic combination of their respective businesses and became wholly owned subsidiaries of the company . story_separator_special_tag asu 2016-07 simplifies the equity method of accounting by eliminating the requirement to retrospectively apply the equity method to an investment that subsequently qualifies for such accounting as a result of an increase in the level of ownership interest or degree of influence . consequently , when an investment qualifies for the equity method ( as a result of an increase in the level of ownership interest or degree of influence ) , the cost of acquiring the additional interest in the investee would be added to the current basis of the investor 's previously held interest and the equity method would be applied subsequently from the date on which the investor obtains the ability to exercise significant influence over the investee . asu 2016-07 further requires that unrealized holding gains or losses in accumulated other comprehensive income related to an available-for-sale security that becomes eligible for the equity method be recognized in earnings as of the date on which the investment qualifies for the equity method . asu 2016-07 is effective for fiscal years beginning after december 15 , 2016 , including interim periods within those fiscal years , with early adoption permitted . entities are required to apply the guidance prospectively to increases in the level of ownership interest or degree of influence occurring after the effective date of asu 2016-07. additional transition disclosures are not required upon adoption . the adoption of asu 2016-07 is not expected to have a material impact our consolidated financial statements . asu no . 2016-05 , “ effect of derivative contract novations on existing hedge accounting relationships ” in march 2016 , the fasb issued asu no . 2016-05 , “ effect of derivative contract novations on existing hedge accounting relationships ” ( “ asu 2016-05 ” ) . asu 2016-05 clarifies that “ a change in the counterparty to a derivative instrument that has been designated as the hedging instrument in an existing hedging relationship would not , in and of itself , be considered a termination of the derivative instrument ” or “ a change in a critical term of the hedging relationship ” . as long as all other hedge accounting criteria in asc 815 are met , a hedging relationship in which the hedging derivative instrument is novated would not be discontinued or need to be redesignated . this clarification applies to both cash flow and fair value hedging relationships . asu 2016-05 is effective for fiscal years beginning after december 15 , 2016 , including interim periods within those fiscal years . an entity would apply the guidance prospectively unless it elects modified retrospective transition . early adoption is permitted , including in an interim period . the adoption of asu 2016-05 is not expected to have a material impact on our consolidated financial statements . asu no . 2016-02 , “ leases ” in february 2016 , the fasb issued asu no . 2016-02 , “ leases ” ( “ asu 2016-02 ” ) . the core principle of asu 2016-02 is that an entity should recognize on its balance sheet assets and liabilities arising from a lease . in accordance with that principle , asu 2016-02 requires that a lessee recognize a liability to make lease payments ( the lease liability ) and a right-of-use asset representing its right to use the underlying leased asset for the lease term . the recognition , measurement , and presentation of expenses and cash flows arising from a lease by a lessee will depend on the lease classification as a finance or operating lease . this new accounting guidance is effective for public companies for fiscal years beginning after december 15 , 2018 ( i.e. , calendar years beginning on january 1 , 2019 ) , including interim periods within those fiscal years . early adoption is permitted . we are currently evaluating the impact the adoption of asu 2016-02 will have on our consolidated financial statements . asu no . 2016-01 , “ amending guidance on classification and measurement of financial instruments ” in february 2016 , the fasb issued asu no . 2016-01 , “ amending guidance on classification and measurement of financial instruments ” ( “ asu 2016-01 ” ) . asu 2016-01 amends the guidance in u.s. gaap on the classification and measurement of financial instruments . although asu 2016-01 retains many current requirements , it significantly revises an entity 's accounting related to ( 1 ) the classification and measurement of investments in equity securities and ( 2 ) the presentation of certain fair value changes for financial liabilities measured at fair value . asu 2016-01 also amends certain disclosure requirements associated with the fair value of financial instruments . asu 2016-01 is effective for fiscal years beginning after december 15 , 2017 , including interim periods within those fiscal years . the adoption of asu 2016-01 is not expected to have a material impact on our consolidated financial statements . asu no . 2015-16 , “ business combinations – simplifying the accounting for measurement-period adjustments ” in september 2015 , the fasb issued asu no . 2015-16 , “ business combinations – simplifying the accounting for measurement-period adjustments ” ( “ asu 2015-16 ” ) . asu 2015-16 requires the recognition of adjustments to provisional amounts that are identified during the measurement period , in the reporting period in which the adjustments are determined . the effects of the adjustments to provisional amounts on depreciation , amortization or other income effects should be recognized in current-period earning as if the accounting had been completed at the acquisition date . disclosure of the portion of the adjustment recorded in current-period earnings that would have been reported in prior reporting periods if the adjustment to the provisional amounts had been recognized at the acquisition date is also required . asu 2015-16 is effective for annual reporting periods beginning after december 15 , 2015 , including interim periods within that reporting period .
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results of operations comparison of the years ended december 31 , 2016 and 2015 the following table summarizes our results of operations for the years indicated and is derived from our consolidated financial statements : replace_table_token_4_th net revenue . the increase in net revenue for the year ended december 31 , 2016 as compared to the year ended december 31 , 2015 is primarily attributable to the acquisition of gaiam , inc. during the third quarter of 2016 and the acquisitions of the martha stewart , jessica simpson , joe 's jeans and emeril lagasse brands which occurred between the second and fourth quarters of 2015. net revenue for the year ended december 31 , 2016 consists primarily of licensing revenue earned from our license agreements relating to the martha stewart , jessica simpson , avia , and1 , gaiam , ellen tracy and joe 's jeans brands . net revenue for the year ended december 31 , 2015 consists of licensing revenue earned primarily from our license agreements related to our jessica simpson , and1 , avia , ellen tracy and martha stewart brands . operating expenses . operating expenses increased $ 26.8 million for the year ended december 31 , 2016 to $ 85.4 million compared to $ 58.6 million for the year ended december 31 , 2015. excluding incremental costs incurred on a go forward basis after the mergers of $ 33.6 million , operating expenses decreased $ 6.8 million . this decrease was primarily driven by lower acquisition related costs of $ 6.4 million and restructuring charges of $ 5.6 million , partially offset by higher compensation costs of $ 2.5 million and rent and office expenses of $ 1.8 million . other ( expense ) income .
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r. greg smith on july 1 , 2008 , the company entered into an executive employment agreement with r. greg smith , expiring december 31 , 2010. during the term of his employment , mr. smith is entitled to ( i ) a base salary of $ 200,000 per year , ( ii ) standard benefits that are available to other executive officers , and ( iii ) a stock grant of up to 2,550,000 shares , as follows . the erf wireless incentive targets up to 1,300,000 shares of common stock : ( 1 ) 500,000 shares if the company achieves positive ebitda ; ( ii ) 500,000 shares upon cumulative funding of $ 25 million ; and ( 3 ) 300,000 shares upon satisfaction of certain acquisition thresholds . the ens incentive targets up to 500,000 shares of common stock : ( i ) 300,000 shares upon achieving 2009 positive ebitda ; and ( ii ) 200,000 shares upon obtaining 2009 ens contract values of $ 1,000,000 . the wbs incentive targets up to 750,000 shares of common stock : ( i ) 250,000 shares upon securing school district contracts within certain thresholds and ( ii ) 500,000 shares upon obtaining certain gross profit thresholds on these contracts . in the event mr. smith employment agreement is terminated without cause he is entitled to receive ( i ) the balance of this unpaid salary through the term of the agreement , ( ii ) a one year extension for vesting of stock grants , ( iii ) and the grant of an option to purchase 500,000 shares of company common stock at an exercise price equal to the lesser of $ .50 a share or the market price on the date of termination , provided that such option terminates on may 31 , 2013. mr. smith under a previous employment contract which expired in july 2008 received 63,828 shares of our series a preferred stock for total consideration of $ 31,913.50 . as of december 31 , 2007 , mr. smith converted all of his series a convertible preferred stock into 1,196,070 shares story_separator_special_tag this management 's discussion and analysis of financial condition and results of operations ( md & a ) should be read in conjunction with the other sections of this annual report on form 10-k , including the financial statements . overview historically , our revenues have been generated primarily from internet and construction services . our internet revenues result from our offering of broadband and basic communications services to residential and enterprise customers . our construction revenues result from the construction of bank networks and other services associated with providing wireless products and services to the regional banking industry . during fiscal 2008 , approximately 71 % of our revenues were generated from internet services and 17 % of our revenues were generated from construction services . we expect that our internet services will experience the most growth during fiscal 2009 , as we expect to devote significant capital resources to developing the oil and gas market utilizing wireless services . during the 2008 fiscal year and the first quarter of fiscal 2009 , the company made significant progress with its strategic business plan as evidenced by the completion and announcement of numerous agreements . these include : · the completion of the acquisition of assets and operations of crosswind enterprises , inc. , giving the company access to a large geographic area covering multiple counties in the west texas area and new mexico ; · the completion of the centramedia asset acquisition , providing the company access to a large geographic area in the panhandle area of texas ; · the entry into two exclusive reseller agreements with schlumberger to market our wireless services and products to the oil and gas industry ; · the decision to management to primarily focus capital and personnel resources to deploying wireless services to the oil and gas industry ; · the hiring of mike jones as our chief technology officer and gary busby as senior vice-president of sales and marketing ; and · the company filed additional patents regarding our cryptovue ( tm ) the company 's revenue is generated primarily from the sale of wireless communications products and services , including providing reliable enterprise-class wireless broadband services . the company recognizes revenue when persuasive evidence of an arrangement exists , delivery has occurred , the sales price is fixed or determinable , and collectibility is probable . the company records revenues from its fixed-price , long-term contracts using the percentage-of-completion method . revenues are recorded based on construction costs incurred to date as a percentage of estimated total cost at completion . the percentage-of-completion , determined by using total costs incurred to date as a percentage of estimated total costs at completion , reflects the actual physical completion of the project . this method of revenue recognition is used because management considers total cost to be the best available measure of progress on the contracts . the company recognizes product sales generally at the time the product is shipped . concurrent with the recognition of revenue , the company provides for the estimated cost of product warranties and reduces revenue for estimated product returns . sales incentives are generally classified as a reduction of revenue and are recognized at the later of when revenue is recognized or when the incentive is offered . shipping and handling costs are included in cost of goods sold . service revenue is principally derived from wireless broadband services , including internet , voice , and data and monitoring service . subscriber fees are recorded as revenues in the period during which the service is provided . 22 story_separator_special_tag a $ 1,278,000 increase in employment expense , primarily attributable to increased work force to 81 employees from 67 employees from a year ago primarily associated with our recent acquisitions . story_separator_special_tag other ( income ) expense , net for the year ended december 31 , 2007 , the increase in other expense is primarily attributable to interest expense on debt obligations totaling $ 891,000 , derivative expense of $ 253,000 and warrant expense of $ 155,000 as compared to interest expense of $ 738,000 , derivative income of $ 929,000 and warrant expense of $ 76,000 for the year ended december 31 , 2006. the derivative expense represents the net unrealized ( non-cash ) charge during the year ended december 31 , 2007 and 2006 , in the fair value of our derivative instrument liabilities related to warrants and embedded derivatives in our debt instruments that have been bifurcated and accounted for separately . net loss for the year ended december 31 , 2007 , our net loss was $ 7,067,000 compared to a loss of $ 5,232,000 for the year ended december 31 , 2006. the increase in the loss for the year ended december 31 , 2007 , as compared to the year ended december 31 , 2006 is primarily attributable to increase in employment and professional services . net loss applicable to common shareholders for the year ended december 31 , 2007 , our net loss was $ 7,067,000 compared to a loss of $ 5,362,000 for year ended december 31 , 2006. the company 's net loss applicable to common shareholders included deemed dividends on the beneficial conversion of year ended december 31 , 2006 . 27 cash flows the company 's operating activities increased net cash used by operating activities to $ 4,048,000 in the year ended december 31 , 2008 , compared to net cash used of $ 2,739,000 in the year ended december 31 , 2007. the increase in net cash used by operating activities was primarily attributable to fund an increase in the company 's net operating loss $ 8,162,000 , net of $ 4,624,000 non-cash charges combined with derivative income $ 306,000 to equal net non-cash charge of $ 4,318,000 , combine together with $ 204,000 of cash used by fluctuations in working capital requirements consisting of the combination of accounts receivable , inventory , prepaid expenses , accounts payable , accrued expenses , cost and profit in excess of billings , deferred liability lease and deferred revenue . the company 's investing activities used net cash of $ 974,000 in the year ended december 31 , 2008 , compared to use of net cash of $ 729,000 in the year ended december 31 , 2007. the increase in investing activities is primarily growing as a result wireless capabilities through asset acquisition and expansion of our infrastructure in texas , new mexico and louisiana . the company 's financing activities provided net cash of $ 3,159,000 in the year ended december 31 , 2008 , compared to $ 5,286,000 of cash provided in year ended december 31 , 2007. the cash provided in the year ended december 31 , 2008 , was primarily associated with the proceeds from equity financings and the line of credit , net . liquidity and capital resources general at december 31 , 2008 , the company 's current assets totaled $ 1,762,000 ( including cash and cash equivalents of $ 348,000 ) , total current liabilities were $ 4,128,000 , resulting in negative working capital of $ 2,366,000. the company has funded operations to date primarily through a combination of utilizing cash on hand , borrowings and raising additional capital through the sale of its securities . the company operations for the year ended december 31 , 2008 , was primarily funded by proceeds from the company 's line of credit totaling $ 2,810,000 , sale of restricted common stock , net to accredited investors of $ 1,180,000 and convertible debt financing of $ 50,000. current debt facility at december 31 , 2008 , the company had approximately $ 4,317,000 available on a $ 6.5 million unsecured revolving credit facility with angus capital partners , which matures in march 2011. the terms of the two-year unsecured revolving credit facility will allow us to draw upon the facility as financing requirements dictate and provides for quarterly interest payments at an annual 12 % rate . the loan may be prepaid without penalty or repaid at maturity . issuance of common stock during the fiscal year ended december 31 , 2008 , we issued to various accredited investors an aggregate of 6,026,000 shares of restricted common stock for net consideration of $ 1,180,000. we relied on section 4 ( 2 ) of the securities act in effecting this transaction . during the fiscal year ended december 31 , 2008 , we issued 5,273,000 shares of common stock to employees and business consultants , for aggregate consideration of $ 1,983,000 of services rendered , pursuant to a registration statement on form s-8 . use of working capital we believe our cash and available credit facilities afford us adequate liquidity for the balance of fiscal 2009. we anticipate that we will need additional capital in the future to continue to expand our business operations , which expenditures may include acquisitions and capital expenditures . we have historically financed our operations through private equity and debt financings . we do not have any commitments for equity funding at this time , and additional funding may not be available to us on favorable terms , if at all . as such there is no assurance that we can raise additional capital from external sources , the failure of which could cause us to curtail operations .
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results of operations year ended december 31 , 2008 , compared to year ended december 31 , 2007 the following table sets forth summarized consolidated financial information for the years ended december 31 , 2008 and 2007 : replace_table_token_2_th for the year ended december 31 , 2008 , the company 's consolidated operations generated net sales of $ 5,155,000 compared to prior-year net sales of $ 5,569,000 for the year ended december 31 , 2007. the $ 414,000 decrease in net sales is primarily attributable to $ 1,691,000 decrease in wms prior year sales associated with the el dorado golf and beach club of san jose del cabo , mexico , a $ 743,000 decrease in banking network installation and services resulting in reduced network construction revenues in 2008 and offset with an increase of $ 2,020,000 in recurring wireless broadband services with the increased growth attributed to recent wisp acquisitions . for the year ended december 31 , 2008 , the company had a gross profit margin of 39 % , compared to a gross profit margin of 26 % for the prior-year period ended december 31 , 2007. the $ 598,000 increased in gross profit margin percentage is primarily due to net increase sales volume which attributed to margins as follows ; ( i ) approximately $ 919,000 increase in gross margin attributable to the increased wireless customer base and strong margins as result of recent acquisitions ( ii ) offset by approximately $ 187,000 decreased in gross margin due to lower sales expectation in our wireless infrastructure construction , and ( iii ) by $ 134,000 decrease in gross margins for banking network services .
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the results of operations of sartini gaming and its subsidiaries have been included in our results subsequent to that date . in connection with the merger , our name was changed to golden entertainment , inc. our common stock continues to be traded on the nasdaq global market , and our ticker symbol was changed from “ laco ” to “ gden ” effective august 4 , 2015. on october 28 , 2015 , our board of directors approved a change in our fiscal year from a 52- or 53-week fiscal year ending on the sunday closest to december 31 of each year to a calendar year ending on december 31 , effective as of the beginning of the third quarter of 2015. as a result of this change , our fiscal quarters for 2015 ended on march 29 , 2015 , june 28 , 2015 , september 30 , 2015 and december 31 , 2015. beginning january 1 , 2016 , our fiscal quarters end on march 31 , june 30 , september 30 and december 31. during the third quarter of 2015 , we redefined our reportable segments to reflect the change in our business following the merger . as a result of the merger , we now conduct our business through two reportable operating segments : distributed gaming and casinos . prior to the merger , we conducted our business through the following two segments : rocky gap and other . prior period information has been recast to reflect the new segment structure and present comparative year-over-year results . see note 19 , segment information , in the accompanying consolidated financial statements for financial information regarding our segments . distributed gaming our distributed gaming segment involves the installation , maintenance and operation of gaming devices in certain strategic , high-traffic , non-casino locations ( such as grocery stores , convenience stores , restaurants , bars , taverns , saloons and liquor stores ) , and the operation of traditional , branded taverns targeting local patrons , primarily in the greater las vegas , nevada metropolitan area . as of december 31 , 2015 , our distributed gaming operations comprised over 7,600 gaming devices in approximately 680 locations . in january 2016 , we completed the acquisition of approximately 1,000 gaming devices from a distributed gaming operator in montana , as well as certain other non-gaming assets and the right to operate within certain locations ; see note 21 , subsequent events , in the accompanying consolidated financial statements for information regarding the acquisition . nevada law limits distributed gaming operations to certain types of non-casino locations , including grocery stores , drug stores , convenience stores , restaurants , bars , taverns , saloons and liquor stores . most locations are restricted to offering no more than 15 gaming devices . gaming devices are placed in locations where we believe they will receive maximum customer traffic , generally near a store 's entrance . we generally enter into three types of gaming device placement contracts as part of our distributed gaming business : space lease , revenue share and participation agreements . under space lease agreements , we pay a fixed monthly rental fee for the right to install , maintain and operate our gaming devices at a business location . under revenue share agreements , we pay the business location a percentage of the gaming revenue generated from our gaming devices placed at the location , rather than a fixed monthly rental fee . with regard to both space lease and revenue share agreements , we hold the applicable gaming license to conduct gaming at the location ( although revenue share locations are required to obtain separate regulatory approval to receive a percentage of the gaming revenue ) . under participation agreements , the business location holds the applicable gaming license and retains a percentage of the gaming revenue that it generates from our gaming devices . our branded taverns offer a casually upscale environment catering to local patrons offering superior food , beer and other alcoholic beverages and typically include 15 onsite gaming devices . as of december 31 , 2015 , we operated 48 taverns , which offered a total of 764 onsite gaming devices . most of our taverns are located in the greater las vegas , nevada metropolitan area and cater to locals seeking to avoid the congestion of the las vegas strip . our tavern brands include pt 's pub , pt 's gold , pt 's place , sierra gold and sean patrick 's . our taverns also serve as an incubator for new games and technology that can then be rolled out to our third party distributed gaming customers within the segment and to our casinos segment . we also opened our first brewery in las vegas , pt 's brewing company , during the first quarter of 2016 to produce craft beer for our taverns and casinos , as well as other establishments licensed to sell liquor for on-premises consumption . 23 casinos we own and operate rocky gap in flintstone , maryland and , as a result of the merger , three casinos in pahrump , nevada : pahrump nugget , gold town casino and lakeside casino & rv park . pahrump is located approximately 60 miles from las vegas and is a gateway to death valley national park . all of our casinos emphasize gaming device play . we acquired rocky gap in august 2012 , and converted the then-existing convention center into a gaming facility which opened to the public in may 2013. rocky gap is situated on approximately 270 acres in the rocky gap state park , which are leased from the maryland dnr under a 40-year operating ground lease expiring in 2052 ( plus a 20-year option renewal ) . as of december 31 , 2015 , rocky gap offered 631 gaming devices , 19 table games , two casino bars , three restaurants , a spa and the only jack nicklaus signature golf course in maryland . story_separator_special_tag our effective tax rate was ( 68.4 ) % for the year ended december 31 , 2015 , which differed from the federal tax rate of 35 % due to the $ 10.2 million release of the valuation allowance and the limitation of the income tax benefit due to the uncertainty of its future realization . our effective tax rate for the year ended december 28 , 2014 was 0 % , which differed from the federal tax rate of 35 % due primarily to the limitation of the income tax benefit due to the uncertainty of its future realization . 26 as of december 31 , 2015 , we evaluated all available positive and negative evidence related to our ability to utilize our deferred tax assets . we considered the expected future book income ( losses ) , lack of taxable loss carryback potential and other factors in reaching the conclusion that the deferred tax assets were not currently expected to be realized , and that therefore the valuation allowance against the deferred tax assets continued to be appropriate as of december 31 , 2015. year e nded december 28 , 2014 compared to year ended december 29 , 2013 net revenues net revenues were $ 55.2 million for the year ended december 28 , 2014 compared to $ 38.8 million for the prior year period . the increase was due primarily to additional net revenue of $ 24.1 million related to the operation of rocky gap , which commenced gaming operations in may 2013. included in net revenues for the prior year period were $ 7.8 million in management fees earned related to the management of the red hawk casino . due to the termination of the management agreement between us and the shingle springs tribe for the management of the red hawk casino during the third quarter of 2013 , our consolidated statements of operations do not include management fee revenues related to the management of the red hawk casino subsequent to august 29 , 2013. property operating expenses property operating expenses were $ 31.9 million for the year ended december 28 , 2014 compared to $ 19.5 million for the prior year period , which primarily related to gaming , rooms , food and beverage and golf operations of rocky gap . the increase in property operating expenses was due primarily to the inclusion of a full period of gaming-related expenses as gaming operations at rocky gap commenced in may 2013. selling , general and administrative expenses sg & a expenses were $ 22.1 million for the year ended december 28 , 2014 ( excluding $ 0.5 million in transaction-related costs associated with the merger ) , compared to $ 19.3 million for the prior year period . included in sg & a during the years ended december 28 , 2014 and december 29 , 2013 , were corporate sg & a expenses of $ 7.1 million and $ 6.8 million , respectively , and rocky gap sg & a expenses of $ 15.0 million and $ 12.5 million , respectively . the increase in rocky gap sg & a expenses was due primarily to the commencement of gaming operations in may 2013. for 2014 , sg & a expenses included payroll and related expenses of $ 11.3 million ( including share-based compensation ) , marketing and advertising expenses of $ 2.5 million , building and rent expense of $ 2.6 million , professional fees of $ 2.3 million and business development expenses of $ 1.3 million . for 2013 , sg & a expenses included payroll and related expenses of $ 9.6 million ( including share-based compensation ) , marketing and advertising expenses of $ 2.0 million , building and rent expense of $ 2.4 million and professional fees of $ 2.8 million . recovery of impairment on notes receivable on july 17 , 2013 , we entered into the debt termination agreement with the shingle springs tribe relating to the shingle springs notes we had previously advanced to the shingle springs tribe . pursuant to the debt termination agreement , the shingle springs tribe paid us $ 57.1 million in august 2013 as full and final payment of the shingle springs notes , including accrued and unpaid interest . the shingle springs notes had previously been impaired and we had determined the fair value of the shingle springs notes to be $ 39.7 million . as a result of the satisfaction and discharge of the shingle springs notes , during the third quarter of 2013 , we recognized approximately $ 17.4 million in recovery of impairment on notes receivable . gain on extinguishment of o perating o bligations during the year ended december 29 , 2013 , we recognized a gain on extinguishment of operating obligations of $ 3.8 million associated with contract acquisition costs related to the project with the shingle springs tribe that were no longer owed upon the termination of the management agreement between us and the shingle springs tribe . impairments and other losses during the year ended december 28 , 2014 , we recognized impairments and other losses of $ 21.0 million related to our investment in rock ohio ventures . based on information provided by rock ohio ventures , we determined that there was significant uncertainty surrounding the recovery of our investment in rock ohio ventures . as a result , we determined that an other-than-temporary impairment had occurred and reduced the carrying value of the investment to its estimated fair value of zero as of december 28 , 2014. during the year ended december 29 , 2013 , we recognized impairment and other losses of $ 2.4 million related to the intangible assets associated with the development and management agreement with the shingle springs tribe , which were considered fully impaired upon the termination of the management agreement on august 29 , 2013 and were written down to zero .
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results of operations the following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this annual report on form 10-k for the year ended december 31 , 2015. replace_table_token_2_th 24 year ended december 31 , 2015 compared to year ended december 28 , 2014 net revenues net revenues were $ 177.0 million for the year ended december 31 , 2015 compared to $ 55.2 million for the prior year period . the increase resulted primarily from the completion of the merger on july 31 , 2015 , which resulted in the inclusion of five months of net revenues related to sartini gaming 's distributed gaming and casino businesses during 2015. net revenues related to our distributed gaming segment were $ 103.6 million for the year ended december 31 , 2015 , all of which related to sartini gaming 's distributed gaming business acquired through the merger . there were no net revenues related to our distributed gaming segment during the prior year period . net revenues related to our casinos segment were $ 73.2 million for the year ended december 31 , 2015 compared to $ 55.0 million for the prior year period . the $ 18.2 million increase resulted primarily from the completion of the merger on july 31 , 2015 , which resulted in the inclusion of approximately $ 14.0 million of net revenues related to sartini gaming 's casino business during 2015 , as well as an increase of approximately $ 4.2 million in net revenues related to our rocky gap casino compared to the prior year period . property operating expenses property operating expenses were $ 120.9 million for the year ended december 31 , 2015 compared to $ 31.9 million for the prior year period .
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under the terms of the arrangement , as amended , we received an initial payment of $ 10 million in 2008. revenue from the initial payment from gsk was deferred and is being recognized over the estimated period of performance under the agreement , initially estimated to be seven years . in 2013 , we reevaluated and revised the estimated period of performance under the agreement resulting in the recognition of $ 1.1 million of additional revenue for the year ended december 31 , 2014. in august 2014 , we announced results of story_separator_special_tag the following management 's discussion and analysis of financial condition and results of operations contains forward-looking statements that involve a number of risks and uncertainties . our actual results could differ materially from those indicated by forward-looking statements as a result of various factors , including but not limited to , the period for which we estimate our cash resources are sufficient , the availability of additional funds , as well as those set forth under “ risk factors ” and those that may be identified from time to time in our reports and registration statements filed with the securities and exchange commission . the following discussion and analysis is intended to provide an investor with a narrative of our financial results and an evaluation of our financial condition and results of operations . the discussion should be read in conjunction with “ item 6—selected financial data ” and the consolidated financial statements and the related notes thereto set forth in “ item 8—financial statements and supplementary data. ” overview we are a clinical-stage biopharmaceutical company that uses toll-like receptor ( “ tlr ” ) biology to discover and develop novel vaccines and therapeutics . our development programs are focused on vaccines and cancer immunotherapy . our vaccine research has focused on the use of tlr9 agonists as novel adjuvants . our lead vaccine product candidate is heplisav-b tm , an investigational adult hepatitis b vaccine , which combines our proprietary tlr9 agonist adjuvant and recombinant hepatitis b surface antigen ( “ rhbsag ” ) . at the end of the first quarter of 2016 , we intend to submit to the u.s. food and drug administration ( “ fda ” ) our revised biologics license application ( “ bla ” ) and respond to all questions raised in the complete response letter . we currently expect the submission will be assigned a 6-month prescription drug user fee act ( “ pdufa ” ) review period . if this timing is correct and heplisav-b is approved upon completion of the review period , we expect to launch the product in the fourth quarter of 2016. our lead cancer immunotherapy candidate is sd-101 , a c class cpg tlr9 agonist that was selected for characteristics optimal for treatment of cancer , including high interferon induction . our sd-101 clinical program is intended to assess the preliminary efficacy of sd-101 in a range of tumors and in combination with a range of treatments . several phase 1/2 clinical trials are ongoing or planned for 2016. our most advanced inflammatory disease candidate is azd1419 , which is partnered with astrazeneca ab ( “ astrazeneca ” ) . azd1419 is designed to change the basic immune response to environmental allergens , such as house dust and pollens , leading to prolonged reduction in asthma symptoms . we are currently working with astrazeneca to design a phase 2 trial , which astrazeneca will fully fund and conduct , and is expected to begin in the second half of 2016. our revenues consist of amounts earned from collaborations , grants and fees from services and licenses . product revenue will depend on our ability to receive regulatory approvals for , and successfully market , our drug candidates . we have yet to generate any revenues from product sales and have recorded an accumulated deficit of $ 699.7 million at december 31 , 2015. these losses have resulted principally from costs incurred in connection with research and development activities , compensation and other related personnel costs and general corporate expenses . research and development activities include costs of outside contracted services including clinical trial costs , manufacturing and process development costs , research costs and other consulting services . salaries and other personnel-related costs include non-cash stock-based compensation associated with options and other equity awards granted to employees . general corporate expenses include outside services such as accounting , consulting , business development , commercial , investor relations , insurance services and legal costs . our operating results may fluctuate substantially from period to period principally as a result of the timing of preclinical activities and other activities related to clinical trials for our drug candidates . since our inception , we have relied primarily on the proceeds from public and private sales of our equity securities , government grants and revenues from collaboration agreements to fund our operations . we expect to continue to spend substantial funds in connection with the development and manufacturing of our product candidates , particularly heplisav-b and our investigational cancer immunotherapeutic product candidate , sd-101 , human clinical trials for our other product candidates and additional applications and advancement of our technology . costs relating to hbv-23 declined following the last subject visit in october 2015 , but costs relating to seeking regulatory approval and preparing for the anticipated commercial launch of heplisav-b in the united states , as well as costs related to the ongoing development of sd-101 and our other cancer immunotherapeutic research and development programs , are increasing . in order to continue these activities , we may need to raise additional funds . this may occur through strategic alliance and licensing arrangements and or future public or private debt and equity financings . if adequate funds are not available in the future , we may need to delay , reduce the scope of or put on hold the heplisav-b program or other development programs while we seek strategic alternatives . story_separator_special_tag for such contingent payments we expect to recognize the payments as revenue upon receipt , provided that revenue recognition criteria have been satisfied . revenues from manufacturing services are recognized upon meeting the criteria for substantial performance and acceptance by the customer . revenue from royalty payments is contingent on future sales activities by our licensees . royalty revenue is recognized when all revenue recognition criteria have been satisfied . revenue from government and private agency grants is recognized as the related research expenses are incurred and to the extent that funding is approved . additionally , we recognize revenue based on the facilities and administrative cost rate reimbursable per the terms of the grant awards . research and development expenses and accruals research and development expenses include personnel and facility-related expenses , outside contracted services including clinical trial costs , manufacturing and process development costs , research costs and other consulting services and non-cash stock-based compensation . research and development costs are expensed as incurred . amounts due under contracts with third parties may be either fixed fee or fee for service , and may include upfront payments , monthly payments and payments upon the completion of milestones or receipt of deliverables . non-refundable advance payments under agreements are capitalized and expensed as the related goods are delivered or services are performed . we contract with third parties to perform various clinical trial activities in the on-going development of potential products . the financial terms of these agreements are subject to negotiation , vary from contract to contract and may result in uneven payment flows to our vendors . payments under the contracts depend on factors such as the achievement of certain events , successful enrollment of patients , and completion of portions of the clinical trial or similar conditions . our accrual for clinical trials is based on estimates of the services received and efforts expended pursuant to contracts with clinical trial centers and clinical research organizations . we may terminate these contracts upon written notice and we are generally only liable for actual effort expended by the organizations to the date of termination , although in certain instances we may be further responsible for termination fees and penalties . the company estimates its research and development expenses and the related accrual as of each balance sheet date based on the facts and circumstances known to the company at that time . there have been no material adjustments to the company 's prior period accrued estimates for clinical trial activities through december 31 , 2015. stock-based compensation stock-based compensation expense for stock options and other stock awards is estimated at the grant date based on the award 's estimated fair value-based measurement and is recognized on a straight-line basis over the award 's requisite service period , assuming appropriate forfeiture rates . our determination of the fair value-based measurement of stock options on the date of grant using an option-pricing model is affected by our stock price , as well as assumptions regarding a number of subjective variables . we selected the black-scholes option pricing model as the most appropriate method for determining the estimated fair value-based measurement of our stock options . the black-scholes model requires the use of highly subjective assumptions which determine the fair value-based measurement of stock options . these assumptions include , but are not limited to , our expected stock price volatility over the term of the awards , and projected employee stock option exercise behaviors . in the future , as additional empirical evidence regarding these input estimates becomes available , we may change or refine our approach of deriving these input estimates . these changes could impact our fair value-based measurement of stock options granted in the future . changes in the fair value-based measurement of stock awards could materially impact our operating results . our current estimate of volatility is based on the historical volatility of our stock price . to the extent volatility in our stock price increases in the future , our estimates of the fair value of options granted in the future could increase , thereby increasing stock-based compensation cost recognized in future periods . we derive the expected term assumption primarily based on our historical settlement experience , while giving consideration to options that have not yet completed a full life cycle . stock-based compensation cost is recognized only for awards ultimately expected to vest . our estimate of the forfeiture rate is based primarily on our historical experience . to the extent we revise this estimate in the future , our share-based compensation cost could be materially impacted in the period of revision . 31 recent accounting pronouncements accounting standards update 2014-09 in may 2014 , the financial accounting standards board ( “ fasb ” ) issued guidance codified in asc 606 , revenue recognition — revenue from contracts with customers , which amends the guidance in former asc 605 , revenue recognition , which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance . this accounting standards update ( “ asu ” ) is based on the principle that revenue is recognized to depict the transfer of 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 asu also requires additional disclosure about the nature , amount , timing and uncertainty of revenue and cash flows arising from customer contracts , including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract . in july 2015 , the fasb deferred the effective date for annual reporting periods beginning after december 15 , 2017 ( including interim periods within those periods ) . the company is currently evaluating the impact of the provisions of asc 606 on its financial statements . accounting standards update 2016-02 in february 2016 , the fasb issued asu no .
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results of operations revenues revenues consist of amounts earned from collaborations , grants and services and license fees . collaboration revenue includes amounts recognized under our collaboration agreements . grant revenue includes amounts earned under government and private agency grants . service and license fees include revenues related to research and development and contract manufacturing services , license fees and royalty payments . the following is a summary of our revenues ( in thousands , except for percentages ) : replace_table_token_4_th 2015 versus 2014 total revenues for the year ended december 31 , 2015 , decreased by $ 7.0 million or 63 % as compared to the same period in 2014. collaboration revenue decreased by $ 5.2 million due to winding down of work performed for the phase 1 clinical trial for azd1419 , extension of the estimated performance period for the $ 5.4 million payment received from astrazeneca in march 2014 , and expiration of our collaboration agreement with gsk in 2014. grant revenue decreased by $ 2.0 million due to expiration of our national institute of health 's national institute of allergy and infectious diseases ( “ niaid ” ) contracts for adjuvant development in 2014. the overall decrease was partially offset by an increase of service and license revenue of $ 0.2 million due to revenue received from manufacturing services performed on behalf of a third party . 32 2014 versus 2013 total revenues for the year ended december 31 , 2014 , decreased by $ 0.2 million or 2 % as compared to the same period in 2013 , as the increase in collaboration revenue offset the decrease in grant revenue and service and license revenue .
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, gains or losses ) of a derivative story_separator_special_tag the following is a discussion of our financial condition and results of our operations for the years ended december 31 , 2020 and 2019 and our results of operations for each of the years in the three-year period ended december 31 , 2020. the purpose of this discussion is to focus on information about our financial condition and results of operations which is not otherwise apparent from our consolidated financial statements . the following discussion and analysis should be read along with our consolidated financial statements and the related notes included . this discussion and analysis contains forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that we believe are reasonable but may prove to be inaccurate . certain risks , uncertainties and other factors , including those set forth in the “ forward-looking statements ” and “ risk factors ” sections of this annual report , may cause actual results to differ materially from those projected results discussed in the forward-looking statements appearing in this discussion and analysis . we assume no obligation to update any of these forward-looking statements . business overview we are a bank holding company that was incorporated on september 19 , 1983 under the laws of the state of tennessee , and operate primarily through our wholly-owned bank subsidiary , smartbank . smartbank provides a comprehensive suite of commercial and consumer banking services to clients through 35 full-service bank branches and one loan production office in select markets in east and middle tennessee , alabama and the florida panhandle . while we offer a wide range of commercial banking services , we focus on making loans secured primarily by commercial real estate and other types of secured and unsecured commercial loans to small and medium-sized businesses in a number of industries , as well as loans to individuals for a variety of purposes . our principal sources of funds for loans and investing in securities are deposits and , to a lesser extent , borrowings . we offer a broad range of deposit products , including checking ( “ now ” ) , savings , money market accounts and certificates of deposit . we actively pursue business relationships by utilizing the business contacts of our senior management , other bank officers and our directors , thereby capitalizing on our knowledge of our local market areas . executive summary the following is a summary of the company 's financial highlights and significant events during 2020 : ● completed the acquisition and integration of progressive financial group , inc. ( `` pfg '' ) . ● originated approximately 2,950 paycheck protection program ( “ ppp ” ) loans totaling $ 300.8 million . 34 ● net income totaled $ 24.3 million , or $ 1.62 per diluted common share , during the year ended of 2020 compared to $ 26.5 million , or $ 1.89 per diluted common share , for the same period in 2019 . ● ended 2020 with record high total assets of $ 3.3 billion , net loans of $ 2.4 billion , and deposits of $ 2.8 billion . ● return on average assets was 0.79 % for the year ended december 31 , 2020 , compared to 1.13 % for the year ended december 31 , 2019 . ● allowance for loan losses increased to $ 18.3 million at december 31 , 2020 , an increase of 79.1 % from the prior year , in response to the current economic conditions related to covid-19 . ● the covid-19 pandemic has caused economic and social disruption on an unprecedented scale . congress , former president donald trump , and the federal reserve have taken several actions designed to cushion the economic fallout . on march 27 , 2020 , the cares act was signed into law . it contained substantial tax and spending provisions intended to address the impact of the covid-19 pandemic . the cares act included the ppp , a nearly $ 350 billion program designed to aid small and medium-sized businesses through federally guaranteed loans distributed through banks . these loans were intended to guarantee eight weeks of payroll and other costs to help those businesses remain viable and allow their workers to pay their bills . the initial $ 350 billion program was supplemented in late april 2020 with $ 310 billion in additional funding . on june 5 , 2020 , the paycheck protection program flexibility act ( the “ new act ” ) was signed into law and made significant changes to the ppp to provide additional relief for small businesses . the new act increased flexibility for small businesses that have been unable to rehire employees due to lack of employee availability or have been unable to operate as normal due to covid-19 related restrictions . it extended the period that businesses have to use ppp funds to qualify for loan forgiveness to 24 weeks , up from 8 weeks under the original rules . the new act also relaxed the requirements that loan recipients must adhere to in order to qualify for loan forgiveness . in addition , the new act extended the payment deferral period for ppp loans until the date when the amount of loan forgiveness is determined and remitted to the lender . for ppp recipients who do not apply for forgiveness , the loan deferral period is 10 months after the applicable forgiveness period ends . the ppp program expired august 8 , 2020 . ● on december 21 , 2020 , the bipartisan-bicameral omnibus covid relief deal , included as a component of appropriations legislation , was passed by congress to provide economic stimulus to individuals and businesses in further response to the economic distress caused by the covid-19 pandemic . story_separator_special_tag noninterest expense the following table provides a summary of noninterest expense for the periods presented ( dollars in thousands ) : replace_table_token_4_th 2020 compared to 2019 noninterest expense increased $ 13.6 million to $ 76.7 million in 2020 , compared to $ 63.2 million in 2019. the change in noninterest expense primarily resulted from the following : 39 ● increase in salary and employee benefits of $ 6.3 million , due to overall franchise growth , including the acquisition of pfg ; ● increase of occupancy and equipment of $ 1.6 million , associated with ongoing infrastructure and facilities added to accommodate our growth in operations and the additional branches from the pfg acquisition ; ● increase in fdic insurance of $ 1.1 million , related to increase in assets due to overall assets growth stemming from our acquisition of pfg , deposit growth and production of ppp loans . the company recognized a credit during 2019 from the fdic , as result of the fdic insurance exceeding 1.38 % of insured deposits as of june 30 , 2019 ; ● increase in other real and loan related expense of $ 730 thousand , primarily attributable to increased activity in loan related production ; ● increase in professional services of $ 583 thousand , due to increased volume of services performed ; ● increase in merger related and restructuring expenses of $ 1.3 million , from the acquisition of pfg and the consolidation and termination of two leased properties ; and ● increase in other noninterest expense of $ 1.4 million , due to overall franchise growth . 2019 compared to 2018 noninterest expense increased $ 4.2 million to $ 63.2 million in 2019 , compared to $ 59.0 million in 2018. the change in noninterest expense primarily resulted from the following : ● increase in salary and employee benefits of $ 6.0 million , primarily because of a full year of post-merger expenses from the mergers in 2018 and to the lessor extent , the increased hiring of talented associates during 2019 ; ● increase in occupancy and equipment of $ 413 thousand , primarily because of a full year of post-merger expenses from the mergers in 2018 ; and ● decrease in fdic insurance of $ 646 thousand , the company recognized a credit in the third quarter of 2019 from the fdic , as a result of the fdic insurance exceeding 1.38 % of insured deposits as of june 30 , 2019 . income taxes 2020 compared to 2019 in 2020 , income tax expense totaled $ 6.6 million compared to $ 6.9 million a year ago . the effective tax rate was approximately 21.2 % for 2020 compared to 20.6 % a year ago . 2019 compared to 2018 in 2019 , income tax expense totaled $ 6.9 million compared to $ 3.2 million in 2018. in 2019 the effective tax rate was 20.6 % , which was lower than normal due to a tax benefit of $ 1.1 million associated with a program the state of tennessee manages for community investment loans . the bank strategically originated loans in this program to reduce its 2019 tax liability . in 2018 the effective tax rate was 15.2 % , which was also lower than normal due to a tax benefit from options exercised in the prior period . loan portfolio composition our loans represent the largest portion of our earning assets , substantially greater than the securities portfolio or any other asset category , and the quality and diversification of the loan portfolio is an important consideration when reviewing our financial condition . the company had total net loans outstanding , including organic and purchased loans , of approximately $ 2.36 billion at december 31 , 2020 and $ 1.89 billion at december 31 , 2019. loans secured by real estate , consisting of commercial or residential property , are the principal component of our loan portfolio . organic loans our organic net loans , which excludes loans purchased through acquisitions , increased by $ 469.8 million , or 31.1 % , from december 31 , 2019 , to $ 1.98 billion at december 31 , 2020. included in the growth was $ 300.8 million of ppp loans that 40 were originated and funded during the second and third quarters of 2020. total net deferred fees associated with the ppp loans during the year of 2020 was approximately $ 11.0 million and $ 5.9 million was accreted into income during the second , third and fourth quarters of 2020. purchased loans purchased non-credit impaired loans of $ 350.7 million at december 31 , 2020 increased by $ 1.7 million from december 31 , 2019. since december 31 , 2019 , our net purchased credit impaired ( “ pci ” ) loans increased by $ 5.2 million to $ 32.0 million at december 31 , 2020. the increase in purchased non-credit impaired loans and pci loans is related to the acquisition of pfg and offset by maturities , paydowns and payoffs . the following tables summarize the composition of our loan portfolio for the periods presented ( dollars in thousands ) : replace_table_token_5_th replace_table_token_6_th replace_table_token_7_th 41 replace_table_token_8_th replace_table_token_9_th loan portfolio maturities the following table sets forth the maturity distribution of our loans , including the interest rate sensitivity for loans maturing after one year ( dollars in thousands ) : replace_table_token_10_th nonaccrual , past due , and restructured loans loans are considered past due when the contractual amounts due with respect to principal and interest are not received within 30 days of the contractual due date . loans are generally classified as nonaccrual if they are past due for a period of 90 days or more , unless such loans are well secured and in the process of collection . if a loan or a portion of a loan is classified as doubtful or as partially charged off , the loan is generally classified as nonaccrual .
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analysis of results of operations 2020 compared to 2019 net income was $ 24.3 million , or $ 1.62 per diluted common share in 2020 , compared to $ 26.5 million , or $ 1.89 per diluted common share in 2019. the tax equivalent net interest margin for 2020 was 3.61 % compared to 3.95 % for 2019. noninterest income to average assets was 0.50 % for 2020 , decreasing from 0.65 % for 2019. noninterest expense to average assets decreased to 2.50 % in 2020 , from 2.70 % in 2019. the results above include operating effects of the pfg acquisition , which was completed on march 1 , 2020. income tax expense was $ 6.6 million in 2020 with an effective tax rate of 21.2 % , compared to $ 6.9 million in 2019 with an effective tax rate of 20.6 % . 2019 compared to 2018 net income was $ 26.5 million in 2019 , compared to $ 18.1 million in 2018. net income available to common shareholders was $ 26.5 million , or $ 1.89 per diluted common share , in 2019 , compared to $ 18.1 million , or $ 1.45 per diluted common share , in 2018. the net interest margin , taxable equivalent , for 2019 was 3.95 % compared to 4.43 % for 2018. noninterest income to average assets increased from 0.34 % in 2018 , to 0.65 % in 2019 , primarily due to the $ 6.4 million termination 35 fee from the termination of the entegra merger . noninterest expense to average assets decreased from 3.00 % in 2018 to 2.70 % in 2019 as the company continued to capture economies of scale following the mergers with foothills bancorp , inc. ( “ foothills ” ) and tennessee bancshares , inc. ( “ tennessee bancshares ” ) .
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for investments in equity securities , in addition to the general factors mentioned above for determining whether the decline in market value is other-than-temporary , the analysis of story_separator_special_tag the following discussion and analysis represents a review of the corporation 's consolidated financial condition and results of operations for the years ended december 31 , 2011 and 2010. this review should be read in conjunction with the consolidated financial statements beginning on page f- 1 . overview the corporation reported an increase in net income available to common stockholders of $ 640,000 for 2011 as consolidated net income available to common stockholders amounted to $ 3.3 million or $ 1.98 per common share for 2011 , compared to $ 2.7 million or $ 1.85 per common share for 2010. net income available to common stockholders was impacted by the following : net interest income increased $ 624,000 or 4.2 % in 2011. this increase was primarily related to a decrease in interest expense of $ 1.2 million or 16.9 % as the corporation 's cost of funds decreased 29 basis points to 1.33 % for 2011 from 1.62 % for 2010. noninterest income decreased $ 365,000 or 8.7 % to $ 3.8 million for the year ended december 31 , 2011 from $ 4.2 million for the same period in 2010. the decrease was primarily related to a $ 493,000 decrease in nonrecurring securities gains and an $ 180,000 decrease in fees from financial services , which were partially offset by increases in customer service fees and other income of $ 71,000 and $ 248,000 , respectively . provision for loan losses decreased $ 886,000 or 67.8 % to $ 420,000 for the year ended december 31 , 2011 from $ 1.3 million in 2010. the decrease was primarily related to the successful resolution and payoff of certain nonperforming loans during 2011 , which led to an overall decrease in the provision for loan losses . noninterest expense increased $ 232,000 or 1.7 % primarily due to increases in compensation and benefits , premises and equipment , professional fees and other noninterest expense of $ 248,000 , $ 55,000 , $ 158,000 and $ 54,000 , respectively . included in other noninterest expense was $ 334,000 in prepayment penalties incurred in the third quarter of 2011 associated with the early retirement of a $ 5.0 million federal home loan bank advance , compared to $ 557,000 in prepayment penalties related to the early retirement of $ 10.0 million in advances during 2010. changes in financial condition total assets increased $ 10.0 million or 2.1 % to $ 491.9 million at december 31 , 2011 from $ 481.9 million at december 31 , 2010. this increase primarily related to increases in cash and equivalents and net loans receivable of $ 9.2 million and $ 6.4 million , respectively . partially offsetting these increases , investment securities and other assets decreased $ 2.7 million and $ 1.9 million , respectively . the corporation 's asset growth was primarily driven by increases in customer deposits of $ 6.8 million and stockholders ' equity of $ 11.6 million . partially offsetting these increases , borrowed funds decreased $ 10.0 million . cash and cash equivalents . these accounts increased $ 9.2 million or 48.2 % to $ 28.2 million at december 31 , 2011 from $ 19.0 million at december 31 , 2010. this increase primarily related to proceeds from investment security calls received in late december 2011 , which were not redeployed into securities or loans before year-end . typically , cash accounts are increased by net operating results , deposits by customers into savings and checking accounts , loan and security repayments and proceeds from borrowed funds . decreases result from customer deposit withdrawals , new loan originations or other loan fundings , security purchases , repayments of borrowed funds and cash dividends to stockholders . securities . securities decreased $ 2.7 million or 2.1 % to $ 123.2 million at december 31 , 2011 from $ 125.8 million at december 31 , 2010. this decrease was partly related to the utilization of cash received from investment security calls to fund loan originations rather than security purchases . partially offsetting this deployment strategy , net unrealized gains associated with the investment portfolio increased $ 4.2 million to $ 4.5 million at december 31 , 2011 from $ 260,000 at december 31 , 2010 primarily due to the decline in market interest rates during 2011. k-20 loans receivable . net loans receivable increased $ 6.4 million or 2.1 % to $ 312.5 million at december 31 , 2011 from $ 306.2 million at december 31 , 2010 as residential first mortgages increased $ 9.0 million or 10.7 % , commercial real estate loans increased $ 1.7 million or 1.9 % and commercial business loans increased $ 46,000 , partially offset by a $ 4.2 million or 5.6 % decrease in home equity loans and lines of credit and an $ 801,000 decrease in consumer loans . non-performing assets . non-performing assets include non-accrual loans , loans 90 days past due and still accruing , repossessions and real estate owned . non-performing assets were $ 5.9 million or 1.19 % of total assets at december 31 , 2011 compared to $ 7.0 million or 1.45 % of total assets at december 31 , 2010. non-performing assets consisted of non-performing loans and real estate owned of $ 5.6 million and $ 307,000 , respectively , at december 31 , 2011 and $ 6.6 million and $ 373,000 , respectively , at december 31 , 2010. at december 31 , 2011 , non-performing loans consisted primarily of consumer , commercial mortgage and residential mortgage loans . federal bank stocks . story_separator_special_tag interest expense decreased $ 1.2 million or 16.9 % to $ 5.9 million for 2011 , compared to $ 7.1 million for 2010. this decrease can be attributed to decreases in interest incurred on interest-bearing deposits and borrowed funds of $ 718,000 and $ 479,000 , respectively . deposit interest expense decreased $ 718,000 or 13.3 % to $ 4.7 million for 2011 , compared to $ 5.4 million for 2010. the rate on interest-bearing deposits decreased by 24 basis points or 14.5 % to 1.41 % for 2011 versus 1.65 % for 2010 accounting for an $ 802,000 decrease in interest expense . average interest-bearing deposits increased $ 5.2 million or 1.6 % accounting for $ 84,000 in additional interest expense . interest expense on borrowed funds decreased $ 479,000 or 28.8 % to $ 1.2 million for 2011 compared to $ 1.7 million for 2010. average borrowed funds decreased $ 11.0 million or 30.2 % accounting for a decrease in interest expense of $ 511,000. the average rate on borrowed funds increased 9 basis points to 4.65 % for 2011 versus 4.56 % for 2010. this increase in rate accounted for $ 32,000 of additional interest expense . provision for loan losses . the corporation records provisions for loan losses to maintain a level of total allowance for loan losses that management believes , to the best of its knowledge , covers all probable incurred losses estimable at each reporting date . management considers historical loss experience , the present and prospective financial condition of borrowers , current conditions ( particularly as they relate to markets where the corporation originates loans ) , the status of non-performing assets , the estimated underlying value of the collateral and other factors related to the collectability of the loan portfolio . nonperforming loans decreased $ 1.0 million or 15.8 % to $ 5.6 million at december 31 , 2011 from $ 6.6 million at december 31 , 2010. this decrease was primarily due to an $ 800,000 principal payment made on one problem loan during the third quarter of 2011. while 2011 charge-offs increased to $ 1.1 million in 2011 compared to $ 552,000 in 2010 , a significant portion of the charge-offs experienced during 2011 related to four loans with prior specific reserves allocated . while these charge-offs resulted in an increase in the corporation 's historical loss experience , the decrease in specific reserves was greater than the result of increasing general reserves triggered by these charge-offs . specific reserves totaling $ 568,000 had been allocated during the fourth quarter of 2010 associated with the previously mentioned problem loan resolved during 2011. the provision for loan losses decreased $ 886,000 or 67.8 % to $ 420,000 for 2011 , compared to $ 1.3 million for 2010. the corporation 's allowance for loan losses amounted to $ 3.5 million or 1.12 % of the corporation 's total loan portfolio at december 31 , 2011 , compared to $ 4.1 million or 1.33 % of total loans at december 31 , 2010. the allowance for loan losses as a percentage of non-performing loans at december 31 , 2011 and 2010 was 63.5 % and 62.5 % , respectively . noninterest income . noninterest income includes revenue that is not related to interest rates , but rather to services rendered and activities conducted in the financial services industry , including fees on depository accounts , general transaction and service fees , commissions on financial services , title premiums , security and loan gains and losses , and earnings on boli . noninterest income decreased $ 365,000 or 8.7 % to $ 3.8 million for 2011 , compared to $ 4.2 million for 2010. this decrease was primarily due to a decrease in net gains on securities available for sale from $ 975,000 in 2010 to $ 482,000 in 2011. included in the 2010 and 2011 gains , $ 565,000 and $ 355,000 , respectively , were related to balance sheet management strategies whereby securities were sold to prepay long term fhlb advances and associated security gains were used to offset the k-25 prepayment penalties related to the early retirement of the advances . also contributing to the decrease in noninterest income , commissions on financial services decreased $ 180,000 or 25.7 % due partly to a decrease in the number of representatives in the division . partially offsetting these decreases , interchange fee income and customer service fees increased $ 216,000 and $ 71,000 , respectively , primarily related to deposit account growth . noninterest expense . noninterest expense increased $ 232,000 or 1.7 % to $ 14.0 million for 2011 , compared to $ 13.8 million for 2010. this increase in noninterest expense was comprised of increases in compensation and employee benefits , premises and equipment , professional fees and other expenses , partially offset by decreases in fdic insurance and intangible amortization . the largest component of noninterest expense , compensation and employee benefits , increased $ 248,000 or 3.6 % to $ 7.1 million for 2011 , compared to $ 6.9 million for 2010. this increase was primarily related to normal compensation increases and higher incentive program payouts . premises and equipment expense increased $ 55,000 or 2.6 % to $ 2.2 million for 2011 , compared to $ 2.1 million for 2010 , primarily related to increased equipment service contract expenses and increased costs associated with the fourth quarter 2010 purchase of the titusville , pennsylvania branch office building . the corporation recognized $ 441,000 of intangible amortization in 2011 compared to $ 564,000 in 2010 associated with a core deposit intangible asset of $ 2.8 million that was recorded related to the 2009 branch acquisition .
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changes in results of operations the corporation reported net income before accumulated preferred stock dividends and discount accretion of $ 3.8 million and $ 3.1 million in 2011 and 2010 , respectively . the following average balance sheet and yield/rate analysis and analysis of changes in net interest income tables should be utilized in conjunction with the discussion of the net interest income and interest expense components of net income . k-22 average balance sheet and yield/rate analysis . the following table sets forth , for the periods indicated , information concerning the total dollar amounts of interest income from interest-earning assets and the resulting average yields , the total dollar amounts of interest expense on interest-bearing liabilities and the resulting average costs , net interest income , interest rate spread and the net interest margin earned on average interest-earning assets . for purposes of this table , average loan balances include non-accrual loans and exclude the allowance for loan losses and interest income includes accretion of net deferred loan fees . interest and yields on tax-exempt loans and securities ( tax-exempt for federal income tax purposes ) are shown on a fully tax equivalent basis . the information is based on average daily balances during the periods presented . replace_table_token_12_th k-23 analysis of changes in net interest income . the following table analyzes the changes in interest income and interest expense in terms of : ( 1 ) changes in volume of interest-earning assets and interest-bearing liabilities and ( 2 ) changes in yields and rates . the table reflects the extent to which changes in the corporation 's interest income and interest expense are attributable to changes in rate ( change in rate multiplied by prior year volume ) , changes in volume ( changes in volume multiplied by prior year rate ) and changes attributable to the combined impact of volume/rate ( change in rate multiplied by change in volume ) .
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each director of the company serves as a director for a term until the next annual meeting of the shareholders of the company and until his/her successor is elected and qualifies . each officer of the company serves as an officer of the company for a term until the next annual meeting of the board of directors and until his/her respective successor is elected and qualifies . background and business experience chairman of the board franc smidt , age 55 , has served as a director of the company and as its chairman of the board of directors since december 4 , 2017. dr. smidt received a phd in economics in 2004. in 2010 he received a diploma of polished diamond grader . since 2013 , smidt has taken courses in materials science and microbiology . 1983 - 1985 teacher of german language and literature , kazakhstan ; 1985 - 1988 school deputy director , kazakhstan ; 1988 - 1989 school director , kazakhstan ; 1989 - 1990 chairman , commercial director , cooperative company north - west , nizhnevartovsk , russia ; 1990 - 1991 president , interregional agricultural group а м к , kazakhstan 1991 ; 1991 - 1993 deputy chairman , administrative council , free economical zone lisakovsk , kazakhstan advisor to supreme council of the republik of kazakhstan , co-author , co-elaboration , law on free economic zones & land act of kazakhstan , advisor to chairman of the geology , ecology and natural resources committee of supreme council marash nurtazin ( alma-ata ) ; 1993 - 1998 chairman , general director , transport company transagency-5 , moscow ; 1998 - dec , 2002 chairman , commercial director , trade center jsc dastin market , tymen , russia ; jan , 2003 - 2009 chairman , director lux diamond technologies ag , luxembourg ; 2003 - today president of the european association of independent journalists , luxembourg , honorary post ; 2005 - 2012 chairman , president mmi-trust ag ( holding ) , luxembourg ; 2014 - today chairman , director , scientific research institute of technologi с al progress , cyprus and chairman of hi-tech inovace sro . since 1995 dr. smidt has published dozens of academic papers and received numerous patents . 36 director , president & ceo stephen h. smoot , age 63 , has served as a director and as the president and ceo of the company since december 4 , 2017. smoot has been self-employed since 1983 as a consultant in the area of foreign technology development and transfer . from 1994 till 1999 , smoot funded and directed research in boundary-air laminar-flow technology resulting in u.s. patents and successful commercial applications . smoot assisted in forming , and was president of , caspian service group limited , a wholly-owned subsidiary of caspian services , inc. , formerly emps corporation , in december 1999 , and served as president of caspian services inc. from inception until february 2002. smoot served as the interim president of emps corporation from june 2004 until december 2004 and for several years directed and funded research in high-frequency eddy-current particle separation technology . from 2005 to 2009 , smoot served as director of bmb munai , inc. an oil and gas company in kazakhstan . all companies cited above have been sec reporting issuers . smoot is not a director or nominee of any other sec reporting issuer . director & vice president alex schmidt . mr. schmidt , age 26 , has served as a director and as vice president of the company since december 4 , 2017. he was a graduate at the university of central lancashire in business administration . in 2014 he incorporated , and now leads , the company tortec ltd ( cyprus ) which is involved in the scientific and technological development and application of tor technologies ( micronisation of materials ) . as a result , the first industrial installation under the name tornado was created . in 2015 tortec ltd ( cyprus ) , under the leadership of schmidt , opened an experimental manufactory with the tornado installation for producing micro powders , metal carbides and composites ( prague , czech republic ) . in 2016 tortec ltd and the scientific research institute of technological progress made a factory project for producing micro-powders of metal ceramics , metal oxides , intermetalides and composites with the potential capacity of 2000 tons per year which will be placed in 2018 in infrapark , basel ( switzerland ) . in 2017 , schmidt incorporated and now leads the company tor biologos gmbh ( switzerland ) for developing applications of tor biological technologies in the bio + project . the project for the bio factory is planned with the technology for the processing of cannabis and extraction of botanical substances , and also extracting of bas ( biological active substance ) from phyto-mass of medicinal herbs . in 2017 , the companies working on various applications of tor technologies in different industries joined tortec group , a wyoming corporation in the usa . special interests and skills : economics , german , russian and english language , project financing , development of investment projects and new technologies . director , secretary and treasurer irina kochetkova , age 65 , has served as a director and as secretary and treasurer of the company since december 4 story_separator_special_tag when used in this annual report , the words may , will , expect , anticipate , continue , estimate , project , intend , and similar expressions are intended to identify forward-looking statements regarding events , conditions , and financial trends that may affect our future plans of operations , business strategy , operating results , and financial position . persons reviewing this annual report are cautioned that any forward-looking statements are not guarantees of future performance and are subject to story_separator_special_tag each director of the company serves as a director for a term until the next annual meeting of the shareholders of the company and until his/her successor is elected and qualifies . each officer of the company serves as an officer of the company for a term until the next annual meeting of the board of directors and until his/her respective successor is elected and qualifies . background and business experience chairman of the board franc smidt , age 55 , has served as a director of the company and as its chairman of the board of directors since december 4 , 2017. dr. smidt received a phd in economics in 2004. in 2010 he received a diploma of polished diamond grader . since 2013 , smidt has taken courses in materials science and microbiology . 1983 - 1985 teacher of german language and literature , kazakhstan ; 1985 - 1988 school deputy director , kazakhstan ; 1988 - 1989 school director , kazakhstan ; 1989 - 1990 chairman , commercial director , cooperative company north - west , nizhnevartovsk , russia ; 1990 - 1991 president , interregional agricultural group а м к , kazakhstan 1991 ; 1991 - 1993 deputy chairman , administrative council , free economical zone lisakovsk , kazakhstan advisor to supreme council of the republik of kazakhstan , co-author , co-elaboration , law on free economic zones & land act of kazakhstan , advisor to chairman of the geology , ecology and natural resources committee of supreme council marash nurtazin ( alma-ata ) ; 1993 - 1998 chairman , general director , transport company transagency-5 , moscow ; 1998 - dec , 2002 chairman , commercial director , trade center jsc dastin market , tymen , russia ; jan , 2003 - 2009 chairman , director lux diamond technologies ag , luxembourg ; 2003 - today president of the european association of independent journalists , luxembourg , honorary post ; 2005 - 2012 chairman , president mmi-trust ag ( holding ) , luxembourg ; 2014 - today chairman , director , scientific research institute of technologi с al progress , cyprus and chairman of hi-tech inovace sro . since 1995 dr. smidt has published dozens of academic papers and received numerous patents . 36 director , president & ceo stephen h. smoot , age 63 , has served as a director and as the president and ceo of the company since december 4 , 2017. smoot has been self-employed since 1983 as a consultant in the area of foreign technology development and transfer . from 1994 till 1999 , smoot funded and directed research in boundary-air laminar-flow technology resulting in u.s. patents and successful commercial applications . smoot assisted in forming , and was president of , caspian service group limited , a wholly-owned subsidiary of caspian services , inc. , formerly emps corporation , in december 1999 , and served as president of caspian services inc. from inception until february 2002. smoot served as the interim president of emps corporation from june 2004 until december 2004 and for several years directed and funded research in high-frequency eddy-current particle separation technology . from 2005 to 2009 , smoot served as director of bmb munai , inc. an oil and gas company in kazakhstan . all companies cited above have been sec reporting issuers . smoot is not a director or nominee of any other sec reporting issuer . director & vice president alex schmidt . mr. schmidt , age 26 , has served as a director and as vice president of the company since december 4 , 2017. he was a graduate at the university of central lancashire in business administration . in 2014 he incorporated , and now leads , the company tortec ltd ( cyprus ) which is involved in the scientific and technological development and application of tor technologies ( micronisation of materials ) . as a result , the first industrial installation under the name tornado was created . in 2015 tortec ltd ( cyprus ) , under the leadership of schmidt , opened an experimental manufactory with the tornado installation for producing micro powders , metal carbides and composites ( prague , czech republic ) . in 2016 tortec ltd and the scientific research institute of technological progress made a factory project for producing micro-powders of metal ceramics , metal oxides , intermetalides and composites with the potential capacity of 2000 tons per year which will be placed in 2018 in infrapark , basel ( switzerland ) . in 2017 , schmidt incorporated and now leads the company tor biologos gmbh ( switzerland ) for developing applications of tor biological technologies in the bio + project . the project for the bio factory is planned with the technology for the processing of cannabis and extraction of botanical substances , and also extracting of bas ( biological active substance ) from phyto-mass of medicinal herbs . in 2017 , the companies working on various applications of tor technologies in different industries joined tortec group , a wyoming corporation in the usa . special interests and skills : economics , german , russian and english language , project financing , development of investment projects and new technologies . director , secretary and treasurer irina kochetkova , age 65 , has served as a director and as secretary and treasurer of the company since december 4 story_separator_special_tag when used in this annual report , the words may , will , expect , anticipate , continue , estimate , project , intend , and similar expressions are intended to identify forward-looking statements regarding events , conditions , and financial trends that may affect our future plans of operations , business strategy , operating results , and financial position . persons reviewing this annual report are cautioned that any forward-looking statements are not guarantees of future performance and are subject to
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results of operations year ended march 31 , 2018 , compared to year ended march 31 , 2017 during the fiscal year ended march 31 , 2018 , we terminated our environmental remediation business and commenced our tortec technology business . as a result we had a loss from discontinued operations of $ 82,580 in the fiscal year ended march 31 , 2018 compared to a gain of $ 48,216 in the prior year . because of the discontinued operations , we reported no sales in either fiscal year ended march 31 , 2018 or 2017. general and administrative expenses during the fiscal year ended march 31 , 2018 , were $ 114,328 , compared to $ 225,969 , during the fiscal year ended march 31 , 2017 , a decrease of $ 111,641. the decrease in general and administrative expenses was related to a decrease in allowances on notes receivables recorded during fiscal 2017. in the fiscal year ended march 31 , 2018 we had an expense of $ 4,689,275 for the fair value of shares issued in connection with the tortec assets . we had no similar expense in the fiscal year ended march 31 , 2017. we had a gain on extinguishment of liabilities of $ 16,070 in the fiscal year ended march 31 , 2018 , and no similar gain in the prior year . we had a gain on collection of reserved note receivable of $ 20,000 in the fiscal year ended march 31 , 2018 , and no similar gain in the prior year .
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once it is determined that a position meets the more-likely-than-not story_separator_special_tag the following discussion should be read in conjunction with the consolidated financial statements and notes thereto in item 8 of this report . you should also bear in mind the risk factors set forth in item 1a , any of which could materially and adversely affect the company 's business , operating results , financial condition and the actual results of the matters addressed by the forward-looking statements contained in the following discussion . in march 2019 , the sec amended its rules to modernize and simplify certain reporting requirements for public companies . as part of this change , registrants may exclude discussion of the earliest of the three years in management 's discussion and analysis ( md & a ) . for further discussion regarding our results of operations for the year ended december 31 , 2018 as compared to the year ended december 31 , 2017 , refer to item 7 , management 's discussion and analysis of financial condition and results of operations , in our annual report on form 10-k for the fiscal year ended december 31 , 2018. ransomware incident during the fourth quarter ended december 31 , 2019 , some of the company 's systems were affected by a ransomware incident that encrypted information on its systems and disrupted customer and employee access to its applications and services . the company immediately took steps to isolate the impact and implemented measures to prevent additional systems from being affected , including taking its network offline as a precaution . in connection with this incident , third party consultants and forensic experts were engaged to assist with the restoration and remediation of the company 's systems and , with the assistance of law enforcement , to investigate the incident . the company has found no evidence that customer or employee data was exfiltrated from its network . the company restored connectivity and resumed operations quickly following the ransomware incident . however , fourth quarter 2019 operations were adversely affected by the inefficiencies caused by taking the network offline for a period of time . as a result , the company 's fourth quarter 2019 revenue was also adversely affected as the company was unable to fulfill a portion of customer demand during the quarter . we do have insurance coverage , including cyber insurance , and are working diligently with our insurance carriers on claims to recover costs incurred . we expect that the insurance recovery process will be ongoing throughout 2020. in 2019 , ransomware incident related costs incurred totaled $ 7.7 million , net of estimated insurance recoveries of $ 5.0 million . these costs were primarily comprised of the certain employee related expenses and various third party consulting services , including forensic experts , legal counsel and other it professional expenses . we expect to incur additional costs related to the ransomware event in 2020 , but these are not expected to be significant . further insurance recoveries will be recorded when considered probable for recovery . 2019 overview sales for 2019 were $ 2.3 billion , a 12 % decrease from sales of $ 2.6 billion in 2018. during 2019 , sales to customers in our various industry sectors fluctuated from 2018 as follows : · industrials decreased by 8 % , · a & d increased by 6 % , · medical increased by 14 % , · semi-cap decreased by 22 % , · computing decreased by 38 % , and · telecommunications decreased by 12 % . the overall revenue decrease was due primarily to our planned exit of a legacy computing contract which was completed in 2019 ( as discussed below ) , in addition to the decline in the overall semi-cap market , reduced revenues 33 from other computing and telecommunications customers and the impact of the ransomware incident ( as discussed below ) . our sales depend on the success of our customers , some of which operate in businesses associated with rapid technological change and consequent product obsolescence . developments adverse to our major customers or their products , or the failure of a major customer to pay for components or services , can adversely affect us . a substantial percentage of our sales are made to a small number of customers , and the loss of a major customer , if not replaced , would adversely affect us . sales to our ten largest customers represented 38 % and 44 % of our sales in 2019 and 2018 , respectively . in 2019 , there was no single customer with sales over 10 % of our sales . in 2018 , sales to international business machines corporation ( ibm ) represented 13 % of our sales . as part of our ongoing process to review contracts that are marginal and dilutive to our gross margin , we made the decision to not renew the contract with a large computing customer that was to expire at the end of 2019. during the second quarter of 2019 , we completed the final build out of this legacy contract and in the third quarter had an immaterial amount of revenue from this contract as the transition was completed . during 2019 , we incurred an $ 11.0 million charge for the write-down of inventory and a provision for accounts receivable associated with the insolvency of a customer . these charges increased cost of sales by $ 0.9 million and selling , general and administrative expenses by $ 10.1 million . in 2019 , we also recovered $ 1.7 million of amounts written down in 2018 associated with the insolvency of another customer . we experience fluctuations in gross profit from period to period . different programs contribute different gross profits depending on the type of services involved , location of production , size of the program , complexity of the product and level of material costs associated with the various products . story_separator_special_tag in addition , our past , current and future operations , and the operations of businesses we have or may acquire , may give rise to claims of exposure by employees or the public , or to other claims or liabilities relating to environmental , waste management or health and safety concerns . as of december 31 , 2019 , we had cash and cash equivalents totaling $ 364.0 million and $ 497.0 million available for borrowings under the credit agreement . during the next 12 months , we believe our capital expenditures will approximate $ 50 to $ 55 million , principally for machinery and equipment to support our ongoing business around the globe . on march 6 , 2018 , our board of directors approved an expanded stock repurchase program granting us the authority to repurchase up to $ 250 million in common stock in addition to the $ 100 million approved on december 7 , 2015. on october 26 , 2018 , the board of directors authorized an additional $ 100 million shares for repurchase above our existing program . as of december 31 , 2019 , we had $ 79.5 million remaining under the share repurchase authorization to purchase additional shares . on february 19 , 2020 , the board of directors authorized the repurchase of an additional $ 150 million of the company 's common stock . we are under no commitment or obligation to repurchase any particular amount of common stock . the company began declaring and paying quarterly dividends during the first quarter of 2018. during 2019 and 2018 , cash dividends paid totaled $ 23.3 million and $ 21.0 million , respectively . on december 16 , 2019 , the company declared a quarterly cash dividend of $ 0.15 per share of the company 's common stock to shareholders of record as of december 30 , 2019. the dividend of $ 5.5 million was paid on january 13 , 2020. in february 2020 , the board of directors approved a quarterly dividend increase , raising the quarterly dividend from $ 0.15 to $ 0.16 per 38 common share . the board of directors currently intends to continue paying quarterly dividends . however , the company 's future dividend policy is subject to the company 's compliance with applicable law , and depending on , among other things , the company 's results of operations , financial condition , level of indebtedness , capital requirements , contractual restrictions , restrictions in the company 's debt agreements , and other factors that the board of directors may deem relevant . dividend payments are not mandatory or guaranteed ; there can be no assurance that the company will continue to pay a dividend in the future . management believes that our existing cash balances and funds generated from operations will be sufficient to permit us to meet our liquidity requirements over the next 12 months . management further believes that our ongoing cash flows from operations and any borrowings we may incur under our revolving credit facility will enable us to meet operating cash requirements in future years . if we consummated significant acquisitions in the future , our capital needs would increase and could possibly result in our need to increase available borrowings under our credit agreement or access public or private debt and equity markets . there can be no assurance , however , that we would be successful in raising additional debt or equity on acceptable terms . critical accounting policies and estimates management 's discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements , which have been prepared in accordance with u.s. gaap . our significant accounting policies are summarized in note 1 to the consolidated financial statements in item 8 of this report . the preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets , liabilities , revenues and expenses , and related disclosure of contingent assets and liabilities . on an ongoing basis , we evaluate our estimates , including those related to accounts receivable , inventories , revenue recognition , income taxes , long-lived assets , stock-based compensation and contingencies and litigation . we base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances , the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources . actual results may differ materially from these estimates . we believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements . allowance for doubtful accounts our accounts receivable balance is recorded net of allowances for amounts not expected to be collected from our customers . because our accounts receivable are typically unsecured , we periodically evaluate their collectability based on a combination of factors , including a particular customer 's ability to pay as well as the age of the receivables . to evaluate a specific customer 's ability to pay , we analyze financial statements , payment history and various information or disclosures by the customer or other publicly available information . in cases where the evidence suggests a customer may not be able to satisfy its obligation to us , we establish a specific allowance in an amount we determine appropriate for the perceived risk . if the financial condition of our customers were to deteriorate , resulting in an impairment of their ability to make payments , additional allowances may be required . inventory obsolescence we purchase inventory based on forecasted demand and record inventory at the lower of cost or net realizable value . we write down inventory for estimated obsolescence , as necessary , in an amount equal to the difference between the cost of inventory and estimated market value based on assumptions of future demands and market conditions .
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results of operations the following table presents the percentage relationship that certain items in our consolidated statements of income bear to sales for the periods indicated . the financial information and the discussion below should be read in conjunction with the consolidated financial statements and notes thereto in item 8 of this report . 34 replace_table_token_7_th 2019 compared with 2018 sales as noted above , sales decreased 12 % in 2019. the percentages of our sales by sector were as follows : replace_table_token_8_th industrials . 2019 sales decreased 8 % to $ 453.6 million from $ 493.1 million in 2018. the decreases were primarily from softer demand from customers in the industrial transportation market and the ramp delays from previously booked new programs . aerospace and defense . 2019 sales increased 6 % to $ 431.9 million from $ 406.4 million in 2018 primarily due to increased demand from our defense customers . medical . 2019 sales increased 14 % to $ 448.2 million from $ 394.0 million in 2018 from higher demand and program ramps from new and existing customers . semiconductor capital equipment . 2019 sales decreased 22 % to $ 277.8 million from $ 355.0 million in 2018. the decrease reflected is due to declines in demand throughout the broader semi-capital equipment market . computing . 2019 sales decreased 38 % to $ 361.2 million from $ 580.8 million in 2018. the decrease is primarily due from our planned exit of a legacy computing contract that was completed in 2019 . 35 telecommunications . 2019 sales decreased 12 % to $ 295.4 million from $ 337.2 million in 2018. the decrease is primarily due to decreased demand from existing customers . our international operations are subject to the risks of doing business abroad . see item 1a for factors pertaining to international sales , fluctuations in foreign currency exchange rates and a discussion of potential adverse effects in operating results associated with the risks of doing business abroad .
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overview we are a provider of communications systems-on-chip solutions used in broadband , mobile and wireline infrastructure , data center , and industrial and multi-market applications . we are a fabless integrated circuit design company whose products integrate all or substantial portions of a high-speed communication system , including radio frequency ( rf ) , high-performance analog , mixed-signal , digital signal processing , security engines , data compression and networking layers , and power management . in most cases , these products are designed on a single silicon-die , using standard digital complimentary metal oxide semiconductor ( cmos ) processes and conventional packaging technologies . we believe this approach enables our solutions to achieve superior power , performance , and cost relative to our industry competition . our customers include electronics distributors , module makers , original equipment manufacturers ( oems ) , and original design manufacturers ( odms ) , who incorporate our products in a wide range of electronic devices . examples of such devices include cable data over cable service interface specifications ( docsis ) , fiber and dsl broadband modems and gateways ; wi-fi and wireline routers for home networking ; radio transceivers and modems for 4g/5g base-station and backhaul infrastructure ; fiber-optic modules for data center , metro , and long-haul transport networks ; as well as power management and interface products used in these and many other markets . our highly integrated semiconductor devices and platform-level solutions are primarily manufactured using low-cost cmos process technology . cmos processes are ideally suited for large digital logic implementations targeting high-volume and low-cost consumer applications . importantly , our ability to design analog and mixed-signal circuits in cmos allows us to efficiently combine analog functionality and complex digital signal processing logic in the same integrated circuit . as a result , our solutions have exceptional levels of functional integration and performance , low manufacturing cost , and reduced power consumption . in addition , our proprietary cmos-based radio and digital system architectures also enable shorter design cycles , significant design flexibility and low system-level cost across a wide range of broadband communications , wired and wireless infrastructure , and industrial and multi-market customer applications . in fiscal 2020 , our net revenue was derived primarily from sales of rf receivers and rf receiver systems-on-chip and connectivity solutions into broadband operator voice and data modems and gateways and connectivity adapters , global analog and digital rf receiver products for analog and digital pay-tv applications , radio and modem solutions into wireless carrier access and backhaul infrastructure platforms , high-speed optical interconnect solutions sold into optical modules for data-center , metro and long-haul networks , and high-performance interface and power management solutions into a broad range of communications , industrial , automotive and multi-market applications . our ability to achieve revenue growth in the future will depend , among other factors , on our ability to further penetrate existing markets ; our ability to expand our target addressable markets by developing new and innovative products ; changes in government trade policies ; and our ability to obtain design wins with device manufacturers , in particular manufacturers of set-top boxes , data modems , and gateways for the broadband 45 service provider and pay-tv industries , manufacturers selling into the smartphone market , storage networking market , cable infrastructure market , industrial and automotive markets , and optical module and telecommunications infrastructure markets . products shipped to asia accounted for 82 % , 84 % and 81 % of net revenue during the years ended december 31 , 2020 , 2019 and 2018 , respectively , including for 42 % , 46 % , and 43 % , respectively , from products shipped to hong kong and 17 % , 14 % and 19 % , respectively , from products shipped to china . although a large percentage of our products is shipped to asia , we believe that a significant number of the systems designed by these customers and incorporating our semiconductor products are then sold outside asia . for example , revenue generated from sales of our cable modem products during the years ended december 31 , 2020 , 2019 and 2018 related principally to sales to asian odms and contract manufacturers delivering products into european and north american markets . to date , all of our sales have been denominated in united states dollars . a significant portion of our net revenue has historically been generated by a limited number of customers . sales to customers comprise both direct sales to customers and indirect sales through distributors . in the year ended december 31 , 2020 , two of our direct customers accounted for 28 % of our net revenue , and our ten largest customers collectively accounted for 68 % of our net revenue , of which distributor customers comprised 41 % of our net revenue . in the year ended december 31 , 2019 , one of our direct customers , commscope , accounted for 14 % of our net revenue , and our ten largest customers collectively accounted for 63 % of our net revenue , of which distributor customers comprised 38 % of our net revenue . in the year ended december 31 , 2018 , commscope accounted for 18 % of our net revenue , and our ten largest customers collectively accounted for 61 % of our net revenue , of which distributor customers comprised 29 % of our net revenue . for certain customers , we sell multiple products into disparate end user applications such as cable modems , satellite set-top boxes and broadband gateways . our business depends on winning competitive bid selection processes , known as design wins , to develop semiconductors for use in our customers ' products . story_separator_special_tag ” recent developments acquisition of home gateway platform division of intel corporation on july 31 , 2020 , we completed our acquisition of the home gateway platform division , which we refer to as the wi-fi and broadband assets business , pursuant to an asset purchase agreement with intel , dated april 5 , 2020 , and related agreements . we paid cash consideration of $ 150.0 million for the purchase of certain assets of the wi-fi and broadband assets business , and assumed certain liabilities related to specified employment matters . the transaction was funded with a portion of the proceeds from a secured incremental term loan with an aggregate principal amount of $ 175.0 million . acquisition of nanosemi , inc. on september 9 , 2020 , we completed our acquisition of nanosemi pursuant to the merger agreement . the initial closing transaction consideration consisted of $ 10 million in cash and 804,163 shares of our common stock . in addition , the nanosemi securityholders will receive $ 35 million in deferred cash payments payable in 2021 , and certain nanosemi securityholders may also receive up to an additional $ 35 million in potential contingent consideration , subject to the acquired business 's satisfying certain financial objectives from july 1 , 2020 through december 31 , 2022. the stock consideration was issued in reliance on exemptions from the registration requirements of the securities act of 1933 , as amended . in connection with the acquisition , we agreed to provide the nanosemi stockholders with certain registration rights with respect to the shares of our common stock they received in the acquisition . for more information , please refer to note 3 of our consolidated financial statements . critical accounting policies and estimates management 's discussion and analysis of our financial condition and results of operations is based upon our financial statements which are prepared in accordance with accounting principles that are generally accepted in the united states . the preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities , related 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 . we continually evaluate our estimates and judgments , the most critical of which are those related to revenue recognition , inventory valuation , income taxes and stock-based compensation . we base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances . materially different results can occur as circumstances change and additional information becomes known . we believe that the following accounting policies involve a greater degree of judgment and complexity than our other accounting policies . accordingly , these are the policies we believe are the most critical to understanding and evaluating our consolidated financial condition and results of operations . business combinations we apply the provisions of asc 805 , business combinations , in accounting for our acquisitions . asc 805 requires us to recognize separately from goodwill the assets acquired and the liabilities assumed , at the acquisition date fair values . goodwill 47 as of the acquisition date is measured as the excess of consideration transferred over the acquisition date fair values of the net assets acquired and the liabilities assumed . while we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration , where applicable , our estimates are inherently uncertain and subject to refinement . as a result , during the measurement period , which may be up to one year from the acquisition date , we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill . upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed , whichever comes first , any subsequent adjustments are recorded to the consolidated statements of operations . costs to exit or restructure certain activities of an acquired company or our internal operations are accounted for as termination and exit costs pursuant to asc 420 , exit or disposal cost obligations , and are accounted for separately from the business combination . a liability for costs associated with an exit or disposal activity is recognized and measured at its fair value in the consolidated statement of operations in the period in which the liability is incurred . for a given acquisition , we may identify certain pre-acquisition contingencies as of the acquisition date and may extend our review , evaluation , and adjustment of these pre-acquisition contingencies throughout the measurement period in order to obtain sufficient information to assess whether we include these contingencies as a part of the fair value estimates of assets acquired and liabilities assumed and , if so , to determine their estimated amounts . a pre-acquisition contingency ( non-income tax related ) is only recognized as an asset or a liability if ( i ) it is probable that an asset existed or a liability had been incurred at the acquisition date and ( ii ) the amount of the asset or liability can be reasonably estimated . subsequent to the measurement period , changes in estimates of such contingencies will affect earnings and could have a material effect on results of operations and financial position . in addition , uncertain tax positions and tax related valuation allowances assumed in connection with a business combination are initially estimated as of the acquisition date . we reevaluate these items quarterly based upon facts and circumstances that existed as of the acquisition date with any adjustments to the preliminary estimates being recorded to goodwill if identified within the measurement period .
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results of operations the following describes the line items set forth in our consolidated statements of operations . a discussion of changes in our results of operations during the year ended december 31 , 2019 compared to the year ended december 31 , 2018 has been omitted from this annual report on form 10-k , but may be found in “ item 7. management 's discussion and analysis of financial condition and results of operations ” in our annual report on form 10-k for the year ended december 31 , 2019 , filed with the sec on february 5 , 2020 , which discussion is incorporated herein by reference and which is available free of charge on the sec 's website at www.sec.gov . net revenue . net revenue is primarily generated from sales of radio-frequency , analog , digital , and mixed-signal integrated circuits for the access and connectivity , wired and wireless infrastructure , and industrial and multi-market applications . a significant portion of our sales are to distributors , which then resell our products . cost of net revenue . cost of net revenue includes the cost of finished silicon wafers processed by third-party foundries ; costs associated with our outsourced packaging and assembly , test and shipping ; costs of personnel , including stock-based compensation , and equipment associated with manufacturing support , logistics and quality assurance ; amortization of acquired developed technology intangible assets ; inventory fair value adjustments ; amortization of certain production mask costs ; cost of production load boards and sockets ; and an allocated portion of our occupancy costs . research and development . research and development expense includes personnel-related expenses , including stock-based compensation , new product engineering mask costs , prototype integrated circuit packaging and test costs , computer-aided design software license costs , intellectual property license costs , reference design development costs , development testing and evaluation costs , depreciation expense and allocated occupancy costs .
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the company combines the legendary design and engineering expertise of henrik fisker to develop high quality electric vehicles with strong emotional appeal . central to fisker 's business model is the fisker flexible platform agnostic design ( “ ff-pad ” ) , a proprietary process that allows the development and design of a vehicle to be adapted to any given electric vehicle ( “ ev ” ) platform in the specific segment size . the process focuses on selecting industry leading vehicle specifications and adapting the design to crucial hard points on a third-party supplied ev platform and outsourced manufacturing to reduce development cost and time to market . the first example of this is fisker 's work to adapt the fisker ocean design to a base vehicle platform developed by magna steyr ( “ magna ” ) . this development with magna began in september 2020 and passed the first engineering gateway in november 2020. fisker believes it is well-positioned through its global premium ev brand , its renowned design capabilities , its sustainability focus , and its asset-light and low overhead , direct to consumer business model which enables products like the fisker ocean to be priced roughly equivalent to internal combustion engine-powered suv 's from premium brand competitors . the fisker ocean is targeting a large and rapidly expanding “ premium with volume ” segment ( meaning a premium automaker producing more than 100,000 units of a single model such as the bmw x3 series or tesla model y ) of the electric suv market . fisker expects to begin production of the ocean as early as the fourth quarter of 2022. the fisker ocean , a five-passenger vehicle with potentially a 250- to over 350-mile range and state-of-the-art autonomous driving capabilities , will be differentiated in the marketplace by its innovative and timeless design and a re-imagined customer experience delivered through an advanced software-based user interface . the fisker ocean is designed for a high degree of sustainability , using recycled rubber , eco-suede interior trim made from recycled polyester , and carpeting from fishing nets and plastic bottles recycled from ocean waste , among many other sustainable features . the optional features for the ocean , including california mode ( patent pending ) , a solar photovoltaic roof and “ head-up ” display , resulted in the fisker ocean prototype being the most awarded new automobile at ces 2020 by time , newsweek , business insider , cnet and others . fisker believes its innovative business model , including “ e-mobility-as-a-service ” ( “ emaas ” ) , will revolutionize how consumers view personal transportation and car ownership . over time , fisker plans to combine a customer-focused experience with flexible leasing options , affordable monthly payments and no fixed lease terms , in addition to direct-to-consumer sales . through an innovative platform sharing partnership strategy , fisker believes that it will be able to significantly reduce the capital intensity typically associated with 53 index to financial statements developing and manufacturing vehicles , while maintaining flexibility and optionality in component sourcing and manufacturing due to fisker 's ff-pad proprietary process . through fisker 's ff-pad proprietary process , fisker is currently working with magna to develop a proprietary electric vehicle platform called fm29 that will underpin fisker ocean and at least one additional nameplate . fisker intends to cooperate with one or more additional industry-leading original equipment manufacturers ( “ oems ” ) , technology companies , and or tier-one automotive suppliers for platform sharing and access to procurement networks , while focusing on key differentiators in innovative design , software and user interface . multiple platform-sharing partners is intended to accelerate growth in fisker 's portfolio of electric vehicle offerings . fisker envisions a go-to-market strategy with both web- and app-based digital sales , loan financing approvals , leasing , and service management , with limited reliance on traditional brick-and-mortar “ sales-and-service ” dealer networks . fisker believes that this customer-focused approach will drive revenue , user satisfaction and higher margins than competitors . the business combination fisker inc. ( “ fisker ” or the “ company ” ) was originally incorporated in the state of delaware in october 13 , 2017 as a special purpose acquisition company under the name spartan energy acquisition corp. ( “ spartan ” ) , formed for the purpose of effecting a merger , capital stock exchange , asset acquisition , stock purchase , recapitalization , reorganization or similar business combination with one or more businesses . spartan completed its ipo in august 2018. in october 2020 , spartan 's wholly-owned subsidiary merged with and into fisker inc. , a delaware corporation ( “ legacy fisker ” ) , with legacy fisker surviving the merger as a wholly-owned subsidiary of spartan ( the “ business combination ” ) . in connection with the business combination , spartan changed its name to fisker inc. in connection with the consummation of the business combination ( the “ closing ” ) , the registrant changed its name from spartan energy acquisition corp. to fisker inc. the business combination was accounted for as a reverse recapitalization , in accordance with gaap . under this method of accounting , spartan was treated as the “ acquired ” company for financial reporting purposes . accordingly , the business combination was treated as the equivalent of legacy fisker issuing stock for the net assets of spartan , accompanied by a recapitalization , whereby no goodwill or other intangible assets was recorded . operations prior to the business combination are those of legacy fisker . key trends , opportunities and uncertainties fisker is a pre-revenue company and believes that its future performance and success depends to a substantial extent on the ability to capitalize on the following opportunities , which in turn is subject to significant risks and challenges , including those discussed below and in the section of this form 10-k titled “ risk factors . story_separator_special_tag while fisker believes that the low-capital-intensity platform sharing partnership strategy , together with direct-to-customer commercialization , provides the company with an advantage relative to traditional and other established auto manufacturers , fisker 's better capitalized competitors may seek to undercut the pricing or compete directly with fisker 's designs by replicating their features . in addition , while fisker believes that its strong management team forms the necessary backbone to execute on its strategy , the company expects to compete for talent , as fisker 's future growth will depend on hiring qualified and experienced personnel to operate all aspects of the business as it prepares to launch commercial operations . commercialization fisker currently anticipates commencing production of the fisker ocean in the fourth quarter of 2022 , with initial customer deliveries in late 2022 at the earliest . production commencement is dependent upon fisker entering into definitive platform sharing agreements with one or more industry-leading oems and or tier-one automotive suppliers . failure to enter into these agreements timely could result in being unable to begin production in the timeframe anticipated . as of march 19 , 2021 , we have received over 13,300 retail reservations and 700 fleet reservations . this is after accounting for about 1,100 retail customers who have canceled over time . fisker has obtained over 57,000 indications of interest through the flexee app ( meaning the flexee app has been downloaded and the potential purchaser has provided a contact phone number ) and internet , reflecting the significant public interest in the fisker ocean . fisker plans to initially market its vehicles through its direct-to-consumer sales model , leveraging its proprietary flexee app , which will serve as a one-stop-shop for all components of its emaas business model . over time , fisker plans to develop fisker experience centers in select cities in north america and europe , which will enable prospective customers to experience fisker vehicles through test drives and virtual and augmented reality . fisker also intends to enter , in each launch market , into third-party service partnerships with credible vehicle service organizations with established service facilities , operations and technicians . these companies ' services will be integrated into and booked via the flexee app in order to create a hassle-free , app-based service experience for fisker 's customers delivered at home , at work , or with a pick-up and delivery 56 index to financial statements service booked online . for north america and united kingdom , as examples , fisker has entered into non-exclusive memorandum of understandings with divisions of cox automotive related to fleet management services . fisker will continue to seek opportunities to build the service partnership model . over time , fisker aims to transform the ev sales model through the flexible lease model , under which customers will be able to utilize a vehicle on a month-to-month basis at an anticipated cost of $ 379 per month for the base model , with the ability to terminate the lease or upgrade their vehicle at any time . development of a fleet of high value , sustainable evs will allow fisker to offer these flexible lease options to capture more customers . fisker intends to require a non-refundable up-front payment of $ 3,000 under the flexible lease model , which the company believes will reduce its cash flow risk and incentivize customers to keep their vehicles for a period of time . fisker anticipates that , over time , it will acquire a substantial fleet of used evs available for sale or further flexible lease by fisker , which it believes will enhance its ability to maintain its premium brand and pricing . fisker believes its digital , direct-to-consumer sales model reflects today 's changing consumer preferences and is less capital intensive and expensive than the traditional automotive sales models . fisker 's commercialization strategy is , however , relatively novel for the car industry , which has historically relied on extensive advertising and marketing , as well as relationships with physical car dealership networks . should fisker 's assumptions about the commercialization of its vehicles prove overly optimistic or if the company is unable to develop , obtain or maintain the direct-to-consumer marketing or service technology upon which its prospective customer base would rely , fisker may incur delays to its ability to commercialize the fisker ocean . this may also lead fisker to make changes in its commercialization plans , which could result in unanticipated marketing delays or cost overruns , which could in turn adversely impact margins and cash flows or require fisker to change its pricing . further , to the extent that fisker does n't generate the margins it expects upon commercialization of the fisker ocean , fisker may be required to raise additional debt or equity capital , which may not be available or may only be available on terms that are onerous to fisker and its stockholders . regulatory landscape fisker operates in an industry that is subject to and benefits from environmental regulations , which have generally become more stringent over time , particularly across developed markets . regulations in fisker 's target markets include economic incentives to purchasers of evs , tax credits for ev manufacturers , and economic penalties that may apply to a car manufacturer based on its fleet-wide emissions ratings . see “ information about fisker—government regulation and credits . ” for example , a federal tax credit of $ 7,500 may be available to u.s. purchasers of fisker vehicles , which would bring the effective estimated purchase price of the base fisker ocean model to approximately $ 30,000. further , the registration and sale of zero emission vehicles ( “ zevs ” ) in california will earn fisker zev credits , which it may be able to sell to other oems or tier-one automotive suppliers seeking to access the state 's market . several other u.s. states have adopted similar standards .
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results of operations comparison of the year ended december 31 , 2020 to the year ended december 31 , 2019 the following table sets forth fisker 's historical operating results for the periods indicated : replace_table_token_1_th n.m. = not meaningful . general and administrative general and administrative expenses increased by $ 18.6 million or 514 % from $ 3.6 million during year ended december 31 , 2019 to $ 22.2 million during year ended december 31 , 2020 , primarily due to increased salaried employee headcount , transaction-related expenses of $ 5 million , including $ 3.5 million in success fees related to the issuance of our convertible security in july 2020 , and legal costs of $ 5.3 million . general and administrative expenses includes stock-based compensation expense of $ 377,000 and $ 30,000 for the years ended december 31 , 2020 and 2019 , respectively . on march 18 , 2021 , the board of directors of fisker , approved , effective as of march 15 , 2021 , at the request of dr. geeta gupta , the company 's chief financial officer , an 82 % decrease in dr. gupta 's annual base salary from $ 325,000 to $ 58,240 which is california 's minimum annual wage . 59 index to financial statements research and development research and development expenses increased by $ 14 million or 202 % from $ 7 million during the year ended december 31 , 2019 to $ 21 million during the year ended december 31 , 2020. the increase by $ 14 million primarily relates to higher headcount in research and development and payments to suppliers . research and development expenses includes stock-based compensation expense of $ 333,000 and $ 55,000 for the years ended december 31 , 2020 and 2019 , respectively .
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“ management 's discussion and analysis of financial condition and results of operations ” should be read in conjunction with the consolidated financial statements and the related notes included elsewhere in this report . this discussion contains forward-looking statements that are subject to numerous risks and uncertainties . actual results may differ materially from those contained in any forward-looking statements . see “ forward-looking statements ” above . overview cdw is a fortune 500 company and a leading provider of integrated information technology ( “ it ” ) solutions in north america and the united kingdom . we help our customer base of over 250,000 small , medium and large business , government , education and healthcare customers by delivering critical solutions to their increasingly complex it needs . our broad array of offerings ranges from discrete hardware and software products to integrated it solutions such as mobility , security , data center optimization , cloud computing , virtualization and collaboration . we are technology “ agnostic , ” with a product portfolio including more than 100,000 products from more than 1,000 brands . we provide our products and solutions through more than 5,000 customer-facing coworkers , including field sellers , highly-skilled technology specialists and advanced service delivery engineers . we are a leading sales channel partner in north america and the united kingdom for many original equipment manufacturers ( “ oems ” ) and software publishers ( collectively , our “ vendor partners ” ) , whose products we sell or include in the solutions we offer . we believe we are an important extension of our vendor partners ' sales and marketing capabilities , providing them with a cost-effective way to reach customers and deliver a consistent brand experience through our established end-market coverage and extensive customer access . on august 1 , 2015 , we completed the acquisition of kelway topco limited ( “ kelway ” ) by purchasing the remaining 65 % of its outstanding common stock which increased our ownership interest from 35 % to 100 % , and provided us control . kelway is a u.k.-based it solutions provider , which has global supply chain relationships that enable it to conduct business in more than 80 countries . this investment strengthens our ability to provide a more comprehensive solution to our customers and enhances our ability to serve our existing multi-national customers . we included the financial results of kelway in our consolidated financial statements from the date of acquisition . for additional information relating to the acquisition , see note 3 ( acquisition ) to our consolidated financial statements . we have two reportable segments : corporate , which is comprised primarily of private sector business customers in the u.s. , and public , which is comprised of government agencies and education and healthcare institutions in the u.s. our corporate segment is divided into a medium/large business customer channel , primarily serving customers with more than 100 employees , and a small business customer channel , primarily serving customers with up to 100 employees . we also have three other operating segments : cdw advanced services ; canada ; and kelway , each of which do not meet the reportable segment quantitative thresholds and , accordingly , are included in an all other category ( “ other ” ) . for additional information relating to kelway , see note 3 ( acquisition ) to these consolidated financial statements . the cdw advanced services business consists primarily of customized engineering services delivered by technology specialists and engineers , and managed services that include infrastructure as a service ( “ iaas ” ) offerings . effective january 1 , 2016 , the cdw advanced services business will be included in our corporate and public segments and other will be comprised of canada and kelway . revenues in the u.s. from the sale of hardware , software , custom configuration and third-party provided services are recorded within our corporate and public segments . we may sell all or only select products that our vendor partners offer . each vendor partner agreement provides for specific terms and conditions , which may include one or more of the following : product return privileges , price protection policies , purchase discounts and vendor incentive programs , such as purchase or sales rebates and cooperative advertising reimbursements . we also resell software for major software publishers . our agreements with software publishers allow the end-user customer to acquire software or licensed products and services . in addition to helping our customers determine the best software solutions for their needs , we help them manage their software agreements , including warranties and renewals . a significant portion of our advertising and marketing expenses is reimbursed through cooperative advertising programs with our vendor partners . these programs are at the discretion of our vendor partners and are typically tied to sales or other commitments to be met by us within a specified period of time . 30 trends and key factors affecting our financial performance we believe the following trends may have an important impact on our financial performance : our public segment sales are impacted by government spending policies , budget priorities and revenue levels . an adverse change in any of these factors could cause our public segment customers to reduce their purchases or to terminate or not renew contracts with us , which could adversely affect our business , results of operations or cash flows . for the year ended december 31 , 2015 , sales to federal customers increased year-over-year in the mid-teens as we continued to benefit from strategic changes made to better align with new federal government purchasing programs implemented last year . during the same period , sales to state and local customers also increased year-over-year in the mid-teens , driven by the continued focus on public safety . story_separator_special_tag amortization expense related to intangibles increased $ 16.7 million , or 9.2 % , during 2015 compared to 2014 , primarily due to incremental amortization expense related to the intangible assets arising from our acquisition of kelway . non-cash equity-based compensation expense increased $ 14.8 million , or 90.7 % , during 2015 compared to 2014 , primarily due to annual equity awards granted under our 2013 long-term incentive plan in 2015 , performance against long-term incentive program targets and equity awards granted in connection with our acquisition of kelway . in addition , we incurred $ 10.2 million of acquisition and integration costs in 2015 related to our acquisition of kelway . income from operations income from operations by segment , in dollars and as a percentage of net sales , and the year-over-year percentage change for the years ended december 31 , 2015 and 2014 is as follows : replace_table_token_9_th * not meaningful 34 ( 1 ) segment income from operations includes the segment 's direct operating income , allocations for headquarters ' costs , allocations for income and expenses from logistics services , certain inventory adjustments and volume rebates and cooperative advertising from vendors . ( 2 ) includes the financial results for our other operating segments , cdw advanced services , canada and five months for kelway , which do not meet the reportable segment quantitative thresholds . ( 3 ) includes certain headquarters ' function costs that are not allocated to the segments . income from operations was $ 742.0 million in 2015 , an increase of $ 69.0 million , or 10.3 % , compared to $ 673.0 million in 2014 . total operating margin increased 10 basis points to 5.7 % in 2015 , from 5.6 % in 2014 . operating margin was positively impacted by the increase in gross profit margin , partially offset by an increase in selling and administrative expenses as a percentage of net sales . this increase was driven by higher net sales and gross profit . corporate segment income from operations was $ 470.1 million in 2015 , an increase of $ 30.3 million , or 6.9 % , compared to $ 439.8 million in 2014 . corporate segment operating margin increased 10 basis points to 6.9 % in 2015 , from 6.8 % in 2014 . this increase was driven by higher net sales and gross profit . public segment income from operations was $ 343.3 million in 2015 , an increase of $ 30.1 million , or 9.6 % , compared to $ 313.2 million in 2015 . public segment operating margin increased 30 basis points to 6.7 % in 2015 , from 6.4 % in 2014 . this increase was driven by higher net sales and gross profit . interest expense , net at december 31 , 2015 , our outstanding long-term debt totaled $ 3,259.7 million , compared to $ 3,166.0 million at december 31 , 2014 , an increase of $ 93.7 million primarily due to the completion of the acquisition of kelway . net interest expense in 2015 was $ 159.5 million , a decrease of $ 37.8 million , compared to $ 197.3 million in 2014 . this decrease was primarily due to lower effective interest rates for 2015 , compared to 2014 as a result of redemptions and refinancing activities completed during 2014 and 2015. net loss on extinguishments of long-term debt for information regarding our debt , see note 8 ( long-term debt ) to the accompanying consolidated financial statements . during 2015 , we recorded a net loss on extinguishments of long-term debt of $ 24.3 million compared to $ 90.7 million in 2014. net loss on extinguishments of long-term debt for the years ended december 31 , 2015 and 2014 are as follows : replace_table_token_10_th ( 1 ) we redeemed or repurchased all of or a portion of the remaining aggregate principal amount outstanding . the loss recognized represents the difference between the redemption price and the net carrying amount of the purchased debt , adjusted for the remaining unamortized deferred financing costs and or premium . 35 ( 2 ) we entered into the revolving loan , a new $ 1,250 million five-year senior secured asset-based revolving credit facility . the revolving loan replaced our previous revolving loan credit facility that was to mature on june 24 , 2016. the loss recognized represents the write-off of a portion of unamortized deferred financing costs . gain on remeasurement of equity investment on august 1 , 2015 , we completed the acquisition of kelway by purchasing the remaining 65 % of its outstanding common stock which increased our ownership interest from 35 % to 100 % , and provided us control . as a result , our previously held 35 % equity investment was remeasured to fair value , resulting in a gain of $ 98.1 million recorded in gain on remeasurement of equity investment in the consolidated statements of operations . income tax expense income tax expense was $ 243.9 million in 2015 , compared to $ 142.8 million in 2014 . the effective income tax rate , expressed by calculating income tax expense or benefit as a percentage of income before income taxes , was 37.7 % and 36.8 % for 2015 and 2014 , respectively . for 2015 , the effective tax rate differed from the u.s. federal statutory rate primarily due to state income taxes and withholding tax expense on the earnings of our canadian business as a result of no longer asserting permanent reinvestment which was partially offset by a deferred tax benefit as a result of a tax rate reduction in the u.k. for 2014 , the effective tax rate differed from the u.s. federal statutory rate primarily due to state income taxes , including current year state income tax credits .
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results of operations year ended december 31 , 2015 compared to year ended december 31 , 2014 results of operations , in dollars and as a percentage of net sales , for the years ended december 31 , 2015 and 2014 are as follows : replace_table_token_7_th ( 1 ) percentages may not total due to rounding . 32 net sales net sales by segment , in dollars and as a percentage of total net sales , and the year-over-year dollar and percentage change in net sales for the years ended december 31 , 2015 and 2014 are as follows : replace_table_token_8_th ( 1 ) there were 254 selling days for the years ended december 31 , 2015 and 2014 . total net sales in 2015 increased $ 914.2 million , or 7.6 % , to $ 12,988.7 million , compared to $ 12,074.5 million in 2014 , reflecting both organic net sales growth and the impact of consolidating five months of kelway net sales . customer priorities continued to shift more towards integrated solutions , which drove higher growth in solutions sales compared to transactional product sales . strong sales performance in solutions-focused products was driven by netcomm and server and server-related products . the growth in transactional products was led by notebooks/mobile devices , partially offset by a decline in desktop computers . organic net sales , which excludes the impact of the acquisition of kelway , increased $ 563.5 million , or 4.7 % , to $ 12,638.0 million in 2015 , compared to $ 12,074.5 million in 2014 . organic net sales on a constant currency basis , which excludes the impact of foreign currency translation , in 2015 increased $ 635.0 million , or 5.3 % , to $ 12,638.0 million , compared to $ 12,003.0 million in 2014 . for additional information , see “ non-gaap financial measure reconciliations ” below .
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march 19 , 2018 - - teresa a. herbert 47,300 - $ 9.09 january 5 , 2017 - - 11,000 - $ 7.11 march 16 , 2016 ( 1 ) - - 27,500 - $ 9.99 march 19 , 2018 - - david t. story_separator_special_tag condition and results of operations overview independence holding company , a delaware corporation ( nyse : ihc ) , is a holding company principally engaged in the life and health insurance business through : ( i ) its insurance companies , standard security life insurance company of new york ( `` standard security life '' ) , madison national life insurance company , inc. ( `` madison national life '' ) , and independence american insurance company ( independence american ) ; and ( ii ) its marketing and administrative companies , including ihc specialty benefits inc. and ihc carrier solutions , inc. ihc also owns a significant equity interest in : ( i ) ebix health exchange holdings , llc ( ebix health exchange ) , a newly formed administration exchange for health and pet insurance ; and ( ii ) a managing general underwriter ( mgu ) that writes medical stop-loss . prior to march 31 , 2016 , we sold medical stop-loss insurance for self-insured employer groups through our wholly owned full service mgu , ihc risk solutions , llc ( risk solutions ) . standard security life , madison national life and independence american are sometimes collectively referred to as the insurance group . ihc and its subsidiaries ( including the insurance group ) are sometimes collectively referred to as the `` company '' , or ihc , or are implicit in the terms we , us and our . ihc 's health insurance products serve niche sectors of the commercial market through multiple classes of business and varied distribution channels . medical stop-loss was marketed to employer groups that self-insure their medical risks . with regard to those persons in the growing individual market , ihc 's products offer coverage for individuals and families with stm needs , and fixed indemnity limited benefit and scheduled benefit plans through select distribution partners . we offer pet insurance for dogs and cats in all 50 states through a national distributor . our fixed indemnity limited benefit product is primarily purchased by hourly workers and others who are generally not eligible for coverage under their employer 's group medical plan . the dental and vision products are marketed to large and small groups as well as individuals . with respect to ihc 's life and disability business , madison national life has historically sold almost all of this business through one distribution source specializing in serving school districts and municipalities . while management considers a wide range of factors in its strategic planning and decision-making , underwriting profit is consistently emphasized as the primary goal in all decisions as to whether or not to increase our retention in a core line , expand into new products , acquire an entity or a block of business , or otherwise change our business model . management 's assessment of trends in healthcare and morbidity , with respect to medical stop-loss , fully insured medical , disability and dbl ; mortality rates with respect to life insurance ; and changes in market conditions in general play a significant role in determining the rates charged , deductibles and attachment points quoted , and the percentage of business retained . ihc also seeks transactions that permit it to leverage its vertically integrated organizational structure by generating fee income from production and administrative operating companies as well as risk income for its carriers and profit commissions . management has always focused on managing the costs of its operations and providing its insureds with the best cost-containment tools available . the following is a summary of key performance information and events : results of operations are summarized as follows for the periods indicated ( in thousands ) : replace_table_token_5_th · net income of $ 1.71 per share , diluted , for the year ended december 31 , 2015 , compared to $ .92 per share , diluted , for the year ended december 31 , 2014. o net income for the year ended december 31 , 2015 includes a $ 6.7 million gain , net of tax , resulting from the deconsolidation of a subsidiary and corresponding joint venture transaction . see discussion on gain on sale of subsidiary to joint venture . o net income for the year ended december 31 , 2015 includes a gain of $ 3.3 million , net of tax , on the sale of the infrastructure associated with the administration of substantially all of our individual life and annuity policies ceded during the third quarter . see discussion on other income . o the results for 2014 include credits to federal income taxes of $ 2.5 million as a result of the reduction in amic 's valuation allowance related to its net deferred tax asset at december 31 , 2014 ; · consolidated investment yield ( on an annualized basis ) of 2.8 % in 2015 compared to 3.3 % in 2014 ; and · book value of $ 18.73 per common share at december 31 , 2015 compared to $ 17.25 at december 31 , 2014. the following is a summary of key performance information by segment : · the medical stop-loss segment reported income before taxes of $ 23.1 million and $ 21.9 million for the years ended december 31 , 2015 and 2014 , respectively ; o premiums earned increased $ 32.8 million for the year ended december 31 , 2015 when compared to 2014. the increase in premiums earned is primarily due to increased volume of business produced by ihc risk solutions . o underwriting experience for the medical stop-loss segment , as indicated by its u.s. gaap combined ratios , is as follows for the years indicated ( in thousands ) : replace_table_token_6_th ( a ) loss ratio represents insurance benefits claims and reserves divided by premiums earned . story_separator_special_tag insurance liabilities the company maintains loss reserves to cover its estimated liability for unpaid losses and loss adjustment expenses , where material , ( including legal , other fees , and costs not associated with specific claims but related to the claims payment function ) for reported and unreported claims incurred as of the end of each accounting period . these loss reserves are based on actuarial assumptions and are maintained at levels that are in accordance with u.s. gaap accounting principles . many factors could affect these reserves , including economic and social conditions , frequency and severity of claims , medical trend resulting from the influences of underlying cost inflation , changes in utilization and demand for medical services , and changes in doctrines of legal liability and damage awards in litigation . therefore , the company 's reserves are necessarily based on estimates , assumptions and analysis of historical experience . the company 's results depend upon the variation between actual claims experience and the assumptions used in determining reserves and pricing products . reserve assumptions and estimates require significant judgment and , therefore , are inherently uncertain . the company can not determine with precision the ultimate amounts that will be paid for actual claims or the timing of those payments . the company 's estimate of loss represents management 's best estimate of the company 's liability at the balance sheet date . loss reserves differ for short-duration and long-duration insurance policies , including annuities . reserves are based on approved actuarial methods , but necessarily include assumptions about expenses , mortality , morbidity , lapse rates and future yield on related investments . policy benefits and claims all of the company 's short-duration contracts are generated from its accident , health , disability and pet insurance business , and are accounted for based on actuarial estimates of the amount of loss inherent in that period 's claims , including losses incurred for which claims have not been reported . short-duration contract loss estimates rely on actuarial observations of ultimate loss experience for similar historical events . the company believes that its liability for policy benefits and claims is reasonable and adequate to satisfy its ultimate liability . the company primarily uses its own loss development experience , but will also supplement that with data from its outside actuaries , reinsurers and industry loss experience as warranted . to illustrate the impact that loss ratios have on the company 's loss reserves and related expenses , each hypothetical 1 % change in the loss ratio for the health business ( i.e. , the ratio of insurance benefits , claims and settlement expenses to earned health premiums ) for the year ended december 31 , 2015 , would increase reserves ( in the case of a higher ratio ) or decrease reserves ( in the case of a lower ratio ) by approximately $ 4.5 million with a corresponding increase or decrease in the pre-tax expense for insurance benefits , claims and reserves in the consolidated statement of income . depending on the circumstances surrounding a change in the loss ratio , other pre-tax amounts reported in the consolidated statement of income could also be affected , such as amortization of deferred acquisition costs and commission expense . the liability for policy benefits and claims by segment is as follows ( in thousands ) : replace_table_token_10_th replace_table_token_11_th medical stop-loss all of the company 's medical stop-loss policies are short-duration and are accounted for based on actuarial estimates of the amount of loss inherent in that period 's claims or open claims from prior periods , including losses incurred for claims that have not been reported ( ibnr ) . short-duration contract loss estimates rely on actuarial observations of ultimate loss experience for similar historical events . the two primary assumptions underlying the calculation of policy benefits and claims for medical stop-loss business are ( i ) projected net loss ratio , and ( ii ) claim development patterns . the projected net loss ratio is set at expected levels consistent with the underlying assumptions ( projected net loss ratio ) . claim development patterns are set quarterly as reserve estimates are developed and are based on recent claim development history ( claim development patterns ) . the company uses the projected net loss ratio to establish reserves until developing losses provide a better indication of ultimate results and it is feasible to set reserves based on claim development patterns . the company has concluded that a reasonably likely change in the projected net loss ratio assumption could have a material effect on the company 's financial condition , results of operations , or liquidity ( material effect ) but a reasonably likely change in the claim development pattern would not have a material effect . projected net loss ratio generally , during the first twelve months of an underwriting year , policy benefits and claims for medical stop-loss are first set at the projected net loss ratio , which is set using assumptions developed using completed prior experience trended forward . the projected net loss ratio is the company 's best estimate of future performance until such time as developing losses provide a better indication of ultimate results . while the company establishes a best estimate of the projected net loss ratio , actual experience may deviate from this estimate . this was the case with the 2012 , 2013 and 2014 underwriting years which increased by 0.4 , 2.8 and 5.9 net loss ratio points , respectively .
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results of operations results of operations for the year ended december 31 , 2015 compared to the year ended december 31 , 2014 information by business segment for the year ended december 31 , 2015 and 2014 is as follows : replace_table_token_12_th replace_table_token_13_th premiums earned in 2015 , premiums earned increased $ 0.5 million over the comparable period of 2014. the increase is primarily due to : ( i ) a $ 32.8 million increase in earned premiums from the medical stop-loss segment as a result of higher volume ; ( ii ) a $ 21.7 million increase in the group disability , life and dbl segment primarily due to increased volume and retentions in the group term life and ltd lines ; partially offset by ( iii ) a decrease of $ 47.0 million in the fully insured health segment as a result of a $ 58.4 million decrease in premiums from exiting major medical , partially offset by premium increases in the ancillary lines ( primarily short-term medical ) , fixed indemnity limited benefit products , pet , and occupational accident lines of business as a result of higher volume ; and ( iv ) a decrease of $ 7.0 million in the individual life , annuities and other segment primarily as a result of a reinsurance transaction in the third quarter of 2015 whereby the company ceded substantially all of its ordinary life and annuity business . net investment income total net investment income decreased $ 4.4 million . the overall annualized investment yields were 2.8 % and 3.3 % in 2015 and 2014 , respectively . the overall decrease was primarily a result of a decrease in investment income on bonds , equities and short-term investments as the company transferred approximately $ 208.0 million of cash to an unaffiliated reinsurer in connection with a coinsurance and sale transaction on july 31 , 2015 ( see note 8 ) . the annualized investment yields on bonds , equities and short-term investments were 2.8
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see also “ cautionary note regarding forward-looking statements. ” critical accounting policies we have established various accounting policies that govern the application of gaap in the preparation of our consolidated financial statements . the preparation of financial statements in conformity with gaap requires management to make estimates and assumptions to arrive at the carrying value of assets and liabilities and amounts reported for revenues and expenses . our financial position and results of operations can be materially affected by these estimates and assumptions . critical accounting policies are those policies that are most important to the determination of our financial condition and results of operations or that require management to make assumptions and estimates that are subjective or complex . our significant accounting policies are discussed in the “ notes to consolidated financial statements , note 1 — summary of significant accounting policies. ” management believes that the following policy is critical . allowance for credit losses and allowance for credit losses related to off-balance sheet items our allowance for credit losses methodologies incorporate a variety of risk considerations , both quantitative and qualitative , in establishing an allowance for credit losses that management believes is appropriate at each reporting date . quantitative factors include our historical loss experiences on loan pools segmented by type , and considers risk rating , delinquency and charge-off trends , collateral values , changes in nonperforming loans , and other factors . qualitative factors include the general economic environment in our markets , delinquency and charge-off trends , and the change in nonperforming loans . concentration of credit , change of lending management and staff , quality of the loan review system , and changes in interest rates are other qualitative factors that are considered in our methodologies . see “ — allowance for credit losses ” , “ financial condition — allowance for credit losses and allowance for credit losses related to off-balance sheet items ” , “ results of operations — provision for credit losses ” and “ notes to consolidated financial statements , note 1 — summary of significant accounting policies ” for additional information on methodologies used to determine the allowance for credit losses and the allowance for credit losses related to off-balance sheet items . executive overview for the years ended december 31 , 2020 , 2019 and 2018 , net income was $ 42.2 million , $ 32.8 million and $ 57.9 million , respectively . the increase of $ 9.4 million , or 28.7 percent , in net income for the year ended december 31 , 2020 as compared with the year ended december 31 , 2019 , was primarily due to lower interest expense on customer deposits of $ 29.1 million and higher noninterest income of $ 15.6 million primarily from higher gains on sale of securities . these increases were partially offset by lower interest income on loans receivable of $ 17.6 million and higher credit loss provisions of $ 15.3 million for loans receivable , off-balance sheet items and accrued interest receivable . the decrease of $ 25.1 million , or 43.3 percent , in net income for the year ended december 31 , 2019 as compared with the year ended december 31 , 2018 , was primarily due to a $ 26.2 million increase in the provision for loan losses relating to a troubled loan relationship and impaired leases receivable . effective january 1 , 2020 , the company adopted accounting standards update ( “ asu ” ) 2016-13 , financial instruments – credit losses , which replaced the incurred loss methodology for estimating credit losses with a forward-looking current expected credit losses ( “ cecl ” ) methodology . the adoption resulted in a $ 17.4 million increase to the beginning balance of the allowance for credit losses , a $ 335,000 decrease to the beginning balance of the allowance for off-balance sheet-items and an after-tax charge of $ 12.2 million to the beginning balance of retained earnings . for the years ended december 31 , 2020 , 2019 and 2018 , our earnings per diluted share were $ 1.38 , $ 1.06 and $ 1.79 , respectively . 28 additional s ignificant financial highlights include : cash and due from banks increased $ 270.2 million to $ 391.8 million as of december 31 , 2020 from $ 121.7 million at december 31 , 2019 , primarily from higher volume of non-interest bearing deposits . the increase in deposits reflects depositors placing proceeds from ppp loans and proceeds from other government assistance programs with the bank , as well as an increase from our marketing efforts and depositors seeking safety for their funds . loans receivable increased by $ 270.0 million , or 5.9 percent , to $ 4.88 billion as of december 31 , 2020 , compared with $ 4.61 billion as of december 31 , 2019. the increase includes hanmi 's participation in the ppp where we originated $ 301.8 million of ppp loans in 2020. deposits were $ 5.28 billion at december 31 , 2020 compared with $ 4.70 billion at december 31 , 2019 as noninterest-bearing deposits increased $ 507.1 million and interest-bearing deposits increased by $ 68.9 million . cash dividends of $ 0.52 per share of common stock were declared for the year ended december 31 , 2020 compared with $ 0.96 per share of common stock for the years ended december 31 , 2019 and 2018. story_separator_special_tag time deposits , money market and savings , offset mainly by a decrease in borrowings . the average yield on loans and leases increased to 5.09 percent for the year ended december 31 , 2019 from 4.93 percent in 2018 , primarily due to an increase in market interest rates commencing in the second-half of 2018 and change in composition of the loan portfolio with a greater concentration of commercial and industrial loans and leases receivable , and a decrease in residential loans . story_separator_special_tag 2019 compared to 2018 for the year ended december 31 , 2019 , noninterest expense was $ 125.9 million , an increase of $ 8.3 million , or 7.1 percent , compared with $ 117.6 million in 2018. the increase was due primarily to increases in occupancy and equipment , data processing , professional fees , other operating expenses and an impairment loss on bank premises , offset by decreases in salaries and employee benefits and merger and integration costs . income tax expense for the years ended december 31 , 2020 , 2019 and 2018 , income tax expense was $ 17.3 million , $ 14.6 million and $ 26.1 million , respectively . the effective tax rate for the years ended december 31 , 2020 , 2019 and 2018 was 29.1 percent , 30.8 percent and 31.1 percent , respectively . the lower effective tax rate in 2020 compared to 2019 and 2018 was due mainly to lower federal and low-income housing tax credits , as well as a reduction in the valuation allowance for net operating loss carryforwards . income taxes are discussed in more detail in “ notes to consolidated financial statements , note 1 — summary of significant accounting policies ” and “ note 11 — income taxes ” presented elsewhere herein . financial condition securities portfolio as of december 31 , 2020 , our securities portfolio was primarily composed of mortgage-backed securities , collateralized mortgage obligations and debt securities issued by u.s. government agencies and sponsored agencies . most of the securities carried fixed interest rates . other than holdings of u.s. government and agency securities , there were no securities of any one issuer exceeding 10 percent of stockholders ' equity as of december 31 , 2020 , 2019 or 2018. as of december 31 , 2020 , securities available for sale increased $ 119.3 million , or 18.8 percent , to $ 753.8 million from $ 634.5 million as of december 31 , 2019. the increase was mainly due to purchases of mortgage-backed securities and u.s. government agency securities . the following table summarizes the contractual maturity schedule for securities , at amortized cost , and their cost-weighted average yield , which is calculated using amortized cost as the weight and tax-equivalent book yield , as of december 31 , 2020 : after one year but after five years but within one year within five years within ten years after ten years total amount yield amount yield amount yield amount yield amount yield ( dollars in thousands ) securities available for sale : u.s. treasury securities $ 9,997 2.67 % $ — 0.00 % $ — 0.00 % $ — 0.00 % $ 9,997 2.67 % u.s. government agency and sponsored agency obligations : mortgage-backed securities 1,691 1.04 % 3,176 1.38 % — 0.00 % 510,302 1.13 % 515,169 1.13 % collateralized mortgage obligations — 0.00 % 956 1.47 % 1,285 1.12 % 131,391 0.61 % 133,632 0.62 % debt securities — 0.00 % 80,660 0.53 % 10,000 0.85 % — — 90,660 0.57 % total u.s. government agency and sponsored agency obligations 1,691 1.04 % 84,792 0.58 % 11,285 0.88 % 641,693 1.02 % 739,461 0.97 % total securities available for sale $ 11,688 2.44 % $ 84,792 0.58 % $ 11,285 0.88 % $ 641,693 1.02 % $ 749,458 0.99 % 34 loan portfolio as of december 31 , 2020 , 2019 and 2018 , loans receivable ( excluding loans held for sale ) , net of deferred loan costs , discounts and allowance for credit losses , were $ 4.79 billion , $ 4.55 billion and $ 4.57 billion , respectively , representing an increase of $ 241.0 million or 5.3 percent in 2020 and a decrease of $ 19.8 million , or 0.4 percent in 2019. the $ 241.0 million increase in loans in 2020 was attributable to higher new loan production ( primarily ppp loans ) , partially offset by higher allowance for credit losses from the impacts of cecl implementation and the covid-19 pandemic . during the year ended december 31 , 2020 , total loan disbursements consisted of $ 525.5 million in commercial real estate loans , $ 133.2 million in leases receivable , $ 229.4 million in commercial and industrial loans , $ 410.5 million in sba loans and $ 28.5 million in residential/consumer loans , offset by $ 1.05 billion in pay-offs and other net reductions . the table below shows the maturity distribution of outstanding loans as of december 31 , 2020. in addition , the table shows the distribution of such loans between those with floating or variable interest rates and those with fixed or predetermined interest rates . replace_table_token_7_th as of december 31 , 2020 , the loan portfolio included the following concentrations of loans to one type of industry that were greater than 10 percent of loans receivable : balance as of december 31 , 2020 percentage of loans receivable outstanding ( in thousands ) lessor of nonresidential buildings $ 1,448,067 29.7 % hospitality $ 915,294 18.8 % loan quality indicators delinquent loans ( defined as 30 to 89 days past due and still accruing ) were $ 9.5 million , $ 10.3 million and $ 10.7 million as of december 31 , 2020 , 2019 and 2018 , respectively , representing a decrease of $ 777,000 or 7.6 percent , in 2020 and a decrease of $ 427,000 or 4.0 percent , in 2019. special mention loans increased by $ 50.3 million , or 189.0 percent to $ 77.0 million at december 31 , 2020 compared with $ 26.6 million as of december 31 , 2019. of such loans outstanding as of december 31 , 2020 , $ 49.1 million consisted of loans adversely affected by the pandemic .
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results of operations net interest income our primary source of revenue is net interest income , which is the difference between interest and fees derived from earning assets , and interest paid on liabilities obtained to fund those assets . our net interest income is affected by changes in the level and mix of interest-earning assets and interest-bearing liabilities , referred to as volume changes . net interest income is also affected by changes in the yields earned on assets and rates paid on liabilities , referred to as rate changes . interest rates charged on loans are affected principally by changes to market interest rates , the demand for such loans , the supply of money available for lending purposes , and other competitive factors . those factors are , in turn , affected by general economic conditions and other factors beyond our control , such as federal economic policies , the general supply of money in the economy , legislative tax policies , governmental budgetary matters , and the actions of the federal reserve . 29 the following table shows the average balances of assets , liabilities and stockholders ' equity ; the amount of interest income , on a tax equivalent basis and interest expense ; the average yield or rate for each category of interest-earning assets and interest-bearing liabilities ; and the net interest spread and the net interest margin for the periods indicated . all average balances are daily average balances . replace_table_token_3_th ( 1 ) loans receivable include loans held for sale and exclude the allowance for credit losses . nonaccrual loans receivable are included in the average loans receivable balance . ( 2 ) amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate . ( 3 ) represents interest expense on deposits as a percentage of all interest-bearing and noninterest-bearing deposits . ( 4 ) represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities .
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the criteria for revenue recognition of prepaid royalties are that a formal agreement with the licensee is executed , no deliverables , development or support services related to prepaid royalties are required , the fees are non-refundable and not contingent upon future product shipments by the licensee , and the fees are payable by the licensee in a time period consistent with the company 's normal billing terms . if any of these criteria are not met , the company defers revenue recognition until such time as all criteria have been met . ic products the company sells products both directly to customers , as well as through distributors . revenue from sales directly to story_separator_special_tag this management 's discussion and analysis of financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements and notes included in this report . overview our strategy and primary business objective is to become a fabless semiconductor company focused on the development and sale of integrated circuits , or ics , for the high-speed networking , communications , storage and computing markets . our technology delivers time-to-market , performance , power and economic benefits for system original equipment manufacturers , or oems . we have developed a family of ics , called bandwidth engine , which combines our proprietary 1t-sram high-density embedded memory and high-speed 10 gigabits per second , or gbps , serial interface , or i/o , with our intelligent access technology and a highly efficient interface protocol . historically , our primary business was the design , development , marketing , sale and support of differentiated intellectual property , or ip , including embedded memory and high-speed parallel and serial i/o used in advanced systems-on-chips , or socs . we are focused on developing differentiated ip-rich ic products , such as the bandwidth engine , and are dedicating substantially all our r & d , marketing and sales budget to these ic products . since the beginning of 2010 , we have invested an increasing amount of our research and development resources towards development of our bandwidth engine family of ics . our future success and ability to achieve and maintain profitability will be dependent on the marketing and sales of our bandwidth engine ic products into networking , communications and other markets requiring high bandwidth memory access . during 2011 , we began placing less emphasis on ip licensing and deploying more resources towards our ic product development and marketing efforts . in december 2011 , we sold a number of patents in an arrangement that provided $ 35 million in cash with no equity dilution to the company . we are using the proceeds from this sale to partially fund our investment in our bandwidth engine ic product line . we retained a license to the sold patents to cover our bandwidth engine ic product line and to execute current business with our ip technology customers and partners . however , the retained license limits , among other things , the number of future licenses of 1t-sram memory technology that we can grant to developers of socs , which , at one time , were a principal focus of our 1t-sram licensing activities . we still maintain a large patent portfolio with over 100 patents granted and more in process . historically , our primary business has been defining , designing , marketing and licensing differentiated embedded memory and high-speed parallel and serial interface ip for advanced socs designs . revenue from ip licensing and royalties represented the majority of our revenues for 2012 , and we expect revenue from ip licensing and royalties to represent a significant portion of our revenues in 2013. due to the shift in our engineering and research and development focus and the decline in major consumer electronics applications utilizing customized versions of our 1t-sram technology , our competitiveness and the demand for our ip have declined since the beginning of 2011. as a result of our reduced licensing activities , we expect our licensing and royalty revenue to decrease in future periods . our expectation is that our revenue will transition from primarily licensing and royalty to predominately ic product sales . to date , we have substantially completed our performance obligations under our existing agreements , and we expect licensing revenues to decline in 2013. we have also been focused on monetizing our ip portfolio to fund the change in our business . towards this end , we have completed asset sales for proceeds of approximately $ 39.3 million , including our december 2011 patent sale and march 2012 serdes technology sale . 30 the 1t-sram is our high-density , high-performance patented memory solution that represents an alternative to traditional volatile embedded memory . our i/o ip includes physical layer ( phy ) circuitry that allows ics to communicate with one another in the networking , storage , computer and consumer market segments . our phy ip supports serial interface technologies , such as 10 gbps base kr , xaui , pci express and sata , as well as parallel interfaces like ddr3 . our ip customers typically include fabless semiconductor companies , integrated device manufacturers ( idms ) and foundries . critical accounting policies and use of estimates our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the united states of america . note 1 to the consolidated financial statements in item 15 of this report describes the significant accounting policies and methods used in the preparation of our consolidated financial statements . we have identified the accounting policies below as some of the more critical to our business and the understanding of our results of operations . these policies may involve estimates and judgments that affect the reported amounts of assets , liabilities , revenues and expenses . although we believe our judgments and estimates are appropriate , actual future results may differ from our estimates , and if different assumptions or conditions were to prevail , the results could be materially different from our reported results . story_separator_special_tag many of the products of our licensees that are currently subject to licenses from us are used in consumer products , such as electronic game consoles , for which demand can be seasonal . ic products products are sold both directly to customers , as well as through distributors . revenue from sales directly to customers is generally recognized at the time of shipment . we record an estimated allowance , at the time of shipment , for future returns and other charges against revenue consistent with the terms of sale . ic product revenue and costs relating to sales made through distributors with rights of return and stock rotation are deferred until the distributors sell the product to end customers due to our inability to estimate future returns and credits to be issued . distributors are generally able to return up to 10 % of their purchases of slow , non-moving or obsolete inventory for credit every six months . at the time of shipment to distributors , an accounts receivable for the selling price is recorded , 32 as there is a legally enforceable right to receive payment , and inventory is relieved , as legal title to the inventory is transferred upon shipment . revenues are recognized upon receiving notification from the distributors that products have been sold to end customers . distributors provide information regarding products and quantity , end customer shipments and remaining inventory on hand . the associated deferred margin is included in the deferred revenues line item in the consolidated balance sheet . we recorded initial ic product revenue in 2012 , and a significant reserve for returns has been recorded due to the product 's early stage of development and testing . ic product revenue was not significant in 2012 , and has been included in the licensing and other revenue line item in the consolidated statement of operations and comprehensive loss . fair value measurements of financial instruments we measure the fair value of financial instruments using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels , as follows : level 1inputs used to measure fair value are unadjusted quoted prices that are available in active markets for the identical assets or liabilities as of the reporting date . level 2pricing is provided by third party sources of market information obtained from investment advisors rather than models . we do not adjust for or apply any additional assumptions or estimates to the pricing information we receive from advisors . our level 2 securities include cash equivalents and available-for-sale securities , which consisted primarily of corporate debt , and government agency and municipal debt securities from issuers with high quality credit ratings . our investment advisors obtain pricing data from independent sources , such as standard & poor 's , bloomberg and interactive data corporation , and rely on comparable pricing of other securities because the level 2 securities we hold are not actively traded and have fewer observable transactions . we consider this the most reliable information available for the valuation of the securities . level 3unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment are used to measure fair value . these values are generally determined using pricing models for which the assumptions utilize management 's estimates of market participant assumptions . the determination of fair value for level 3 investments and other financial instruments involves the most management judgment and subjectivity . valuation of long-lived assets we evaluate our long-lived assets for impairment at least annually , or more frequently when a triggering event is deemed to have occurred . this assessment is subjective in nature and requires significant management judgment to forecast future operating results , projected cash flows and current period market capitalization levels . if our estimates and assumptions change in the future , it could result in a material write-down of long-lived assets . we amortize our finite-lived intangible assets , such as developed technology , customer relationships and patent license , on a straight-line basis over their estimated useful lives of one to seven years . we recognize an impairment charge as the difference between the net book value of such assets and the fair value of the assets on the measurement date . goodwill we review goodwill for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable . we first assess qualitative factors to determine whether it is more-likely-than-not that the fair value of the reporting unit is less than the carrying amount as a basis for determining whether it is necessary to perform the two-step impairment test . if the qualitative assessment warrants further analysis , we compare the fair value of the reporting unit to its carrying value . the fair value of the reporting unit is determined using the 33 market approach . if the fair value of the reporting unit exceeds the carrying value of net assets of the reporting unit , goodwill is not impaired , and no further testing is performed . if the carrying value of the reporting unit 's goodwill exceeds its implied fair value , then we must record an impairment charge equal to the difference . we have determined that we have a single reporting unit for purposes of performing the goodwill impairment test . we performed the annual impairment test in september 2012 , and the test did not indicate impairment of goodwill . as of december 31 , 2012 , we did not identify any factors to indicate there was an impairment of our goodwill and determined that no additional impairment analysis was required . deferred tax valuation allowance when we prepare our consolidated financial statements , we estimate our income tax liability for each of the various jurisdictions where we conduct business .
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results of operations net revenue . replace_table_token_5_th licensing revenue decreased $ 4.6 million in 2012 due to the lack of new license agreements and a decline in the number of residual fee-generating license agreements . license revenue recognized in 2012 was generated solely from agreements entered into in 2011 and prior years . we expect our licensing revenue to decrease in 2013 as we will not be pursuing new ip licenses , and our sales and marketing personnel will be focusing on selling ics . licensing revenue decreased $ 0.5 million in 2011 due to a decline in the number and value of new license agreements . licensing revenue in 2011 included significant revenue recognized from the 34 achievement of final milestones for two 1t-sram technology license agreements executed in the fourth quarter of 2009. replace_table_token_6_th royalty revenue decreased $ 3.4 million in 2012 primarily due to a decrease in shipments by an idm licensee whose product is used in the nintendo wii® game console and tsmc , a major foundry partner . we expect royalty revenues to decrease in 2013 , primarily due to reduced shipments by the idm licensee , as nintendo has introduced a new console that does not incorporate our technology . in addition , we expect decline in shipments of units incorporating our technology by other licensees , as their products approach their end of life . royalty revenue decreased $ 1.0 million in 2011 primarily due to a decrease in shipments by an idm licensee whose product is used in the nintendo wii® game console , although we did experience an increase in royalties received from tsmc and from another licensee due to higher manufacturing volumes for their products . cost of net revenue and gross profit .
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50 at our core , we are an antibody-centric company and leverage our proprietary g-mab lib rary and targeted delivery modalities to generate the next generation of cancer therapeutics . our validated fully human antibodies include pd-1 , pd-l1 , cd38 , cd123 , cd47 , c-met , vegfr2 , ccr2 , ox40 , tigit and cd137 among others . our vision is to leverage th ese antibodies in conjunction with proprietary targeted delivery modalities to generate the next generation of cancer therapeutics . these modalities include proprietary antibody drug conjugates ( “ adcs ” ) , bispecific approaches , as well as tcr-like antibodie s. with la cell , inc. ( “ la cell ” ) , our joint venture with city of hope , our objective is to become the global leader in the development of antibodies against intracellular targets such as stat3 , mutant kras , myc , p53 and tau . additionally , we have acquired and are assessing the regulatory and strategic path forward for our portfolio of late stage biosimilar/biobetter antibodies based on erbitux ® , remicade ® , xolair ® , and simulect ® as these may represent nearer term commercial opportunities . although we intend to retain ownership and control of product candidates by advancing their development , we regularly also consider , ( i ) partnerships with pharmaceutical or biopharmaceutical companies and ( ii ) license or sale of certain products in each case , in order to balance the risks and costs associated with drug discovery , development and commercialization with efforts to maximize our stockholders ' returns . our partnering objectives include generating revenue through license fees , milestone-related development fees and royalties as well as profit shares or joint ventures to generate potential returns from our product candidates and technologies . significant developments yuhan agreement in march 2016 , we and yuhan corporation , a south korea company ( “ yuhan ” ) , entered into an agreement to form a joint venture company called immuneoncia therapeutics , llc ( “ immuneoncia ” ) to develop and commercialize a number of immune checkpoint antibodies against undisclosed targets for both hematological malignancies and solid tumors . in april 2016 , yuhan purchased $ 10.0 million of shares of our common stock , $ 0.0001 par value per share ( “ common stock ” ) , and warrants as part of our private placement offering . separately , under the terms of the joint venture agreement , yuhan contributed an initial investment of $ 10.0 million to immuneoncia , and we granted immuneoncia an exclusive license to one of our immune checkpoint antibodies for specified countries while retaining the rights for the u.s. , european and japanese markets , as well as global rights for immuneoncia to two additional antibodies that will be selected by immuneoncia from a group of pre-specified antibodies from our immuno-oncology antibody portfolio . yuhan owns 51 % of immuneoncia , while we own 49 % . 3sbio term sheet in june 2016 , we and tnk entered into a binding term sheet with shenyang sunshine pharmaceutical company ltd ( “ 3sbio ” ) , a china based company , to form a joint venture to develop and commercialize proprietary immunotherapies , including those developed from , including or using tnk 's car-t technology targeting cea positive cancers . due diligence and negotiations between 3sbio and us for the definitive agreement ( s ) are currently ongoing . in june 2016 , 3sbio purchased $ 10.0 million of common stock and warrants as part of our private placement offering . servier license and collaboration agreement in july 2016 , we announced a license and collaboration agreement with les laboratoires servier , sas , a corporation incorporated under the laws of france , and institut de recherches internationales servier , a company duly organized and existing under the laws of france ( individually and collectively , “ servier ” ) for the development , manufacture and commercialization of products using our fully human immuno-oncology anti-pd-1 mab sti-a1110 . the financial terms of the agreement include , among other things , a non-refundable upfront payment to sorrento of 25 million , or $ 27.4 million , which we received in july 2016. we may also receive development milestone payments for the initial product and each additional product . we may receive up to 710 million in various payments based on commercial sales milestones related to annual net sales levels for the initial product and then also for each additional product . in addition to the commercial sales milestones , we will be entitled to receive variable royalties on the sales of all commercialized products ranging from high single-digit to double-digit percentages . during the twelve months ended december 31 , 2016 , we recognized $ 3.8 million in license fee revenue pursuant to the agreement . cha biotech term sheet in august 2016 , we announced a binding term sheet to create a joint venture ( the “ jv ” ) with cha biotech co. , ltd. ( “ cbt ” ) of south korea to develop and commercialize proprietary car modified cellular therapies based on cbt 's activated killer cell ( “ akc ” ) technology in combination with five of our cars for all disease conditions , including oncology and infectious diseases . the jv will cover products on a global basis with the exception of the greater chinese market , which includes mainland china , hong kong , macau and taiwan . in addition , we will obtain an exclusive license to develop and commercialize cbt 's novel investigator-initiated trial stage akc technology in major territories , including the united states and europe , and with a co-exclusive license in china . under the terms of the term sheet , we and cbt will make contributions of $ 2 million to the jv , and we will grant the jv an 51 exclusive license to five cars solely for combination with the akc technology , while cbt will contribute its akc technology . story_separator_special_tag 52 binding term sheet regarding acquisition of virttu biologics limited on november 15 , 2016 , we , tnk and virttu biologics limited ( “ virttu ” ) entered into a binding term sheet ( the “ virttu binding term sheet ” ) setting forth the terms and conditions by which tnk will purchase all of the issued and outstanding equity of virttu ( the “ virttu acquisition ” ) . subject to certain conditions , at the closing of the virttu acquisition ( the “ virttu closing ” ) , we will issue to the equityholders of virttu an aggregate of $ 5.0 million of shares of our common stock ( the “ closing shares ” ) . the number of closing shares issuable shall be determined based on the closing price of our common stock on the date of the virttu closing . further , upon the occurrence of the closing of the next third party equity financing of tnk in which tnk receives at least $ 50.0 million in proceeds ( a “ financing ” ) , tnk will issue to the equityholders of virttu an aggregate of $ 20.0 million of shares of the same class and series of capital stock of tnk as is issued in such financing , based upon the valuation of tnk achieved in such financing ( the “ tnk financing shares ” ) . if a financing has not occurred within twelve months of the virttu closing ( the “ financing due date ” ) , the equityholders of virttu will be issued an aggregate of $ 20.0 million of shares of our common stock in lieu of the tnk financing shares ( the “ sorrento financing shares ” ) . the number of sorrento financing shares issuable shall be determined based on the closing price of our common stock on the financing due date . in the event that the tnk financing shares are issued , 20 % of the tnk financing shares will be placed into escrow until the financing due date to secure the indemnification obligations of virttu and its equityholders for breaches of their representations , warranties or covenants under the definitive agreements governing the virttu acquisition . the closing shares and the tnk financing shares or the sorrento financing shares will be issued to the virttu equityholders on a pro rata basis based on each such equityholder 's equity interest in virttu as of the virttu closing . as of december 31 , 2016 , the virttu acquisition had not closed . the final terms of the virttu acquisition are subject to the negotiation and finalization of the definitive agreements relating to the virttu acquisition and the material terms of the virttu acquisition may differ from those set forth in the virttu binding term sheet . in addition , the virttu closing will be subject to various customary and other closing conditions . story_separator_special_tag expenses consist primarily of salaries and personnel related expenses , stock-based compensation expense , clinical development expenses , preclinical testing , lab supplies , consulting costs , depreciation and other expenses . the increase of $ 10,832 thousand is primarily attributable to preclinical testing and completion of our be registration trial prior to its sale in july 2015 , salaries and compensation related expense , consulting and lab supply costs incurred in connection with our expanded research and development activities and activities to advance rtx into clinical trials and potentially pursue other development activities . we expect research and development expenses to increase in absolute dollars as we : ( i ) advance rtx and our other product candidates into clinical trials and pursue other development , acquire , develop and manufacture clinical trial materials and increase other regulatory operating activities , ( ii ) incur incremental expenses associated with our efforts to further advance a number of potential product candidates into preclinical development activities , ( iii ) continue to identify and advance a number of fully human therapeutic antibody and adc preclinical product candidates , ( iv ) incur higher salary , lab supply and infrastructure costs incurred in connection with supporting all of our programs , ( v ) invest in our joint ventures , collaborations or other third party agreements , and ( vi ) expand our corporate infrastructure . acquired in-process research and development expenses . acquired in-process research and development expenses for the years ended december 31 , 2016 and 2015 were $ 45,000 thousand and $ 24,013 thousand , respectively . acquired in-process research and development expenses for the year ended december 31 , 2016 include costs associated with the acquisition of acquired in-process research and development from mabtech limited and la cell . acquired in-process research and development expenses for the year ended december 31 , 2015 include costs associated with the purchase price of the license rights from mabtech limited , the purchase price of the license rights from the city of hope and the purchase price of cargenix holdings llc and bdl products , inc. 54 general and administrative expenses . general and administrative expenses for the years ended december 31 , 2016 and 2015 were $ 24,219 thousand and $ 20,132 thousand , respectively . general and administrative expenses consist primarily of salaries and personnel related expenses for executive , finance and administrative personnel , stock-based co mpensation expense , professional fees , infrastructure expenses , legal and accounting expenses and other general corporate expenses . the increase of $ 4,087 thousand is primarily attributable to higher salaries and related compensation expenses , stock-based compensation , legal costs related to acquisitions , general corporate and intellectual property matters , consulting and business development expenses and higher compliance costs associated with our public reporting obligations .
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results of operations the following discussion of our operating results explains material changes in our results of operations for the years ended december 31 , 2016 , 2015 and 2014. the discussion should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this form 10-k. comparison of the years ended december 31 , 2016 and 2015 revenues . revenues were $ 8,152 thousand for the year ended december 31 , 2016 , as compared to $ 4,590 thousand for the year ended december 31 , 2015. the net increase of $ 3,562 thousand is primarily due to an increase in royalty and licensing activities for the year ended december 31 , 2016 compared to the corresponding period of 2015. royalties and license revenues increased $ 3,052 thousand for the year ended december 2016 as compared to the same period of 2015. sales and service revenues generated from the sale of customized reagents and providing contract development services increased $ 1,007 thousand for the year ended december 2016 as compared to the same period of 2015. in june 2014 , the national institute of allergy and infectious diseases ( “ niaid ” ) , a division of the national institutes of health ( “ nih ” ) awarded us a phase ii small business technology transfer ( “ sttr ” ) grant ( the “ staph grant iii award ” ) to support the advanced preclinical development of human bispecific antibody therapeutics to prevent and treat staphylococcus aureus ( “ s. aureus ” or “ staph ” ) infections , including methicillin-resistant s. aureus ( “ mrsa ” ) . the project period for the staph grant iii award covered a two-year period which commenced in june 2014 , with total funds available of approximately $ 1 million per year for up to 2 years . during the years ended december 31 , 2016 and 2015 , we recorded $ 699 thousand and $ 884 thousand of revenue , respectively , associated with the staph grant iii award .
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all of our segments have similar customers , products and services , and distribution methods . our financial statements contain additional information regarding segment performance which is discussed in note 14 to the consolidated financial statements included in item 8 of this annual report on form 10-k. we offer an integrated solution to our customers providing manufacturing , supply and installation of a full range of structural and related building products . our manufactured products include our factory-built roof and floor trusses , wall panels and stairs , vinyl windows , custom millwork and trim , as well as engineered wood that we design , cut , and assemble for each home . we also assemble interior and exterior doors into pre-hung units . additionally , we supply our customers with a broad offering of professional grade building products not manufactured by us , such as dimensional lumber and lumber sheet goods and various window , door and millwork lines . our full range of construction-related services includes professional installation , turn-key framing and shell construction , and spans products across all of our product categories . we group our building products into six product categories : lumber & lumber sheet goods . lumber & lumber sheet goods include dimensional lumber , plywood , and osb products used in on-site house framing . manufactured products . manufactured products consist of wood floor and roof trusses , steel roof trusses , wall panels , stairs , and engineered wood . windows , door & millwork . windows & doors are comprised of the manufacturing , assembly , and distribution of windows and the assembly and distribution of interior and exterior door units . millwork includes interior trim and custom features including those that we manufacture under the synboard ® brand name . gypsum , roofing & insulation . gypsum , roofing , & insulation include wallboard , ceilings , joint treatment and finishes . siding , metal , and concrete . siding , metal , and concrete includes vinyl , composite , and wood siding , exterior trim , other exteriors , metal studs and cement . other building products & services . other building products & services are comprised of products such as cabinets and hardware as well as services such as turn-key framing , shell construction , design assistance , and professional installation spanning the majority of our product categories . our operating results are dependent on the following trends , strategies , events and uncertainties , some of which are beyond our control : homebuilding industry . our business is driven primarily by the residential new construction market and the residential repair and remodel market , which are in turn dependent upon a number of factors , including demographic trends , interest rates , consumer confidence , employment rates , foreclosure rates , the availability of skilled construction labor , and the health of the economy and mortgage markets . according to the u.s. census bureau , annual u.s. total and single-family housing starts were 1.2 million and 0.9 million , respectively , in 2018. however , both total and single-family housing starts remain well below the normalized historical averages ( from 1959 through 2018 ) of 1.5 million and 1.1 million , respectively . we believe the housing industry is currently experiencing a shortage of skilled construction labor , which is constraining housing activity . due to the lower levels in housing starts versus historical norms , increased competition for homebuilder business and cyclical fluctuations in commodity prices we have seen and may continue to experience pressure on our gross margins . in addition to these factors , there has been a trend of consolidation within the building products supply industry . however , our industry remains highly fragmented and competitive and we will continue to face significant competition from local and regional suppliers . we still believe there are several meaningful trends that indicate u.s. housing demand will continue to trend towards recovering to the historical average . these trends include relatively low interest rates , the aging of housing stock , and normal population growth due to immigration and birthrate exceeding death rate . while the rate of market growth has recently eased , industry forecasters , including the national association of homebuilders ( “ nahb ” ) , expect to see continued increases in housing demand over the next year . 24 targeting large product ion homebuilders . in recent years , the homebuilding industry has undergone consolidation , and the larger homebuilders have increased their market share . we expect that trend to continue as larger homebuilders have better liquidity and land positions relati ve to the smaller , less capitalized homebuilders . our focus is on maintaining relationships and market share with these customers while balancing the competitive pressures we are facing in servicing large homebuilders with certain profitability expectation s. additionally , we have been successful in expanding our custom homebuilder base while maintaining acceptable credit standards . repair and remodel end market . although the repair and remodel end market is influenced by housing starts to a lesser degree than the homebuilding market , the repair and remodel end market is still dependent upon some of the same factors as the homebuilding market , including demographic trends , interest rates , consumer confidence , employment rates , foreclosure rates , and the health of the economy and home financing markets . we expect that our ability to remain competitive in this space will depend on our continued ability to provide a high level of customer service coupled with a broad product offering . use of prefabricated components . homebuilders are increasingly using prefabricated components in order to realize increased efficiency , overcome skilled construction labor shortages and improve quality . shortening cycle time from start to completion is a key imperative of the homebuilders during periods of strong consumer demand . we see the demand for prefabricated components increasing as the residential new construction market continues to strengthen and the availability of skilled construction labor remains limited . economic conditions . story_separator_special_tag our gross margin percentage increased by 0.3 % during the year ended december 31 , 2018 compared to the year ended december 31 , 2017. the pressure we experienced on our gross margins in the first half of 2018 due to rising commodity costs relative to our customer pricing commitments was more than offset by the sharp decline in these commodity costs during the second half of 2018. we continue to invest in our business to improve our operating efficiency , which , along with operating leverage and disciplined cost management , has allowed us to better leverage our operating costs against changes in net sales . our selling , general and administrative expenses , as a percentage of net sales , were 20.1 % for the year ended december 31 , 2018 , a 0.4 % decrease from 20.5 % in 2017. this improvement was primarily driven by cost leverage . however , this decrease was partially offset by increased commissions due to increased sales and margins as well as increased incentives and operating costs related to our profitable growth in 2018. while the rate of market growth has recently eased we still believe the long-term outlook for the housing industry is positive due to growth and trends in the underlying demographics . we feel we are well-positioned to take advantage of the construction activity in our markets and to increase our market share , which may include strategic acquisitions or investments in organic growth opportunities . we will continue to focus on working capital by closely monitoring the credit exposure of our customers , remaining focused on maintaining the right level of inventory and by working with our vendors to improve payment terms and pricing on our products . we strive to achieve the appropriate balance of short-term expense control while maintaining the expertise and capacity to grow the business as market conditions improve . in addition , debt reduction will continue to be a key area of focus for the company . story_separator_special_tag style= '' margin-bottom:0pt ; margin-top:12pt ; text-indent:4.54 % ; font-style : italic ; font-size:10pt ; font-family : times new roman ; font-weight : normal ; text-transform : none ; font-variant : normal ; '' > gross margin . gross margin increased $ 130.6 million to $ 1,727.4 million . our gross margin percentage decreased to 24.6 % in 2017 from 25.1 % in 2016 , a 0.5 % decrease . our gross margin percentage decreased primarily due to gross profit margin compression on commodity products resulting from inflation in the lumber and lumber sheet goods markets during most of 2017. selling , general and administrative expenses . selling , general and administrative expenses increased $ 81.9 million , or 6.0 % . our salaries and benefits expense was $ 935.5 million , an increase of $ 41.1 million from 2016 , and stock compensation increased $ 3.0 million . office general and administrative increased $ 13.9 million , delivery expense increased $ 10.1 million and occupancy expense increased $ 5.9 million . in addition , we recognized a $ 4.2 million loss on the disposal of assets during the year ended december 31 , 2017 compared to a gain of $ 5.0 million during the year ended december 31 , 2016. as a percentage of net sales , selling , general and administrative expenses decreased from 21.4 % in 2016 to 20.5 % in 2017 due to cost leverage as well as the decline in depreciation and amortization on acquired probuild assets , partially offset by investments the company made towards growth initiatives , including additional sales associates and new locations . interest expense , net . interest expense was $ 193.2 million in 2017 , a decrease of $ 21.5 million from 2016. this decrease was largely attributable to the positive results of our debt transactions executed in fiscal years 2016 and 2017. interest expense for the years ended december 31 , 2017 and 2016 included one-time charges related to the debt transactions of $ 58.7 million and $ 57.0 million , respectively . income tax expense . we recorded income tax expense of $ 53.1 million during the year ended december 31 , 2017 compared to an income tax benefit of $ 122.7 million during the year ended december 31 , 2016. due to the enactment of the 2017 tax act , we recorded income tax expense of $ 29.0 million for the year ended december 31 , 2017 related to the revaluation of our net deferred tax assets . we recorded reductions of $ 2.8 million and $ 131.7 million in the after tax non-cash valuation allowance on our net deferred tax assets for the years ended december 31 , 2017 and 2016 , respectively . for the year ended december 31 , 2017 , our effective tax rate was 57.8 % largely due to the impact of the additional income tax expense recognized in connection with the enactment of the 2017 tax act . our effective rate for the year ended december 31 , 2016 was ( 566.1 % ) primarily due to the release of the valuation allowance against our net federal and some state deferred tax assets in that period . absent the effect of the 2017 tax act and the changes to our valuation allowance , our effective rate would have been 29.4 % and 41.8 % for the years ended december 31 , 2017 and 2016 , respectively . 28 results by reportable segment the following tables show net sales and income before income taxes by reportable segment excluding the “ all other ” caption as shown in note 14 to the consolidated financial statements included in item 8 of this annual report on form 10-k ( dollars in thousands ) : replace_table_token_6_th replace_table_token_7_th we have four reportable segments based on an aggregation of the geographic regions in which we operate . while there is some geographic similarity between our reportable segments and the regions as defined by the u.s. census bureau , our reportable segments do not necessarily fully align with any single u.s. census bureau region .
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results of operations the following table sets forth the percentage relationship to sales of certain costs , expenses and income items for the years ended december 31 : replace_table_token_3_th 26 2018 compared with 2017 net sales . sales for the year ended december 31 , 2018 were $ 7,724.8 million , a 9.8 % increase from sales of $ 7,034.2 million for 2017. we estimate that 6.7 % of this increase is attributable to the impact of commodity price inflation on sales in 2018 compared to 2017. single-family and repair and remodel/other end market sales unit volume growth in 2018 was partially offset by declines in multi-family . the following table shows sales classified by major product category ( dollars in millions ) : replace_table_token_4_th the impact of commodity price inflation in 2018 resulted in the sales growth of our lumber and lumber sheet goods and manufactured products categories exceeding the sales growth of our other product categories . gross margin . gross margin increased $ 195.5 million to $ 1,922.9 million . our gross margin percentage increased to 24.9 % in 2018 from 24.6 % in 2017 , a 0.3 % increase . the pressure we experienced on our gross margins in the first half of 2018 due to rising commodity costs relative to our customer pricing commitments was more than offset by the sharp decline in these commodity costs during the second half of 2018. selling , general and administrative expenses . selling , general and administrative expenses increased $ 111.7 million , or 7.7 % . our salaries and benefits expense was $ 1,021.5 million , an increase of $ 86.0 million from 2017 , primarily due to increases in variable compensation attributable to the increase in sales as well as an increase in group health insurance costs .
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although we believe our estimates are reasonable , there can be no assurance that the final tax outcome of these matters will not be different from that which we have reflected in our historical income tax provisions and accruals . such difference could have a material impact on our income tax provision and operating results in the period in which it makes such determination . 76 the aggregate changes in story_separator_special_tag safe harbor in addition to historical information , this annual report contains forward-looking statements within the meaning of section 27a of the securities act of 1933 and section 21e of the securities exchange act of 1934. actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors , risks and uncertainties , including the risk factors set forth in item 1a . above and the risk factors set forth in this annual report . generally , the words “ anticipate ” , “ expect ” , “ intend ” , “ believe ” and similar expressions identify forward-looking statements . the forward-looking statements made in this annual report are made as of the filing date of this annual report with the sec , and future events or circumstances could cause results that differ significantly from the forward-looking statements included here . accordingly , we caution readers not to place undue reliance on these statements . we expressly disclaim any obligation to update or alter our forward-looking statements , whether , as a result of new information , future events or otherwise after the date of this document . overview we are a provider of cloud-based infrastructure services to entrepreneurs and small and medium-sized businesses . our services include high quality voice and messaging services over broadband networks , do-it-for-me and do-it-yourself content management and website building tools , online marketing , online lead generation , e-commerce technology , and training solutions that enable entrepreneurs and small and medium–sized businesses to build and maintain an effective online presence . our services are designed to help increase the predictability of success for online businesses . our primary web service offerings are designed to meet the needs of entrepreneurs and small and medium-sized businesses anywhere along its lifecycle . our do-it-yourself package includes our robust content management and website building solution , fully enabled e-commerce package , online marketing tools , and educational training modules . in addition to our primary service offerings for the do-it-yourself customer base , we also offer a variety of premium services to the do-it-yourself customer such as initial site design and build , logo design , dropshipper/supplier integration , and a variety of search engine optimization and link building packages . our do-it-for-me services are comprehensive and flexible allowing us to meet the needs of a wide variety of customers ranging from those just establishing their online presence to those wanting to enhance their existing online presence . these services include custom website design and development , search engine optimization , link building , conversion rate optimization , paid search management , and social media management . additionally , as the online space continues to evolve our product and service offerings will continue to evolve to keep our customers on the cutting edge of the online space . in addition to web services , we offer a suite of high quality voice and messaging services over broadband networks . our small and home office services are portable and allow our customers to make and receive phone calls almost anywhere a broadband internet connection is available . we transmit these calls using voip technology , which converts voice signals into digital data packets for transmission over the internet . at a cost effective rate , each of our calling plans provides a number of basic features typically offered by traditional telephone service providers , plus a wide range of enhanced features that we believe offers an attractive value proposition to our customers . we rely heavily on our network , which is a flexible , scalable session initiation protocol ( sip ) based voip network that rides on top of the internet . this platform enables a user via a single “ identity ” to access and utilize services and features regardless of how they are connected to the internet . as a result , with one identity , either a number or user name , customers have access to crexendo voice , messaging , features , and personal profile information regardless of location , device , or how they access the internet . sources of revenue we derive our revenue from sales of a variety of services to entrepreneurs , small and medium-sized businesses , including sale of software licenses , web design , seo , paid search management , hosting , link building , and commissions from third parties . leads are generated primarily through direct mail marketing campaigns , online advertising campaigns , and through strategic partnerships . license revenue we currently derive a substantial majority of our revenue from cash collected on the sale of our content management and web building software licenses at workshop events held throughout the year , as well as principal collected on the sale of software licenses sold through extended payment term arrangements ( eptas ) . in the fourth quarter of 2010 we transitioned approximately 80 % from a software license model to a software as a service ( saas ) model . however , as we recognize revenue on our epta contracts as cash is collected , we will continue to derive software license revenue for the next two to three years as the original sale that derived the epta contract was a software license . 34 professional services revenue we generate professional services revenue primarily from website design and development , search engine optimization services , link building , paid search management services , and conversion rate optimization services . these services are typically billed on a fixed price basis or on a monthly recurring basis with an initial term of six to twelve months . story_separator_special_tag management has discussed the development , selection and disclosure of these estimates with our board of directors and its audit committee . a summary of our significant accounting policies is provided in note 1 to our consolidated financial statements . we believe the critical accounting policies and estimates described below reflect our more significant estimates and assumptions used in the preparation of our consolidated financial statements . the impact and any associated risks on our business that are related to these policies are also discussed throughout this “ management 's discussion and analysis of financial condition and results of operations ” where such policies affect reported and expected financial results . revenue recognition in general , we recognize revenue when all of the following conditions are satisfied : ( 1 ) there is persuasive evidence of an arrangement ; ( 2 ) the product or service has been provided to the customer ; ( 3 ) the amount of fees to be paid by the customer is fixed or determinable ; and ( 4 ) the collection of our fees is probable . specifics to revenue category are as follows : software license and product revenue cash sales of software licenses and dvd training courses , are recognized as revenue when the cash is received , net of expected customer refunds , upon expiration of the customers ' rescission period , which typically occurs three days after the licenses are delivered or when the internet training workshop takes place , whichever occurs later . software licenses and dvd training courses sold under eptas are recognized as revenue upon receipt of cash from customers and not at the time of sale . although we believe we are able to reasonably estimate the collectability of our receivables based upon our history of offering eptas , accounting standards require revenue to be deferred until customer payments are received if collection of the original principal balance is not probable . additionally , if we subsequently sell the receivables on a non-recourse basis , accounting standards require that the related revenue be deferred until the customer makes cash payments to the third-party purchaser of the receivables . there are no receivable balances outstanding that are subject to recourse by our company . 36 we have bundled products in two types of arrangements at our internet training workshop . during the fiscal year ended june 30 , 2009 , the six month ended december 31 , 2009 , and the first three quarters of the year ended december 31 , 2010 , we primarily combined our software license with other complementary products and would assign fair value using the residual method in accordance with accounting guidance for software arrangements . we use the residual method as we have vendor specific objective evidence for all undelivered elements in the software arrangement . during the fourth quarter of 2010 , we primarily sold our software under a saas model and would combine it with other complementary products and would assign fair value using the residual method in accordance with accounting guidance for multi-element arrangements . we use the residual method as we have vendor specific objective evidence for all undelivered elements in the multi-element arrangement . professional services revenue fees collected for professional services , including website design and development , search engine optimization services , link-building , and paid search management services are recognized as revenue , net of expected customer refunds , over the period during which the services are expected to be performed , based upon the fair value for such services . fees related to epta contracts are deferred and recognized as revenue during the service period or when cash is collected , whichever occurs later . subscription and hosting revenue fees collected for subscription and hosting revenue are recognized ratably as services are provided . customers are billed for these services on a monthly or annual basis at the customer 's option . for all of our customers , regardless of their billing method , subscription revenue is recorded as deferred revenue in the accompanying consolidated balance sheets . as services are performed , we recognize subscription revenue ratably over the applicable service period . when we provide a free trial period , we do not begin to recognize subscription revenue until the trial period has ended and the customer has been billed for the services . commission revenue we have contracts with third-party entities with respect to telemarketing product sales to our customers following the sale of the initial software licenses . these products and services are intended to assist the customers with their internet businesses . these products are sold and delivered completely by third parties . we receive commissions from these third parties , and recognize the revenue as the commissions are received , net of expected customer refunds . change in avail contract in april 2007 , we began marketing and selling avail 24/7 , an all-in-one communications service which assists small businesses and entrepreneurs to manage phone menus , voicemail , email , and fax in one online application . customers purchasing the avail product are charged a non-refundable activation fee along with a monthly service fee . the non-refundable activation fee is deferred and recognized ratably over the estimated customer life , which is currently estimated to be four and one-half years . the monthly service fee is recognized ratably over the service period . in january 2010 we changed the contract that is associated with the sale of our avail 24/7 subscription . effective march 31 , 2010 any customer that has not activated their avail 24/7 subscription was assessed an activation fee of an additional $ 34.95. prior to this change in contract , this activation fee was included in a bundle of items sold at the workshop and there was no time limit on activation . all existing customers were notified of the change in contract in january and were given 60-days to activate avail 24/7 without paying the additional activation fee .
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segment operating results the information below is organized in accordance with our three reportable segments . segment operating income ( loss ) is equal to segment net revenue less segment cost of revenue , sales and marketing , and general and administrative expenses . segment expenses do not include certain costs , such as corporate general and administrative expenses and share-based compensation expenses , which are not allocated to specific segments . operating results of our storesonline division ( in thousands ) replace_table_token_10_th year ended december 31 , 2010 compared to year ended december 31 , 2009 revenue revenue for the year ended december 31 , 2010 decreased 15 % to $ 64,471,000 from $ 75,880,000 for the year ended december 31 , 2009 . 41 revenue from our storesonline division is generated primarily through cash collected on the sale of storesonline software licenses at workshop events held throughout the year , as well as principal amounts collected on the sale of storesonline software licenses sold through eptas . fees for our storesonline software ( sos ) licenses sold under eptas are recognized as revenue as cash payments are received from the customer and not at the time of sale . revenue related to cash collected under epta agreements decreased to $ 18,028,000 for the year ended december 31 , 2010 , compared to $ 24,966,000 for the year ended december 31 , 2009. the decrease in cash collected under epta agreements was primarily due to a decrease in our accounts receivable balance , which for storesonline , generates revenue as cash is collected in future periods . our typical epta contract is for a period of two to three years . as such , increases in sales at our workshop events made through epta 's are initially recognized in our balance sheet , net of bad debt , through our deferred revenue balance , rather than through the income statement .
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we implemented a new lease system in connection with the adoption and we also expect changes to our internal story_separator_special_tag this discussion and analysis below for darden restaurants , inc. ( darden , the company , we , us or our ) should be read in conjunction with our consolidated financial statements and related financial statement notes included in part ii of this report under the caption “ item 8 - financial statements and supplementary data. ” we operate on a 52/53-week fiscal year , which ends on the last sunday in may . fiscal 2019 , which ended may 26 , 2019 , consisted of 52 weeks and fiscal 2018 , which ended may 27 , 2018 , consisted of 52 weeks . overview of operations our business operates in the full-service dining segment of the restaurant industry . at may 26 , 2019 , we operated 1,785 restaurants through subsidiaries in the united states and canada under the olive garden ® , longhorn steakhouse ® , cheddar 's scratch kitchen ® , yard house ® , the capital grille ® , seasons 52 ® , bahama breeze ® and eddie v 's prime seafood ® trademarks . we own and operate all of our restaurants in the united states and canada , except for 3 joint venture restaurants managed by us and 37 franchised restaurants . we also have 33 franchised restaurants in operation located in latin america and the middle east . all intercompany balances and transactions have been eliminated in consolidation . we believe that capable operators of strong , multi-unit brands have the opportunity to increase their share of the restaurant industry 's full-service segment . generally , the restaurant industry is considered to be comprised of three segments : quick service , fast casual , and full service . all of our restaurants fall within the full-service segment , which is highly fragmented and includes many independent operators and small chains . we believe we have strong brands and that the breadth and depth of our experience and expertise sets us apart in the full-service segment of the restaurant industry . this collective capability is the product of investments over many years in areas that are critical to success in our business , including restaurant operations excellence , brand management excellence , supply chain , talent management and information technology , among other things . with a focus on growing same-restaurant sales , we 've implemented a “ back-to-basics ” approach rooted in strong operating fundamentals . we 're focused on improving culinary innovation and execution inside each of our brands , delivering attentive service to each and every one of our guests , and creating an inviting and engaging atmosphere inside our restaurants . we support these priorities with smart and relevant integrated marketing programs that resonate with our guests . by delivering on these operational and brand-building imperatives , we expect to increase our market share through new restaurant and same-restaurant sales growth and deliver best-in-class profitability . the darden support structure enables our brands to achieve their ultimate potential through : ( 1 ) driving advantages in supply chain and general and administrative support ; ( 2 ) applying insights collected from our significant guest and transactional databases to enhance guest relationships and identify new opportunities to drive sales growth ; ( 3 ) relentlessly driving operating efficiencies and continuous improvement , operating with a sense of urgency and inspiring a performance-driven culture ; and ( 4 ) our commitment to rigorous strategic planning . we seek to increase profits by leveraging our fixed and semi-fixed costs with sales from new restaurants and increased guest traffic and sales at existing restaurants . to evaluate our operations and assess our financial performance , we monitor a number of operating measures , with a special focus on two key factors : same-restaurant sales – which is a year-over-year 52-week comparison of each period 's sales volumes for restaurants open at least 16 months ; and segment profit – which is restaurant sales , less food and beverage costs , restaurant labor costs , restaurant expenses and marketing expenses ( sometimes referred to as restaurant-level earnings ) . increasing same-restaurant sales can improve segment profit because these incremental sales provide better leverage of our fixed and semi-fixed restaurant-level costs . a restaurant brand can generate same-restaurant sales increases through increases in guest traffic , increases in the average guest check , or a combination of the two . the average guest check can be impacted by menu price changes and by the mix of menu items sold . for each restaurant brand , we gather daily sales data and regularly analyze the guest traffic counts and the mix of menu items sold to aid in developing menu pricing , product offerings and promotional strategies . we focus on balancing our pricing and product offerings with other initiatives to produce sustainable same-restaurant sales growth . we compute same-restaurant sales using restaurants open at least 16 months because this period is generally required for new restaurant sales levels to normalize . sales at newly opened restaurants generally do not make a significant contribution to profitability in their initial months of operation due to operating or integration inefficiencies . our sales and expenses can be impacted significantly by the number and timing of new restaurant openings and closings , and relocations and remodeling of existing restaurants . pre-opening expenses each period reflect the costs associated with opening new restaurants in current and future periods . 28 fiscal 2019 financial highlights our sales from continuing operations were $ 8.51 billion in fiscal 2019 compared to $ 8.08 billion in fiscal 2018 . the 5.3 percent increase in sales from continuing operations was primarily driven by revenue from the addition of 39 net new company-owned restaurants and a combined darden same-restaurant sales increase of 2.5 percent . story_separator_special_tag our judgment in determining the appropriate expected term for each lease affects our evaluation of : the classification and accounting for leases as capital versus operating ; the rent holidays and escalation in payments that are included in the calculation of straight-line rent ; and the term over which leasehold improvements for each restaurant facility are amortized . these judgments may produce materially different amounts of depreciation , amortization and rent expense than would be reported if different expected lease terms were used . valuation of long-lived assets land , buildings and equipment and certain other assets , including definite-lived intangible assets , are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable . the judgments we make related to the expected useful lives of long-lived assets , definitions of lease terms and our ability to realize undiscounted cash flows in excess of the carrying amounts of these assets are affected by factors such as the ongoing maintenance and improvements of the assets , changes in economic conditions , changes in usage or operating performance , desirability of the restaurant sites and other factors , such as our ability to sell our assets held for sale . as we assess the ongoing expected cash flows and carrying amounts of our long-lived assets , significant adverse changes in these factors could cause us to realize an impairment loss . based on a review of operating results for each of our restaurants , the amount of net book value associated with lower performing restaurants that would be deemed at risk for impairment is not material to our consolidated financial statements . valuation and recoverability of goodwill and trademarks goodwill and trademarks are not subject to amortization and have been assigned to reporting units for purposes of impairment testing . the reporting units are our restaurant brands . a significant amount of judgment is involved in determining if an indicator of impairment has occurred . such indicators may include , among others : a significant decline in our expected future cash flows ; a sustained , significant decline in our stock price and market capitalization ; a significant adverse change in legal factors or in the business climate ; unanticipated competition ; the testing for recoverability of a significant asset group within a reporting unit ; and slower growth rates . any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact on our consolidated financial statements . we review our goodwill and trademarks for impairment annually , as of the first day of our fourth fiscal quarter , or more frequently if indicators of impairment exist . each reporting unit 's fair value is compared to its carrying value . we estimate fair value of each reporting unit using the best information available , including market information ( also referred to as the market approach ) and discounted cash flow projections ( also referred to as the income approach ) . a market approach estimates fair value by applying cash flow and sales multiples to the reporting unit 's operating performance . the 34 multiples are derived from comparable publicly traded companies with similar operating and investment characteristics of the reporting units . the income approach uses a reporting unit 's projection of estimated operating results and cash flows that are discounted using a weighted-average cost of capital that reflects current market conditions . we recognize an impairment loss when the fair value of the reporting unit is less than its carrying value . we estimate the fair value of trademarks using the relief-from-royalty method , which requires assumptions related to projected sales from our annual long-range plan ; assumed royalty rates that could be payable if we did not own the trademarks ; and a discount rate . we recognize an impairment loss when the estimated fair value of the trademark is less than its carrying value . we performed our annual impairment test of our goodwill and trademarks as of the first day of our fiscal 2019 fourth quarter . as of the beginning of our fiscal fourth quarter , we had eight reporting units , six of which had goodwill and seven of which had trademarks . as a result of the impairment tests , no indicators of impairment were identified and no additional indicators of impairment were identified through the end of our fourth fiscal quarter that would require us to test further for impairment . however , changes in circumstances existing at the measurement date or at other times in the future , such as declines in our market capitalization ( reflected in our stock price ) as well as in the market capitalization of other companies in the restaurant industry , declines in sales at our restaurants , and significant adverse changes in the operating environment for the restaurant industry could result in an impairment loss of all or a portion of our goodwill or trademarks . the fair value of each reporting unit exceeded its carrying value by at least 40 percent and the fair value of each reporting unit 's trademark exceeded its carrying value by at least 20 percent . if our annual test resulted in an impairment of our goodwill or trademarks , our financial position and results of operations would be adversely affected and our leverage ratio for purposes of our credit agreement would increase . a leverage ratio exceeding the maximum permitted under our credit agreement would be a default under our credit agreement . at may 26 , 2019 , a write-down of goodwill , other indefinite-lived intangible assets , or any other assets in excess of approximately $ 1.28 billion would have been required to cause our leverage ratio to exceed the permitted maximum . as our leverage ratio is determined on a quarterly basis , and due to the seasonal nature of our business , a lesser amount of impairment in future quarters could cause our leverage ratio to exceed the permitted maximum .
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resulted from a 3.8 percent increase in average check combined with a 0.1 percent increase in same-restaurant guest counts . longhorn steakhouse 's sales increase for fiscal 2019 was driven by a same-restaurant sales increase combined with revenue from new restaurants . the increase in same-restaurant sales in fiscal 2019 resulted from a 3.2 percent increase in average check combined with a 0.1 percent increase in same-restaurant guest counts . in total , cheddar 's scratch kitchen , yard house , the capital grille , seasons 52 , bahama breeze and eddie v 's generated sales in fiscal 2019 that were 4.1 percent above fiscal 2018 . the sales increase for fiscal 2019 was primarily driven by the incremental sales from new restaurants , as well as same-restaurant sales increases at the capital grille and eddie v 's in fiscal 2019 , partially offset by same-restaurant sales decreases at cheddar 's scratch kitchen , yard house , seasons 52 and bahama breeze . costs and expenses the following table sets forth selected operating data as a percent of sales from continuing operations for the periods indicated . this information is derived from the consolidated statements of earnings for the fiscal years ended may 26 , 2019 and may 27 , 2018 . 31 replace_table_token_11_th total operating costs and expenses from continuing operations were $ 7.68 billion in fiscal 2019 and $ 7.31 billion in fiscal 2018 . fiscal 2019 compared to fiscal 2018 : food and beverage costs decreased as a percent of sales primarily due to a 0.5 % impact from pricing and a 0.3 % impact related to cost savings initiatives , partially offset by a 0.7 % impact from unfavorable menu mix and inflation .
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refer to cautionary information about forward-looking statements in part i of this report for important information about these types of statements . overview cimarex is an independent oil and gas exploration and production company . our operations are entirely located in the united states , mainly in oklahoma , texas , and new mexico . currently our operations are focused in two main areas : the permian basin and the mid-continent . our permian basin region encompasses west texas and southeast new mexico . our mid-continent region consists of oklahoma and the texas panhandle . our principal business objective is to profitably grow proved reserves and production for the long-term benefit of our stockholders through a balanced and abundant drilling inventory while seeking to minimize our impact on the communities in which we operate for the long-term . our strategy centers on maximizing cash flow from producing properties and profitably reinvesting that cash flow in exploration and development activities . we consider property acquisitions , dispositions , and occasional mergers to enhance our competitive position . we believe that detailed technical analysis , operational focus , and a disciplined capital investment process mitigate risk and position us to continue to achieve profitable increases in proved reserves and production . our drilling inventory and limited long-term commitments provide the flexibility to respond quickly to industry volatility . our investments are generally funded with cash flow provided by operating activities together with cash on hand , bank borrowings , sales of non-strategic assets , and occasional public financing based on our monitoring of capital markets and our balance sheet . conservative use of leverage has long been a part of our financial strategy . we believe that maintaining a strong balance sheet mitigates financial risk and enables us to withstand unpredictable fluctuations in commodity prices . market conditions the oil and gas industry is cyclical and commodity prices can fluctuate significantly . commodity prices are affected by many factors outside of our control , including changes in market supply and demand , inventory storage levels , weather conditions , and other factors . oil prices have improved from early 2016 ; however , they continue to be volatile and we expect this volatility to persist . during 2017 , average nymex oil and gas prices were $ 50.94 per barrel and $ 3.11 per mcf , respectively , representing an increase of 18 % and 26 % , respectively , from the average nymex oil and gas prices for 2016 . further , local market prices for oil and gas can be impacted by pipeline capacity constraints limiting takeaway and increasing basis differentials . the permian basin and mid-continent region gas production growth has resulted in higher differentials and if pipeline constraints remain , higher differentials will persist or potentially worsen . 34 our revenue , profitability , and future growth are highly dependent on the prices we receive for our oil and gas production . compared to 2016 , our realized oil price for 2017 increased 23 % to $ 47.06 per barrel . similarly , our realized gas price increased 19 % to $ 2.76 per mcf , while our realized ngl price increased 54 % to $ 21.61 per barrel . see results of operations revenues below for further information regarding our realized commodity prices . 2017 summary of operating and financial results the following is a summary of certain 2017 operating and financial results : total daily production volumes increased 19 % to 1,142.1 mmcfe per day . oil volumes increased 27 % to 57.2 mbbls per day . gas volumes increased 12 % to 513.6 mmcf per day . ngl volumes increased 23 % to 47.6 mbbls per day . total production revenue increased 53 % to $ 1.87 billion . year-end proved reserves increased to 3.35 tcfe , as compared to 2.89 tcfe at year-end 2016 . exploration and development capital investments were $ 1.28 billion , as compared to $ 734.8 million in 2016 . cash flow provided by operating activities increased 75 % to $ 1.10 billion . total debt at december 31 , 2017 and 2016 consisted of $ 1.50 billion of senior notes . during the second quarter 2017 , we repaid our 5.875 % $ 750 million notes due 2022 and issued 3.90 % $ 750 million notes due 2027 . our 4.375 % $ 750 million notes are due 2024 . cash on hand at december 31 , 2017 was $ 400.5 million . for the year ended december 31 , 2017 , we had net income of $ 494.3 million ( $ 5.19 per diluted share ) , as compared to a net loss of $ 408.8 million ( $ 4.38 per diluted share ) in 2016 . production revenue in 2017 was positively impacted by increased realized commodity prices and production volumes . lower commodity prices negatively impacted 2016 , including resulting in $ 757.7 million of impairments of our oil and gas properties in that year . year-over-year changes are discussed further in the results of operations section that follows . proved reserves our proved reserves by region at december 31 , 2017 and 2016 were as follows : replace_table_token_17_th replace_table_token_18_th 35 year-end 2017 proved reserves increased approximately 16 % to 3.35 tcfe , compared to 2.89 tcfe at year-end 2016 . proved gas reserves were 1.61 tcf , proved oil reserves were 0.82 tcfe , and proved ngl reserves were 0.92 tcfe . reserves in our mid-continent region accounted for 52 % of total proved reserves with nearly all of the remainder in the permian basin . during 2017 , we added 940.7 bcfe of new reserves through extensions and discoveries . net negative revisions totaled 59.7 bcfe , which consisted primarily of a decrease of 248.8 bcfe for the removal of pud reserves whose development will likely be delayed beyond five years of initial disclosure , offset by an increase of 187.2 bcfe related to improved commodity prices . story_separator_special_tag a decline of approximately 19 % or more in the value of the ceiling limitation would have resulted in an impairment at december 31 , 2017 . during the year ended december 31 , 2016 , we recognized ceiling test impairments totaling $ 757.7 million ( $ 481.4 million , net of tax ) . these impairments were primarily the result of decreases in the trailing twelve-month average prices for oil , gas , and ngls utilized in determining the estimated future net revenues from proved reserves . because the ceiling calculation uses trailing twelve-month average commodity prices , the effect of increases and decreases in period-over-period prices can significantly impact the ceiling limitation calculation . in addition , other factors that impact the ceiling limitation calculation include , but are not limited to , incremental proved reserves that may be added each period , revisions to previous reserve estimates , capital expenditures , operating costs , depletion expense , and all related tax effects . depending on fluctuations in these factors , including a decline in prices , we may incur full cost ceiling test impairments in future quarters . the calculated ceiling limitation is not intended to be indicative of the fair market value of our proved reserves or future results . impairment charges do not affect cash flow from operating activities , but do adversely affect our net income and various components of our balance sheet . any impairment of oil and gas properties is not reversible at a later date . 38 depreciation , depletion , and amortization depletion of our producing properties is computed using the units-of-production method . the economic life of each producing well depends upon the estimated proved reserves for that well , which in turn depend upon the assumed realized sales price for future production . therefore , fluctuations in oil and gas prices will impact the level of proved reserves used in the calculation . higher prices generally have the effect of increasing reserves , which reduces depletion expense . conversely , lower prices generally have the effect of decreasing reserves , which increases depletion expense . the cost of replacing production also impacts our depletion expense . in addition , changes in estimates of reserve quantities , estimates of operating and future development costs , reclassifications of properties from unproved to proved , and impairments of oil and gas properties will also impact depletion expense . depletion is calculated quarterly before the ceiling test impairment calculation . while prices have increased in 2017 from 2016 , thus increasing our reserves , so too have our exploration and development expenditures and activities , thus increasing our proved oil and gas properties and future development costs , causing an overall increase in depletion expense . fixed assets consist primarily of gathering and plant facilities , vehicles , airplanes , office furniture , and computer equipment and software . these items are recorded at cost and are depreciated on the straight-line method based on expected lives of the individual assets , which range from 3 to 30 years . depreciation , depletion , and amortization ( “ dd & a ” ) consisted of the following for the years indicated : replace_table_token_23_th asset retirement obligation asset retirement obligation expense is typically primarily comprised of accretion expense . in periods subsequent to the initial measurement of an asset retirement obligation liability at present value , a period-to-period increase in the carrying amount of the liability is recognized as accretion expense , which represents the effect of the passage of time on the amount of the liability . an equivalent amount is added to the carrying amount of the liability . also included in asset retirement obligation expense are gains and losses recognized on the settlement of asset retirement obligation liabilities . asset retirement obligation expense includes $ 10.5 million in 2017 for the estimated liability to decommission two offshore properties in the gulf of mexico in which we were a prior lessee . in january 2018 , the bureau of safety and environmental enforcement ( “ bsee ” ) notified us and other prior lessees that the current lessee of the properties had filed a petition for relief under the bankruptcy code and , as a result , had defaulted on its obligation to decommission the properties . consequently , bsee ordered us and other prior lessees to decommission all wells , pipelines , platforms , and other facilities related to these properties . our estimate of our liability may change as we refine our understanding of the extent of our obligations under the orders from bsee and obtain additional information on decommissioning costs . production production expense generally consists of costs for labor , equipment , maintenance , saltwater disposal , compression , power , treating , and miscellaneous other costs ( lease operating expense ) . production expense also includes well workover activity necessary to maintain production from existing wells . production expense consists of lease operating expense and workover expense as follows : replace_table_token_24_th 39 through efficiency gains and increasing daily production by 19 % during 2017 as compared to 2016 , we reduced our per unit lease operating expense by 4 % between these two periods . on an absolute basis , lease operating expense in 2017 increased 14 % , or $ 25.9 million , compared to 2016. the increase was primarily caused by : ( i ) increased saltwater disposal costs primarily attributed to the addition of new wells and recompleted wells ; ( ii ) increased labor costs primarily due to additional employees and salary and bonus increases ; ( iii ) increased equipment maintenance costs , primarily the result of the addition of new wells ; ( iv ) increased gas lift and fuel compression costs ; and ( v ) increased chemicals and treating costs . workover expense increased 10 % , or $ 4.3 million , during 2017 as compared to 2016. during 2017 , we had costlier major well workover projects than during 2016 , which increased expense .
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results of operations above for more information regarding year-over-year changes in revenue and operating expenses . in 2017 , net cash used by investing activities was $ 1.27 billion , compared to $ 692.4 million and $ 1.01 billion in 2016 and 2015 , respectively . prevailing commodity prices have a significant impact on the amount of cash flow available to invest in e & d activities , which comprise the majority of our cash used by investing activities . our e & d capital expenditures , as reflected in the statements of cash flows , were $ 1.23 billion , $ 699.6 million , and $ 979.0 million in 2017 , 2016 , and 2015 , respectively . our other capital expenditures were $ 45.4 million , $ 22.2 million , and $ 70.6 million in 2017 , 2016 , and 2015 , respectively . these other capital expenditures are primarily for our gathering facilities . capital expenditures were partially offset by proceeds from asset sales of $ 12.6 million , $ 29.4 million , and $ 41.0 million in 2017 , 2016 , and 2015 , respectively . from time-to-time we sell interests in various non-core assets . net cash used by financing activities in 2017 was $ 83.0 million and includes $ 772.9 million used for the early extinguishment of the $ 750 million 5.875 % senior notes due 2022 , which included $ 22.6 million of tender and redemption premiums .
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