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we suspended the equity method of accounting during the quarter ended june 30 , 2011 since the adjusted basis of our investment was zero at june 30 , 2011 and we have no commitments to provide story_separator_special_tag overview the following discussion should be read in conjunction with the audited consolidated financial statements and notes thereto included in part ii , item 8 of this annual report on form 10-k. geron is a biopharmaceutical company developing first-in-class therapies for cancer . imetelstat , a telomerase inhibitor , is currently being evaluated in four phase 2 clinical trials for the following indications : metastatic breast cancer , advanced non-small cell lung cancer , essential thrombocythemia and multiple myeloma . grn1005 , an lrp-directed peptide-drug conjugate , is being evaluated in two phase 2 clinical trials : brain metastases arising from breast cancer and brain metastases arising from non-small cell lung cancer . 40 critical accounting policies and estimates our consolidated financial statements 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 , revenues and expenses . note 1 of notes to consolidated financial statements describes the significant accounting policies used in the preparation of the consolidated financial statements . certain of these significant accounting policies are considered to be critical accounting policies , as defined below . a critical accounting policy is defined as one that is both material to the presentation of our financial statements and requires management to make difficult , subjective or complex judgments that could have a material effect on our financial condition and results of operations . specifically , critical accounting estimates have the following attributes : ( i ) we are required to make assumptions about matters that are highly uncertain at the time of the estimate ; and ( ii ) different estimates we could reasonably have used , or changes in the estimate that are reasonably likely to occur , would have a material effect on our financial condition or results of operations . estimates and assumptions about future events and their effects can not be determined with certainty . we base our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances . these estimates may change as new events occur , as additional information is obtained and as our operating environment changes . these changes have historically been minor and have been included in the consolidated financial statements as soon as they became known . based on a critical assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies , management believes that our consolidated financial statements are fairly stated in accordance with accounting principles generally accepted in the united states , and meaningfully present our financial condition and results of operations . we believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of our consolidated financial statements : revenue recognition since our inception , a substantial portion of our revenues has been generated from research and licensing agreements . revenue under such agreements typically includes upfront signing or license fees , cost reimbursements , milestone payments and royalties on future product sales . we recognize nonrefundable signing , license or non-exclusive option fees as revenue when rights to use the intellectual property related to the license have been delivered and over the term of the agreement if we have continuing performance obligations . we recognize milestone payments , which are subject to substantive contingencies , upon completion of specified milestones , which represents the culmination of an earnings process , according to contract terms . royalties are generally recognized as revenue upon the receipt of the related royalty payment . we recognize cost reimbursement revenue under collaborative agreements as the related research and development costs for services are rendered . we recognize related party revenue under collaborative agreements as the related party research and development costs for services are rendered and when the source of funds has not been derived from our contributions to the related party . deferred revenue represents the portion of research or license payments received which has not been earned . when payments are received in equity securities , we do not recognize any revenue unless such securities are determined to be realizable in cash . we estimate the projected future term of license agreements over which we recognize revenue . our estimates are based on contractual terms , historical experience and general industry practice . revisions in the estimated terms of these license agreements have the effect of increasing or decreasing license fee revenue in the period of revision . as of december 31 , 2011 , no revisions to the estimated future terms of license agreements have been made and we do not expect revisions to the currently active agreements in the future . valuation of stock-based compensation we measure and recognize compensation expense for all stock-based awards to our employees and directors , including stock options , restricted stock awards and employee stock purchases related to our employee stock purchase plan ( espp ) based on estimated fair values . we use the black scholes option-pricing valuation model to estimate the grant-date fair value of our stock options and employee stock plan purchases . option-pricing model assumptions such as expected volatility , risk-free interest rate and expected term impact the fair value estimate . 41 further , the estimated forfeiture rate impacts the amount of aggregate compensation recognized during the period . the fair value of stock options and employee stock purchases is amortized over the vesting period of the awards using a straight-line method . expected volatilities are based on historical volatilities of our stock since traded options on geron stock do not correspond to option terms and trading volume of options is limited . story_separator_special_tag following is a description of the valuation methodologies used for instruments measured at fair value on our consolidated balance sheet , including the category for such instruments . we classify inputs to derive fair values for marketable debt securities available-for-sale and marketable investments in licensees as level 1 and 2. instruments classified as level 1 include money market funds and certificates of deposit , representing 9 % of total financial assets measured at fair value as of december 31 , 2011. instruments classified as level 2 include u.s. government-sponsored enterprise securities , commercial paper and corporate notes , representing 91 % of total financial assets measured at fair value as of december 31 , 2011. the price for each security at the measurement date is derived from various sources . periodically , we assess the reasonableness of these sourced prices by comparing them to the prices provided by our portfolio managers from broker quotes as well as reviewing the pricing methodologies used by our portfolio managers . historically , we have not experienced significant deviation between the sourced prices and our portfolio manager 's prices . warrants to purchase common stock and non-employee options are normally traded less actively , have trade activity that is one way , and or traded in less-developed markets and are therefore valued based upon models with significant unobservable market parameters , resulting in level 3 categorization . the fair value for these instruments is calculated using the black scholes option-pricing model . the model 's inputs reflect assumptions that market participants would use in pricing the instrument in a current period transaction . inputs to the model include stock volatility , dividend yields , expected term of the derivatives and risk-free interest rates . see the following discussion , ยfair value of derivatives , ย for information on the derivation of inputs to the model . changes to the model 's inputs are not changes to valuation methodologies , but instead reflect direct or indirect impacts from changes in market conditions . accordingly , results from the valuation model in one period may not be indicative of future period measurements . instruments classified as level 3 include derivative liabilities , representing all of total financial liabilities measured at fair value as of december 31 , 2011. for a further discussion regarding fair value measurements , see note 2 on fair value measurements in notes to consolidated financial statements of this form 10-k. clinical trial accruals substantial portions of our preclinical studies and all of our clinical trials have been performed by third-party contract research organizations , or cros , and other vendors . we accrue expenses for preclinical studies performed by our vendors based on certain estimates over the term of the service period and adjust our estimates as required . we accrue expenses for clinical trial activities performed by cros based upon the estimated amount of work completed on each study . for clinical trial expenses , the significant factors used in estimating accruals include the number of patients enrolled , the number of active clinical sites , and the duration for which the patients will be enrolled in the study . we monitor patient enrollment levels and related activities to the extent possible through internal reviews , review of contractual terms and correspondence with cros . we base our estimates on the best information available at the time . however , additional information may become available to us which will allow us to make a more accurate estimate in future periods . in this event , we may be required to record adjustments to research and development expenses in future periods when the actual level of activity becomes more certain . 43 fair value of derivatives for warrants and non-employee options classified as assets or liabilities , the fair value of these instruments is recorded on the consolidated balance sheet at inception of such classification and marked to fair value at each financial reporting date . the change in fair value of the warrants and non-employee options is recorded in the consolidated statements of operations as an unrealized gain ( loss ) on fair value of derivatives . the warrants and non-employee options continue to be reported as an asset or liability until such time as the instruments are exercised or expire or are otherwise modified to remove the provisions which require this treatment , at which time these instruments are marked to fair value and reclassified from assets or liabilities to stockholders ' equity . for warrants and non-employee options classified as permanent equity , the fair value of the warrants and non-employee options is recorded in stockholders ' equity and no further adjustments are made . fair value of warrants and non-employee options is estimated using the black scholes option-pricing model . use of this model requires us to make assumptions regarding stock volatility , dividend yields , expected term of the warrants and non-employee options and risk-free interest rates . expected volatilities are based on historical volatilities of our stock . the expected term of warrants and non-employee options represent the remaining contractual term of the instruments . the risk-free interest rate is based on the u.s. zero coupon treasury strip yields for the remaining term of the instrument . if factors change and we employ different assumptions in future periods , the fair value of these warrants and non-employee options reflected as of each balance sheet date and the resulting change in fair value that we record may differ significantly from what we have recorded in previous periods . as of december 31 , 2011 , we have not revised the method in which we derive assumptions in order to estimate fair values of warrants and non-employee options classified as assets or liabilities , and we do not expect revisions in the future .
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results of operations our results of operations have fluctuated from period to period and may continue to fluctuate in the future , based upon the progress of our research and development efforts and variations in the level of expenses related to developmental efforts during any given period . results of operations for any period may be unrelated to results of operations for any other period . in addition , historical results should not be viewed as indicative of future operating results . we are subject to risks common to companies in our industry and at our stage of development , including risks inherent in our research and development efforts , reliance upon our collaborative partners , enforcement of our patent and proprietary rights , need for future capital , potential competition and uncertainty of preclinical and clinical trial results or regulatory approvals or clearances . in order for a product candidate to be commercialized based on our research , we and our collaborators must conduct preclinical tests and clinical trials , demonstrate the efficacy and safety of our product candidates , obtain regulatory approvals or clearances and enter into manufacturing , distribution and marketing arrangements , as well as obtain market acceptance . we do not expect to receive revenues or royalties based on therapeutic products for a period of years , if at all . revenues we recognized $ 300,000 of revenues from collaborative agreements in 2011 compared to $ 925,000 in 2010 and $ 450,000 in 2009. revenues in 2011 , 2010 and 2009 primarily reflected revenue recognized under our collaboration with ge healthcare uk , ltd. ( ge healthcare ) . the collaboration with ge healthcare began in july 2009 and concluded in june 2011. we have entered into license and option agreements with companies involved with oncology , diagnostics , research tools , agriculture and biologics production . in each of these agreements , we have granted certain rights to our technologies .
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you can identify forward-looking statements because they contain words such as โ believes , โ โ expects , โ โ may , โ โ should , โ โ seeks , โ โ approximately , โ โ intends , โ โ plans , โ โ estimates , โ โ anticipates โ or similar expressions that relate to our strategy , plans or intentions . all statements we make relating to our estimated and projected earnings , margins , costs , expenditures , cash flows , growth rates and financial results or to our strategies , objectives , intentions , resources and expectations regarding future industry trends are forward-looking statements . in addition , we , through our senior management , from time to time make forward-looking public statements concerning our expected future operations and performance and other developments . these forward-looking statements are subject to risks and uncertainties that may change at any time , and , therefore , our actual results may differ materially from those that we expected . we derive many of our forward-looking statements from our operating budgets and forecasts , which are based upon many detailed assumptions . while we believe that our assumptions are reasonable , we caution that it is very difficult to predict the impact of known factors , and , of course , it is impossible for us to anticipate all factors that could affect our actual results . important factors that could cause actual results to differ materially from our expectations , which we refer to as โ cautionary statements , โ are disclosed under โ item 1a . risk factors , โ and โ item 7. management 's discussion and analysis of financial condition and results of operations โ and elsewhere in this annual report on form 10-k. all forward-looking information in this annual report on form 10-k and subsequent written and oral forward-looking statements attributable to us , or persons acting on our behalf , are expressly qualified in their entirety by the cautionary statements . some of the factors that we believe could affect our results include : supply , demand , prices and other market conditions for our products , including volatility in commodity prices ; the effects of competition in our markets ; changes in currency exchange rates , interest rates and capital costs ; adverse developments in our relationship with both our key employees and unionized employees ; our ability to operate our businesses efficiently , manage capital expenditures and costs ( including general and administrative expenses ) and generate earnings and cash flow ; o ur indebtedness ; our expectations with respect to our capital improvement and turnaround projects ; our supply and inventory intermediation arrangements expose us to counterparty credit and performance risk ; termination of our inventory intermediation agreements with j. aron , which could have a material adverse effect on our liquidity , as we would be required to finance our crude oil , intermediate and refined products inventory covered by the agreements . additionally , we are obligated to repurchase from j. aron certain products located at our j. aron storage tanks upon termination of these agreements ; restrictive covenants in our indebtedness that may adversely affect our operational flexibility or ability to make distributions ; our assumptions regarding payments arising under pbf energy 's tax receivable agreement and other arrangements relating to pbf energy ; our expectations and timing with respect to our acquisition activity ; the impact of disruptions to crude or feedstock supply to any of our refineries , including disruptions due to problems at pbfx or with third-party logistics infrastructure or operations , including pipeline , marine and rail transportation ; the impact of current and future laws , rulings and governmental regulations , including the implementation of rules and regulations regarding transportation of crude oil by rail ; 48 the impact of the recently enacted federal income tax legislation on our business ; the threat of cyber-attacks ; the effectiveness of our crude oil sourcing strategies , including our crude by rail strategy and related commitments ; adverse impacts related to legislation by the federal government lifting the restrictions on exporting u.s. crude oil ; adverse impacts from changes in our regulatory environment , such as the effects of compliance with ab32 , or from actions taken by environmental interest groups ; market risks related to the volatility in the price of rins required to comply with the renewable fuel standards and ghg emission credits required to comply with various ghg emission programs , such as ab32 ; our ability to complete the successful integration of the martinez refinery and any other acquisitions into our business and to realize the benefits from such acquisitions ; unforeseen liabilities associated with the martinez acquisition and any other acquisitions ; and any decisions we continue to make with respect to our energy-related logistics assets that may be transferred to pbfx . we caution you that the foregoing list of important factors may not contain all of the material factors that are important to you . in addition , in light of these risks and uncertainties , the matters referred to in the forward-looking statements contained in this annual report on form 10-k may not in fact occur . accordingly , investors should not place undue reliance on those statements . our forward-looking statements speak only as of the date of this annual report on form 10-k. except as required by applicable law , including the securities laws of the united states , we do not intend to update or revise any forward-looking statements . all subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing . story_separator_special_tag credit agreement . 50 senior notes on may 30 , 2017 , we and pbf finance issued $ 725.0 million , in aggregate , principal amount of the 2025 senior notes . story_separator_special_tag these factors can impact , among other things , the level of inventories in the market , resulting in price volatility and a reduction or increase in product margins . moreover , the industry typically experiences seasonal fluctuations in demand for refined petroleum products , such as for gasoline and diesel , during the summer driving season and for home heating oil during the winter . benchmark refining margins in assessing our operating performance , we compare the refining margins ( revenue less materials cost ) of each of our refineries against a specific benchmark industry refining margin based on crack spreads . benchmark refining margins take into account both crude and refined petroleum product prices . when these prices are combined in a formula they provide a single valueโa gross margin per barrelโthat , when multiplied by throughput , provides an approximation of the gross margin generated by refining activities . the performance of our east coast refineries generally follows the dated brent ( nyh ) 2-1-1 benchmark refining margin . our toledo refinery generally follows the wti ( chicago ) 4-3-1 benchmark refining margin . our chalmette refinery generally follows the lls ( gulf coast ) 2-1-1 benchmark refining margin . our torrance refinery generally follows the ans ( west coast ) 4-3-1 benchmark refining margin . while the benchmark refinery margins presented below under โ results of operationsโmarket indicators โ are representative of the results of our refineries , each refinery 's realized gross margin on a per barrel basis will differ from the benchmark due to a variety of factors affecting the performance of the relevant refinery to its corresponding benchmark . these factors include the refinery 's actual type of crude oil throughput , product yield differentials and any other factors not reflected in the benchmark refining margins , such as transportation costs , storage costs , credit fees , fuel consumed during production and any product premiums or discounts , as well as inventory fluctuations , timing of crude oil and other feedstock purchases , a rising or declining crude and product pricing environment and commodity price management activities . as discussed in more detail below , each of our refineries , depending on market conditions , has certain feedstock-cost and product-value advantages and disadvantages as compared to the refinery 's relevant benchmark . credit risk management credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to us . our exposure to credit risk is reflected in the carrying amount of the receivables that are presented in our consolidated balance sheets . to minimize credit risk , all customers are subject to extensive credit verification procedures and extensions of credit above defined thresholds are to be approved by the senior management . our intention is to trade only with recognized creditworthy third parties . in addition , receivable balances are monitored on an ongoing basis . we also limit the risk of bad debts by obtaining security such as guarantees or letters of credit . 52 other factors we currently source our crude oil for our refineries on a global basis through a combination of market purchases and short-term purchase contracts , and through our crude oil supply agreements . we believe purchases based on market pricing has given us flexibility in obtaining crude oil at lower prices and on a more accurate โ as needed โ basis . since our paulsboro and delaware city refineries access their crude slates from the delaware river via ship or barge and through our rail facilities at delaware city , these refineries have the flexibility to purchase crude oils from the mid-continent and western canada , as well as a number of different countries . we have not sourced crude oil under our crude supply arrangement with pdvsa since 2017 as pdvsa has suspended deliveries due to our inability to agree to mutually acceptable payment terms and because of u.s. government sanctions against pdvsa . in the past several years , we expanded and upgraded the existing on-site railroad infrastructure at the delaware city refinery . currently , crude oil delivered by rail to this facility is consumed at our delaware city and paulsboro refineries . the delaware city rail unloading facilities , which were sold to pbfx in 2014 and the east coast storage assets , allow our east coast refineries to source wti-based crude oils from western canada and the mid-continent , which we believe , at times , may provide cost advantages versus traditional brent-based international crude oils . in support of this rail strategy , we have at times entered into agreements to lease or purchase crude railcars . certain of these railcars were subsequently sold to a third-party , which has leased the railcars back to us for periods of between four and seven years . in subsequent periods , we have sold or returned railcars to optimize our railcar portfolio . our railcar fleet , at times , provides transportation flexibility within our crude oil sourcing strategy that allows our east coast refineries to process cost advantaged crude from canada and the mid-continent . our operating cost structure is also important to our profitability . major operating costs include costs relating to employees and contract labor , energy , maintenance and environmental compliance and emission control regulations , including the cost of rins required for compliance with the rfs . the predominant variable cost is energy , in particular , the price of utilities , natural gas and electricity . our operating results are also affected by the reliability of our refinery operations . unplanned downtime of our refinery assets generally results in lost margin opportunity and increased maintenance expense . the financial impact of planned downtime , such as major turnaround maintenance , is managed through a planning process that considers such things as the margin environment , the availability of resources to perform the needed maintenance and feed logistics , whereas unplanned downtime does not afford us this opportunity .
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executive summary we were formed in march 2008 to pursue the acquisitions of crude oil refineries and downstream assets in north america . as of december 31 , 2019 , we owned and operated five domestic oil refineries and related assets located in delaware city , delaware , paulsboro , new jersey , toledo , ohio , chalmette , louisiana and torrance , california . our refineries have a combined processing capacity , known as throughput , of approximately 900,000 bpd , and a weighted average nelson complexity index of 12.2. our five oil refineries are all engaged in the refining of crude oil and other feedstocks into petroleum products , and are aggregated into one reportable segment . following the completion of the martinez acquisition , we increased our total throughput capacity to over 1,000,000 bpd and became the most complex independent refiner with a consolidated nelson complexity of 12.8. factors affecting comparability our results over the past three years have been affected by the following events , the understanding of which will aid in assessing the comparability of our period to period financial performance and financial condition . torrance land sale on august 1 , 2019 and august 7 , 2018 , we closed on third-party sales of parcels of real property acquired as part of the torrance refinery , but not part of the refinery itself . the sales resulted in gains of approximately $ 33.1 million and $ 43.8 million in the third quarter of 2019 and 2018 , respectively , included within gain on sale of assets in the consolidated statements of operations . 49 inventory intermediation agreements the inventory intermediation agreements with j. aron were amended in the first quarter of 2019 and amended and restated in the third quarter of 2019 , pursuant to which certain terms of the inventory intermediation agreements were amended , including , among other things , the maturity date . on march 29 , 2019 , the inventory intermediation agreement by and among j.
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as of december 31 , 2018 , that collateral consisted of fixed income securities included in our total investment portfolio , and cash and cash equivalents , with a total fair value of $ 168.9 million . unrealized investment losses tables 5.4a and 5.4b below summarize , for all available-for-sale investments in an unrealized loss position as of december 31 story_separator_special_tag introduction as used below , โ we โ and โ our โ refer to mgic investment corporation 's consolidated operations or to mgic investment corporation , as a separate entity , as the context requires . references to `` we '' and `` our '' in the context of debt obligations refer to mgic investment corporation . see the `` glossary of terms and acronyms '' for definitions and descriptions of terms used throughout this annual report . the risk factors contained in item 1a discuss trends and uncertainties affecting us and are an integral part of the md & a . forward looking and other statements as discussed under โ forward looking statements and risk factors โ in item 1a of part 1 of this report , actual results may differ materially from the results contemplated by forward looking statements . we are not undertaking any obligation to update any forward looking statements or other statements we may make in the following discussion or elsewhere in this document even though these statements may be affected by events or circumstances occurring after the forward looking statements or other statements were made . therefore , no reader of this document should rely on these statements being current as of any time other than the time at which this document was filed with the securities and exchange commission . overview this overview of the md & a highlights selected information and may not contain all of the information that is important to readers of this annual report . hence , this overview is qualified by the information that appears elsewhere in this annual report , including the other portions of the md & a . through our subsidiary , mgic , we are a leading provider of pmi in the united states , as measured by $ 209.7 billion of primary iif on a consolidated basis at december 31 , 2018 . replace_table_token_12_th ( 1 ) see `` explanation and reconciliation of our use of non-gaap financial measures . '' summary of 2018 financial results net income of $ 670.1 million for 2018 increased by $ 314.3 million when compared to the prior year , and diluted income per share of $ 1.78 increased by 87 % when compared to the prior year . these increases primarily reflect decreases in our provision for income taxes and losses incurred associated with delinquency notices received in the current year , partially offset by a decrease in favorable loss reserve development associated with delinquency notices received in prior mgic investment corporation 2018 form 10-k | 44 mgic investment corporation and subsidiaries management 's discussion and analysis | glossary of terms and acronyms years . adjusted net operating income of $ 668.7 million for 2018 ( 2017 : $ 517.7 million ) and adjusted net operating income per diluted share of $ 1.78 ( 2017 : $ 1.36 ) each increased from the prior year primarily for the same reasons . the decrease in our tax provision reflects the lower corporate income tax rate in 2018 under the tax act , the 2017 remeasurement of our deferred tax assets and an additional tax provision recorded in 2017 for the settlement of our irs litigation , partially offset by the tax associated with a 2018 increase in income before tax . losses incurred , net were $ 36.6 million , down 32 % when compared to the prior year . the decrease was driven by a 20 % decline in new delinquency notices compared to the prior year , along with a lower estimated claim rate on new notices ( approximately 9 % , down from approximately 10 % in the prior year ) . the decline in new delinquency notices reflected , in part , that 2017 notices included an elevated level of notices associated with major hurricanes . the estimated claim rate on 2017 notices , excluding those associated with hurricanes , was 10.5 % . the decrease in our estimated claim rate on new notices reflects improved cure activity due to the current economic environment . favorable loss reserve development associated with delinquency notices received in prior years was $ 167 million and $ 231 million , in 2018 and 2017 , respectively , due to a lower estimated claim rate in each year compared to the prior year-end . during 2018 , mgic paid $ 220 million in dividends to our holding company . during 2018 , we repurchased approximately 16.0 million shares of our common stock for approximately $ 175 million . business environment economic conditions current u.s. economic conditions continue to support favorable housing fundamentals , such as low unemployment , strong consumer confidence , increasing household formations , and appreciating home values . we benefit from favorable housing fundamentals that increase home purchase activity and provide borrowers reliable , or increasing , financial resources . as a result of the current and expected economic conditions , mortgage interest rates have been higher on average in 2018 compared to 2017. the increase in mortgage interest rates did not materially impact home purchasing activity in 2018. despite the impact of rising rates on housing affordability , the homeownership rate continued to edge up in 2018. in particular , the homeownership rate of those 35 and younger ( which likely includes many first time homebuyers that require mortgage insurance ) is indicated to be at levels last seen in 2013. the increase in purchase mortgage originations , and first-time homebuyer activity , resulted in a modest increase in our niw in 2018 when compared to 2017. the level of unemployment , interest rates , and home prices may change in the future . story_separator_special_tag refer to `` mortgage insurance portfolio '' for additional discussion of the 2018 business environment and the impact it had on operating measures including niw , iif and rif . pmiers since december 31 , 2015 we have operated under the requirements of the pmiers of the gses in order to insure loans delivered to or purchased by them . the pmiers include financial requirements that require an approved mortgage insurer to have available assets that meet or exceed its minimum required assets . mgic 's available assets under pmiers totaled $ 4.8 billion , an excess of $ 1.4 billion over its minimum required assets at december 31 , 2018 . revised pmiers were published in september 2018 and will become effective march 31 , 2019. see `` revised pmiers '' below for additional information on the changes made to the pmiers and their impact on mgic 's excess of available assets over its minimum required assets . business outlook for 2019 our outlook for 2019 should be viewed against the backdrop of the business environment discussed above . niw we expect our 2019 niw to be relatively flat with 2018. our niw is affected by total mortgage originations , the percentage of total mortgage originations utilizing private mortgage insurance ( the `` pmi penetration rate '' ) , and our market share within the pmi industry . as of late january 2019 , total mortgage origination forecasts indicate relatively flat origination volume in 2019 compared to 2018 , with a slight increase in purchase originations offsetting a decline in refinance originations . we expect the pmi penetration rate to remain strong in part because the pmi industry 's share of purchase originations has historically been 3-4 times greater than its share of refinance originations . mgic investment corporation 2018 form 10-k | 46 mgic investment corporation and subsidiaries management 's discussion and analysis | glossary of terms and acronyms the widespread use of loan level pricing systems by the pmi industry will make it more difficult to compare our rates to those offered by our competitors . we may not be aware of industry changes until we observe that our volume of niw has changed and our volume may fluctuate more as a result . iif and rif our iif increased 7.6 % in 2018 and we expect our iif to increase in 2019. our book of iif is the main driver of our revenues and earnings , and its growth is driven by our ability to generate niw and retain existing policies in force , as measured by our persistency . interest rates influence both our niw and persistency . in a rising rate environment , total mortgage originations may decline , however , we would also expect policy cancellation rates to decline , and in turn increase persistency , although the impact generally lags the change in interest rates . results of operations premiums . we believe that in 2019 , growth in our earned premiums ( on a direct basis ) will continue to be slower than the growth of our iif . overall , our premium rates have been trending down in recent years , including in 2018 , and the affected books of business represent an increasing percentage of our total iif . our 2019 direct premiums written and net premiums earned are expected to be comparable to 2018. our net premiums earned will be impacted by the decrease in premium rates noted above and by the amount of premiums we cede under our quota share and excess of loss reinsurance transactions . the amount of profit commission we receive , which reduces the amount of premiums we cede , is variable year-to-year and is dependent on the amount of losses ceded . our profit commission in recent years has benefited from favorable loss reserve development associated with delinquency notices received in prior years . further , 2019 will include a full year of premiums ceded under our excess of loss reinsurance transaction that went into effect in the fourth quarter of 2018. the actual amount of premiums we cede in 2019 will also be affected by any changes in the structure of our reinsurance coverage , such as termination of existing quota share reinsurance or additional excess of loss coverage . factors that affect the amount of premiums we earn from our iif are further discussed in our `` consolidated results of operations - premium yield . '' investment income . net investment income is a material contributor to our results of operations . we expect an increase in our net investment income in 2019 compared to 2018 primarily due to an increase in our invested assets . the amount of investment income will also be impacted by the yield we can earn on investments . losses . we expect 2019 losses incurred with respect to delinquency notices received in 2019 to be lower than the comparable amount for 2018 as we expect to receive fewer new delinquency notices in 2019. overall , however , 2019 losses incurred , net are expected to increase compared to 2018 if we experience no favorable loss reserve development associated with delinquency notices received in prior years . income taxes . we expect our 2019 effective tax rate to be approximately 21 % . revised pmiers the primary change included in the financial requirements of the revised pmiers published in september 2018 and effective march 31 , 2019 , is the elimination of any credit for future premiums that had previously been allowed for certain insurance policies . as a result , upon their effectiveness , mgic 's excess of available assets over its minimum required assets will decrease . see `` gses '' below for the expected impact of the revised pmiers .
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balance sheet review shareholders ' equity replace_table_token_40_th the increase in shareholders ' equity was due to net income during 2018 , offset in part by a decrease in the fair value of our investment portfolio and the repurchase of shares of our common stock . total assets and total liabilities as of december 31 , 2018 , total assets were $ 5.7 billion and total liabilities were $ 2.1 billion . compared to year-end 2017 , total assets increased by $ 58.3 million and total liabilities decreased by $ 369.1 million . the following sections focus on the assets and liabilities experiencing major developments in 2018. investment portfolio the investment portfolio increased 3 % , to $ 5.2 billion as of december 31 , 2018 ( 2017 : $ 5.0 billion ) , as net cash from operations was used in part for additional investment . the return we generate on our investment portfolio is an important component of our consolidated financial results . our investment portfolio primarily consists of a diverse mix of highly rated fixed income securities . the investment portfolio is designed to achieve the following objectives : operating companies ( 1 ) holding company รจ preserve pmiers assets รจ provide liquidity with minimized realized loss รจ maximize total return with emphasis on yield , subject to our other objectives รจ maintain highly liquid , low volatility assets รจ limit portfolio volatility รจ maintain high credit quality รจ duration 3.5 to 5.5 years รจ duration maximum of 2.5 years ( 1 ) primarily mgic to achieve our portfolio objectives , our asset allocation considers the risk and return parameters of the various asset classes in which we invest . this asset allocation is informed by , and based on the following factors : รจ economic and market outlooks ; รจ diversification effects ; รจ security duration ; รจ liquidity ; รจ capital considerations ; and รจ income tax rates .
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in this discussion and analysis , we discuss and explain the consolidated financial condition and results of operations for the years ended december 31 , 2013 , 2012 and 2011 , including the following topics : an overview of our business , including the acquisition of sealy corporation and its subsidiaries ( โ sealy โ ) that closed on march 18 , 2013 ; the effect of the foregoing on our overall financial performance and condition ; our net sales and costs in the periods presented as well as changes between periods ; and expected sources of liquidity for future operations . business overview general we are the world 's largest bedding provider . we develop , manufacture , market , and distribute bedding products , which we sell globally . our brand portfolio includes many of the most highly recognized brands in the industry , including tempurยฎ , tempur-pedicยฎ , sealyยฎ , sealy posturepedicยฎ , optimum , and stearns & fosterยฎ . our comprehensive suite of bedding products offers a variety of products to consumers across a broad range of channels . we sell our products through three distribution channels in each operating business segment : retail ( furniture and bedding retailers , department stores , specialty retailers and warehouse clubs ) ; direct ( e-commerce platforms , company-owned stores , and call centers ) ; and other ( third party distributors , hospitality and healthcare customers ) . business segments we have three reportable business segments : tempur north america , tempur international , and sealy . these reportable segments are strategic business units that are managed separately based on the fundamental differences in their operations . our tempur north america segment consists of two u.s. manufacturing facilities and our tempur north america distribution subsidiaries . our tempur international segment consists of our manufacturing facility in denmark , whose customers include all of our distribution subsidiaries and third party distributors outside our tempur north america and sealy segments . our sealy segment consists of company-owned and operated bedding and component manufacturing facilities located around the world , along with distribution subsidiaries , joint ventures , and licensees . we evaluate segment performance based on net sales and operating income . strategy we are the world 's largest bedding provider and the only provider with global scale . we believe our future growth potential is significant in our existing markets and through expansion into new markets . in order to achieve our long-term growth potential while managing the current economic and competitive environment , we will focus on the key strategic growth initiatives discussed below : product innovation we will continue to invest in research and development to leverage the combined technologies of our comprehensive portfolio of products to deliver a stream of innovative products . our goal is to provide consumers the best bed and best sleep of their life and to provide our retailers a complete and optimal offering across brands , products , and prices to drive growth . we will also pursue opportunities to enter or develop new product categories . 30 marketing we will increase our investment in advertising to increase consumer awareness , preference and loyalty for each of our key brands . we will also invest in in-store marketing and direct sales to maximize our sales opportunity driven from national brand and retailer advertising . new market expansion we will pursue opportunities to expand into new international markets and over time into non-consolidated markets where our brands are currently represented under licensee , joint venture or third party distributor agreements . supply chain ( โ easier to do business with โ ) we are committed to building a world-class supply chain that is โ easier to do business with. โ our goal is to improve efficiencies related to purchasing and delivery , as well as inventory management to drive sales growth . our strategic growth initiatives will be supported by cost synergies realized from the acquisition of sealy as well as through our ongoing cost productivity initiatives . factors that could impact results of operations the factors outlined below could impact our future results of operations . for more extensive discussion of these and other risk factors , please refer to `` risk factors '' , under part i , item1a in this report . general business and economic conditions our business has been affected by general business and economic conditions , and these conditions could have an impact on future demand for our products . the global economic environment continues to be challenging , and we expect the uncertainty to continue . in light of the macroeconomic environment , we continue to take steps to further align our cost structure with our anticipated level of net sales . we continued to make strategic investments , including : introducing new products ; investing in increasing our global brand awareness ; extending our presence and improving our retail account productivity and distribution ; investing in our operating infrastructure to meet the requirements of our business ; and taking actions to further strengthen our business . competition participants in the bedding industry compete primarily on price , quality , brand name recognition , product availability , and product performance . we compete with a number of different types of mattress alternatives , including standard innerspring mattresses , viscoelastic mattresses , foam mattresses , hybrid innerspring/foam mattresses , futons , air beds and other air-supported mattresses . these alternative products are sold through a variety of channels , including furniture and bedding stores , department stores , mass merchants , wholesale clubs , internet , telemarketing programs , television infomercials , television advertising and catalogs . our tempur north america segment competes in the non-innerspring mattress category and contributes 36.9 % of our net sales . beginning in the second half of 2012 , a significant number of new non-innerspring mattress products were introduced in this category and changed the competitive environment of the u.s. bedding industry . many of these new non-innerspring mattress products have been supported by aggressive marketing campaigns and promotions . story_separator_special_tag refer to note 5 , โ debt โ , in our consolidated financial statements included in part ii , item 8 of this report for the definition of these terms and further discussion . the purchase price of sealy , including debt assumed , consisted of the following items : replace_table_token_4_th ( 1 ) the cash consideration for outstanding shares of sealy common stock is the product of the agreed-upon cash per share price of $ 2.20 and total sealy shares of 105.1 million . ( 2 ) the cash consideration for share-based awards is the product of the agreed-upon cash per share price of $ 2.20 and the total number of restricted stock units ( โ rsus โ ) and deferred stock units ( โ dsus โ ) outstanding and the โ in the money โ stock options net of the weighted average exercise price . ( 3 ) the cash consideration for 8.0 % sealy notes is the result of applying the adjusted equity conversion rate to the 8.0 % sealy notes tendered for conversion and multiplying the result by the agreed-upon cash per share price of $ 2.20. the 8.0 % sealy notes that were converted represented the right to receive the same merger consideration that would have been payable to a holder of 201.0 million shares of sealy common stock , subject to adjustment in accordance with the terms of the supplemental indenture governing the 8.0 % sealy notes . ( 4 ) the cash consideration for sealy 's 10.875 % senior notes due 2016 ( โ sealy senior notes โ ) reflects the repayment of the outstanding obligation . ( 5 ) the cash consideration for sealy 's 8.25 % senior subordinated notes due 2014 ( โ sealy 2014 notes โ ) reflects the repayment of the outstanding obligation . ( 6 ) represents the sealy cash balance acquired at acquisition . our sealy segment manufactures and markets a complete line of bedding products under the sealyยฎ , sealy posturepedicยฎ , optimum , and stearns & fosterยฎ brands . sealy 's results of operations are reported within our sealy reportable segment . the combination brings together two highly complementary companies with iconic brands and significant opportunities for global innovation and growth . we will have products for almost every consumer preference and price point , distribution through all key channels , in-house expertise on most key bedding technologies , and a world-class research and development team . 33 results of operations a summary of our results for the year ended december 31 , 2013 include : earnings per diluted common share ( โ eps โ ) were $ 1.28 for the full year 2013 compared to $ 1.70 per diluted share for the full year 2012. the 2013 results include sealy results for the post-acquisition period from march 18 , 2013 to december 31 , 2013 and also reflect transaction and integration costs related to the sealy acquisition , interest and fees related to our refinancing of our term a facility and term b loans under our senior secured credit facility , as well as tax provision adjustments related to the repatriation of foreign earnings utilized in connection with the sealy acquisition . 2012 eps reflects the tax expense recorded in connection with the anticipated repatriation of foreign earnings together with certain transaction and integration costs related to the sealy acquisition , and other restructuring costs . adjusted eps were $ 2.38 for the full year 2013 compared to adjusted eps $ 2.61 for the full year 2012. for a discussion and reconciliation of eps to adjusted eps , refer to the non-gaap financial information set forth below under the heading โ non-gaap financial information โ . net income for the full year 2013 was $ 78.6 million as compared to net income of $ 106.8 million for the full year 2012. adjusted net income was $ 146.4 million for the full year 2013 as compared to adjusted net income of $ 164.1 million for the full year 2012. for a discussion and reconciliation of net income to adjusted net income , refer to the non-gaap financial information set forth below under the heading โ non-gaap financial information โ . net sales increased 75.7 % to $ 2,464.3 million for the full year 2013 compared to $ 1,402.9 million for the full year 2012. the net sales increase was due to the inclusion of $ 1,114.7 million of sealy net sales for the post-acquisition period from march 18 , 2013 to december 31 , 2013. gross margin was 41.2 % for the full year 2013 compared to 50.9 % for the full year 2012. the gross margin decreased primarily as a result of the inclusion of sealy , which has lower margins than the tempur north america and tempur international segments , and changes in product mix , offset partially by lower sourcing costs . operating income was $ 243.8 million for the full year 2013 as compared to $ 248.3 million for the full year 2012. operating income for the full year 2013 included $ 44.6 million of transaction and integration costs related to the sealy acquisition . excluding these costs , the higher operating income reflects the inclusion of sealy . 34 the following table sets forth the various components of our consolidated statements of income , and expresses each component as a percentage of net sales : replace_table_token_5_th 35 consolidated summary net sales and gross profit replace_table_token_6_th year ended december 31 , 2013 compared to year ended december 31 , 2012 36 net sales increased $ 1,061.4 million , or 75.7 % . the increase was due to the inclusion of sealy 's net sales of $ 1,114.7 million for the post-acquisition period from march 18 , 2013 to december 31 , 2013. the increase in net sales was partially offset by decreases in our tempur north america segment in bedding net sales , driven by decreases in our retail and direct channels . gross profit increased $ 300.3 million , or 42.0 % . gross margin decreased 9.7 % .
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tempur international segment summary replace_table_token_14_th year ended december 31 , 2013 compared to year ended december 31 , 2012 tempur international net sales remained flat . on a constant currency basis ( 1 ) , our tempur international net sales increased approximately 1.0 % . retail channel net sales decreased $ 7.2 million , or 2.0 % , primarily due to macroeconomic pressure in europe which was partially offset by growth in our asia-pacific and latin american businesses . direct channel net sales increased $ 12.5 million , or 33.8 % , due to expanding our points of distribution through an increase in the number of company-owned stores and e-commerce . operating income increased $ 3.6 million , or 3.5 % , and was primarily impacted by the following factors : gross profit increased $ 4.6 million , or 1.7 % . gross margin increased 0.9 % . the increase in gross margin was due to a 1.8 % increase related to favorable product mix and a 0.9 % decrease related to floor model discounts for new product introductions . operating expenses were $ 162.3 million for the full year 2013 and $ 161.3 million for the full year 2012 , remaining flat as a percentage of net sales . ( 1 ) the references to โ constant currency basis โ in this management discussion & analysis do not include operational impacts that could result from fluctuations in foreign currency rates . certain financial results are adjusted based on a simple mathematical model that translates current period results in local currency using the comparable prior year period 's currency conversion rate . this approach is used for countries where the functional currency is the local country currency . this information is provided so that certain financial results can be viewed without the impact of fluctuations in foreign currency rates , thereby facilitating period-to-period comparisons of business performance . refer to item 7a under part ii of this report .
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we design and manufacture a broad variety of railcar types for transportation of bulk commodities and containerized freight products primarily in north america . we rebuild railcars and sell forged , cast and fabricated parts for all of the railcars we produce , as well as those manufactured by others . between november 2010 , when we acquired the business assets of dte rail services , inc. , and september 2015 , when we sold our repair and maintenance services business , we provided railcar repair and maintenance for all types of freight railcars . we also lease freight cars . our primary customers are railroads , shippers and financial institutions . on august 1 , 2016 , we announced a cost reduction program whereby approximately 15 % of our salaried administrative workforce would be eliminated , our johnstown , pennsylvania administrative facility would be closed and certain discretionary spending would be reduced . the total estimated costs of implementing this program are approximately $ 2.7 million , including approximately $ 1.1 million of employee-related costs and approximately $ 1.3 million of long-lived asset impairments . we currently estimate that the annualized cost savings resulting from this restructuring program will be approximately $ 5.0 million when fully implemented . in connection with our cost reductions program during 2016 , we recorded restructuring and impairment charges of $ 2.3 million , which consisted primarily of non-cash impairment charges of $ 1.3 million for property , plant and equipment at our johnstown administrative facility and employee severance and other employment termination costs of $ 1.0 million . our railcar manufacturing facilities are located in cherokee , alabama ( ยshoalsย ) , danville , illinois and roanoke , virginia . our shoals facility is an important part of our long-term growth strategy as we continue to expand our railcar product and service offerings . our shoals facility delivered its first railcars during the fourth quarter of 2013 and additional production capacity became operational during the second quarter of 2015. our roanoke facility has the capacity to build a variety of railcar types in a cost effective manner and will continue to support our coal car products when market conditions improve . our danville facility resumed production in june 2014 after being idled for 14 months and , given the challenged coal market , operations there were again significantly curtailed in 2016. our danville facility will be idled for railcar production effective march 31 , 2017. in light of the current cyclical downturn in the railcar industry and the challenged coal market , on february 27 , 2017 we announced further reductions to our salaried workforce and initiatives to reduce discretionary spending . these actions are expected to be completed by the end of the second quarter of 2017. total estimated costs to implement these actions are approximately $ 1.0 million of employee-related costs . we currently estimate that the annualized cost savings resulting from these actions will be approximately $ 3.0 million when fully implemented . railcar deliveries totaled 5,559 units , consisting of 5,332 new railcars and 227 rebuilt railcars , for the year ended december 31 , 2016 , compared to 8,980 units , consisting of 6,280 new railcars , 2,600 rebuilt railcars and 100 railcars leased , for the year ended december 31 , 2015. our total backlog of firm orders for railcars decreased from 9,840 railcars as of december 31 , 2015 to 4,259 railcars as of december 31 , 2016. the company 's operations comprise two operating segments , manufacturing and parts , and one reportable segment , manufacturing . the company 's manufacturing segment includes new railcar manufacturing , used railcar sales , railcar leasing and major railcar rebuilds . the company 's parts operating segment is not significant for reporting purposes and has been combined with corporate and other non-operating activities as corporate and other . 19 financial statement presentation revenues our manufacturing segment revenues are generated primarily from sales of the railcars that we manufacture . our manufacturing segment sales depend on industry demand for new railcars , which is driven by overall economic conditions and the demand for railcar transportation of various products , such as coal , steel products , minerals , cement , motor vehicles , forest products and agricultural commodities . our manufacturing segment sales are also affected by competitive market pressures that impact our market share , the prices for our railcars and by the types of railcars sold . our manufacturing segment revenues also include revenues from major railcar rebuilds and lease rental payments received with respect to railcars under operating leases . our corporate and other revenue sources include parts sales and , through september 30 , 2015 , revenues from our repair and maintenance business that was sold in september 2015. we generally manufacture railcars under firm orders from our customers . we recognize revenue , when ( 1 ) we complete the individual railcars , ( 2 ) the railcars are accepted by the customer following inspection , ( 3 ) the risk of any damage or other loss with respect to the railcars passes to the customer and ( 4 ) title to the railcars transfers to the customer . deliveries include new and used cars sold , cars built and contracted under operating leases and rebuilt cars . we value used railcars received at their estimated fair market value . revenues derived from a single sales contract that contains multiple products and services are allocated based on the relative fair value of each item to be delivered and recognized in accordance with the applicable revenue recognition criteria for the specific unit of accounting . the variable purchase patterns of our customers and the timing of completion , delivery and customer acceptance of railcars may cause our revenues and income from operations to vary substantially each quarter , which will result in significant fluctuations in our quarterly results . story_separator_special_tag corporate and other selling , general and administrative expenses were $ 29.3 million for the year ended december 31 , 2015 compared to $ 24.3 million for the year ended december 31 , 2014. the increase in corporate and other selling , general and administrative expenses for the year ended december 31 , 2015 compared to the year ended december 31 , 2014 , reflected increases in incentive compensation , salaries and wages and legal costs , which were partially offset by decreases in selling , general and administrative expenses due to the sale of our repair and maintenance business . gain on sale of railcars available for lease gain on sale of railcars available for lease for the year ended december 31 , 2015 was $ 1.2 million and represented the gain on sale of leased railcars with a net book value of $ 6.4 million . gain on sale of railcars available for lease for the year ended december 31 , 2014 was $ 1.4 million and represented the gain on sale of leased railcars with a net book value of $ 12.2 million . gain on sale of railcar repair and maintenance services business and facility on september 30 , 2015 , we sold our railcar repair and maintenance services business for an aggregate purchase price of $ 20.0 million . the sale included assets of freightcar rail services , llc ( ยfcrsย ) , which operated our railcar repair and maintenance services business , and freightcar short line , inc. ( ยfcslย ) , which owned a short-line railway . on september 30 , 2015 , $ 2.0 million of the aggregate purchase price was placed into escrow in order to secure the indemnification obligations of fcrs and fcsl under the asset purchase agreement relating to the sale and $ 0.4 million was used to pay certain liabilities of fcrs and fcsl , resulting in cash proceeds to us of $ 17.6 million . as a result of the sale , we recorded a pre-tax gain of $ 4.6 million for the year ended december 31 , 2015. in december 2013 , we closed our underperforming maintenance and repair shop in clinton , indiana , reduced the carrying values of repair shop assets to their estimated fair market value , representing the estimated salvage values of building , equipment and rail at the facility and the estimated sales value of the associated land , and recorded restructuring and impairment charges of $ 1.7 million . as a result of the sale of the repair shop assets to a strategic buyer in september 2014 , we recorded a pre-tax gain of $ 1.1 million for the year ended december 31 , 2014. operating income ( loss ) our consolidated operating income for the year ended december 31 , 2015 was $ 46.8 million compared to $ 9.5 million for the year ended december 31 , 2014. operating income for the manufacturing segment was $ 69.2 million for the year ended december 31 , 2015 compared to $ 32.2 million for the year ended december 31 , 2014 , reflecting the increase in manufacturing segment gross profit , which was partially offset by the increase in manufacturing segment selling , general and administrative expenses and the decrease in manufacturing segment gain on sale of railcars available for lease . corporate and other operating loss was $ 22.4 million for the year ended december 31 , 2015 compared to an operating loss of $ 22.6 million for the year ended december 31 , 2014 reflecting an increase in operating income from repair and maintenance services of $ 5.1 million ( primarily related to the gain on sale or our repair and maintenance business ) , which was partially offset by an increase in corporate costs of $ 5.0 million ( primarily increases in incentive compensation , salaries and wages and legal costs ) . 23 interest expense and deferred financing costs interest expense and the amortization of deferred financing costs were $ 0.2 million for the year ended december 31 , 2015 compared to $ 1.1 million for the year ended december 31 , 2014. in addition to commitment fees on our revolving credit facility , letter of credit fees and amortization of deferred financing costs , results for 2014 included non-cash imputed interest on a customer advance for leased railcars delivered for which revenue could not be recognized until all contingencies had been resolved . income taxes the income tax provision was $ 14.8 million for the year ended december 31 , 2015 compared to $ 2.6 million for the year ended december 31 , 2014. the effective tax rates for the years ended december 31 , 2015 and 2014 , were 31.8 % and 30.3 % , respectively . net income as a result of the foregoing , our net income was $ 31.8 million for the year ended december 31 , 2015 compared to $ 5.9 million for the year ended december 31 , 2014. for the year ended december 31 , 2015 , our diluted net income per share was $ 2.58 compared to $ 0.49 for the year ended december 31 , 2014. liquidity and capital resources our primary sources of liquidity for the years ended december 31 , 2016 and 2015 , were our cash provided by operations , cash and cash equivalent balances on hand , our securities held to maturity and our revolving credit facilities . on june 13 , 2016 , we entered into a first amendment to credit agreement ( the ยfirst amendmentย ) by and among us and certain of our subsidiaries , as borrowers and guarantors ( together , the ยborrowersย ) , and bank of america , n.a. , as lender , administrative agent , swingline lender and letter of credit issuer ( the ยbankย ) .
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results of operations year ended december 31 , 2016 compared to year ended december 31 , 2015 revenues our consolidated revenues for the year ended december 31 , 2016 were $ 523.7 million compared to $ 772.9 million for the year ended december 31 , 2015. manufacturing segment revenues for the year ended december 31 , 2016 were $ 516.1 million compared to $ 745.7 million for the year ended december 31 , 2015. the decrease in manufacturing segment revenues for 2016 compared to 2015 reflects the 38 % decrease in the number of railcars delivered , partially offset by a higher mix of new versus rebuilt railcars . corporate and other revenues for the year ended december 31 , 2016 were $ 7.7 million compared to $ 27.1 million for the year ended december 31 , 2015 , which for the year ended december 31 , 2015 included revenue from our repair and maintenance business that was sold in september 2015 . 20 gross profit our consolidated gross profit margin was 7.7 % for the year ended december 31 , 2016 compared to 10.7 % for the year ended december 31 , 2015. our consolidated gross profit for the year ended december 31 , 2016 was $ 40.2 million compared to $ 82.7 million for the year ended december 31 , 2015 , reflecting a decrease in gross profit from our manufacturing segment of $ 39.8 million and a decrease in gross profit from corporate and other of $ 2.7 million . the 38 % decline in railcar deliveries in 2016 contributed a $ 38.3 million decrease in gross profit in our manufacturing segment and production inefficiencies , net of a favorable sales mix of cars sold , contributed to a $ 2.8 million decrease in gross profit in our manufacturing segment .
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subsequent increases and decreases , if not an other-than-temporary impairment , in the fair value of available-for-sale securities that were previously impaired , are recorded in other comprehensive income ( loss ) . ( g ) other investments other investments primarily consist of limited partnership interests carried on the equity method , which approximates the company 's equity in the underlying net assets of the partnership . equity income or loss on 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 ( โ independence american โ ) ; and ( ii ) its marketing and administrative companies , including ihc specialty benefits inc. ihc carrier solutions , inc. and a majority interest in petpartners , inc. ( โ petpartners โ ) . ihc also owns a significant equity interest in ebix health exchange holdings , llc ( โ ebix health exchange โ ) , an administration exchange for health insurance . standard security life , madison national life and independence american are sometimes collectively referred to as the โ insurance group โ . ihc and its subsidiaries ( including the insurance group ) are sometimes collectively referred to as the `` company '' , or โ ihc โ , or are implicit in the terms โ we โ , โ us โ and โ our โ . ihc 's health insurance products serve niche sectors of the commercial market through multiple classes of business and varied distribution channels . with regard to those persons in the growing individual market , ihc 's products offer coverage for individuals and families with short-term needs , and fixed indemnity limited benefit and scheduled benefit plans through multiple distribution partners . we offer pet insurance for dogs and cats in all 50 states through select distributors . 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 . medical stop-loss was marketed to employer groups that self-insure their medical risks . on march 31 , 2016 , the company sold ihc risk solutions , llc ( โ risk solutions โ ) , a managing general underwriter that was its principal source of medical stop-loss business . in addition , all of the in-force medical stop-loss business of standard security life and independence american produced by risk solutions was 100 % co-insured as of january 1 , 2016 and ihc 's block of medical stop-loss business is in run-off . on december 22 , 2017 , president trump signed tax legislation commonly referred to as the tax cuts and jobs act ( the โ tax act โ ) . the tax act makes broad and complex changes to the u.s. tax code , including , but not limited to reducing the federal corporate income tax rate from 35 % to 21 % .the company has completed its accounting for the income tax effects under the tax act that are relevant to the company using best estimates based on reasonable and supportable assumptions and available inputs and underlying information . we believe that our accounting is final relative to the tax act . the consolidated financial statements reflect all such adjustments and disclosures related to the tax act . refer to note 12 of the consolidated financial statements for more information regarding the impacts of the tax act . 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 specialty medical , disability and new york short-term disability ( โ dbl โ ) ; 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 . management has always focused on managing the costs of its operations . 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_6_th ๏ท income from continuing operations of $ 2.63 per share , diluted , for the year ended december 31 , 2017 compared to $ 1.27 per share , diluted , for the same period in 2016. o the company reduced amic 's deferred tax asset valuation allowance by $ 20.3 million at december 31 , 2017 primarily due to an increase in projected future income and associated utilization of federal net operating losses . no such adjustment was recorded for the years ended december 31 , 2016 or 2015. o income taxes for the years ended december 31 , 2017 and 2016 , include income tax benefits of $ 11.6 million and $ 3.9 million , respectively , on worthless stock deductions representing the company 's tax basis on its unrecovered investments in those subsidiaries . story_separator_special_tag policy charges consist of fees assessed against the policyholder for cost of insurance ( mortality risk ) , policy administration and early surrender . these revenues are recognized when assessed against the policyholder account balance . policies that do not subject the company to significant risk arising from mortality or morbidity are considered investment contracts . deposits received from such contracts are reported as other policyholder funds . policy charges for investment contracts consist of fees assessed against the policyholder account for maintenance , administration and surrender of the policy prior to contractually specified dates , and are recognized when assessed against the policyholder account balance . insurance liabilities policy benefits and claims 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 . all of the company 's short-duration contracts are generated from its accident , health , term life , 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 , 2017 , would increase reserves ( in the case of a higher ratio ) or decrease reserves ( in the case of a lower ratio ) by approximately $ 2.6 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 specialty health for the specialty health business , incurred but not reported ( โ ibnr โ ) claims liabilities plus expected development on reported claims are calculated using standard actuarial methods and practices . the โ primary โ assumption in the determination of specialty health reserves is that historical claim development patterns are representative of future claim development patterns . factors that may affect this assumption include changes in claim payment processing times and procedures , changes in time delay in submission of claims , and the incidence of unusually large claims . liabilities for policy benefits and claims for specialty health medical and disability coverage are computed using completion factors and expected net loss ratios derived from actual historical premium and claim data . the reserving analysis includes a review of claim processing statistical measures and large claim early notifications ; the potential impacts of any changes in these factors are not material . the company has business that is serviced by third-party administrators . from time to time , there are changes in the timing of claims processing due to any number of factors including , but not limited to , system conversions and staffing changes during the year . these changes are monitored by the company and the effects of these changes are taken into consideration during the claim reserving process . other than these considerations , there have been no significant changes to methodologies and assumptions from the prior year . while these calculations are based on standard methodologies , they are estimates based on historical patterns . to the extent that actual claim payment patterns differ from historical patterns , such estimated reserves may be redundant or inadequate . the effects of such deviations are evaluated by considering claim backlog statistics and reviewing the reasonableness of projected claim ratios .
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results of operations results of operations for the year ended december 31 , 2017 compared to the year ended december 31 , 2016 information by business segment for the periods indicated is as follows ( in thousands ) : replace_table_token_12_th replace_table_token_13_th premiums earned in 2017 , premiums earned increased $ 19.6 million over the comparable period of 2016. the increase is primarily due to : ( i ) an increase of $ 27.5 million in the specialty health segment principally as a result of a $ 36.7 million increase in the fixed indemnity limited benefit line , a $ 9.7 million increase in premiums from the short term medical line of business , and a $ 0.9 million increase in the pet line of business , partially offset by a decrease of $ 9.9 million in occupational accident business premiums due to the run-off of this line following the sale of our primary producer of this business , in the third quarter of 2016 , a decrease of $ 4.1 million in the dental line of business and a $ 5.9 million decline in international premiums ; ( ii ) a $ 3.7 million increase in earned premiums from the group disability , life , annuities and dbl segment primarily due to increased volume in the ltd , dbl and group term life lines ; and ( iii ) an increase of $ 0.2 million in the individual life , annuities and other segment ; partially offset by ( iv ) a decrease of $ 11.8 million in the medical stop-loss segment as a result of the sale of risk solutions and exit from the medical stop-loss business , further described in note 3. net investment income total net investment income decreased $ 0.3 million over the comparable period in 2016. the overall annualized investment yields for the years ended december 31 , 2017 and 2016 were 3.2 % and 2.7 % , respectively .
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201 9 201 8 expected volatility - - expected dividend yield - - expected term ( in years ) - - risk-free rate - - the following is a summary of activity under the plans as of november 30 , 2019 and 2018 , and changes during the years then ended : replace_table_token_18_th replace_table_token_19_th no options were granted during the 2019 or 2018 fiscal years . as of both november 30 , 2019 and november 30 , 2018 , there were no non-vested options . as of november 30 , 2019 , there was no unrecognized compensation cost related to non-vested share-based compensation arrangements under the plan related to stock options . no options vested during the 2019 or 2018 fiscal years . the company received no cash from the exercise of options during the 2019 or 2018 fiscal years . ( 15 ) income taxes total income tax expense ( benefit ) for the 2019 and 2018 fiscal years consists of the following : replace_table_token_20_th 38 the reconciliation of the statutory federal income tax rate is as follows : replace_table_token_21_th tax effects of temporary differences that give rise to significant portions of the deferred tax assets ( liabilities ) at november 30 , 2019 and 2018 are presented as approximate amounts below : replace_table_token_22_th 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 . the company 's net operating loss amounting to approximately $ 5,033,000 and tax credit carryforward amounting to approximately $ 109,000 for its u.s. operations expire on november 30 , 2036 , 2037 , 2038 and 2039. management believes that the company will be able to utilize the u.s. net operating losses and credits before their expiration . on december 22 , 2017 , the tax cuts and job act of 2017 was enacted , which reduced the top corporate income tax rate from 35 % to 21 % . the application of this new rate was recognized in the first quarter of the 2018 fiscal year . tax expense from continuing operations includes an adjustment of approximately $ 298,000 related to the revaluation of the company 's net deferred tax asset at the new statutory rate . ( 16 ) disclosures about the fair value of financial instruments the fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties . at november 30 , 2019 , and november 30 , 2018 , the carrying amount approximated fair value for cash , accounts receivable , net investment in sales-type leases , accounts payable , notes payable to bank , and other current and long-term liabilities . the carrying amounts of current assets and liabilities approximate fair value because of the short maturity of these instruments . the fair value of the net investment in sales-type leases also approximates recorded value as that is based on discounting future cash flows at rates implicit in the lease . the rates implicit in the lease do not materially differ from current market rates . the fair value of the company 's installment term loans payable also approximates recorded value because the interest rates charged under the loan terms are not substantially different from current interest story_separator_special_tag . this report contains forward-looking statements that involve significant risks and uncertainties . the following discussion , which focuses on our results of operations , contains forward-looking information and statements . actual events or results may differ materially from those indicated or anticipated , as discussed in the section entitled โ forward looking statements. โ the following discussion of our financial condition and results of operations should also be read in conjunction with our financial statements and notes to financial statements contained in โ item 8 . financial statements and su p plementary data โ - of this report . 11 financial condition fiscal year 2019 proved to be another adverse year in the agricultural sector . we have now seen five consecutive years of decreased net sales for our agricultural products segment . at the end of the third fiscal quarter , we found ourselves down approximately 18 % in net sales year on year in this segment . by end of the fourth fiscal quarter , we had closed this gap to only be a 6 % decrease year on year . our 2019 fourth fiscal quarter had increased agricultural product sales of 59 % year on year and the highest fourth quarter total since our 2014 fiscal year . this strong fourth quarter provides us renewed optimism about the state of the agricultural market . in the 2019 fiscal year , we continued our continuous improvement projects including warehouse reorganization , improved product routings for efficiency and general cost cutting . these projects will improve our operational effectiveness and will allow us to thrive in periods of agricultural economic boom . despite the struggles in our agricultural products segment , our diversification through different industries has helped us tremendously . our modular building segment was profitable in the 2019 fiscal year mainly due a large contract that is approximately 55 % complete . this segment carries a strong backlog into 2020 that will provide a great start to our 2020 fiscal year . our tools segment did not have a strong year financially but did sign an oem agreement that has the potential to increase their sales in the 2020 fiscal year . story_separator_special_tag at the transfer of title , all risks of ownership have passed to the buyer , and the buyer agrees to maintain insurance on the manufactured items that have not yet been shipped . we have operated using bill and hold agreements with certain customers for many years , with consistent satisfactory results for both buyer and seller . the credit terms on this agreement are consistent with the credit terms on all other sales . all risks of loss are shouldered by the buyer , and there are no exceptions to the buyer 's commitment to accept and pay for these manufactured goods . revenues recognized at the completion of production in the 2019 and 2018 fiscal years were approximately $ 16,000 and $ 202,000 , respectively . our modular buildings segment is in the construction industry with its major source of revenue arising from modular building sales . sales of modular buildings are generally recognized using input methods to measure progress towards the satisfaction of a performance obligation using the percentage of completion method . revenue and gross profit are recognized as work is performed based on the relationship between actual costs incurred and total estimated costs at completion . contract costs consist of direct costs on contracts , including labor , materials , amounts payable to subcontractors and those indirect costs related to contract performance , such as equipment costs , insurance and employee benefits . contract cost is recorded as incurred , and revisions in contract revenues and cost estimates are reflected in the accounting period when known . provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined . contract losses are recognized when current estimates of total contract revenue and contract cost indicate a loss . estimated contract costs include any and all costs appropriately allocable to the contract . the provision for these contract losses will be the excess of estimated contract costs over estimated contract revenues . changes in job performance , job conditions and estimated profitability , including those changes arising from contract change orders , penalty provisions and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined . we use significant judgements in determining estimated contract costs and completion percentages throughout the life of the project . stock modular building sales also occur and are recognized at a point in time when the performance obligation is fulfilled through substantial completion . substantial completion is achieved through customer acceptance of the completed building . the modular buildings segment executes contracts with customers that can be short- or long-term in nature . these contracts can have multiple performance obligations and revenue from these can be recognized over time or at a point in time depending on the nature of the contracts . payment terms for the modular buildings segment vary by contract , but typically utilize money down and progress payments throughout the life of the contract . the payment terms of the modular buildings segment have the most impact on our contract receivables , contract assets and contract liabilities . project invoicing from the modular buildings segment increases contract receivables and has an effect on contract liabilities through billings in excess of costs and estimated gross profit and advanced payments . the balance of contract assets is typically made up of the balance of costs in and estimated gross profit in excess of billings . costs and profit in excess of amounts billed are classified as current assets and billings in excess of cost and profit are classified as current liabilities . 13 we lease modular buildings to certain customers and account for these transactions as operating or sales-type leases . these leases have terms of up to 36 months and are collateralized by a security interest in the related modular building . on sales-type leases , the lessee has a bargain purchase option available at the end of the lease term . a minimum lease receivable is recorded net of unearned interest income and profit on sale at the time the building is substantially complete . profit related to the sale of the building is recorded upon fulfillment of our obligation to the lessee . on operating leases , we recognize rent when the lessee has all the rights and benefits of ownership of the asset . the agricultural products segment offers variable consideration in the form of discounts depending on participation in yearly early order programs . this variable consideration is allocated to the transaction price of all products in a sales arrangement and is not contingent on future outcomes . the agricultural products segment does not offer rebates or credits . the tools segment offers quantity discounts that are allocated to the transaction price of each product once the quantity break is achieved . the tools segment does not offer rebates or credits . the modular buildings segment does not offer discounts , rebates or credits . our returns policy allows for new and saleable parts to be returned , subject to inspection and a restocking charge , which is included in net sales . whole goods are not returnable . shipping costs charged to customers are included in net sales . freight costs incurred are included in cost of goods sold . customer deposits consist of advance payments from customers , in the form of cash , for revenue to be recognized in the following year . for information on product warranty as it applies to asc 606 , refer to note 9 โ product warranty , โ contained in our financial statements in โ item 8. financial statements and supplementary data โ of this report .
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results of operations โ continuing operations fiscal year ended november 30 , 201 9 compared to fiscal year ended november 30 , 201 8 our consolidated net sales for continuing operations totaled $ 22,889,000 for the 2019 fiscal year , which represents a 16.0 % increase from our consolidated net sales of $ 19,727,000 for the 2018 fiscal year . the increase in revenue is due to a 133.5 % increase in sales in our modular buildings segment due to the progress on a large contract . we experienced approximately a 6 % and 7 % decrease in sales in our agricultural products and tools segments , respectively , for the 2019 fiscal year . our consolidated gross profit as a percentage of net sales remained fairly steady at 17.2 % in the 2019 fiscal year when compared to 17.8 % of net sales in the 2018 fiscal year . we saw an increased gross profit percentage in our modular buildings segment while we had slight decreases in gross profit percentage in our agricultural products and tools segments . our consolidated operating expenses from continuing operations decreased by 17.9 % , from $ 6,607,000 in the 2018 fiscal year to $ 5,424,000 in the 2019 fiscal year . because the majority of our corporate general and administrative expenses are borne by our agricultural products segment , that segment represented $ 3,796,000 of our total consolidated operating expenses , while our modular buildings segment represented $ 962,000 and our tools segment represented $ 666,000. our consolidated operating loss from continuing operations for the 2019 fiscal year was $ ( 1,497,000 ) compared to $ ( 3,095,000 ) for the 2018 fiscal year . our agricultural products segment had an operating loss of $ ( 1,599,000 ) , our modular buildings segment had operating income of $ 208,000 , and our tools segment had an operating loss of $ ( 106,000 ) .
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revenue with respect to remaining performance obligations related to capital equipment-related service agreements with original terms in excess of one year and the upfront payments discussed under the heading โ contract balances โ above amounted to approximately $ 1.1 million at december 31 , 2019. the company expects to recognize this revenue within the next three years . 4. inventory inventory consists of the following as of december 31 : replace_table_token_16_th 5. property and equipment property and equipment consist of the following as of december 31 : replace_table_token_17_th f- 14 clearpoint neuro , inc. ( formerly mri interventions , inc. ) notes to consolidated financial statements depreciation and amortization expense related to property and equipment for the years ended december 31 , 2019 and 2018 was $ 143,604 and $ 109,439 , respectively . loaned systems are clearpoint systems that are in operation at customer sites on an evaluation basis . 6. notes payable 2014 junior secured notes payable on june 6 , 2019 , the company repaid in full all the outstanding principal , which , together with accrued and unpaid interest , totaled approximately $ 2.0 million , of its 12 % second-priority secured non-convertible promissory notes due 2019 , as amended ( the โ 2014 secured notes โ ) . the 2014 secured notes had a maturity date of september 30 , 2020 , and interest was payable semi-annually in arrears . in connection with the repayment , the security agreement under which the 2014 secured note had been collateralized by all the assets of the company was terminated . 2010 junior secured notes payable the indebtedness outstanding under the 2010 junior secured notes payable ( the โ 2010 secured notes โ ) at december 31 , 2019 and 2018 was $ 2.8 million and $ 3.0 million , respectively . as discussed in note 11 story_separator_special_tag the following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes thereto included elsewhere in this annual report . this discussion and analysis contains forward-looking statements that are based upon current expectations and involve risks , assumptions and uncertainties . you should review the โ risk factors โ section of this annual report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements described in the following discussion and analysis . overview we are a medical device company that develops and commercializes innovative platforms for performing minimally invasive surgical procedures in the brain under direct , intra-procedural mri guidance . our principal product platform is our clearpoint system , which is in commercial use and is used to perform minimally invasive surgical procedures in the brain . the clearpoint system utilizes intra-procedural mri to guide the procedures and are designed to work in a hospital 's existing mri suite . we believe that this product platform delivers better patient outcomes , enhances revenue potential for both physicians and hospitals , and reduces costs to the healthcare system . in 2010 , we received regulatory clearance from the fda to market our clearpoint system in the u.s. for general neurological procedures . in 2011 , we also obtained ce marking approval for our clearpoint system , which enables us to sell our clearpoint system in the european union . substantially all our product revenues for the years ended december 31 , 2019 and 2018 relate to sales of our clearpoint system products . we have financed our operations and internal growth primarily through the sale of equity securities , the issuance of convertible and other secured notes , and license arrangements . we have incurred significant losses since our inception in 1998 as we have devoted substantial efforts to research and development . as of december 31 , 2019 , we had accumulated losses of approximately $ 113 million . we may continue to incur operating losses as we expand our clearpoint system platform and our business generally . factors which may influence future results of operations the following is a description of factors which may influence our future results of operations , and which we believe are important to an understanding of our business and results of operations . revenues in 2010 , we received 510 ( k ) clearance from the fda to market our clearpoint system in the u.s. for general neurological procedures . future revenues from sales of our clearpoint platform products and services are difficult to predict and may not be sufficient to offset our continuing research and development expenses and our increasing selling , general and administrative expenses . generating recurring revenues from the sale of functional neurosurgical products is an important part of our business model for our clearpoint system . we anticipate that , over time , recurring revenues will constitute an increasing percentage of our total revenues as we leverage installations of our clearpoint system to generate recurring sales of our functional neurosurgical products . our product revenues were approximately $ 9.5 million and $ 6.7 million for the years ended december 31 , 2019 and 2018 , respectively , and were almost entirely related to our clearpoint system . in addition , we expect that , over time , service revenues will constitute an increasing portion of our total revenues based on : ( a ) leveraging current and future installations of clearpoint systems , as discussed above , so as to result in an increase in functional neurosurgical service revenues ; and ( b ) increasing biologics and drug delivery service revenues should our customers in this space be successful in expansion of their clinical trials , and should we be successful in continuing to establish relationships with new biologic and drug delivery partners . our service revenues were approximately $ 1.7 million and $ 700,000 for the years ended december 31 , 2019 and 2018 , respectively . story_separator_special_tag 42 lines of business ; timing of revenue recognition functional neurosurgery product , biologics and drug delivery systems product , and non-neurosurgery therapy product sales : revenues from the sale of functional neurosurgery products ( consisting of disposable products sold commercially and related to cases utilizing our clearpoint system ) , biologics and drug delivery systems ( consisting primarily of disposable products related to customer-sponsored clinical trials utilizing the clearpoint system ) , and non-neurosurgery therapy products ( consisting of disposable products for non-neurosurgery procedures ) are generally based on customer purchase orders , the predominance of which require delivery within one week of the order having been placed , and are recognized at the point in time of delivery to the customer , which is the point at which legal title , and risks and rewards of ownership , along with physical possession , transfer to the customer . capital equipment sales o capital equipment sales preceded by evaluation periods : the predominance of capital equipment sales ( consisting of integrated computer hardware and software that are integral components of our clearpoint system ) are preceded by customer evaluation periods of generally 90 days . during these evaluation periods , installation of , and training of customer personnel on , the systems have been completed and the systems have been in operation . accordingly , revenue from capital equipment sales following such evaluation periods is at the point in time that we are in receipt of an executed purchase agreement or purchase order . o capital equipment sales not preceded by evaluation periods : revenue from sales of capital equipment not having been preceded by an evaluation period is recognized at the point in time that the equipment has been delivered to the customer . for both types of capital equipment sales described above , our determination of the point in time at which to recognize revenue represents that point at which the customer has legal title , physical possession , and the risks and rewards of ownership , and we have a present right to payment . functional neurosurgery and related services : revenues from functional neurosurgery and related services are recognized over the period of time such services are rendered . biologics and drug delivery services o outsourced recruitment and or designation of a clinical services liaison between our customer and us : we recognize revenue at the point in time that the liaison is either recruited or designated , which is the point at which the customer is able to direct , and obtain benefit from , use of the liaison . we made this determination based on the decision made by the customer to outsource this function to us , rather than to incur its own recruiting costs . upon such recruitment or designation , the liaison becomes the customer 's outsourced clinical support services coordinator . o outsourced technical clinical support of cases performed pursuant to customer-sponsored clinical trials : when our fee arrangement with a customer is based on our attendance at cases , we recognize revenue at the point in time a clinical trial case is performed based on the allocated per-case transaction price . when our fee arrangement with a customer is based on a stand-ready service to be available when cases are performed , we recognize revenue ratably over the period covered by the fee . a time-elapsed output method is used for such service revenues because we transfer control evenly by providing this stand-ready service . o other related services : we recognize revenue for such services at the point in time that the performance obligation has been satisfied . capital equipment-related services o rental , service and other revenues : revenues from rental of clearpoint capital equipment are recognized ratably on a monthly basis over the term of the rental agreement , which is less than one year . revenue from service of clearpoint capital equipment previously sold to customers is based on agreements with terms ranging from one to three years and revenue is recognized ratably on a monthly basis over the term of the service agreement . a time-elapsed output method is used for rental and service revenues because we transfer control evenly by providing a stand-ready service . 43 o installation , training and shipping : consistent with our recognition of revenue for capital equipment sales as described above , fees for installation , training and shipping in connection with sales of capital equipment that have been preceded by customer evaluation periods are recognized as revenue at the point in time we are in receipt of an executed purchase order for the equipment . installation , training and shipping fees related to capital equipment sales not having been preceded by an evaluation period are recognized at the point in time that the related services are performed . inventory . inventory is carried at the lower of cost ( first-in , first-out method ) or net realizable value . all items included in inventory relate to our functional neurosurgical products , drug delivery and biologic products , non-neurosurgical therapy products and clearpoint capital equipment . software license inventory related to clearpoint systems undergoing on-site customer evaluation is included in inventory in the accompanying consolidated balance sheets . all other software license inventory is classified as a non-current asset . we periodically review our inventory for obsolete items and provide a reserve upon identification of potentially obsolete items . share-based compensation . we account for compensation for all arrangements under which employees and others receive shares of stock or other equity instruments ( including options and warrants ) based on fair value . the fair value of each award is estimated as of the grant date and amortized as compensation expense over the requisite vesting period . the fair values of our share-based awards are estimated on the grant dates using the black-scholes valuation model .
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results of operations comparison of the year ended december 31 , 2019 to the year ended december 31 , 2018 replace_table_token_1_th 44 revenue . total revenues were approximately $ 11.2 million and $ 7.4 million for the years ended december 31 , 2019 and 2018 , respectively . functional neurosurgery revenue , which consists of disposable product commercial sales related to cases utilizing the clearpoint system and related services , increased 29 % to $ 6.9 million during the year ended december 31 , 2019 from $ 5.3 million for the same period in 2018. the increase was due primarily to 801 cases utilizing our clearpoint neuro navigation system in 2019 , as compared to 670 such cases in 2018 , an increase of 20 % . the increase in sales was also influenced by two factors : ( a ) fda actions taken in early 2018 , that adversely affected third-party providers in the laser ablation space ; and ( b ) the introduction by a third-party provider of a new deep brain stimulation system that did not have approval for use in the mri suite for most of 2018. the fda actions were resolved by the affected third-parties , but not until the fourth quarter of 2018 , and the new deep brain stimulation system received fda clearance for use in the mri suite in the third quarter of 2018. there were no increases in functional neurosurgery product prices during 2019 that would be reasonably expected to affect a typical customer order .
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we monitor production reports by the oil and gas companies to assure that we are being paid the appropriate royalties . we review conditions in the agricultural industry in the areas in which our lands are located and seek to keep as much of our lands as possible under lease to local ranchers at competitive rates . in recent years , we have been successful at keeping over 96 % of our land subject to grazing leases . 9 story_separator_special_tag revenue was $ 11,870,354 and gas royalty revenue was $ 2,800,561 in 2012. crude oil production from trust royalty wells increased 5.8 % in 2012 from 2011. the average prices per royalty barrel of crude oil for 2012 and 2011 were $ 87.56 and $ 89.21 , respectively . total gas production increased 26.0 % , but this increase in the volume of gas produced was more than offset by a 31.7 % decrease in the average price received for gas by the trust in 2012 compared to 2011. grazing lease income in 2012 was $ 488,694 compared to $ 499,400 in 2011. interest revenue ( including interest on investments ) was $ 725,687 in 2012 compared to $ 898,277 in 2011 , a decrease of 19.2 % . interest on notes receivable amounted to $ 706,252 in 2012 compared to $ 879,749 in 2011. at year end 2012 , notes receivable from land sales were $ 8,370,984 compared to $ 10,354,103 at year end 2011. interest on investments amounted to $ 19,435 in 2012 and $ 18,528 in 2011 , respectively . total principal cash payments on notes receivable were $ 2,596,919 in 2012 including $ 940,145 of prepaid principal . 11 easement and sundry income revenue in 2012 was $ 10,911,848 compared to $ 6,362,745 in 2011. the increase in easement and sundry income revenue was primarily attributable to increases in the amount of pipeline easement income , sundry income , seismic easement income , and sundry lease rental income received in 2012 compared to 2011 due to an increase in drilling and exploration activity on land owned by the trust . easement and sundry income is unpredictable and may vary significantly from period to period . taxes , other than income taxes were $ 941,757 in 2012 compared to $ 922,951 in 2011. oil and gas production taxes were $ 756,076 in 2012 compared to $ 769,807 in 2011. ad valorem taxes were $ 128,391 in 2012 compared to $ 102,625 in 2011. all other expenses were $ 2,342,248 in 2012 compared to $ 2,640,167 in 2011. liquidity the trust 's principal sources of liquidity are its revenues from oil and gas royalties , lease rentals and receipts of interest and principal payments on the notes receivable arising from its sales of land . in the past , these sources have generated more than adequate amounts of cash to meet the trust 's needs and , in the opinion of management , should continue to do so in the foreseeable future . off-balance sheet arrangements the trust has not engaged in any off-balance sheet arrangements . tabular disclosure of contractual obligations as of december 31 , 2013 , the trust 's known contractual obligations were as follows : replace_table_token_4_th effects of inflation we do not believe that inflation has had a material impact on our operating results . we can not assure you , however , that future increases in our costs will not occur or that any such increases that may occur will not adversely affect our results of operations . 12 critical accounting policies and estimates the preparation of financial statements in conformity with accounting principles generally accepted in the united states of america ( gaap ) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements . it is our opinion that we fully disclose our significant accounting policies in the notes to the financial statements . consistent with our disclosure policies , we include the following discussion related to what we believe to be our most critical accounting policies that require our most difficult , subjective or complex judgment . valuation of notes receivable - management of the trust monitors delinquencies to assess the propriety of the carrying value of its notes receivable . at the point in time that notes receivable become delinquent , management reviews the operations information of the debtor and the estimated fair value of the collateral held as security to determine whether an allowance for losses is required . any required allowance for losses is recorded in the period of determination . at december 31 , 2013 , and 2012 , there were no significant delinquencies and , as such , no allowances for losses have been recorded . valuation of real estate acquired through foreclosure - the value of real estate acquired through foreclosure is established at the lower of cost or fair value less disposition costs at the date of foreclosure . cost is considered to be the aggregate of the outstanding principal and interest , past due ad valorem taxes and other fees associated with the foreclosure . subsequent to the foreclosure date , valuations are periodically performed or obtained by management when events or changes in circumstances indicate that the full carrying amount may not be recoverable . at such time , a valuation allowance is established to reduce the carrying value to the estimated fair value . valuation of the real estate is based on the estimates of management and is subject to judgment . at december 31 , 2013 and 2012 , no valuation allowances were recorded . gain recognition on land sales - accounting principles generally accepted in the united states of america dictate the manner in which the gain or loss on the sale of land is recorded . the trust has established policies for the sale of land which result in the full accrual method of story_separator_special_tag we monitor production reports by the oil and gas companies to assure that we are being paid the appropriate royalties . we review conditions in the agricultural industry in the areas in which our lands are located and seek to keep as much of our lands as possible under lease to local ranchers at competitive rates . in recent years , we have been successful at keeping over 96 % of our land subject to grazing leases . 9 story_separator_special_tag revenue was $ 11,870,354 and gas royalty revenue was $ 2,800,561 in 2012. crude oil production from trust royalty wells increased 5.8 % in 2012 from 2011. the average prices per royalty barrel of crude oil for 2012 and 2011 were $ 87.56 and $ 89.21 , respectively . total gas production increased 26.0 % , but this increase in the volume of gas produced was more than offset by a 31.7 % decrease in the average price received for gas by the trust in 2012 compared to 2011. grazing lease income in 2012 was $ 488,694 compared to $ 499,400 in 2011. interest revenue ( including interest on investments ) was $ 725,687 in 2012 compared to $ 898,277 in 2011 , a decrease of 19.2 % . interest on notes receivable amounted to $ 706,252 in 2012 compared to $ 879,749 in 2011. at year end 2012 , notes receivable from land sales were $ 8,370,984 compared to $ 10,354,103 at year end 2011. interest on investments amounted to $ 19,435 in 2012 and $ 18,528 in 2011 , respectively . total principal cash payments on notes receivable were $ 2,596,919 in 2012 including $ 940,145 of prepaid principal . 11 easement and sundry income revenue in 2012 was $ 10,911,848 compared to $ 6,362,745 in 2011. the increase in easement and sundry income revenue was primarily attributable to increases in the amount of pipeline easement income , sundry income , seismic easement income , and sundry lease rental income received in 2012 compared to 2011 due to an increase in drilling and exploration activity on land owned by the trust . easement and sundry income is unpredictable and may vary significantly from period to period . taxes , other than income taxes were $ 941,757 in 2012 compared to $ 922,951 in 2011. oil and gas production taxes were $ 756,076 in 2012 compared to $ 769,807 in 2011. ad valorem taxes were $ 128,391 in 2012 compared to $ 102,625 in 2011. all other expenses were $ 2,342,248 in 2012 compared to $ 2,640,167 in 2011. liquidity the trust 's principal sources of liquidity are its revenues from oil and gas royalties , lease rentals and receipts of interest and principal payments on the notes receivable arising from its sales of land . in the past , these sources have generated more than adequate amounts of cash to meet the trust 's needs and , in the opinion of management , should continue to do so in the foreseeable future . off-balance sheet arrangements the trust has not engaged in any off-balance sheet arrangements . tabular disclosure of contractual obligations as of december 31 , 2013 , the trust 's known contractual obligations were as follows : replace_table_token_4_th effects of inflation we do not believe that inflation has had a material impact on our operating results . we can not assure you , however , that future increases in our costs will not occur or that any such increases that may occur will not adversely affect our results of operations . 12 critical accounting policies and estimates the preparation of financial statements in conformity with accounting principles generally accepted in the united states of america ( gaap ) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements . it is our opinion that we fully disclose our significant accounting policies in the notes to the financial statements . consistent with our disclosure policies , we include the following discussion related to what we believe to be our most critical accounting policies that require our most difficult , subjective or complex judgment . valuation of notes receivable - management of the trust monitors delinquencies to assess the propriety of the carrying value of its notes receivable . at the point in time that notes receivable become delinquent , management reviews the operations information of the debtor and the estimated fair value of the collateral held as security to determine whether an allowance for losses is required . any required allowance for losses is recorded in the period of determination . at december 31 , 2013 , and 2012 , there were no significant delinquencies and , as such , no allowances for losses have been recorded . valuation of real estate acquired through foreclosure - the value of real estate acquired through foreclosure is established at the lower of cost or fair value less disposition costs at the date of foreclosure . cost is considered to be the aggregate of the outstanding principal and interest , past due ad valorem taxes and other fees associated with the foreclosure . subsequent to the foreclosure date , valuations are periodically performed or obtained by management when events or changes in circumstances indicate that the full carrying amount may not be recoverable . at such time , a valuation allowance is established to reduce the carrying value to the estimated fair value . valuation of the real estate is based on the estimates of management and is subject to judgment . at december 31 , 2013 and 2012 , no valuation allowances were recorded . gain recognition on land sales - accounting principles generally accepted in the united states of america dictate the manner in which the gain or loss on the sale of land is recorded . the trust has established policies for the sale of land which result in the full accrual method of
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results of operations the trust 's primary sources of income are revenue derived from sales of land , either for cash or a combination of cash and mortgage notes , and revenue derived from the trust 's land and mineral interests . 2013 compared to 2012 total operating and investing revenues in 2013 aggregated $ 44,121,079 , an increase of $ 11,514,188 , or 35.3 % , from the $ 32,606,891 of total operating and investing revenues recorded in 2012. this increase resulted primarily from increases in oil and gas royalty revenue , easements and sundry income , and land sales . these increases were partially offset by a decrease in interest income from notes receivable . earnings per sub-share certificate were $ 3.16 for 2013 compared to $ 2.20 in 2012. the trust purchased and retired 322,056 sub-shares during 2013 , leaving 8,473,202 sub-shares outstanding at december 31 , 2013. land sales in 2013 were $ 6,413,588 compared to $ 5,809,747 in 2012 , an increase of $ 603,841 , or 10.4 % . a total of 10,399 acres were sold in 2013 at an average price of $ 617 per acre , compared to 7,252 acres in 2012 at an average price per acre of $ 801. rentals , royalties and other income ( including interest on investments ) were $ 37,707,491 in 2013 compared to $ 26,797,144 in 2012 , an increase of 40.7 % . oil and gas royalty revenue in 2013 was $ 24,496,851 compared to $ 14,670,915 in 2012 , an increase of 67.0 % . oil royalty revenue was $ 19,930,212 and gas royalty revenue was $ 4,566,639 in 2013. crude oil production from trust royalty wells increased 60.6 % in 2013 from 2012. the average prices per royalty barrel of crude oil for 2013 and 2012 were $ 91.56 and $ 87.56 , respectively . total gas production increased 47.7 % , and the average price of gas increased by 10.6
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additionally we capitalize personnel expenses attributable to the development of internal-use software , which include stock-based compensation costs . we recognize share-based award forfeitures as they occur . prior to the offering reorganization on june 3 , 2015 , stock-based awards were granted in the stock of the company to employees of its equity-method investee , evolent health llc . as such , the company was required to use a โ non-employee โ model for recognizing stock-based compensation , which required the awards to be marked-to-market through net income at the end of each reporting period until vesting occurred . subsequent to the offering reorganization described in note 4 , stock-based awards are granted in the company 's stock to the employees of evolent health llc and compensation costs are therefore recognized using an โ employee โ model . under the โ employee โ model , we no longer mark the awards to market at the end of each reporting period . 77 income taxes deferred income taxes are recognized , based on enacted rates , when assets and liabilities have different values for financial statement and tax reporting purposes . a valuation allowance is recorded to the extent required . considerable judgment and the use of estimates are required in determining whether a valuation allowance is necessary and , if so , the amount of such valuation allowance story_separator_special_tag the following management 's discussion and analysis of financial condition and results of operations ( โ md & a โ ) is intended to help the reader understand the company 's financial condition and results of operations . the md & a is provided as a supplement to , and should be read in conjunction with our consolidated financial statements and the accompanying notes to consolidated financial statements presented in โ part ii โ item 8. financial statements and supplementary data โ as well as โ part i - item 1a . risk factors. โ introduction background and recent events evolent health , inc. is a holding company whose principal asset is all of the class a common units it holds in evolent health llc , and its only business is to act as sole managing member of evolent health llc . evolent health , inc. was incorporated in the state of delaware in december 2014 and completed its ipo in june 2015. substantially all of its operations are conducted through evolent health llc and its consolidated subsidiaries . the financial results of evolent health llc are consolidated in the financial statements of evolent health , inc. during 2017 , the company undertook several transactions ( including various offerings of its class a common shares , investments in affiliates and an asset acquisition ) , some of which may impact year-to-year comparisons . in addition , subsequent to year-end , the company undertook transactions that may impact our results of operations in future periods . the following is a discussion of certain transactions . acquisition of new mexico health connections on january 2 , 2018 , the company , through its wholly-owned subsidiary , true health , completed its previously announced acquisition of assets related to nmhc 's commercial business . the assets include a health plan management services organization with a leadership team and employee base with experience working locally with providers to run nmhc 's suite of preventive , disease and care management programs . the consideration paid by the company in connection with the acquisition consisted of $ 10.3 million in cash ( subject to certain adjustments ) , of which $ 0.3 million was deposited in an escrow account . this acquisition is expected to allow the company to leverage its platform to support a value-based , provider-centric model of care in new mexico . at the time of the acquisition , the company also entered into a managed services agreement with nmhc to support its ongoing business . the company will begin reporting the results of true health during the first quarter of 2018 , and anticipates the results will be presented as a new reportable segment . medicaid opportunities following the establishment of our medicaid center of excellence alongside passport and our acquisitions of valence health and aldera in 2016 , the company has significantly expanded its presence in medicaid and continues to look for additional ways to expand in the market . a part of the company 's strategy is to align with providers by participating in state mandated managed medicaid initiatives . in connection with select initiatives , the company may create a dedicated managed services organization ( โ mso โ ) in which it would acquire a minority stake and its provider partner would own a majority position . as member lives are added to the mso through the program , the company may provide additional financial support to the mso to support reserve requirements . this support could take the form of provision of letters of credit , loans , equity investments , reinsurance arrangements and other extensions of capital , and the company has provided and in the future may provide similar forms of support to partners outside of an mso arrangement . securities offerings august 2017 primary offering in august 2017 , the company completed a primary offering of 8.8 million shares of its class a common stock at a price to the public of $ 19.85 per share and a corresponding price to the underwriters of $ 19.01 per share ( the โ august 2017 primary โ ) . this offering resulted in net cash proceeds to the company of approximately $ 166.9 million ( gross proceeds of $ 175.0 million , net of $ 8.1 million in underwriting discounts and stock issuance costs ) . for each share of class a common stock issued by evolent health , inc. , the company received a corresponding class a common unit from evolent health llc in exchange for contributing the issuance proceeds to evolent health llc . story_separator_special_tag as a result of the class b exchanges and evolent health llc 's cancellation of its class b common units during the march 2017 option to purchase additional shares , the company 's economic interest in evolent health llc increased from 83.9 % to 84.9 % immediately following the march 2017 option to purchase additional shares , and , accordingly , the company reclassified a portion of its non-controlling interests into shareholders ' equity attributable to evolent health , inc. the june 2017 secondary , may 2017 secondary , march 2017 secondary and march 2017 option to purchase additional shares are collectively referred to as the โ 2017 secondary offerings. โ the company owned 96.6 % and 77.4 % of the economic interests and 100 % of the voting rights in evolent health llc as of december 31 , 2017 and 2016 , respectively . asset acquisitions accordion health , inc. on june 8 , 2017 , the company entered into an agreement to acquire accordion for $ 3.2 million ( the โ accordion purchase agreement โ ) . accordion provides technology that the company believes enhances its raf services to its partners . in addition to technology assets , the software development team from accordion joined evolent as full-time employees . under the terms of the accordion purchase agreement , members of the software development team will be eligible for an additional $ 0.8 million earn-out , contingent upon the completion of specified software development targets . the company accounted for the transaction as an asset acquisition as substantially all of the fair value of the gross assets acquired was concentrated in a single identified asset , thus satisfying the requirements of the screen test introduced in asu 2017-01. the assets acquired in the transaction were measured based on the amount of cash paid to accordion , including transaction costs , as the fair value of the assets given was more readily determinable than the fair value of the assets received . the company classified and designated the identifiable assets acquired as a $ 3.3 million technology intangible asset , inclusive of approximately $ 0.1 million of capitalized transaction costs . the company also assessed and determined the useful life of the acquired intangible assets to be 5 years , and the intangible assets will be amortized on a straight line basis over this period . the company will account for the contingent earn-out as a post-acquisition expense if the specified software development targets are achieved . the transaction was a taxable stock acquisition and the company recognized deferred tax liability of approximately $ 2.0 million related to the book-tax basis difference in the acquired asset , which resulted in an income tax benefit related to the reduction in the company 's previously established valuation allowance , the reduction of which is accounted for outside of acquisition accounting . this amount was recorded as an intangible asset . the deferred tax liability represents a future source of potential taxable income that enables the company to release some of its previously established valuation allowance , the reduction of which is accounted for outside of acquisition accounting , resulting in income tax benefit . 43 business overview we are a market leader in the new era of health care delivery and payment , in which leading providers are taking on increasing clinical and financial responsibility for the populations they serve . our purpose-built platform , powered by our technology , proprietary processes and integrated services , enables providers to migrate their economic orientation from ffs reimbursement to value-based payment models . by partnering with providers to accelerate their path to value-based care , we enable our provider partners to expand their market opportunity , diversify their revenue streams , grow market share and improve the quality of the care they provide . we believe we are pioneers in enabling health systems to succeed in value-based payment models . we were founded in 2011 by members of our management team , upmc , an integrated delivery system based in pittsburgh , pennsylvania , and the advisory board , to enable providers to pursue a value-based business model and evolve their competitive position and market opportunity . we consider value-based care to be the necessary convergence of health care payment and delivery . we believe the pace of this convergence is accelerating , driven by price pressure in traditional ffs health care , a market environment that is incentivizing value-based care models and innovation in data and technology . we believe providers are positioned to lead this transition to value-based care because of their control over large portions of health care delivery costs , their primary position with consumers and their strong local brand . we market and sell our services primarily to major providers throughout the united states . we typically work with our partners in two phases . in the transformation phase , we initially work with our partners to develop a strategic plan for their transition to a value-based care model which includes sizing the market opportunity for our partner and creating a blueprint for executing that opportunity . during the second portion of the transformation phase , which typically lasts 12 to 15 months , we generally work with our partner to implement the blueprint by establishing the resources necessary to launch its strategy and capitalize on the opportunity . during the transformation phase , we seek to enter into agreements which we call the platform and operations phase and for which we deliver a wide range of services that support our partner in the execution of its new strategy . contracts in the platform and operations phase can range from three to ten years in length . in the platform and operations phase , we establish a local market presence and embed our resources alongside our partners .
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review of consolidated financial condition liquidity and capital resources the financial statements of evolent health , inc. include the consolidated results and cash flows of evolent health llc for the twelve months ended december 31 , 2017 and 2016. as noted in โ results of operations โ above , evolent health , inc. is the managing member of evolent health llc . the financial statements of evolent health , inc. for the year ended december 31 , 2015 , include the consolidated results and cash flows of evolent health llc for the period june 4 , 2015 , through december 31 , 2015 , and reflect the results of evolent health llc as an equity method investment for the period january 1 , 2015 , through june 3 , 2015. as a result , we did not have cash flows from operating , investing or financing activities for the period january 1 , 2015 , through june 3 , 2015. since its inception , the company has incurred operating losses and net cash outflows from operations . the company incurred operating losses of $ 72.8 million , $ 237.4 million and $ 43.0 million , in 2017 , 2016 and 2015 , respectively . net cash and restricted cash used in operating activities was $ 28.0 million , $ 35.5 million and $ 18.5 million in 2017 , 2016 and 2015 , respectively . as of december 31 , 2017 , the company had $ 238.4 million of cash and cash equivalents and $ 65.7 million in restricted cash and restricted investments . we believe our current cash and cash equivalents and other sources of liquidity will be sufficient to meet our working capital and capital expenditure requirements for the next twelve months as of the date these financial statements were available to be issued .
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the company records this initial payment , commonly referred to as set-up fees , as a deferred income liability which amortizes into rental revenue over the term of the related lease story_separator_special_tag the following discussion and analysis covers the financial condition and results of operations of our predecessor , qualitytech , lp , and our successor , qts realty trust , inc. you should read the following discussion and analysis in conjunction with the accompanying consolidated financial statements and related notes and ยrisk factorsย contained elsewhere in this form 10-k. overview we are a leading owner , developer and operator of state-of-the-art , carrier-neutral , multi-tenant data centers . our data centers are facilities that house the network and computer equipment of multiple customers and provide access to a range of communications carriers . we have a fully integrated platform through which we own and operate our data centers and provide a broad range of it infrastructure solutions . we refer to our spectrum of core data center products as our ย3cs , ย which consists of custom data center , colocation and cloud and managed services . we believe that we own and operate one of the largest portfolios of multi-tenant data centers in the united states , as measured by gross square footage , and have the capacity to more than double our leased raised floor without constructing or acquiring any new buildings . we operate a portfolio of 10 data centers across seven states , located in some of the top u.s. data center markets plus other high-growth markets . our data centers are highly specialized , full-service , mission-critical facilities used by our customers to house , power and cool the networking equipment and computer systems that support their most critical business processes . we believe that our data centers are best-in-class and engineered to among the highest specifications commercially available to customers , providing fully redundant , high-density power and cooling sufficient to meet the needs of major national and international companies and organizations . this is in part reflected by our operating track record of ยfive-ninesย ( 99.999 % ) reliability and by our diverse customer base of more than 880 customers , including financial institutions , healthcare companies , government agencies , communications service providers , software companies and global internet companies . we are a maryland corporation formed on may 17 , 2013. on october 15 , 2013 , we completed our ipo of our class a common stock , $ 0.01 par value per share . our class a common stock trades on the new york stock exchange under the ticker symbol ยqts.ย concurrently with the completion of the ipo , we consummated a series of transactions pursuant to which we became the sole general partner and majority owner of quality tech , lp , our operating partnership . we contributed the net proceeds of the ipo to the operating partnership in exchange for units of limited partnership interest . as of december 31 , 2013 , we owned an approximate 78.8 % ownership interest in the operating partnership . substantially all of our assets are held by , and our operations are conducted through , the operating partnership . we believe that we have operated and are organized in conformity with the requirements for qualification and taxation as a reit commencing with our taxable year ended december 31 , 2013. our qualification as a reit , and maintenance of such qualification , depends upon our ability to meet , on a continuing basis , various complex requirements under the code relating to , among other things , the sources of our gross income , the composition and values of our assets , our distributions to our stockholders and the concentration of ownership of our equity shares . our customer base we provide data center solutions to a diverse set of customers . our customer base is comprised of companies of all sizes representing an array of industries , each with unique and varied business models and needs . we serve fortune 1000 companies as well as small and medium businesses , or smbs , including financial institutions , healthcare companies , government agencies , communications service providers , software companies and global internet companies . our custom data center , or c1 , customers typically are large enterprises with significant it expertise and specific it requirements , including financial institutions , ยbig fourย accounting firms and the world 's largest global internet companies . our colocation , or c2 , customers consist of a wide range of organizations , including 67 major healthcare , telecommunications and software and web-based companies . our c3 cloud customers include both large organizations and smbs seeking to reduce their capital expenditures and outsource their it infrastructure on a flexible basis . examples of current c3 cloud customers include a global financial processing company , a u.s. government agency and an educational software provider . as a result of our diverse customer base , customer concentration in our portfolio is limited . as of december 31 , 2013 , only two of our more than 880 customers individually accounted for more than 3 % of our mrr , with no single customer accounting for more than 8 % of our mrr . in addition , approximately 40 % of our mrr was attributable to customers who use more than one of our 3cs products . our portfolio we operate 10 data centers located in seven states , containing an aggregate of approximately 3.8 million gross square feet of space ( approximately 92 % of which is wholly owned by us ) , including approximately 1.8 million ยbasis-of-designย raised floor square feet , which represents the total data center raised floor potential of our existing data center facilities . this represents the maximum amount of space in our existing buildings that could be leased following full build-out , depending on the configuration that we deploy . story_separator_special_tag leases representing approximately 11 % and 10 % of our total leased raised floor are scheduled to expire during the years ending december 31 , 2014 ( including all month-to-month leases ) and 2015 , respectively . these leases also represented approximately 23 % and 20 % , respectively , of our annualized rent as of december 31 , 2013. at expiration , as a general matter , based on current market conditions , we expect that expiring rents will be at or below the then-current market rents . acquisitions , redevelopment and financing . our revenue growth also will depend on our ability to acquire and redevelop and subsequently lease data center space at favorable rates . we generally fund the cost of data center acquisition and redevelopment from capital which we would expect to obtain primarily through our net cash provided by operations , credit facilities , other unsecured and secured borrowings or the issuance of additional equity . we believe that we have sufficient access to capital from our current cash and cash equivalents balance , and borrowings under our credit facilities to fund our redevelopment projects . operating expenses . our operating expenses generally consist of direct personnel costs , utilities , property and ad valorem taxes , insurance and site maintenance costs and rental expenses on our ground and building leases . in particular , our buildings require significant power to support the data center operations conducted in them . although substantially all of our long-term leasesยleases with a term greater than three yearsยcontain reimbursements for certain operating expenses , we will not in all instances be reimbursed for all of our property operating expenses incurred . we also incur general and administrative expenses , including expenses relating to 69 senior management , our in-house sales and marketing organization , cloud and managed services support personnel and legal , human resources , accounting and other expenses related to professional services . we also will incur additional expenses arising from our becoming a publicly traded company including employee equity based compensation . increases or decreases in our operating expenses will impact our results of operations and cash flows . we expect to incur additional operating expenses as we continue to expand . general leasing activity during the twelve months ended december 31 , 2013 , the company entered into customer leases representing approximately $ 3.6 million of incremental mrr , net of downgrades ( and representing approximately $ 43.0 million of annualized rent ) at $ 330 per square foot . during the twelve months ended december 31 , 2013 , the company renewed leases with a total annualized rent of $ 20.8 million at an average rent per square foot of $ 871 , which was 0.1 % lower than the annualized rent prior to renewal . we define renewals as leases which the customer retains the same amount of space before and after renewal , which facilitates rate comparability . customers that renew with adjustments to square feet are reflected in the net leasing activity as discussed above . the rental churn rate for the twelve months ended december 31 , 2013 , was 5.7 % . during the twelve months ended december 31 , 2013 , the company commenced customer leases representing approximately $ 7.0 million of mrr ( and representing approximately $ 84.1 million of annualized rent ) at $ 360 per square foot . as of december 31 , 2013 , our booked-not-billed mrr balance ( which represents customer leases that have been executed , but for which lease payments have not commenced as of december 31 , 2013 ) was approximately $ 2.3 million , or $ 28.2 million of annualized rent . of this booked-not-billed balance , approximately $ 4.9 million of annualized rent was attributable to new customers and approximately $ 23.3 million of annualized rent was attributable to existing customers . of this booked-not-billed mrr balance , leases representing approximately $ 13.5 million of annualized mrr are scheduled to commence in 2014 , which is expected to contribute approximately $ 9.5 million of incremental revenue in 2014 . 70 story_separator_special_tag to cover back-office and service-related costs associated with the day-to-day operations of our data center facilities , with a corresponding offset to general and administrative expenses . the increase in other operating expenses of $ 3.7 million was due to higher outsourced services of $ 1.1 million due to the outsourcing of our facility security personnel , which resulted in a decrease in direct personnel costs , and higher bad debt expense of $ 0.7 million in 2013 of which $ 0.5 million related to one customer . additionally , as discussed below , during the first quarter of 2012 we decided to consolidate our new york and new jersey data center operations into our new jersey data center facility and recorded a restructuring charge of $ 3.3 million . as a result , in 2012 other operating expenses for the year ended december 31 , 2012 were reduced by approximately $ 1.5 million relating to certain costs , including rent , utility and certain personnel costs , associated with the new york data center that were applied against the restructuring charge . these property operating cost increases were partially offset by a reduction in rent expense of $ 1.1 million attributable to vacating our former new york leased facility . real estate taxes and insurance . real estate taxes and insurance for the year ended december 31 , 2013 were $ 4.5 million compared to $ 3.6 million for the year ended december 31 , 2012. the increase of $ 0.9 million , or 24 % , was primarily attributable to the expansion of our atlanta-metro and richmond data center facilities , and the acquisition of our sacramento data center facility , partially offset by lower property taxes for the santa clara data center due to a reassessment of taxes in santa clara for 2009 , 2010 and 2011 , which was expensed in 2012. depreciation and amortization .
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results of operations year ended december 31 , 2013 compared to year ended december 31 , 2012 the following data for the year ended december 31 , 2013 , includes financial data on a combined basis for both our predecessor and successor together with its consolidated subsidiaries after giving effect to the formation transactions described in this form 10-k ( in thousands ) . replace_table_token_28_th * not applicable for comparison 71 changes in revenues and expenses for the year ended december 31 , 2013 compared to the year ended december 31 , 2012 are summarized below ( in thousands ) : replace_table_token_29_th * not applicable for comparison revenues . total revenues for the year ended december 31 , 2013 were $ 177.9 million compared to $ 145.8 million for the year ended december 31 , 2012. the increase of $ 32.1 million , or 22 % , was primarily due to organic growth in our customer base and the acquisition of our sacramento data center in december 2012. the increase of $ 27.6 million , or 20 % , in combined rental and cloud and managed services revenue was primarily due to a $ 15.9 million increase related to newly leased space as well as increases in rents from previously leased space , net of downgrades at renewal and rental churn . additionally , the acquisition of our sacramento data center contributed approximately $ 11.7 million of combined rental and cloud and managed services revenues for the year ended december 31 , 2013. the impact from customer downgrades in our combined rental and cloud and managed services revenues for the year ended december 31 , 2013 included the downgrade associated with our reclaiming of approximately 80,000 square feet of raised floor at our atlanta-suwanee facility in july 2012 from a c1 customer . this customer was underutilizing a portion of its space and power at both our atlanta-metro and atlanta-suwanee data centers .
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in addition , mrec agreed that , after giving effect to their payment to us of $ 161,573 towards the $ 280,000 minimum royalty due covering the first 12-month royalty period , the balance due to us in order to maintain exclusivity was $ 118,427 . in addition , on august 16 , 2017 , the company entered into an amendment to the co-venture agreement to permit mrec to sublicense the virtra technology to third party operators of stand-alone location-based entertainment companies . mrec agreed to pay the company royalties for any such sublicenses in an amount equal to 10 % of the revenue paid to mrec in cases where mrec pays for the cost of the equipment for such location or 14 % of the revenue paid to mrec in cases where it does not pay for the cost of the equipment . during the fourth quarter of 2017 , the company reviewed its investment in mrec and determined that an impairment loss was appropriate . the company incurred an impairment loss of $ 613,241 to write-down its investment to its estimated fair value . f- 16 note 6. related party transactions during the years ended december 31 , 2017 and 2016 , the company issued 41,250 and 46,667 stock options to the ceo , coo and members of the board of directors to purchase shares of common stock at a weighted average purchase price of $ 4.42 and $ 3.44 , respectively . all options are exercisable within seven years of grant date . during the years ended december 31 , 2017 and 2016 , related parties redeemed 67,500 and 187,500 previously awarded options reaching expiration , respectively . these redemptions resulted in $ 160,050 and $ 341,838 in additional compensation expense in 2017 and 2016 , respectively , of which $ 153,750 and $ 293,188 were related to redemptions by the company 's ceo and coo , respectively . on july 1 , 2016 , 25,000 shares of the series a preferred shares were issued to robert ferris , the company 's chief executive officer and a director and he paid $ 2,500 for these shares . effective on september 16 , 2016 , these same 25,000 shares of the series a preferred shares were automatically redeemed from mr. ferris by the company for $ 2,500 and cancelled . mr. saltz who is a member of our board of directors is also chairman of the board of directors of modern round entertainment company , as well as , a majority story_separator_special_tag the following discussion and analysis should be read in conjunction with our financial statements and related notes thereto included in this annual report . the discussion contains forward-looking statements that involve risks , uncertainties and assumptions . our actual results may differ materially from those anticipated in those forward-looking statements as a result of many factors , including , but not limited to , those set forth under โ risk factors โ and elsewhere in this annual report . story_separator_special_tag income tax benefit was ( $ 2,505,292 ) for the year ended december 31 , 2017 , reflecting a reversal of our previously established valuation allowance , partially offset by the effect of a change in the federal income tax rate applied to our deferred tax assets and miscellaneous state income taxes . income tax expense was $ 204,890 for the year ended december 31 , 2016 , reflecting miscellaneous state income taxes . other income ( expense ) . other income ( expense ) was ( $ 549,527 ) for the year ended december 31 , 2017 as compared to $ 26,448 for the year ended december 31 , 2016. the change was primarily attributable to the write-down of our investment in mrec . net income . net income was $ 3,262,282 for the year ended december 31 , 2017 compared to $ 2,050,022 for the same period in 2016. the increase in net income resulted from an increase in revenues and an increase in income tax benefit , partially offset by an increase in operating expenses and an increase in other expense as noted in each respective section . 22 adjusted earnings before interest , taxes , depreciation and amortization ( aebitda ) explanation and use of non-gaap financial measures : earnings before interest , income taxes , depreciation and amortization and before other non-operating costs and income ( โ ebitda โ ) and adjusted ebitda are non-gaap measures . adjusted ebitda also includes non-cash stock option expense . other companies may calculate adjusted ebitda differently . the company calculates its adjusted ebitda to eliminate the impact of certain items it does not consider to be indicative of its performance and its ongoing operations . adjusted ebitda is presented herein because management believes the presentation of adjusted ebitda provides useful information to the company 's investors regarding the company 's financial condition and results of operations and because adjusted ebitda is frequently used by securities analysts , investors and other interested parties in the evaluation of companies in the company 's industry , several of which present ebitda and a form of adjusted ebitda when reporting their results . adjusted ebitda has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of the company 's results as reported under u.s. gaap . adjusted ebitda should not be considered as an alternative for net ( loss ) income , cash flows from operating activities and other consolidated income or cash flows statement data prepared in accordance with u.s. gaap or as a measure of profitability or liquidity . a reconciliation of net income to adjusted ebitda is provided in the following table : replace_table_token_2_th liquidity and capital resources . story_separator_special_tag product sales consist of simulators , upgrade components , scenarios , scenario software , recoil kits , threat-fire ยฎ and other accessories . services include installation , training , limited warranties , service agreements and related support . certain components of our sales include multiple elements comprising of both products and services . our revenue recognition falls under asc 605-25 , multiple element arrangements , with the delivery of the simulator and installation being two separate deliverables . our delivery of the simulator and the installation has been assessed to qualify as separate units of accounting : 1. the simulator unit upon shipment or delivery and customer acceptance , depending on the shipping terms . 2. the installation upon completion and customer sign-off . additionally , we recognize revenue for these products and services when it is realized or realizable and earned . revenue is considered realized and earned when : ( i ) persuasive evidence of an arrangement exists ; ( ii ) delivery has occurred and or services have been rendered ; ( iii ) the price is fixed and determinable ; and ( iv ) collection of the resulting receivable is reasonably assured . shipping fees charged to customers are recorded as a component of net revenues . all sales and sales contracts , including international sales , have been denominated in us dollars . products revenue from the sale of products is recognized when title and risk of loss passes to the customer . delivery is considered complete when products have been shipped to the customer and title and risk of loss has transferred to the customer . for customers other than united states governmental agencies , we generally require deposits in advance of shipment for customer sales orders . customer deposits are recorded as a current liability under deferred revenue on the accompanying balance sheet and totaled $ 709,676 and $ 51,334 as of december 31 , 2017 and 2016 , respectively . services services include installation of product , separately priced extended limited warranties on parts and labor , and technical support . revenue is recognized for service contracts as earned , which is generally upon completion of installation or , as it relates to the extended warranties , on a straight-line basis over the term of the contract . the company does warranty its products from manufacturing defects on a limited basis for a period of one year after purchase , but also sells separately priced extended warranties for periods of up to four years after the expiration of the standard one-year warranty . the company reviews historical warranty costs to estimate first year warranty costs as a percentage of revenue and records a corresponding warranty expense and accrued warranty liability related to product sales in the same period . after the one-year standard warranty expires and during the term of the extended warranty , if the device fails to operate properly from defects in materials and workmanship , we will fix or replace the defective product . deferred revenue for separately priced extended warranties longer than one year totaled $ 2,156,950 and $ 2,014,571 as of december 31 , 2017 and 2016 , respectively . we record a gross to net revenue adjustment and accrue on an annual basis the estimated cost of complying with the warranty agreements for the next fiscal year . the accrual for the one-year manufacturer 's warranty liability totaled $ 135,000 and $ 122,000 as of december 31 , 2017 and 2016 , respectively . income taxes deferred tax assets and liabilities are recorded based on the difference between the financial statement and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse . the company calculates a provision for income taxes using the asset and liability method , under which deferred tax assets and liabilities are recognized by identifying the temporary differences arising from the different treatment of items for tax and accounting purposes . in determining the future tax consequences of events that have been recognized in the financial statements or tax returns , judgment and interpretation of statutes are required . in assessing realizable deferred tax assets , management assesses the likelihood that deferred tax assets will be recovered from future taxable income , and to the extent that recovery is not likely or there is insufficient operating history , a valuation allowance is established . the company adjusts the valuation allowance in the period management determines it is more likely than not that net deferred tax assets will or will not be realized . during the quarter ended december 31 , 2017 , the company reversed all previously recorded valuation allowances . 25 as of december 31 , 2017 and 2016 , the company did not recognize any assets or liabilities relative to uncertain tax positions . interest or penalties , if any , will be recognized in income tax expense . since there are no significant unrecognized tax benefits as a result of tax positions taken , there are no accrued penalties or interest . tax positions are positions taken in a previously filed tax return or positions expected to be taken in a future tax return that are reflected in measuring current or deferred income tax assets and liabilities reported in the financial statements . the company reflects tax benefits , only if it is more likely than not that the company will be able to sustain the tax return position , based on its technical merits . if a tax benefit meets this criterion , it is measured and recognized based on the largest amount of benefit that is cumulatively greater than 50 % likely to be realized .
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overview we develop , sell and support use of force training and marksmanship firearms training systems and accessories for law enforcement , military or civilian use . our simulators use software , hardware and content to create uniquely effective and realistic training that does not require live ammunition or less-than-lethal munitions , which can both save money and provide certain training capabilities unavailable to live fire exercises . we have developed a higher standard in simulation training including capabilities such as : multi-screen video based scenarios , unique scenario authoring ability , superior training scenarios , the patented threat-fire shoot-back system , powerful gas-powered simulated recoil weapons , and more . we also are engaged in licensing our technology to modern round entertainment corporation ( โ mrec โ ) , a developer and operator of a combined dining and entertainment concept centered on an indoor shooting experience . simulator product offerings our simulator products include the following : โ v-300 simulator โ a 300ยฐ wrap-around screen with video capability is the higher standard for simulation training โ v-180 simulator โ a 180ยฐ screen with video capability is for smaller spaces or smaller budgets โ v-100 simulator โ a single-screen based simulator system โ the v-100 mil is sold to various military commands throughout the world and can support any local language . the system is extremely compact and can even share space with a standard classroom or squeeze into almost any existing facility . if a portable firearms simulator is needed , this model offers the most compact single-screen simulator on the market today โ everything organized into one standard case .
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6. stockholders ' equity 2014 equity incentive plan in july 2014 , the company 's board of directors approved the 2014 equity incentive plan ( ย2014 planย ) . the 2014 plan became story_separator_special_tag the following discussion and analysis of our financial condition and results of operations together with the section entitled ยselected financial data , ย should be read in conjunction with our financial statements and the related notes to those statements included elsewhere in this annual report . in addition to historical financial 48 information , the following discussion and analysis contains forward-looking statements within the meaning of section 21e of the securities exchange act of 1934 , as amended , or the exchange act . these forward-looking statements relate to future events or our future financial performance that involve risks , uncertainties and assumptions . our actual results and timing of events may differ materially from those anticipated in these forward-looking statements as a result of many factors , including those discussed under ยrisk factorsย and elsewhere in this prospectus . please see ยcautionary information regarding forward-looking statementsย at the beginning of this form 10-k for additional information you should consider regarding forward-looking statements . we undertake no obligation to revise or update any forward-looking statements to reflect any event or circumstance that arises after the date of this report , or to conform such statements to actual results or changes in our expectations . overview we are a commercial stage drug-device company committed to improving the quality of life for patients with ear , nose and throat conditions . we have developed a drug releasing bioabsorbable implant technology that enables targeted and sustained release of therapeutic agents . this targeted drug delivery technology is designed to allow ear , nose and throat , or ent , physicians to improve patient care . our approved and in-development products are designed to treat the spectrum of needs among patients who are managed by ent physicians for chronic sinusitis , one of the most prevalent chronic diseases in the united states and one of the most costly conditions for u.s. employers . chronic sinusitis patients include those needing and electing surgery , those who have not had sinus surgery and those that have had one or more surgeries but continue to suffer from symptoms . to address these patient groups , we are : marketing propel ยฎ and propel ยฎ mini , the first and only steroid releasing implants approved by the u.s. food and drug administration , or fda , for use in patients undergoing surgery for chronic sinusitis . propel has been proven in a meta-analysis of prospective , multicenter , randomized , controlled , double-blind clinical studies to improve surgical outcomes , demonstrating a 35 % reduction in the need for postoperative oral steroid and surgical intervention . inserted by a physician into the ethmoid sinuses following sinus surgery , the self-expanding implants are designed to conform to and hold open the surgically enlarged sinus , while gradually releasing an anti-inflammatory steroid over a period of approximately 30 days , before being fully absorbed into the body . marketing propel mini for chronic sinusitis patients undergoing frontal sinus surgery . based on results from the progress clinical study , designed to evaluate the safety and efficacy of propel mini when placed in the frontal sinuses following surgery , propel mini demonstrated a statistically significant 38 % relative reduction in the need for postoperative interventions compared to surgery alone . received fda approval to market of propel ยฎ contour , formerly referred to as nova , in february 2017 , a steroid releasing implant designed to facilitate treatment of the frontal and maxillary sinus ostia , or openings , of the dependent sinuses , which we believe represents an opportunity for procedures to be performed in operating rooms or in the office setting of care . propel contour has the potential to expand adoption of steroid releasing implants overall by providing physicians with a range of products needed to customize treatment based on their patients ' disease and anatomy . in particular , we believe propel contour 's lower profile , malleable delivery system will increase usage particularly in those patients whose frontal sinuses are more challenging to access . we announced results of the second cohort of patients in the progress study in may 2016. this phase of the progress study was an 80-patient prospective randomized blinded multicenter trial designed to assess the safety and efficacy of propel contour when placed in the frontal sinuses following opening of the sinus . the propel contour cohort demonstrated a statistically significant 65 % relative reduction in the need for post-operative interventions , such as the need for additional surgical procedures or need for oral steroid prescription , compared to surgery alone with standard post-operative care . 49 pursuing approval of resolve , a steroid releasing implant designed to provide a cost-effective , less invasive solution for patients that have had ethmoid sinus surgery yet suffer from recurrent sinus obstruction due to polyps . the resolve implant is designed to be placed in the ethmoid sinus in a procedure conducted in the physician 's office as an alternative to other treatment options such as further medical therapy or revision surgery . we have completed four studies of resolve in a total of 417 patients . in october 2016 , we announced the results of resolve ii , a phase iii trial of 300 patients to assess the safety and efficacy of the product . the resolve ii clinical study met both primary efficacy endpoints , reduction in nasal congestion and polyp burden . we plan to submit a new drug application in the first quarter of 2017 to seek regulatory approval from the fda to market the resolve product . we have expanded our sales organization and we intend to continue to grow our sales force in order to expand our communication of the benefits of our steroid releasing implants to our physician customers . story_separator_special_tag additional sg & a expenses include commissions , training , travel expenses , promotional activities , conferences , trade shows , professional services fees , audit and sarbanes-oxley act of 2002 compliance expenses , insurance costs and general corporate expenses including allocated facilities and information technology expenses . we expect sg & a expenses to continue to increase in absolute dollars for the foreseeable future as we expand our commercial infrastructure to drive and support the anticipated growth in revenue and incur additional legal , accounting , insurance and other professional services fees . research and development expenses research and development , or r & d , expenses consist primarily of product development , clinical and regulatory affairs , consulting services and other costs associated with products and technologies in development . these expenses include employee compensation , stock-based compensation , supplies , quality assurance and related travel and allocated facilities and information technology expenses . clinical expenses include clinical trial design , clinical site reimbursement , data management and travel expenses , and the cost of manufacturing products for clinical trials . we expect r & d expenses to increase in absolute dollars for the foreseeable future as we continue to develop and commercialize new products as well as to enhance current products . however , we expect r & d expenses as a percentage of revenue to vary over time depending on the level and timing of initiating new product development efforts as well as our clinical development activities . 51 story_separator_special_tag income . the preferred stock warrants were converted to common stock warrants upon the completion of our ipo in july 2014 , and are no longer required to be marked-to-market at each reporting period . liquidity and capital resources overview as of december 31 , 2016 , we had cash , cash equivalents and short-term investments of $ 103.9 million and an accumulated deficit of $ 148.5 million , compared to cash , cash equivalents and short-term investments of $ 124.3 million and an accumulated deficit of $ 123.3 million as of december 31 , 2015. cash flows replace_table_token_6_th net cash used in operating activities during the year ended december 31 , 2016 , net cash used in operating activities was $ 20.1 million , consisting primarily of a net loss of $ 25.2 million and an increase in net operating assets of $ 3.6 million , partially offset by non-cash charges of $ 8.7 million . the cash used in operations was primarily due to the ongoing commercialization of propel and propel mini . to support the ongoing commercialization of these products , we continued to expand our sales , marketing and reimbursement organizations . the increase in net operating assets is primarily due to an increase in accounts receivable and inventory , partially offset by an increase in accounts payable . the non-cash charges primarily consisted of stock-based compensation expense . during the year ended december 31 , 2015 , net cash used in operating activities was $ 20.1 million , consisting primarily of a net loss of $ 26.6 million , partially offset by non-cash charges of $ 6.4 million and a decrease in net operating assets of $ 0.1 million . the cash used in operations was primarily due to the ongoing commercialization of propel and propel mini . to support the ongoing commercialization of these products , we continued to expand our sales , marketing and reimbursement organizations . the non-cash charges primarily consisted of stock-based compensation expense . the decrease in net operating assets is primarily due to an increase in accrued compensation , partially offset by an increase in accounts receivable and inventory . 54 during the year ended december 31 , 2014 , net cash used in operating activities was $ 18.0 million , consisting primarily of a net loss of $ 18.4 million and an increase in net operating assets of $ 2.2 million , partially offset by non-cash charges of $ 2.6 million . the cash used in operations was primarily due to the ongoing commercialization of propel and propel mini . to support the ongoing commercialization of these products , we continued to expand our sales , marketing and reimbursement organizations resulting in an increase in accounts receivable , partially offset by an increase in accrued compensation . the non-cash charges primarily consisted of stock-based compensation expense , depreciation and amortization and the change in fair value of convertible preferred stock warrants . net cash used in investing activities during the year ended december 31 , 2016 , net cash used in investing activities was $ 6.9 million , consisting of net purchases of short-term investments and purchases of property and equipment . during the year ended december 31 , 2015 , net cash used in investing activities was $ 56.7 million , consisting primarily of net purchases of short-term investments of $ 55.1 million . during the year ended december 31 , 2014 , net cash used in investing activities was $ 35.5 million , consisting primarily of net purchases of short-term investments of $ 35.1 million . net cash provided by financing activities during the year ended december 31 , 2016 , net cash provided by financing activities was $ 2.0 million , consisting of net proceeds from the issuance of common stock upon the exercises of employee stock options and purchases under our employee stock purchase plan . during the year ended december 31 , 2015 , net cash provided by financing activities was $ 98.2 million , consisting primarily of net proceeds from our follow-on offering of $ 96.4 million . during the year ended december 31 , 2014 , net cash provided by financing activities was $ 54.6 million , consisting primarily of net proceeds from our ipo of $ 55.8 million , partially offset by the repayments in full of our equipment loan and capital lease of $ 1.5 million .
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results of operations replace_table_token_5_th comparison of years ended december 31 , 2016 and 2015 revenue revenue increased $ 17.1 million , or 28 % , to $ 78.7 million during the year ended december 31 , 2016 , compared to $ 61.6 million during the year ended december 31 , 2015. the growth in revenue was attributable to an increase in unit sales of propel and propel mini from 85,600 units to 103,400 units , or 21 % . the increase in units was driven by an expansion of our sales , marketing and reimbursement organizations as well as by the introduction of an expanded indication for propel mini following approval from the fda to treat patients undergoing frontal sinus surgery . in addition , our average selling price increased during the year ended december 31 , 2016. cost of sales and gross margin cost of sales increased $ 0.7 million , or 6 % , to $ 13.0 million during the year ended december 31 , 2016 , compared to $ 12.3 million during the year ended december 31 , 2015. the increase in cost of sales was attributable to the growth in the number of propel and propel mini units sold , partially offset by the reduced per unit overhead costs and increases in manufacturing efficiency . gross margin for the year ended december 31 , 2016 , increased to 83 % , compared to 80 % for the year december 31 , 2015. the increase in gross margin was due to several factors including an increase in our average selling price , growth in unit volume during the year ended december 31 , 2016 , which allowed us to spread our manufacturing overhead costs over more production units , and ongoing increases in manufacturing efficiency .
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risk factors , ย ยitem 6. selected financial dataย and the consolidated financial statements and related notes included elsewhere in this annual report on form 10-k. business overview as a global business , ametek 's operations are affected by global , regional and industry economic factors . however , the company 's strategic geographic and industry diversification , and its mix of products and services , have helped to limit the potential adverse impact of any unfavorable developments in any one industry or the economy of any single country on its consolidated operating results . in 2011 , the company established records for net sales , operating income , operating income margins , net income , diluted earnings per share and operating cash flow . the impact of contributions from recent acquisitions , combined with successful operational excellence initiatives , had a positive impact on 2011 results . the company also benefited from its strategic initiatives under ametek 's four growth strategies : operational excellence , new product development , global and market expansion and strategic acquisitions and alliances . highlights of 2011 were : in 2011 , net sales were $ 3.0 billion , an increase of $ 518.9 million or 21.0 % from 2010 , on internal growth of approximately 16 % in the electronic instruments group ( ยeigย ) and 6 % in the electromechanical group ( ยemgย ) excluding the effect of foreign currency translation , and contributions from the 2010 and 2011 acquisitions . net income for 2011 was $ 384.5 million , an increase of $ 100.6 million or 35.4 % when compared with $ 283.9 million in 2010. during 2011 , the company completed the following acquisitions : in april 2011 , the company acquired avicenna technology , inc. ( ยavicennaย ) , a supplier of custom , fine-featured components used in the medical device industry . in may 2011 , the company acquired coining holding company ( ยcoiningย ) , a leading supplier of custom-shaped metal preforms , microstampings and bonding wire solutions for interconnect applications in microelectronics packaging and assembly . in october 2011 , the company acquired reichert technologies , a manufacturer of analytical instruments and diagnostic devices for the eye care market . in october 2011 , the company acquired em test ( switzerland ) gmbh , a manufacturer of advanced monitoring , testing , calibrating and display instruments in the electrical immunity testing and emissions measurement markets . in december 2011 , the company acquired technical manufacturing corporation ( ยtmcย ) , a world leader in high-performance vibration isolation systems and optical test benches used to isolate highly sensitive instruments for the microelectronics , life sciences , photonics and ultra-precision manufacturing industries . 22 higher earnings resulted in record cash flow provided by operating activities that totaled $ 508.6 million for 2011 , a $ 85.6 million or 20.2 % increase from 2010. the company continues to maintain a strong international sales presence . international sales , including u.s. export sales , were $ 1,501.1 million or 50.2 % of net sales in 2011 , compared with $ 1,211.3 million or 49.0 % of net sales in 2010. new orders for 2011 were $ 3,072.5 million , an increase of $ 421.2 million or 15.9 % when compared with $ 2,651.3 million in 2010. as a result , the company 's backlog of unfilled orders at december 31 , 2011 was a year end record at $ 911.4 million . the company continued its emphasis on investment in research , development and engineering , spending $ 137.6 million in 2011 before customer reimbursement of $ 6.1 million . sales from products introduced in the last three years were $ 595.2 million or 19.9 % of net sales . in september 2011 , ametek completed a new five-year revolving credit facility with a total borrowing capacity of $ 700 million , which excludes an accordion feature that permits the company to request up to an additional $ 200 million in revolving credit commitments at any time during the life of the revolving credit agreement under certain conditions . the new revolving credit facility replaced a $ 450 million total borrowing capacity revolving credit facility , which excluded a $ 100 million accordion feature , that was due to expire in june 2012. at december 31 , 2011 , the company had $ 742.7 million available under its revolving credit facility , including the $ 200 million accordion feature . in the fourth quarter of 2011 , the company issued a 55 million swiss franc ( $ 59.0 million ) 2.44 % senior note due december 2021. results of operations the following table sets forth net sales and income by reportable segment and on a consolidated basis : replace_table_token_10_th ( 1 ) after elimination of intra- and intersegment sales , which are not significant in amount . ( 2 ) segment operating income represents net sales less all direct costs and expenses ( including certain administrative and other expenses ) applicable to each segment , but does not include interest expense . 23 year ended december 31 , 2011 compared with year ended december 31 , 2010 story_separator_special_tag style= '' margin-top:12px ; margin-bottom:0px ; text-indent:4 % '' > emg 's net sales totaled $ 1,342.7 million for 2011 , an increase of $ 195.9 million or 17.1 % when compared with $ 1,146.8 million in 2010. the net sales increase was due to internal growth of approximately 6 % , excluding a favorable 1 % effect of foreign currency translation , and was driven by increases in emg 's differentiated businesses . the acquisitions of coining , avicenna , haydon enterprises and tse accounted for the remainder of the net sales increase . story_separator_special_tag consolidated operating income was $ 482.2 million or 19.5 % of net sales for 2010 , an increase of $ 116.1 million or 31.7 % when compared with $ 366.1 million or 17.4 % of net sales in 2009. interest expense was $ 67.5 million for 2010 , a decrease of $ 1.3 million or 1.9 % when compared with $ 68.8 million in 2009. the decrease was primarily due to the impact of the repayment of a 40 million british pound borrowing under the revolving credit facility in the second quarter of 2009 and a 50 million british pound senior note in the third quarter of 2010 , partially offset by the issuance of an 80 million british pound senior note in the third quarter of 2010. other expenses , net were $ 8.4 million for 2010 , an increase of $ 5.7 million when compared with $ 2.7 million in 2009. the increase was primarily driven by acquisition related expenses . the effective tax rate for 2010 was 30.1 % compared with 30.2 % in 2009. the effective tax rate for 2010 primarily reflects the impact of settlements of income tax examinations and the benefits obtained from international and state income tax planning initiatives . net income for 2010 was $ 283.9 million , an increase of $ 78.1 million or 37.9 % when compared with $ 205.8 million in 2009. diluted earnings per share for 2010 were $ 1.76 , an increase of $ 0.49 or 38.6 % when compared with $ 1.27 per diluted share in 2009. segment results eig 's net sales totaled $ 1,324.1 million for 2010 , an increase of $ 177.5 million or 15.5 % when compared with $ 1,146.6 million in 2009. the net sales increase was due to internal growth of approximately 15 % , with no impact from foreign currency translation , driven primarily by eig 's process , power and industrial businesses . the acquisition of atlas primarily accounted for the remainder of the net sales increase . eig 's operating income was $ 316.2 million for 2010 , an increase of $ 83.3 million or 35.8 % when compared with $ 232.9 million in 2009. eig 's operating margins were 23.9 % of net sales for 2010 compared with 20.3 % of net sales in 2009. the increase in segment operating income and operating margins was driven by the leveraged impact of the group 's increase in net sales noted above , as well as the benefit of the group 's lower cost structure through operational excellence initiatives . emg 's net sales totaled $ 1,146.8 million for 2010 , an increase of $ 195.0 million or 20.5 % when compared with $ 951.8 million in 2009. the net sales increase was due to internal growth of approximately 12 % , with no impact from foreign currency translation . the acquisitions of ameron global , tse and haydon enterprises primarily accounted for the remainder of the net sales increase . emg 's operating income was $ 210.4 million for 2010 , an increase of $ 43.8 million or 26.3 % when compared with $ 166.6 million in 2009. emg 's operating margins were 18.3 % of net sales for 2010 compared with 17.5 % of net sales in 2009. emg 's increase in operating income and operating margins was primarily due to the leveraged impact of the group 's higher net sales , which includes the acquisitions mentioned above . liquidity and capital resources cash provided by operating activities totaled $ 508.6 million in 2011 , an increase of $ 85.6 million or 20.2 % when compared with $ 423.0 million in 2010. the increase in cash provided by operating activities was primarily 27 due to the $ 100.6 million increase in net income , partially offset by higher overall operating working capital levels necessary to grow the company 's businesses . free cash flow ( cash flow provided by operating activities less capital expenditures ) was $ 457.8 million in 2011 , compared with $ 383.8 million in 2010. ebitda ( earnings before interest , income taxes , depreciation and amortization ) was $ 712.2 million in 2011 , compared with $ 545.9 million in 2010. free cash flow and ebitda are presented because the company is aware that they are measures used by third parties in evaluating the company . ( see the ยnotes to selected financial dataย included in item 6 in this annual report on form 10-k for a reconciliation of u.s. generally accepted accounting principles ( ยgaapย ) measures to comparable non-gaap measures ) . cash used for investing activities totaled $ 526.5 million in 2011 , compared with $ 566.8 million in 2010. in 2011 , the company paid $ 474.9 million for five business acquisitions , net of cash received , compared with $ 538.6 million paid for six business acquisitions , net of cash received , in 2010. additions to property , plant and equipment totaled $ 50.8 million in 2011 , compared with $ 39.2 million in 2010. cash provided by financing activities totaled $ 31.9 million in 2011 , compared with $ 62.6 million in 2010. in 2011 , net total borrowings increased by $ 99.1 million , compared with a net total borrowings increase of $ 139.3 million in 2010. in 2011 , the company repurchased 1.7 million shares of its common stock for $ 59.3 million , compared with $ 78.6 million used for repurchases of 3.1 million shares of the company 's common stock in 2010. in november 2011 , the board of directors approved an increase of $ 100 million in the authorization for the repurchase of the company 's common stock . at december 31 , 2011 , $ 105.5 million was available under the board authorization for future share repurchases .
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results of operations in 2011 , the company established records for sales , operating income , operating income margins , net income , diluted earnings per share and operating cash flow . the company achieved these results from strong internal growth in both eig and emg , as well as contributions from acquisitions completed in 2011 and the acquisitions of technical services for electronics ( ยtseย ) in june 2010 , haydon enterprises in july 2010 and atlas material testing technology llc ( ยatlasย ) in november 2010. the full year impact of the 2011 acquisitions and our operational excellence capabilities should have a positive impact on our 2012 results . net sales for 2011 were $ 2,989.9 million , an increase of $ 518.9 million or 21.0 % when compared with net sales of $ 2,471.0 million in 2010. net sales for eig were $ 1,647.2 million in 2011 , an increase of 24.4 % from net sales of $ 1,324.1 million in 2010. net sales for emg were $ 1,342.7 million in 2011 , an increase of 17.1 % from net sales of $ 1,146.8 million in 2010. the increase in net sales was primarily attributable to higher order rates , as well as the impact of the acquisitions mentioned above . the net sales increase for 2011 was driven by strong internal sales growth of approximately 11 % , which excludes a 1 % favorable effect of foreign currency translation . the acquisitions mentioned above contributed the remainder of the net sales increase .
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jdsu test and measurement solutions help accelerate the deployment of new services , lower operating expenses , reduce customer turnover , and increase productivity across each critical phase of the network lifecycle , including research and development , production , deployment , and cem . jdsu enables the effective management of services , such as voice-over-internet protocol ( `` voip '' ) and internet-protocol tv ( `` iptv '' ) , by providing visibility into the end-user experience and also by providing repair , calibration , instrument management , and other services to aid its customers in the rapid deployment and repair of networks and services . jdsu test solutions address lab and production ( capacity expansion , 40g/100g ) , field service ( triple-play deployments for cable , telecom , fttx , and home networking ) , wireless ( drive test , protocol test ) , and cem ( quality of experience for wireless and wireline networks ) . jdsu also provides protocol test solutions for the development and field deployment of storage and storage-network technologies . jdsu test and measurement customers include the world 's largest communications service providers , communications-equipment manufacturers , and government organizations . these include major telecom service providers , wireless operators and cable operators including at & t , bell canada , bharti airtel limited , british telecom , china mobile , china telecom , chunghwa telecom , comcast , csl , deutsche telecom , france telecom , saudi telecom company , singtel , talktalk , telefรณnica , telmex , timewarner , and verizon . network equipment manufacturing customers include alcatel-lucent , ciena , cisco systems , fujitsu , huawei , and motorola . customers in the storage group are chip and infrastructure vendors , storage-device manufacturers , storage-network and switch vendors , and deployed private enterprise customers . storage group customers include brocade , cisco systems , emc , hewlett-packard , and ibm . communications and commercial optical products the ccop business segment is a leading provider of products and technologies used in the optical communications and commercial laser markets . ccop optical communications products include a wide range of components , modules , subsystems , and solutions for two markets : telecommunications , including access ( local ) , metro ( intracity ) , long-haul ( city-to-city and worldwide ) , and submarine ( undersea ) networks ; and , enterprise data communications including sans , lans , and ethernet wans . ccop products enable the transmission and transport of 34 video , audio , and data over high-capacity , fiber-optic cables . transmission products primarily consist of optical transceivers , optical transponders , and their supporting components such as modulators and source lasers including vcsels . transport products primarily consist of amplifiers , roadms , and stbs , and their supporting components such as 980 nanometer ( `` nm '' ) pumps , passive devices , and array waveguides ( `` awg '' s ) . ccop laser products serve a wide variety of oem applications from low- to high-power output and with uv , visible , and ir wavelengths . the broad portfolio addresses the needs of laser clients in applications such as micromachining , materials processing , bioinstrumentation , consumer electronics , graphics , medical/dental , and optical pumping . core laser technologies include continuous-wave ( `` cw '' ) , q-switched , and mode-locked lasers addressing application needs from cw to megahertz repetition rates . laser products include diode , direct-diode , diode-pumped solid-state ( `` dpss '' ) , fiber and gas lasers . ccop provides two lines of pv products . cpv cell products convert light into electrical energy , enabling high efficiency multijunction solar cells and receiver assemblies . photonic power ( `` pp '' ) products transport energy over optical fiber , enabling electromagnetic- and radio-interference-free power and data transmission for remote sensors such as high-voltage line current monitors . today 's most advanced optical networks are built with jdsu transport and transmission components , modules , and subsystems . customers for optical communications products include network equipment manufacturers such as alcatel-lucent , ciena , cisco systems , ericsson , fujitsu , hewlett-packard , huawei , ibm , nokia siemens networks , and tellabs . customers for jdsu commercial lasers include amada , asml , beckman coulter , becton dickinson , disco , electro scientific industries , and han 's laser . customers for photovoltaic products include amplifier research , ets-lindgren , nanjing xinning optoelectronics automation and siemens . advanced optical technologies the aot business segment leverages its core technology strengths in optics and materials science to manage light and or color effects for a wide variety of marketsยfrom product security to space exploration . aot consists of the authentication solutions group , the custom optics products group , and the flex products group . the authentication solutions group provides multilayer authentication solutions that include overt , covert , forensic , and digital technologies for protection from product and document counterfeiting and tampering . these solutions , many of which leverage aot color-shifting and holographic technologies , safeguard brands in the secure document , transaction card , pharmaceutical , consumer electronics , printing/imaging supplies , licensing , and fast-moving consumer goods industries . the custom optics group produces precise , high-performance , optical thin-film coatings for a variety of applications in government and aerospace , biomedical , display , office automation , entertainment , and other emerging markets . these applications include night-vision goggles , satellite solar covers , medical instrumentation , information displays , office equipment , computer-driven projectors , 3d cinema and gesture recognition . the flex products group includes custom color solutions , a product line of unique solutions for product finishes and a wide variety of decorative packaging . these include innovative , optically-based , light-management solutions that provide product enhancement for brands in the pharmaceutical , automotive , consumer electronics , and fast-moving consumer goods industries . story_separator_special_tag we consider revenue realized or realizable and earned when there is persuasive evidence of an arrangement , delivery has occurred , the sales price is fixed or determinable , and collectability is reasonably assured . delivery does not occur until products have been shipped or services have been provided , risk of loss has transferred and in cases where formal acceptance is required , customer acceptance has been obtained or customer acceptance provisions have lapsed . in situations where a formal acceptance is required but the acceptance only relates to whether the product meets its published specifications , revenue is recognized upon shipment provided all other revenue recognition criteria are met . the sales price is not considered to be fixed or determinable until all contingencies related to the sale have been resolved . we reduce revenue for rebates and other similar allowances . revenue is recognized only if these estimates can be reliably determined . our estimates are based on historical results taking into consideration the type of customer , the type of transaction and the specifics of each arrangement . in addition to the aforementioned general policies , the following are the specific revenue recognition policies for multiple-element arrangements and for each major category of revenue . multiple-element arrangements in october 2009 , the fasb issued authoritative guidance that applies to arrangements with multiple deliverables . the guidance eliminates the residual method of revenue recognition , on non-software arrangements , and allows the use of management 's best estimate of selling price ( `` besp '' ) for individual elements of an arrangement when vendor-specific objective evidence ( `` vsoe '' ) or third-party evidence ( `` tpe '' ) is unavailable . in addition , the fasb issued authoritative guidance which removes non-software components of tangible products and certain software components of tangible products from the scope of existing software revenue guidance , resulting in the recognition of revenue similar to that for other tangible products . we have adopted these standards at 37 the beginning of our first quarter of fiscal 2011 on a prospective basis for applicable transactions originating or materially modified on or after july 3 , 2010. when a sales arrangement contains multiple deliverables , such as sales of products that include services , the multiple deliverables are evaluated to determine the units of accounting , and the entire fee from the arrangement is allocated to each unit of accounting based on the relative selling price . under this approach , the selling price of a unit of accounting is determined by using a selling price hierarchy which requires the use of vsoe of fair value if available , tpe if vsoe is not available , or besp if neither vsoe nor tpe is available . revenue is recognized when the revenue recognition criteria for each unit of accounting are met . we establish vsoe of selling price using the price charged for a deliverable when sold separately and , in remote circumstances , using the price established by management having the relevant authority . tpe of selling price is established by evaluating similar and interchangeable competitor goods or services in sales to similarly situated customers . when vsoe or tpe are not available then we use besp . generally , we are not able to determine tpe because our product strategy differs from that of others in our markets , and the extent of customization varies among comparable products or services from our peers . we establish besp using historical selling price trends and considering multiple factors including , but not limited to geographies , market conditions , competitive landscape , internal costs , gross margin objectives , and pricing practices . when determining besp , we apply significant judgment in establishing pricing strategies and evaluating market conditions and product lifecycles . the determination of besp is made through consultation with and approval by the segment management . segment management may modify or develop new pricing practices and strategies in the future . as these pricing strategies evolve , we may modify our pricing practices in the future , which may result in changes in besp . the aforementioned factors may result in a different allocation of revenue to the deliverables in multiple element arrangements from the current fiscal quarter , which may change the pattern and timing of revenue recognition for these elements but will not change the total revenue recognized for the arrangement . to the extent that a deliverable ( s ) in a multiple-element arrangement is subject to specific guidance ( for example , software that is subject to the authoritative guidance on software revenue recognition ) we allocate the fair value of the units of accounting using relative selling price and that unit of accounting is accounted for in accordance with the specific guidance . some of our product offerings include hardware that are integrated with or sold with software that delivers the functionality of the equipment . we believe that this equipment is not considered software related and would therefore be excluded from the scope of the authoritative guidance on software revenue recognition . if the transactions entered into or materially modified on or after july 3 , 2010 were subject to the previous accounting guidance , the reported net revenue amount during the year ended july 2 , 2011 , would decrease by approximately $ 7 million . hardware revenue from hardware sales is recognized when the product is shipped to the customer and when there are no unfulfilled company obligations that affect the customer 's final acceptance of the arrangement . any cost of warranties and remaining obligations that are inconsequential or perfunctory are accrued when the corresponding revenue is recognized . services revenue from services and system maintenance is typically recognized on a straight-line basis over the term of the contract . revenue from time and material contracts is recognized at the contractual 38 rates as labor hours are delivered and direct expenses are incurred . revenue related to extended warranty and product maintenance contracts is deferred and recognized on a straight-line basis over the delivery period .
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results of operations the following table sets forth the components of our consolidated statements of operations as a percentage of net revenue : replace_table_token_5_th 44 financial data for fiscal 2011 , 2010 , and 2009 the following table summarizes selected consolidated statement of operations items ( in millions , except for percentages ) : replace_table_token_6_th net revenue net revenue in fiscal 2011 increased 32.3 % , or $ 440.6 million , to $ 1,804.5 million from $ 1,363.9 million in fiscal 2010. this increase is primarily due to an increased demand in the markets we serve . commtest revenue increased $ 160.3 million largely due to the nsd acquisition in may of fiscal 2010 , which contributed $ 112.3 million of the increase in revenue . ccop revenue increased $ 271.5 million due to an increase in demands for our pluggables , high powered lasers , modulators , tunables , roadms , commercial lasers and circuit pack product lines . aot revenue increased $ 8.8 million due to higher demand for gesture recognition and transaction card products . net revenue in fiscal 2010 increased 6.3 % , or $ 80.6 million , to $ 1,363.9 million from $ 1,283.3 million in fiscal 2009. the increase was primarily due to upturn in the global economy . commtest revenue increased $ 48.9 million largely due to the acquisition of snt in july 2009 and nsd in may 2010 , contributing $ 34.4 million and $ 8.9 million , respectively , in revenue during fiscal 2010. ccop revenue increased $ 18.2 million due to a rebound in our pluggables , high powered lasers , commercial lasers and amplifiers product lines . aot segment increased $ 13.5 million due to higher demand for 3d cinema and currency products , partially offset by lower transaction card revenue .
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during 2010 , the company recorded a net gain of $ 18 for asset impairments and sales including a gain of $ 14 from sales story_separator_special_tag ( in millions , except per share , average settlement cost per asbestos claim , employee , shareholder and statistical data ; per share earnings are quoted as diluted ) introduction this discussion summarizes the significant factors affecting the results of operations and financial condition of crown holdings , inc. ( the ยcompanyย ) as of and during the three-year period ended december 31 , 2011. this discussion should be read in conjunction with the consolidated financial statements included in this annual report . executive overview the company 's focus is to increase shareholder value by maximizing cash flow while investing in promising growth projects in emerging markets and generating sufficient returns which can be reinvested in the company to expand or improve its operations , used to pay down debt and or returned to shareholders . the company 's current growth projects include expansion in the emerging markets of brazil , china , and southeast asia . when the current lineup of expansion projects is completed , the company expects to have added approximately 8.5 billion units of incremental can capacity to its year-end 2011 levels . in the mature , developed markets of north america and western europe , the company continues to focus on improving productivity and efficiency while reducing material and resource use and waste . the key performance measure used by the company is segment income , which is a non-gaap measure . segment income is defined by the company as gross profit less selling and administrative expenses . improving segment income is primarily dependent on the company 's ability to increase revenues and manage costs . the company 's key strategies for increasing revenues include investing in geographic markets with growth potential and developing innovative packaging products using proprietary technology . the company 's cost control efforts focus on improving operating efficiencies and managing material and labor costs , including pension and other benefit costs . in addition , the company considers refinancing transactions aimed at reducing the company 's leverage , as well as possible acquisitions ( which , if effected , may increase the company 's indebtedness or involve the issuance of company securities ) , dispositions , investments or repurchases of its common stock . such transactions would be subject to compliance with the company 's debt agreements . the company 's revenues and costs are impacted by the cost of aluminum and steel , the primary raw materials used to manufacture the company 's products , which have been subject to significant volatility in recent years . the company attempts to pass-through these costs to its customers either through provisions that adjust the selling prices to certain customers based on changes in the market price of the applicable raw material , or through surcharges where no such provision exists . however , there can be no assurance that the company will be able to fully recover from its customers the impact of any increased aluminum and steel costs . in addition , if the company is unable to purchase steel or aluminum for a significant period of time , its operations would be disrupted . story_separator_special_tag style= '' margin-top:12px ; margin-bottom:0px '' > segment income in the european beverage segment decreased from $ 262 in 2009 to $ 244 in 2010 primarily due to pricing adjustments including inventory holding gains from 2009 that did not recur in 2010 and $ 4 from the impact of foreign currency translation , partially offset by an increase in sales unit volumes . european food the european food segment manufactures steel and aluminum food cans and ends , and metal vacuum closures and supplies a variety of customers throughout europe and africa . net sales in the european food segment increased from $ 1,841 in 2010 to $ 1,999 in 2011 primarily due to $ 142 from the pass-through of higher raw material costs , primarily tinplate , and $ 86 from the impact of foreign currency translation partially offset by $ 70 from lower sales unit volumes . net sales in the european food segment decreased from $ 1,968 in 2009 to $ 1,841 in 2010 , primarily due to the pass-through of lower steel costs and $ 73 from the impact of foreign currency translation , partially offset by $ 50 from increased sales unit volumes . segment income in the european food segment increased from $ 224 in 2010 to $ 239 in 2011 primarily due to $ 24 from lower operating costs , $ 5 from inventory holding gains from the sale of inventory on hand at the end of 2010 and $ 11 from the impact of foreign currency translation partially offset by $ 25 from lower sales unit volumes including the fourth quarter 2010 effects of customers ' buying ahead of 2011 tinplate price increases . segment income in the european food segment decreased from $ 238 in 2009 to $ 224 in 2010 , primarily due to inventory holding gains from 2009 that did not recur in 2010 and $ 10 from the impact of foreign currency translation , partially offset by an increase in sales unit volumes . -33- crown holdings , inc. european specialty packaging the european specialty packaging segment manufactures a wide variety of specialty containers , with numerous lid and closure variations and supplies a variety of customers throughout europe . net sales in the european specialty packaging segment increased from $ 395 in 2010 to $ 434 in 2011 primarily due to $ 26 from the pass-through of higher raw material costs and $ 21 from the impact of foreign currency translation partially offset by $ 8 from lower sales unit volumes . story_separator_special_tag selling and administrative expense selling and administrative expense increased from $ 360 in 2010 to $ 395 in 2011 primarily due to $ 20 of benefit from the settlement of a legal dispute unrelated to the company 's ongoing operations in 2010 that did not recur in 2011 and $ 10 from the impact of foreign currency translation . selling and administrative expense decreased from $ 381 in 2009 to $ 360 in 2010 primarily due to a benefit of $ 20 from the settlement of a legal dispute unrelated to the company 's ongoing operations . provision for asbestos crown cork & seal company , inc. is one of many defendants in a substantial number of lawsuits filed throughout the u.s. by persons alleging bodily injury as a result of exposure to asbestos . during 2011 , 2010 and 2009 the company recorded charges of $ 28 , $ 46 and $ 55 , respectively , to increase its accrual for asbestos-related costs and made asbestos-related payments of $ 28 , $ 27 and $ 26 , respectively . the company expects 2012 payments to be generally consistent with prior years ' levels . see note k to the consolidated financial statements for additional information regarding the provision for asbestos-related costs . also see the critical accounting policies section of this ยmanagement 's discussion and analysis of financial condition and results of operationsย for a discussion of the company 's policies with respect to asbestos liabilities . -35- crown holdings , inc. provision for restructuring in 2011 , the company recorded a charge of $ 77 for restructuring actions as follows . the company recorded a charge of $ 20 related to the relocation of its european division and management to switzerland effective january 1 , 2011 in order to benefit from a more centralized management location . the charge included $ 19 for the estimated employee compensation costs resulting from an intercompany payment related to the relocation and is expected to be paid over the next one to four years . the company recorded a charge of $ 3 in its north america food segment primarily related to prior canadian plant closures . the company recorded a charge of $ 9 for headcount reductions in its european food segment . the company expects that these actions may result in annual pre-tax savings of $ 6 when fully implemented in 2013. the company recorded a charge of $ 45 to reduce manufacturing capacity and headcount throughout its western european operations , primarily in its european aerosol can business . the company expects that these actions may result in annual pre-tax savings of $ 27 when fully implemented in 2013. there can be no assurance that any such pre-tax savings will be realized . during 2010 , the company recorded a charge of $ 42 for restructuring costs including $ 22 related to the closure of a canadian plant in the company 's north america food segment , $ 6 for strip and clean costs from prior restructuring actions primarily in the company 's north america food segment , $ 8 for severance costs covering administrative headcount reductions due to relocation of the company 's european division headquarters and $ 6 for other related costs . during 2009 , the company recorded a charge of $ 43 for restructuring costs , including $ 20 related to the closure of two food can plants and an aerosol can plant in canada , $ 19 for severance costs to reduce headcount in the company 's european division and $ 4 for costs related to a prior restructuring action in canada . see note m to the consolidated financial statements for additional information on these charges . loss from early extinguishments of debt during 2011 , the company recorded a charge of $ 32 in connection with the repayment of its $ 600 outstanding 7.75 % senior secured notes due 2015 and its ย83 ( $ 121 ) 6.25 % first priority senior secured notes due 2011. during 2010 , the company recorded a charge of $ 16 in connection with the repayment of ย76 ( $ 101 ) of its 6.25 % first priority senior secured notes due 2011 and its $ 200 outstanding 7.625 % senior notes due 2013. during 2009 , the company recorded a charge of $ 26 in connection with the repayment of ย300 ( $ 442 ) of its 6.25 % first priority senior secured notes due 2011 , its outstanding 8.0 % debentures due 2023 , $ 300 of its 7.625 % senior notes due 2013 and $ 86 of its 7.50 % debentures due 2096. interest expense interest expense increased from $ 203 in 2010 to $ 232 in 2011 primarily due to $ 23 from higher average debt outstanding and $ 4 from the impact of foreign currency translation . interest expense decreased from $ 247 in 2009 to $ 203 in 2010 primarily due to $ 41 from lower average debt outstanding . translation and foreign exchange adjustments during 2011 , 2010 and 2009 , the company recorded foreign exchange ( losses ) /gains of $ ( 2 ) , $ 4 and $ 6 , respectively , primarily for certain subsidiaries that had unhedged currency exposure arising from intercompany debt obligations and for other subsidiaries whose functional currency is not their local currency . -36- crown holdings , inc. taxes on income the company 's effective income tax rate in 2011 , 2010 and 2009 was as follows : replace_table_token_4_th the effective income tax rate in 2011 was higher than in 2010 primarily due to a net tax charge of $ 25 in 2011 in connection with the relocation of the company 's european headquarters and management to switzerland and a tax benefit of $ 7 in 2010 , that did not recur in 2011 , from the nontaxable settlement of a legal dispute unrelated to the company 's operations .
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results of operations the foreign currency translation impacts referred to below were primarily due to changes in the euro and pound sterling in the company 's european segments , the canadian dollar in the company 's americas segments and the chinese renminbi and thai baht in the company 's asian businesses included in non-reportable segments . net sales and segment income net sales increased from $ 7,941 in 2010 to $ 8,644 in 2011 primarily due to $ 432 from the pass-through of higher raw material costs , $ 84 from higher net global sales unit volumes due to organic growth and increased customer demand and $ 197 from the impact of foreign currency translation . -31- crown holdings , inc. net sales increased from $ 7,938 in 2009 to $ 7,941 in 2010 primarily due to higher global sales unit volumes which offset decreases due to the pass-through of lower raw material costs and $ 42 from the impact of foreign currency translation . information about categories of net sales as a percentage of consolidated net sales follows . replace_table_token_3_th discussion and analysis of net sales and segment income by segment follows . americas beverage the americas beverage segment manufactures aluminum beverage cans and ends and steel crowns , commonly referred to as ยbottle capsย , and supplies a variety of customers throughout the u.s. , brazil , canada , colombia and mexico . the company recently completed construction of a new plant in ponta grossa , brazil with the first line commencing commercial operations in the first quarter of 2011 and a second line commencing commercial operations in the second quarter of 2011. in addition , the company commenced commercial operations of a second line in its plant in estancia , brazil in the second quarter of 2011. at full capacity and efficiency , these additions are expected to add annual capacity of more than 2.5
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the following discussion should be read in conjunction with the accompanying consolidated financial statements and notes to the consolidated financial statements , which are prepared in accordance with accounting principles generally accepted in the united states of america ( โ us gaap โ ) . investors are cautioned that the forward-looking statements contained in this section and other parts of this annual report involve both risk and uncertainty . several important factors could cause actual results to differ materially from those anticipated by these statements . many of these statements are macroeconomic in nature and are , therefore , beyond the control of management . see โ forward-looking statements โ below . forward-looking statements management 's discussion and analysis of financial condition and results of operations ( โ md & a โ ) and other parts of this annual report contain certain forward-looking statements and information relating to us that are based on the beliefs of our management as well as assumptions made by , and information currently available to , us . generally , words such as โ believe , โ โ expect , โ โ intend , โ โ estimate , โ โ anticipate , โ โ project , โ โ plan , โ โ may , โ โ can , โ โ could , โ โ might , โ and โ will , โ and similar expressions , as they relate to us are intended to identify forward-looking statements . these statements reflect our current views with respect to future events , are not guarantees of future performance and involve risks and uncertainties that are difficult to predict . further , certain forward-looking statements are based upon assumptions as to future events that may not prove to be accurate . see โ special note regarding forward-looking statements โ at the beginning of this annual report for further discussion . item 1a . risk factors of this annual report also contains a description of certain risk factors that you should consider which could significantly affect our financial results . in addition , the following factors could cause our actual results to differ materially from those results , performance or achievements that may be expressed or implied by such forward-looking statements . these factors include , among other things : changes in general economic , business , political and regulatory conditions in the countries or regions in which we operate ; the length and depth of product and industry business cycles particularly in the automotive , electrical , textiles , electronics and construction industries ; changes in the price and availability of raw materials , particularly changes in the demand for , supply of , and market prices of ethylene , methanol , natural gas , wood pulp and fuel oil and the prices for electricity and other energy sources ; the ability to pass increases in raw material prices on to customers or otherwise improve margins through price increases ; the ability to maintain plant utilization rates and to implement planned capacity additions and expansions ; the ability to reduce or maintain at their current levels production costs and improve productivity by implementing technological improvements to existing plants ; increased price competition and the introduction of competing products by other companies ; changes in the degree of intellectual property and other legal protection afforded to our products or technologies , or the theft of such intellectual property ; costs and potential disruption or interruption of production or operations due to accidents , cyber security incidents , terrorism or political unrest , or other unforeseen events or delays in construction of facilities ; potential liability for remedial actions and increased costs under existing or future environmental regulations , including those relating to climate change ; 35 potential liability resulting from pending or future litigation , or from changes in the laws , regulations or policies of governments or other governmental activities in the countries in which we operate ; changes in currency exchange rates and interest rates ; our level of indebtedness , which could diminish our ability to raise additional capital to fund operations or limit our ability to react to changes in the economy or the chemicals industry ; and various other factors , both referenced and not referenced in this annual report . many of these factors are macroeconomic in nature and are , therefore , beyond our control . should one or more of these risks or uncertainties materialize , or should underlying assumptions prove incorrect , our actual results , performance or achievements may vary materially from those described in this annual report as anticipated , believed , estimated , expected , intended , planned or projected . we neither intend nor assume any obligation to update these forward-looking statements , which speak only as of their dates . overview we are a global technology and specialty materials company . we are one of the world 's largest producers of acetyl products , which are intermediate chemicals , for nearly all major industries , as well as a leading global producer of high performance engineered polymers that are used in a variety of high-value applications . as a recognized innovator in the chemicals industry , we engineer and manufacture a wide variety of products essential to everyday living . our broad product portfolio serves a diverse set of end-use applications including paints and coatings , textiles , automotive applications , consumer and medical applications , performance industrial applications , filter media , paper and packaging , chemical additives , construction , consumer and industrial adhesives , and food and beverage applications . our products enjoy leading global positions due to our large global production capacity , operating efficiencies , proprietary production technology and competitive cost structures . our large and diverse global customer base primarily consists of major companies in a broad array of industries . we hold geographically balanced global positions and participate in diversified end-use applications . we combine a demonstrated track record of execution , strong performance built on shared principles and objectives , and a clear focus on growth and value creation . story_separator_special_tag we expect to increase earnings in excess of revenue growth due to our leading technologies and culture of productivity both of which contribute to our high operating leverage . equity in net earnings of affiliates is also expected to improve during 2012 due to continued geographic growth and no planned plant turnarounds at our strategic affiliates . 37 results of operations financial highlights replace_table_token_10_th replace_table_token_11_th 38 consolidated results โ year ended december 31 , 2011 compared with year ended december 31 , 2010 net sales increased in 2011 from 2010 primarily due to higher pricing across all of our business segments . favorable foreign currency impacts also added to the increase in net sales . in addition to higher pricing , our advanced engineered materials segment contributed to our increase in net sales reflecting the impact of the two product lines , zenite ยฎ lcp and thermx ยฎ pct , acquired from dupont performance polymers in may 2010 , as well as higher volumes in almost all of its product lines , particularly in lft and gur ยฎ ultra-high molecular weight polyethylene . increased net sales also were a result of higher growth and innovation volumes from our emulsions business . volumes in our consumer specialties business remained relatively flat while volumes in our acetyl intermediates segment decreased primarily due to planned and unplanned production outages at our nanjing facility . gross profit increased from the prior year due to higher net sales and the absence of certain write-offs and accelerated amortization recorded in 2010 . during the year ended december 31 , 2010 , we wrote-off other productive assets of $ 18 million related to our singapore and nanjing , china facilities , which are included in our acetyl intermediates segment . we also recorded $ 22 million of accelerated amortization to write-off the asset associated with a raw material purchase agreement with a supplier who filed for bankruptcy in 2009. the accelerated amortization was recorded as $ 20 million to our acetyl intermediates segment and $ 2 million to our advanced engineered materials segment . both the write-off of other productive assets and accelerated amortization were recorded to cost of sales in the accompanying consolidated statements of operations during the year ended december 31 , 2010 . gross profit as a percentage of sales in 2011 increased due to higher pricing which more than offset higher raw material costs . selling , general and administrative expenses increased in 2011 primarily due to costs associated with business and functional optimization initiatives and higher spending on innovation . however , as a percentage of sales , selling , general and administrative expenses declined from 8.5 % to 7.9 % for the year ended december 31 , 2011 as compared to the same period in 2010 due to sustainable efficiencies . other ( charges ) gains , net increased $ 2 million during 2011 as compared to 2010 : replace_table_token_12_th as a result of the company 's pardies , france โ project of closure โ and the previously announced closure of the company 's spondon , derby , united kingdom facility , the company recorded $ 4 million and $ 4 million , respectively , of employee termination benefits during the year ended december 31 , 2011 . the pardies , france operations are included in our acetyl intermediates segment . the spondon , derby , united kingdom operations are included in our consumer specialties segment . see note 4 to the accompanying consolidated financial statements for further information regarding these plant closures . additionally , the company recorded $ 8 million of employee termination benefits during the year ended december 31 , 2011 related to the relocation of the company 's ticona kelsterbach , germany operations to frankfurt hoechst industrial park , germany . on september 26 , 2011 , the company announced the start-up of the new pom production facility in frankfurt hoechst industrial park , germany . the ticona german operations are included in our advanced engineered materials segment . see note 27 in the accompanying consolidated financial statements for further information regarding the ticona kelsterbach plant relocation . the company recorded $ 6 million of employee termination benefits during the year ended december 31 , 2011 related to a business optimization project which is included in our other activities segment . 39 during the year ended december 31 , 2011 , the company received consideration of $ 17 million in connection with the settlement of a claim against a bankrupt supplier . the resolution of this commercial dispute is included in the acetyl intermediates segment . other charges for the year ended december 31 , 2011 and 2010 was partially offset by $ 6 million and $ 59 million , respectively , of recoveries and decreases in legal reserves associated with plumbing actions which are included in our advanced engineered materials business segment . as a result of certain events beginning in october 2008 and subsequent periodic cessation of production during 2009 , we recorded $ 25 million of insurance recoveries during the year ended december 31 , 2010 in our industrial specialties segment . this amount was partially offset by a $ 7 million charge from our captive insurance companies included in our other activities segment . during 2010 , we concluded that certain long-lived assets were partially impaired at our acetate flake and tow manufacturing operations in spondon , derby , united kingdom . accordingly , we wrote down the related property , plant and equipment to its fair value of $ 31 million , resulting in long-lived asset impairment losses of $ 72 million . equity in net earnings of affiliates increased during 2011 primarily due to higher earnings in our ibn sina affiliate in our advanced engineered materials segment . our effective income tax rate for the year ended december 31 , 2011 was 20 % compared to 21 % for the year ended december 31 , 2010 .
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consolidated results - year ended december 31 , 2010 compared with year ended december 31 , 2009 during 2010 the global economy gradually began to recover from the challenging economic environment we experienced during the second half of 2008 and throughout 2009. net sales increased in 2010 from 2009 primarily due to increased volumes as a result of the gradual recovery and increased selling prices across the majority of our business segments . the increase in net sales resulting from our acquisition of fact in december 2009 only slightly offset the decrease in net sales due to the sale of our polyvinyl alcohol ( โ pvoh โ ) business in july 2009 within our industrial specialties segment . unfavorable foreign currency impacts only slightly offset the increase in net sales . gross profit increased due to higher net sales . gross profit as a percentage of sales remained consistent with prior year as increased pricing offset increased raw material and energy costs . in 2010 , we wrote off $ 18 million of other productive assets related to our asian facilities and recorded $ 22 million in accelerated amortization to write off an asset associated with a raw material purchase agreement with a supplier who filed bankruptcy . both of these costs were recorded to cost of sales during the year ended december 31 , 2010 . selling , general and administrative expenses increased during 2010 primarily due to the increase in net sales and higher legal costs and costs associated with business optimization initiatives . as a percentage of sales , selling , general and administrative expenses declined slightly as compared to 2009 due to our continued fixed spending reduction efforts , restructuring efficiencies and a positive impact from foreign currency .
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we serve a wide array of consumer groups from coast to coast , including entry-level , move-up , and active adult buyers , building single and multi-family attached and detached homes . our homebuilding company operates under our taylor morrison and darling homes , and our recently acquired william lyon signature , brand names . we also have an exclusive partnership with christopher todd communities in our โ build-to-rent โ business . ( refer to item 1. business for additional discussion regarding build-to-rent . ) in addition , as part of our acquisition of wlh , we acquired urban form development , llc ( โ urban form โ ) , which primarily develops and constructs multi-use properties consisting of commercial space , retail , and multi-family properties . we also have operations which provide financial services to customers through our wholly owned mortgage subsidiary , taylor morrison home funding , inc ( โ tmhf โ ) , title services through our wholly owned title services subsidiary , inspired title services , llc ( โ inspired title โ ) , and homeowner 's insurance policies through our insurance agency , taylor morrison insurance services , llc ( โ tmis โ ) . our business as of december 31 , 2020 , is organized into multiple homebuilding operating components , and a financial services component , all of which are managed as four reportable segments : east , central , west and financial services , as follows : east atlanta , charlotte , jacksonville , naples , orlando , raleigh , sarasota , and tampa central austin , dallas , denver , and houston west bay area , las vegas , phoenix , portland , sacramento , seattle , and southern california financial services taylor morrison home funding , inspired title services and taylor morrison insurance services annual overview and business strategy the covid-19 pandemic continues to impact the national economy , our industry , and various areas within our operations ; however , the demand for housing has remained strong . we believe strong demand is , in part , attributable to an increase in families working and learning from home . there has been an increase in the need for indoor space and outdoor living . furthermore , the instability in several major cities throughout the united states has driven people to search for homes in more suburban areas on the outskirts of cities , which are areas in which we typically build . we experienced price appreciation in our markets and utilized price increases to slow our net sales orders pace . interest rates have remained low and our buyer profile has remained strong , driving demand even further . while we are encouraged by certain positive and improved trends during recent months , several challenges still exist , such as lingering underemployment concerns , stagnation in real wages and real or perceived personal wealth , national and global economic uncertainty and uncertainty around the interest rate environment . as it relates to covid-19 , we are also challenged by shortages in the labor supply , partially driven by social distancing measures , uncertainty of future local , state and national mandates , and the overall impact the virus can have on the general population . while certain regions of the united states are in various stages of reopening , the united states continues to struggle with rolling outbreaks of the virus , and the effects of covid-19 could continue to impact our financial condition and results of operations . due to uncertainty surrounding this ongoing public health crisis and its continued impact on the u.s. economy , we can not fully predict either the near-term or long-term effects that the pandemic will have on our business . although customer traffic and sales initially slowed following the imposition of social distancing and government-mandated economic shutdowns in march 2020 , resulting in higher rates of cancellation than usual as a result of buyers ' economic uncertainty , we saw a recovery in all of our metrics , including net sales orders , average sales pace per community , home closings , and cancellation rate throughout the remainder of the year . however , the duration and magnitude of the impact of the covid-19 pandemic remains unknown , and could adversely affect our business in future periods . because residential construction was designated as an essential business in nearly all of our operating markets , our construction operations continued wherever appropriate during the year , despite the shelter-in-place orders and other restrictions on commercial activity . all company operations have been conducted in compliance with federal , state , and local covid-19 guidelines , orders , and ordinances applicable to construction and homebuilding activities . since the height of the pandemic , the majority of the states in which we operate have begun to gradually resume normal business operations , and we have continued our construction operations in each of those states . from the beginning of the pandemic , we have taken and continue to take a number of strategic actions in response to the covid-19 crisis to continue to provide uninterrupted service 34 table of contents to our customers while protecting their health and safety , as well as that of our employees and vendors . specifically , we have focused on transforming our customer experience online through innovative digital options , including ( i ) shifting to a remote selling environment ; ( ii ) providing virtual options for online home tours , design center selections and new home demonstrations ; and ( iii ) offering โ curbside โ or โ drive thru โ closings nationwide . to mitigate the inherent business impacts and the uncertainty of the duration of the covid-19 pandemic , we implemented initiatives across the company to reduce all non-essential expenses and capital expenditures , including but not limited to temporarily reducing or deferring new land acquisitions , phasing development , and implementing a revised cadence on all new inventory home starts . story_separator_special_tag the life cycle of the community generally ranges from two to five years , commencing with the acquisition of unentitled or entitled land , continuing through the land development phase and concluding with the sale , construction and delivery of homes . actual community lives will vary based on the size of the community , the sales absorption rate and whether we purchased the property as raw land or as finished lots . we capitalize qualifying interest costs to inventory during the development and construction periods . capitalized interest is charged to cost of sales when the related inventory is charged to cost of sales . we assess the recoverability of our inventory in accordance with the provisions of asc topic 360 , property , plant , and equipment . we review our real estate inventory for indicators of impairment on a community-level basis during each reporting period . if indicators of impairment are present for a community , generally , an undiscounted cash flow analysis is prepared in order to determine if the carrying value of the assets in that community exceeds the undiscounted cash flows . generally , if the carrying value of the assets exceeds their estimated undiscounted cash flows , the assets are potentially impaired , requiring a fair value analysis . our determination of fair value is primarily based on a discounted cash flow model which includes projections and estimates relating to sales prices , construction costs , sales pace , and other factors . however , fair value can be determined through other methods , such as appraisals , contractual purchase offers , and other third party opinions of value . changes in these expectations may lead to a change in the outcome of our impairment analysis , and actual results may also differ from our assumptions . in certain cases , we may elect to cease development and or marketing of an existing community if we believe the economic performance of the community would be maximized by deferring development for a period of time to allow for market conditions to improve . we refer to such communities as long-term strategic assets . the decision may be based on financial and or operational metrics as determined by us . if we decide to cease development , we will evaluate the project for impairment and then cease future development and marketing activity until such a time when we believe that market conditions have improved and economic performance can be maximized . our assessment of the carrying value of our long-term strategic assets typically includes subjective estimates of future performance , including the timing of when development will recommence , the type of product to be offered , and the margin to be realized . in the future , some of these inactive communities may be re-opened while others may be sold . in the ordinary course of business , we enter into various specific performance agreements to acquire lots . real estate not owned under these agreements is reflected in consolidated real estate not owned with a corresponding liability in liabilities attributable to consolidated real estate not owned in the consolidated balance sheets . as a method of acquiring land in staged takedowns , while limiting risk and minimizing the use of funds from our available cash or other financing sources , we may transfer our right under certain specific performance agreements acquired in the acquisition of wlh to entities owned by third parties ( โ land banking arrangements โ ) . these entities use equity contributions from their owners and or incur debt to finance the acquisition and development of the land . the entities grant us an option to acquire lots in staged takedowns . in consideration for this option , we make a non-refundable deposit of 15 % to 25 % of the total purchase price . we are not legally obligated to purchase the balance of the lots , but would forfeit any existing deposits and could be subject to financial and other penalties if the lots were not purchased . we do not have an ownership interest in these entities or title to their assets and do not guarantee their liabilities . these land banking arrangements help us manage the financial and market risk associated with land holdings . 37 table of contents insurance costs , self-insurance reserves and warranty reserves we have certain deductible limits for each of our policies under our workers ' compensation , automobile , and general liability insurance policies , and we record warranty expense and liabilities for the estimated costs of potential claims for construction defects . the excess liability limits are $ 50 million per occurrence , aggregated annually and applied in excess of automobile liability , employer 's liability under workers compensation and general liability policies . we also generally require our subcontractors and design professionals to indemnify us and provide evidence of insurance for liabilities arising from their work , subject to certain limitations . we are the parent of beneva indemnity company ( โ beneva โ ) , which provides insurance coverage for construction defects discovered up to ten years following the close of a home , coverage for premise operations risk , and from time to time , property damage . we accrue for the expected costs associated with the deductibles and self-insured amounts under our various insurance policies based on historical claims , estimates for claims incurred but not reported , and potential for recovery of costs from insurance and other sources . the estimates are subject to significant variability due to factors , such as claim settlement patterns , litigation trends , and the extended period of time in which a construction defect claim might be made after the closing of a home . we offer a one-year limited warranty to cover various defects in workmanship or materials , a two-year limited warranty on certain systems ( such as electrical or cooling systems ) , and a ten-year limited warranty on structural defects . in addition , any outstanding warranties which were offered by our acquired companies are also honored .
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factors affecting comparability of results for the year ended december 31 , 2020 , we recognized $ 127.2 million of costs relating to our acquisition of wlh . for the year ended december 31 , 2019 , we recognized aggregate costs of $ 10.7 million relating to our acquisitions of wlh and av homes . for the year ended december 31 , 2018 , we recognized $ 30.8 million of costs relating to the av homes acquisition . such costs are recognized in transaction and corporate reorganization expenses on the consolidated statement of operations . for the year ended december 31 , 2020 , we recognized $ 74.1 million of expense relating to purchase accounting for wlh . of that expense , $ 69.7 million is included in cost of home closings and $ 4.4 million is included in cost of land closings . no such expenses were recognized for the years ended december 31 , 2019 or december 31 , 2018. for the years ended december 31 , 2020 and 2019 , we recognized $ 10.2 million and $ 5.8 million of expense relating to losses on our extinguishment of debt , respectively . for the year ended december 31 , 2018 , we did not incur a loss on extinguishment of debt . as of december 31 , 2019 , our assets in chicago were held for sale and as a result we adjusted the fair value of the assets within this division to the lower of fair value ( less costs to sell ) or net book value . in addition , we wrote off other components of the operations in accordance with the guidance set forth in accounting standards codification ( โ asc โ ) topic 360 , property , plant , and equipment .
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- 70 - our purchase and contribution agreements with hfc with respect to the intermediate pipelines acquired in 2005 and the crude pipelines and tankage assets acquired in 2008 , restrict us from selling these pipelines and terminals acquired from hfc . under these agreements , we are restricted from prepaying borrowings and long-term debt to outstanding balances below $ 206 million prior to 2015 and $ 171 million prior to 2018 , subject to story_separator_special_tag this item 7 , including but not limited to the sections on โ liquidity and capital resources , โ contains forward-looking statements . see โ forward-looking statements โ at the beginning of part i and item 1a . `` risk factors . '' in this document , the words โ we , โ โ our , โ โ ours โ and โ us โ refer to hep and its consolidated subsidiaries or to hep or an individual subsidiary and not to any other person . - 38 - ril 19 , overview hep is a delaware limited partnership . we own and operate petroleum product and crude oil pipelines and terminal , tankage and loading rack facilities that support hfc 's refining and marketing operations in the mid-continent , southwest and rocky mountain regions of the united states and alon 's refinery in big spring , texas . at december 31 , 2013 , hfc owned a 39 % interest in us including the 2 % general partnership interest . additionally , we own a 75 % interest in unev , the owner of a pipeline running from woods cross , utah to las vegas , nevada and related products terminals and a 25 % joint venture interest in the slc pipeline , a 95-mile intrastate crude oil pipeline system that serves refineries in the salt lake city , utah area . we generate revenues by charging tariffs for transporting petroleum products and crude oil through our pipelines , by charging fees for terminalling and storing refined products and other hydrocarbons and providing other services at our storage tanks and terminals . we do not take ownership of products that we transport , terminal or store , and therefore we are not directly exposed to changes in commodity prices . on january 16 , 2013 , a two-for-one unit split was paid in the form of a common unit distribution for each issued and outstanding common unit to all unitholders of record on january 7 , 2013. all references to unit and per unit amounts in this document and related disclosures have been adjusted to reflect the effect of the unit split for all prior periods presented . in march 2013 , we closed on a public offering of 1,875,000 of our common units . additionally , an affiliate of hfc , as a selling unitholder , closed on a public sale of 1,875,000 of its hep common units for which we did not receive any proceeds . we used our net proceeds of $ 73.4 million to repay indebtedness incurred under our credit facility and for general partnership purposes . amounts repaid under our credit facility may be reborrowed from time to time , and we intend to reborrow certain amounts to fund capital expenditures . we believe the continuing growth of crude production in the permian basin and throughout the mid-continent and favorable refining economics should support high utilization rates for the refineries we serve , which in turn will support volumes in our product pipelines , crude gathering system and terminals . unev pipeline interest acquisition on july 12 , 2012 , we acquired hfc 's 75 % interest in unev . we paid consideration consisting of $ 260.9 million in cash and 2,059,800 of our common units . also under the terms of the transaction , we issued to hfc a class b unit comprising a noncontrolling equity interest in a wholly-owned subsidiary subject to redemption to the extent that hfc is entitled to a 50 % interest in our share of annual unev earnings before interest , income taxes , depreciation , and amortization above $ 30 million beginning july 1 , 2016 and ending in june 2032 , subject to certain limitations . however , to the extent earnings thresholds are not achieved , no redemption payments are required . contemporaneously with this transaction , hfc ( our general partner ) agreed to forego its right to incentive distributions of up to $ 1.25 million per quarter over twelve consecutive quarterly periods following the closing of the transaction and up to an additional four quarters in certain circumstances . in connection with the transaction , we entered into 15-year throughput agreements with shippers containing minimum annual revenue commitments to us of $ 25 million . legacy frontier pipeline and tankage asset transaction on november 9 , 2011 , we acquired from hfc certain tankage , loading rack and crude receiving assets located at hfc 's el dorado and cheyenne refineries . we paid non-cash consideration consisting of promissory notes with an aggregate principal amount of $ 150 million and 7,615,230 of our common units . in connection with the transaction , we entered into 15-year throughput agreements with hfc containing minimum annual revenue commitments to us of $ 48.3 million . agreements with hfc and alon we serve hfc 's refineries under long-term pipeline and terminal , tankage and throughput agreements expiring from 2019 to 2026. under these agreements , hfc agreed to transport , store and throughput volumes of refined product and crude oil on our pipelines and terminal , tankage and loading rack facilities that result in minimum annual payments to us . additionally , such agreements require hfc to reimburse us for certain costs . these minimum annual payments or revenues are subject to annual tariff rate adjustments on july 1 , based on the ppi or ferc index . as of december 31 , 2013 , these agreements with hfc will result in minimum annualized payments to us of $ 225.5 million . story_separator_special_tag these factors were offset partially by increased operating costs and expenses , higher interest expense and a loss on the early extinguishment of debt . although net income attributable to hep increased , limited partners ' per unit interest in earnings decreased from $ 1.38 per unit in 2011 to $ 1.29 per unit in 2012. the principal factors that caused the decrease in limited partners ' per unit interest , relative to the overall net income attributable to hep increase , were higher incentive distributions to the general partner and the unev acquisition not yet being accretive to earnings , although it was accretive to distributable cash flow . - 44 - ril 19 , revenues for the year ended december 31 , 2012 include the recognition of $ 4.0 million of prior shortfalls billed to shippers in 2011. deficiency payments of $ 7.8 million associated with certain guaranteed shipping contracts were deferred during the year ended december 31 , 2012. revenues total revenues for the year ended december 31 , 2012 were $ 292.6 million , a $ 78.3 million increase compared to the year ended december 31 , 2011. this was due principally to increased pipeline shipments , revenues attributable to our recent acquisitions and the effect of annual tariff increases partially offset by a $ 4.6 million decrease in previously deferred revenue realized under our guaranteed shipping contracts . overall pipeline volumes were up 18 % compared to the year ended december 31 , 2011. revenues from our refined product pipelines were $ 105.2 million , an increase of $ 20.3 million compared to the year ended december 31 , 2011. this included $ 15.0 million in revenues attributable to unev pipeline throughputs which commenced initial start-up activities in december 2011 partially offset by a $ 5.4 million decrease in previously deferred revenue realized under our guaranteed shipping contracts . volumes shipped on our refined product pipelines averaged 170.7 thousand barrels per day compared to 143.1 mbpd for 2011. revenues from our intermediate pipelines were $ 28.5 million , an increase of $ 6.6 million compared to the year ended december 31 , 2011. this included $ 3.4 million of increased revenues attributable to the tulsa interconnect pipelines , which were placed in service in september 2011 , and a $ 0.8 million increase in previously deferred revenue realized under our guaranteed shipping contracts . volumes shipped on our intermediate pipelines averaged 127.2 mbpd compared to 93.4 mbpd for 2011. revenues from our crude pipelines were $ 45.9 million , a decrease of $ 1.7 million compared to the year ended december 31 , 2011. revenues for the year ended december 31 , 2011 included $ 5.5 million attributable to a crude pipeline revenue settlement with hfc . volumes shipped on our crude pipelines increased to an average of 171.0 mbpd compared to 161.8 mbpd for 2011. revenues from terminal , tankage and loading rack fees were $ 112.9 million , an increase of $ 53.0 million compared to year ended december 31 , 2011. this increase was due principally to $ 45.4 million of increased revenues attributable to our terminal , tankage and loading racks serving hfc 's el dorado and cheyenne refineries . refined products terminalled in our facilities increased to an average of 325.0 mbpd compared to 238.1 mbpd for 2011. operations expense operations expense for the year ended december 31 , 2012 increased by $ 24.7 million compared to the year ended december 31 , 2011. this increase was due principally to increased operating costs of $ 9.6 million and $ 5.2 million attributable to the 2012 acquired unev pipeline and assets serving hfc 's el dorado and cheyenne refineries , respectively , higher throughput levels as well as year-over-year increases in property taxes , maintenance service and payroll costs . depreciation and amortization depreciation and amortization for the year ended december 31 , 2012 increased by $ 20.5 million compared to the year ended december 31 , 2011. this increase was due principally to depreciation attributable to our recent acquisitions from hfc and capital projects . also contributing were increases in asset abandonment charges related to tankage no longer in service . general and administrative general and administrative costs for the year ended december 31 , 2012 increased by $ 1.0 million compared to the year ended december 31 , 2011 due to timing of professional fees related to recent acquisitions . equity in earnings of slc pipeline our equity in earnings of the slc pipeline was $ 3.4 million and $ 2.6 million for the years ended december 31 , 2012 and 2011. interest expense interest expense for the year ended december 31 , 2012 totaled $ 47.2 million , an increase of $ 11.2 million compared to the year ended december 31 , 2011. this increase reflected interest on a year-over-year increase in debt levels . our aggregate effective interest rate was 6.5 % and 6.7 % for the years ended december 31 , 2012 and 2011 , respectively . loss on early extinguishment of debt we recognized a charge of $ 3.0 million upon the early extinguishment of our 6.25 % senior notes for the year ended december 31 , 2012. this charge related to the premium paid to noteholders upon their tender of an aggregate principal amount of $ 185.0 million and related financing costs that were previously deferred . - 45 - ril 19 , state income tax we recorded state income tax expense of $ 371,000 and $ 234,000 for the years ended december 31 , 2012 and 2011 which was solely attributable to the texas margin tax . liquidity and capital resources overview in november 2013 , we amended the credit agreement increasing the size of the credit facility from $ 550 million to $ 650 million . our $ 650 million senior secured revolving credit facility expires in november 2018 and is available to fund capital expenditures , investments , acquisitions , distribution payments and working capital and for general partnership purposes .
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summary net income attributable to hep for the year ended december 31 , 2013 was $ 79.4 million , a $ 14.7 million decrease compared to the year ended december 31 , 2012 . this decrease in earnings is due principally to increased operating costs and expenses , including higher depreciation resulting from asset abandonment charges related to tankage permanently removed from service , combined with higher allocations of income to noncontrolling interests . overall revenues increased but did not keep pace with the cost increases as pipeline volumes supporting hfc 's navajo refinery were reduced in 2013 as the refinery experienced a planned turnaround in the first quarter and unplanned refinery downtime in the fourth quarter . limited partners ' per unit interest in earnings decreased from $ 1.29 per unit in 2012 to $ 0.88 per unit in 2013 due to the income decreases combined with higher incentive distributions to the general partner . revenues for the year ended december 31 , 2013 include the recognition of $ 7.8 million of prior shortfalls billed to shippers in 2012 . as of december 31 , 2013 , deferred revenue on our consolidated balance sheet related to shortfalls billed was $ 12.0 million . such deferred revenue will be recognized in earnings either as payment for shipments in excess of guaranteed levels , if and to the extent the pipeline system will not have necessary capacity to provide for shipments in excess of guaranteed levels , or when shipping rights expire unused . revenues total revenues for the year ended december 31 , 2013 were $ 305.2 million , a $ 12.6 million increase compared to the year ended december 31 , 2012 . the revenue increase was due to the effect of annual tariff increases , higher cost reimbursement receipts from hfc and a $ 1.5 million increase in previously deferred revenue realized .
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million . a large portion of this increase was in digital marketing , which is one of our highest return investments in brand marketing support . in 2013 , due to the low interest rate environment , retirement benefit expense is expected to increase by $ 22 million . about 60 % of this increase is expected to impact sg & a . replace_table_token_5_th interest expense for 2012 was higher than the prior year . the impact of higher average debt balances in 2012 compared to 2011 was partially offset by the impact of lower interest rates for 2012 compared to 2011. the higher average debt balances in 2012 were due to the acquisitions completed late in 2011. replace_table_token_6_th in 2012 , we repatriated $ 70.0 million of cash from foreign subsidiaries . this transaction generated u.s. foreign tax credits due to the mix of foreign earnings that related to this cash . these u.s. foreign tax credits reduced 2012 tax expense by $ 9.7 million and were the major driving factor in a reduction in the tax rate for 2012 as compared to the prior year . discrete tax benefits in 2012 were $ 2.0 million compared to $ 0.8 million in 2011. the increase in 2012 is mainly due to the reversal of a portion of a valuation allowance originally established against a subsidiary 's net operating losses . this subsidiary has established a pattern of profitability which resulted in us concluding that a portion of the valuation allowance should be reversed . in 2010 , the internal revenue service ( irs ) commenced an examination of our u.s. federal income tax return for the 2007 and 2008 tax years . during the course of the examination , we held discussions with the irs on certain issues and in october 2012 we received proposed adjustments for these tax years . in november 2012 we deposited $ 18.8 million with the irs to stop any potential interest on these proposed adjustments . we believe we have established appropriate deferred taxes or tax accruals under us gaap for these issues in prior periods . while it is often difficult to predict the final outcome or the timing of resolution of uncertain tax positions , we believe that our unrecognized tax benefits reflect the most likely outcome . we will continue to update these unrecognized tax benefits , and the related interest , in light of changing facts and circumstances in the future . in addition , see note 10 of the financial statements for a reconciliation of the u.s. federal statutory tax rate with the effective tax rate . replace_table_token_7_th income from unconsolidated operations decreased $ 3.9 million in 2012 compared to 2011. most of this decrease is attributable to our largest joint venture , mccormick de mexico , which was negatively impacted by an unfavorable foreign exchange rate between the mexican peso an the u.s. dollar for most of 2012. while this business grew sales 6 % , profits were also pressured by higher soybean oil cost ( a main ingredient for mayonnaise which is the leading product for this joint venture ) . this situation began in the fourth quarter of 2011 and the year-on-year impact in the fourth quarter of 2012 had eased . in 2012 , our mccormick de mexico joint venture represented 59 % of the sales and 82 % of the net income of our unconsolidated joint ventures . we own a 26 % share in our eastern condiments joint venture and on average own 50 % of our other unconsolidated joint ventures . we reported diluted earnings per share of $ 3.04 in 2012 , compared to $ 2.79 in 2011. the following table outlines the major components of the change in diluted earnings per share from 2011 to 2012 : replace_table_token_8_th consumer business replace_table_token_9_th we grew consumer business sales 9.8 % in 2012 when compared to 2011 , which included a 7.2 % increase from acquisitions completed in 2011. the remaining increase was driven by higher pricing which added 3.7 % and volume and product mix which added 0.3 % . unfavorable foreign exchange rates reduced sales by 1.4 % . in the americas , consumer business sales rose 4.0 % , primarily as a result of pricing actions which added 4.5 % . these pricing actions , taken in response to an increase in material costs , went into effect late in fiscal year 2011. our 2011 acquisition of kitchen basics ยฎ added 0.8 % to sales , volume and product mix reduced sales by 1.1 % and foreign exchange rates reduced sales by 0.2 % . while higher prices had an unfavorable impact on volume and product mix , we offset this in part with our initiatives to drive growth through new product introductions and brand marketing . in 2012 , our new product launches included a line of gourmet recipe mixes , authentic hispanic recipe mixes , zatarain 's frozen dinners for two , new varieties of grill mates , and in canada , club house brand grinders . a portion of our incremental brand marketing support was in support of our new products . we also increased our digital marketing activity , which offers a more personal way to interact with consumers . recipe views at www.mccormick.com rose 30 % in 2012 and our facebook fan base grew to 1.5 million . in 2011 , we reported that an estimated $ 10 million in sales shifted from the first quarter of 2011 into the fourth quarter of 2010 , as a result of customer purchases in advance of a late 2010 price increase . in europe , the middle east and africa ( emea ) , consumer business sales increased 15.3 % , with our 2011 acquisition of kamis adding 16.9 % to sales . unfavorable foreign currency decreased sales 5.7 % . in local currency and excluding the impact of acquisitions , we grew sales 4.1 % with 2.9 % from volume and product mix and 1.2 % from pricing actions . story_separator_special_tag cci cost savings totaled $ 65 million in 2011 , of which $ 45 million lowered cost of goods sold . replace_table_token_13_th selling , general and administrative expenses in total dollars increased in 2011 compared to 2010 , but decreased as a percentage of net sales for those same time periods . the increase in total dollars was largely driven by higher incremental brand marketing support , sg & a of acquired businesses and $ 10.9 million of transaction costs related to completed acquisitions . the decrease in sg & a as a percent of net sales is primarily driven by lower selling costs as a percentage of net sales . during 2011 , we increased brand marketing support by $ 20.1 million or 12 % . a portion of this increase was in digital marketing , which is one of our highest return investments in brand marketing support . we nearly doubled our digital marketing in the past year , including a program behind grill mates in the u.s. that contributed to a 7 % unit increase in 2011. we also increased support behind our hispanic products in the u.s. , which included television and a sampling program . this helped drive a 9 % increase in sales of hispanic products which exceeded $ 100 million for the first time in 2011. replace_table_token_14_th interest expense for 2011 was higher than the prior year . this was caused by higher average debt balances , due to our acquisitions in 2011 and a slightly higher weighted-average interest rate . replace_table_token_15_th the increase in the tax rate in 2011 was due to a lower level of net discrete tax benefits , decreased u.s. foreign tax credits in the current year as compared to the prior year , partially offset by a favorable mix of earnings among our different tax jurisdictions . discrete tax benefits in 2011 were $ 0.8 million compared to $ 20.1 million in 2010. the $ 20.1 million in 2010 was mainly due to a $ 13.9 million reversal of a tax accrual for a closed tax year . this tax accrual was recorded in a prior period based on uncertainties about the tax aspects of transactions related to the reorganization of our european operations and divestment of certain of our joint ventures . in 2010 , u.s. foreign tax credits included the impact of a $ 108.5 million repatriation of cash from foreign subsidiaries . due to the mix of foreign earnings related to this cash , the repatriation generated additional tax credits . in addition , see note 10 of the financial statements for a reconciliation of the u.s. federal statutory tax rate with the effective tax rate . replace_table_token_16_th income from unconsolidated operations decreased $ 0.1 million in 2011 compared to 2010. we increased income with our unconsolidated joint venture in india , eastern condiments , which was completed late in fiscal year 2010. this was offset by investment spending behind our new joint venture in turkey and decreases in some of our smaller joint ventures . our largest joint venture , mccormick de mexico , had net income comparable to the prior year . while this business grew sales 12 % , profits were pressured by higher soybean oil cost and a weakening mexico peso in the fourth quarter of 2011. we own a 26 % share in our eastern condiments joint venture and on average own 50 % of our other unconsolidated joint ventures . in 2011 , sales of these joint ventures grew 32 % to $ 709 million ( at 100 % of these businesses ) with many products marketed under the mccormick name . the eastern condiments joint venture added 18 % , while existing joint ventures increased sales by 14 % . we reported diluted earnings per share of $ 2.79 in 2011 , compared to $ 2.75 in 2010. the following table outlines the major components of the change in diluted earnings per share from 2010 to 2011 : replace_table_token_17_th consumer business replace_table_token_18_th we grew consumer business sales 10.0 % in 2011 when compared to 2010. higher pricing added 5.1 % and favorable foreign exchange rates added 1.8 % . volume and product mix rose 3.1 % , which included a 2.6 % increase from acquisitions in 2011. in the americas , consumer business sales rose 8.2 % , primarily as a result of pricing actions which added 6.0 % . our acquisition of kitchen basics added 1.1 % to sales , other increases in volume and product mix added 0.4 % and favorable foreign exchange rates added 0.7 % . increased pricing unfavorably impacted volume and product mix during 2011. in addition , an estimated $ 10 million in sales shifted from the first quarter of 2011 into the fourth quarter of 2010 , as a result of customer purchases in advance of a late 2010 price increase . however , the impact of these reductions to volume and product mix were more than offset by a favorable impact of product innovation , brand marketing support and expanded distribution . new products introduced in 2011 included new recipe inspirations , grinders , grill mates and reduced sodium dry seasoning mixes . we had particular success with new zatarain 's frozen entrees which helped contribute to a 40 % increase in sales of zatarain 's frozen products . a portion of our incremental brand marketing support was directed toward a new advertising campaign for dry seasoning mixes , a hispanic marketing program that included sampling , and a digital marketing program behind grill mates which contributed to a 7 % unit increase in grill mates sales . new distribution was gained for both brand and private label items in a variety of retail channels that included grocery , warehouse clubs , dollar stores and drug chains . in europe , the middle east and africa ( emea ) , consumer business sales increased 13.5 % . our acquisition of kamis added 6.5 % to sales , favorable foreign exchange rates added 4.2 % and pricing actions added 2.8 % .
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overview the following management 's discussion and analysis of financial condition and results of operations ( md & a ) is intended to help the reader understand mccormick & company incorporated , our operations and our present business environment . md & a is provided as a supplement to , and should be read in conjunction with , our consolidated financial statements and the accompanying notes thereto contained in item 8 of this report . mccormick is a global leader in flavor . the company manufactures , markets and distributes spices , seasoning mixes , condiments and other flavorful products to the entire food industryโretail outlets , food manufacturers and foodservice businesses . we manage our business in two operating segments , consumer and industrial as described in item 1 of this report . our strategy for growth is to increase sales and profit by investing in the business and fueling that investment with our comprehensive continuous improvement - cci - cost savings . cci is our ongoing initiative to improve productivity and reduce costs throughout the organization . our long-term annual growth objectives are to increase sales 4 % to 6 % , increase operating income 7 % to 9 % and increase earnings per share 9 % to 11 % . over time , we expect similar contributions to sales growth largely from three sources : 1 ) our base businessโdriven by brand marketing support , expanded distribution and category growth ; 2 ) product innovation ; and 3 ) acquisitions . in addition to fueling sales growth , our cci program is contributing to higher operating income and earnings per share . our business generates strong cash flow and we have a balanced use of cash , funding dividends , which we have increased in each of the past 27 years , capital expenditures , acquisitions and share repurchases . each year , we expect a combination of acquisitions and share repurchases to add about 2 % to earnings per share growth .
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the company is continuing its evaluation , which may identify additional impacts this standard will have on its consolidated financial statements and related disclosures . f-11 in july 2018 , the fasb issued asu 2018-11 , leases โ targeted improvements ( โ asu 2018-11 โ ) , which provides entities with relief from the costs of implementing certain aspects of asu 2016-02. the asu provides a practical expedient which allows l essors to not separate lease and non-lease components in a contract and allocate the consideration in the contract to the separate components if both ( i ) the timing and pattern of revenue recognition for the non-lease component and the related lease compon ent are the same and ( ii ) the combined single lease component would be classified story_separator_special_tag financial condition and results of operations the following is a discussion and analysis of our financial condition and our historical results of operations . the following should be read in conjunction with our financial statements and accompanying notes . this discussion contains forward-looking statements that involve risks and uncertainties . our actual results could differ materially from those projected , forecasted , or expected in these forward-looking statements as a result of various factors , including , but not limited to , those discussed below and elsewhere in this annual report . see โ cautionary statement regarding forward-looking statements โ and โ risk factors โ in this annual report . our management believes the assumptions underlying the company 's financial statements and accompanying notes are reasonable . however , the company 's financial statements and accompanying notes may not be an indication of our financial condition and results of operations in the future . overview as of december 31 , 2018 , our portfolio consisted of 35 multifamily properties primarily located in the southeastern and southwestern united states encompassing 12,555 units of apartment space that was approximately 94.6 % leased with a weighted average monthly effective rent per occupied apartment unit of $ 985. substantially all of our business is conducted through the op . we own the portfolio through the op and our trs . the op owns approximately 99.9 % of the portfolio ; our trs owns approximately 0.1 % of the portfolio . the op gp is the sole general partner of the op . as of december 31 , 2018 , there were 23,819,402 op units outstanding , of which 23,746,169 , or 99.7 % , were owned by us and 73,233 , or 0.3 % , were owned by an unaffiliated limited partner ( see note 10 to our consolidated financial statements ) . we are primarily focused on directly or indirectly acquiring , owning , and operating well-located multifamily properties with a value-add component in large cities and suburban submarkets of large cities , primarily in the southeastern and southwestern united states . we generate revenue primarily by leasing our multifamily properties . we intend to employ targeted management and a value-add program at a majority of our properties in an attempt to improve rental rates and the noi at our properties and achieve long-term capital appreciation for our stockholders . we are externally managed by the adviser through the advisory agreement , by and among the op , the adviser and us . the advisory agreement was renewed on february 13 , 2019 for a one-year term set to expire on march 16 , 2020. the adviser is wholly owned by nexpoint advisors , l.p. , which is an affiliate of our sponsor . we began operations on march 31 , 2015 as a result of the transfer and contribution by nhf of all but one of the multifamily properties owned by nhf through its wholly owned subsidiary nreo in exchange for 100 % of its outstanding common stock . we use the term โ predecessor โ to mean the carve-out business of nreo , which owned all or a majority interest in the multifamily properties transferred or contributed to us by nhf through nreo . on march 31 , 2015 , nhf distributed all of the outstanding shares of our common stock held by nhf to holders of nhf common shares . we refer to the distribution of our common stock by nhf as the โ spin-off. โ substantially all of our operations were conducted by our predecessor prior to march 31 , 2015. with the exception of a nominal amount of initial cash funded at inception , we did not own any assets prior to march 31 , 2015. our predecessor included all of the properties in our portfolio that were held indirectly by nreo prior to the spin-off . our predecessor was determined in accordance with the rules and regulations of the sec . references throughout this report to the โ company , โ โ we , โ or โ our , โ include the activity of the predecessor defined above . on november 14 , 2018 , in connection with the 2018 offering , we issued 2,702,500 shares of our common stock , par value $ 0.01 per share , at a public offering price of $ 33.00 per share , for net proceeds of approximately $ 84.8 million ( after underwriters ' discounts and offering costs ) . we contributed the net proceeds from the 2018 offering to the op in exchange for 2,702,500 op units , and the op in turn used a majority of the net proceeds to repay the $ 50.0 million outstanding under the $ 60 million credit facility and the $ 30.0 million outstanding under the $ 30 million bridge facility ( see notes 6 and 8 to our consolidated financial statements ) . we have elected to be taxed as a reit under sections 856 through 860 of the code , and expect to continue to qualify as a reit . to qualify as a reit , we must meet a number of organizational and operational requirements , including a requirement that we distribute at least 90 % of our reit taxable income to our stockholders . story_separator_special_tag corporate general and administrative expenses . corporate general and administrative expenses were $ 7.8 million for the year ended december 31 , 2018 compared to $ 6.3 million for the year ended december 31 , 2017 , which was an increase of approximately $ 1.5 million . the increase between the periods was primarily due to approximately $ 4.2 million of equity-based compensation expense recognized during the year ended december 31 , 2018 related to the grants of restricted stock units to our directors , officers , employees and certain key employees of our adviser pursuant to our long-term incentive plan ( the โ 2016 ltip โ ) , compared to $ 3.1 million of equity-based compensation expense recognized during the year ended december 31 , 2017 ( see note 8 to our consolidated financial statements ) . subject to the expense cap , corporate general and administrative expenses may increase in future periods as we acquire additional properties . property general and administrative expenses . property general and administrative expenses were $ 6.1 million for the year ended december 31 , 2018 compared to $ 6.2 million for the year ended december 31 , 2017 , which was a decrease of approximately $ 0.1 million . the decrease between the periods was primarily due to our acquisition and disposition activity in 2017 and 2018 and the timing of the transactions , as described above . depreciation and amortization . depreciation and amortization costs were $ 47.5 million for the year ended december 31 , 2018 compared to $ 48.8 million for the year ended december 31 , 2017 , which was a decrease of approximately $ 1.3 million . the decrease between the periods was primarily due to the amortization of intangible lease assets of $ 2.5 million related to four properties for the year ended december 31 , 2018 compared to $ 8.9 million related to seven properties for the year ended december 31 , 2017 , which was a decrease of approximately $ 6.4 million . the decrease between the periods was partially offset by a $ 5.1 million increase in depreciation expense , primarily due to our acquisition activity in 2017 and 2018 and the timing of the transactions , as described above . the amortization of intangible lease assets over a six-month period from the date of acquisition is expected to increase the amortization expense during the initial year of operations for each property . other income and expense interest expense . interest expense was $ 28.6 million for the year ended december 31 , 2018 compared to $ 29.6 million for the year ended december 31 , 2017 , which was a decrease of approximately $ 1.0 million . the decrease between the periods was primarily due to an increase in gain recognized related to the effective portion of changes in fair value of our interest rate swap derivatives designated as cash flow hedges of approximately $ 5.3 million ( see โ debt , derivatives and hedging activity โ interest rate swap agreements โ below ) . the decrease between the periods was partially offset by an increase in interest on debt of approximately $ 4.6 million . the following table details the various costs included in interest expense for the years ended december 31 , 2018 and 2017 ( in thousands ) : replace_table_token_12_th ( 1 ) prior to our adoption of asu 2017-12 , derivatives and hedging ( topic 815 ) ( โ asu 2017-12 โ ) on january 1 , 2018 , the ineffective portion of changes in the fair value of our derivatives designated as cash flow hedges was recognized directly in net income ( loss ) as interest expense . the adoption of asu 2017-12 eliminates the separate measurement of effectiveness and ineffectiveness , and all changes in the fair value of derivatives that are designated as cash flow hedges are recorded directly in other comprehensive income ( โ oci โ ) . see notes 2 and 7 to our consolidated financial statements for additional information . 51 loss on extinguishment of debt and modification costs . loss on extinguishment of debt and modification costs was $ 3.6 mill ion for the year ended december 31 , 2018 compared to $ 5.7 million for the year ended december 31 , 2017 , which was a decrease of approximately $ 2.1 million . the decrease between the periods was primarily due to decreases in debt modification and other extinguishment costs of approximately $ 1.5 million and prepayment penalties and defeasance costs of approximately $ 1.0 million . the following table details the various costs included in loss on extinguishment of debt and modific ation costs for the years ended december 31 , 2018 and 2017 ( in thousands ) : replace_table_token_13_th gain on sales of real estate . gain on sales of real estate was $ 13.7 million for the year ended december 31 , 2018 compared to $ 78.4 million for the year ended december 31 , 2017 , which was a decrease of approximately $ 64.7 million . during the year ended december 31 , 2018 , we sold one property ; during the year ended december 31 , 2017 , we sold nine properties . the year ended december 31 , 2017 as compared to the year ended december 31 , 2016 the following table sets forth a summary of our operating results for the years ended december 31 , 2017 and 2016 ( in thousands ) : replace_table_token_14_th the change in our net income for the year ended december 31 , 2017 as compared to the year ended december 31 , 2016 primarily relates to increases in total revenues and gain on sales of real estate , and was partially offset by increases in total property operating expenses , depreciation and amortization expense , interest expense and loss on extinguishment of debt and modification costs .
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results of operations for the years ended december 31 , 2018 , 2017 and 2016 the year ended december 31 , 2018 as compared to the year ended december 31 , 2017 the following table sets forth a summary of our operating results for the years ended december 31 , 2018 and 2017 ( in thousands ) : replace_table_token_11_th the change in our net income ( loss ) for the year ended december 31 , 2018 as compared to the year ended december 31 , 2017 primarily relates to a decrease in gain on sales of real estate , and was partially offset by an increase in total revenues and decreases in total property operating expenses , depreciation and amortization expense and loss on extinguishment of debt and modification costs . the change in our net income ( loss ) between the periods was also due to our acquisition and disposition activity in 2017 and 2018 and the timing of the transactions ( we acquired one property in the first quarter of 2017 , one property in the second quarter of 2017 , one property in the fourth quarter of 2017 and three properties in the third quarter of 2018 ; we sold four properties in the second quarter of 2017 , five properties in the third quarter of 2017 and one property in the first quarter of 2018 ) . revenues rental income . rental income was $ 128.0 million for the year ended december 31 , 2018 compared to $ 125.0 million for the year ended december 31 , 2017 , which was an increase of approximately $ 3.0 million .
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if such financing is not met , msk will have the right to terminate the original msk license agreement with prior written notice , unless the company manages to overcome the shortfall during the term of the notice period . as part of the consideration for the rights , privileges and licenses granted under the original msk license agreement , the company issued 13,199 shares to msk representing 1.5 % of the company 's fully diluted share capital as of the msk effective date , which obligation was satisfied by assignment of 6,599 shares from each of the company 's president , chief executive officer , and co-founder , dr. angelos story_separator_special_tag you should read the following discussion in conjunction with the consolidated financial statements and the notes to the consolidated financial statements included elsewhere in this annual report on form 10-k. this discussion contains forward-looking statements within the meaning of federal securities laws . such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contained in such forward-looking statements , including those discussed in the section โ risk factors โ in part i โ item 1a of this annual report on form 10-k. please see part i , item 1 โ businessโ strategic collaboration and license agreements โ and note 6 to our audited consolidated financial statements appearing elsewhere in this annual report on form 10-k for more information relating to such arrangements . recent developments on march 6 , 2019 , we entered into a warrant exercise agreement , or the exercise agreement , with one of the holders of our warrants issued in july 2018. pursuant to the exercise agreement , such holder agreed that it would cash exercise up to 3,800,000 of its warrants issued in july 2018 into shares of common stock at a reduced exercise price of $ 1.10 per share for any warrants exercised prior to may 31 , 2019. in addition to reducing the exercise price of the warrants , the exercise agreement also provides for the issuance of new warrants to purchase up to an aggregate of approximately 3,800,000 shares of common stock at an exercise price of $ 1.40 per share , or new warrants , to be issued on a share-for-share basis in an amount equal to the number of the warrants that are cash exercised by the holder by may 31 , 2019. to date , the holder has exercised approximately 1.2 million warrants for gross proceeds of $ 1.3 million and approximately 1.2 million new warrants were issued . under the terms of the warrant exchange agreement , we may receive aggregate gross proceeds of up to approximately $ 4.2 million from the cash exercise if all of the warrants under the exercise agreement are exercised . in february 2019 , we engaged cantor fitzgerald & co. as a financial advisor to explore a wide range of strategic alternatives , with the ultimate objective being an outcome that is in the best interest of our shareholders . such alternatives may include , but are not limited to , a sale of the company , a business combination , a merger or reverse merger with another company , a strategic investment/financing or a funded collaboration or partnership . to the extent that this engagement results in a transaction , our business objectives may change depending upon the nature of the transaction . there can be no assurance that we will enter into any transaction as a result of the engagement . on july 16 , 2018 , we consummated an underwritten public offering of 6,845,000 shares of common stock and 4,675,000 pre-funded warrants exercisable for shares of common stock , and accompanying common stock warrants to purchase an aggregate of 11,520,000 shares of common stock . at closing , we received aggregate net proceeds from the offering of approximately $ 21.6 million , after deducting underwriting discounts and commissions and offering expenses . on july 16 , 2018 , following the consummation of the underwritten public offering , the holders of our shares of series a convertible preferred stock exchanged an aggregate of $ 7,871,186 of stated value and accrued but unpaid dividends on their shares for an aggregate of 3,748,184 shares of our common stock and warrants to purchase an aggregate of 3,748,184 shares of our common stock . as a result of such exchange , there are no longer any shares of series a convertible preferred stock issued and outstanding . the warrants have an exercise price of $ 2.10 per share and a term of five years . in addition , pursuant to certain anti-dilution provisions included in warrants issued to the holders of our series a convertible preferred stock in march and may 2018 , or pipe warrants , the exercise price of the pipe warrants was automatically adjusted to $ 2.10 per share from the original exercise price of $ 6.59 per share . 84 on november 5 , 2018 , we entered into a settlement agreement with jgb ( cayman ) newton , ltd. , or jgb , regarding our counterclaims against jgb that were asserted in the litigation originally commenced by jgb in april 2018. as part of the settlement , jgb paid us approximately $ 6.6 million in exchange for a full discharge of all counterclaims asserted by us against jgb in the litigation . we and jgb also agreed to terminate the senior secured debenture agreement and all related agreements , and jgb released all of its interests in the collateral for the senior secured debenture . see note 8 to the consolidated financial statements for a description of the litigation and settlement agreement . overview we are a clinical-stage biopharmaceutical company focused on developing novel cancer immunotherapeutics for a broad range of cancer indications . story_separator_special_tag we expect that our existing cash as of december 31 , 2018 , together with the gross proceeds of up to $ 4.2 million we may receive in connection with the exercise of certain warrants to purchase shares of common stock beginning in march 2019 , pursuant to a warrant exercise agreement , will enable us to fund our operating expenses through june 2019 . in the event that not all of the warrants subject to the warrant exercise agreement are exercised , we will need to raise additional capital earlier than anticipated to fund our operations . collaboration and license agreements although we currently have a number of collaborations with corporate partners for the development of our products in various territories worldwide , the following collaborations and license agreements are those that are most significant to us from a financial statement perspective and where significant ongoing collaboration activity exists . memorial sloan kettering cancer center in september 2014 , we entered into a license agreement with msk , under which we were granted an exclusive license to develop and commercialize msk 's wt1 peptide vaccine technology . the msk original license agreement was first amended in october 2015 , further amended in august 2016 , amended and restated in may 2017 and further amended and restated in october 2017. in connection with the entry of the original license agreement and its amendments , msk was issued or assigned an aggregate of 4,846 ordinary shares of common stock of the privately held bermuda exempted company , sellas life sciences group ltd. , or private sellas , during the year ended december 31 , 2017. these shares of common stock were converted into shares of our common stock upon the merger by and among sellas intermediate holdings i , inc. , sellas intermediate holdings ii , inc. , galena bermuda merger sub , ltd. , and private sellas , or the merger . 86 under the terms of the current amended and restated msk license agreement , we agreed to pay minimum royalty payments in the amount of $ 0.1 million each year commencing in 2015 and research funding costs of $ 0.2 million in each year and for three years commencing in january 2016. we also agreed to pay msk a mid-six digit amount over a one year period in exchange for msk 's agreement to further amend and restate the msk license agreement in october 2017. in addition , to the extent certain development and commercial milestones are achieved , we also agreed to pay msk up to $ 17.4 million in aggregate milestone payments for each licensed product , and for each additional patent licensed product , up to $ 2.8 million in additional milestone payments . we also agreed to pay msk a tiered royalty in the mid-single digits in the event of commercial sales of any licensed products and agreed to raise $ 25.0 million in gross proceeds no later than december 31 , 2018. we raised this amount from the proceeds received from the sale of our series a convertible preferred stock in march 2018 and our underwritten public offering of shares of common stock , pre-funded warrants to purchase shares of common-stock , and warrants to purchase shares of common stock in july 2018. under the terms of the agreement , we achieved a clinical development milestone the end of the fourth quarter of 2018 triggering a $ 0.5 million payment in the first quarter of the 2019. unless terminated earlier in accordance with its terms , the msk license agreement , as amended and restated , will continue on a country-by-country and licensed product-by-licensed product basis , until the later of : ( a ) expiration of the last valid claim embracing such licensed product ; ( b ) expiration of any market exclusivity period granted by law with respect to such licensed product ; or ( c ) ten ( 10 ) years from the first commercial sale in such country . for additional information on our collaboration arrangement with msk , please read note 6 , collaborative and license agreements , to our consolidated financial statements included in this report . merck & co. , inc. in september 2017 , we entered into a clinical trial collaboration and supply agreement through a merck & co. ( `` merck '' ) subsidiary , whereby we agreed with the merck subsidiary to collaborate on a research program to evaluate gps as it is administered in combination with merck 's pd1 blocker pembrolizumab ( keytruda ) in a phase 1/2 clinical trial enrolling patients in up to five cancer indications , including both hematologic malignancies and solid tumors . the phase 1/2 clinical trial will utilize a combination of gps plus pembrolizumab in patients with wt1+ relapsed or refractory tumors . specifically , the study is expected to explore the following cancer indications : aml , ovarian , triple-negative breast , small cell lung , and colorectal . this study will assess the efficacy and safety of the combination , comparing overall response rates and immune response markers achieved with the combination compared to prespecified rates based on those seen with pembrolizumab alone in comparable patient populations . this trial was initiated in december 2018. advaxis , inc. in february 2017 , we entered into a research and development collaboration agreement with advaxis , inc. whereby we agreed to collaborate in a research program to evaluate , through a โ proof of principle , '' or pop , trial , a clinical candidate comprised of the combination of advaxis ' proprietary lm-based antigen delivery technology and gps , our wt1 peptide . unless terminated earlier in accordance with its terms , the advaxis agreement will expire upon the earlier of : ( a ) completion of the pop trial , ( b ) a decision by the parties to cease further development of the clinical candidate or ( c ) early termination pursuant to the terms of the advaxis agreement .
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results of operations for the years ended december 31 , 2018 and 2017 the following table summarizes our results of operations for the years ended december 31 , 2018 and 2017 : replace_table_token_1_th for the year ended december 31 , 2018 , our net loss was $ 27.7 million compared with a net loss of $ 23.8 million for the year ended december 31 , 2017 . the increase of $ 3.9 million in net loss was primarily attributable to an increase in operating loss of $ 8.1 million , primarily driven by a one-time non-cash charge of $ 9.6 million for impairment of in-process research and development , partially offset by an increase in non-operating income of $ 2.5 million and an increase in income tax benefit of $ 1.6 million . further analysis of the changes and trends in our operating results are discussed below . research and development research and development expenses were $ 8.8 million for the year ended december 31 , 2018 compared to $ 6.1 million for the year ended december 31 , 2017 . as compared to the prior period , research and development expenses experienced a $ 1.4 million increase in clinical and regulatory consulting , a $ 1.0 million increase in licensing fees , and a $ 1.4 million increase in clinical expenses driven by startup costs related to the phase 1/2 basket trial of gps in combination with pembrolizumab ( keytruda ยฎ ) in multiple tumor types during 2018 , and ongoing costs incurred related to the phase 2b trial of nps in combination with trastuzumab ( herceptin ยฎ ) . these increases were partially offset by a $ 0.8 million decrease in compensation and benefits , including stock-based compensation , a $ 0.2 million decrease in manufacturing expenses , and $ 0.3 million in other expenses .
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long-lived asset impairments we evaluate long-lived assets and investments for impairment whenever events or changes in circumstances indicate that our carrying amount of an asset or investment may not be story_separator_special_tag the following discussion and analysis should be read in conjunction with our consolidated financial statements and the notes thereto . we prepared our consolidated financial statements in accordance with gaap . additional sections in this report which should be helpful to the reading of our discussion and analysis include the following : ( i ) a description of our business strategy found in items 1 and 2 โ business and propertiesโ ( c ) narrative description of businessโbusiness strategy ; โ ( ii ) a description of developments during 2015 , found in items 1 and 2 โ business and propertiesโ ( a ) general development of businessโrecent developments ; โ and ( iii ) a description of risk factors affecting us and our business , found in item 1a โ risk factors. โ inasmuch as the discussion below and the other sections to which we have referred you pertain to management 's comments on financial resources , capital spending , our business strategy and the outlook for our business , such discussions contain forward-looking statements . these forward-looking statements reflect the expectations , beliefs , plans and objectives of management about future financial performance and assumptions underlying management 's judgment concerning the matters discussed , and accordingly , involve estimates , assumptions , judgments and uncertainties . our actual results could differ materially from those discussed in the forward-looking statements . factors that could cause or contribute to any differences include , but are not limited to , those discussed below and elsewhere in this report , particularly in item 1a โ risk factors โ and at the beginning of this report in โ information regarding forward-looking statements. โ general our business model , through our ownership and operation of energy related assets , is built to support two principal objectives : helping customers by providing safe and reliable energy , bulk commodity and liquids products transportation , storage and distribution ; and creating long-term value for our shareholders . to achieve these objectives , we focus on providing fee-based services to customers from a business portfolio consisting of energy-related pipelines , natural gas storage , processing and treating facilities , and bulk and liquids terminal facilities . we also produce and sell crude oil . our reportable business segments are based on the way our management organizes our enterprise , and each of our business segments represents a component of our enterprise that engages in a separate business activity and for which discrete financial information is available . our reportable business segments are : natural gas pipelinesโthe ownership and operation of ( i ) major interstate and intrastate natural gas pipeline and storage systems ; ( ii ) natural gas and crude oil gathering systems and natural gas processing and treating facilities ; ( iii ) ngl fractionation facilities and transportation systems ; and ( iv ) lng facilities ; co 2 โ ( i ) the production , transportation and marketing of co 2 to oil fields that use co 2 as a flooding medium for recovering crude oil from mature oil fields to increase production ; ( ii ) ownership interests in and or operation of oil fields and gas processing plants in west texas ; and ( iii ) the ownership and operation of a crude oil pipeline system in west texas ; terminalsโ ( i ) the ownership and or operation of liquids and bulk terminal facilities located throughout the u.s. and portions of canada that transload and store refined petroleum products , crude oil , condensate , and bulk products , including coal , petroleum coke , cement , alumina , salt and other bulk chemicals and ( ii ) the ownership and operation of our jones act tankers ; products pipelinesโthe ownership and operation of refined petroleum products and crude oil and condensate pipelines that deliver refined petroleum products ( gasoline , diesel fuel and jet fuel ) , ngl , crude oil , condensate and bio-fuels to various markets , plus the ownership and or operation of associated product terminals and petroleum pipeline transmix facilities ; 39 kinder morgan canadaโthe ownership and operation of the trans mountain pipeline system that transports crude oil and refined petroleum products from edmonton , alberta , canada to marketing terminals and refineries in british columbia , canada and the state of washington , plus the jet fuel aviation turbine fuel pipeline that serves the vancouver ( canada ) international airport ; and otherโprimarily other miscellaneous assets and liabilities including ( i ) our corporate headquarters in houston , texas ; ( ii ) several physical natural gas contracts with power plants associated with legacy trading activities ; and ( iii ) other miscellaneous assets and liabilities . as an energy infrastructure owner and operator in multiple facets of the various u.s. and canadian energy industries and markets , we examine a number of variables and factors on a routine basis to evaluate our current performance and our prospects for the future . with respect to our interstate natural gas pipelines , related storage facilities and lng terminals , the revenues from these assets are primarily received under contracts with terms that are fixed for various and extended periods of time . to the extent practicable and economically feasible in light of our strategic plans and other factors , we generally attempt to mitigate risk of reduced volumes and prices by negotiating contracts with longer terms , with higher per-unit pricing and for a greater percentage of our available capacity . these long-term contracts are typically structured with a fixed-fee reserving the right to transport natural gas and specify that we receive the majority of our fee for making the capacity available , whether or not the customer actually chooses to utilize the capacity . story_separator_special_tag to the extent practicable and economically feasible in light of our strategic plans and other factors , we generally attempt to mitigate the risk of reduced volumes and pricing by negotiating contracts with longer terms , with higher per-unit pricing and for a greater percentage of our available capacity . in addition , weather-related factors such as hurricanes , floods and droughts may impact our facilities and access to them and , thus , the profitability of certain terminals for limited periods of time or , in relatively rare cases of severe damage to facilities , for longer periods . our eight jones act qualified tankers operate in the marine transportation of crude oil , condensate and refined products in the u.s. and are currently operating pursuant to multi-year charters with major integrated oil companies , major refiners and the u.s. military sealift command . the profitability of our refined petroleum products pipeline transportation and storage business is generally driven by the volume of refined petroleum products that we transport and the prices we receive for our services . we also have approximately 55 liquids terminals in this business segment that store fuels and offer blending services for ethanol and biofuels . the transportation and storage volume levels are primarily driven by the demand for the refined petroleum products being shipped or stored . demand for refined petroleum products tends to track in large measure demographic and economic growth , and with the exception of periods of time with very high product prices or recessionary conditions , demand tends to be relatively stable . because of that , we seek to own refined petroleum products pipelines located in , or that transport to , stable or growing markets and population centers . the prices for shipping are generally based on regulated tariffs that are adjusted annually based on changes in the u.s. producer price index . our crude and condensate transportation services are primarily provided either pursuant to ( i ) long-term contracts that normally contain minimum volume commitments or ( ii ) through terms prescribed by the toll settlements with shippers and approved by regulatory authorities . as a result of these contracts , our settlement volumes are generally not sensitive to changing market conditions in the shorter term , however , in the longer term the revenues and earnings we realize from our crude and condensate pipelines in the u.s. and canada are affected by the volumes of crude and condensate available to our pipeline systems , which are impacted by the level of oil and gas drilling activity in the respective producing regions that we serve . our petroleum condensate processing facility splits condensate into its various components , such as light and heavy naphtha , under a long-term fee-based agreement with a major integrated oil company . a portion of our business portfolio ( including the kinder morgan canada business segment , the canadian portion of the cochin pipeline , and the bulk and liquids terminal facilities located in canada ) transact in and or use the canadian dollar as the functional currency , which affect segment results due to the variability in u.s. - canadian dollar exchange rates . in our discussions of the operating results of individual businesses that follow ( see โ โresults of operations โ below ) , we generally identify the important fluctuations between periods that are attributable to acquisitions and dispositions separately from those that are attributable to businesses owned in both periods . critical accounting policies and estimates accounting standards require information in financial statements about the risks and uncertainties inherent in significant estimates , and the application of gaap involves the exercise of varying degrees of judgment . certain amounts included in or affecting our consolidated financial statements and related disclosures must be estimated , requiring us to make certain assumptions with respect to values or conditions that can not be known with certainty at the time our financial statements are prepared . these estimates and assumptions affect the amounts we report for our assets and liabilities , our revenues and expenses during the reporting period , and our disclosure of contingent assets and liabilities at the date of our financial statements . we routinely evaluate these estimates , utilizing historical experience , consultation with experts and other methods we consider reasonable in the particular circumstances . nevertheless , actual results may differ significantly from our estimates , and any effects on our business , financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known . 41 in preparing our consolidated financial statements and related disclosures , examples of certain areas that require more judgment relative to others include our use of estimates in determining : ( i ) the economic useful lives of our assets and related depletion rates ; ( ii ) the fair values used to assign purchase price from business combinations , determine possible asset impairment charges , and calculate the annual goodwill impairment test ; ( iii ) reserves for environmental claims , legal fees , transportation rate cases and other litigation liabilities ; ( iv ) provisions for uncollectible accounts receivables ; ( v ) exposures under contractual indemnifications ; and ( vi ) unbilled revenues . for a summary of our significant accounting policies , see note 2 โ summary of significant accounting policies โ to our consolidated financial statements . we believe that certain accounting policies are of more significance in our consolidated financial statement preparation process than others , which policies are discussed as follows . acquisition method of accounting for acquired businesses , we generally recognize the identifiable assets acquired , the liabilities assumed and any noncontrolling interest in the acquiree at their estimated fair values on the date of acquisition .
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consolidated earnings results in the results of operations table below and in the business segment tables that follow , segment ebda before certain items is calculated by adjusting the segment earnings before dd & a for the applicable certain item amounts in the footnotes to those tables . in general , interest expense , general and administrative expenses , dd & a , unallocable interest income and income taxes and net income attributable to noncontrolling interests are not controllable by our business segment operating managers and therefore are not included when we measure business segment operating performance . our general and administrative expenses include such items as employee benefits insurance , rentals , unallocated litigation and environmental expenses , and shared corporate services including accounting , information technology , human resources and legal services . we evaluate business segment performance primarily based on segment ebda before certain items in relation to the level of capital allocated and consider this to be an important measure of our business segment performance . we account for intersegment sales at market prices , which are eliminated in consolidation . replace_table_token_13_th _ ( a ) includes revenues , earnings from equity investments , allocable interest income and other , net , less operating expenses , allocable income taxes , other expense ( income ) , net , losses on impairments of goodwill and losses on impairments and disposals of long-lived assets , net and equity investments . operating expenses include natural gas purchases and other costs of sales , operations and maintenance expenses , and taxes , other than income taxes . allocable income tax expenses included in segment earnings for the years ended december 31 , 2015 , 2014 and 2013 were $ 61 million , $ 63 million and $ 49 million , respectively .
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significant judgment is required in evaluating the company 's uncertain tax positions and determining the company 's income story_separator_special_tag the following discussion and analysis of our financial condition and results of operations should be read in conjunction with โ item 6 - selected financial data โ and with the audited consolidated financial statements and the related notes included in โ item 8 - financial statements and supplementary data. โ the statements in this discussion regarding industry outlook , our expectations regarding our future performance , liquidity and capital resources and other non-historical statements in this discussion are forward-looking statements . see part i โ cautionary note regarding forward-looking statements โ for a discussion of the uncertainties , risks , and assumptions associated with those statements . these forward-looking statements are subject to risks and uncertainties , including , but not limited to , the risks and uncertainties described in โ item 1a - risk factors. โ our actual results may differ materially from those contained in or implied by any forward-looking statements . we operate on a 52 or 53 week fiscal year ending on the last saturday of each calendar year . our fiscal quarters are comprised of 13 weeks , with the exception of the fourth quarter of a 53 week year , which contains 14 weeks . fiscal years 2018 and 2017 each contain 52 weeks . overview wingstop is a high-growth franchisor and operator of restaurants that offers cooked-to-order , hand-sauced and tossed chicken wings . we believe we pioneered the concept of wings as a โ center-of-the-plate โ item for all of our meal occasions . while other concepts include wings as add-on menu items or focus on wings in a bar or sports-centric setting , we are focused on wings , fries and sides , which generate approximately 93 % of our system-wide sales . we offer our guests 11 bold , distinctive and craveable flavors on our bone-in and boneless chicken wings and tenders that are always cooked to order and paired with our fresh-cut , seasoned fries and made-from-scratch ranch and bleu cheese dips . our menu is highly-customizable for different dining occasions , and we believe it delivers a compelling value proposition for groups , families , and individuals . we have broad and growing consumer appeal anchored by a sought after core demographic of 18-34 year old millennials , which we believe is a loyal consumer group that dines at fast casual restaurants more frequently than other consumer groups . wingstop is the largest fast casual chicken wings-focused restaurant chain in the world and has demonstrated strong , consistent growth . as of december 29 , 2018 , we had a total 1,252 restaurants across ten countries in our global system ( including 43 states in the united states ) . our restaurant base is 98 % franchised , with 1,223 franchised locations ( including 128 international locations ) and 29 company-owned restaurants as of december 29 , 2018 . we plan to grow our business by opening new franchised restaurants and increasing our same store sales , while leveraging our franchise model to create shareholder value . domestic restaurant count has nearly doubled since the end of 2013 , with 119 net unit openings in 2018 . our vision is to become a top 10 global restaurant brand and we believe our unit potential is 3,000 domestic units and 3,000 international units . domestic same store sales have increased for 15 consecutive years beginning in 2004 , which includes 5-year cumulative domestic same stores sales growth of 32.7 % since fiscal 2014 . we anticipate further increases in domestic same store sales through improvements in brand awareness from national advertising , flavor innovation , increases in digital expansion , and the rollout of delivery . we believe our asset-light , highly-franchised business model generates strong operating margins and requires low capital expenditures , creating shareholder value through strong and consistent free cash flow and capital-efficient growth . highlights for fiscal year 2018 : system-wide restaurant count increased 10.5 % over the prior year to a total of 1,252 worldwide locations , driven by 119 net unit openings ; domestic same store sales increased 6.5 % over the prior year ; company-owned restaurant same store sales increased 6.2 % over the prior year ; system-wide sales increased 16.0 % over the prior year to $ 1.3 billion ; total revenue increased 14.9 % over the prior year to $ 153.2 million ; and net income decreased 9.3 % over the prior year to $ 21.7 million , while adjusted ebitda increased 25.3 % over the prior year to $ 49.0 million ; 40 in fiscal year 2018 we paid quarterly dividends of $ 0.32 per share of common stock and special dividends of $ 6.22 per share of common stock , for a combined $ 6.54 per share of common stock . key performance indicators key measures that we use in evaluating our restaurants and assessing our business include the following : number of restaurants . management reviews the number of new restaurants , the number of closed restaurants , and the number of acquisitions and divestitures of restaurants to assess net new restaurant growth , system-wide sales , royalty and franchise fee revenue and company-owned restaurant sales . replace_table_token_10_th system-wide sales . system-wide sales represents net sales for all of our company-owned and franchised restaurants . this measure allows management to better assess changes in our royalty revenue , our overall store performance , the health of our brand and the strength of our market position relative to competitors . our system-wide sales growth is driven by new restaurant openings as well as increases in same store sales . average unit volume ( auv ) . auv consists of the average annual sales of all restaurants that have been open for a trailing 52-week period or longer . auv allows management to assess our company-owned and franchised restaurant economics . story_separator_special_tag accordingly , figures expressed as percentages when aggregated may not be the arithmetic aggregation of the percentages that precede them . 43 year ended december 29 , 2018 compared to year ended december 30 , 2017 the following table sets forth information comparing the components of net income in fiscal year 2018 and fiscal year 2017 ( in thousands ) : replace_table_token_13_th ( 1 ) exclusive of depreciation and amortization , shown separately , and includes advertising expenses incurred at company-owned restaurants . total revenue . total revenue was $ 153.2 million in fiscal year 2018 , an increase of $ 19.9 million , or 14.9 % , compared to $ 133.3 million in the prior fiscal year . royalty revenue and franchise fees and other . royalty revenue and franchise fees were $ 71.9 million in fiscal year 2018 , an increase of $ 5.8 million , or 8.8 % , compared to $ 66.1 million in the prior fiscal year . royalty revenue increased by $ 8.7 million primarily due to 113 net franchise restaurant openings and domestic same store sales growth of 6.5 % . other revenue decreased $ 3.3 million primarily due to a one-time payment received in conjunction with a new vendor agreement that was executed during the first quarter of 2017. the funding from this agreement was primarily used to support the launch of our national advertising campaign in 2017. advertising fees and related income . advertising fees and related income were $ 34.5 million in fiscal year 2018 , an increase of $ 4.3 million , or 14.3 % , compared to $ 30.2 million in the comparable period in 2017. advertising fees increased primarily due to the increase in system-wide sales in fiscal year 2018 , compared to the prior fiscal year . company-owned restaurant sales . company-owned restaurant sales were $ 46.8 million in fiscal year 2018 , an increase of $ 9.8 million , or 26.4 % , compared to $ 37.1 million in the prior fiscal year . the increase is due to additional sales of $ 7.2 million from the acquisition of six company-owned restaurants from franchisees in the current year and the full year impact of the acquisition of two restaurants from a franchisee in the prior year . the remaining increase is due to company-owned domestic same store sales growth of 6.2 % , which was driven by both an increase in transactions and an increase in average transaction size . cost of sales . cost of sales was $ 32.1 million in fiscal year 2018 , an increase of $ 3.3 million , or 11.5 % , compared to $ 28.7 million in the prior fiscal year . cost of sales as a percentage of company-owned restaurant sales was 68.5 % in fiscal year 2018 compared to 77.5 % in the prior fiscal year . 44 the table below presents the major components of cost of sales ( in thousands ) : replace_table_token_14_th food , beverage and packaging costs as a percentage of company-owned restaurant sales were 33.2 % in fiscal year 2018 compared to 40.0 % in the prior fiscal year . the decrease is primarily due to a 20.6 % decrease in the cost of bone-in chicken wings compared to the prior fiscal year . labor costs as a percentage of company-owned restaurant sales were 22.4 % in fiscal year 2018 compared to 23.9 % in the prior fiscal year . the decrease as a percentage of company-owned restaurant sales was primarily due to our ability to leverage costs as a result of the company-owned domestic same store sales increase of 6.2 % . other restaurant operating expenses as a percentage of company-owned restaurant sales were 15.4 % in fiscal year 2018 compared to 16.2 % in the prior fiscal year . the decrease as a percentage of company-owned restaurant sales was primarily due to our ability to leverage costs as a result of the company-owned domestic same store sales increase of 6.2 % . advertising expenses . advertising expenses were $ 33.7 million in fiscal year 2018 , an increase of $ 1.3 million , or 3.9 % , compared to $ 32.4 million in the prior fiscal year . advertising expenses are recognized at the same time the related revenue is recognized , which does not necessarily correlate to the actual timing of the related advertising spend . selling , general and administrative . sg & a expense was $ 44.6 million in fiscal year 2018 , an increase of $ 9.7 million , or 27.7 % , compared to $ 34.9 million in the prior fiscal year . the increase in sg & a expense was primarily due to nonrecurring costs of $ 2.4 million related to our debt refinancings and payment of special dividends during fiscal year 2018. also contributing to the increase in sg & a was an increase of $ 1.9 million in stock based compensation , as well as increases payroll and benefits expenses associated with planned headcount additions . depreciation and amortization . depreciation and amortization was $ 4.3 million in fiscal year 2018 , an increase of $ 0.9 million , or 27.8 % , compared to $ 3.4 million in the prior fiscal year . the increase in depreciation and amortization was primarily due to additional amortization associated with reacquired franchise rights resulting from the acquisition of franchised restaurants . interest expense , net . interest expense was $ 10.1 million in fiscal year 2018 , an increase of $ 5.0 million from $ 5.1 million in the prior fiscal year . the increase is primarily due to an increase in the principal amount of indebtedness we had outstanding . income tax expense . income tax expense was $ 5.2 million in fiscal year 2018 , yielding an effective tax rate of 19.3 % , compared to an effective tax rate of 16.7 % in the prior fiscal year .
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segment results . the following table sets forth our revenue and operating profit for each of our segments for the period presented ( in thousands ) : replace_table_token_15_th franchise segment . franchise segment revenue was $ 106.3 million in fiscal year 2018 , an increase of $ 10.1 million , or 10.5 % , from $ 96.3 million in the prior fiscal year . royalty revenue increased by $ 8.7 million primarily due to 139 franchise restaurant openings and domestic same store sales growth of 6.5 % during the current fiscal year . advertising fees and related income increased $ 4.3 million due to the increase in system-wide sales during fiscal year 2018. other revenue decreased $ 3.3 million primarily due to an decrease in vendor rebates related to a one-time payment received in conjunction with a vendor agreement executed during the first quarter of 2017. franchise segment profit was $ 30.6 million in fiscal year 2018 , an increase of $ 1.4 million , or 4.8 % , from $ 29.2 million in the prior fiscal year primarily due to an increase in revenue , which was offset by an increase of $ 1.9 million in stock based compensation , as well as increases in payroll and benefit expenses related to planned headcount additions . company segment . company-owned restaurant sales were $ 46.8 million in fiscal year 2018 , an increase of $ 9.8 million , or 26.4 % , compared to $ 37.1 million in the prior fiscal year . the increase is primarily due to the acquisition of six franchised restaurants during the current fiscal year and two restaurants from a franchisee in the third quarter of 2017 resulting in additional sales of $ 7.2 million and an increase in company-owned domestic same store sales of 6.2 % , driven by both an increase in transactions and an increase in average transaction size .
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our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors , including those set forth under โ risk factors โ and elsewhere in this annual report . we assume no obligation to update forward-looking statements or the risk factors . you should read the following discussion in conjunction with our consolidated financial statements and related notes included in item 8 of this annual report . certain figures , such as interest rates and other percentages included in this section have been rounded for ease of presentation . percentage figures included in this section have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding . for this reason , percentage amounts in this section may vary slightly from those obtained by performing the same calculations using the figures in our consolidated financial statements or in the associated text . certain other amounts that appear in this section may similarly not sum due to rounding . recent developments in january 2019 , we announced and closed on a $ 25.0 million private placement with handok , inc. and genexine , inc. , two publicly traded south korean-based pharmaceutical companies ( collectively referred to as โ h & g โ ) . h & g acquired shares of our series aa preferred stock that converted in april 2019 into an aggregate of 113.6 million shares of our common stock at a conversion price of $ 0.22 per share . upon our request , we also provided an option for h & g to purchase up to an aggregate of $ 20.0 million of shares of our common stock prior to december 31 , 2020 , at a price per common share equal to the greater of $ 0.29 or 75 % of the volume weighted average closing price of our common stock over 30 consecutive trading days prior to the exercise of the option to purchase . in july 2019 , we requested that h & g provide such funding as part of a larger private placement . on july 23 , 2019 , h & g agreed to purchase an aggregate of approximately 69.0 million shares of our common stock for $ 0.29 per share which resulted in gross proceeds of $ 20.0 million . in addition , other investors participated in this private placement , resulting in the issuance in july and august 2019 of an aggregate of 14.0 million shares for an additional cash infusion of $ 4.1 million . commissions and other offering costs related to these equity issuances in july and august 2019 amounted to an aggregate of approximately $ 1.4 million . accordingly , we have received net capital infusions of approximately $ 25.0 million in january 2019 and an additional $ 22.6 million in july and august 2019 , which provides us with the needed capital resources to pursue our development strategy . we have also relocated our headquarters to redwood city , california , opened an ancillary facility in bend , oregon , and began expanding our team in key areas such as clinical operations , accounting , cmc , and quality . we have begun actively preparing rz358 for clinical studies , initiated pre-clinical activities for rz402 , and resumed the ab101 clinical studies in southern california . for our fiscal year ending june 30 , 2020 , we have the following objectives to advance our development strategy : ( i ) initiate the phase 2b clinical study for rz358 in the us and or europe , ( ii ) complete the necessary toxicology studies for rz402 to enable the filing of an ind and the initiation of clinical studies thereafter , and ( iii ) complete the phase 1 study for ab101 and explore partnership opportunities reference is made to note 13 to our consolidated financial statements included in item 8 of this annual report for further discussion of our financing activities completed in july and august 2019 , approval of our 2019 stock plan , grants of stock options for approximately 34.0 million shares of common stock and , subject to stockholder approval , our ability to complete a reverse stock split and set the exchange ratio between 20 and 100 shares of our common stock into one issued and outstanding share of common stock . 17 factors impacting our results operations we have not generated any revenues since our inception in march 2010. since inception , we have engaged in organizational activities , conducted private placements to raise additional capital , built out a manufacturing suite and produced material for our lead product candidate under good laboratory practices ( โ glp โ ) , conducted studies using the glp material , subsequently changed our strategy to a licensing model that resulted in disposal of our manufacturing assets , and conducted other research and development activities on our pipeline product candidates . due to the time required to conduct clinical trials and obtain regulatory approval for any of our product candidates , we anticipate it will be some time before we generate substantial revenues , if ever . we expect to generate operating losses for the foreseeable future ; therefore we expect to continue efforts to raise additional capital to maintain our current operating plans beyond the next year . we can not assure you that we will secure such financing or that it will be adequate for the long-term execution of 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 our existing stockholders . our stated strategy has been to build a metabolic focused biotechnology company by in-licensing compelling compounds that we believe clearly target different diseases where there is an unmet need . in december 2017 , we completed the latest phase of this strategy by in-licensing rz358 from xoma corporation . story_separator_special_tag changes in estimates are reflected in reported results for the period in which they become known . actual results may differ from these estimates under different assumptions or conditions . with respect to our significant accounting policies that are described in note 1 to our consolidated financial statements included in item 8 of this annual report , we believe that the following accounting policies involve a greater degree of judgment and complexity . accordingly , these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations . debt ddic incurred to obtain new debt financing or modify existing debt financing consists of incremental direct costs incurred for professional fees and due diligence services , and the fair value of warrants issued in connection with the financing . ddic is presented in the accompanying consolidated balance sheets as a reduction in the carrying value of the debt and is accreted to interest expense using the effective interest method . when we amend our debt arrangements , we evaluate the terms to determine if the amendment should be accounted for as a troubled debt restructuring ( โ tdr โ ) , a modification or an extinguishment . if we determine that the lender has provided a concession and we are experiencing financial difficulties , we would generally recognize a tdr gain . if we conclude that accounting as a modification is required , then any costs incurred on behalf of the lenders is accounted for as additional ddic . if we conclude that accounting as an extinguishment is required , we measure the extinguishment charge on the date of the amendment based on the amount by which the fair value of the new debt instrument exceeds the net carrying value of the original debt instrument . 19 beneficial conversion features a beneficial conversion feature ( โ bcf โ ) is a non-detachable conversion feature that is โ in the money โ at the commitment date , which requires recognition of interest expense for underlying debt instruments and a deemed dividend for underlying equity instruments . a bcf that is accounted for as a deemed dividend is given effect in our net loss per share calculations . a conversion option is in the money if the effective conversion price is lower than the commitment date fair value of a share into which it is convertible . a contingent bcf feature is measured using the commitment date security price but is not recognized in earnings until the contingency is resolved . research and development research and development costs are expensed as incurred . intangible assets related to in-licensing costs under license agreements with third parties are charged to expense unless we are able to determine that the licensing rights have an alternative future use in other research and development projects or otherwise . valuation of stock options and warrants we measure the fair value of employee and director services received in exchange for all equity awards granted , including stock options , based on the fair market value of the award as of the grant date . we compute the fair value of stock options using the black-scholes-merton ( โ bsm โ ) option pricing model and recognize the cost of the equity awards over the period that services are provided to earn the award , which is typically a vesting period over four years . for awards granted which contain a graded vesting schedule , and the only condition for vesting is a service condition , compensation cost is recognized on a straight-line basis over the requisite service period as if the award was , in substance , a single award . we recognize the impact of forfeitures in the period that the forfeiture occurs , rather than estimating the number of awards that are not expected to vest in accounting for stock-based compensation . we account for stock options and warrants granted to non-employees by determining the fair value of the equity instrument issued on the commitment date , with expense recognized over the service period . prior to the establishment of the commitment date , we continue to remeasure the fair value of the award , resulting in the recognition of subsequent gains and losses until the commitment date is achieved . we estimate fair value of non-employee awards using the bsm option pricing model . 20 story_separator_special_tag impairment evaluation of our leasehold improvements was conducted with the determination that an impairment charge of $ 1.7 million was required for the fiscal year ended june 30 , 2018. for the fiscal year ended june 30 , 2019 , we performed additional impairment evaluations as we prepared to sell excess laboratory and other equipment . as a result of these impairment evaluations , we recognized an additional impairment charge of $ 33,000 for the fiscal year ended june 30 , 2019 . 22 loss on sale of property and equipment for the fiscal year ended june 30 , 2019 , we sold excess laboratory and other equipment from our former facility in colorado for proceeds of $ 0.3 million , which resulted in recognition of a loss of $ 12,000. for the fiscal year ended june 30 , 2018 , we did not recognize any gains or losses from the sale of property and equipment . non-operating income ( expense ) non-operating expense was $ 4.5 million for the fiscal year ended june 30 , 2019 compared to non-operating expense of approximately $ 1.1 million for the fiscal year ended june 30 , 2018 , an increase of approximately $ 3.4 million . presented below is a discussion of the components of our non-operating income and expenses for the fiscal years ended june 30 , 2019 and 2018. interest expense . interest expense increased from approximately $ 0.7 million for the fiscal year ended june 30 , 2018 to $ 5.0 million for the fiscal year ended june 30 , 2019 , an increase of $ 4.3 million .
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results of operations our consolidated statements of operations for the fiscal years ended june 30 , 2019 and 2018 , along with the changes between years , are presented below ( in thousands ) : replace_table_token_3_th revenue as a clinical stage company , we did not generate any revenue for the fiscal years ended june 30 , 2019 and 2018. research and development expenses research and development ( โ r & d โ ) costs increased from approximately $ 17.3 million for the fiscal year ended june 30 , 2018 to $ 19.1 million for the fiscal year ended june 30 , 2019 , an increase of $ 1.8 million or 10 % . this increase was primarily attributable to an amendment to our license agreement with xoma related to rz358 , whereby we incurred aggregate license fees of $ 14.0 million for the fiscal year ended june 30 , 2019 , which is an increase of $ 7.8 million compared to $ 6.3 million incurred for the fiscal year ended june 30 , 2018 . 21 intangible assets for costs incurred under license agreements with third parties are charged to expense , unless the licensing rights have separate economic value in alternative future research and development projects or otherwise . accordingly , all of the payments under our licensing agreements with xoma and activesite have been charged to expense in the period in which the cost is incurred .
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โ the various sections of this md & a contain a number of forward-looking statements , all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing , including part i , โ item 1a : risk factors. โ our actual results may differ materially from those described in any such forward-looking statement . business overview and environment tessco technologies incorporated ( tessco , we , or the company ) architects and delivers innovative product and value chain solutions to support wireless systems . although we sell products to customers in over 100 countries , approximately 98 % of our sales are to customers in the united states . we have operations and office facilities in hunt valley , maryland , reno , nevada and san antonio , texas . the company evaluates its business and customer base in two segments โ commercial and retail . the commercial segment includes : ( 1 ) public carriers , contractors , and program managers that are generally responsible for building and maintaining the infrastructure system and provide airtime service to individual subscribers ; ( 2 ) private system operators and governments including commercial entities such as major utilities and transportation companies , federal agencies and state and local governments that run wireless networks for their own use ; and ( 3 ) commercial dealers and resellers that sell , install and or service cellular telephone , wireless networking , broadband and two-way radio communications equipment primarily for the enterprise market . the retail segment includes : ( 1 ) retailers , dealer agents and carriers ; and ( 2 ) our major 3pl relationship ( our largest customer , at & t ) . we offer a wide range of products that are classified into four business categories : base station infrastructure ; network systems ; installation , test and maintenance ; and mobile devices and accessories . base infrastructure products are used to build , repair and upgrade wireless telecommunications . sales of traditional base station infrastructure products , such as base station radios , cable and transmission lines and antennas are in part dependent on capital spending in the wireless communications industry . network systems products are used to build and upgrade computing and internet networks . we have also been growing our offering of wireless broadband , network equipment , security and surveillance products , which are not as dependent on the overall capital spending of the industry . installation , test and maintenance products are used to install , tune , and maintain wireless communications equipment . this category is made up of sophisticated analysis equipment and various frequency- , voltage- and power-measuring devices , replacement parts and components as well as an assortment of tools , hardware and supplies required by service technicians . mobile devices and accessory products include cellular phone and data device accessories . our customers generally have the ability to purchase any of our product categories , but base station infrastructure , network systems and installation , test and maintenance products are primarily sold into our commercial segment , while mobile device and accessories products are primarily sold into our retail segment . our largest customer relationship , at & t , a tier 1 cellular carrier purchasing phone accessories , accounted for approximately 30 % of our total revenues during fiscal year 2013. in april 2012 , we were notified by at & t of their intention to transition their 3pl retail store supply chain business , which makes up the vast majority of the company 's at & t revenues , away from tessco beginning in the second quarter of our fiscal 2013. as this transition continued toward completion , revenues from this relationship for the fourth quarter declined significantly , although resulting in a lesser relative impact on overall profits . this reduction in revenue for the second half of fiscal 2013 was more than fully offset by an increase in the company 's non-at & t revenues during the fiscal year . while we expect no revenue in 2014 for the transitioned 3pl business , we do expect to continue to supply product to this customer 's other programs and supply proprietary ventev ยฎ products to at & t retail stores . due to the loss of this 3pl relationship , which generated $ 213.5 million in revenues during fiscal 2013 , we do expect to have a significant decline in overall revenues in fiscal 2014. the wireless communications distribution industry is competitive and fragmented , and is comprised of several national distributors . in addition , many manufacturers sell direct . barriers to entry for distributors are relatively low , particularly in the mobile devices and accessory market , and the risk of new competitors entering the market is high . consolidation of larger wireless carriers has and will most likely continue to impact our current and potential customer base . in addition , the agreements or arrangements with our customers or vendors looking to us for product and supply chain solutions are typically of limited duration and are terminable by either party upon several months or otherwise short notice . our ability to maintain these relationships is subject to competitive pressures and challenges . we believe , however , that our strength in service , the breadth and depth of our product offering , our information technology system , our large customer base and our purchasing relationships with approximately 375 manufacturers provide us with a significant competitive advantage over new entrants to the market . results of operations -27- story_separator_special_tag tessco 's chief financial officer . in connection with his departure , mr. young was paid 1.65 times his base salary , or $ 499,125 , and the sum of $ 102,424 , as the prorated amount of any value share incentive compensation due for the current fiscal year . additionally , in accordance with the terms of the applicable agreements , all of mr. young 's earned but not yet vested psu shares ( 30,563 shares ) vested and were issued . story_separator_special_tag because our proprietary products generally carry higher gross margins than our other non-proprietary third party products , the increased sales of proprietary products on a dollar basis contributed to the margin growth we experienced during the year in sales to other than our major 3pl relationship customer ( see detailed explanation below ) . gross profit . gross profit increased 11.5 % in fiscal year 2012 compared to fiscal year 2011 , due to a 15.0 % increase in our retail segment and 9.3 % increase in our commercial segment . within the retail segment , our major 3pl relationship market showed a considerable increase in sales , but the impact on overall gross profit was lessened by the lower margins we experienced in sales to at & t resulting from the business relationship expansion . the increase in our commercial segment gross profit was driven by increases in our private and government market and our commercial dealers and resellers , and was partially offset by a decline from our public carrier , contractor and program manager market . overall gross profit margin decreased to 20.3 % , compared to 22.0 % in fiscal year 2011 , driven by the expanded lower margin at & t business . however , excluding our major 3pl relationship market , gross profit margin increased from 24.6 % in fiscal year 2011 to 25.3 % in fiscal year 2012 , due in part to pricing adjustments , product mix and lower excess and obsolete inventory writeoffs . selling , general and administrative expenses . total selling , general and administrative expenses increased by 3.7 % during fiscal year 2012 as compared to fiscal year 2011. total selling , general and administrative expenses as a percentage of revenues decreased from 19.4 % in fiscal year 2011 to 16.6 % in fiscal year 2012 , due to the increase of revenues as discussed above , offset by a less significant increase in selling , general and administrative expenses . the largest factors contributing to the overall increase in total selling , general and administrative expenses were increased at & t market development expenses and increased pay for performance bonus expense , partially offset by decreased compensation and benefits , freight out , and sales promotion expenses . marketing expenses increased by $ 1.8 million , or 27.4 % , in fiscal year 2012 as compared to fiscal year 2011 , primarily related to an increase in at & t market development expenses , which are completely variable to sales . pay for performance bonus expense ( including both cash and equity plans ) increased by $ 8.9 million in fiscal year 2012 as compared to fiscal year 2011. because our reward programs are performance based , our strong results during fiscal year 2012 resulted in increased bonus expense . compensation and benefits expense decreased approximately $ 3.8 million in fiscal year 2012 compared to fiscal year 2011. this decrease was primarily related to position consolidations made during the fourth quarter of fiscal year 2011. freight expense decreased by approximately $ 1.7 million , or 11.4 % , in fiscal year 2012. this was a result of more efficient operational flow and fewer pounds shipped as compared to fiscal year 2011 . -31- sales promotions declined by $ 1.1 million , or 35.8 % . this was primarily a result of decreased travel and trade shows expense . we recorded a provision for bad debts of $ 458,700 and $ 1,050,500 for fiscal year 2012 and fiscal year 2011 , respectively . during fiscal year 2012 , we experienced lower bad debt expense in part due to recoveries of amounts previously reserved or written off as well as better collection experience . interest , net . net interest expense decreased from $ 420,600 in fiscal year 2011 to $ 292,900 in fiscal year 2012 , primarily due to decreased average borrowings on our revolving credit facility as well as a lower variable rate on our term loan . income taxes , net income and diluted earnings per share . the effective tax rates in fiscal year 2012 and 2011 were 38.5 % and 35.6 % , respectively . the lower than normal tax rate in fiscal year 2011 was primarily attributable to a one-time reduction in our uncertain tax position reserve as a result of a lapse in the applicable statute of limitations . absent this one-time adjustment , the tax rate for fiscal year 2011 would have been 38.2 % . as a result of the factors discussed above , net income and diluted earnings per share for fiscal year 2011 increased 64.1 % and 59.8 % , respectively , compared with fiscal year 2011. commercial segment . revenues in our commercial segment totaled $ 328.4 million in fiscal year 2012 , compared to $ 312.7 million in the prior year , a 5.0 % increase . gross profit totaled $ 88.4 million , a 9.3 % increase as compared to last year . within this segment , the commercial dealers and resellers market grew revenues by 7.0 % and gross profits by 11.6 % . the private system operator and government market grew revenues by 19.0 % and gross profits by 23.7 % . we continue to see strong opportunities for our proprietary and customized solutions in this market , as these customers continue to build and enhance their own private wireless applications . the public carrier , contractor and program manager market revenue declined 15.2 % and gross profit declined by 15.1 % , as carriers continued to delay significant network builds . our direct expenses in this segment totaled $ 41.5 million , an 11.9 % decline compared to the fiscal year 2011 , due to a decrease in compensation and marketing expenses . therefore , total segment net profit contribution ( segment gross profit less segment direct expenses ) was $ 46.9 million , a 38.9 % increase over the prior year . retail segment . revenues in our retail segment totaled $ 405.0 million in fiscal year 2012 , representing a 38.5 % increase from the prior year .
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results of operations the following tables summarize the results of our operations for fiscal years 2013 , 2012 and 2011 : replace_table_token_4_th -28- fiscal year 2013 compared to fiscal year 2012 revenues . revenues for fiscal year 2013 increased 2.6 % as compared to fiscal year 2012 , due to a 13.0 % increase in commercial segment revenues partially offset by a 5.8 % decrease in retail segment revenues . the increase in commercial segment revenues was due to a significant increase in our public carrier , contractor and program manager market , a smaller increase in our commercial dealers and resellers market , and was partially offset by a decline in sales to our private and government system operators market . the retail reduction in sales was a result of a 15.0 % decrease in sales to our major 3pl relationship , at & t , partially offset by 9.2 % sales growth in our retailers , independent dealer agents and carriers market . as noted above , in april 2012 , we were notified by at & t of their intention to transition their 3pl retail store supply chain business , which made up the vast majority of the company 's historical at & t revenues , away from tessco beginning in the second quarter of our fiscal 2013. this transition was completed by the close of our fiscal 2013. gross profit . gross profit decreased 1.1 % in fiscal year 2013 compared to fiscal year 2012 , due to a 15.6 % decrease in our retail segment partially offset by an 8.8 % increase in our commercial segment . within the retail segment , our major 3pl relationship market showed a decrease in sales , with a larger decrease of 44.2 % in gross profit due to the transition of the at & t third party logistics retail supply chain business . this decrease in gross profit was partially offset by a 7.4 % increase in the retailers , independent dealer agents and carriers market .
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a liability for uncertain tax positions is recorded when it is more 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 , madison national life , and independence american ; and ( ii ) its marketing and administrative companies , including ihc specialty benefits inc. , ihc brokerage group , inc. , my1hr and a majority interest in petpartners . standard security life , madison national life and independence american are sometimes collectively referred to as the โ insurance group โ . ihc and its subsidiaries ( including the insurance group ) are sometimes collectively referred to as the `` company '' , or โ ihc โ , or are implicit in the terms โ we โ , โ us โ and โ our โ . ihc 's health insurance products serve niche sectors of the commercial market through multiple classes of business and varied distribution channels . with regard to those persons in the growing individual market , ihc 's products offer coverage for individuals and families with short-term needs , and fixed indemnity limited benefit and scheduled benefit plans through multiple distribution partners . we offer pet insurance for dogs and cats in all 50 states through select distributors . 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 . medical stop-loss was marketed to employer groups that self-insure their medical risks . in 2016 , the company sold a managing general underwriter that was its principal source of medical stop-loss business and simultaneously 100 % co-insured all of the in-force medical stop-loss business of standard security life and independence american . ihc 's block of medical stop-loss business is in run-off . 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 specialty health , disability , dbl and pfl ; 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 . management has always focused on managing the costs of its operations . 35 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_4_th ๏ท income from operations of $ .83 per share , diluted , for the year ended december 31 , 2019 compared to $ 1.89 per share , diluted , for the same period in 2018 ; o for the years ended december 31 , 2019 and 2018 , the company accrued $ 10.7 million and $ 7.0 million , respectively , of estimated amounts that the company paid or will potentially pay into the new york state adjustment pool as a result of ihc having significantly better experience with its pfl business than that of the industry as a whole ; o selling , general and administrative expenses for the year ended december 31 , 2019 include $ 4.2 million of bad debt expense ; o other income in 2019 includes a $ 3.6 million pretax gain on the sale of an equity investment in the first quarter that was offset in the fourth quarter by a $ 3.7 million pretax impairment on an equity method investment ; o income taxes for the year ended december 31 , 2019 include a $ 7.9 million increase in amic 's valuation allowance due to the reduction of estimated tax benefits from the expected utilization of amic 's net operating loss carryforwards expiring in 2020 and 2021. earnings expectations decreased relative to the remaining period that amic 's net operating loss carryforwards are available to offset income and therefore necessitated an increase in the valuation allowance ; ๏ท consolidated investment yields ( on an annualized basis ) of 3.0 % in both 2019 and 2018 ; and ๏ท book value of $ 30.92 per common share at december 31 , 2019 compared to $ 30.16 at december 31 , 2018. the following is a summary of key performance information by segment : ๏ท the specialty health segment reported $ 7.8 million of income before taxes for the year ended december 31 , 2019 compared to $ 28.7 million for the comparable period in 2018. the decrease in 2019 when compared to 2018 is primarily due to lower premium volume in the fixed indemnity limited benefit line , which has lower loss ratios than other lines of business , as well as less favorable prior year loss development in the short-term medical and fixed indemnity limited benefit lines of business . additionally , the 2019 results of this segment include increased costs related to overall infrastructure improvements in lead generation capabilities and sales automation platforms at ihc specialty benefits , inc. , the write-off of an equity method investment and bad debt expense . story_separator_special_tag 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 . all of the company 's short-duration contracts are generated from its accident , health , term life , 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 , 2019 , would increase reserves ( in the case of a higher ratio ) or decrease reserves ( in the case of a lower ratio ) by approximately $ 3.2 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 commission expense . 39 the gross liability for policy benefits and claims by segment is as follows ( in thousands ) : replace_table_token_8_th replace_table_token_9_th specialty health for the specialty health business , incurred but not reported ( โ ibnr โ ) claims liabilities plus expected development on reported claims are calculated using standard actuarial methods and practices . the โ primary โ assumption in the determination of specialty health reserves is that historical claim development patterns are representative of future claim development patterns . factors that may affect this assumption include changes in claim payment processing times and procedures , changes in time delay in submission of claims , and the incidence of unusually large claims . liabilities for policy benefits and claims for specialty health medical and disability coverage are computed using completion factors and expected net loss ratios derived from actual historical premium and claim data . the reserving analysis includes a review of claim processing statistical measures and large claim early notifications ; the potential impacts of any changes in these factors are not material . the company has business that is serviced by third-party administrators . from time to time , there are changes in the timing of claims processing due to any number of factors including , but not limited to , system conversions and staffing changes during the year . these changes are monitored by the company and the effects of these changes are taken into consideration during the claim reserving process . other than these considerations , there have been no significant changes to methodologies and assumptions from the prior year . while these calculations are based on standard methodologies , they are estimates based on historical patterns . to the extent that actual claim payment patterns differ from historical patterns , such estimated reserves may be redundant or inadequate . the effects of such deviations are evaluated by considering claim backlog statistics and reviewing the reasonableness of projected claim ratios . other factors which may affect the accuracy of policy benefits and claim estimates include the proportion of large claims which may take longer to adjudicate , changes in billing patterns by providers and changes in claim management practices such as hospital bill audits . since our analysis considered a variety of outcomes related to these factors , the company does not believe that any reasonably likely change in these factors will have a material effect . 40 disability the company 's disability business is comprised of group disability and dbl . the two โ primary โ assumptions on which disability policy benefits and claims are based are : ( i ) morbidity levels ; and ( ii ) recovery rates . if morbidity levels increase , for example due to an epidemic or a recessionary environment , the company would increase reserves because there would be more new claims than expected . in regard to the assumed recovery rate , if disabled lives recover more quickly than anticipated then the existing claims reserves would be reduced ; if less quickly , the existing claims reserves would be increased . advancements in medical treatments could affect future recovery , termination , and mortality rates . with respect to dbl , the liability for policy benefits and claims for the most recent quarter of earned premium is established using a net loss ratio methodology . the net loss ratio is determined by applying the completed prior four quarters of historical net loss ratios to the last quarter of earned premium .
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results of operations results of operations for the year ended december 31 , 2019 compared to the year ended december 31 , 2018 information by business segment for the periods indicated is as follows ( in thousands ) : replace_table_token_10_th replace_table_token_11_th premiums earned in 2019 , premiums earned increased $ 17.5 million over the comparable period of 2018. the increase in earned premiums is primarily due to : ( i ) a $ 24.0 million increase from the group disability , life , dbl and pfl segment as a result of $ 13.2 million in increased dbl and pfl premiums primarily due to an increase in rates , a $ 6.6 million increase in combined ltd/std premiums primarily from new std business and increased retentions , a $ 3.6 million increase in group term life premiums as a result of increased retentions , and $ .6 million of other group life business due to new product sales ; partially offset by ( ii ) a $ 6.5 million decrease in specialty health segment premiums , principally due to decreased premiums of $ 21.1 million in fixed indemnity limited benefit business and $ 1.6 million in the dental line , partially offset by increased premium volume of $ 9.2 million from pet lines , $ 3.0 million in short term medical business , $ 1.7 million in group gap lines , $ .9 million in occupational accident business and $ .9 million in ancillary accident & health business . 45 net investment income total net investment income increased $ .6 million .
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the drivetrain segment 's products include transmission systems , torque transfer systems and rotating electrical components . proposed acquisition of delphi technologies plc on january 28 , 2020 , the company entered into a definitive agreement to acquire delphi technologies plc ( โ delphi technologies โ ) in an all-stock transaction valued at approximately $ 3.3 billion , based on the closing price of borgwarner stock on january 27 , 2020. refer to note 23 , โ subsequent event , โ to the consolidated financial statements in item 8 of this report for more information . the company expects to pay fees , costs and expenses associated with the transaction with available cash . the following discussion and analysis of financial condition and results of operations does not address matters associated with the anticipated acquisition . 31 story_separator_special_tag during the year ended december 31 , 2018 , the company recorded a gain of approximately $ 4 million related to the settlement of a commercial contract for an entity acquired in the 2015 remy acquisition . the company 's provision for income taxes for the year ended december 31 , 2018 includes reductions of income tax expense of $ 15 million related to restructuring expense , $ 6 million related to the asbestos-related adjustments , and $ 8 million related to asset impairment expense , offset by increases to tax expense of $ 1 million and $ 6 million related to a gain on commercial settlement and a gain on the sale of a building , respectively , discussed in note 4 , `` other expense , net , '' to the consolidated financial statements . the provision for income taxes also includes reductions of income tax expense of $ 13 million related to final adjustments made to measurement period provisional estimates associated with the tax cuts and jobs act ( the `` tax act '' ) , $ 22 million related to a decrease in our deferred tax liability due to a tax benefit for certain foreign tax credits now available due to actions the company took during the year , $ 9 million related to valuation allowance releases , $ 3 million related to tax reserve adjustments , and $ 30 million related to changes in accounting methods and tax filing positions for prior years primarily related to the tax act . refer to note 5 , `` income taxes , '' to the consolidated financial statements in item 8 of this report for more information . net sales net sales for the year ended december 31 , 2019 totaled $ 10,168 million , a 3.4 % decrease from the year ended december 31 , 2018. excluding the impact of weaker foreign currencies and the net impact of acquisitions and divestitures , net sales increased 0.7 % . the following table details our results of operations as a percentage of net sales : replace_table_token_8_th cost of sales as a percentage of net sales was 79.3 % and 78.8 % in the years ended december 31 , 2019 and 2018 , respectively . the company 's material cost of sales was approximately 55 % of net sales in the years ended december 31 , 2019 and 2018. gross profit as a percentage of net sales was 20.7 % and 21.2 % in the years ended december 31 , 2019 and 2018 , respectively . the reduction of gross margin in 2019 compared to 2018 was primarily due to the impact of lower revenue , the increased cost from tariffs and supplier cost reductions not keeping pace with normal customer price deflation . 35 selling , general and administrative expenses ( โ sg & a โ ) was $ 873 million and $ 946 million , or 8.6 % and 9.0 % of net sales for the years ended december 31 , 2019 and 2018 , respectively . the decrease in sg & a expenses was primarily due to stock-based compensation expense and cost control measures . research and development ( `` r & d '' ) costs , net of customer reimbursements , were $ 413 million , or 4.1 % of net sales , in the year ended december 31 , 2019 , compared to $ 440 million , or 4.2 % of net sales , in the year ended december 31 , 2018. the decrease of r & d costs , net of customer reimbursements , in the year ended december 31 , 2019 compared with the year ended december 31 , 2018 was primarily due to cost control measures and an increase in customer reimbursements . we will continue to invest in a number of cross-business r & d programs , as well as a number of other key programs , all of which are necessary for short- and long-term growth . our current long-term expectation for r & d spending remains in the range of 4 % to 4.5 % of net sales . other ( income ) expense , net was $ ( 75 ) million and $ 94 million for the years ended december 31 , 2019 and 2018 , respectively . this line item is primarily comprised of non-income tax items discussed within the subtitle `` non-comparable items impacting the company 's earnings per diluted share and net earnings '' above . equity in affiliates ' earnings , net of tax was $ 32 million and $ 49 million in the years ended december 31 , 2019 and 2018 , respectively . this line item is driven by the results of our 50 % -owned japanese joint venture , nsk-warner kk , and our 32.6 % -owned indian joint venture , turbo energy private limited ( โ tel โ ) . the decrease in equity in affiliates ' earnings in the year ended december 31 , 2019 was due to lower industry volumes and cost pressures in a reduced market . interest expense and finance charges were $ 55 million and $ 59 million in the years ended december 31 , 2019 and 2018 , respectively . story_separator_special_tag corporate represents headquarters ' expenses not directly attributable to the individual segments . this net expense was $ 206 million and $ 219 million for the years ended december 31 , 2019 and 2018 , respectively . the decrease in corporate expenses in 2019 compared to 2018 is primarily due to lower costs associated with stock-based compensation and cost control initiatives . 38 outlook our overall outlook for 2020 is cautious . net new business-related sales growth , due to increased penetration of borgwarner products around the world , is expected to be partially offset by declining global industry production expected in 2020. the company expects flat to modestly declining revenue in 2020 , excluding the impact of foreign currencies and the net impact of acquisitions and divestitures . the company maintains a positive long-term outlook for its global business and is committed to new product development and strategic capital investments to enhance its product leadership strategy . the several trends that are driving the company 's long-term growth are expected to continue , including the increased turbocharger adoption in north america and asia , the increased adoption of automated transmissions in asia-pacific , and increased global penetration of all-wheel drive . the company 's long-term growth is also expected to benefit from the adoption of product offerings for hybrid and electric vehicles . liquidity and capital resources the company maintains various liquidity sources including cash and cash equivalents and the unused portion of our multi-currency revolving credit agreement . at december 31 , 2019 , the company had $ 832 million of cash and cash equivalents , of which $ 562 million of cash and cash equivalents was held by our subsidiaries outside of the united states . cash and cash equivalents held by these subsidiaries is used to fund foreign operational activities and future investments , including acquisitions . the vast majority of cash and cash equivalents held outside the united states is available for repatriation . the tax act reduced the u.s. federal corporate tax rate from 35 percent to 21 percent and required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred . as of january 1 , 2018 , funds repatriated from foreign subsidiaries are generally no longer taxable for u.s. federal tax purposes . in light of the treatment of foreign earnings under the tax act , the company recorded a liability for the u.s. federal and applicable state income tax liabilities calculated under the provisions of the deemed repatriation of foreign earnings . a deferred tax liability has been recorded for substantially all estimated legally distributable foreign earnings . the company uses its u.s. liquidity primarily for various corporate purposes , including but not limited to debt service , share repurchases , dividend distributions , acquisitions and divestitures and other corporate expenses . the company has a $ 1.2 billion multi-currency revolving credit facility , which includes a feature that allows the company 's facility to be increased to $ 1.5 billion with bank approval . the facility provides for borrowings through june 29 , 2022 . the company has one key financial covenant as part of the credit agreement which is a debt to ebitda ( `` earnings before interest , taxes , depreciation and amortization '' ) ratio . the company was in compliance with the financial covenant at december 31 , 2019 and expects to remain compliant in future periods . at december 31 , 2019 and december 31 , 2018 , the company had no outstanding borrowings under this facility . the company 's commercial paper program allows the company to issue short-term , unsecured commercial paper notes up to a maximum aggregate principal amount outstanding of $ 1.2 billion . under this program , the company may issue notes from time to time and use the proceeds for general corporate purposes . the company had no outstanding borrowings under this program as of december 31 , 2019 and december 31 , 2018. the total current combined borrowing capacity under the multi-currency revolving credit facility and commercial paper program can not exceed $ 1.2 billion . in addition to the credit facility , the company 's universal shelf registration provides the ability to issue various debt and equity instruments subject to market conditions . 39 on february 6 , 2019 , april 25 , 2019 , july 25 , 2019 and november 13 , 2019 , the company 's board of directors declared quarterly cash dividends of $ 0.17 per share of common stock . these dividends were paid on march 15 , 2019 , june 17 , 2019 , september 16 , 2019 and december 16 , 2019. from a credit quality perspective , the company had a credit rating of bbb+ from both standard & poor 's and fitch ratings and baa1 from moody 's as of december 31 , 2019 with a stable outlook from all rating agencies . on january 28 , 2020 , the company entered into a definitive agreement to acquire delphi technologies . due to uncertainties surrounding this anticipated transaction , moody 's adjusted their outlook to negative and standard & poor 's placed the company on creditwatch with negative implications . the company 's current outlook from fitch ratings remained stable . none of the company 's debt agreements require accelerated repayment in the event of a downgrade in credit ratings . capitalization total equity increased by $ 499 million in the year ended december 31 , 2019 as follows : replace_table_token_11_th operating activities net cash provided by operating activities was $ 1,008 million and $ 1,126 million in the years ended december 31 , 2019 and 2018 , respectively . the decrease for the year ended december 31 , 2019 compared with the year ended december 31 , 2018 primarily reflected the cash outflow related to the derecognition of a subsidiary , partially offset by changes in working capital . investing activities net cash used in investing activities was $ 489 million and $ 514 million in the years ended december 31 , 2019 and 2018 , respectively .
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results of operations a detailed comparison of the company 's 2017 operating results to its 2018 operating results can be found in the management 's discussion and analysis of financial condition and results of operations section in the company 's 2018 annual report on form 10-k filed february 19 , 2019. a summary of our operating results for the years ended december 31 , 2019 and 2018 is as follows : replace_table_token_6_th 32 non-comparable items impacting the company 's earnings per diluted share and net earnings the company 's earnings per diluted share were $ 3.61 and $ 4.44 for the years ended december 31 , 2019 and 2018 , respectively . the non-comparable items presented below are calculated after tax using the corresponding effective tax rate and the weighted average number of diluted shares for each of the years then ended . the company believes the following table is useful in highlighting non-comparable items that impacted its earnings per diluted share : replace_table_token_7_th a summary of non-comparable items impacting the company 's net earnings for the years ended december 31 , 2019 and 2018 is as follows : year ended december 31 , 2019 : the company recorded restructuring expense of $ 72 million primarily related to actions to reduce structural costs . refer to note 16 , `` restructuring , '' to the consolidated financial statements in item 8 of this report for more information . over the course of the next few years , the company plans to take additional actions to reduce existing structural costs .
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the expected risk-free interest rates are based on the yields of u.s. treasury securities with maturities appropriate for the expected term of the stock options . the expected dividend yield was based on the calculated yield on our common stock at the time of grant assuming annual dividends totaling $ 0.36 per share . foreign currency we remeasure foreign currency transactions into the relevant functional currency and record the foreign currency transaction gains or losses as a component of other , net in our consolidated statements of operations . we translate the financial statements of our non-u.s. dollar functional currency foreign subsidiaries into u.s. story_separator_special_tag the following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included in item 8 of this annual report on form 10-k. overview we are a leading technology solutions provider to the global travel and tourism industry . we operate through two business segments : ( i ) travel network , our global b2b travel marketplace for travel suppliers and travel buyers and ( ii ) airline and hospitality solutions , an extensive suite of leading software solutions primarily for airlines and hotel properties . collectively , these offerings enable travel suppliers to better serve their customers across the entire travel lifecycle , from planning to post-trip business intelligence , marketing and analytics . a significant portion of our revenue is generated through transaction-based fees that we charge to our customers . for travel network , this fee is in the form of a transaction fee for bookings on our gds ; for airline and hospitality solutions , this fee is a recurring usage-based fee for the use of our saas and hosted systems , as well as implementation fees and consulting fees . items that are not allocated to our business segments are identified as corporate and include primarily certain shared technology costs as well as stock-based compensation expense , litigation costs and other items that are not identifiable with one of our segments . in the first quarter of 2015 , we completed our exit of the online travel agency business through the sale of travelocity.com and lastminute.com . our travelocity segment has no remaining operations as a result of these dispositions . the financial results of our travelocity segment are included in net income ( loss ) from discontinued operations in our consolidated statements of operations for all periods presented . the discussion and analysis of our results of operations refers to continuing operations unless otherwise indicated . on july 1 , 2015 , we completed the acquisition of the remaining 65 % interest in aipl , a singapore-based business-to-business travel e-commerce provider that serves the asia-pacific region . prior to the acquisition , aipl was 65 % owned by a consortium of 11 airlines and the remaining 35 % was owned by us . in the third and fourth quarters of 2015 , aipl completed the acquisition of the remaining interest in three national marketing companies , abacus distribution systems ( hong kong ) , abacus travel systems ( singapore ) and abacus distribution systems sdn bhd ( malaysia ) ( the โ nmcs โ and together with aipl , โ abacus โ ) . the net cash consideration for abacus was $ 442 million . abacus is managed as a region of our travel network business . separately , aipl has signed new long-term agreements with the consortium of 11 airlines to continue to utilize the abacus gds . in january 2016 , we completed the acquisition of the trust group of companies ( โ trust group โ ) , a central reservation , revenue management and hotel marketing provider with a significant presence in emea and apac , for net cash consideration of $ 159 million , subject to the finalization of working capital adjustments . the trust group will be integrated and managed as part of our airline and hospitality solutions segment . factors affecting our results the following is a discussion of trends that we believe are the most significant opportunities and challenges currently impacting our business and industry . the discussion also includes management 's assessment of the effects these trends have had and are expected to have on our results of continuing operations . this information is not an exhaustive list of all of the factors that could affect our results and should be read in conjunction with the factors referred to in the sections entitled โ risk factors โ and โ forward-looking statements โ included elsewhere in this annual report on form 10-k. shift to saas and hosted solutions by airlines and hotels to manage their daily operations initially , large travel suppliers built custom in-house software and applications for their business process needs . in response to a desire for more flexible systems given increasingly complex and constantly changing technological requirements , reduced it budgets and increased focus on cost efficiency , many travel suppliers turned to third party solutions providers for many of their key technologies and began to license software from software providers . we believe that significant revenue opportunity remains in this outsourcing trend , as legacy in-house systems continue to migrate and upgrade to third party systems . by moving away from one time license fees to recurring monthly fees associated with our saas and hosted solutions , our revenue stream has become more predictable and sustainable . the saas and hosted models ' centralized deployment also allows us to save time and money by reducing maintenance and implementation tasks and lowering operating costs . 40 increasing importance of otas to travel network the significance of otas to our travel network business has increased in recent years and as a result , our earnings may be impacted by factors affecting otas . as otas experience growth , we believe they shift bookings away from offline travel agencies and direct channels of travel suppliers . we expect to continue to benefit from this trend as we are a substantial gds provider to the ota industry . story_separator_special_tag this trend may adversely affect our travel network contract renegotiations with suppliers that use alternative distribution channels . for example , airlines may withhold part of their content for distribution exclusively through their own direct distribution channels or offer more attractive terms for content available through those direct channels . however , since 2010 , we believe the rate at which bookings are shifting from indirect to direct distribution channels has slowed for a number of reasons , including the increased participation of lcc/hybrids in indirect channels . over the last several years , notable carriers that previously only distributed directly , including jetblue and norwegian , have adopted our gds . other carriers such as eva airways and virgin australia have further increased their participation in a gds . these trends have impacted the revenue of travel network , which recognizes revenue for airline ticket sales based on transaction volumes , and the revenue of airline and hospitality solutions , which recognizes a portion of its revenue based on the number of passengers boarded , depending upon the applicable revenue model . simultaneously , this focus on cost cutting and direct distribution has also presented opportunities for airline and hospitality solutions . many airlines have turned to outside providers for key systems , process and industry expertise and other products that assist in their cost cutting initiatives in order to focus on their primary revenue generating activities . components of revenues and expenses revenues travel network primarily generates revenues from direct billable bookings processed on our gds as well as the sale of aggregated bookings data to carriers . prior to our acquisition of the remaining interest in aipl on july 1 , 2015 , we generated revenue from certain services we provided aipl . airline and hospitality solutions primarily generates revenue through upfront solution fees and recurring usage-based fees for the use of our software solutions hosted on our own secure platforms or deployed through our saas . airline and hospitality solutions also generates revenue through consulting services and software licensing fees . cost of revenue cost of revenue incurred by travel network and airline and hospitality solutions consists of expenses related to our technology infrastructure that hosts our gds and software solutions , salaries and benefits , and allocated overhead such as facilities and other support costs . cost of revenue for travel network also includes incentive consideration expense representing payments or other consideration to travel agencies for reservations made on our gds which have accrued on a monthly basis . corporate cost of revenue includes a technology organization that provides development and support activities to our segments . the costs associated with our technology organization primarily include labor , data processing and technology costs , of which the majority are allocated to the segments primarily based on the segments ' usage of resources . corporate cost of revenue also includes stock-based compensation expense , professional services and other items that are not identifiable with our segments . depreciation and amortization included in cost of revenue is associated with property and equipment ; software developed for internal use that supports our revenue , businesses and systems ; amortization of contract implementation costs which relates to airline and hospitality solutions ; and intangible assets for technology purchased through acquisitions or established with our take-private transaction . cost of revenue also includes amortization of upfront incentive consideration representing upfront payments or other consideration provided to travel agencies for reservations made on our gds which are capitalized and amortized over the expected life of the contract . 42 selling , general and administrative expenses selling , general and administrative expenses consist of personnel-related expenses for employees that sell our services to new customers and administratively support the business , information technology and communication costs , professional services fees , certain settlement charges and costs to defend legal disputes , bad debt expense , depreciation and amortization and other overhead costs . intersegment transactions we account for significant intersegment transactions as if the transactions were with third parties , that is , at estimated current market prices . airline and hospitality solutions pays fees to travel network for airline trips booked through our gds . in addition , travel network historically recognized intersegment incentive consideration expense for bookings generated by our discontinued travelocity business . these costs are representative of costs incurred on a consolidated basis relating to travel network 's revenue from airlines for bookings transacted through our gds . key metrics โ direct billable bookings โ and โ passengers boarded โ are the primary metrics utilized by travel network and airline solutions , respectively , to measure operating performance . travel network generates fees for each direct billable booking which include bookings made through our gds ( e.g. , air , car and hotel bookings ) and through our joint venture partners in cases where we are paid directly by the travel supplier . passengers boarded ( โ pbs โ ) is the primary metric used by airline solutions to recognize saas and hosted revenue from recurring usage-based fees . the following table sets forth our key metrics ( in thousands ) : replace_table_token_14_th story_separator_special_tag style= '' vertical-align : bottom ; background-color : # cceeff ; padding-left:2px ; padding-top:2px ; padding-bottom:2px ; padding-right:2px ; '' > 19 % selling , general and administrative expenses ( โ sg & a โ ) increased by $ 89 million , or 19 % , for the year ended december 31 , 2015 compared to the prior year . the acquisition of abacus contributed $ 55 million to the increase in sg & a , primarily due to its costs of operations , $ 14 million in acquisition-related costs , $ 9 million in restructuring and related costs , and $ 10 million of amortization of acquired intangible assets .
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results of operations the following table sets forth our consolidated statement of operations data for each of the periods presented : replace_table_token_15_th 43 years ended december 31 , 2015 and 2014 revenue replace_table_token_16_th travel network โrevenue increased $ 248 million , or 13 % , for the year ended december 31 , 2015 compared to the prior year . the increase in revenue primarily resulted from : a $ 272 million increase in transaction-based revenue to $ 1,887 million primarily due to the acquisition of abacus . direct billable bookings increased by 18 % to 443 million in the year ended december 31 , 2015. excluding the impact of the acquisition of abacus , direct billable bookings increased by 6 % , which was driven by growth of 6 % in north america and 15 % in emea , partially offset by a slight decline in latin america ; and the increase in revenue was partially offset by a $ 21 million decrease in other revenue related to services we provided to abacus prior to the acquisition . airline and hospitality solutions โrevenue increased $ 86 million , or 11 % , for the year ended december 31 , 2015 compared to the prior year . the increase in revenue primarily resulted from : a $ 57 million increase in airline solutions ' sabresonic revenue for the year ended december 31 , 2015 compared to the same period in the prior year . approximately $ 38 million of the revenue increase in sabresonic is attributable to growth in pbs of 15 % to 585 million for the year ended december 31 , 2015 , combined with a $ 10 million increase in revenue due to broader adoption of our products by our existing customers .
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we generate revenue and cash primarily through the design , manufacture , sale and service of a diverse portfolio of industrial and commercial products that include well-recognized , premium brand names such as ingersoll-rand ยฎ , trane ยฎ , thermo king ยฎ , american standard ยฎ and club car ยฎ . to achieve our mission of being a world leader in creating comfortable , sustainable and efficient environments , we continue to focus on increasing our recurring revenue stream from parts , service , used equipment and rentals ; and to continuously improve the efficiencies and capabilities of the products and services of our high-potential businesses . additional emphasis is placed on expanding market coverage in terms of geography or by taking advantage of a particular vertical market or opportunity . we also continue to focus on operational excellence strategies as a central theme to improving our earnings and cash flows . trends and economic events we are a global corporation with worldwide operations . as a global business , our operations are affected by worldwide , regional and industry-specific economic factors , as well as political factors , wherever we operate or do business . our geographic and industry diversity , and the breadth of our product and services portfolios , have helped mitigate the impact of any one industry or the economy of any single country on our consolidated operating results . given the broad range of products manufactured and geographic markets served , management uses a variety of factors to predict the outlook for the company . we monitor key competitors and customers in order to gauge relative performance and the outlook for the future . we regularly perform detailed evaluations of the different market segments we are serving to proactively detect trends and to adapt our strategies accordingly . in addition , we believe our order rates are indicative of future revenue and thus a key measure of anticipated performance . in those industry segments where we are a capital equipment provider , revenues depend on the capital expenditure budgets and spending patterns of our customers , who may delay or accelerate purchases in reaction to changes in their businesses and in the economy . current market conditions remain challenging across different international markets . residential and commercial new construction activity are slowly recovering in the united states . this is impacting the results of our commercial heating , ventilation and air conditioning ( hvac ) business . non-residential new construction remains sluggish in europe and is growing at slower pace in asia . however , hvac equipment replacement and aftermarket continue to experience steady growth . we have seen slower worldwide industrial equipment and aftermarket activity . as economic conditions stabilize , we expect moderate growth in worldwide construction markets and slow growth in industrial markets , along with benefits from productivity programs for the remainder of the year . despite the current market environment , we believe we have a solid foundation of global brands and leading market shares in all of our major product lines . our growing geographic and industry diversity coupled with our large installed product base provides growth opportunities within our service , parts and replacement revenue streams . in addition , we are investing substantial resources to innovate and develop new products and services which we expect will drive our future growth . 22 significant events in 2014 announcement to acquire cameron international corporation 's centrifugal compression division on august 18 , 2014 , the company announced an agreement to acquire the assets of cameron international corporation 's centrifugal compression division ( the division ) for $ 850 million . the acquisition was completed on january 1 , 2015 , and was funded through a combination of cash from operations and debt . the division provides centrifugal compression equipment and aftermarket parts and services for global industrial applications , air separation , gas transmission and process . the assets acquired and the results of its operations will be reflected in our consolidated financial statements beginning in the first quarter of 2015. issuance of senior notes due 2020 , 2024 , and 2044 in october 2014 , we issued $ 1.1 billion principal amount of senior notes in three tranches through a newly-created wholly-owned subsidiary , ingersoll-rand luxembourg finance s.a. ( ir-lux ) . the tranches consist of $ 300 million of 2.625 % senior notes due in 2020 , $ 500 million of 3.55 % senior notes due 2024 , and $ 300 million of 4.65 % senior notes due in 2044. the notes are fully and unconditionally guaranteed by ingersoll-rand plc ( ir-ireland ) and certain of our wholly-owned subsidiaries . the proceeds from the notes were primarily used to ( i ) fund the october 2014 redemption of the $ 200 million of 5.50 % notes due 2015 and $ 300 million 4.75 % senior notes due 2015 , and ( ii ) fund the acquisition of cameron international corporation 's centrifugal compression division on january 1 , 2015. related to the redemption , the company recognized $ 10.2 million of premium expense in interest expense . for additional information regarding the terms of the notes and the related guarantees , see notes 7 and 19 to the consolidated financial statements . 2014 dividend increase and share repurchase activity in february 2015 , we announced an increase in our quarterly dividend from $ 0.25 to $ 0.29 per share beginning with our march 2015 payment . in february 2014 , our board of directors authorized the repurchase of up to $ 1.5 billion of our ordinary shares under a new share repurchase program . the new share repurchase program began in the second quarter of 2014. during 2014 , the company repurchased 23.0 million shares for $ 1.4 billion , of which 9.8 million shares for $ 583.4 million were under the 2014 program . shares repurchased prior to october 2014 were canceled upon repurchase and beginning in october 2014 , repurchased shares were held in treasury and recognized at cost . story_separator_special_tag furthermore , a substantial amount of information has been provided to the irs in connection with its audit of our 2007-2011 tax years . we expect the irs to propose similar adjustments with respect to the 2001 debt , although we do not know how the irs will apply its position to the different facts presented in these years or whether the irs will take a similar position with respect to intercompany debt instruments not outstanding in prior years . we have vigorously contested all of these proposed adjustments and intend to continue to do so . although the outcome of these matters can not be predicted with certainty , based upon an analysis of the merits of our position we believe that we are adequately reserved under the applicable accounting standards for these matters and do not expect that the ultimate resolution will have a material adverse impact on our future results of operations , financial condition , or cash flows . as we move forward to resolve these matters with the irs , the reserves established may be adjusted . although we continue to contest the irs 's position , there can be no assurance that we will be successful . if the irs 's position with respect to the 2002-2006 tax years is ultimately sustained we would be required to record additional charges and the resulting liability would have a material adverse impact on our future results of operations , financial condition and cash flows . we believe that we have adequately provided for any reasonably foreseeable resolution of any tax disputes , but will adjust our reserves if events so dictate in accordance with gaap . to the extent that the ultimate results differ from our original or adjusted estimates , the effect will be recorded in the provision for income taxes . significant events in 2013 allegion spin-off on december 1 , 2013 , the company completed the previously announced separation of its commercial and residential security businesses by distributing the related ordinary shares of allegion , on a pro rata basis , to the company 's shareholders of record as of november 22 , 2013. following the spin-off , allegion became an independent publicly traded company . we do not beneficially own any ordinary shares of allegion , and no longer consolidate allegion into our financial results . allegion 's historical financial results for all periods prior to december 1 , 2013 are presented as a discontinued operation in our consolidated financial statements . see โ discontinued operations โ within management 's discussion and analysis of financial condition and results of operations and also note 15 to the consolidated financial statements for a further discussion of our discontinued operations . issuance of senior notes due 2019 , 2023 , and 2043 in june 2013 , we issued $ 1.55 billion principal amount of senior notes in three tranches through our wholly-owned subsidiary , ingersoll-rand global holding company limited ( ir-global ) pursuant to rule 144a of the u.s. securities act of 1933 ( securities 24 act ) . the tranches consist of $ 350 million of 2.875 % senior notes due in 2019 , $ 700 million of 4.250 % senior notes due in 2023 , and $ 500 million of 5.750 % senior notes due in 2043. later in 2013 , the notes were modified to include ir-jersey as a co-obligor . the notes are also fully and unconditionally guaranteed by ir-ireland and certain of our wholly-owned subsidiaries . the proceeds from these notes were primarily used to fund the july 2013 redemption of $ 600 million of 6.000 % senior notes due 2013 and $ 655 million of 9.500 % senior notes due 2014 and to fund expenses related to the spin-off of the commercial and residential security businesses . related to this redemption , the company recorded $ 45.6 million of premium expense in interest expense . for additional information regarding the terms of the notes and the related guarantees , see notes 7 and 19 to the consolidated financial statements . 25 results of operations - for the years ended december 31 replace_table_token_6_th net revenues net revenues for the year ended december 31 , 2014 increased by 4.4 % , or $ 540.9 million , compared with the same period of 2013 , which primarily resulted from the following : volume/product mix 4.6 % pricing 0.5 % currency exchange rates ( 0.7 ) % total 4.4 % the increase in revenues was primarily driven by volume improvements within the climate and industrial segments . net revenues for the year ended december 31 , 2013 increased by 3.0 % , or $ 362.2 million , compared with the same period of 2012 , which primarily resulted from the following : volume/product mix 2.3 % pricing 0.7 % total 3.0 % the increase in revenues was primarily driven by higher volumes and improved pricing across both segments . operating income/margin operating margin improved to 10.9 % for the year ended december 31 , 2014 , compared to 8.9 % for the same period of 2013 . the increase was primarily due to productivity benefits in excess of other inflation ( 1.1 % ) , favorable product mix and volume ( 0.6 % ) , improved pricing net of material inflation ( 0.2 % ) and decreased restructuring spending ( 0.6 % ) , partially offset by increased investment ( 0.5 % ) . operating margin remained flat at 8.9 % for the years ended december 31 , 2013 , and 2012. during 2013 , we experienced improved pricing in excess of material inflation ( 0.5 % ) and productivity benefits in excess of other inflation ( 0.4 % ) , offset by increased investment and restructuring spending ( 0.9 % ) . during 2013 and 2012 , the company incurred costs of $ 82.3 million and $ 23.3 26 million , respectively , associated with ongoing restructuring actions . these actions included workforce reductions as well as the closure and consolidation of manufacturing facilities in an effort to improve the company 's cost structure .
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review of business segments the segment discussions that follow describe the significant factors contributing to the changes in results for each segment included in continuing operations . segment operating income is the measure of profit and loss that our chief operating decision maker uses to evaluate the financial performance of the business and as the basis for performance reviews , compensation and resource allocation . for these reasons , we believe that segment operating income represents the most relevant measure of segment profit and loss . we may exclude certain charges or gains from operating income to arrive at a segment operating income that is a more meaningful measure of 27 profit and loss upon which to base our operating decisions . we define segment operating margin as segment operating income as a percentage of net revenues . climate our climate segment delivers energy-efficient solutions globally and includes trane ยฎ and american standard ยฎ heating & air conditioning which provide heating , ventilation and air conditioning ( hvac ) systems , and commercial and residential building services , parts , support and controls ; and thermo king ยฎ , the leader in transport temperature control solutions . climate segment results for the years ended december 31 were as follows : replace_table_token_8_th 2014 vs 2013 net revenues for the year ended december 31 , 2014 increased by 4.9 % or $ 465.7 million , compared with the same period of 2013 , which primarily resulted from the following : volume/product mix 5.0 % pricing 0.6 % currency exchange rates ( 0.7 ) % total 4.9 % commercial hvac net revenues increased due to improvements in equipment , parts , services and solutions markets . residential hvac net revenues increased due to increased volume in all major product categories . thermo king refrigerated transport revenues increases in north america were partially offset by declines overseas . segment operating margin improved to 12.1 % for the year ended december 31 , 2014 , compared to 9.9 % for the same period of 2013 .
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the cost of the machine was approximately $ 12,000 and is included in office furniture and equipment category in the table above . the lease payments commenced when the machine was placed in service in january 2016. the machine is being amortized over the life of the lease , which is for a three-year term and includes a bargain purchase option at the end of the term . see note 5 for details of this capital lease commitment . f- 11 5. commitments and contingencies operating lease commitment on may 30 , 2014 , the company entered into a commercial lease for 2,387 square feet of office space in norwood , ma . the lease commenced on july 1 , 2014 , had a three-year term , and required a standby letter of credit of $ 13,728 payable in favor of the landlord . in august 2015 , the lease was amended for the relocation of the company into 6,326 square feet of office space within the existing building ( โ august 2015 amendment โ ) . in january 2016 , the company began occupying the space under this lease amendment , which was for a five-year term . the amendment also required an increase in the standby letter of credit to $ 36,375 ( see note 3 ) . in september 2016 , the lease was amended for the company 's expansion into an additional 4,088 square feet of office space within the existing building ( โ september 2016 amendment โ ) . the company began occupying this space in early november 2016 and the final lease payment per the terms of the september 2016 amendment is due in january 2021. additionally , the september 2016 amendment requires an increase in the standby letter of credit to $ 50,000 ( see note 3 ) . the company records the total rent payable during the lease term on a straight-line basis over the term of the lease and records the difference between the rents paid and the straight-line rent as deferred rent , which is classified in deferred rent , current and deferred rent , noncurrent in the company 's balance sheet as of december 31 , 2016. pursuant to the terms of the company 's non-cancelable lease agreements in effect at december 31 , 2016 , the future minimum rent commitments are as follows : replace_table_token_15_th total rent expense for the years ended december 31 , 2016 and 2015 was $ 229,705 and $ 55,496 , respectively . capital lease commitment on december 30 , 2015 , the company entered into a capital lease agreement for a copier machine . the lease payments commenced when the machine was placed in service in january 2016. the lease is for a three-year term and includes a bargain purchase option at the end of the term . in the accompanying balance sheet as of december 31 , 2016 , the current portion of this capital lease obligation is classified in accrued expenses and the long-term portion of the capital lease obligation is classified in other long-term liabilities . pursuant to the terms of this capital lease agreement , the future minimum capital lease commitments are as follows as of december 31 , 2016 : replace_table_token_16_th interest expense for this capital lease obligation for the years ended december 31 , 2016 and 2015 was $ 1,286 and $ 0 , respectively . 6. notes payable in november 2015 , the company entered into a loan agreement with a financing company for $ 207,750 to finance one of the company 's insurance policies . the terms of the loan stipulated equal monthly payments of principal and interest payments of $ 23,397 over a nine month period . interest on this loan was accrued at an annual rate of 3.25 % . this loan was fully repaid in july 2016. f- 12 in october 2016 , the company entered into a loan agreement with a financing company for $ 348,750 to finance one of the company 's insurance policies . the terms of the loan stipulate equal monthly payments of principal and interest payments of $ 39,114 over a nine-month period . interest accrues on this loan at an annual rate of 2.25 % . interest expense for notes payable for the years ended december 31 , 2016 and 2015 totaled $ 3,115 and $ 2,440 , respectively . notes payable consisted of the following : december 31 , 2016 2015 notes payable $ 271,757 $ 162,019 less : current portion ( 271,757 ) ( 162,019 ) $ โ $ โ 7. accrued expenses accrued expenses consisted of the following : replace_table_token_17_th story_separator_special_tag the following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and the related notes and the other financial information included elsewhere in this annual report . 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 various factors , including those discussed below and elsewhere in this annual report , particularly those under โ risk factors. โ overview we are a clinical stage pharmaceutical company , focused on the development and commercialization of novel therapeutics to treat rare , chronic and serious inflammatory and fibrotic diseases with clear unmet medical needs . our product jbt-101 is a novel synthetic oral endocannabinoid-mimetic drug that is intended to resolve chronic inflammation and halt fibrotic processes without causing immunosuppression . jbt-101 is currently being developed to treat four life-threatening diseases : systemic sclerosis , cystic fibrosis , diffuse cutaneous , skin-predominant dermatomyositis and systemic lupus erythematosus ( โ sle '' ) . story_separator_special_tag the payments received under the award have been recorded as deferred revenue and are being amortized on a straight-line basis over the expected duration of the performance period under the award , which is expected to conclude in the second quarter of 2017. upon the execution of the award agreement , we received a payment of $ 1,250,000 in may 2015. in november 2015 , we received a second payment of $ 1,250,000 upon the achievement of a milestone for dosing the first patient . in august 2016 , we received a third payment from the cfft in the amount of $ 1,000,000 for achieving a milestone in july 2016 related to dosing the median clinical trial patient . in january 2017 , we received a fourth payment from the cfft in the amount of $ 1,000,000 for achieving a milestone in december 2016 related to completing the final visit for the final patient . we expect that the last milestone payment of $ 500,000 under the award will be recognized in the second quarter of 2017 upon the achievement of the final milestone related to the phase 2 cf clinical trial , as set forth in the award agreement . research and development research and development expenses are incurred for the development of jbt-101 and consist primarily of payroll , and payments to contract research and development companies . to date , these costs are related to generating pre-clinical data and the cost of manufacturing jbt-101 for clinical trials and conducting clinical trials . these costs are expected to increase significantly in the future as jbt-101 is continued to be evaluated in additional later stage clinical trials . general and administrative expenses general and administrative expenses consist primarily of payroll , rent and professional services . other general and administrative expenses include accounting and legal services . we anticipate that our general and administrative expenses will increase significantly during 2017 and in the future as we increase our headcount to support our continued research and development and the potential commercialization of our product candidates . we also anticipate increased expenses related to audit , legal , and tax-related services associated with maintaining compliance with nasdaq exchange listing and sec requirements , director and officer insurance , and investor relations costs associated with being a public company . 48 total other income ( expense ) total other income ( expense ) consists primarily of interest income we earn on interest-bearing accounts , interest expense incurred on our outstanding debt , and gains or losses related to foreign currency exchange rate fluctuations . accrued research and development expenses as part of the process of preparing financial statements , we are required to estimate and accrue expenses , the largest of which are research and development expenses . this process involves : communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost ; estimating and accruing expenses in our financial statements as of each balance sheet date based on facts and circumstances known to us at the time ; and periodically confirming the accuracy of our estimates with selected service providers and making adjustments , if necessary . examples of estimated research and development expenses that we accrue include : โ fees paid to cros in connection with nonclinical studies ; โ fees paid to contract manufacturers in connection with the production of jbt-101 for clinical trials ; โ fees paid to cro and research institutions in connection with conducting of clinical studies ; and โ professional service fees for consulting and related services . we base our expense accruals related to clinical studies on our estimates of the services performed pursuant to contracts with multiple research institutions and clinical research organizations that conduct and manage clinical studies on our behalf . the financial terms of these agreements vary from contract to contract and may result in uneven payment flows . payments under some of these contracts depend on factors , such as the successful enrollment of patients and the completion of clinical study milestones . our service providers invoice us monthly in arrears for services performed . in accruing service fees , we estimate the time period over which services will be performed and the level of effort to be expended in each period . if we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of these services , our actual expenses could differ from our estimates . to date , we have not experienced significant changes in our estimates of accrued research and development expenses following each applicable reporting period . however , due to the nature of estimates , we can not assure you that we will not make changes to our estimates in the future as we become aware of additional information regarding the status or conduct of our clinical studies and other research activities . stock-based compensation stock options are granted with an exercise price at no less than fair market value at the date of the grant . the stock options normally expire ten years from the date of grant . stock option awards vest upon terms determined by our board of directors . we recognize compensation costs resulting from the issuance of stock-based awards to employees , members of our board of directors and consultants . the fair value of each option grant was estimated as of the date of grant using the black-scholes option-pricing model .
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results of operations comparison of year ended 2016 to 2015 collaboration revenue . we have recorded $ 1,911,424 and $ 648,382 of collaboration revenue in the year ended december 31 , 2016 and december 31 , 2015 , respectively , related to an award agreement we entered into in fiscal 2015 with the cfft , pursuant to which we received a development award ( the โ award โ ) for up to $ 5 million in funding . the funding from the award is supporting the phase 2 clinical trial of jbt-101 in adults with cystic fibrosis . we have billed and received a total of $ 4.5 million in payments since the inception of the award as outlined below . the payments received under the award have been recorded as deferred revenue and are being amortized on a straight-line basis over the expected duration of the performance period under the award , which is expected to conclude in the second quarter of 2017. upon the execution of the award agreement , we received a payment of $ 1,250,000 in may 2015. in november 2015 , we received a second payment of $ 1,250,000 upon the achievement of a milestone for dosing the first patient . in august 2016 , we received a third payment from the cfft in the amount of $ 1,000,000 for achieving a milestone in july 2016 related to dosing the median clinical trial patient . in january 2017 , we received a fourth payment from the cfft in the amount of $ 1,000,000 for achieving a milestone in december 2016 related to completing the final visit for the final patient . we expect that the last milestone payment of $ 500,000 under the award will be recorded in the second quarter of 2017 upon the achievement of the final milestone related to the phase 2 cf clinical trial , as set forth in the award agreement . research and development .
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in addition , the number of shares of common stock available for issuance under the 2013 plan will be annually increased on the first day of each fiscal year during the term of the 2013 plan , beginning with the 2014 fiscal year , by an amount equal to the least of : ( i ) 300,000 shares ; ( ii ) story_separator_special_tag the following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and the related notes and other financial information included elsewhere in this annual report on form 10-k. some of the information contained in this discussion and analysis or set forth elsewhere in this annual report on form 10-k , including information with respect to our plans and strategy for our business , includes forward-looking statements that involve risks and uncertainties . our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors , including , but not limited to , those set forth under โ risk factors โ under item 1a of part i of this annual report on form 10-k and elsewhere in this annual report on form 10-k. overview we are a specialty pharmaceutical company focused primarily on the development of drugs to treat gastrointestinal , or gi , disorders and diseases . we are developing evk-001 , a metoclopramide nasal spray for the relief of symptoms associated with acute and recurrent diabetic gastroparesis in women . diabetic gastroparesis is a gi disorder afflicting millions of sufferers worldwide in which the stomach takes too long to empty its contents resulting in serious digestive system symptoms . metoclopramide is the only product currently approved in the united states to treat the symptoms associated with gastroparesis , and is currently available only in oral and intravenous forms . evk-001 is a novel formulation of this drug , designed to provide systemic delivery of metoclopramide through nasal administration . we have evaluated evk-001 in a multicenter , randomized , double-blind , placebo-controlled parallel-group , dose-ranging phase 2b clinical trial in 287 subjects with diabetic gastroparesis where evk-001 was observed to be effective in improving the most prevalent and clinically relevant symptoms associated with gastroparesis in women while exhibiting a favorable safety profile . in april 2014 , we commenced enrollment in a phase 3 clinical trial of evk-001 in female subjects with symptoms associated with acute and recurrent diabetic gastroparesis . this phase 3 clinical trial is a multicenter , randomized , double-blind , placebo-controlled , parallel-group study evaluating the efficacy , safety and population pharmacokinetics of evk-001 in adult female subjects with diabetic gastroparesis when dosed four times a day for 28 days . the phase 3 trial is expected to enroll approximately 200 female subjects at sites across the united states . as of february 29 , 2016 , we had randomized 186 subjects . overall enrollment has been slower than previously anticipated . although the trial sites have been screening significant numbers of potential subjects , patients with diabetic gastroparesis typically have symptoms that vary in timing and severity , unpredictable gastric emptying delays , and complex medical histories . we are also facing competition for subjects from other ongoing competing clinical trials that were not active when we started our phase 3 trial . this combination of factors creates a challenge for enrollment into diabetic gastroparesis trials . we anticipate fully enrolling this clinical trial during the second quarter of 2016. we will need to successfully complete this trial before we are able to submit a new drug application , or nda , to the u.s. food and drug administration , or fda , for evk-001 . fda approval of the nda is required in order for us to commercially market evk-001 in the united states . we successfully completed a thorough ecg ( qt/qtc ) trial and reported positive results in december 2014. a thorough ecg ( qt/qtc ) trial is a specialized clinical trial designed to assess whether an investigational medication has the potential to prolong the qt interval . the qt interval represents the amount of time the heart 's electrical system takes to repolarize , or recharge , after each beat , and the qtc interval represents the qt interval corrected for differences in heart rate . prolongation of the qt interval may increase the risk for cardiac arrhythmias . data from the thorough ecg ( qt/qtc ) trial met the pre-specified primary endpoint , demonstrating that evk-001 , at therapeutic and supratherapeutic doses , did not prolong the qt/qtc interval in healthy subjects . we are also conducting a companion clinical trial with evk-001 in male subjects with symptoms associated with acute and recurrent diabetic gastroparesis to assess the safety and efficacy of evk-001 in men . the male companion trial was initiated in may 2014 and is designed similarly to the phase 3 trial in women . this trial was requested by the fda , but is not required for submission of the evk-001 nda for women , however , we expect to include safety data from this trial in the nda submission . we have no products approved for sale , and we have not generated any revenue from product sales or other arrangements . we have primarily funded our operations through the sale of our convertible preferred stock , borrowings under our loan and security agreements and the sale of shares of our common stock on the nasdaq capital market . we have incurred losses in each year since our inception . our net losses were $ 12.1 million and $ 13.2 million for the years ended december 31 , 2015 and 2014 , respectively . as of december 31 , 2015 and 2014 , we had an accumulated deficit of $ 48.1 million and $ 35.9 million , respectively . substantially all of our operating losses resulted from expenses incurred in connection with advancing evk-001 through development activities and general and administrative costs associated with our operations . story_separator_special_tag the costs of clinical trials may vary significantly over the life of a project owing to , but not limited to , the following : โ per patient trial costs ; โ the number of sites included in the trials ; โ the countries in which the trials are conducted ; โ the length of time required to enroll eligible subjects ; 44 โ the number of subjects that participate in the trials ; โ the number of doses that subjects receive ; โ the cost of comparative agents used in trials ; โ the drop-out or discontinuation rates of subjects ; โ potential additional safety monitoring or other studies requested by regulatory agencies ; โ the duration of patient follow-up ; and โ the efficacy and safety profile of the product candidate . we do not yet know when evk-001 may be commercially available , if at all . general and administrative expenses general and administrative expenses consist primarily of salaries and related benefits , including stock-based compensation . other general and administrative expenses include professional fees for accounting , tax , patent costs , legal services , insurance , facility costs and costs associated with being a publicly-traded company . we expect that general and administrative expenses will increase in the future as we expand our operating activities , prepare for the growth needs associated with commercialization and continue to incur additional costs associated with being a publicly-traded company and maintaining compliance with exchange listing and securities and exchange commission requirements . these increases will likely include higher consulting costs , legal fees , accounting fees , directors ' and officers ' liability insurance premiums and fees associated with investor relations . total other expense total other expense consists primarily of interest expense incurred on our outstanding debt offset by interest income we earn on interest-bearing accounts and money market funds for cash and cash equivalents . critical accounting policies and significant judgments and estimates our management 's discussion and analysis of our financial condition and results of operations is based on our financial statements , which we have prepared in accordance with generally accepted accounting principles in the united states , or gaap . the preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements , as well as the reported revenues and expenses during the reporting periods . we evaluate these estimates and judgments on an ongoing basis . we base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances , the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources . our actual results may differ materially from these estimates under different assumptions or conditions . while our significant accounting policies are more fully described in note 2 to our financial statements appearing elsewhere in this annual report on form 10-k , we believe that the following accounting policies are the most critical for fully understanding and evaluating our financial condition and results of operations . accrued research and development expenses as part of the process of preparing financial statements , we are required to estimate and accrue expenses , the largest of which are research and development expenses . this process involves the following : โ communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost ; โ estimating and accruing expenses in our financial statements as of each balance sheet date based on facts and circumstances known to us at the time ; and โ periodically confirming the accuracy of our estimates with selected service providers and making adjustments , if necessary . examples of estimated research and development expenses that we accrue include : โ fees paid to cros in connection with clinical studies ; โ fees paid to investigative sites in connection with clinical studies ; 45 โ fees paid to cmos in connection with the production of clinical study materials ; and โ professional service fees for consulting and related services . we base our expense accruals related to clinical studies on our estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and cros that conduct and manage clinical studies on our behalf . the financial terms of these agreements vary from contract to contract and may result in uneven payment flows . payments under some of these contracts depend on factors such as the successful enrollment of subjects , site initiation and the completion of clinical study milestones . our service providers invoice us monthly in arrears for services performed . in accruing service fees , we estimate the time period over which services will be performed and the level of effort to be expended in each period . if we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of these services , our actual expenses could differ materially from our estimates . to date , we have not experienced significant changes in our estimates of accrued research and development expenses after a reporting period . however , due to the nature of estimates , we can not assure you that we will not make changes to our estimates in the future as we become aware of additional information about the status or conduct of our clinical studies and other research activities . stock-based compensation stock-based compensation expense is recorded at the estimated fair value of the award as of the grant date and is recognized as expense on a straight-line basis over the employee 's requisite service period , which is generally the vesting period of the award .
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results of operations comparison of years ended december 31 , 2015 and 2014 the following table summarizes the results of our operations for the fiscal years ended december 31 , 2015 and 2014 : replace_table_token_8_th research and development expenses . research and development expenses for the year ended december 31 , 2015 compared to the year ended december 31 , 2014 decreased by approximately $ 1.8 million primarily due to making a $ 500,000 payment during may 2014 to questcor for achieving a milestone associated with the acquisition of our technology and incurring an expense of approximately $ 1.2 million conducting the thorough ecg ( qt/qtc ) trial of evk-001 primarily during the third quarter of 2014. costs incurred in 2015 include approximately $ 5.7 million related to our ongoing clinical trials , approximately $ 2.0 million for wages , taxes and employee insurance , including approximately $ 579,000 of stock-based compensation expense , and approximately $ 256,000 related to stability testing and the completion of the production of a commercial-size batch of evk-001 . costs incurred in 2014 include approximately $ 7.1 million related to the clinical trials for evk-001 , approximately $ 1.9 million for wages , taxes and employee insurance , including approximately $ 410,000 of stock-based compensation expense , approximately $ 522,000 related to stability testing and preparation for the commercial-scale production of evk-001 and the payment of $ 500,000 to questcor . included in research and development expenses were costs of approximately $ 218,000 and $ 255,000 for the years ended december 31 , 2015 and 2014 , respectively , for clinical trial services incurred by a related party of one of our officers . general and administrative expenses .
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and consolidated financial conditions as of december 31 , 2020 , and 2019 should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this document . overview we are a major grower and seller of yew trees and manufacturer of products made from yew trees , we also sell branches and leaves of yew trees for the manufacture of tcm containing taxol , which tcm has been approved in the prc for use as a secondary treatment of certain cancers , meaning it must be administered in combination with other pharmaceutical drugs . the yew industry is highly regulated in the prc because the northeast yew tree is considered an endangered species . in the third quarter of 2016 , we started to sell handmade yew-related products , such as yew essence oil soaps , yew candles and yew extracts . for the years ended december 31 , 2020 and 2019 , we operated in two reportable business segments . the business of hds , jsj and hyf in prc was managed and reviewed as prc segment . the business of ybp , yew bio-pharm ( hk ) , and mc was managed and reviewed as usa segment . for the year ended december 31 , 2020 and 2019 , revenues from the prc segment accounted for approximately 99.83 % and 98.73 % of consolidated revenue ; revenues from usa segment accounted for approximately 0.17 % and 1.27 % of consolidated revenue . 27 ybp 's revenues were mostly generated by hds in the prc . the expenses incurred in the u.s. were primarily related to fulfilling the reporting requirements of public listed company , stock-based compensation , office daily operations , inventory write-down and other costs . as of december 31 , 2020 , ybp had approximately $ 1,888,000 assets and held the 100 % equity interests in its subsidiaries yew hk and jsj . yew hk itself has no business operations or assets other than holding of equity interests in jsj . jsj had no business operations and assets with a book value of approximately $ 12,000 , including approximately $ 10,000in cash at december 31 , 2020. jsj also holds the vie interests in hds through the contractual arrangements ( the โ contractual arrangements โ ) described in notes to consolidated financial statements . on november 4 , 2014 , hds established a new subsidiary , harbin yew food co. ltd. ( โ hyf โ ) , to develop and cultivate wood ear mushroom . for the year ended december 31 , 2020 , hyf had limited activities . in the event that we are unable to enforce the contractual agreements , we may not be able to exert effective control over hds and hyf , and our ability to conduct our business may be materially and adversely affected . if the applicable prc authorities invalidate our contractual agreements for any violation of prc laws , rules and regulations , we would lose control of the vie and its subsidiary resulting in its deconsolidation in financial reporting and severe loss in our market valuation . on june 8 , 2016 , ybp established a new subsidiary , mc commerce holding inc. ( mc ) , to sales the company 's yew products in american market . mc had limited operation activities for the year ended december 31 , 2020. in december 2019 , covid-19 was reported in china . since then , covid-19 has spread globally , to include the united states and several european countries . many countries around the world have imposed quarantines and restrictions on travel and mass gatherings to slow the spread of the virus and have closed non-essential businesses . the pandemics could result in increased travel restrictions , market downturns and changes in the behavior of the terminal customers of our products related to pandemic fears . in addition , our certain customers could decrease the demand on our products due to the outbreak of the covid-19 . to date , our business is impact by the outbreak of the coronavirus ( covid-19 ) in china , which resulted the decrease of our revenue during the first half of 2020. the extent to which the coronavirus impacts our results will depend on future developments and reactions in china , which are highly uncertain and will include emerging information concerning the severity of the coronavirus and the actions taken by governments to attempt to contain the coronavirus . any decreased collectability of accounts receivable , or reduction of purchase orders could further negatively impact our results of operations . critical accounting policies and estimates our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements , which have been prepared in accordance with accounting principles generally accepted in the united states . the preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets , liabilities , revenues and expenses , and related disclosure of contingent assets and liabilities . we continually evaluate our estimates , including those related to bad debts , allowance for obsolete inventory , and the classification of short and long-term inventory , the useful life of property and equipment and land use rights and yew forest assets , recovery of long-lived assets , write-down in value of inventory , and the valuation of equity transactions . we base our estimates on historical experience and on various other assumptions that we 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 . any future changes to these estimates and assumptions could cause a material change to our reported amounts of revenues , expenses , assets and liabilities . actual results may differ from these estimates under different assumptions or conditions . we believe the following critical accounting policies affect our significant judgments and estimates used in the preparation of the financial statements . story_separator_special_tag finished goods-handicraft and yew seedlings include direct materials and direct labor . we estimate the amount of the excess inventories by comparing inventory on hand with the estimated sales that can be sold within our normal operating cycle of one year . any inventory in excess of our current requirements based on historical and anticipated levels of sales is classified as long-term on our consolidated balance sheets . our classification of long-term inventory requires us to estimate the portion of inventory that can be realized over the next 12 months . to estimate the amount of slow-moving or obsolete inventories , we analyze movement of our products , monitor competing products and technologies and evaluate acceptance of our products . periodically , we identify inventories that can not be sold at all or can only be sold at deeply discounted prices . an allowance will be established if management determines that certain inventories may not be saleable . if inventory costs exceed expected net realizable value due to obsolescence or quantities in excess of expected demand , we will record reserves for the difference between the carrying cost and the estimated net realizable value . our handicraft and yew furniture products are hand-made by traditional chinese artisans . in accordance with asc 905 , โ agriculture โ , our costs of growing yew seedlings are accumulated until the time of harvest and are reported at the lower of cost or net realizable value , with cost computed on a weighted-average basis . property and equipment property and equipment are carried at cost and are depreciated on a straight-line basis ( after taking into account their respective estimated residual value ) over the estimated useful lives of the assets . the cost of repairs and maintenance is expensed as incurred ; major replacements and improvements are capitalized . when assets are retired , or disposed of , the cost and accumulated depreciation are removed from the accounts , and any resulting gains or losses are included in income in the year of disposition . we examine the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable . the estimated useful lives are as follows : building 10-20 years machinery and equipment 3-10 years office equipment 2-5 years motor vehicles 4-10 years 29 land use rights and yew forest assets all land in the prc is owned by the prc government and can not be sold to any individual or company . we have recorded the amounts paid to the prc government to acquire long-term interests to utilize land and yew forests as land use rights and yew forest assets . this type of arrangement is common for the use of land in the prc . yew trees on land containing yew tree forests are used to supply raw materials such as branches , leaves and fruit to us that will be used to manufacture our products . we amortize these land and yew forest use rights over the term of the respective land and yew forest use right , which ranges from 15 to 50 years . the lease agreements do not have any renewal option and we have no further obligations to the lessor . we record the amortization of these land and forest use rights as part of our cost of revenues . revenue recognition the company accounts for revenue arising from contracts and customers in accordance with accounting standards update ( asu or update ) no . 2014-09 , revenue from contracts with customers ( โ asc 606 โ ) , which was adopted on january 1 , 2018 using the full retrospective method . the adoption of asc 606 did not impact the company 's previously reported financial statements in any prior period nor did it result in a cumulative effect adjustment to retained earnings . under asc 606 , the company recognizes revenue when its customer obtains control of promised goods , in an amount that reflects the consideration which the company expects to receive in exchange for those goods . to determine revenue recognition for arrangements that the company determines are within the scope of asc 606 , the company performs the following five steps : ( i ) identify the contract ( s ) with a customer ; ( ii ) identify the performance obligations in the contract ; ( iii ) determine the transaction price ; ( iv ) allocate the transaction price to the performance obligations in the contract ; and ( v ) recognize revenue when ( or as ) the company satisfies a performance obligation . the company only applies the five-step model to contracts when it is probable that company will collect the consideration it is entitled to in exchange for the goods it transfers to the customer . at contract inception , once the contract is determined to be within the scope of asc 606 , the company assesses the goods promised within each contract and determines those that are performance obligations and assesses whether each promised good is distinct . the company then recognizes as revenue the amount of the transaction price , which is allocated to the respective performance obligation , when the performance obligation is satisfied . generally , the company 's performance obligations are satisfied when the customers take possession of the products , which normally occurs upon shipment or delivery depending on the terms of the contracts . income taxes we are governed by the income tax law of the prc , hong kong and the united states . we account for income tax using the liability method prescribed by asc 740 , โ income taxes โ . under this method , deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the year in which the differences are expected to reverse .
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results of operations the following tables set forth key components of our results of operations for the periods indicated , in dollars . the discussion following the table is based on these results : replace_table_token_1_th 32 year ended december 31 , 2020 compared to year ended december 31 , 2019 revenues for the year ended december 31 , 2020 , we had total revenues of $ 27,307,687 , as compared to $ 27,883,649 for the year ended december 31 , 2019 , a decrease of $ 575,962 or 2.07 % . the decrease in total revenue was attributable to the decrease in revenues from extracts , partially offset by increase in revenues from sales of tcm raw materials . total revenue is summarized as follows : replace_table_token_2_th for the year ended december 31 , 2020 compared to december 31 , 2019 , the increase in revenue of tcm raw material was mainly attributable to the increase in demand from our related party , yew pharmaceutical . the decrease in revenue of extracts was mainly attributable to the increase in demand of pine needle extract , complex taxus cuspidate extract , and composite northeast yew extract . cost of revenues for the year ended december 31 , 2020 , cost of revenues amounted to $ 23,780,672 as compared to $ 27,109,518 for the year ended december 31 , 2019 , a decrease of $ 3,328,846 or 12.28 % . for the year ended december 31 , 2020 , cost of revenues accounted for 87.08 % of total revenues compared to 97.22 % of total revenues for the year ended december 31 , 2019. cost of revenues by product categories is as follows : replace_table_token_3_th the decrease in our cost of revenues for the year ended december 31 , 2020 as compared to the year ended december 31 , 2019 was primarily a result of the decrease in costs of revenue in extracts , partially offset by increases in tcm raw materials .
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this story_separator_special_tag you should read the following discussion together with โ selected financial data โ and our consolidated financial statements and the related notes included elsewhere in this annual report on form 10-k. this discussion contains forward-looking statements , which involve risks and uncertainties . our actual results may differ materially from those we currently anticipate as a result of many factors , including the factors we describe under โ item 1aโrisk factors , โ and elsewhere in this annual report on form 10-k. overview we are a leading provider of cloud communications services for businesses and consumers . our business services transform the way people work and businesses operate through a portfolio of communications solutions that enable internal collaboration among employees , while also keeping companies closely connected with their customers , across any mode of communication , on any cloud-connected device . vonage customers can choose among or combine two separate service delivery options to suit their specific cloud communication needs . they can buy vonage business as a subscription and they can buy our vonage api platform and consume our cloud communication as a service product as programmable modules , delivered via apis . we also provide a robust suite of feature-rich residential communication solutions . business for our business customers , we provide innovative , cloud-based unified communications as a service , or ucaas , solutions , comprised of integrated voice , text , video , data , collaboration , and mobile applications over our flexible , scalable session initiation protocol based voice over internet protocol , or voip , network . we also offer cpaas solutions designed to enhance the way businesses communicate with their customers by embedding communications into apps , websites and business processes . in august 2018 , the company completed the acquisition of tokbox which added video functionality to the cpaas suite of services available to its customers . in combination , our products and services permit our business customers to communicate with their customers and employees through any cloud-connected device , in any place , at any time without the often costly investment required with on-site equipment . we have a robust set of product families tailored to serve the full range of the business value chain , from the smb market , through mid-market and enterprise markets . we provide customers with multiple deployment options , designed to provide the reliability and quality of service they demand . we provide customers the ability to integrate our cloud communications platform with many cloud-based productivity and crm solutions , including google 's g suite , zendesk , salesforce 's sales cloud , oracle , and clio . with our ability to integrate these cloud-based , workplace tools , vonage integrates the entire business communications value chain - from employee communications that maximize productivity to the direct engagement with customers that cpaas provides . when combined with our mpls network , as well as voice services over customers ' broadband networks via our smartwan solution , we create a differentiated offering . on october 31 , 2018 , the company completed the acquisition of newvoicemedia , a leading provider of contact center as a service , or ccaas , solutions allowing the company to compliment its existing suite of cloud communications services available to its customers . consumer for our consumer customers , we enable users to access and utilize our services and features , via their existing internet connections , including over 3g/4g , lte , cable , or dsl broadband networks . this technology enables us to offer our consumer customers attractively priced voice and messaging services and other features around the world on a variety of devices . our consumer strategy is focused on the continued penetration of our core north american markets , where we will continue to provide value in international long distance and target under-served segments . services outside of the united states we currently have ucaas and consumer operations in the united states , united kingdom , and canada and believe that our low-cost internet based communications platform enables us to cost effectively deliver voice and messaging services to other locations throughout the world . through nexmo , we have operations in the united states , united kingdom , hong kong , and singapore , and provide cpaas solutions to our customers located in many countries around the world . trends in our industry a number of trends in our industry have a significant effect on our results of operations and are important to an understanding of our financial statements . 28 vonage annual report 2018 competitive landscape . we face intense competition from traditional telephone companies , wireless companies , cable companies , and alternative communication providers . most traditional wireline and wireless telephone service providers and cable companies are substantially larger and better capitalized than we are and have the advantage of a large existing customer base . in addition , because our competitors provide other services , they often choose to offer voip services or other voice services as part of a bundle that includes other products , such as video , high speed internet access , and wireless telephone service , which we do not offer . we also compete against alternative communication providers . some of these service providers have chosen to sacrifice telephony revenue in order to gain market share and have offered their services at low prices or for free . as we continue to introduce applications that integrate different forms of voice and messaging services over multiple devices , we are facing competition from emerging competitors focused on similar integration , as well as from alternative voice communication providers . we also are subject to the risk of future disruptive technologies . in connection with our emphasis on the international long distance market in the united states , we face competition from low-cost international calling cards and voip providers in addition to traditional telephone companies , cable companies , and wireless companies , each of which may implement promotional pricing targeting international long distance callers . story_separator_special_tag our customer churn will fluctuate over time due to economic conditions , competitive pressures including promotional pricing targeting international long distance callers , marketplace perception of our services , and our ability to provide high quality customer care and network quality and add future innovative products and services . see the discussion below for detail regarding churn impacting our business customers . revenues revenues consist of services revenue and customer equipment and shipping fee revenue . substantially all of our revenues are services revenue . for consumer customers in the united states , we offer domestic and international rate plans , including a variety of residential plans and mobile plans . through our acquisitions we offer smb , mid-market , and enterprise customers several service plans with different pricing structures and contractual requirements ranging in duration from month-to-month to three years . in addition , we provide managed equipment to business customers for which the customers pay a monthly fee . customers also have the opportunity to purchase premium features for additional fees . in addition , we derive revenue from usage-based fees earned from customers using our cloud-based software products . these usage-based software products include our messaging , voice , verify and chat apis . usage-based fees include number of text messages sent or received using our messaging apis , minutes of call duration activity for our voice apis , and number of converted authentications for our verify api . services revenue is offset by the cost of certain customer acquisition activities , such as rebates and promotions . in addition , in certain instances , we charge disconnect fees which are recognized as revenue at the time the disconnect fees are collected from our customer . in the united states , we charge regulatory , compliance , e-911 , and intellectual property-related recovery fees on a monthly basis to defray costs , and to cover taxes that we are charged by the suppliers of telecommunications services . in addition , we recognize revenue on a gross basis for contributions to the federal universal service fund , or usf , and related fees . all other taxes are recorded on a net basis . revenues are generated from sales of customer equipment directly to customers for replacement devices , or for upgrading their device at the time of customer sign-up for which we charge an additional fee . in addition , customer equipment and shipping revenues include revenues from the sale of voip telephones in order to access our small and medium business services . customer equipment and shipping revenues also include the fees that customers are charged for shipping their customer equipment to them . operating expenses operating expenses consist of cost of revenues , sales and marketing expense , engineering and development expense , general and administrative expense , and depreciation and amortization . 30 vonage annual report 2018 story_separator_special_tag style= '' padding-left:0px ; text-indent:0px ; line-height : normal ; padding-top:10px ; '' > ( in thousands ) service gross margin increased 23 % primarily due to continued growth of our service offerings to our business customers consistent with our overall organic growth in our business customer base of 14 % as compared to the prior year period along with the acquisitions of tokbox in august 2018 and newvoicemedia in october 2018 $ 54,547 access and product gross margin decreased due to higher costs providing access services to business customers during the current period ( 5,078 ) usf gross margin decreased mainly due to payment during the first quarter of 2018 for usf fees not collected in 2017 ( 5 ) increase in segment gross margin $ 49,464 33 vonage annual report 2018 while service gross margin has increased , service gross margin percentage decreased to 54.6 % for the year december 31 , 2018 from 55.9 % for the year ended december 31 , 2017. the decrease in business service gross margin percentage is a result of the sale of a greater proportion of lower margin services across our business segment during the year ended december 31 , 2018 as compared to the same period in the prior year along with lower credits . our gross margin percentage may continue to be impacted by changes in the mix of service offerings provided to our customers across our business segment . for the year ended december 31 , 2017 compared to the year ended december 31 , 2016 the following table describes the increase in business gross margin for the year ended december 31 , 2017 as compared to the year ended december 31 , 2016 : ( in thousands ) service gross margin increased 22 % primarily due to higher cpaas gross margin of $ 8,321 related to nexmo which was acquired on june 3 , 2016 along with an increase in ucaas gross margin of $ 34,351 primarily due to an increase in seats of 14 % during the current year $ 42,672 product gross margin decreased 322 % primarily due to lower costs during the current year period ( 4,256 ) usf gross margin increased slightly due to the decrease in business seats along with the acquisitions of simple signal and icore 11 increase in segment gross margin $ 38,427 while service gross margin has increased , service gross margin percentage decreased to 55.9 % for the year december31 , 2017 from 63.1 % for the year ended december 31 , 2016. the decrease in business service gross margin percentage is a result of the sale of a greater proportion of lower margin services across our business segment during the year ended december 31 , 2017 as compared to the same period in the prior year . our gross margin percentage may continue to be impacted by changes in the mix of service offerings provided to our customers across our business segment and in different geographical regions . 34 vonage annual report 2018 consumer gross margin for the years ended december 31 , 2018 , 2017 , and 2016 replace_table_token_9_th ( 1 ) includes customer premise equipment , and shipping and handling .
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results of operations the following table sets forth , as a percentage of consolidated operating revenues , our consolidated statement of income for the periods indicated : replace_table_token_6_th management 's discussion of the results of operations for the years ended december 31 , 2018 , 2017 , and 2016 the company reported income before income taxes of $ 36,525 and $ 45,793 for the years ended december 31 , 2018 and 2017 , respectively . the decrease in income before income taxes as compared to the prior year was primarily caused by higher other operating expenses of $ 31,935 as a result of increased engineering and development expenses as the company continues to increase focus on innovation along with increased general and administrative expenses associated with the acquisitions of tokbox and newvoicemedia which were completed in the second half of 2018 , partially offset by higher gross margin discussed below . the company reported income before taxes of $ 45,793 and $ 30,845 for the years ended december 31 , 2017 and 2016 , respectively . the increase in income before income taxes is largely due to a decrease in other operating expenses during the year ended december 31 , 2017 of $ 18,376 due to a reduction in sales and marketing associated with the consumer segment as part of the company 's overall strategy to focus sales growth on its business segment partially offset by lower gross margin as discussed above . the company reported net income of $ 35,728 and net loss of $ 33,933 for the years ended december 31 , 2018 and 2017 , respectively .
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our insurance subsidiaries , atlantic states insurance company ( โ atlantic states โ ) , southern insurance company of virginia ( โ southern โ ) , the peninsula insurance company and peninsula indemnity company ( collectively , โ peninsula โ ) , and michigan insurance company ( โ mico โ ) and their affiliates write personal and commercial lines of property and casualty coverages exclusively through a network of independent insurance agents in certain mid-atlantic , midwest , new england , southern and southwestern states . the personal lines products of our insurance subsidiaries consist primarily of homeowners and private passenger automobile policies . the commercial lines products of our insurance subsidiaries consist primarily of commercial automobile , commercial multi-peril and workers ' compensation policies . beginning in 2018 , we and donegal mutual implemented a number of actions to improve our financial results and enhance our operations in the future . those actions included implementing premium rate increases in many of our operating states and business lines , strengthening our loss reserves in response to changing loss reporting and litigation trends , entering into a transfer agreement to facilitate an orderly exit from the personal lines markets in seven states where we had projected continuing underwriting losses , consolidating a regional branch office into our home office , consolidating our reinsurance program and initiating a multi-year systems modernization project . donegal mutual completed the merger of mountain states mutual casualty company , or mountain states , with and into donegal mutual effective may 25 , 2017. donegal mutual was the surviving company in the merger , and mountain states ' insurance subsidiaries , mountain states indemnity company and mountain states commercial insurance company ( collectively , the โ mountain states insurance subsidiaries โ ) , became insurance subsidiaries of donegal mutual upon completion of the merger . upon completion of the merger , donegal mutual assumed all of the policy obligations of mountain states and began to market its products together with the mountain states insurance subsidiaries as the mountain states insurance group in four southwestern states . donegal mutual also entered into a 100 % quota-share reinsurance agreement with the mountain states insurance subsidiaries on the merger date . beginning with policies effective in 2021 , donegal mutual began to place the business of the mountain states insurance group into the underwriting pool we describe in โ business - history and organizational structure. โ as a result , our consolidated financial results through december 31 , 2020 excluded the results of the mountain states insurance group operations in those southwestern states . we and donegal mutual insurance company sold donegal financial services corporation ( โ dfsc โ ) to northwest bancshares , inc. ( โ northwest โ ) on march 8 , 2019 , resulting in proceeds valued at approximately $ 85.8 million in a combination of cash and northwest common stock . immediately prior to the closing of the merger , dfsc paid a dividend of approximately $ 29.2 million to us and donegal mutual . as the owner of 48.2 % of dfsc 's common stock , we received a dividend payment from dfsc of approximately $ 14.1 million and consideration from northwest valued at approximately $ 41.4 million . we recorded a gain of $ 12.7 million from the sale of dfsc in our results of operations during 2019. we sold the northwest common stock that we received as part of the consideration during 2019. this transaction represented the culmination of a banking strategy that began with the formation of dfsc in 2000. effective december 1 , 2019 , our insurance subsidiaries le mars insurance company ( โ le mars โ ) and sheboygan falls insurance company ( โ sheboygan falls โ ) merged with and into atlantic states ( the โ mergers โ ) . as a result of the mergers , the separate corporate existences of le mars and sheboygan falls ceased and atlantic states continued as the surviving insurance company . atlantic states placed the business of le mars and sheboygan falls , as their policies renewed subsequent to the effective date of the mergers , into the underwriting pool . at december 31 , 2020 , donegal mutual held approximately 42 % of our outstanding class a common stock and approximately 84 % of our outstanding class b common stock . this ownership provides donegal mutual with approximately 71 % of the combined voting power of our outstanding shares of class a common stock and our outstanding shares of class b common stock . -48- donegal mutual and atlantic states have participated in a proportional reinsurance agreement , or pooling agreement , since 1986. under the pooling agreement , donegal mutual and atlantic states contribute substantially all of their respective premiums , losses and loss expenses to the underwriting pool , and the underwriting pool , acting through donegal mutual , then allocates 80 % of the pooled business to atlantic states . thus , donegal mutual and atlantic states share the underwriting results of the pooled business in proportion to their respective participation in the underwriting pool . the operations of our insurance subsidiaries and donegal mutual are interrelated due to the pooling agreement and other factors . while maintaining the separate corporate existence of each company , our insurance subsidiaries conduct business together with donegal mutual and its insurance subsidiaries as the donegal insurance group . the donegal insurance group is not a legal entity , is not an insurance company and does not issue or administer insurance policies . rather , it is a trade name that refers to the group of insurance companies that are affiliated with donegal mutual . see โ business - history and organizational structure โ for more information regarding the pooling agreement and other transactions with our affiliates . story_separator_special_tag the establishment of appropriate liabilities is an inherently uncertain process and we can provide no assurance that our insurance subsidiaries ' ultimate liability will not exceed our insurance subsidiaries ' loss and loss expense reserves and have an adverse effect on our results of operations and financial condition . furthermore , we can not predict the timing , frequency and extent of adjustments to our insurance subsidiaries ' estimated future liabilities , because the historical conditions and events that serve as a basis for our insurance subsidiaries ' estimates of ultimate claim costs may change . as is the case for substantially all property and casualty insurance companies , our insurance subsidiaries have found it necessary in the past to increase their estimated future liabilities for losses and loss expenses in certain periods and , in other periods , their estimated future liabilities for losses and loss expenses have exceeded their actual liabilities for losses and loss expenses . changes in our insurance subsidiaries ' estimates of their liability for losses and loss expenses generally reflect actual payments and their evaluation of information received subsequent to the prior reporting period . our insurance subsidiaries recognized a decrease in their liability for losses and loss expenses of prior years of $ 12.9 million for each of 2020 and 2019. our insurance subsidiaries recognized an increase in their liability for losses and loss expenses of prior years of $ 35.6 million in 2018. our insurance subsidiaries made no significant changes in their reserving philosophy or claims management personnel , and they have made no significant offsetting changes in estimates that increased or decreased their loss and loss expense reserves in those years . the 2020 development represented 2.6 % of the december 31 , 2019 net carried reserves and resulted primarily from lower-than-expected severity in the workers ' compensation and personal automobile lines of business , partially offset by higher-than-expected severity in the commercial automobile and commercial multi-peril lines of business , for accident years prior to 2020. the majority of the 2020 development related to decreases in the liability for losses and loss expenses of prior years for atlantic states and mico . the 2019 development represented 2.7 % of the december 31 , 2018 net carried reserves and resulted primarily from lower-than-expected severity in the workers ' compensation line of business , partially offset by higher-than-expected severity in the commercial automobile and commercial multi-peril lines of business , for accident years prior to 2019. the majority of the 2019 development related to decreases in the liability for losses and loss expenses of prior years for atlantic states and mico . the 2018 development represented 9.3 % of the december 31 , 2017 net carried reserves and resulted primarily from higher-than-expected severity in the commercial multi- -50- peril , personal automobile and commercial automobile lines of business , offset by lower-than-expected severity in the workers ' compensation line of business , for accident years prior to 2018. the majority of the 2018 development related to increases in the liability for losses and loss expenses of prior years for atlantic states and southern . during 2018 , our insurance subsidiaries received new information on previously-reported commercial automobile and personal automobile claims that led our insurance subsidiaries to conclude that their prior actuarial assumptions did not fully anticipate recent changes in severity and reporting trends . our insurance subsidiaries have encountered increasing difficulties in projecting the ultimate severity of automobile losses over recent accident years , which our insurance subsidiaries attribute to worsening litigation trends and an increased delay in the reporting to our insurance subsidiaries of information with respect to the severity of claims . as a result , our insurance subsidiaries ' actuaries increased their projections of the ultimate cost of our insurance subsidiaries ' prior-year personal automobile and commercial automobile losses , and our insurance subsidiaries added $ 17.7 million to their reserves for personal automobile and $ 20.8 million to their reserves for commercial automobile for accident years prior to 2018. excluding the impact of severe weather events and the covid-19 pandemic , our insurance subsidiaries have noted stable amounts in the number of claims incurred and the number of claims outstanding at period ends relative to their premium base in recent years across most of their lines of business . however , the amount of the average claim outstanding has increased gradually over the past several years due to various factors such as rising medical loss costs and increased litigation trends . we have also experienced a general slowing of settlement rates in litigated claims . our insurance subsidiaries could have to make further adjustments to their estimates in the future . however , on the basis of our insurance subsidiaries ' internal procedures , which analyze , among other things , their prior assumptions , their experience with similar cases and historical trends such as reserving patterns , loss payments , pending levels of unpaid claims and product mix , as well as court decisions , economic conditions and public attitudes , we believe that our insurance subsidiaries have made adequate provision for their liability for losses and loss expenses . atlantic states ' participation in the pool with donegal mutual exposes atlantic states to adverse loss development on the business of donegal mutual that the pool includes . however , pooled business represents the predominant percentage of the net underwriting activity of both companies , and donegal mutual and atlantic states share proportionately any adverse risk development relating to the pooled business . the business in the pool is homogeneous and each company has a pro-rata share of the entire pool .
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results of operations year ended december 31 , 2020 compared to year ended december 31 , 2019 net premiums earned our insurance subsidiaries ' net premiums earned decreased to $ 742.0 million for 2020 , a decrease of $ 14.1 million , or 1.9 % , compared to 2019 , primarily reflecting decreases in personal lines premiums written during 2019 and 2020. our insurance subsidiaries earn premiums and recognize them as income over the terms of the policies they issue . such terms are generally one year or less in duration . therefore , increases or decreases in net premiums earned generally reflect increases or decreases in net premiums written in the preceding twelve-month period compared to the same period one year earlier . net premiums written our insurance subsidiaries ' 2020 net premiums written decreased 1.4 % to $ 742.1 million , compared to $ 752.6 million for 2019. we attribute the decrease primarily to net attrition in our personal lines segment that resulted from increased pricing on renewal policies and underwriting measures our insurance subsidiaries implemented to slow new policy growth and improve profitability , offset somewhat by the impact of premium rate increases and an increase in the writing of new accounts in commercial lines of business . commercial lines net premiums written increased $ 21.1 million , or 5.2 % , for 2020 compared to 2019. personal lines net premiums written decreased $ 31.6 million , or 9.1 % , for 2020 compared to 2019. investment income for 2020 , our net investment income was unchanged at $ 29.5 million , as an increase in average invested assets offset a modest decrease in the average investment yield . net investment gains our net investment gains for 2020 and 2019 were $ 2.8 million and $ 22.0 million , respectively . the net investment gains for 2020 were primarily related to an increase in unrealized gains within our equity securities portfolio . the net investment gains for 2019 included $ 12.7
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in november 2016 , the fasb issued asu 2016-18 - statement of cash flows ( topic 230 ) : restricted cash ( a consensus of the fasb emerging issues task force ) . the amendments in this update apply to all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows . the amendments in this update require that a statement of cash flows explain the change during the period in the total of cash , cash equivalents , and amounts generally described as restricted cash or restricted cash equivalents . therefore , amounts generally described as story_separator_special_tag forward-looking statements certain statements in this form 10-k , which are not historical fact , are forward-looking statements within the meaning of section 27a of the securities act , section 21e of the exchange act , and the private securities litigation reform act of 1995. words such as โ anticipate โ , โ estimates โ , โ may โ , โ feels โ , โ expects โ , โ believes โ , โ plans โ , โ will โ , โ would โ , โ should โ , โ could โ and similar expressions are intended to identify these forward-looking statements but are not the exclusive means of identifying such statements . forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially . factors that might cause such a difference include , but are not limited to : ( 1 ) peoples ' ability to leverage the system conversion ( including the related core operating systems , data systems and products ) without complications or difficulties that may otherwise result in the loss of customers , operational problems or one-time costs currently not anticipated to arise in connection with such conversion ; ( 2 ) the success , impact , and timing of the implementation of peoples ' business strategies , including the successful integration of acquisitions and the expansion of consumer lending activity ; ( 3 ) peoples ' ability to integrate future acquisitions which may be unsuccessful , or may be more difficult , time-consuming or costly than expected ; ( 4 ) peoples may issue equity securities in connection with future acquisitions , which could cause ownership and economic dilution to peoples ' current shareholders ; ( 5 ) local , regional , national and international economic conditions and the impact they may have on peoples , its customers and its counterparties , and peoples ' assessment of the impact , which may be different than anticipated ; ( 6 ) competitive pressures among financial institutions or from non-financial institutions may increase significantly , including product and pricing pressures , changes to third-party relationships and revenues , and peoples ' ability to attract , develop and retain qualified professionals ; ( 7 ) changes in the interest rate environment due to economic conditions and or the fiscal policies of the u.s. government and federal reserve board , which may adversely impact interest rates , interest margins , loan demand and interest rate sensitivity ; ( 8 ) changes in prepayment speeds , loan originations , levels of non-performing assets , delinquent loans and charge-offs , which may be less favorable than expected and adversely impact the amount of interest income generated ; ( 9 ) adverse changes in economic conditions and or activities , including , but not limited to , continued economic uncertainty in the u.s. , the european union ( including the uncertainty created by the june 23 , 2016 referendum by british voters to exit the european union ) , asia , and other areas , which could decrease sales volumes and increase loan delinquencies and defaults ; ( 10 ) uncertainty regarding the nature , timing and effect of legislative or regulatory changes or actions , promulgated and to be promulgated by governmental and regulatory agencies including the odfi , the fdic , the occ , the federal reserve board and the cfpb , which may subject peoples , its subsidiaries , or one or more acquired companies to a variety of new and more stringent legal and regulatory requirements which adversely affect their respective businesses , including in particular the rules and regulations promulgated and to be promulgated under the dodd-frank wall street reform and consumer protection act of 2010 , and the basel iii regulatory capital reform ; ( 11 ) deterioration in the credit quality of peoples ' loan portfolio , which may adversely impact the provision for loan losses ; ( 12 ) changes in accounting standards , policies , estimates or procedures which may adversely affect peoples ' reported financial condition or results of operations ; ( 13 ) peoples ' assumptions and estimates used in applying critical accounting policies , which may prove unreliable , inaccurate or not predictive of actual results ; ( 14 ) adverse changes in the conditions and trends in the financial markets , including political developments , which may adversely affect the fair value of securities within peoples ' investment portfolio , the interest rate 28 sensitivity of peoples ' consolidated balance sheet , and the income generated by peoples ' trust and investment activities ; ( 15 ) peoples ' ability to receive dividends from its subsidiaries ; ( 16 ) peoples ' ability to maintain required capital levels and adequate sources of funding and liquidity ; ( 17 ) the impact of new minimum capital thresholds established as a part of the implementation of basel iii ; ( 18 ) the impact of larger or similar sized financial institutions encountering problems , which may adversely affect the banking industry and or peoples ' business generation and retention , funding and liquidity ; ( 19 ) the costs and effects of regulatory and legal developments , including the outcome of potential regulatory or other governmental inquiries and legal proceedings and results of regulatory examinations ; ( 20 ) peoples ' ability to secure confidential information through the use of computer systems and telecommunications networks , including those of peoples ' third-party vendors and other service providers , story_separator_special_tag ( `` raymond james bank '' ) , which provides peoples with a revolving line of credit in the maximum aggregate principal amount of $ 15 million , for the purpose of : ( i ) to the extent that any amounts remained outstanding , paying off the then outstanding $ 15 million revolving line of credit to peoples pursuant to the u.s. bank loan agreement ; ( ii ) making acquisitions ; ( iii ) making stock repurchases ; ( iv ) working capital needs ; and ( v ) other general corporate purposes . on march 4 , 2016 , peoples paid upfront fees for the establishment of a revolving line of credit agreement of $ 70,600 , representing 0.47 % of the loan commitment under the rjb credit agreement . โฆ on january 6 , 2016 , peoples bank acquired a small financial advisory book of business in marietta , ohio for cash consideration of $ 0.5 million . this acquisition did not materially impact peoples ' financial position , results of operations or cash flows . โฆ during 2015 , peoples recorded aggregate charge-offs of $ 13.1 million on a single , impaired commercial loan relationship consisting of four impaired loans . as of december 31 , 2015 , peoples net recorded investment with respect to these loans was zero . โฆ on december 30 , 2015 , peoples announced that peoples bank , national association , the banking subsidiary of peoples , converted from a national banking association into an ohio state-chartered bank which is a member of the federal reserve system . as a result of the charter conversion , the legal name of peoples ' banking subsidiary was changed to `` peoples bank '' and the converted bank operates under the trade name and federally registered service mark `` peoples bank . '' additionally , peoples ' banking subsidiary saw a reduction in the annual cost associated with regulatory examination fees commencing in 2016 . โฆ on november 3 , 2015 , peoples announced that its board of directors approved and adopted a share repurchase program authorizing peoples to purchase , from time to time , up to an aggregate of $ 20 million of its outstanding common shares . as of december 31 , 2016 , peoples had repurchased an aggregate of 279,770 common shares with a total cost of $ 5.0 million . all of these common shares were purchased in the first half of 2016 with none being purchased in 2015 . โฆ on july 24 , 2015 , peoples repaid the principal balance of the $ 12.0 million term loan then outstanding under the u.s. bank loan agreement . there were no early termination fees associated with the repayment . the revolving credit loan commitment available under the u.s. bank loan agreement remained outstanding until the termination of the u.s. bank loan agreement effective march 2 , 2016 , as described above . โฆ on july 21 , 2015 , peoples insurance acquired an insurance agency and related customer accounts in the lebanon , ohio area for total cash consideration of $ 0.9 million , and recorded $ 0.5 million of customer relationship intangibles and $ 0.4 million of goodwill . 30 โฆ in december 2016 , the federal reserve board raised short-term rates , including the federal funds rate and the discount rate by 0.25 % , to a range of 0.50 % to 0.75 % for the federal funds rate and to 1.25 % for the discount rate . the federal reserve board had previously maintained its target federal funds rate at a level of 0.25 % to 0.50 % since december 2015 and had maintained the discount rate at 1.00 % since december 2015. the federal reserve board has indicated the possibility that these short-term rates could again be raised in 2017. the impact of these transactions , where material , is discussed in the applicable sections of this management 's discussion and analysis of financial condition and results of operations . critical accounting policies the accounting and reporting policies of peoples conform to us gaap and to general practices within the financial services industry . a summary of significant accounting policies is contained in note 1 of the notes to the consolidated financial statements . while all of these policies are important to understanding the consolidated financial statements , certain accounting policies require management to exercise judgment and make estimates or assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes . these estimates and assumptions are based on information available as of the date of the consolidated financial statements ; accordingly , as this information changes , the consolidated financial statements could reflect different estimates or assumptions . management has identified the accounting policies described below as those that , due to the judgments , estimates and assumptions inherent in the policies , are critical to an understanding of peoples ' consolidated financial statements and management 's discussion and analysis of financial condition and results of operations . interest income recognition interest income on loans and investment securities is recognized by methods that result in level rates of return on principal amounts outstanding , including yield adjustments resulting from the amortization of loan costs and premiums on investment securities and accretion of loan fees and discounts on investment securities . since mortgage-backed securities comprise a sizable portion of peoples ' investment portfolio , a significant increase in principal payments on those securities could impact interest income due to the corresponding acceleration of premium amortization or discount accretion . peoples discontinues the accrual of interest on a loan when conditions cause management to believe collection of all or any portion of the loan 's contractual interest is doubtful . such conditions may include the borrower being 90 days or more past due on any contractual payments or current information regarding the borrower 's financial condition and repayment ability . all unpaid accrued interest deemed uncollectable is reversed , which would reduce peoples ' net interest income .
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executive summary net income for the year ended december 31 , 2016 was $ 31.2 million , compared to $ 10.9 million in 2015 and $ 16.7 million in 2014 , representing earnings per diluted common share of $ 1.71 , $ 0.61 and $ 1.35 , respectively . the increase in earnings during 2016 was driven by a decrease in the provision for loan losses of $ 10.6 million , primarily due to the control of credit quality and associated credit costs . in 2016 , earnings also benefited from a decrease in acquisition-related charges of $ 10.7 million compared to 2015 , which was partially offset by costs related to the conversion of peoples ' core banking system of $ 1.3 million . the increase in the provision for loan losses and acquisition-related charges in 2015 were the primary reasons for the decrease in net income for the year ended december 31 , 2015 compared to 2014. in 2016 , peoples had a provision for loan losses of $ 3.5 million , a decrease of $ 10.6 million compared to the $ 14.1 million that was recorded in 2015. the decrease in 2016 from 2015 was primarily related to peoples recording net charge-offs of $ 1.9 million compared to $ 15.2 million for 2016 and 2015 , respectively . the charge-off in 2015 was primarily due to the charge-off of one large commercial loan relationship . the provision for loan losses represented amounts needed , in management 's opinion , to maintain the appropriate level of the allowance for loan losses . net interest income grew 7 % to $ 104.9 million in 2016 mostly due to higher loan balances . in 2015 , net interest income grew 40 % to $ 97.6 million , primarily due to acquisitions . net interest margin was 3.54 % in 2016 , higher than the 3.53 % in 2015 and 3.45 % in 2014 .
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you should read this discussion and analysis along with our consolidated financial statements and related notes thereto at april 28 , 2017 and april 29 , 2016 and for each of the three fiscal years ended april 28 , 2017 ( fiscal year 2017 ) , april 29 , 2016 ( fiscal year 2016 ) , and april 24 , 2015 ( fiscal year 2015 ) . our fiscal year-end is the last friday in april , and therefore , the total weeks in a fiscal year may fluctuate between 52 and 53 weeks . fiscal years 2017 and 2015 were 52-week years . fiscal year 2016 was a 53-week year , with the additional week occurring in the first quarter . early in the week of june 19 , 2017 , we experienced a global information technology systems interruption that affected our ability to manufacture devices and fulfill orders from customers in a large portion of our business . our systems have now been fully restored . at this time , we do not believe our fiscal year 2018 results of operations or financial condition will be materially affected by this incident . on january 26 , 2015 , the company acquired covidien and medtronic , inc. ( collectively , the transactions ) . following the consummation of the transactions , medtronic , inc. and covidien became subsidiaries of the company . in connection with the transactions , the company became the successor registrant to medtronic , inc. and re-registered as a public limited company organized under the laws of ireland . for fiscal year 2015 , the results of operations of covidien are reflected in the company 's results of operations for only the fourth quarter due to the timing of the acquisition of covidien , which affects comparability throughout this annual report on form 10-k. organization of financial information management 's discussion and analysis provides material historical and prospective disclosures designed to enable investors and other users to assess our financial condition and results of operations . statements that are forward-looking and not historical in nature are subject to risks and uncertainties . see `` item 1a . risk factors '' in this annual report on form 10-k and `` cautionary factors that may affect future results '' in this management 's discussion and analysis for more information . the consolidated financial statements are presented within `` item 8. financial statements and supplementary data '' in this annual report on form 10-k and include the consolidated statements of income , consolidated statements of comprehensive income , consolidated balance sheets , consolidated statements of equity , consolidated statements of cash flows , and the related notes , which are an integral part of the consolidated financial statements . financial trends throughout this management 's discussion and analysis , we present certain financial measures that management uses to evaluate the operational performance of the company and as a basis for strategic planning ; however , such financial measures are not presented in our financial statements prepared in accordance with generally accepted accounting principles in the united states ( u.s. ) ( u.s. gaap ) . these financial measures are considered `` non-gaap financial measures . '' management uses non-gaap financial measures to facilitate management 's review of the operational performance of the company and as a basis for strategic planning . management believes that non-gaap financial measures provide useful information to investors regarding the underlying business trends and performance of the company 's ongoing operations and are useful for period over period comparisons of such operations . the non-gaap financial measures reflect an additional way of viewing aspects of the company 's operations . investors should not consider results reflecting non-gaap financial measures in isolation from , or as a substitute for , financial information prepared in accordance with u.s. gaap and are cautioned that medtronic may calculate results reflecting non-gaap financial measures in a manner that is different from other companies . the gaap to non-gaap reconciliation presents non-gaap financial measures that exclude the impact of charges or gains that contribute to or reduce earnings and that may affect financial trends , but which include charges or benefits that result from transactions or events that management believes may or may not recur with similar materiality or impact to our operations in future periods ( non-gaap adjustments ) . in the event there is a non-gaap adjustment recognized in our operating results , the tax cost or benefit attributable to that item is separately calculated . because the effective rate may be significantly affected by the non-gaap adjustments that take place during the period , we often refer to our tax rate using both the effective rate and the non-gaap nominal tax rate ( non-gaap nominal tax rate ) . the non-gaap nominal tax rate is calculated as the provision for income taxes , adjusted for the impact of non-gaap adjustments , as a percentage of income from operations before income taxes , excluding non-gaap adjustments . 39 free cash flow is a non-gaap financial measure calculated by subtracting additions to property , plant , and equipment from net cash provided by operating activities . refer to the โ gaap to non-gaap reconciliation , '' `` income taxes , '' and `` summary of cash flows '' sections for reconciliations of our results of operations prepared in accordance with u.s. gaap to the adjusted non-gaap financial measures considered by management . executive level overview medtronic is among the world 's largest medical technology , services , and solutions companies - alleviating pain , restoring health , and extending life for millions of people around the world . we employ more than 91,000 full-time employees worldwide , serving physicians , hospitals , and patients in approximately 160 countries . our primary products include those for cardiac rhythm disorders , cardiovascular disease , advanced and general surgical care , respiratory and monitoring solutions , neurological disorders , spinal conditions and musculoskeletal trauma , urological and digestive disorders , and ear , nose , and throat and diabetes conditions . story_separator_special_tag we base our estimates on historical experience and on various 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 . our critical accounting estimates include the following : revenue recognition rebates are estimated based on sales terms , historical experience , and trend analysis . in estimating rebates , we consider the lag time between the point of sale and the payment of the rebate claim , contractual commitments , including stated rebate rates , and other relevant information . we adjust reserves to reflect differences between estimated and actual experience and recognize such adjustment as a reduction of sales in the period of adjustment . adjustments to recorded reserves have not been significant . price adjustment rebates charged against gross sales were $ 3.0 billion and $ 2.9 billion in fiscal years 2017 and 2016 , respectively , and $ 679 million for the fourth quarter of fiscal year 2015. litigation contingencies we are involved in a number of legal actions involving product liability , intellectual property disputes , shareholder related matters , environmental proceedings , income tax disputes , and governmental proceedings and investigations in the u.s. and around the world . the outcomes of these legal actions are not within our complete control and may not be known for prolonged periods of time . in some actions , the enforcement agencies or private claimants seek damages , as well as other civil or criminal remedies ( including injunctions barring the sale of products that are the subject of the proceeding ) , that could require significant expenditures or result in lost revenues or limit our ability to conduct business in the applicable jurisdictions . estimates of probable losses resulting from litigation and governmental proceedings involving us are inherently difficult to predict , particularly when the matters are in early procedural stages , with incomplete scientific facts or legal discovery ; involve unsubstantiated or indeterminate claims for damages ; potentially involve penalties , fines , or punitive damages ; or could result in a change in business practice . our significant legal proceedings are discussed in note 20 to the consolidated financial statements in `` item 8. financial statements and supplementary data '' in this annual report on form 10-k and while it is not possible to predict the outcome for 42 most of the matters discussed , we believe it is possible that costs associated with these matters could have a material adverse impact on our consolidated earnings , financial position , and or cash flows . income tax reserves we establish reserves when , despite our belief that our tax return positions are fully supportable , we believe that certain positions are likely to be challenged and that we may or may not prevail . under u.s. gaap , if we determine that a tax position is more likely than not of being sustained upon audit , based solely on the technical merits of the position , we recognize the benefit . we measure the benefit by determining the amount that is greater than 50 percent likely of being realized upon settlement . we presume that all tax positions will be examined by a taxing authority with full knowledge of all relevant information . the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across our global operations . we regularly monitor our tax positions and tax liabilities . we reevaluate the technical merits of our tax positions and recognize an uncertain tax benefit , or derecognize a previously recorded tax benefit , when there is ( i ) a completion of a tax audit , ( ii ) effective settlement of an issue ( iii ) a change in applicable tax law including a tax case or legislative guidance , or ( iv ) an expiration of the statute of limitations . significant judgment is required in accounting for tax reserves . although we believe that we have adequately provided for liabilities resulting from tax assessments by taxing authorities , positions taken by these tax authorities could have a material impact on our effective tax rate , consolidated earnings , financial position and or cash flows . valuation of intangible assets and goodwill when we acquire a business , the assets acquired and liabilities assumed are recorded at their respective fair values at the acquisition date . goodwill is the excess of the purchase price consideration over the estimated fair value of net assets of acquired businesses . intangible assets include patents , trademarks , tradenames , customer relationships , purchased technology , and ipr & d . determining the fair value of intangible assets acquired as part of a business combination requires us to make significant estimates . these estimates include the amount and timing of projected future cash flows of each project or technology , the discount rate used to discount those cash flows to present value , the assessment of the asset 's life cycle , and the consideration of legal , technical , regulatory , economic , and competitive risks . the test for goodwill impairment requires us to make several estimates about fair value , most of which are based on projected future cash flows . our estimates associated with the goodwill impairment test are considered critical due to the amount of goodwill recorded on our consolidated balance sheets and the judgment required in determining fair value , including projected future cash flows . we assess the impairment of goodwill at the reporting unit level annually in the third quarter and whenever an event occurs or circumstances change that would indicate that the carrying amount may be impaired . goodwill was $ 38.5 billion and $ 41.5 billion at april 28 , 2017 and april 29 , 2016 , respectively .
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summary of cash flows replace_table_token_18_th operating activities the $ 1.7 billion increase in net cash provided by operating activities in fiscal year 2017 as compared to fiscal year 2016 was primarily attributable to an increase in accounts receivable collections , as well as a decrease in cash paid for income taxes and interest of $ 350 million and $ 132 million , respectively , and a $ 191 million payment in fiscal year 2016 related to the covidien tax sharing agreement . the increase in cash from accounts receivable was primarily attributable to an increase in revenue . the decrease in cash paid for income taxes was primarily a result of payments made for the resolution of the kyphon acquisition-related matters , as well as covidien income tax extension payments in fiscal year 2016 . we did not make any significant tax audit settlement payments or significant extension payments in fiscal year 2017 . the decrease in cash paid for interest was the result of less debt , on average , in fiscal year 2017 as compared to fiscal year 2016 . the $ 316 million increase in net cash provided by operating activities in fiscal year 2016 as compared to fiscal year 2015 was primarily attributable to an increase in net income before depreciation and amortization , loss on debt extinguishment , and acquisition-related items of $ 2.1 billion and a decrease in certain litigation payments of $ 469 million , partially offset by an increase in cash paid for incomes taxes and interest of $ 747 million and $ 688 million , respectively . the increase in cash paid for income taxes was primarily a result of the settlement payments made for the resolution of the kyphon acquisition-related matters , covidien income tax extension payments , and the impacts from the full year of covidien results .
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2016-20 in march 2016 , april 2016 , may 2016 , and december 2016 , respectively , to help provide interpretive clarifications on the new guidance in asc topic 606. autodesk currently plans to adopt asu 2014-09 as of february 1 , 2018 , using the modified retrospective transition method . in terms of autodesk 's evaluation story_separator_special_tag the discussion in our md & a and elsewhere in this form 10-k contains trend analyses and other 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. forward-looking statements are any statements that look to future events and consist of , among other things , our business strategies , future financial results ( including by product type and geography ) and subscriptions , the effectiveness of our efforts to successfully manage transitions to new business models and markets , our expectations regarding the continued transition of our business model , our ability to increase our subscription base , expected market trends , including the growth of cloud and mobile computing , the effect of unemployment , the availability of credit , our expectations for our restructuring , the effects of mixed global economic conditions , the effects of revenue recognition , expected trends in certain financial metrics , including expenses , the impact of acquisitions and investment activities , expectations regarding our cash needs , the effects of fluctuations in exchange rates and our hedging activities on our financial results , our ability to successfully expand adoption of our products , our ability to gain market acceptance of new businesses and sales initiatives , and the impact of economic volatility and geopolitical activities in certain countries , particularly emerging economy countries , the timing and amount of purchases under our newly announced stock buy-back plan , and the effects of potential non-cash charges on our financial results and the resulting effect on our financial results . in addition , forward-looking statements also consist of statements involving expectations regarding product capability and acceptance , remediation to our controls environment , statements regarding our liquidity and short-term and long-term cash requirements , as well as statements involving trend analyses and statements including such words as โ may , โ โ believe , โ โ could , โ โ anticipate , โ โ would , โ โ might , โ โ plan , โ โ expect , โ and similar expressions or the negative of these terms or other comparable terminology . these forward-looking statements speak only as of the date of this annual report on form 10-k and are subject to business and economic risks . as such , our actual results could differ materially from those set forth in the forward-looking statements as a result of a number of factors , including those set forth above in item 1a , โ risk factors , โ and in our other reports filed with the u.s. securities and exchange commission . we assume no obligation to update the forward-looking statements to reflect events that occur or circumstances that exist after the date on which they were made , except as required by law . strategy autodesk makes software for people who make things . if you 've ever driven a high-performance car , admired a towering skyscraper , used a smartphone , or watched a great film , chances are you 've experienced what millions of autodesk customers are doing with our software . autodesk gives you the power to make anything . autodesk was founded during the platform transition from mainframe computers and engineering workstations to personal computers . we developed and sustained a compelling value proposition based upon desktop software for the personal computer . just as the transition from mainframes to personal computers transformed the industry over 30 years ago , we believe our industry is undergoing a similar transition from the personal computer to cloud , mobile , and social computing . to address this transition we have accelerated our move to the cloud and mobile devices and are offering more flexible licensing . our product subscriptions presently represent a hybrid of desktop software and cloud-based functionality , which provides a device-independent , collaborative design workflow for designers and their stakeholders . our cloud service offerings , for example , bim 360 , shotgun , fusion 360 , and autocad 360 pro , provide tools , including mobile and social capabilities , to help streamline design , collaboration , and data management processes . we believe that customer adoption of these new offerings will continue to grow as customers across a range of industries begin to take advantage of the scalable computing power and flexibility provided through these new services . our strategy is to lead the industries we serve to cloud-based technologies and business models . this entails both a technological shift and a business model shift . as part of the transition , we discontinued selling new perpetual licenses of most individual software products effective february 1 , 2016 , and discontinued selling new perpetual licenses of suites while introducing industry collections effective august 1 , 2016. industry collections allow access to a broad set of products and services that exceeds those previously available in suites - simplifying the customer ability to get access to a complete set of tools for their industry . we now offer subscriptions for individual products and industry collections , cloud service offerings , and flexible enterprise business agreements ( `` new model subscription offerings '' ) . these offerings are designed to give our customers more flexibility with how they use our products and service offerings and to attract a broader range of customers , such as project-based users and small businesses . with the discontinuation of the sale of most perpetual licenses , we have accelerated our transition away from selling a mix of perpetual licenses and term-based product subscriptions toward a single subscription model . story_separator_special_tag 2017 form 10-k 37 our strategy depends upon a number of assumptions to successfully make the transition toward new cloud and mobile platforms , including : the related technology and business model shifts ; making our technology available to mainstream markets ; leveraging our large global network of distributors , resellers , third-party developers , customers , educational institutions , and students ; improving the performance and functionality of our products ; and adequately protecting our intellectual property . if the outcome of any of these assumptions differs from our expectations , we may not be able to implement our strategy , which could potentially adversely affect our business . for further discussion regarding these and related risks , see part i , item 1a , โ risk factors . โ critical accounting policies and estimates our consolidated financial statements are prepared in conformity with u.s. generally accepted accounting principles . in preparing our consolidated financial statements , we make assumptions , judgments , and estimates that can have a significant impact on amounts reported in our consolidated financial statements . we base our assumptions , judgments , and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances . actual results could differ materially from these estimates under different assumptions or conditions . we regularly reevaluate our assumptions , judgments , and estimates . our significant accounting policies are described in note 1 , โ business and summary of significant accounting policies , โ in the notes to consolidated financial statements . we believe that of all our significant accounting policies , the following policies involve a higher degree of judgment and complexity . accordingly , these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations . revenue recognition . we recognize revenue when persuasive evidence of an arrangement exists , delivery has occurred or services have been rendered , the price is fixed or determinable , and collection is probable . however , determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue we report . for multiple element arrangements containing only software and software-related elements , we allocate the sales price among each of the deliverables using the residual method , under which revenue is allocated to undelivered elements based on our vendor-specific objective evidence ( โ vsoe โ ) of fair value . vsoe is the price charged when an element is sold separately or a price set by management with the relevant authority . if we do not have vsoe of an undelivered software license , we defer revenue recognition on the entire sales arrangement until all elements for which we do not have vsoe are delivered . if we do not have vsoe for undelivered product subscriptions , maintenance or services , the revenue for the arrangement is recognized over the longest contractual service period in the arrangement . we are required to exercise judgment in determining whether vsoe exists for each undelivered element based on whether our pricing for these elements is sufficiently consistent . for multiple elements arrangements involving non-software elements , including cloud subscription services , our revenue recognition policy is based upon the accounting guidance contained in accounting standards codification ( `` asc '' ) 605 , revenue recognition . for these arrangements , we first allocate the total arrangement consideration based on the relative selling prices of the software group of elements as a whole and to the non-software elements . we then further allocate consideration within the software group to the respective elements within that group using the residual method as described above . we exercise judgment and use estimates in connection with the determination of the amount of revenue to be recognized in each accounting period . we allocate the total arrangement consideration among the various elements based on a selling price hierarchy . the selling price for a deliverable is based on its vsoe if available , third-party evidence ( `` tpe '' ) if vsoe is not available , or the best estimated selling price ( `` besp '' ) if neither vsoe nor tpe is available . besp represents the price at which autodesk would transact for the deliverable if it were sold regularly on a standalone basis . to establish besp for those elements for which neither vsoe nor tpe are available , we perform a quantitative analysis of pricing data points for historical standalone transactions involving such elements for a twelve-month period . as part of this analysis , we monitor and evaluate the besp against actual pricing to ensure that it continues to represent a reasonable estimate of the standalone selling price , considering several other external and internal factors including , but not limited to , pricing and discounting practices , contractually stated prices , the geographies in which we offer our products and services , and the type of customer ( i.e . distributor , value-added reseller , and direct end user , among others ) . we analyze besp at least annually or on a more frequent basis if a significant change in our business necessitates a more timely analysis or if we experience significant variances in our selling prices . in situations when we have multiple contracts with a single counterparty , we use the guidance in asc 985-605 to evaluate both the form and the substance of the arrangements to determine if they should be combined and accounted for as one arrangement or as separate arrangements . 2017 form 10-k 38 our assessment of the likelihood of collection is also a critical factor in determining the timing of revenue recognition . if we do not believe that collection is probable , the revenue will be deferred until payment is received .
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results of operations replace_table_token_8_th ( 1 ) prior periods have been adjusted to conform with current period 's presentation . fiscal 2017 net revenue compared to fiscal 2016 net revenue subscription revenue our subscription revenue consists of three components : ( 1 ) maintenance plan revenue from our perpetual software products ; ( 2 ) maintenance revenue from our term-based product subscriptions and flexible enterprise business agreements ; and ( 3 ) revenue from our cloud service offerings . our maintenance plan provides our customers with a cost effective and predictable budgetary option to obtain the productivity benefits of our new releases and enhancements when and if released during the term of their contracts . under our maintenance plan , customers are eligible to receive unspecified upgrades when and if available , and online support . we recognize maintenance plan revenue over the term of the agreements , generally between one and three years . with the discontinuation of our perpetual license sales , we no longer offer new maintenance subscriptions and expect our maintenance subscription revenue to decline over time . our flexible enterprise business agreements are designed to give our customers increased flexibility with how they use our products and service offerings and to attract a broader range of customers such as project-based users and small businesses . we recognize maintenance revenue from these enterprise agreements ratably over their contract terms . revenue for our cloud service offerings is recognized ratably over the contract term commencing with the date our service is made available to customers and when all other revenue recognition criteria have been satisfied . subscription revenue increased 1 % during fiscal 2017 as compared to fiscal 2016 primarily due to a 39 % increase in new model subscription revenue , partially offset by a 3 % decrease in maintenance plan revenue .
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any fees received at the time of sale or syndication are recognized as part of investment income . asset management fees are recognized story_separator_special_tag overview sl green realty corp. , which is referred to as sl green or the company , a maryland corporation , and sl green operating partnership , l.p. , which is referred to as slgop or the operating partnership , a delaware limited partnership , were formed in june 1997 for the purpose of combining the commercial real estate business of s.l . green properties , inc. and its affiliated partnerships and entities . the company is a self-managed real estate investment trust , or reit , with in-house capabilities in property management , acquisitions and dispositions , financing , development and redevelopment , construction and leasing . unless the context requires otherwise , all references to `` we , '' `` our '' and `` us '' means the company and all entities owned or controlled by the company , including the operating partnership . reckson associates realty corp. , or reckson , and reckson operating partnership , l.p. or rop , are wholly-owned subsidiaries of the sl green realty corp. the following discussion related to our consolidated financial statements should be read in conjunction with the financial statements appearing in item 8 of this annual report on form 10-k. the new york city commercial real estate market continued to strengthen in 2015 , and we took advantage of this strengthening market in improving occupancies and deploying capital in the borough of manhattan to strategically position the company for future growth . leasing and operating in 2015 , our same-store manhattan office property occupancy based on leases signed increased to 97.1 % from 95.7 % in the prior year . we signed office leases in manhattan encompassing approximately 2.3 million square feet , of which approximately 0.9 million square feet represented office leases that replaced previously occupied space . our mark-to-market on these approximately 0.9 million square feet of signed manhattan office leases that replaced previously occupied space was 15.3 % for 2015. according to cushman & wakefield , new leasing activity in manhattan in 2015 totaled approximately 28.2 million square feet . of the total 2015 leasing activity in manhattan , the midtown submarket accounted for approximately 18.5 million square feet , or approximately 65.6 % . midtown 's overall office vacancy decreased from 9.3 % at december 31 , 2014 to 8.5 % at december 31 , 2015. overall average asking rents in manhattan increased from $ 67.70 per square foot at december 31 , 2014 to $ 71.58 per square foot at december 31 , 2015. midtown manhattan average asking rents increased from $ 75.14 per square foot at december 31 , 2014 to $ 76.65 per square foot at december 31 , 2015. the midtown south average asking rent rose 14.7 % year-over-year to $ 69.66 per square foot while downtown average asking rents increased 16.7 % year-over-year to $ 59.58 per square foot . acquisition and disposition activity overall manhattan sales volume increased by 37.3 % in 2015 to $ 57.8 billion as compared to $ 42.1 billion in 2014. consistent with our multi-faceted approach to property acquisitions , we were able to source transactions during 2015 that provided both stable cash flows and value enhancement opportunities , including the acquisition of consolidated interests in three office properties , one retail property and two retail and residential mixed-use properties , representing total gross asset value of $ 3.1 billion . we also continued to take advantage of significant interest by both international and domestic institutions and individuals seeking ownership interests in manhattan properties to sell assets , disposing of properties that were non-core or had more limited growth opportunities , and raising efficiently priced capital for reinvestment or debt reduction . during the year , we sold our interest in 140-150 grand street , 570 & 574 fifth avenue , 120 west 45th street , 131-137 spring street , and 180 maiden lane and contracted for the sale of our interests in 885 third avenue , 248-252 bedford avenue , and 33 beekman street . debt and preferred equity in 2014 and 2015 , in our debt and preferred equity portfolio we continued to focus on the origination of financings , typically in the form of preferred equity and mezzanine debt , for owners or acquirers seeking higher leverage than is available from traditional lending sources who continue to lend at modest leverage levels . this provided us with an opportunity to fill a need for additional debt by providing more modest amounts of leverage , while achieving attractive risk adjusted returns to us on the investments and receiving a significant amount of additional information on the manhattan market . the typical investments made by us during 2014 and 2015 were to reputable owners or acquirers , and at leverage levels which are senior to sizable equity investments by the sponsors . during 2015 , our debt and preferred equity activities included purchases and originations , inclusive of advances under 40 future funding obligations , discount and fee amortization , and paid-in-kind interest , net of premium amortization , of $ 781.4 million , and sales , redemption and participations of $ 520.2 million . for descriptions of significant activities in 2015 , refer to `` part i , item 1. business - highlights from 2015 '' . critical accounting policies our discussion and analysis of financial condition and results of operations is based on our consolidated financial statements , which have been prepared in accordance with accounting principles generally accepted in the united states . the preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets , liabilities , and contingencies as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods . we evaluate our assumptions and estimates on an ongoing basis . story_separator_special_tag we amortize the amount allocated to the values associated with in-place leases over the expected term of the associated lease , which generally ranges from 1 to 14 years . if a tenant vacates its space prior to the contractual termination of the lease and no rental payments are being made on the lease , any unamortized balance of the related intangible will be written off . the tenant improvements and origination costs are amortized as an expense over the remaining life of the lease ( or charged against earnings if the lease is terminated prior to its contractual expiration date ) . we assess fair value of the leases based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information . estimates of future cash flows are based on a number of factors including the historical operating results , known trends , and market/economic conditions that may affect the property . to the extent acquired leases contain fixed rate renewal options that are below-market and determined to be material , we amortize such below-market lease value into rental income over the renewal period . investments in unconsolidated joint ventures we account for our investments in unconsolidated joint ventures under the equity method of accounting in cases where we exercise significant influence over , but do not control , these entities and are not considered to be the primary beneficiary . we consolidate those joint ventures that we control or which are vies and where we are considered to be the primary beneficiary . in all these joint ventures , the rights of the joint venture partner are both protective as well as participating . unless we are determined to be the primary beneficiary in a vie , these participating rights preclude us from consolidating these vie entities . these investments are recorded initially at cost , as investments in unconsolidated joint ventures , and subsequently adjusted for equity in net income ( loss ) and cash contributions and distributions . equity in net income ( loss ) from unconsolidated joint ventures is allocated based on our ownership or economic interest in each joint venture . when a capital event ( as defined in each joint venture agreement ) such as a refinancing occurs , if return thresholds are met , future equity in net income will be allocated at our increased economic interest . we recognize incentive income from unconsolidated real estate joint ventures as income to the extent it is earned and not subject to a clawback feature . distributions we receive from unconsolidated real estate joint ventures in excess of our basis in the investment are recorded as offsets to our investment balance if we remain liable for future obligations of the joint venture or may otherwise be committed to provide future additional financial support . none of the joint venture debt is recourse to us , except for $ 18.4 million which we guarantee at 1 joint venture and performance guarantees under master leases at two other joint ventures . see note 6 , `` investments in unconsolidated joint ventures , '' in the accompanying consolidated financial statements . we assess our investments in unconsolidated joint ventures for recoverability , and if it is determined that a loss in value of the investment is other than temporary , we write down the investment to its fair value . we evaluate our equity investments for impairment based on the joint venture 's projected discounted cash flows . we do not believe that the values of any of our equity investments were impaired at december 31 , 2015 . we may originate loans for real estate acquisition , development and construction where we expect to receive some of the residual profit from such projects . when the risk and rewards of these arrangements are essentially the same as an investor or joint venture partner , we account for these arrangements as real estate investments under the equity method of accounting for investments . otherwise , we account for these arrangements consistent with our loan accounting for our debt and preferred equity investments . revenue recognition rental revenue is recognized on a straight-line basis over the term of the lease . the excess of rents recognized over amounts contractually due pursuant to the underlying leases are included in deferred rents receivable on the consolidated balance sheets . we establish , on a current basis , an allowance for future potential tenant credit losses , which may occur against this account . the balance reflected on the consolidated balance sheets is net of such allowance . we record a gain on sale of real estate when title is conveyed to the buyer , subject to the buyer 's financial commitment being sufficient to provide economic substance to the sale and provided that we have no substantial economic involvement with the buyer . interest income on debt and preferred equity investments is accrued based on the outstanding principal amount and contractual terms of the instruments and when , in the opinion of management , it is deemed collectible . some debt and preferred equity investments provide for accrual of interest at specified rates , which differ from current payment terms . interest is recognized on such loans at the accrual rate subject to management 's determination that accrued interest is ultimately collectible , based on the 42 underlying collateral and operations of the borrower . if management can not make this determination , interest income above the current pay rate is recognized only upon actual receipt . deferred origination fees , original issue discounts and loan origination costs , if any , are recognized as an adjustment to the interest income over the terms of the related investments using the effective interest method . fees received in connection with loan commitments are also deferred until the loan is funded and are then recognized over the term of the loan as an adjustment to yield .
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results of operations comparison of the year ended december 31 , 2015 to the year ended december 31 , 2014 the following comparison for the year ended december 31 , 2015 , or 2015 , to the year ended december 31 , 2014 , or 2014 , makes reference to the following : ( i ) the effect of the โ same-store properties , โ which represents all operating properties owned by us at january 1 , 2014 and still owned by us in the same manner at december 31 , 2015 ( same-store properties totaled 54 of our 75 consolidated operating properties , representing 69.5 % of our share of annualized cash rent ) , ( ii ) the effect of the โ acquisition properties , โ which represents all properties or interests in properties acquired in 2015 and 2014 and all non-same-store properties , including properties that are under development , redevelopment or deconsolidated during the period , and ( iii ) โ other , โ which represents corporate level items not allocable to specific properties , as well as the service corporation and eemerge inc. any assets sold or held for sale are excluded from the income from continuing operations and from the following discussion . replace_table_token_25_th rental , escalation and reimbursement revenues rental revenues increased primarily as a result of the properties acquired ( $ 107.0 million ) , which included the consolidation of 388-390 greenwich street ( $ 58.1 million ) , as discussed below , and the acquisition of 11 madison avenue ( $ 33.9 million ) , an 45 increase in occupancy at our same-store properties ( $ 33.8 million ) and an increase in occupancy at two properties that were placed into service ( $ 9.2 million ) . this increase was partially offset by vacating the properties that comprise the one vanderbilt development site ( $ 16.6 million ) . in may 2014 , we acquired our joint venture partner 's interest in 388-390 greenwich street thereby assuming full ownership of this triple net lease property .
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while the traditional focus of our cutting-edge technology has been on the e & p industry , we are now broadening and diversifying our business into relevant adjacent markets such as offshore logistics , military and marine robotics . leveraging innovative technologies , we create value through data capture , analysis and optimization to enhance companies ' critical decision-making abilities and returns . our e & p offerings are focused on improving decision-making , enhancing reservoir management and optimizing offshore operations . we provide our services and products through three business segments โ e & p technology & services , operations optimization and ocean bottom integrated technologies . for a full discussion of our business , see part i , item 1 . โ business . โ macroeconomic conditions demand for our services and products is cyclical and dependent upon activity levels in the oil and gas industry , particularly our customers ' willingness to invest capital in the exploration for oil and natural gas . our customers ' capital spending programs are generally based on their outlook for near-term and long-term commodity prices , economic growth , commodity demand and estimates of resource production . third-party reports now indicate that global exploration and production spending is expected to increase by 8 % in 2019 , consistent with 8 % in 2018 and up from the 4 % growth of 2017. this is an improvement from the double-digit declines sustained from 2014 to 2016. in addition , this is the second consecutive year that international spending is expected to increase , where our offerings are more relevant . shale production has dominated activity during the downturn due to its competitive break-even prices and short payback period compared to conventional exploration . however , we believe that investment in conventional resources during the next decade will be required to meet longer-term demand . we 're starting to see increasing pressure for a resumption in offshore investment and exploration activity to replace reserves . the following is a summary of recent oil and gas pricing trends : replace_table_token_2_th crude oil prices can be volatile due to a number of factors . significant downward price volatility in brent crude oil began late in 2014 and reached a low average of $ 33 per barrel in early 2016 before improving to approximately $ 55 per barrel by the end of 2016. the prices for brent crude oil increased to an average of $ 71 per barrel for the full year 2018. this represents an $ 18 per barrel improvement over the average crude oil prices for the full year 2017 of $ 53. this price increase was due to robust global demand and sustained opec production cuts , the combination of which resulted in net inventory crude draws that reduced the overall crude surplus . daily brent crude oil spot prices reached a peak of $ 86 per barrel in october 2018 , which was the highest level since october 2014 , before falling to nearly $ 50 per barrel before the end of 2018. the price decrease in the latter part of 2018 reflected global oil inventory builds and record levels of production from the world 's three largest 34 producers - united states , saudi arabia and russia . the eia forecasts the brent crude oil spot price will average $ 61 per barrel in 2019 , $ 11 per barrel lower than 2018 , resulting from concerns of oversupply and slower than expected pace of oil demand growth . in december 2018 , opec and other non-opec participants such as russia reached an agreement to cut their oil production for six months beginning january 2019 in response to increasing evidence that the global crude oil market could become oversupplied in 2019. this production cut is expected to keep global crude oil supply and demand in equilibrium , stabilizing prices . e & p spending is expected to increase over the near-term as crude oil prices are forecasted to remain more stable . in 2018 , mexico 's new president has announced that the mexican government will not offer any new license rounds for the next three years while assuring that existing contracts will not be cancelled . in the medium-term , global crude oil demand is expected to continue growing while the oil & gas industry is predicted to face a supply crunch due to unsustainably low levels of exploration investments . as a result , e & p companies are expected to increase their focus on offshore oil exploration to replenish reserves . given the historical volatility of crude prices , there is a continued risk that if prices do not continue to improve , or if they start to decline again due to high levels of crude oil production , there is a potential for slowing growth rates in various global regions and or for ongoing supply/demand imbalances . if commodity prices do not continue to improve , or if they start to deteriorate again , demand for our services and products could decline . impact to our business while our 2018 revenues were down compared to 2017 , we are seeing signs of increasing activity in our business , primarily due to the strategic shift we made to move our offerings closer to the reservoir and the associated continued success of our 3-d multi-client programs as well as clients starting to renew interest in conventional reserve replacement and offshore exploration . historically , our revenue and ebitda generation is lower in the first part of the year as customers tend to set budgets in the first quarter , firm up plans through the year , and spend excess budget in the fourth quarter . investments in our multi-client data library are dependent upon the timing of our new venture projects and the availability of underwriting by our customers . we continue to maintain high standards for underwriting new projects . story_separator_special_tag total operating expenses as a percentage of total net revenues for 2018 and 2017 were 42 % and 40 % , as adjusted , respectively . during 2018 , our loss from operations was $ 15.6 million , as adjusted , compared to a loss of $ 2.6 million , as adjusted , for 2017 . our net loss for 2018 was $ 32.5 million , as adjusted , or $ ( 2.37 ) per share , compared to net loss of $ 19.1 million , as adjusted , or $ ( 1.61 ) per share for 2017 . as noted above , our net loss for 2018 and 2017 included other special items totaling $ 38.7 million and $ 11.1 million , respectively , impacting our loss per share by $ 2.83 and $ 0.94 , respectively . net revenues , gross profits and gross margins e & p technology & services โ net revenues for 2018 decreased by $ 20.7 million , or 13 % , to $ 136.5 million , compared to $ 157.2 million for 2017 . within the e & p technology & services segment , total multi-client revenues were $ 116.8 million , a decrease of 17 % , with new venture revenues experiencing significant declines during 2018. partially offsetting the overall decline in new venture revenues was an increase in data library revenues , attributable to sales of the recently completed phases of the brazil and mexico reimaging programs , along with sales of 2-d data libraries in libya . the decrease in multi-client revenues was driven by the continued delay of the panama license round announcement , the deferment of new e & p investments in mexico and the continued focus on cash preservation within e & p companies restricting exploration spending . imaging services revenues were $ 19.7 million , a 20 % increase , due to an increase in proprietary ocean bottom nodal imaging projects . gross profit decreased by $ 21.8 million to $ 43.4 million , representing a 32 % gross margin , compared to $ 65.2 million , or 41 % gross margin , for 2017 . the decline in gross profit and margin were due to the decrease in new venture revenues partly offset by the increases in data library and imaging services revenues , as noted above . operations optimization โ net revenues for 2018 increased by $ 3.2 million , or 8 % , to $ 43.5 million , compared to $ 40.3 million for 2017 . optimization software & services net revenues increased by $ 4.4 million , or 26 % , to $ 21.1 million , compared to $ 16.7 million for 2017 due to increase in sales of our gator ocean bottom command and control system . devices revenues for 2018 decreased by $ 1.2 million , or 5 % , to $ 22.4 million , compared to $ 23.6 million for 2017 . this decrease was due to a decline in our repairs business due to seismic contractors focus on cash preservation and decrease in sales of our various product offerings . operations optimization gross profit for 2018 increased by $ 2.2 million to $ 22.3 million , in 2018 , compared to $ 20.1 million , for 2017 . gross margin increased to 51 % in 2018 from 50 % in 2017. ocean bottom integrated technologies โ net revenues for both 2018 and 2017 were zero . in line with our component strategy , revenues for the elements of fully integrated 4sea system will be recognized in the relevant segment , either e & p technology & services or operations optimization . gross loss was $ 6.0 million for 2018 compared to gross loss of $ 9.6 million for 2017 . this decline was due to reduced depreciation expense as some assets were fully depreciated in late 2017 and early 2018. operating expenses ( as adjusted ) the following table presents the โ as adjusted โ in both 2018 and 2017 , excluding other special items ( in thousands ) : 39 replace_table_token_5_th ( a ) represents accelerated vesting and cash exercise of stock appreciation rights awards . ( b ) represents a write-down of the cable-based ocean bottom acquisition technologies . research , development and engineering โ research , development and engineering expense increased $ 1.8 million , or 11 % , to $ 18.2 million , for 2018 , compared to $ 16.4 million , for 2017 . increase is primarily driven by increased employment costs as we continue to invest in imaging algorithms and infrastructure , devices and software . we see significant long-term potential for investing in technologies that improve image quality , safety and productivity . marketing and sales โ marketing and sales expense increased $ 1.0 million , or 5 % , to $ 21.8 million , for 2018 , compared to $ 20.8 million , for 2017 . this increase was primarily due to increased marketing expenses to broaden and diversify our offerings into adjacent markets including consulting fees , partly offset by decrease in commission expense . general , administrative and other operating expenses โ general , administrative and other operating expenses decreased $ 5.7 million , or 14 % , to $ 35.3 million , as adjusted , for 2018 compared to $ 41.0 million , as adjusted , for 2017 . the decrease was driven by reductions in bonus expense due to current operating results . other items interest expense , net โ interest expense , net , of $ 13.0 million for 2018 compared to $ 16.7 million for 2017 . the decrease in interest expense was a result of lower outstanding debt during 2018. for additional information , please refer to โ โ liquidity and capital resources โ sources of capital โ below . other expense โ other expense for 2018 was $ 0.4 million compared to other expense of $ 3.9 million for 2017 . the difference primarily relates to changes in our accrual for loss contingency related to the westerngeco legal proceedings .
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results of operations year ended december 31 , 2017 ( as adjusted ) compared to year ended december 31 , 2016 ( as adjusted ) our total net revenues of $ 197.6 million for 2017 increased $ 24.8 million , or 14 % , compared to total net revenues of $ 172.8 million for 2016. our overall gross profit percentage for 2017 was 38 % , compared to a gross profit percentage of 21 % , as adjusted , for 2016. total operating expenses as a percentage of net revenues for 2017 and 2016 were 40 % and 45 % , as adjusted , respectively . during 2017 , our loss from operations was $ 2.6 million , as adjusted , compared to a loss of $ 41.2 million , as adjusted , for 2016. our net loss for 2017 was $ 19.1 million , as adjusted , or $ ( 1.61 ) per share , compared to net loss of $ 66.1 million , as adjusted , or $ ( 5.80 ) per share for 2016. as noted above , our net loss for 2017 and 2016 included restructuring charges and other special items totaling $ 11.1 million and $ ( 1.0 ) million , respectively , impacting our earnings per share by $ 0.94 and $ ( 0.09 ) , respectively . net revenues , gross profits and gross margins ( as adjusted for 2016 ) e & p technology & services โ net revenues for 2017 increased by $ 64.4 million , or 69 % , to $ 157.2 million , compared to $ 92.9 million for 2016. within the e & p technology & services , total multi-client revenues were $ 140.8 million , an increase of 109 % , driven by new venture revenues from our 3-d multi-client reimaging programs offshore mexico and brazil , as well as revenues from a new 2-d multi-client program in panama and other programs that have recently been launched .
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this discussion contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from historical results or anticipated results including those set forth in item 1a . โ risk factors โ of this report . see the discussion of forward-looking statements on page 1 of part i of this report . overview stamps.com รฒ is the leading provider of internet-based postage solutions . our customers use our service to mail and ship a variety of mail pieces , including postcards , envelopes , flats and packages , using a wide range of united states postal service ( โ usps โ ) mail classes , including first class mailยฎ , priority mailยฎ , express mailยฎ , media mailยฎ , parcel postยฎ , and others . our customers include individuals , small businesses , home offices , medium-size businesses and large enterprises , and within these segments we target both mailers and shippers . we were the first ever usps-licensed vendor to offer pc postageยฎ in a software-only business model in 1999. section 382 update we currently have federal and state nol carry-forwards of approximately $ 210 million and $ 100 million , respectively , which when combined with our other tax credits and tax assets have a potential value of up to $ 72 million in tax savings over the next 19 years . under internal revenue code section 382 rules , if a โ change of ownership โ is triggered , our nol asset may be impaired . a change in ownership can occur whenever there is a shift in ownership by more than 50 percentage points by one or more โ 5 % shareholders โ within a three-year period . we estimate that as of december 31 , 2012 we were at approximately a 22 % level compared with the 50 % level that would trigger impairment of our nol asset . under our certificate of incorporation , any person or entity , including any company and investment firm , that wishes to become a โ 5 % shareholder โ ( as defined in our certificate of incorporation ) must first obtain a waiver from our board of directors . in addition , any person , including any company and investment firm , that is already a โ 5 % shareholder โ of ours can not make any additional purchases of our stock without a waiver from our board of directors . the nol protective measures contained in our certificate of incorporation are more specifically described in our definitive proxy statement filed with the sec on april 2 , 2008. on july 22 , 2010 , our board of directors suspended the nol protective measures by approving a waiver from the nol protective measures to all persons and entities , including companies and investment firms . as a result , our stockholders are now allowed to become โ 5 % shareholders โ and existing โ 5 % shareholders โ are allowed to make additional purchases of our stock each without having to comply with the restrictions contained in the nol protective measures . this waiver may be revoked by our board of directors at any time if the board deems the revocation necessary to protect against a section 382 โ change of ownership โ that would limit our ability to utilize future nols . for complete details about this waiver from the nol protective measures , please see our form 8-k filed on july 28 , 2010. as of february 28 , 2013 , we had 15,319,433 shares outstanding , and therefore ownership of approximately 766,000 shares or more would currently constitute a โ 5 % shareholder โ . we strongly urge that any stockholder contemplating becoming a 5 % or more shareholder contact us before doing so . pc postage business references when we refer to our โ pc postage โ business , we are referring to our pc postage service and integrations , mailing & shipping supplies store and branded insurance offering . we do not include our photostamps business when we refer to our pc postage business . when we refer to our `` core pc postage business '' , we are referring to the portion of our pc postage business targeting our small business , enterprise and high volume shipping customers . when we refer to our `` non-core pc postage business '' , we are referring to the portion of our pc postage business that targets a more consumer oriented customer through the `` enhanced promotion '' marketing channel . in the `` enhanced promotion '' channel , we work with various companies to advertise our service in a variety of sites on the internet . these companies typically offer an additional promotion ( beyond what we typically offer ) directly to the customer in order to get the customer to try our service and we find that this channel attracts more consumer oriented customers . 23 when we refer to our `` core pc postage revenue , '' we are referring to revenues from service , product and insurance generated by customers in our core pc postage business and when we refer to our `` non-core pc postage revenue , '' we are referring to revenues from service , product and insurance generated by customers in our non-core pc postage business . when we refer to our โ total pc postage revenue , โ we are referring to both core pc postage and non-core pc postage revenues generated from all service , product and insurance revenues . when we refer to our `` core pc postage marketing channels , '' we are referring to our marketing channels targeted at acquiring small business , enterprise and high volume shipping customers . these channels include partnerships , online advertising , affiliate channel , direct mail , traditional media advertising and others . when we refer to our `` non-core pc postage marketing channel , '' we are referring to the online enhanced promotion marketing channel . story_separator_special_tag during the fourth quarter of 2012 , we re-evaluated positive and negative evidence relating to our gross deferred tax assets and valuation allowance noting that there was no additional discrete event subsequent to the first quarter of 2012. during the fourth quarter of 2012 , we updated our three year forecast of projected taxable income . based on the updated forecast and a change in the california state tax laws , we recorded another release of a portion of our valuation allowance in the fourth quarter of 2012 totaling approximately $ 2.5 million . as of december 31 , 2012 , we recorded approximately $ 31 million of net deferred tax assets , and we continued to maintain a valuation allowance for the remainder of our gross deferred tax assets . 28 during 2012 , we recorded current tax provision for corporate alternative minimum federal and state taxes of approximately $ 565,000. during 2011 , we were in a taxable loss position for tax reporting purposes and as a result we did not incur any current tax provision . expectations for 2013 we expect the following trends for 2013 : ยท we expect total 2013 revenue to be in a range of between $ 120 million to $ 130 million . ยท we expect 10 % to 15 % growth in core pc postage revenue for 2013 compared to 2012 . ยท we expect non-core pc postage and photostamps revenues to decrease in 2013 compared with 2012 , as we expect to minimize investment in these areas of our business . ยท in october 2012 , amazon.com launched an additional marketplace usps shipping solution as an alternative to our shipping solution and we expect this to have a negative impact on our 2013 revenue from this partnership . ยท we expect to continue to increase customer acquisition spending on our core pc postage marketing channels by 5 % - 15 % in 2013 compared to 2012. we will continue to monitor our customer metrics and the state of the economy and adjust our level of spending accordingly . ยท we expect research and development expenses to be higher in 2013 as compared to 2012 , primarily related to expected increased headcount costs to support the growth in our products and services . ยท we expect general and administrative expenses to be higher in 2013 as compared to 2012 , primarily related to increased headcount costs . ยท we expect capital expenditures to be approximately $ 3.5 million in 2013 reflecting an increased level of investment in our technology platform and data centers to ensure the scalability and reliability of our solutions . as discussed above , our results are subject to macro economic factors and other factors which could cause these trends to be worse than our current expectation or which could cause actual results to be materially different than our current expectations . these expectations are โ forward looking statements โ , are made only as of the date of this report and are subject to the qualification and limitations on the forward-looking statements discussion on page 1 of part i of this report and the risks and other factors set forth in item 1a โ risk factors โ . as described in our forward-looking statements discussion , we do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances after the date of this report . years ended december 31 , 2011 and 2010 total revenue in 2011 was $ 101.6 million , an increase of 19 % from $ 85.5 million in 2010. pc postage revenue , including service revenue , product revenue and insurance revenue , in 2011 was $ 93.3 million , an increase of 19 % compared to $ 78.4 million in 2010. core pc postage revenue increased 22 % to $ 90.2 million in 2011 from $ 73.8 million in 2010. non-core pc postage revenue decreased 30 % to $ 3.2 million in 2011 from $ 4.5 million in 2010. photostamps revenue in 2011 was $ 8.3 million , an increase of 15 % compared to $ 7.2 million in 2010. other revenue in 2011 was $ 6,000 , a decrease of 78 % compared to $ 27,000 in 2010 . 29 the following table sets forth the breakdown of revenue for 2011 and 2010 and the resulting percent change ( revenue in $ 000s ) : replace_table_token_14_th the following table sets forth the breakdown of pc postage revenue , which includes core pc postage revenue and non-core pc postage revenue for 2011 and 2010 and the resulting percent change ( revenue in $ 000s ) : replace_table_token_15_th the increase in core pc postage revenue was driven by both an increase in paid customers and an increase in average revenue per paid customer . average revenue per paid customer increased 10 % to $ 20.20 in 2011 from $ 18.25 in 2010. annual average paid customers increased 11 % to 372,000 in 2011 from 337,000 in 2010. we define paid customers for the quarter as ones from whom we successfully collected service fees at least once during that quarter , and we define average paid customers for the year as the average of the paid customers for each of the four quarters during the year . the following table sets forth the total number of paid customers in the period that were originally acquired through our core pc postage channels ( in thousands ) : replace_table_token_16_th the following table sets forth the growth in paid customers and average annual revenue per paid customer for customers originally acquired through our core pc postage channel : replace_table_token_17_th the increase in paid customers in 2011 was primarily attributable to ( 1 ) our increased customer acquisition spending in these channels leading to an increase in the number of customers acquired and ( 2 ) reductions in our paid customer churn rates .
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results of operations years ended december 31 , 2012 and 2011 total revenue increased 14 % to $ 115.7 million in 2012 from $ 101.6 million in 2011. pc postage revenue , including service revenue , product revenue and insurance revenue , in 2012 was $ 110.0 million , an increase of 18 % compared to $ 93.3 million in 2011. core pc postage revenue increased 19 % to $ 107.0 million in 2012 from $ 90.2 million in 2011. non-core pc postage revenue decreased 5 % to $ 3.0 million in 2012 from $ 3.2 million in 2011. photostamps revenue decreased 32 % to $ 5.7 million in 2012 from $ 8.3 million in 2011. other revenue increased 9 % to $ 7,000 in 2012 from $ 6,000 in 2011. the following table sets forth the breakdown of revenue for 2012 and 2011 and the resulting percent change ( revenue in $ 000s ) : replace_table_token_7_th the following table sets forth the breakdown of pc postage revenue , which includes core pc postage revenue and non-core pc postage revenue for 2012 and 2011 and the resulting percent change ( revenue in $ 000s ) : replace_table_token_8_th the increase in core pc postage revenue was driven by both an increase in average revenue per paid customer and an increase in paid customers . average revenue per paid customer increased 5 % to $ 21.18 in 2012 from $ 20.20 in 2011. annual average paid customers increased 13 % to 421,000 in 2012 from 372,000 in 2011 . 24 we define paid customers for the quarter as ones from whom we successfully collected service fees at least once during that quarter , and we define average paid customers for the year as the average of the paid customers for each of the four quarters during the year .
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the following management 's discussion and analysis of financial condition and results of operations ( โ md & a โ ) is designed to provide the reader with information that will assist in understanding the company 's consolidated financial statements , the changes in certain key items in those financial statements from year to year , and the primary factors that accounted for those changes , as well as how certain accounting principles affect the consolidated financial statements . the discussion also provides information about the financial results of the various business segments to provide a better understanding of how those segments and their results affect the financial condition and results of operations of littelfuse as a whole . 21 business segment information u.s. story_separator_special_tag resulted from operating leverage on higher sales , an improved cost structure due to consolidation of manufacturing facilities and the impact of restructuring activities in 2009. the company recorded approximately $ 4.2 million of restructuring charges in cost of sales in 2009 due primarily to the reorganization of the company 's european and asian operations . the european restructuring charges included the transfer of its manufacturing operations from dรผnsen , germany , to piedras negras , mexico . the asian restructuring included the planned closure of a manufacturing facility in taiwan . 23 the company continues to focus heavily on research and development ( r & d ) to develop new solutions for customers and expand product offerings . during 2010 , the company continued moving r & d operations to lower cost locations closer to its customers . r & d operations are now in canada , china , germany , the philippines and mexico , as well as the united states . total operating expense was $ 126.3 million or 20.8 % of net sales for 2010 compared to $ 111.7 million or 26.0 % of net sales for 2009. the increase in operating expenses primarily reflects the increased cost of company incentive programs driven by significantly improved financial performance in 2010. higher transportation costs driven by higher sales volumes also contributed to the increase in operating expenses . operating expenses as a percentage of sales improved in 2010 as compared to 2009 as a result of cost reduction plans initiated in 2009 resulting in improved operating efficiencies across the company . operating income was $ 107.6 million or 17.7 % of net sales in 2010 compared to $ 13.7 million or 3.2 % of net sales in the prior year . the increase in operating income in the current year was due primarily to the increase in sales and reduction in costs as described above . interest expense , net , decreased to $ 1.4 million in 2010 compared to $ 2.4 million for 2009 primarily due to lower borrowing in 2010. other expense ( income ) , net , consisting of interest income , royalties , non-operating income and foreign currency items , was $ 1.5 million of income in 2010 compared to $ 0.5 million of expense in 2009. the increase reflected a favorable net change of approximately $ 1.3 million in foreign currency translation effects primarily due to the strengthening of the philippine peso and mexican peso against the u.s. dollar . income before income taxes was $ 107.7 million in 2010 compared to $ 10.8 million in 2009. income tax expense was $ 29.0 million in 2010 compared to $ 1.4 million in 2009. the 2010 effective income tax rate was 27.0 % compared to 13.2 % in 2009. the increase in the 2010 effective tax rate reflects more income earned in high tax jurisdictions in 2010 ( primarily the u.s. ) as well as the favorable effects of one-time tax adjustments in 2009. results of operations โ 2009 compared with 2008 net sales decreased in 2009 to $ 430.1 million compared to $ 530.9 million in 2008. these results reflected sales declines in the automotive segment of $ 28.4 million or 22 % to $ 98.5 million , along with a decrease in sales in the electronics segment of $ 79.5 million or 23 % to $ 263.0 million , partially offset by an increase in sales in the electrical segment of $ 7.1 million or 12 % to $ 68.6 million . the electrical segment sales included a full year of sales ( $ 23.7 million ) in 2009 from the acquisition of startco engineering ltd. ( โ startco โ ) , which was acquired in the fourth quarter of 2008. the decrease in automotive sales was due primarily to the continued weak passenger car and truck markets across all geographies , resulting in sharp declines in global vehicle production , as oems had extended plant shutdowns . the negative impact from declines in volume was further impacted by unfavorable currency effects of $ 2.6 million in 2009 , mainly due to the weaker euro . the decrease in electronics sales primarily reflected continued weak demand as consumers continued to lose confidence in the economy and cut back on spending , particularly in the consumer electronics market . in addition , many customers in asia , particularly contract manufacturers and original design manufacturers , had extensive plant shutdowns , and electronics distributors reduced inventories in response to weak demand . during the second half of 2009 , demand for some consumer electronic items began to improve resulting in increased demand for the company 's products . the negative impact from declines in volume was further impacted by net unfavorable currency effects of $ 1.5 million largely due to the weakness of the euro and korean won , partially offset by the favorable impact of a stronger japanese yen . story_separator_special_tag million . the company had $ 49.0 million outstanding at january 1 , 2011. further information regarding this arrangement is provided in note 6 of the notes to consolidated financial statements included in this report . the loan agreement requires the company to meet certain financial tests , including a consolidated leverage ratio and a consolidated interest coverage ratio . the loan agreement also contains additional affirmative and negative covenants which , among other things , impose certain limitations on the company 's ability to merge with other companies , create liens on its property , incur additional indebtedness , enter into transactions with affiliates except on an arm 's length basis , dispose of property , or issue dividends or make distributions . at january 1 , 2011 , and for the year then ended , the company was in compliance with these covenants . the loan agreement does not impact the existing debt covenants in the revolving credit facility described below . revolving credit facilities on january 28 , 2009 , the company entered into an unsecured financing arrangement with a canadian bank that provided a cad 10.0 million ( equivalent to approximately $ 10.0 million at january 1 , 2011 ) revolving credit facility , for capital expenditures and general working capital , which expires on july 21 , 2011. this facility consists of prime-based loans and overdrafts , bankers ' acceptances and u.s. base rate loans and overdrafts , and is guaranteed by the company . as of january 1 , 2011 , the company had approximately cad 10.0 million ( equivalent to approximately $ 10.0 million ) available under the revolving credit . 26 this agreement contains covenants that , among other matters , impose limitations on future mergers , sales of assets , and changes in control , as defined in the agreement . in addition , the company is required to satisfy certain financial covenants and tests relating to , among other matters , interest coverage , working capital , leverage and net worth . as of the fiscal year ended 2010 , the company was in compliance with all covenants . the company has an unsecured domestic financing arrangement consisting of a credit agreement with banks that provides a $ 75.0 million revolving credit facility , with a potential increase of up to $ 125.0 million upon request of the company and agreement with the lenders , which expires on july 21 , 2011. at january 2 , 2010 , the company had available $ 50.0 million of borrowing capacity under the revolving credit facility at an interest rate of libor plus 0.500 % ( 0.76 % as of january 1 , 2011 ) . the domestic bank credit agreement contains covenants that , among other matters , impose limitations on the incurrence of additional indebtedness , future mergers , sales of assets , payment of dividends , and changes in control , as defined in the agreement . in addition , the company is required to satisfy certain financial covenants and tests relating to , among other matters , interest coverage , working capital , leverage and net worth . at january 1 , 2011 , and for the year then ended , the company was in compliance with these covenants . other obligations the company had $ 2.3 million available in letters of credit at january 1 , 2011. no amounts were drawn under these letters of credit at january 1 , 2011. cash flows and working capital the company started 2010 with $ 70.4 million of cash . net cash provided by operating activities in 2010 was approximately $ 104.1 million in the year and included $ 78.7 million in net income and $ 46.1 million in non-cash adjustments ( primarily $ 32.0 million in depreciation and amortization ) , partially offset by $ 20.7 million of changes in operating assets and liabilities . changes in various operating assets and liabilities ( including short-term and long-term items ) that negatively impacted cash flows in 2010 consisted of increases in accounts receivable ( $ 12.8 million ) and inventories ( $ 15.1 million ) , a decrease in accounts payable ( $ 1.8 million ) and accrued expenses ( including post-retirement ) ( $ 13.6 million ) . the increase in accounts receivable result from increased sales activity . the increase in inventory results from increased sales activity and production rates in addition to higher prices for raw materials . additionally , the company made contributions to its domestic and foreign pension plans of $ 16.2 million in 2010. positively impacting cash flows were increases in accrued payroll and severance ( $ 2.4 million ) , accrued taxes ( $ 14.9 million ) , and a decrease in prepaid expenses and other current assets ( $ 5.4 million ) . net cash used in investing activities in 2010 was approximately $ 65.7 million and included $ 22.4 million in purchases of property , plant and equipment ( primarily related to the company 's plant expansion and new facilities in the asia-pacific region ) , and a net $ 48.3 million for the acquisition of cole hersee during the fourth quarter of 2010 , partially offset by $ 5.0 million in cash receipts from the sale of property , plant and equipment . the majority of the receipts from asset sales resulted from the sale of the company 's land and building at its utrecht , netherlands location . 27 net cash provided by financing activities in 2010 was approximately $ 2.2 million , which included $ 10.7 million in net proceeds from borrowing and $ 18.5 million in cash proceeds from the exercise of stock options . additionally the company repurchased $ 25.4 million of its common stock during 2010 and paid a cash dividend of $ 3.3 million during the fourth quarter of 2010. the net payments from debt include $ 21.0 million in gross payments under the company 's term loan discussed above .
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generally accepted accounting principles ( gaap ) dictates annual and interim reporting standards for an enterprise 's operating segments and related disclosures about its products , services , geographic areas and major customers . within u.s. gaap , an operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses , and about which separate financial information is regularly evaluated by the chief operating decision maker ( โ codm โ ) in deciding how to allocate resources . the codm is the company 's president and chief executive officer . the company reports its operations by three business unit segments : electronics , automotive and electrical . the following table is a summary of the company 's operating segments ' net sales by business unit and geography ( in thousands ) : replace_table_token_5_th business unit segment information is described more fully in note 15 of the notes to consolidated financial statements . the following discussion provides an analysis of the information contained in the consolidated financial statements and accompanying notes beginning on page 40 at january 1 , 2011 and january 2 , 2010 , and for the three fiscal years ended january 1 , 2011 , january 2 , 2010 and december 27 , 2008. results of operations โ 2010 compared with 2009 net sales increased in the current year to $ 608.0 million compared to $ 430.1 million in 2009 reflecting strong growth in all market segments and geographies . the automotive business segment sales increased $ 31.8 million or 32 % to $ 130.3 million . the electronics business segment sales increased $ 126.9 million or 48 % to $ 389.9 million , and the electrical business segment sales increased $ 19.2 million or 28 % to $ 87.8 million . sales levels were negatively impacted in 2009 due to the sharp downturn in the global economy and credit crisis .
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this discussion and analysis should be read together with the consolidated financial statements and related notes that are included elsewhere in this annual report . in addition to historical financial analysis , this discussion and analysis contains forward-looking statements based upon current expectations that involve risks , uncertainties and assumptions , as described under the heading โ forward-looking statements. โ actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of various factors , including those set forth under โ risk factors โ or elsewhere in this annual report . unless the context otherwise requires , references in this โ management 's discussion and analysis of financial condition and results of operations โ to โ we โ , โ us โ , โ our โ , and โ the company โ are intended to mean the business and operations of porch and its consolidated subsidiaries . certain figures , such as interest rates and other percentages , included in this section have been rounded for ease of presentation . percentage figures included in this section have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding . for this reason , percentage amounts in this section may vary slightly from those obtained by performing the same calculations using the figures in porch 's financial statements or in the associated text . certain other amounts that appear in this section may similarly not sum due to rounding . business overview porch is a vertical software platform for the home , providing software and services to approximately 11,000 home services companies , such as home inspectors , moving companies , utility companies , warranty companies , and others . porch helps these service providers grow their business and improve their customer experience . porch provides software and services to home services companies and , through these relationships , gains unique and early access to homebuyers and homeowners , assists homebuyers and homeowners with critical services such as insurance and moving , and , in turn , porch 's platform drives demand for other services from such companies as part of our value proposition . porch has three types of customers : ( 1 ) home services companies , such as home inspectors , for whom porch provides software and services and who provide introductions to homebuyers and homeowners ; ( 2 ) consumers , such as homebuyers and homeowners , whom porch assists with the comparison and provision of various critical home services , such as insurance , moving , security , tv/internet , and home repair and improvement ; and ( 3 ) service providers , such as insurance carriers , moving companies , security companies and tv/internet providers , who pay porch for new customer sign-ups . throughout the last seven ( 7 ) years , porch has established many partnerships across a number of home-related industries . porch has also proven effective at selectively acquiring companies which can be efficiently integrated into porch 's platform . in 2017 , we significantly expanded our position in the home inspection industry by acquiring isn , a developer of erp and crm software for home inspectors . in november 2018 , we acquired hireahelper , a provider of software and demand for moving companies . we sell our software and services to companies using a variety of sales and marketing tactics . we have teams of inside sales representatives organized by vertical market who engage directly with companies . we have enterprise sales teams which target the large named accounts in each of our vertical markets . these teams are supported by a variety of typical software marketing tactics , including both digital , in-person ( such as trade shows and other events ) and content marketing . for consumers , porch largely relies on our unique and proprietary relationships with the approximately 11,000 companies using porch 's software to provide the company with end customer access and introductions . porch then utilizes technology , lifecycle marketing and teams in lower cost locations to operate as a moving concierge to assist these consumers with services . porch has invested in limited direct-to-consumer ( โ d2c โ ) marketing capabilities , but expects to become more advanced over time with capabilities such as digital and social retargeting . 47 key performance measures and operating metrics in the management of our businesses , we identify , measure and evaluate a variety of operating metrics . the key performance measures and operating metrics we use in managing our businesses are set forth below . these key performance measures and operating metrics are not prepared in accordance with gaap , and may not be comparable to or calculated in the same way as other similarly titled measures and metrics used by other companies . the key performance measures presented have been adjusted for divested porch businesses in 2018 through 2020 . โ average number of companies in quarter โ porch provides software and services to home services companies and , through these relationships , gains unique and early access to homebuyers and homeowners , assists homebuyers and homeowners with critical services such as insurance and moving . porch ' s customers include home services companies , such as home inspectors , for whom porch provides software and services and who provide introductions to homebuyers and homeowners . porch tracks the average number of home services companies from which it generates revenue each quarter in order to measure our ability to attract , retain and grow our relationships with home services companies . management defines average companies in a quarter as the number of home services companies across all of porch ' s home services verticals that ( i ) had revenue contracts with us and ( ii ) generated revenue each month , averaged across a quarterly period . story_separator_special_tag covid-19 impact in march 2020 , the world health organization declared a pandemic related to the global novel coronavirus disease 2019 ( โ covid-19 โ ) outbreak . the covid-19 pandemic has adversely affected porch 's business operations , which has 49 impacted revenue primarily in the first half of 2020. in response to the covid-19 outbreak and government-imposed measures to control its spread , porch 's ability to conduct ordinary course business activities has been and may continue to be impaired for an indefinite period of time . the extent of the impact of the covid-19 pandemic on porch 's operational and financial performance will depend on various future developments , including the duration and spread of the outbreak and impact on the company 's customers , suppliers , and employees , all of which is uncertain at this time . porch expects the covid-19 pandemic to adversely impact revenue and results of operations , but porch is unable to predict at this time the size and duration of this adverse impact . at the same time , porch is observing a recovery in home sales to pre-covid-19 levels in the second half of 2020 , and with them , home inspections and related services . for more information on porch 's operations and risks related to health epidemics , including the coronavirus , please see the section of this annual report entitled โ risk factors โ risks relating to porch 's business and industry . โ comparability of financial information porch 's future results of operations and financial position may not be comparable to historical results as a result of the merger . key factors affecting operating results the company has been implementing its strategy as a vertical software platform for the home , providing software and services to approximately 11,000 home services companies , such as home inspectors , moving companies , utility companies , warranty companies and others . the following are key factors affecting our operating results in 2019 and 2020 : โ continued investment in growing and expanding our position in the home inspection industry as a result of the 2017 acquisition of isn , a developer of erp and crm software for home inspectors . โ continued investment in growing and expanding our position in providing moving services to consumers as a result of the 2018 acquisition of hireahelper , a provider of software and demand for moving companies . โ in 2020 the company invested $ 8.3 million in cash and $ 6.9 million in common stock to acquire four companies to expand the scope and nature of the company ' s product and service offerings , obtain new customer acquisition channels , add additional team members with important skillsets , and realize synergies , in transactions accounted for as a business combination . โ intentionally building operating leverage in the business by growing operating expenses at a slower rate than the growth in revenue . we are specifically increasing economies of scale related to our variable selling costs , moving concierge call center operations and product and technology costs . โ divesting businesses in 2020 and 2019 that were not core to our strategy as a vertical software platform for the home . upon divestiture , we recorded a gain of $ 1.4 million and a loss of $ 5.0 million in 2020 and 2019 , respectively . โ complex debt and equity financings provided gross sources of cash of $ 70.9 million and $ 34.6 million in the years ended december 31 , 2020 and 2019 , respectively . these financings included complex financial instruments , including convertible debt and equity , with both common stock and preferred stock warrants . the reported results include fair value gains and losses from the remeasurement of debt and warrants . โ during 2020 , the company reduced cash payroll costs by $ 4.0 million in exchange for a commitment by the company to provide up to 2,356,045 rsus subject to certain performance and service . the performance vesting conditions , which were previously considered not probable of achievement were met in december 2020 as a result of the merger . as a result , a cumulative catch up of $ 6.5 million of compensation expense was recorded in 2020 . 50 โ a significant secondary stock transaction between the company ' s ceo and a significant porch stockholder at the time resulted in the recognition of a one-time stock-based compensation charge of $ 33.2 million in 2019 . โ i n connection with the merger , the ceo entered into an agreement with another significant shareholder for a payment of $ 3.2 million in cash and 950,000 of porch group , inc. stock from the ceo to the other significant shareholder to induce the conversion of the shareholder 's preferred stock to common stock immediately prior to the close of the ptac merger agreement . this transfer of $ 17.3 million in consideration was accounted for as deemed capital contribution from the ceo and increased total net loss in determining net loss available to common shareholders by $ 17.3 million . basis of presentation the consolidated financial statements and accompanying notes of porch include the accounts of the company and its consolidated subsidiaries and were prepared in accordance with accounting principles generally accepted in the united states ( โ gaap โ ) . all significant intercompany accounts and transactions are eliminated in consolidation . the company operates in a single segment . operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker ( โ codm โ ) in making decisions regarding resource allocation and assessing performance . the company has determined that its chief executive officer is the codm . to date , the company 's codm has made such decisions and assessed performance at the company level .
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results of operations comparison of fiscal year ended december 31 , 2020 to fiscal year ended december 31 , 2019 the net loss in 2020 of $ 51.6 million compared with the net loss in 2019 of $ 103.3 million was impacted by a large , one-time stock-based compensation charge of $ 33.2 million related to the company 's ceo 2019 secondary stock sale transaction , 2019 losses on the remeasurement or extinguishment of debt and warrants that totaled $ 9.0 million , and a $ 5.0 million gain on a divestiture of a businesses in 2019 . 54 the following table sets forth our historical operating results for the periods indicated , with fiscal year 2019 incorporating operating results of since-divested businesses : โ replace_table_token_3_th nm โ percentage calculated is not meaningful . revenue total revenue decreased by $ 4.4 million , or 6 % from $ 77.6 million in the year ended december 31 , 2019 to $ 73.2 million in the year ended december 31 , 2020. revenue decreased by $ 17.7 million due to divested porch businesses , offset by increase in revenue in 2020 primarily driven by the growth in our moving services and insurance businesses , which contributed $ 13.8 million of the revenue increase in 2020. as porch has grown the number of companies that use our software and services , we have been able to grow our b2b2c ( โ business to business to consumer โ ) and move related services revenues . this includes revenues related to moving , insurance , tv/internet connections , and security .
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up to $ 1,500,000 of such loans may be convertible into warrants of the post-business combination entity at a price of $ 0.50 per warrant at the option of the lender . the warrants would be identical to the private placement warrants . the terms of such loans by our officers and directors , if any , have not been determined and no written agreements exist with respect to such loans . we do not expect to seek loans from parties other than our sponsor or an affiliate of our sponsor as we do not believe third parties will be willing to loan such funds and provide a waiver against any and all rights to seek access to funds in our trust account . 47 after our initial business combination , members of our management team who remain with us may be paid consulting , management or other fees from the combined company with any and all amounts being fully disclosed to our stockholders , to the extent then known , in the tender offer or proxy solicitation materials , as applicable , furnished to our stockholders . it is unlikely the amount of such compensation will be known at the time of distribution of such tender offer materials or at the time of a stockholder meeting held to consider our initial business combination , as applicable , as it will be up to the directors of the post-combination business to determine executive and director compensation . we have entered into a registration rights agreement with respect to the founder shares and private placement warrants . the holders of these securities will be entitled to make up to three demands , excluding short form registration demands , that we register such securities for sale under the securities act . in addition , these holders have โ piggy-back โ registration rights to include such securities in other registration statements filed by us and rights to require us to register for resale such securities pursuant to rule 415 under the securities act . we will bear the costs and expenses of filing any such registration statements . director independence nasdaq listing standards require that a majority of our board of directors be independent . an โ independent director โ is defined generally as a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship which in the opinion of the company 's board of directors , would interfere with the director 's exercise of independent judgment in carrying out the responsibilities of a director . our board of directors has determined that messrs. kerr , dicamillo , anthos and weiss are โ independent directors โ as defined in the nasdaq listing standards and applicable sec rules . our independent directors have regularly scheduled meetings at which only independent directors are present . item 14 . principal accountant fees and services . the story_separator_special_tag references to the โ company , โ โ us โ or โ we โ refer to global partner acquisition corp. the following discussion and analysis of the company 's financial condition and results of operations should be read in conjunction with the financial statements and the notes thereto contained elsewhere in this report . special note regarding forward-looking statements all statements other than statements of historical fact included in this form 10-k including , without limitation , statements under โ management 's discussion and analysis of financial condition and results of operations โ regarding the company 's financial position , business strategy and the plans and objectives of management for future operations , are forward-looking statements . when used in this form 10-k , words such as โ anticipate , โ โ believe , โ โ estimate , โ โ expect , โ โ intend โ and similar expressions , as they relate to us or the company 's management , identify forward-looking statements . such forward-looking statements are based on the beliefs of management , as well as assumptions made by , and information currently available to , the company 's management . actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors detailed in our filings with the sec . overview we are a blank check company incorporated on may 19 , 2015 as a delaware corporation and formed for the purpose of effecting a merger , capital stock exchange , asset acquisition , stock purchase , reorganization or similar business combination with one or more businesses . we intend to effectuate our initial business combination using cash from the proceeds of our initial public offering that closed on august 4 , 2015 and a sale of warrants in a private placement that occurred simultaneously with the completion of our initial public offering , our capital stock , debt or a combination of cash , stock and debt . the issuance of additional shares of our stock in a business combination : รธ may significantly dilute the equity interest of our stockholders ; รธ may subordinate the rights of holders of common stock if preferred stock is issued with rights senior to those afforded to our common stock ; รธ could cause a change of control if a substantial number of shares of our common stock are issued , which may affect , among other things , our ability to use our net operating loss carry forwards , if any , and could result in the resignation or removal of our present officers and directors ; รธ may have the effect of delaying or preventing a change of control of us by diluting the stock ownership or voting rights of a person seeking to obtain control of us ; and รธ may result in a decrease in the prevailing market prices for our common stock and or warrants . story_separator_special_tag similarly , if we issue debt securities , it could result in : รธ a decrease in the prevailing market prices for our common stock and or warrants ; รธ default and foreclosure on our assets if our operating revenues after an initial business combination are insufficient to repay our debt obligations ; รธ acceleration of our obligations to repay the indebtedness even if we make all principal and interest payments when due if we breach certain covenants that require the maintenance of certain financial ratios or reserves without a waiver or renegotiation of that covenant ; รธ our immediate payment of all principal and accrued interest , if any , if the debt security is payable on demand ; รธ our inability to obtain necessary additional financing if the debt security contains covenants restricting our ability to obtain such financing while the debt security is outstanding ; รธ our inability to pay dividends on our common stock ; รธ using a substantial portion of our cash flow to pay principal and interest on our debt , which will reduce the funds available for dividends on our common stock if declared , expenses , capital expenditures , acquisitions and other general corporate purposes ; รธ limitations on our flexibility in planning for and reacting to changes in our business and in the industry in which we operate ; รธ increased vulnerability to adverse changes in general economic , industry and competitive conditions and adverse changes in government regulation ; and limitations on our ability to borrow additional amounts for expenses , capital expenditures , acquisitions , debt service requirements , execution of our strategy and other purposes and other disadvantages compared to our competitors who have less debt . as indicated in the accompanying financial statements , at december 31 , 2015 , we had approximately $ 1,048,000 in cash . we expect to incur significant costs in the pursuit of our acquisition plans . we can not assure you that our plans to complete our initial business combination will be successful . 36 story_separator_special_tag as an emerging growth company , can adopt the new or revised standard at the time private companies adopt the new or revised standard . 37 loss per common share net loss per common share is computed by dividing net loss applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period , plus to the extent dilutive the incremental number of shares of common stock to settle warrants , as calculated using the treasury stock method . at december 31 , 2015 , the company had outstanding warrants to purchase 14,170,000 shares of common stock . for all periods presented , these shares were excluded from the calculation of diluted loss per share of common stock because their inclusion would have been anti-dilutive the company had outstanding warrants to purchase 14,170,000 shares of common stock . for all periods presented , the weighted average of these shares was excluded from the calculation of diluted loss per share of common stock because their inclusion would have been anti-dilutive . as a result , diluted loss per common share is the same as basic loss per common share for the period . financial instruments the fair value of the company 's assets and liabilities , which qualify as financial instruments under fasb asc 820 , `` fair value measurements and disclosures , '' approximates the carrying amounts represented in the accompanying condensed balance sheets . offering costs the company complies with the requirements of the asc 340-10-s99-1 and sec staff accounting bulletin ( sab ) topic 5aโ '' expenses of offering '' . offering costs of approximately $ 9,765,000 , consisting of underwriting discounts of $ 9,315,000 ( including approximately $ 4,658,000 of which payment is deferred ) and approximately $ 450,000 of professional , printing , filing , regulatory and other costs were charged to additional paid in capital upon the closing of our initial public offering on august 4 , 2015. income taxes the company follows the asset and liability method of accounting for income taxes under fasb asc , 740 , โ income taxes. โ deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases . deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled . the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that included the enactment date . valuation allowances are established , when necessary , to reduce deferred tax assets to the amount expected to be realized . at december 31 , 2015 the company has a deferred tax asset of approximately $ 100,000 related to net loss carryforwards ( which begin to expire in 2035 ) and start-up costs . management has determined that a full valuation allowance of the deferred tax asset is appropriate at this time . redeemable common stock all of the 15,525,000 shares of common stock sold as part of the units in our initial public offering contain a redemption feature which allows for the redemption of such common stock under the company 's liquidation or tender offer/stockholder approval provisions . in accordance with asc 480 , redemption provisions not solely within the control of the company require the security to be classified outside of permanent equity . ordinary liquidation events , which involve the redemption and liquidation of all of the entity 's equity instruments , are excluded from the provisions of asc 480. although the company does not specify a maximum redemption threshold , its amended and restated certificate of incorporation provides that in no event will the company redeem its public shares in an amount that would
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results of operations for the period from may 19 , 2015 ( inception ) through december 31 , 2015 our activities consisted of formation and preparation for our initial public offering and , subsequent to our initial public offering , locating and evaluating a suitable initial business combination candidate . as such , we had no operations or significant operating expenses until august 2015. our operating costs for the period from may 19 , 2015 ( inception ) through december 31 , 2015 , therefore , include our search for an initial business combination and are largely associated with our governance and public reporting , state franchise taxes of approximately $ 100,000 and charges of $ 10,000 per month from our sponsor for administrative services . for the period from may 19 , 2015 ( inception ) through december 31 , 2015 our operating expenses totaled approximately $ 346,000 and we earned income of approximately $ 43,000 on our investment in u.s. government treasury bills in the trust account , resulting in a net loss of approximately $ 303,000 , or $ 0.07 per share , during the period . liquidity and capital resources on august 4 , 2015 , we consummated our initial public offering of an aggregate of 15,525,000 units ( including the full exercise of the underwriters ' overallotment option ) at a price of $ 10.00 per unit generating gross proceeds of approximately $ 155,250,000 before underwriting discounts and expenses .
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the addition of both of these programs combined with its existing products will bolster the bank 's commitment to continue to serve the communities that it has supported over the past almost sixty years . continue to increase core deposits , with an emphasis on low cost commercial demand deposits , and add non-core funding sources . deposits are the major source of balance sheet funding for lending and other investments . we have made significant investments in new products and services , personnel , branch distribution system as well as enhancing our electronic delivery solutions in an effort to become more competitive in the financial services marketplace and attract more core deposits . core deposits are our least costly source of funds and represent our best opportunity to develop customer relationships that enable us to cross-sell our enhanced products and services . total deposits increased by $ 95.8 million , or 13.4 % , to $ 809.8 million at december 31 , 2018 compared to $ 714.0 million at december 31 , 2017. the majority of the increase was due to an increase of $ 14.0 million , or 3.4 % , in certificates of deposit accounts , $ 12.9 million , or 12.5 % , in demand deposits and $ 68.8 million , or 34.3 % , in other interest bearing deposits , which consist of money markets , now and savings accounts . certificates of deposit accounted for 52.4 % and 57.4 % of total deposits at december 31 , 2018 and december 31 , 2017 , respectively . while we will continue to use certificates of deposit as a funding source , our goal is to continue to reduce our reliance on this source of funding as we grow our core deposit base . manage credit risk to maintain a low level of nonperforming assets . we believe strong asset quality is a key to our long-term financial success . our strategy for credit risk management focuses on having an experienced team of credit professionals , well-defined policies and procedures , appropriate loan underwriting criteria and active credit monitoring . our non-performing assets to total assets ratio was 0.64 % at december 31 , 2018 , 1.23 % at december 31 , 2017 and 1.04 % at december 31 , 2016. the majority of our non-performing assets have been related , largely , to one-to-four family and , to a lesser extent , construction and land loans , as our residential borrowers experienced difficulties repaying their loans during the past recession . we have increased our investment in our credit review function , both in personnel as well as ancillary systems , in order to be able to evaluate more complex loans and better manage credit risk , to further support our intended loan growth . expand our employee base to support future growth . we have already made significant investments in our employee base . however , we will continue to work to attract and retain the necessary talent to support increased lending , deposit activities and enhanced information technology . grow organically and through opportunistic bank or branch acquisitions . we expect to focus primarily on organic growth as a lower-risk means of deploying our acquired capital . the capital raised also will help fund improvements in our operating facilities and customer delivery services in order to enhance our competitiveness . opportunistic acquisition possibilities will be explored provided that we believe they would enhance the value of our franchise and yield potential financial benefits for our stockholders . although we believe opportunities exist to increase our market share in our current locations , we will not be adverse to expanding into nearby markets , enlarging our current branch network , or adding loan production offices , provided we believe such efforts would enhance our competitive standing . 49 critical accounting policies the discussion and analysis of the financial condition and results of operations are based on our consolidated financial statements , which are prepared in conformity with accounting principles generally accepted in the united states and general practices within the banking industry . the preparation of these consolidated financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities , disclosure of contingent assets and liabilities , and the reported amounts of income and expenses . we consider the accounting policies discussed below to be significant accounting policies . the estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances . actual results may differ from these estimates under different assumptions or conditions , resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations . on april 5 , 2012 , the jobs act was signed into law . the jobs act contains provisions that , among other things , reduce certain reporting requirements for qualifying public companies . as an โ emerging growth company โ we have determined to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to nonpublic companies . we intend to take advantage of the benefits of this extended transition period . accordingly , our consolidated financial statements may not be comparable to companies that comply with such new or revised accounting standards . the following represent our significant accounting policies : loans receivable . loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at current unpaid principal balances , net of the allowance for loan losses and including net deferred loan origination fees and costs . interest income is accrued based on the unpaid principal balance . loan origination fees , net of certain direct origination costs , are deferred and recognized in interest income using the interest method without anticipating prepayments . a loan is moved to nonaccrual status in accordance with the bank 's policy , typically after 90 days of non-payment . story_separator_special_tag securities not classified as held to maturity or trading , are classified as โ available-for-sale โ and recorded at fair value , with unrealized gains and losses excluded from earnings and reported in other comprehensive income ( loss ) , net of taxes . purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities . management evaluates securities for other-than-temporary impairment ( โ otti โ ) on at least a quarterly basis , and more frequently when economic or market conditions warrant such an evaluation . for securities in an unrealized loss position , management considers the extent and duration of the unrealized loss , and the financial condition and near-term prospects of the issuer . management also assesses whether it intends to sell , or it is more likely than not that it will be required to sell , a security in an unrealized loss position before recovery of its amortized cost basis . if either of the criteria regarding intent or requirement to sell is met , the entire difference between amortized cost and fair value is recognized as impairment through earnings . for debt securities that do not meet the aforementioned criteria , the amount of impairment is split into two components as follows : 1 ) otti related to credit loss , which must be recognized in the consolidated statements of income ( loss ) and 2 ) otti related to other factors , which is recognized in other comprehensive income . the credit loss is defined as the difference between the discounted present value of the cash flows expected to be collected and the amortized cost basis . for equity securities , the entire amount of impairment is recognized through earnings . 51 gains and losses on the sale of securities are recorded on the trade date and are determined using the specific-identification method . the sale of a held-to-maturity security within three months of its maturit y date or after collection of at least 85 % of the principal outstanding at the time the security was acquired is considered a maturity for purposes of classification and disclosure . income taxes . the bank recognizes income taxes under the asset and liability method . under this method , deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases . deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled . the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date . deferred tax assets are reduced by a valuation allowance when , in the opinion of management , it is more likely than not that all or some portion of the deferred tax assets will not be realized . when tax returns are filed , it is highly certain that some positions taken would be sustained upon examination by the taxing authorities , while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained . the benefit of a tax position is recognized in the consolidated financial statements in the period during which , based on all available evidence , management believes it is more likely than not that the position will be sustained upon examination , including the resolution of appeals or litigation processes , if any . tax positions taken are not offset or aggregated with other positions . tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 % likely of being realized upon settlement with the applicable taxing authority . the portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits along with any associated interest and penalties that would be payable to the taxing authorities upon examination . at december 31 , 2018 and 2017 , there were no liabilities recorded related to uncertain tax positions . the bank is no longer subject to income tax examinations by u.s. federal , state or local tax authorities for years before 2015. interest and penalties associated with unrecognized tax benefits , if any , would be classified as additional provision for income taxes in the consolidated statements of income ( loss ) . refer to note 1 to the consolidated financial statements for management 's assessment of recently issued accounting pronouncements . comparison of financial condition at december 31 , 2018 and december 31 , 2017 total assets . total assets increased $ 134.4 million , or 14.5 % , to $ 1.1 billion at december 31 , 2018 , from $ 925.5 million at december 31 , 2017. the increase was due to increases in net loans and cash and cash equivalents , partially offset by a decrease in available-for-sale securities , as discussed in more detail below . available-for-sale securities . available-for-sale securities , consisting primarily of u.s. government agency sponsored securities , as well as mortgage-backed securities , decreased $ 1.8 million , or 6.1 % , to $ 27.1 million at december 31 , 2018 , from $ 28.9 million at december 31 , 2017. the decrease resulted primarily from the sale of $ 3.8 million of securities , $ 2.9 million principal pay downs and maturities of mortgage-backed securities , offset with $ 5.0 million of securities purchased during the year . net loans receivable . net loans receivable increased $ 119.8 million , or 15.0 % , to $ 918.5 million at december 31 , 2018 from $ 798.7 million at december 31 , 2017 , reflecting increases in all loan categories except owner-occupied one-to-four family residential mortgage loans .
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financial condition and results of operations . general this section is intended to help investors understand the consolidated financial performance of pdl community bancorp through a discussion of the factors affecting our financial condition at december 31 , 2018 and 2017 and our results of operation for the years ended december 31 , 2018 , 2017 and 2016. this section should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements contained in this annual report . overview we have made significant investments over the last several years in adding experienced senior level individuals , expanding our lending staff , absorbing the costs of being a public company and upgrading technology and facilities . these investments have had an adverse effect on our net income during those periods . however , during those same periods , we have been able to significantly grow the bank while improving its asset quality and strengthening its capital . total assets increased $ 134.4 million , or 14.5 % , to $ 1.1 billion at december 31 , 2018 from $ 925.5 million at december 31 , 2017. the increase was mainly due to increases in net loans and cash and cash equivalents , partially offset by a decrease in available-for-sale securities . net loans receivable ( which excludes loans held for sale ) increased $ 119.8 million , or 15.0 % , to $ 918.5 million at december 31 , 2018 from $ 798.7 million at december 31 , 2017 , reflecting increases in all loan categories , except owner-occupied one-to-four family residential mortgage loans .
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factors that could cause or contribute to those differences include , but are not limited to , those identified below and those discussed in the sections titled โ risk factors โ and `` special note regarding forward-looking statements '' included elsewhere in this annual report on form 10-k. a discussion regarding our financial condition and results of operations for the year ended december 31 , 2020 compared to the year ended december 31 , 2019 is presented below . a discussion regarding our financial condition and results of operations for the year ended december 31 , 2019 compared to the year ended december 31 , 2018 is included under โ management 's discussion and analysis of financial condition and results of operations โ in our prior year form 10-k filed on february 28 , 2020. overview we are a leading provider of data and analytics technology and services to healthcare organizations . our solution comprises a cloud-based data platform , analytics software , and professional services expertise . our customers , which are primarily healthcare providers , use our solution to manage their data , derive analytical insights to operate their organizations , and produce measurable clinical , financial , and operational improvements . we envision a future where all healthcare decisions are data informed . health catalyst was founded in 2008 by healthcare analytics industry pioneers . our founders and team developed the initial version of our solution , consisting of an early version of our data platform , select analytics accelerators , and professional services expertise . from the beginning , our solution has been focused on enabling our mission : to be the catalyst for massive , measurable , data-informed healthcare improvement . we currently employ more than 1,000 team members . highlights from the years ended december 31 , 2020 , 2019 , and 2018 include : for the years ended december 31 , 2020 , 2019 , and 2018 , our total revenue was $ 188.8 million , $ 154.9 million , and $ 112.6 million , respectively . the growth in revenue was primarily due to revenue from new customers , including customers of our recent acquired entities , and existing customers paying higher technology access fees from contractual , annual escalators . for the years ended december 31 , 2020 , 2019 , and 2018 , we incurred net losses of $ 115.0 million , $ 60.1 million , and $ 62.0 million , respectively . for the years ended december 31 , 2020 , 2019 , and 2018 , our adjusted ebitda was $ ( 21.3 ) million , $ ( 27.4 ) million , and $ ( 38.1 ) million , respectively . see โ selected consolidated financial and other dataโreconciliation of non-gaap financial measures โ for more information about this financial measure , including the limitations of such measure and a reconciliation to the most directly comparable measure calculated in accordance with gaap . see โ key factors affecting our performance โ for more information about important opportunities and challenges related to our business . on july 29 , 2019 , we closed our ipo in which we issued and sold 8,050,000 shares of common stock at a price to the public of $ 26.00 per share for aggregate net proceeds of $ 190.0 million after deducting underwriting discounts and commissions and offering expenses payable by us . 61 covid-19 impact in march 2020 , the world health organization declared covid-19 a global pandemic . this pandemic , which has continued to spread , and the related adverse public health developments , including orders to shelter-in-place , travel restrictions , and mandated business closures , have adversely affected workforces , organizations , governments , customers , economies , and financial markets globally , leading to an economic downturn and increased market volatility . it has also disrupted the normal operations of many businesses , including ours . covid-19 has disrupted and we believe will continue to disrupt the normal operations of our customers , which are primarily healthcare providers . given the unknown timeline and the near-term uncertainty of covid-19 on our business , there continues to be uncertainty as to the extent to which the global covid-19 pandemic may adversely impact our business operations , financial performance , and results of operations at this time . the ongoing covid-19 surge , coupled alongside vaccine rollout logistics , likely indicate that our country and national healthcare system will be under some amount of continued strain over the coming months . that said , we continue to be encouraged as we witness meaningful evidence that the healthcare provider ecosystem is significantly better equipped and prepared to respond to the ongoing pandemic , including through its treatment efficacy , supply chain logistics , capacity planning , and broader operational optimization . lastly , we see additional reasons for optimism over the near-to-medium term , as we begin to witness early signs of progress on vaccine rollout logistics . we are fortunate to have a highly recurring revenue model in which greater than 90 % of our revenue is recurring in nature . as such , we expect that the near-term impact of covid-19 on our total revenue will be relatively muted , as evidenced by our revenue performance for the year ended december 31 , 2020. additionally , we benefit from a high level of technology revenue predictability , especially our dos subscription customers that typically have built-in , contractual technology revenue escalators . we also have developed a number of technology and services solutions designed specifically to support healthcare providers during the covid-19 pandemic . importantly , since the onset of the covid-19 pandemic , our customers ' overall usage of our data platform has increased meaningfully . additionally , we have seen usage of our covid-19-specific products shift from those focused on covid-19 preparedness to those focused on financial recovery and planning analytics in areas such as elective procedures , ambulatory care , and revenue cycle . story_separator_special_tag we have experienced and expect to continue to experience operational inefficiencies associated with managing multiple hosting providers , resulting in a headwind against adjusted technology gross margin . the primary costs incurred to deliver our professional services are the salaries , benefits , and other headcount-related costs of our team members . we delineate our sales organization by new customer acquisition and existing customer retention and expansion . selling efforts to new customers vary . many of our new customers engage with us broadly for multiple use cases , requiring buy-in during the sales cycle across the c-suite . alternatively , in some instances , we engage with a customer in a single-use case . after we demonstrate measurable improvements , we work with our customers to expand the utilization of our solution to other use cases or enterprise-wide . the average sales cycle for a new customer is approximately one year , and that timeline can vary materially . because of our vertical focus on the healthcare industry , we believe our sales and marketing resources can be deployed more efficiently than at horizontally-focused companies that provide technology and services to multiple industries . over the past few years , we have invested in growth infrastructure by adding to our sales operations and marketing teams , which are built to help us scale over the long term . we have demonstrated a consistent track record of innovation through research and development over time as evidenced by our new product features and new product offerings . this innovation is driven by feedback we glean from our customers , professional services teams , and the market generally . our investments in product development have been focused on increasing the capabilities of our solution and expanding the number of use cases we address for our customers . 63 key business metrics we regularly review a number of metrics , including the following key financial metrics , to manage our business and evaluate our operating performance compared to that of other companies in our industry : replace_table_token_14_th we monitor the key metrics set forth in the preceding table to help us evaluate trends , establish budgets , measure the effectiveness and efficiency of our operations , and determine employee incentives . we discuss adjusted gross profit , adjusted gross margin , and adjusted ebitda in more detail below . adjusted gross profit and adjusted gross margin adjusted gross profit is a non-gaap financial measure that we define as revenue less cost of revenue , excluding depreciation and amortization and excluding stock-based compensation , tender offer payments deemed compensation , and post-acquisition restructuring costs . we define adjusted gross margin as our adjusted gross profit divided by our revenue . we believe adjusted gross profit and adjusted gross margin are useful to investors as they eliminate the impact of certain non-cash expenses and allow a direct comparison of these measures between periods without the impact of non-cash expenses and certain other non-recurring operating expenses . we believe these non-gaap measures are useful in evaluating our operating performance compared to that of other companies in our industry , as these metrics generally eliminate the effects of certain items that may vary from company to company for reasons unrelated to overall profitability . see above for information regarding the limitations of using our adjusted gross profit and adjusted gross margin as financial measures and for a reconciliation of revenue to our adjusted gross profit , the most directly comparable financial measure calculated in accordance with gaap . adjusted ebitda adjusted ebitda is a non-gaap financial measure that we define as net loss adjusted for interest and other expense , net , loss on debt extinguishment , income tax provision ( benefit ) , depreciation and amortization , stock-based compensation , acquisition transaction costs , change in fair value of contingent consideration , duplicate headquarters rent expense , tender offer payments deemed compensation , and post-acquisition restructuring costs when they are incurred . we believe adjusted ebitda provides investors with useful information on period-to-period performance as evaluated by management and comparison with our past financial performance . we believe adjusted ebitda is useful in evaluating our operating performance compared to that of other companies in our industry , as this metric generally eliminates the effects of certain items that may vary from company to company for reasons unrelated to overall operating performance . see โ selected consolidated financial and other data - reconciliation of non-gaap financial measures โ for information regarding the limitations of using our adjusted ebitda as a financial measure and for a reconciliation of our net loss to adjusted ebitda , the most directly comparable financial measure calculated in accordance with gaap . 64 other key metrics we also regularly monitor and review the number of dos subscription customers and dollar-based retention rate as shown in the following tables : replace_table_token_15_th dos subscription customers since 2016 , our primary contracting model is a subscription-based contract to our dos platform , analytics applications , and professional services . given how fundamental dos is to our solution and because the vast majority of our total revenue is derived from dos subscription customers , we believe our dos subscription customer count , which represents customers with active subscriptions at period end , is the best representation of our market penetration and the growth of our business . our 2020 dos subscription customer additions of nine was lower than the historical annual number of additions due to the impact of covid-19 on our sales achievement during the first half of 2020. replace_table_token_16_th dollar-based retention rate we calculate our dollar-based retention rate as of a period end by starting with the sum of the annual recurring revenue ( arr ) from customers as of the date 12 months prior to such period end ( prior period arr ) . we then calculate the sum of the arr from these same customers as of the current period end ( current period arr ) .
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results of operations the following tables set forth our consolidated results of operations data and such data as a percentage of total revenue for each of the periods indicated : replace_table_token_17_th ( 1 ) includes stock-based compensation expense , as follows : replace_table_token_18_th 70 ( 2 ) includes tender offer payments deemed compensation expense , as follows : replace_table_token_19_th ( 3 ) includes post-acquisition restructuring costs , as follows : replace_table_token_20_th ( 4 ) includes acquisition transaction costs , as follows : year ended december 31 , 2020 2019 2018 acquisition transaction costs : ( in thousands ) general and administrative $ 2,670 $ โ $ โ ( 5 ) includes the change in fair value of contingent consideration liabilities , as follows : year ended december 31 , 2020 2019 2018 change in fair value of contingent consideration : ( in thousands ) general and administrative $ 14,088 $ โ $ โ ( 6 ) includes duplicate headquarters rent expense , as follows : year ended december 31 , 2020 2019 2018 duplicate headquarters rent expense : ( in thousands ) general and administrative $ 1,398 $ โ $ โ 71 replace_table_token_21_th discussion of the years ended december 31 , 2020 and 2019 revenue replace_table_token_22_th total revenue was $ 188.8 million for the year ended december 31 , 2020 , compared to $ 154.9 million for the year ended december 31 , 2019 , an increase of $ 33.9 million , or 22 % . technology revenue was $ 110.5 million , or 58 % of total revenue , for the year ended december 31 , 2020 , compared to $ 84.0 million , or 54 % of total revenue , for the year ended december 31 , 2019. the revenue growth was primarily from new dos subscription customers , acquired technology customers , and revenue from existing customers paying higher technology access fees from contractual , annual escalators , and new offerings of expanded support services .
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as we adopted this new guidance beginning with our interim financial statements for the three months ended march 31 , 2013 , all years presented are comparable . see note 12 for our disclosures . in april 2014 , the fasb issued asu 2014-08 , reporting discontinued operations and disclosures of disposals of components of story_separator_special_tag this annual report on form 10-k and the documents incorporated by reference herein contain forward-looking statements regarding future events and results that are subject to the `` safe harbor '' provisions of the private securities litigation reform act of 1995. all statements , other than statements of historical facts , are statements that could be deemed forward-looking statements . see `` private securities litigation reform act of 1995 safe harbor cautionary statement , '' for further information on forward-looking statements . executive summary segment results described in the executive summary and consolidated results of operations section are net of intercompany eliminations . the company is a full-service regional provider of data , entertainment , and voice communications services over wireline and wireless networks , a provider of managed and professional information technology services , and a reseller of information technology ( `` it '' ) and telephony equipment . in addition , enterprise customers across the united states rely on cincinnati bell technology solutions inc. ( `` cbts '' ) , a wholly-owned subsidiary , for efficient , scalable communication systems and end-to-end it solutions . consolidated revenue totaled $ 1,278.2 million for 2014 , up 2 % , as the growth from our strategic products , combined with increased telecom and it equipment sales , more than offset declines from wireless and legacy products . revenue from our strategic products totaled $ 435.6 million in 2014 , up 21 % compared to 2013. operating income in 2014 was $ 115.8 million , down from the prior year primarily due to increased costs associated with winding down wireless operations . wireless restructuring charges totaled $ 16.3 million , in addition to an asset impairment of $ 7.5 million and $ 62.2 million additional depreciation and amortization expense due to reducing the useful lives of certain wireless assets . these cost increases were partially offset by accelerated deferred gain amortization and one-time ipo transaction related compensation in the prior year . net income for the year equaled $ 75.6 million resulting in basic and diluted earnings per share of $ 0.31 due largely to the gain on the initial monetization of our cyrusone equity method investment . on january 24 , 2013 , we completed the initial public offering ( `` ipo '' ) of cyrusone , our former data center colocation segment . as of the date of the ipo , we owned approximately 1.9 million shares , or 8.6 % , of cyrusone 's common stock and were limited partners in cyrusone lp , owning approximately 42.6 million , or 66 % of its partnership units . we effectively owned 69 % of cyrusone and continued to have significant influence over the entity , but we did not control its operations . therefore , effective with the completion of the ipo , we no longer include the accounts of cyrusone in our consolidated financial statements , but account for our ownership in cyrusone as an equity method investment . commencing january 17 , 2014 , we are permitted to exchange the partnership units of cyrusone lp into cash or shares of common stock of cyrusone , as determined by cyrusone , on a one-for-one basis based upon the fair value of a share of cyrusone common stock , subject to certain limitations which restricted the volume of shares we are permitted to sell . the registration statement filed by cyrusone on march 24 , 2014 became effective on april 4 , 2014 and eliminated all prior limitations restricting the volume of shares we are allowed to sell . on june 25 , 2014 , we consummated the sale of 16.0 million partnership units of cyrusone lp to cyrusone , inc. at a price of $ 22.26 per unit . the sale generated proceeds of $ 355.9 million and resulted in a gain of $ 192.8 million . as of december 31 , 2014 , we effectively own 44 % of cyrusone , which is held in the form of 1.9 million shares of cyrusone common stock and 26.6 million cyrusone lp partnership units . 29 form 10-k part ii cincinnati bell inc. in the second quarter of 2014 , we entered into agreements to sell our wireless spectrum licenses and certain other assets related to our wireless business . this agreement to sell our wireless spectrum license closed on september 30 , 2014 , for cash proceeds of $ 194.4 million . as a result , we derecognized the $ 88.2 million carrying value of the licenses previously reported as `` intangible assets , net '' in the consolidated balance sheets . also on september 30 , 2014 , we entered into a separate agreement to use certain spectrum licenses until we no longer provide wireless service . we recorded the fair value of the lease of the spectrum of $ 6.4 million , in `` prepaid expenses '' in the consolidated balance sheets . this fair value is considered a level 3 measurement based on other comparable transactions . the asset is being amortized over a six month period and had a net carrying value of $ 3.2 million as of december 31 , 2014. in addition , as we continue to use the licenses , we deferred the gain of $ 112.6 million related to the sale of the spectrum , which is presented in the consolidated balance sheets . we plan to operate and generate cash from our wireless operations until no later than april 6 , 2015. at that time , we will transfer certain leases and other assets valued at approximately $ 25 million to the acquiring company . story_separator_special_tag the completion of the ipo during 2013 resulted in a qualifying transaction requiring payment of compensation to the employees covered under this plan . no such transaction-related compensation has occurred in 2014 . during the three months ended june 30 , 2013 , the company amended the management pension plan to eliminate all future pension service credits effective july 1 , 2013. as a result , the company remeasured its projected benefit obligation for this plan , and the wireline segment recognized a curtailment gain of $ 0.6 million in the second quarter of 2013 . the gain on sale or disposal of assets totaled $ 0.3 million in 2014 compared to a loss on sale or disposal of assets of $ 2.4 million recorded in 2013 . the wireline segment recorded gains on the sale of copper cabling that was no longer in use totaling $ 0.4 million and $ 1.1 million in 2014 and 2013 , respectively . the corporate segment recorded a loss on sale or disposal of assets of $ 0.1 million in 2014 partially offsetting the gain . in 2013 , wireless recorded a $ 3.5 million loss on disposal of assets for equipment that had no resale market or has either been disconnected from the wireless network , abandoned or demolished . amortization of the deferred gain totaled $ 22.9 million in 2014 compared to $ 3.3 million in 2013. the change in the useful life of our long-lived wireless assets , excluding the spectrum licenses , resulted in the acceleration of the amortization of the deferred gain in 2014 . in december 2009 , the company sold 196 wireless towers for $ 99.9 million in cash proceeds and leased back a portion of the space on these towers for a term of 20 years , which resulted in a deferred gain of $ 35.1 million . impairment charges totaling $ 12.1 million in 2014 included $ 7.5 million for certain construction-in-progress projects that will no longer be completed due to the wind down of the wireless business and $ 4.6 million for the abandonment of an internal use software project that was written off in the wireline segment . no impairment charges were recorded in 2013. transaction costs of $ 4.4 million were incurred in 2014 , up from $ 1.6 million incurred in 2013 . in 2014 , these costs primarily represent fees associated with the sale of our wireless spectrum licenses . in 2013 , these costs represented legal and consulting costs incurred to restructure our legal entities in preparation for the proposed ipo of the common stock of cyrusone and to prepare cyrusone to be a real estate investment trust . interest expense was $ 148.7 million in 2014 compared to $ 182.0 million in 2013 . the decrease was primarily due to the company amending its corporate credit agreement to include a $ 540.0 million tranche b term loan and using the proceeds to redeem all of the company 's $ 500.0 million 8 1 / 4 % senior notes on october 15 , 2013 . in addition , in the third quarter of 2014 , the company redeemed $ 325.0 million outstanding 8 ยพ % senior subordinated notes due 2018 at a redemption price of 104.375 % . the deconsolidation of cyrusone in january 2013 also resulted in a $ 2.5 million decrease compared to the prior year . the company recorded a loss on extinguishment of debt totaling $ 19.4 million in the third quarter of 2014 related to the redemption of $ 325.0 million 8 ยพ % senior subordinated notes due 2018. in the fourth quarter of 2014 , the company redeemed $ 22.7 million of its outstanding 8 3 / 8 % senior notes due 2020 at par and recognized a loss on extinguishment of debt totaling $ 0.2 million . 31 form 10-k part ii cincinnati bell inc. loss from cyrusone equity method investment totaled $ 7.0 million in 2014 , down from $ 10.7 million in 2013 , for the company 's share of cyrusone 's net loss . in the second quarter of 2014 , the company recognized a $ 192.8 million gain on the sale of 16.0 million cyrusone lp partnership units . income tax expense of $ 57.4 million in 2014 was up compared to the prior year due primarily to higher pre-tax income . in 2013 , the tax benefit was a result of loss before income taxes offset by a valuation allowance provision of $ 10.7 million for texas margin credits , which effective with cyrusone 's ipo , are uncertain of being realized before their expiration date . the company has certain non-deductible expenses , including interest on securities originally issued to acquire its broadband business ( the `` broadband securities '' ) or securities that the company has subsequently issued to refinance the broadband securities . in periods without tax law changes , the company expects its effective tax rate to exceed statutory rates primarily due to the non-deductible expenses associated with the broadband securities . the company uses federal and state net operating losses to defray payment of federal and state tax liabilities . as a result , the company had cash income tax payments , net of refunds , of $ 9.1 million in 2014 . 2013 compared to 2012 service revenue was $ 1,039.3 million in 2013 , a decrease of $ 233.5 million compared to 2012 , primarily due to the deconsolidation of cyrusone , which accounted for $ 199.7 million of the decline . wireless service revenue was down $ 39.6 million from the prior year as a result of continued postpaid subscriber losses . wireline service revenue declined by only $ 2.7 million compared to 2012 as the growth in our strategic products continues to increasingly mitigate the loss from access line , long-distance and dsl subscriber declines .
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discussion of operating segment results the company manages its business based upon products and service offerings . at december 31 , 2012 , we operated four business segments : wireline , it services and hardware , wireless and data center colocation . effective january 24 , 2013 , the date of the cyrusone ipo , we no longer include cyrusone , our former data center colocation segment , in our consolidated financial statements and now account for our ownership in cyrusone as an equity method investment . therefore , at december 31 , 2014 and 2013 , we operated three business segments : wireline , it services and hardware and wireless . certain corporate administrative expenses have been allocated to our business segments based upon the nature of the expense and the relative size of the segment . intercompany transactions between segments have been eliminated . 34 form 10-k part ii cincinnati bell inc. wireline the wireline segment provides products and services such as data transport , high-speed internet , entertainment , local voice , long distance , voip , and other services . cincinnati bell telephone company llc ( cbt ) , a subsidiary of the company , is the incumbent local exchange carrier ( ilec ) for a geography that covers a radius of approximately 25 miles around cincinnati , ohio , and includes parts of northern kentucky and southeastern indiana . cbt has operated this territory for over 140 years . voice and data services beyond its ilec territory , particularly in dayton and mason , ohio , are provided through the operations of cincinnati bell extended territories llc ( `` cbet '' ) , a competitive local exchange carrier ( `` clec '' ) and subsidiary of cbt . the company provides long distance and voip services primarily through its cincinnati bell any distance inc. ( `` cbad '' ) and evolve business solutions llc ( `` evolve '' ) subsidiaries .
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we serve our customers through a global network of sales and service professionals and distributors in more than 30 countries and through our ten manufacturing facilities on three continents . these global capabilities and longstanding relationships with some of the largest multinational oil & gas , chemical processing , power and epc companies in the world have enabled us to diversify our revenue streams and opportunistically access high growth markets worldwide . for fiscal 2020 , approximately 59 % of our revenues were generated outside of the united states . since march 2015 , we have acquired four companies ( ths , unitemp , sumac and ipi ) , that offer complementary products and services to our core thermal 28 solution offerings . we actively pursue both organic and inorganic growth initiatives that serve to advance our corporate strategy . revenue . our revenues are derived from providing customers with a full suite of innovative and reliable process heating solutions , including electric and steam heat tracing , tubing bundles , control systems , design optimization , engineering services , installation services , portable power solutions and software . additionally , ths offers a complementary suite of advanced heating and filtration solutions for industrial and hazardous area applications . historically , our sales are primarily to industrial customers for petroleum and chemical plants , oil and gas production facilities and power generation facilities . our petroleum customers represent a significant portion of our business . we serve all three major categories of customers in the petroleum industry - upstream exploration/production , midstream transportation and downstream refining . overall , demand for industrial heat tracing solutions falls into two categories : ( i ) new facility construction , which we refer to as greenfield projects , and ( ii ) recurring maintenance , repair and operations and facility upgrades or expansions , which we refer to as mro/ue . greenfield construction projects often require comprehensive heat tracing solutions . we believe that greenfield revenue consists of sales revenue by customer in excess of $ 1 million annually ( excluding sales to resellers ) , and typically includes most orders for projects related to facilities that are new or that are built independent of existing facilities . we refer to sales revenue by customer of less than $ 1 million annually , which we believe are typically derived from mro/ue , as mro/ue revenue . based on our experience , we believe that $ 1 million in annual sales is an appropriate threshold for distinguishing between greenfield revenue and mro/ue revenue . however , we often sell our products to intermediaries or subcontract our services ; accordingly , we have limited visibility into how our products or services may ultimately be used and can provide no assurance that our categorization may accurately reflect the sources of such revenue . furthermore , our customers do not typically enter into long-term forward maintenance contracts with us . in any given year , certain of our smaller greenfield projects may generate less than $ 1 million in annual sales , and certain of our larger plant expansions or upgrades may generate in excess of $ 1 million in annual sales , though we believe that such exceptions are few in number and insignificant to our overall results of operations . ths has been excluded from the greenfield and mro/ue calculations . most of ths 's revenue would be classified as mro/ue under these definitions . we believe that our pipeline of planned projects , in addition to our backlog of signed purchase orders , provides us with visibility into our future revenue . historically we have experienced few order cancellations , and the cancellations that have occurred in the past have not been material compared to our total contract volume or total backlog . the small number of order cancellations is attributable in part to the fact that a large portion of our solutions are ordered and installed toward the end of greenfield project construction . our backlog at march 31 , 2020 was $ 105.4 million as compared to $ 120.0 million at march 31 , 2019 . the timing of recognition of revenue out of backlog is not always certain , as it is subject to a variety of factors that may cause delays , many of which are beyond our control ( such as customers ' delivery schedules and levels of capital and maintenance expenditures ) . when delays occur , the recognition of revenue associated with the delayed project is likewise deferred . cost of sales . our cost of sales includes primarily the cost of raw material items used in the manufacture of our products , cost of ancillary products that are sourced from external suppliers and construction labor cost . additional costs of revenue include contract engineering cost directly associated to projects , direct labor cost , shipping and handling costs , and other costs associated with our manufacturing/fabrication operations . the other costs associated with our manufacturing/fabrication operations are primarily indirect production costs , including depreciation , indirect labor costs , and the costs of manufacturing support functions such as logistics and quality assurance . key raw material costs include polymers , copper , stainless steel , insulating material , and other miscellaneous parts related to products manufactured or assembled as part of our heat tracing solutions . historically , our primary raw materials have been readily available from multiple suppliers and raw material costs have been stable , and we have been generally successful with passing along raw material cost increases to our customers . therefore , increases in the cost of key raw materials of our products have not generally affected our gross margins . we can not provide any assurance that we may be able to pass along such cost increases , including the potential impacts of tariffs , to our customers in the future , and if we are unable to do so , our results of operations may be adversely affected . operating expenses . story_separator_special_tag the recent covid-19 pandemic and the measures being taken to address and limit the spread of the virus have adversely affected the economies and financial markets of many countries , resulting in an economic downturn that has negatively impacted , and may continue to negatively impact , global demand for our products and services . see part item 1a , `` risk factors '' above , for further discussion . the company has taken the following precautionary measures in light of current macroeconomic uncertainty resulting from the covid-19 pandemic : limiting discretionary spending across the organization ; as a precautionary measure to maximize liquidity , the company drew down $ 30.0 million on our senior secured credit facility ; decreasing payroll expense , including temporarily decreasing salaries for certain officers and implementing a reduction in force initiative that will reduce ongoing personnel cost by $ 6.5 million on an annual basis ; and reducing the budget for capital expenditures in the fiscal year ending march 31 , 2021 by approximately $ 6.9 million as compared to fiscal 2020. story_separator_special_tag style= '' font-family : inherit ; font-size:10pt ; '' > see note 17 , โ income taxes , โ to our audited consolidated financial statements included elsewhere in this annual report , for further detail on income taxes . net income available to thermon group holdings , inc. net income available to the company , after non-controlling interest , was $ 11.9 million in fiscal 2020 as compared to $ 22.8 million in fiscal 2019 , a decrease of $ 10.9 million or 47.5 % . the decrease in fiscal 2020 net income is primarily due to ( i ) a $ 14.3 million decrease in gross profit and ( ii ) a $ 4.5 million increase in marketing , general and administrative and engineering expense ( inclusive of stock compensation expense ) attributable to the growth of the business , offset in part by ( iii ) a $ 3.0 million decrease in amortization of intangibles , and ( iv ) a $ 4.8 million decrease in income tax expense . year ended march 31 , 2019 ( `` fiscal 2019 '' ) compared to the year ended march 31 , 2018 ( `` fiscal 2018 '' ) see item 7 , โ management 's discussion and analysis of financial condition and results of operations โ in our annual report on form 10-k for the fiscal year ended march 31 , 2019 filed with the sec on june 12 , 2019 for a discussion of the results of operations in fiscal 2019 as compared to fiscal 2018. contractual obligations and contingencies contractual obligations . the following table summarizes our significant contractual payment obligations as of march 31 , 2020 and the effect such obligations are expected to have on our liquidity position assuming all obligations reach maturity . replace_table_token_5_th ( 1 ) consists of quarterly scheduled principal payments under our new term loan b credit facility of $ 0.6 million through july 31 , 2024 , with the remaining principal balance being settled with a lump-sum payment of $ 164.8 million due at maturity in october 2024. please see note 11 , โ long-term debt โ in our financial statements , for more information on our new term loan b credit facility . ( 2 ) consists of estimated future term loan interest payments under our credit facility based on our current interest rate as of march 31 , 2020 . ( 3 ) we enter into operating leases in the normal course of business . our operating leases include the leases on certain of our manufacturing and warehouse facilities , in addition to certain offices of our affiliates . ( 4 ) represents the future annual service fees associated with certain information technology service agreements with several vendors . contingencies . we are involved in various legal and administrative proceedings that arise from time to time in the ordinary course of doing business . some of these proceedings may result in fines , penalties or judgments being assessed against us , which may adversely affect our financial results . in addition , from time to time , we are involved in various disputes , which may or may not be settled prior to legal proceedings being instituted and which may result in losses in excess of accrued liabilities , if any , relating to such unresolved disputes . as of march 31 , 2020 , management believes that adequate reserves have been established for any probable and reasonably estimable losses . expenses related to litigation reduce operating income . we do not believe that the outcome of any of these proceedings or disputes would have a significant adverse effect on our financial 33 position , long-term results of operations , or cash flows . it is possible , however , that charges related to these matters could be significant to our results of operations or cash flows in any one accounting period . for information on legal proceedings , see note 14 , `` commitments and contingencies '' to our consolidated financial statements contained elsewhere in this annual report , which is hereby incorporated by reference into this item 7. to bid on or secure certain contracts , we are required at times to provide a performance guaranty to our customers in the form of a surety bond , standby letter of credit or foreign bank guaranty . on march 31 , 2020 , we had in place standby letters of credit , bank guarantees and performance bonds totaling $ 15.2 million to back our various customer contracts . our indian subsidiary also has $ 4.8 million in customs bonds outstanding . liquidity and capital resources our primary sources of liquidity are cash flows from operations and funds available under our revolving credit facility and other revolving lines of credit . our primary liquidity needs are to finance our working capital , capital expenditures debt service needs and potential future acquisitions .
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results of operations the following table sets forth data from our statements of operations as a percentage of sales for the periods indicated . replace_table_token_4_th ( 1 ) other expense in fiscal 2018 includes a foreign currency transaction loss of $ 3.3 million in connection with the option contract entered into to secure the ths acquisition purchase price , and a $ 2.3 million loss related to a derivative contract to hedge a $ 112.8 million long-term intercompany loan between canada and the united states related to the ths acquisition . 31 ( 2 ) represents income attributable to the 25 % non-controlling equity interest in the thermon power solutions ( `` tps '' ) business that was retained by sellers in the tps transaction . subsequent to july 20 , 2018 through august 1 , 2019 , income attributable to non-controlling equity interest represented 12.5 % . subsequent to august 1 , 2019 , income attributable to non-controlling equity interest represents 0 % . see note 12 . `` related party transactions '' to our consolidated financial statements included in item 8 of this annual report for further discussion in connection with decreases in retained sumac equity interest subsequent t o march 31 , 2018. year ended march 31 , 2020 ( `` fiscal 2020 '' ) compared to the year ended march 31 , 2019 ( `` fiscal 2019 '' ) revenue . revenue for fiscal 2020 was $ 383.5 million , compared to $ 412.6 million for fiscal 2019 , a decrease of $ 29.1 million , or 7 % . our sales mix ( excluding ths ) in fiscal 2020 was 40 % greenfield and 60 % mro/ue , as compared to 49 % greenfield and 51 % mro/ue in fiscal 2019 . greenfield revenue is historically at or near 40 % of our total revenue .
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factors that could cause or contribute to such differences include , but are not limited to , those discussed in โ risk factors โ of this annual report on form 10-k. on march 3 , 2015 , we announced our financial results for the year ended december 31 , 2014 which included our preliminary condensed consolidated balance sheet . subsequently , we finalized the accounting for our subsequent events related to our debt financing arrangements with the comerica bank and with the bank of tokyo-mitsubishi ufj , ltd. , respectively , as discussed below and in note 19 to the consolidated financial statements . accordingly , our consolidated balance sheet at december 31 , 2014 presented in this annual report on form 10-k reflects a reclassification of $ 7.5 million from the current portion of long-term debt to the long-term debt , net of current portion and a reclassification of $ 5.3 million from current restricted cash and investments to restricted cash and investments , non-current . business overview we develop , manufacture and sell optoelectronic products that transmit , receive and switch high speed digital optical signals for communications networks . we sell our products to the world 's leading network equipment manufacturers , including alcatel-lucent sa , ciena corporation , cisco systems , inc. , and huawei technologies co. , ltd. these four companies are among our largest customers and a focus of our strategy due to their leading market positions . we have research and development and wafer fabrication facilities in san jose and fremont , california and in tokyo , japan that coordinate with our research and development and manufacturing facilities in dongguan , shenzhen and wuhan , china and ottawa , canada . we use proprietary design tools and design-for-manufacturing techniques to align our design process with our precision nanoscale , vertically integrated manufacturing and testing . we believe we are one of the highest volume pic manufacturers in the world and that we can further expand our manufacturing capacity to meet market needs . in 2014 , our revenue growth of 8 % over the prior-year was driven primarily by demand for our 100gbps speed products , as carriers continued to accelerate deployment of high capacity optical transport networks worldwide . we expect continued volume growth for our 100gbps products , although quarter-to-quarter results may show considerable variability as is usual in a rapid initial ramp-up for a new technology . similar to revenue , our gross margins can fluctuate materially depending on a variety of factors including average selling price changes , product mix , volume , manufacturing utilization and ongoing manufacturing process improvements . we are discontinuing certain products that accounted for approximately $ 23 million of total revenue in 2014 and are expected to account for less than 2 % of anticipated total revenue in 2015. these products , which are in the end of life , had relatively low gross margins , and are in a โ last time buy โ process with customers currently . we intend to continue actions to end the life of certain products that are not contributing to profitability , which going forward is expected to lower our annual revenue growth while improving gross margin and profitability . on january 2 , 2015 , we closed an acquisition of the tunable laser product lines of emcore for approximately $ 17.5 million . consideration for the transaction consisted of $ 1.5 million in cash and a promissory note of approximately $ 16.0 million , which is subject to certain adjustments for inventory , net accounts receivable and pre-closing revenues . the promissory note will bear interest of 5 % per annum for the first year and 13 % per annum for the second year ; the interest will be payable semi-annually in cash , and the note will mature two years from the closing of the transaction . in addition , the promissory note will be subject to prepayment under certain circumstances and will be secured by certain of the assets to be sold pursuant to the asset purchase agreement with emcore . the note is subordinated to our existing bank debt in the u.s. we will account for the acquisition as a business combination . on march 29 , 2013 , we acquired certain assets and assumed certain liabilities related to the semiconductor optical components business unit of lapis semiconductor co. , ltd. ( โ lapis โ ) , a wholly-owned subsidiary of rohm co. , ltd. of japan . the business is now known as neophotonics semiconductor . total consideration for this acquisition was approximately $ 24.3 million , including $ 13.1 million in cash and $ 11.1 million in notes payable for the purchase of the real estate used by neophotonics semiconductor , of which 700 million japanese yen ( โ jpy โ ) ( $ 5.8 million ) was outstanding as of december 31 , 2014 . 46 debt arrangements during the first quarter of 2015 , we completed actions to restructure certain of our debt obligations . by restructuring our debt , we eliminated certain cash restrictions and improved our cash flow . as of december 31 , 2014 , we had $ 23.3 million of long-term debt , which consisted of a term loan led by comerica bank of $ 17.5 million , secured by restricted cash of an equal amount , and a mortgage from lapis of $ 5.8 million . in the first quarter of 2015 , we restructured both of these arrangements to increase the usability of our comerica borrowing capacity by approximately $ 9 million while eliminating certain restrictions on cash ; and we entered into a new financing arrangement with bank of tokyo-mitsubishi ufj , ltd. which paid off the lapis mortgage in japan and increased our available cash balances through two long-term mortgage instruments totaling $ 12.6 million . story_separator_special_tag on most orders , our terms of sale provide that title passes to the buyer upon shipment by us . in certain cases , our terms of sale may provide that title passes to the buyer upon delivery of the goods to the buyer . revenue related to the sale of consignment inventory at customer vendor managed locations is not recognized until the product is pulled from inventory stock by customers . payments made to third-party sales representatives are recorded to sales and marketing expense and not a reduction of revenue as the sales agent services they provide have an identifiable benefit and are made at similar rates of other sales agent service providers . shipping and handling costs are included in the cost of goods sold . we present revenue net of sales taxes and any similar assessments . stock-based compensation expense we grant stock options , stock purchase rights , stock appreciation units and restricted stock units to employees , directors and consultants . the stock-based awards are accounted for at fair value as of the measurement date . for stock options and restricted stock units , the measurement date is the grant date and for stock purchase rights the measurement date is the first day of the offering period . stock appreciation units are subject to re-measurement each reporting period . we recognize the fair value over the period during which an employee is required to provide services in exchange for the award , known as the requisite service period ( usually the vesting period ) on a straight-line basis . stock-based compensation expense includes the impact of estimated forfeitures . we estimate future forfeitures at the date of grant and revise the estimates , if necessary , in subsequent periods if actual forfeitures differ from those estimates . we generally account for stock-based compensation using the black-scholes-merton option-pricing model . determining the appropriate fair value model and calculating the fair value of stock-based awards requires judgment , including estimating stock price volatility , forfeiture rates and expected life . if any of these assumptions used in the option-pricing models change , our stock-based compensation expense could change on our consolidated financial statements . business combinations we allocate the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values . the excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill . when determining the fair values of assets acquired and liabilities assumed , management makes significant estimates and assumptions , especially with respect to intangible assets . fair value estimates are based on the assumptions management believes a market participant would use in pricing the asset or liability . critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows from customer relationships and acquired patents and developed technology ; and discount rates . management 's estimates of fair value are based upon assumptions believed to be reasonable , but which are inherently uncertain and unpredictable and , as a result , actual results may differ from estimates . amounts recorded in a business combination may change during the measurement period , which is a period not to exceed one year from the date of acquisition , as additional information about conditions existing at the acquisition date becomes available . long-lived assets we assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable . an impairment loss would be recognized when the sum of the future net cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount . the estimated future cash flows are based upon , among other things , assumptions about expected future operating performance and may differ from actual cash flows . if our estimates regarding future cash flows derived from such assets were to change , we may record an impairment to the value of these assets . 48 valuation of inventories we record inventories at the lower of cost ( using the first-in , first-out method ) or market , after we give appropriate consideration to obsolescence and inventories in excess of anticipated future demand . in assessing the ultimate recoverability of inventories , we are required to make estimates regarding future customer demand , the timing of new product introductions , economic trends and market conditions . if the actual product demand is significantly lower than forecasted , we could be required to record additional inventory write-downs which would be charged to cost of goods sold . obsolescence is determined from several factors , including competitiveness of product offerings , market conditions and product life cycles . write-downs of excess and obsolete inventory are charged to cost of goods sold . 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 this lower-cost inventory is subsequently sold , it will result in lower costs and higher gross margin for those products . any write-downs would have an adverse impact on our gross margin . during the years ended december 31 , 2014 , 2013 and 2012 , we recorded excess and obsolete inventory charges of $ 1.5 million , $ 3.2 million and $ 3.1 million , respectively . warranty liabilities we provide warranties to cover defects in workmanship , materials and manufacturing of our products for a period of one to two years to meet stated functionality specifications . from time to time , we have agreed , and may agree , to warranty provisions providing for extended terms or with a greater scope . we test products against specified functionality requirements prior to delivery , but we nevertheless from time to time experience claims under our warranty guarantees .
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results of operations the following table presents certain consolidated statements of operations data for the periods indicated as a percentage of total revenue : replace_table_token_6_th revenue ( in thousands , except percentages ) 2014 % change 2013 to 2014 2013 % change 2012 to 2013 2012 total revenue $ 306,177 8 % $ 282,242 15 % $ 245,423 we sell substantially all of our products to original equipment manufacturers , or oems . we recognize revenue upon delivery of our products to the oem . we price our products based on market and competitive conditions and may periodically reduce the price of our products as market and competitive conditions change and as manufacturing costs are reduced . our sales transactions to customers are denominated primarily in chinese renminbi ( โ rmb โ ) , u.s. dollars and jpy . revenue is driven by the volume of shipments and may be impacted by pricing pressures . we have generated most of our revenue from a limited number of customers . customers accounting for more than 10 % of our total revenue and revenue from our top ten customers for the years ended december 31 , 2014 , 2013 and 2012 were as follows : replace_table_token_7_th for the years ended december 31 , 2014 , 2013 and 2012 , our percentage of sales from our china-based subsidiaries , the majority of which were denominated in rmb , were 20 % , 31 % , and 49 % , respectively . total revenue increased by $ 23.9 million , or 8 % , in 2014 compared to 2013. this increase was primarily attributable to a $ 30.5 million increase in revenue from our speed and agility products , including high speed 100gbps products , as carriers continued to accelerate deployments of 4g-lte networks in china which required increases in backbone capacity , partially offset by a 5 % decline in our access product revenue and a 14 % decline in our other telecom products .
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our members provide retail electric service to suburban and rural residences , farms and ranches , cities , towns and suburban communities , as well as large and small businesses and industries . as of december 31 , 2017 , our members served approximately 615,000 retail electric meters over a 200,000 squareโmile area . in 2017 , we sold 18.0 million mwhs , of which 88.3 percent was to members . total revenue from electric sales was $ 1.3 billion for 2017 , of which 92.3 percent was from member sales . we have entered into substantially similar contracts with each member extending through 2050 for 42 members ( which constitute approximately 96.8 percent of our revenue from member sales in 2017 ) and extending through 2040 for the remaining member ( dmea ) . these contracts are subject to automatic extension thereafter until either party provides at least a two years ' notice of its intent to terminate . each contract obligates us to sell and deliver to the member and obligates the member to purchase and receive at least 95 percent of its electric power requirements from us . each member may elect to provide up to 5 percent of its electric power requirements from distributed or renewable generation owned or controlled by the member . as of december 31 , 2017 , 22 members have enrolled in this program with capacity totaling approximately 143 mws of which 98 mws are in operation . in 2017 , we estimate that approximately 30 percent of the energy delivered by us and our members to our members ' customers came from non-carbon emitting resources . we provide electric power to our members at rates established by our board . rates to members are designed to generate revenues sufficient to recover our cost of service and to generate margins sufficient to establish reasonable reserves and to meet or exceed certain financial requirements . we also provide electric power to nonโmembers at contractual rates under longโterm arrangements and at market prices in short-term sale transactions . we are a taxable cooperative subject to federal and state taxation . as a taxable cooperative , we are allowed a tax exclusion for margins allocated to our members as patronage capital . under the cooperative structure , margins represent the excess of revenues over expenses . margins not distributed to members in cash constitute patronage capital , a cooperative 's principal source of equity . patronage capital is held for the account of our members without interest and is retired when our board deems it appropriate to do so . our master indenture restricts our ability to retire patronage capital during an event of default ( as defined in our master indenture ) . we must also satisfy the required ecr after giving effect to such retirement . additionally , the board evaluates liquidity goals and equity goals ( that are a part of the board policy for financial goals and capital credits ) in determining the timing and amount of patronage capital retirement , and if the board determines that our financial condition will not be impaired , retained patronage capital may be retired . historically , patronage capital has been retired in order of priority according to the year in which the patronage capital was furnished and credited ; however , our board has discretion on the order of retirement . as of december 31 , 2017 , patronage capital equity was $ 1.003 billion . we supply and transmit our members ' electric power requirements through a portfolio of resources , including generating and transmission facilities , longโterm purchase contracts and shortโterm energy purchases . we own , lease , have undivided percentage interests in , or have tolling arrangements with respect to , various generating stations . additionally , we transmit power to our members through resources that we own , lease or have undivided percentage interests in , or by wheeling power across lines owned by other transmission providers . see โ business - overview- power supply and transmission โ for a description of miles of transmission lines and substations . depending on our system requirements and contractual obligations , we are likely to both purchase and sell electric power during the same fiscal period . we purchase hydroelectric power under longโterm purchase contracts . 38 these contracts constituted our original power resource , and they remain a costโeffective power source . we also purchase , under longโterm purchase contracts with basin , all the power which we require to serve our members ' load in the eastern interconnection and fixed scheduled quantities of power in the western interconnection . our generating facilities are located in the western interconnection and generally isolated from our members ' load in the eastern interconnection . these longโterm purchase commitments represent a majority of our electric power purchases . we purchase additional power on a long and shortโterm basis , including 477 mws under long-term purchase contracts from other renewable energy resources , including wind , solar and small hydro . at the same time , we have agreed to supply electric power to nonโmembers . in addition , we utilize market purchases to optimize our position by routinely purchasing power when the market price is lower than our incremental production cost and routinely selling power to the shortโterm market after consideration of our incremental production cost when we have excess power available above our firm commitments to both members and nonโmembers . we also use short-term energy purchases during periods of generation outages at our facilities . 2017 developments we , along with nine other participants , are part of an informal group known as the mwtg , which was formed to develop strategies to adapt to the changing electric industry in the rocky mountain region of the western interconnection . in january 2017 , the mwtg began discussions with the spp to explore potential membership . in september 2017 , the mwtg announced plans to commence negotiations with spp regarding membership . story_separator_special_tag over the past five years , the average member revenue/kwh , which is our total member electric sales revenue divided by the kwhs sold , has increased at an average of 1.5 percent per year . this average increase does not represent the actual increase in the energy and demand rate components established by our board and paid by our members . member rates for energy and demand are set by our board , consistent with adequate electrical reliability and sound fiscal policy . energy is the physical electricity delivered through our transmission system to our members . in 2017 ( aโ40 rate ) and 2016 ( aโ39 rate ) , our class a wholesale rate schedules used the same rate design . the energy rate was billed based upon a price per kwh of physical energy delivered and the two demand rates ( a generation demand and a transmission/delivery demand ) were both billed on the member 's highest thirty-minute integrated total demand measured in each monthly billing period during our peak period from noon to 10:00 pm daily , monday through saturday , with the exception of six holidays . the 2017 ( aโ40 rate ) wholesale rate schedule increased the overall average budgeted member revenue/kwh for 2017 by 4.23 percent compared to the overall average budgeted member revenue/kwh for 2016. in accordance with budgetary and rate-setting authority of the board , as part of our board approving the aโ40 rate schedule in 2016 , which was implemented on january 1 , 2017 , the board approved the income recognition of $ 40.0 million of previously deferred regulatory liabilities for use in 2017 , including $ 30.0 million of previously deferred non-member electric sales revenue , of which $ 7.5 million was being recognized per quarter , and $ 10.0 million of previously deferred membership withdrawal income , of which $ 2.5 million was being recognized per quarter . based 40 upon projected margins attributable to us for 2017 , pursuant to the direction of our board , no previously deferred regulatory liabilities were recognized after the six months ended june 30 , 2017. furthermore , based upon the margin attributable to us in 2017 , pursuant to the direction of our board after considering the financial goals and rate objectives set forth in the board policy for financial goals and capital credits , $ 9.5 million of fourth quarter 2017 non-member electric sales revenue was deferred . in 2015 and 2014 , our class a wholesale rate schedule ( aโ38 rate ) had a different rate design that incorporated seasonal average demand rates . the monthly average demand was calculated by dividing each member 's total monthly energy ( kwh ) usage by the total hours in the month . the aโ38 rate design also had an energy rate that incorporated an on-peak and off-peak period . we included demand response and energy shaping products to complement the aโ38 rate schedule . the participating members ' monthly statements were adjusted using the demand response and energy shaping product incentives for members utilizing those products . in november 2014 , we implemented an optional rate ( trโ1 ) available to our non-new mexico members , effective december 1 , 2014 through december 31 , 2015. the trโ1 optional rate had an energy rate billed based upon energy delivered and a demand rate based upon our member 's highest thirty-minute integrated total demand measured using that member 's coincident peak during our peak period in each monthly billing period during our summer peak period or our winter peak period . three members elected this tr-1 optional rate . approved by our board in september 2017 , the aโ40 rate schedule will continue in effect for 2018. although rates established by our board are generally not subject to regulation by federal , state or other governmental agencies , we are currently required to submit our rates to the nmprc . as discussed below , we are involved in a proceeding in new mexico regarding efforts by the nmprc related to our prior wholesale rates payable by our new mexico members . this proceeding is currently suspended for global settlement discussions . as required by new mexico law , we file our rates to our new mexico members with the nmprc , which has regulatory authority over rate increases in new mexico , only in the event three or more of our new mexico members file a request for such a review and such review is found to be qualified by the nmprc . on september 10 , 2013 , we gave notice , as required by new mexico law , to the nmprc of our 2014 class a wholesale rate schedule ( aโ38 ) which was scheduled to become effective on january 1 , 2014. four members filed protests with the nmprc challenging the aโ38 rate . on december 11 , 2013 , the nmprc suspended the aโ38 rate filing . in august 2014 , we and the new mexico members executed a preliminary mediation agreement providing for a temporary rate rider through december 31 , 2015 and a suspension of the procedural schedule related to the rate protest to allow the parties time to proceed with more extensive discussions on a global settlement . we filed notice of the temporary rate rider with the nmprc and it became effective on october 2 , 2014. the temporary rate rider was applied in conjunction with our 2012 class a wholesale rate schedule to recover additional revenue from the new mexico members in an annualized amount of $ 7 million per year , which was prorated beginning october 2 for 2014. in 2015 , the overall impact of the new mexico members paying a lower rate was approximately $ 10.7 million .
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results of operations general our electric sales revenues are derived from electric power sales to our members and nonโmember purchasers . see โ โfactors affecting results โ rates and regulation โ for a description of our energy and demand rates to our members . longโterm contract sales to nonโmembers generally include energy and demand components . short-term sales to nonโmembers are sold at market prices after consideration of incremental production costs . demand billings to nonโmembers are typically billed per kilowatt of capacity reserved or committed to that customer . weather has a significant effect on the usage of electricity by impacting both the electricity used per hour and the total peak demand for electricity . consequently , weather has a significant impact on revenues . relatively higher 42 summer or lower winter temperatures tend to increase the usage of electricity for heating , air conditioning and irrigation . mild weather generally reduces the usage of electricity because heating , air conditioning and irrigation systems are operated less frequently . the amount of precipitation during the growing season ( generally may through september ) also impacts irrigation use . other factors affecting our members ' usage of electricity include : ยท the amount , size and usage of machinery and electronic equipment ; ยท the expansion of operations among our members ' commercial and industrial customers ; ยท the general growth in population ; and ยท economic conditions .
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transaction price is influenced by factors such as seasonality , the average length of the contract term , and the ability of the company to continue to enter multi-year non-cancellable contracts story_separator_special_tag the following management 's discussion and analysis is intended to provide a summary of the principal factors affecting the results of operations , liquidity and capital resources , contractual obligations , and the critical accounting policies of franklin covey co. ( also referred to as we , us , our , the company , and franklin covey ) and subsidiaries . this discussion and analysis should be read together with the accompanying consolidated financial statements and related notes contained in item 8 of this annual report on form 10-k ( form 10-k ) and the risk factors discussed in item 1a of this form 10-k. forward-looking statements in this discussion are qualified by the cautionary statement under the heading โ safe harbor statement under the private securities litigation reform act of 1995 โ contained later in item 7 of this form 10-k. non-gaap measures this management 's discussion and analysis includes the concepts of adjusted earnings before interest , income taxes , depreciation , and amortization ( adjusted ebitda ) and โ constant currency , โ which are non-gaap measures . we define adjusted ebitda as net income or loss excluding the impact of interest expense , income taxes , intangible asset amortization , depreciation , stock-based compensation expense , and certain other items such as adjustments to the fair value of expected contingent consideration liabilities arising from business acquisitions . constant currency is a non-gaap financial measure that removes the impact of fluctuations in foreign currency exchange rates and is calculated by translating the current period 's financial results at the same average exchange rates in effect during the prior year and then comparing this amount to the prior year . we reference these non-gaap financial measures in our decision making because they provide supplemental information that facilitates consistent internal comparisons to the historical operating performance of prior periods and we believe they provide investors with greater transparency to evaluate operational activities and financial results . for a reconciliation of our segment adjusted ebitda to net loss , a comparable gaap measure , please refer to note 16 segment information to our consolidated financial statements as presented in item 8 of this form 10-k. executive summary general overview franklin covey co. is a global company focused on individual and organizational performance improvement . our mission is to โ enable greatness in people and organizations everywhere , โ and our worldwide resources are organized to help individuals and organizations achieve sustained superior performance through changes in human behavior . we believe that our content and services create the connection between capabilities and results . we believe that our clients are able to utilize our content to create cultures whose hallmarks are high-performing , collaborative individuals , led by effective , trust-building leaders who execute with excellence and deliver measurably improved results for all of their key stakeholders . in the training and consulting marketplace , we believe there are three important characteristics that distinguish us from our competitors . 1. world class content โ our content is principle-centered and based on natural laws of human behavior and effectiveness . when our content is applied consistently in an organization , we believe the culture of that organization will change to enable the organization to achieve their own great purposes . our offerings are designed to build new skillsets , establish new mindsets , and provide enabling toolsets . 24 2. breadth and scalability of delivery options โ we have a wide range of content delivery options , including : the all access pass , the leader in me membership , and other intellectual property licenses , digital online learning , on-site training , training led through certified facilitators , blended learning , and organization-wide transformational processes , including consulting and coaching . we believe our investments in digital delivery modalities over the past few years have enabled us to deliver our content to clients in a high-quality learning environment whether those clients are working remotely or in a centralized location . 3. global capability โ we have sales professionals in the united states and canada who serve clients in the private sector , in government , and in educational institutions ; wholly owned subsidiaries in australia , china , japan , the united kingdom , germany , switzerland , and austria ; and we contract with independent licensee partners who deliver our content and provide services in 150 countries and territories around the world . we hold ourselves responsible for and measure ourselves by our clients ' achievement of transformational results . we have some of the best-known offerings in the training industry , including a suite of individual-effectiveness and leadership-development training content based on the best-selling books , the 7 habits of highly effective people , the speed of trust , multipliers , and the 4 disciplines of execution , and proprietary content in the areas of execution , sales performance , productivity , customer loyalty , leadership , and education . we believe that our offerings help individuals , teams , and entire organizations transform their results through achieving systematic , sustainable , and measurable changes in human behavior . our offerings are described in further detail at www.franklincovey.com . the information contained in , or that can be accessed through , our website does not constitute a part of this annual report , and the descriptions found therein should not be viewed as a warranty or guarantee of results . our fiscal year ends on august 31 , and unless otherwise indicated , fiscal 2020 , fiscal 2019 , and fiscal 2018 refer to the twelve-month periods ended august 31 , 2020 , 2019 , 2018 , and so forth . impact of covid-19 pandemic on fiscal 2020 covid-19 was first identified in china during december 2019 , and subsequently declared a pandemic by the world health organization . story_separator_special_tag all access pass revenue retention remained strong and was over 90 percent for fiscal 2020. following the initial impact of the pandemic , our u.s.\canada and governmental clients quickly transitioned to our digital delivery options , and by july our booking pace for add-on coaching and services was equal to that achieved in the prior year and then exceeded last year 's pace through august . we remain optimistic that sales and revenue retention for all access pass subscription sales , and the booking pace for aap-related add-on services will continue to be strong in future periods . our china and japan direct offices and many of our licensee partners had just started to sell the all access pass and had not developed a strong base of subscription revenue at the onset of the pandemic . these operations were highly dependent on the delivery of in-person training and stay-at-home restrictions made it necessary to reschedule nearly all of their training and coaching events . as a result , sales declined disproportionately at these operations compared with our u.s./canada operations . however , these foreign offices are beginning to recover and we are optimistic that international momentum will continue to rebuild in fiscal 2021. we were also encouraged by the performance of the education division in the third and fourth quarters of fiscal 2020. despite the significant uncertainties in educational funding as a result of the pandemic , nearly 2,200 schools renewed their leader in me memberships ( a higher number than in fiscal 2019 ) and the company added 320 new schools to the leader in me program . we believe this performance from the education division was remarkable in the current education and economic environment . 26 our subscription revenue grew 16 percent in fiscal 2020 compared with the prior year . at august 31 , 2020 , we had $ 68.9 million of deferred revenue compared with $ 65.8 million at august 31 , 2019. consolidated deferred revenue reported above at august 31 , 2020 and august 31 , 2019 includes $ 2.2 million and $ 3.6 million , respectively , of deferred revenue that was classified as long-term based on expected recognition . at august 31 , 2020 , our unbilled deferred revenue grew 32 percent to $ 39.6 million compared with $ 29.9 million at the end of fiscal 2019. at august 31 , 2020 , our deferred subscription revenue plus unbilled deferred subscription revenue totaled $ 100.2 million . unbilled deferred revenue represents business that is contracted , but unbilled and therefore excluded from our balance sheet . the following table sets forth our consolidated net sales by division and by reportable segment for the fiscal years indicated ( in thousands ) : replace_table_token_2_th gross profit consists of net sales less the cost of services provided or the cost of goods sold . our cost of sales includes the direct costs of delivering content onsite at client locations , including presenter costs , materials used in the production of training products and related assessments , assembly , manufacturing labor costs , and freight . gross profit may be affected by , among other things , the mix of services sold to clients , prices of materials , labor rates , changes in product discount levels , and freight costs . consolidated cost of sales in fiscal 2020 totaled $ 53.1 million compared with $ 66.0 million in fiscal 2019. the decrease was primarily due to decreased sales in fiscal 2020 resulting from the covid-19 pandemic as described above . our gross profit for the fiscal year ended august 31 , 2020 was $ 145.4 million , compared with $ 159.3 million in fiscal 2019. our gross margin , which is gross profit as a percent of sales , increased to 73.3 percent compared with 70.7 percent primarily due to increased subscription and digital delivery revenues when compared with the prior year . our operating expenses in fiscal 2020 decreased $ 14.3 million compared with fiscal 2019. the decrease was primarily due to a $ 10.6 million decrease in selling , general , and administrative ( sg & a ) expenses , and a $ 5.4 million decrease in stock-based compensation expense . these decreases were partially offset by $ 1.6 million of restructuring costs . decreased sg & a expense was primarily related to decreased variable compensation such as commissions , bonuses , and incentives ; decreased travel and entertainment ; decreased contingent consideration liability expense ; and cost savings from various areas of the company 's operations in response to the pandemic-related reduction in sales . we reevaluate our stock-based compensation instruments at each reporting date . due to the adverse impact of covid-19 and uncertainties related to the expected recovery , we determined that certain tranches of previously granted performance awards would not vest prior to their expiration . based on our analyses , we reversed previously recognized stock-based compensation expense for these tranches during the third quarter of fiscal 2020 , which resulted in a $ 0.6 million net credit to stock-based compensation for the year . during the fourth quarter of fiscal 2020 we restructured certain areas of our operations to reflect changes in our strategy and client needs . the restructuring costs totaled $ 1.6 million , which were comprised of severance costs for impacted personnel . 27 our fiscal 2020 income from operations improved to $ 3.1 million compared with $ 2.7 million in fiscal 2019. fiscal 2020 pre-tax income was $ 0.8 million compared with $ 0.6 million in fiscal 2019 , reflecting the items noted above . our effective income tax rate for fiscal 2020 was approximately 1,284 percent compared with an effective tax rate of approximately 273 percent in fiscal 2019. the increased effective tax rate in fiscal 2020 was primarily due to $ 11.3 million of additional income tax expense from an increase in the valuation allowance against our deferred income tax assets , which was partially offset by a tax benefit resulting from the exercise of stock options by our ceo and cfo .
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quarterly results the following tables set forth selected unaudited quarterly consolidated financial data for the fiscal years ended august 31 , 2020 and 2019. the quarterly consolidated financial data reflects , in the opinion of management , all normal and recurring adjustments necessary to fairly present the results of operations for such periods . results of any one or more quarters are not necessarily indicative of continuing trends ( in thousands , except for per-share amounts ) . replace_table_token_7_th in normal operating years , our fourth quarter typically has higher sales and operating income than other fiscal quarters primarily due to increased revenues in our education division ( when school administrators and faculty have professional development days ) and from increased sales that typically occur during that quarter resulting from year-end incentive programs . overall , training sales are moderately seasonal because of the timing of corporate training , which is not typically scheduled as heavily during holiday and certain vacation periods . quarterly fluctuations may also be affected by other factors including the introduction of new offerings , pandemics and other natural disasters , business acquisitions , the addition of new organizational customers , and the elimination of underperforming offerings . for more information on our quarterly results of operations , refer to our quarterly reports on form 10-q as filed with the sec . our quarterly reports for the periods indicated are available free of charge at www.sec.gov . 33 liquidity and capital resources introduction our cash balance at august 31 , 2020 totaled $ 27.1 million , with no borrowings on our $ 15.0 million revolving credit facility . of our $ 27.1 million in cash at august 31 , 2020 , $ 12.2 million was held outside the u.s. by our foreign subsidiaries . we routinely repatriate cash from our foreign subsidiaries and consider cash generated from foreign activities a key component of our overall liquidity position .
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our products include monitoring instrumentation for marine and environmental applications , harsh environment interconnects , electronic test and measurement equipment , digital imaging sensors and cameras , aircraft information management systems , and defense electronics and satellite communication subsystems . we also supply engineered systems for defense , space , environmental and energy applications . we differentiate ourselves from many of our direct competitors by having a customer and company sponsored applied research center that augments our product development expertise . strategy/overview our strategy continues to emphasize growth in our core markets of instrumentation , digital imaging , aerospace and defense electronics and engineered systems . our core markets are characterized by high barriers to entry and include specialized products and services not likely to be commoditized . we intend to strengthen and expand our core businesses with targeted acquisitions and through product development . we continue to focus on balanced and disciplined capital deployment among capital expenditures , acquisitions and share repurchases . we aggressively pursue operational excellence to continually improve our margins and earnings . at teledyne , operational excellence includes the rapid integration of the businesses we acquire . using complementary technology across our businesses and internal research and development , we seek to create new products to grow our company and expand our addressable markets . we continue to evaluate our businesses to ensure that they are aligned with our strategy . 31 consistent with this strategy , we made five acquisitions in 2016 , three acquisitions in 2015 and four acquisitions in 2014 . on december 6 , 2016 , teledyne instruments , inc. acquired hanson research corporation ( โ hanson research โ ) which specializes in analytical instrumentation for the pharmaceutical industry . on november 2 , 2016 , teledyne instruments , inc. acquired assets of in usa , inc. ( โ in usa โ ) , a manufacturer of a range of ozone generators , ozone analyzers and other gas monitoring instruments utilizing ultraviolet and infrared based technologies . on may 3 , 2016 , teledyne dalsa , inc. , a canadian-based subsidiary , acquired the assets and business of caris , inc. ( โ caris โ ) a leading developer of geospatial software designed for the hydrographic and marine community . on april 15 , 2016 , teledyne lecroy , inc. , a u.s.-based subsidiary , acquired assets of quantum data , inc. ( โ quantum data โ ) a market leader in video protocol analysis test tools . on april 6 , 2016 , teledyne lecroy , inc. also acquired frontline test equipment , inc. ( โ frontline โ ) a market leader in wireless protocol analysis test tools . on june 5 , 2015 , teledyne dalsa b.v. , a netherlands-based subsidiary , acquired industrial control machines sa ( โ icm โ ) a leading supplier of portable x-ray generators for non-destructive testing applications , as well as complete x-ray imaging systems for on-site security screening . on april 29 , 2015 , teledyne dalsa , inc. acquired the remaining 49 % noncontrolling interest in the parent company of optech incorporated ( โ optech โ ) . on february 2 , 2015 , teledyne acquired bowtech products limited ( โ bowtech โ ) through a u.k.-based subsidiary . bowtech designs and manufactures harsh underwater environment vision systems . in 2015 , teledyne made an additional investment in ocean aero , inc. ( โ ocean aero โ ) and we acquired a product line . on december 12 , 2016 , teledyne and e2v technologies plc ( โ e2v โ ) reached agreement on the terms of a recommended cash acquisition to be made by teledyne for the ordinary share capital of e2v by means of a scheme of arrangement ( the โ offer โ ) . under the terms of the offer , e2v 's ordinary shareholders ( โ e2v shareholders โ ) will receive 275 pence in cash for each e2v share valuing the entire issued and to be issued ordinary share capital of e2v at approximately ยฃ619.6 million on a fully diluted basis . it is expected that , subject to the satisfaction or waiver of all relevant conditions , the acquisition will be completed in the first half of calendar 2017. at meetings held in january 2017 , e2v shareholders voted in favor of the resolution to approve the scheme of arrangement and voted to pass a special resolution to approve the implementation of the scheme . the waiting periods required under both the u.s. hart-scott-rodino antitrust improvements act of 1976 , as amended , and in respect of the e2v 's u.s. state department 's itar registration have expired . clearance or expiration of the waiting period under german merger control laws remains outstanding . after discussions with the german authorities , e2v and teledyne submitted a revised application for clearance on february 24 , 2017 in respect of the acquisition . the german authorities have one month to review such revised submission . clearance from the french ministry of economy and finance and the french ministry of defense in respect of the acquisition also remains outstanding . teledyne expects to fund the acquisition from cash on hand and its credit facility , as well as the anticipated proceeds from the issuance of senior unsecured notes and term loans . for the machine vision market , e2v provides high performance image sensors and custom camera solutions and application specific standard products . in addition , e2v provides high performance space qualified imaging sensors and arrays for space science and astronomy . e2v also produces components and subsystems that deliver high reliability radio frequency power generation for healthcare , industrial and defense applications . finally , the company provides high reliability semiconductors and board-level solutions for use in aerospace , space and radio frequency communications applications . at announcement , the aggregate enterprise value for the transaction is expected to be approximately ยฃ627.1 million ( or approximately $ 788.9 million ) taking into account e2v stock options and net debt . story_separator_special_tag bolt is a developer and manufacturer of marine seismic data acquisition equipment used for offshore oil and natural gas exploration . bolt is also a developer and manufacturer of remotely operated robotic vehicles systems used for a variety of underwater tasks . bolt had sales of $ 67.5 million for its fiscal year ended june 30 , 2014. on october 22 , 2014 , a subsidiary of teledyne acquired the assets of oceanscience for $ 14.7 million , net of cash acquired . on august 18 , 2014 , a subsidiary of teledyne acquired assets of atlas for $ 5.2 million . on march 31 , 2014 , a subsidiary of teledyne acquired photon machines , inc. ( โ photon โ ) for an initial payment of $ 3.3 million . all of the 2014 acquisitions are part of the instrumentation segment . see note 3 to our consolidated financial statements for additional information about our recent acquisitions . consolidated operating results our fiscal year is determined based on a 52- or 53-week convention ending on the sunday nearest to december 31. fiscal year 2016 contained 52 weeks , fiscal year 2015 contained 53 weeks and fiscal year 2014 contained 52 weeks . the following are selected financial highlights for 2016 , 2015 and 2014 ( in millions , except per-share amounts ) : replace_table_token_8_th 34 our businesses are aligned in four business segments : instrumentation , digital imaging , aerospace and defense electronics and engineered systems . our four business segments and their respective percentage contributions to our total sales in 2016 , 2015 and 2014 are summarized in the following table : replace_table_token_9_th results of operations 2016 compared with 2015 sales 2016 2015 % change ( in millions ) instrumentation $ 876.7 $ 1,051.1 ( 16.6 ) % digital imaging 398.7 379.0 5.2 % aerospace and defense electronics 615.9 593.4 3.8 % engineered systems 258.6 274.6 ( 5.8 ) % total sales $ 2,149.9 $ 2,298.1 ( 6.4 ) % story_separator_special_tag style= '' vertical-align : bottom ; padding-right:2px ; padding-top:2px ; padding-bottom:2px ; '' > ) % net income attributable to teledyne $ 190.9 $ 195.8 ( 2.5 ) % * not meaningful 35 sales and cost of sales by segment and total company : replace_table_token_10_th we reported 2016 sales of $ 2,149.9 million , compared with sales of $ 2,298.1 million for 2015 , a decrease of 6.4 % . net income attributable to teledyne was $ 190.9 million ( $ 5.37 per diluted share ) for 2016 , compared with net income attributable to teledyne of $ 195.8 million ( $ 5.44 per diluted share ) for 2015 , a decrease of 2.5 % . total year 2016 and 2015 reflected pretax charges totaling $ 17.3 million and $ 8.4 million , respectively , for severance and facility consolidation charges . net income for 2016 and 2015 also included net discrete tax benefits of $ 10.9 million and $ 9.8 million , respectively . we also recorded a gain in 2016 of $ 17.9 million on the sale of a former operating facility in california , and incurred pretax charges totaling $ 7.9 million related to the pending e2v acquisition . sales the decrease in sales in 2016 , compared with 2015 , reflected lower sales in the instrumentation and engineered systems segments , partially offset by higher sales in the aerospace and defense and electronics and digital imaging segments . sales in the instrumentation segment reflected $ 15.6 million of incremental sales from recent acquisitions while sales in the digital imaging segment reflected $ 9.6 million of incremental sales from recent acquisitions . the incremental sales from recent acquisitions in 2016 was $ 25.2 million . sales under contracts with the u.s. government were approximately 27 % of sales in 2016 and 26 % of sales in 2015 . sales to international customers represented approximately 43 % of sales in 2016 and 44 % of sales in 2015 . cost of sales total company cost of sales decreased by $ 109.8 million in 2016 , compared with 2015 , which primarily reflected the impact of lower sales , partially offset by higher severance and facility consolidation expenses of $ 3.1 million . the total company cost of sales as a percentage of sales for 2016 was 61.3 % , compared with 62.1 % for 2015 . 36 selling , general and administrative expenses selling , general and administrative expenses , including company-funded research and development and bid and proposal expense , in total dollars were lower in 2016 , compared with 2015. the decrease reflected the impact of lower sales , partially offset by higher severance and facility consolidation expenses of $ 5.8 million . corporate administrative expense in 2016 was $ 46.1 million , compared with $ 40.2 million in 2015 , an increase of 14.7 % . the increase in corporate administrative expense reflected higher professional fees expense , including $ 1.9 million related to the pending e2v acquisition . for 2016 , we recorded a total of $ 11.6 million in stock option expense , of which $ 3.2 million was recorded as corporate expense and $ 8.4 million was recorded in the operating segment results . for 2015 , we recorded a total of $ 12.2 million in stock option expense , of which $ 3.4 million was recorded as corporate expense and $ 8.8 million was recorded in the operating segment results . selling , general and administrative expenses as a percentage of sales , was 26.9 % for 2016 , compared with 25.6 % for 2015 and reflected the impact of higher research and development and bid and proposal expense , higher severance and facility consolidation expenses and professional fees expense related to the pending e2v acquisition .
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results of operations 2016 2015 % change ( in millions ) instrumentation $ 109.8 $ 171.0 ( 35.8 ) % digital imaging 45.9 40.0 14.8 % aerospace and defense electronics 112.1 84.8 32.2 % engineered systems 32.1 26.1 23.0 % corporate expense ( 46.1 ) ( 40.2 ) 14.7 % operating income 253.8 281.7 ( 9.9 ) % interest and debt expense , net ( 23.2 ) ( 23.9 ) ( 2.9 ) % other income , net 10.7 0.4 * income before income taxes 241.3 258.2 ( 6.5 ) % provision for income taxes 50.4 62.7 ( 19.6 ) % net income 190.9 195.5 ( 2.4 ) % noncontrolling interest โ 0.3 ( 100.0 < td
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estimated future direct warranty costs are accrued and charged to cost of sales in the period story_separator_special_tag you should read the following in conjunction with the sections of this annual report on form 10-k entitled `` risk factors , '' `` cautionary note concerning forward-looking statements , '' `` selected financial data '' and `` business '' and our historical financial statements and related notes thereto included elsewhere in this annual report on form 10-k. this discussion contains forward-looking statements reflecting current expectations that involve risks and uncertainties . actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors , including those discussed in the section entitled `` risk factors '' and elsewhere in this annual report on form 10-k. non-gaap measures this annual report on form 10-k includes certain non-gaap measures , including home sales gross margin before impairments ( or homebuilding gross margin before impairments ) , home sales gross margin percentage before impairments , adjust ed ebitda , adjusted ebitda margin percentage , the ratio of adjusted ebitda to total interest incurred , adjusted net income attributable to the new home company inc. , adjusted earnings per share attributable to the new home company inc. , net debt , the ratio of net debt-to-capital , adjusted homebuilding gross margin ( or homebuilding gross margin before impairments and interest in cost of sales ) , adjusted homebuilding gross margin percentage , general and administrative costs excluding severance charges , general and administrative costs excluding severance charges as a percentage of home sales revenue , selling , marketing and general and administrative costs excluding severance charges , and selling , marketing and general and administrative costs excluding severance charges as a percentage of home sales revenue . for a reconciliation of home sales gross margin before impairments ( or homebuilding gross margin before impairments ) , adjusted homebuilding gross margin ( or homebuilding gross margin before impairments and interest in cost of sales ) , home sales gross margin before impairments percentage and adjusted homebuilding gross margin percentage to the comparable gaap measures , please see `` -- results of operations - homebuilding gross margin . '' for a reconciliation of adjusted ebitda , adjusted ebitda margin percentage , and the ratio of adjusted ebitda to total interest incurred to the comparable gaap measures please see `` -- consolidated financial data . '' for a reconciliation of adjusted net income attributable to the new home company inc. and adjusted earnings per share attributable to the new home company inc. to the comparable gaap measures , please see `` -- overview . '' for a reconciliation of net debt and net debt-to-capital to the comparable gaap measures , please see `` -- liquidity and capital resources - debt-to-capital ratios . '' for a reconciliation of general and administrative costs excluding severance charges , general and administrative expenses excluding severance charges as a percentage of homes sales revenue , selling , marketing and general and administrative expenses excluding severance charges and selling , marketing and general and administrative expenses excluding severance charges as a percentage of home sales revenue , please see `` -- results of operations - selling , general and administrative expenses . '' 33 consolidated financial data replace_table_token_4_th 34 ( 1 ) home sales gross margin before impairments ( also referred to as homebuilding gross margin before impairments ) is a non-gaap measure . the table below reconciles this non-gaap financial measure to homebuilding gross margin , the nearest gaap equivalent . replace_table_token_5_th ( 2 ) adjusted ebitda , adjusted ebitda margin percentage and ratio of adjusted ebitda to total interest incurred are non-gaap measures . adjusted ebitda margin percentage is calculated as a percentage of total revenue . management believes that adjusted ebitda , assists investors in understanding and comparing the operating characteristics of homebuilding activities by eliminating many of the differences in companies ' respective capitalization , interest costs , tax position , inventory impairments and other non-recurring events . due to the significance of the gaap components excluded , adjusted ebitda should not be considered in isolation or as an alternative to net income ( loss ) , cash flows from operations or any other performance measure prescribed by gaap . the table below reconciles net income ( loss ) , calculated and presented in accordance with gaap , to adjusted ebitda . replace_table_token_6_th ( 3 ) due to an inadvertent oversight in prior periods , interest amortized to certain inventory impairment charges and to equity in net loss of unconsolidated joint ventures was duplicated in the adjusted ebitda calculation . the prior periods have been restated to correct this duplication . 35 overview the new home company finished the year on a strong note with solid progress made across many key operating metrics during the fourth quarter . robust demand for new housing resulted in an 89 % increase in net new orders in the fourth quarter . the company 's quarterly sales absorption rates improved sequentially throughout 2020 and ended the year strong , with december 's monthly sales absorption pace of 4.4 representing the highest monthly net order total in the company 's history . while the company 's affordable product offerings continue to grow as a percentage of its total community offerings , new home demand was evident across all product segments and contributed to ending 2020 with a strong level of the number of homes in backlog , up 175 % as compared to the end of 2019. the increase in sales pace and improved pricing power experienced in the latter half of 2020 provided opportunities for meaningful price increases at nearly all of the company 's communities and contributed to an increase in gross margin . homebuilding gross margin for 2020 was 9.4 % and included $ 19.0 million in inventory impairment charges . homebuilding gross margin for 2019 was 10.2 % and included $ 8.3 million in inventory impairment charges . excluding impairment charges , homebuilding gross margin for 2020 was 13.9 % * as compared to 11.8 story_separator_special_tag 36 non-gaap footnote ( continued ) replace_table_token_7_th 37 market conditions and covid-19 impact and strategy while the broader economic recovery following the nationwide covid-19 related shutdown is ongoing , our business generally was only impacted from mid-march of 2020 through mid-second quarter 2020 when economic conditions in our markets started to improve . the company has recently experienced very strong demand for its homes . this resurgence in demand began in the back half of the 2020 second quarter , following the significant drop in sales experienced at the end of the 2020 first quarter through mid-second quarter 2020 as a result of the initial impact of the covid-19 pandemic . the demand for new and existing homes is dependent on a variety of demographic and economic factors , including job and wage growth , household formation , consumer confidence , mortgage financing , interest rates and overall housing affordability . we attribute the recent higher levels of demand to a number of factors , including low interest rates , a continued undersupply of homes , consumers ' increased focus on the importance of home , and a general desire for more indoor and outdoor space . as a result , many of the company 's operating metrics improved significantly as compared to 2019 , as described below . we believe these factors will continue to support demand in the near term but recognize our year-over-year order improvement is not necessarily indicative of future results due to various factors including seasonality , anticipated community openings and closeouts , and continued uncertainty surrounding the economic and housing market environments due to the impacts of the ongoing covid-19 pandemic and the related covid-19 control responses . overall economic conditions in the united states have been , and continue to be , impacted negatively by the covid-19 pandemic and uncertainty exists with respect to unemployment levels , consumer confidence , political uncertainty , civil unrest , financial and mortgage markets , as well as the impacts of covid-19-related government directives , actions and economic relief efforts , all of which could impact the demand for our homes . the covid-19 pandemic has resulted in , among other things , quarantines , `` stay-at-home '' or `` shelter-in-place '' orders , and similar mandates from national , state and local governments that have substantially restricted daily activities and caused many businesses to curtail or cease normal operations . notwithstanding these developments , the state and local governments in the markets in which we operate have deemed housing to be an essential business , which has allowed us to continue with construction and sales of homes . we have also implemented several health and safety protocols to protect our employees , trade partners and customers as required by state and local government agencies and taking into consideration the cdc and other public health authorities ' guidelines . while these actions are and have been necessary , they do impact our ability to operate our business in its ordinary and traditional course due to , among other things , a reduction in efficiency and capacity of municipal and private services necessary to progress our operations , delays as a result of some supply chain disruptions , and , showing homes by `` appointment only '' at various times throughout the year . our sales operations continue to leverage our virtual sales tools to connect with our customers online , including through the use of our online sales concierges , providing virtual options for online home tours and design center selections , and providing for self-guided tour options to allow homebuyers to tour models privately . much uncertainty existed at the onset of the covid-19 pandemic and we experienced adverse business conditions , including a slowdown in customer traffic and sales pace and an increase in cancellations during this time . to mitigate the adverse impacts and uncertainty , we implemented initiatives to preserve capital , including implementing additional cost cutting measures , curtailing the acquisition and development of land , renegotiating lot takedown arrangements and limiting the number of speculative homes under construction . as a result , we made strategic decisions to ( i ) liquidate the remaining developable lots in a land development joint venture in northern california which resulted in a $ 20.0 million other-than-temporary impairment charge in the 2020 second quarter , ( ii ) cease further development at a wholly owned community in scottsdale , arizona resulting in a $ 14.0 million project abandonment charge during the 2020 first quarter , and ( iii ) exit a land development joint venture in southern california which resulted in a $ 2.3 million other-than-temporary impairment charge in the 2020 first quarter . by not continuing with these projects , we avoided capital outlays to help preserve capital for the future , and will be able to seek federal tax refunds . 38 story_separator_special_tag prices within the $ 300,000 to $ 500,000 range , as compared to prior year backlog units for arizona which were mainly comprised of homes from our higher-end , closed-out community in gilbert , arizona where the average price of homes in backlog was $ 1.1 million at december 31 , 2019 . 40 lots owned and controlled replace_table_token_11_th ( 1 ) includes lots that we control under purchase and sale agreements or option agreements with refundable and nonrefundable deposits that are subject to customary conditions and have not yet closed . there can be no assurance that such acquisitions will occur . the 170 lots for arizona at december 31 , 2020 exclude 177 lots that were under a purchase and sale agreement with a refundable deposit , as the company terminated the contract in january 2021 . ( 2 ) lots owned by third party property owners for which we perform general contracting or construction management services .
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results of operations net new home orders replace_table_token_8_th ( 1 ) monthly sales absorption represents the number of net new home orders divided by the number of average selling communities for the period . net new home orders for the year ended december 31 , 2020 increased 53 % as compared to prior year , driven by a 38 % increase in the monthly sales absorption rate of 2.9 per community and , to a lesser extent , a 14 % year-over-year increase in average selling communities , which resulted in an ending community count of 23 compared to 21 for the prior year . quarterly sales absorption rates improved sequentially throughout 2020 and ended the year strong , with december 's monthly sales absorption pace of 4.4 representing the highest monthly net order total in the company 's history . we attribute the recently higher level of demand to a number of factors , including low interest rates , a continued undersupply of homes , consumers ' increased focus on the importance of the home , and the opening of more affordable communities in the strong phoenix , arizona market . the company also benefited from the success of its enhanced virtual selling platform from which a large portion of our net new orders were generated from during the year . home buyers are demonstrating an increased level of comfort with shopping for homes online allowing our sales team to identify qualified , motivated buyers and converting those leads into sales . demand was strongest during 2020 for our more-affordable , entry-level product , which averaged a monthly sales pace of 3.5 per community compared to a total of 2.9 per community for the companywide average . approximately half of all net new orders during the year ended december 31 , 2020 were from entry-level communities compared to approximately 35 % during the prior year .
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consistent with current gaap , the recognition , measurement , and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as story_separator_special_tag you should read the following discussion of our financial condition and results of operations in conjunction with our audited consolidated financial statements and the notes thereto included in this form 10-k. for more detailed information regarding the basis of presentation for the following information , you should read the notes to the audited consolidated financial statements included in this form 10-k. company overview we are a maryland corporation formed with the principle objective of acquiring , financing , developing , leasing , owning and managing income producing , strip centers , neighborhood centers , grocery-anchored centers , community centers and free-standing retail properties . our strategy is to opportunistically acquire quality , well-located , predominantly retail properties in secondary and tertiary markets that generate attractive risk-adjusted returns . we generally target competitively protected properties located within developed areas , commonly referred to as in-fill , that possess minimal competition risk and are surrounded by communities that have strong demographics and dynamic , diversified economies that will continue to generate jobs and future demand for commercial real estate . our primary target markets include the northeast , mid-atlantic , southeast and southwest . our portfolio is comprised of fifty-nine retail shopping centers , five free-standing retail properties , our office building , eight undeveloped land parcels , and one redevelopment project . sixteen of these properties are located in virginia , three are located in florida , seven are located in north carolina , twenty-five are located in south carolina , twelve are located in georgia , two are located in kentucky , two are located in tennessee , one is located in new jersey , three are located in oklahoma , one is located in alabama , one is located in west virginia and one is located pennsylvania . our operating portfolio has a total gla of 4,906,511 square feet and an occupancy level of approximately 94 % . recent trends and activities there have been several significant events in 2016 that have positively impacted our company . these events are summarized below . property acquisitions a-c portfolio on april 12 , 2016 , the company completed its acquisition of 14 retail shopping centers located in georgia and south carolina ( collectively the โ a-c portfolio โ ) for an aggregate purchase price of $ 71.00 million , paid through a combination of cash , debt and the issuance of 888,889 common units in the operating partnership . collectively , the a-c portfolio properties total 605,358 square feet in leaseable space , and were 92 % leased as of the acquisition date by 77 primarily retail tenants . each property is anchored by either a bi-lo , harris teeter or piggly wiggly grocery store . 44 the a-c portfolio consists of the following properties : replace_table_token_18_th berkley shopping center on november 10 , 2016 , we completed our acquisition of berkley shopping center , a 47,945 square foot shopping center located in norfolk , virginia ( `` berkley '' ) from a related party for a contract price of $ 4.18 million . berkley was 100 % leased as of the acquisition date and is anchored by a farm fresh grocery store . we acquired berkley from a related party through a combination of cash and the issuance of 221,476 common units in the operating partnership . sangaree plaza and tri-county plaza on november 10 , 2016 , we completed our acquisition of sangaree plaza and tri-county plaza , a 66,948 and 67,577 square foot shopping center , respectively located in summerville , south carolina and royston , georgia , respectively ( `` sangaree/tri-county '' ) from a related party for a total contract price of $ 10.77 million . sangaree/tri-county was 95.2 % leased as of the acquisition date and are anchored by bi-lo grocery store . we acquired sangaree/tri-county from a related party through a combination of cash and the issuance of 122,250 common units in the operating partnership . riverbridge shopping center on november 15 , 2016 , the company completed its acquisition of riverbridge shopping center ( `` riverbridge '' ) , a 91,188 square foot shopping center located in carollton , georgia for a contract price of $ 7.00 million . riverbridge was 98.5 % leased as of the acquisition date and is anchored by ingles . the company acquired riverbridge through a combination of cash and debt . laburnum square on december 7 , 2016 , the company completed our acquisition of laburnum square , a 109,405 square foot shopping center located in richmond , virginia ( `` laburnum '' ) for a contract price of $ 10.50 million , paid through a combination of cash and debt . laburnum was 96.9 % leased as of the acquisition date and is anchored by kroger . 45 franklin village on december 12 , 2016 , the company completed our acquisition of franklin village , a 151,673 square foot shopping center located in kittanning , pennsylvania ( `` franklin '' ) for a contract price of $ 13.10 million , paid through a combination of cash and debt . franklin was 98.0 % leased as of the acquisition date and is anchored by shop โ n save . village at martinsville on december 16 , 2016 , the company completed our acquisition of village at martinsville , a 297,950 square foot shopping center located in martinsville , virginia ( `` martinsville '' ) for a contract price of $ 23.53 million , paid through a combination of cash and debt . martinsville was 97.0 % leased as of the acquisition date and is anchored by kroger . new market crossing on december 20 , 2016 , the company completed our acquisition of new market crossing , a 116,976 square foot shopping center located in mt . story_separator_special_tag the terms of the revere warrant agreement provide that solely in the event of an event of default ( as defined in the revere term loan ) under the revere term loan , revere shall have the right to purchase an aggregate of up to 6,000,000 shares of the company 's common stock for an exercise price equal to $ 0.0001 per share . the warrant is exercisable at any time and from time to time during the period starting on april 8 , 2016 and expiring on april 30 , 2017 at 11:59 p.m. , virginia beach , virginia time , solely in the event of an event of default under the revere term loan . the company will not receive any proceeds from the issuance of the warrant ; rather the warrant serves as collateral for the revere term loan , the proceeds of which were used as partial consideration for the a-c portfolio . the warrant is treated as embedded equity and separate disclosure is not necessary . senior convertible notes amendment effective as of april 28 , 2016 , the company and certain investors : calapasas west partners , l.p. ; full value partners , l.p. ; full value special situations fund , l.p. ; mcm opportunity partners , l.p. ; mercury partners , l.p. ; opportunity partners , l.p. ; special opportunities fund , inc. ; and steady gain partners , l.p. ( collectively the โ bulldog investors โ ) amended the convertible 9 % senior notes ( โ amended convertible notes โ ) to purchase shares of the company 's common stock . prior to the amendment , the aggregate principal amount of the convertible notes was $ 3.00 million . pursuant to the terms of the amended convertible notes , upon thirty ( 30 ) calendar days ' notice ( โ notice โ ) , the company may prepay any portion of the outstanding principal amount and accrued and unpaid interest , if any , without penalty . in addition , upon notice the bulldog investors may now exercise their right to convert all or any portion of the outstanding principal amount and any accrued but unpaid interest into shares of common stock any time prior to the repayment in full of the amended convertible notes . the maximum number of shares of common stock issuable upon conversion of the amended convertible notes is 1,417,079 shares . as of december 31 , 2016 , the bulldog investors converted approximately $ 1.60 million of principal amount into 1,397,010 shares of the company 's common stock . chesapeake square refinance on july 11 , 2016 , the company executed a promissory note for $ 4.60 million to refinance the chesapeake square collateralized portion of the keybank credit agreement totaling $ 3.90 million . the new loan matures in august 2026 with monthly principal and interest payments due at an interest rate of 4.70 % . 47 perimeter square refinance on july 29 , 2016 , the company executed a promissory note for $ 4.50 million to refinance the perimeter promissory note totaling $ 4.10 million . the new loan matures in august 2026 with principal due at maturity and bears interest at 4.06 % . berkley , sangaree/tri-county on november 10 , 2016 , the company executed a promissory note for $ 9.40 million for the purchase of berkley , sangaree/tri-county . the loan matures in december 2026 with monthly interest only payments due through 2021 at which time monthly principal and interest payments begin . the loan bears interest at 4.78 % . riverbridge on november 15 , 2016 , the company executed a promissory note for $ 4.00 million for the purchase of riverbridge . the loan matures in december 2026 with principal due at maturity and bears interest at 4.48 % . franklin on december 12 , 2016 , the company executed a promissory note for $ 8.52 million for the purchase of franklin . the loan matures in january 2027 with monthly interest only payments due through january 2020 at which time monthly principal and interest payments begin . the loan bears interest at 4.93 % . lumber river on december 20 , 2016 , the company executed a promissory note for $ 1.50 million . the new loan matures in june 2018 with interest only payments at a rate of 295 basis points over one month libor through 2017. principal payments begin in 2018. harbor point renewal on december 2 , 2016 , the company renewed the promissory note for $ 0.65 million on harbor point for two years . the loan matures on december 5 , 2018 with monthly principal and interest payments . the loan bears interest at 5.85 % . rivergate on december 21 , 2016 , the company executed a promissory note for $ 24.2 million for the purchase of rivergate . the loan matures in december 2019 with interest only payments at a rate of 295 basis points on one month libor for the first year and principal and interest for the next two years . certain of the company 's loans payable have covenants with which the company is required to comply . as of december 31 , 2016 , the company believes it is in compliance with all applicable covenants . new leases , leasing renewals and expirations new leases during the year ended december 31 , 2016 were comprised of forty-seven deals totaling 148,328 square feet with a weighted average rate of $ 12.00 per square foot . the commission rate per square foot equated to $ 4.61 . renewals during the year ended december 31 , 2016 were comprised of sixty-nine deals totaling 286,263 square feet with a weighted average increase of $ 0.52 per square foot , representing an increase of 4.9 % over prior rates . the rates on negotiated renewals resulted in a weighted average increase of $ 0.81 per square foot on fifty-one renewals , a $ 0.25 per square foot decrease on one renewal and no changes on eighteen renewals . twenty-six of these renewals represented options being exercised .
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results of operations the following table presents a comparison of the consolidated statements of operations for the years ended december 31 , 2015 and 2014 , respectively . replace_table_token_26_th ( 1 ) excludes the undeveloped land parcels and riversedge north , our corporate headquarters , and the redevelopment property . includes assets held for sale . same store and new store operating income the following table provides same store and new store financial information . same stores consist of those properties we owned during all periods presented in their entirety , while new stores consist of those properties acquired during the periods presented . same store discontinued operations financial information reflects the activity of the following properties : harps at harbor point ( acquired december 14 , 2012 ) 59 bixby commons ( acquired june 11 , 2013 ) jenks reasors ( acquired september 25 , 2013 ) starbucks/verizon ( acquired october 21 , 2013 ) new store discontinued operations financial information reflects the activity for the following entities : outback steakhouse and ruby tuesday ground leases at pierpont centre ( acquired january 14 , 2015 ) the following table provides same store and new store financial information . replace_table_token_27_th property revenues total same store property revenue for the year ended december 31 , 2015 was $ 12.67 million , compared to $ 12.20 million for the year ended december 31 , 2014. same store revenues increased primarily due to increases in tenant reimbursements , contractual rent adjustments , positive rent spreads on renewals and increases in occupancy . these increases were offset by wheeler interests ceasing to pay rent to riversedge north due to the internalization of the operating companies .
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while the company utilizes a number of different methodologies to estimate the accruals , all of the methodologies take into account sales levels to distributors during the relevant period , inventory levels at the distributors , current and projected market trends and conditions , recent and historical activity under the relevant programs , changes in program policies , and open requests for credits . these procedures require the exercise of significant judgments . the company believes that it has a reasonable basis to estimate future credits under the programs . royalty revenues , included in net revenues on the consolidated statements of operations , were $ 3,323 , $ 4,525 , and $ 6,362 for the years ended december 31 , 2015 , 2014 , and 2013 , respectively . the company records royalty revenue in accordance with agreed upon terms when performance obligations are satisfied , the amount is fixed or determinable , and collectibility is reasonably assured . vishay earns royalties at the point of sale of products which incorporate licensed intellectual property . accordingly , the amount of royalties recognized is determined based on periodic reporting to vishay by its licensees , and based on judgments and estimates by vishay management , which management considers reasonable . f-10 notes to the consolidated financial statements ( dollars in thousands , except per share story_separator_special_tag overview vishay intertechnology , inc. is a global manufacturer and supplier of semiconductors and passive components , including power mosfets , power integrated circuits , transistors , diodes , optoelectronic components , resistors , capacitors , and inductors . discrete semiconductors and passive components manufactured by vishay are used in virtually all types of electronic products , including those in the industrial , computing , automotive , consumer electronic products , telecommunications , power supplies , military/aerospace , and medical industries . we operate in five product segments , mosfets , diodes , optoelectronic components , resistors & inductors , and capacitors . since 1985 , we have pursued a business strategy of growth through focused research and development and acquisitions . through this strategy , we have grown to become one of the world 's largest manufacturers of discrete semiconductors and passive components . we expect to continue our strategy of acquisitions while also maintaining a prudent capital structure . we are focused on enhancing stockholder value and improving earnings per share . in addition to our growth plan , we also have opportunistically repurchased our stock . in 2014 , our board of directors instituted a quarterly dividend payment program and declared the first cash dividend in the history of vishay . in december 2015 , we amended our credit facility to increase our ability to repurchase shares of stock or pay cash dividends . although we have no current plans , we will continue to evaluate attractive stock repurchase opportunities . as part of the amendment and restatement of the revolving credit facility in december 2015 , we completed an evaluation of our anticipated domestic cash needs over the next several years and our most efficient use of liquidity , with consideration of the amount of cash that can be repatriated to the u.s. efficiently with lesser withholding taxes in foreign jurisdictions . as a result of that evaluation , during the fourth quarter of 2015 , we recognized income tax expense of $ 164.0 million , including u.s. federal and state income taxes , incremental foreign income taxes , and withholding taxes payable to foreign jurisdictions , on $ 300 million of foreign earnings which we expect to repatriate to the u.s. over the next several years . our business and operating results have been and will continue to be impacted by worldwide economic conditions . our revenues are dependent on end markets that are impacted by consumer and industrial demand , and our operating results can be adversely affected by reduced demand in those global markets . for several years , we implemented aggressive cost reduction programs . we continue to monitor the current economic environment and its potential effects on our customers and the end markets that we serve . additionally , we continue to closely monitor our costs , inventory , and capital resources to respond to changing conditions and to ensure we have the management , business processes , and resources to meet our future needs . we began implementing targeted cost reduction programs in the fourth fiscal quarter of 2013 to support our profitability without jeopardizing our growth plan . complete implementation of these targeted cost reduction programs is expected to occur before the end of the first fiscal quarter of 2016. we initiated additional cost reduction programs in 2015. our cost reduction programs are more fully described in note 4 to the consolidated financial statements and in `` cost management '' below . see additional information regarding our competitive strengths and key challenges as disclosed in part 1. in light of a sustained decline in market capitalization for vishay and our peer group companies , and other factors ( including the cost reduction programs announced during the third fiscal quarter of 2015 as described above and more fully in note 3 to the consolidated financial statements ) , we determined that interim goodwill and indefinite-lived intangible assets impairment tests were required as of the end of the third fiscal quarter of 2015. prior to completing the interim assessment of goodwill for impairment , we performed a recoverability test of certain depreciable and amortizable long-lived assets . as a result of those assessments , it was determined that the depreciable and amortizable assets associated with our capella business were not recoverable , and we recorded impairment charges totaling $ 57.6 million to write-down the related assets to their fair value . after completing step one of the goodwill impairment test , it was determined that the estimated fair value of the capacitors reporting unit was less than the net book value of that reporting unit , requiring the completion of the second step of the impairment evaluation . story_separator_special_tag gross profit margin is clearly a function of net revenues , but also reflects our cost management programs and our ability to contain fixed costs . operating margin is computed as gross profit less operating expenses as a percentage of net revenues . we evaluate business segment performance on segment operating margin . only dedicated , direct selling , general , and administrative expenses of the segments are included in the calculation of segment operating income . segment operating margin is computed as operating income less items such as restructuring and severance costs , asset write-downs , goodwill and indefinite-lived intangible asset impairments , inventory write-downs , gain or losses on purchase commitments , global operations , sales and marketing , information systems , finance and administrative groups , and other items , expressed as a percentage of net revenues . we believe that evaluating segment performance excluding such items is meaningful because it provides insight with respect to intrinsic operating results of the segment . operating margin is clearly a function of net revenues , but also reflects our cost management programs and our ability to contain fixed costs . end-of-period backlog is one indicator of future revenues . we include in our backlog only open orders that we expect to ship in the next twelve months . if demand falls below customers ' forecasts , or if customers do not control their inventory effectively , they may cancel or reschedule the shipments that are included in our backlog , in many instances without the payment of any penalty . therefore , the backlog is not necessarily indicative of the results to be expected for future periods . an important indicator of demand in our industry is the book-to-bill ratio , which is the ratio of the amount of product ordered during a period as compared with the product that we ship during that period . a book-to-bill ratio that is greater than one indicates that our backlog is building and that we are likely to see increasing revenues in future periods . conversely , a book-to-bill ratio that is less than one is an indicator of declining demand and may foretell declining revenues . we focus on our inventory turnover as a measure of how well we are managing our inventory . we define inventory turnover for a financial reporting period as our costs of products sold for the four fiscal quarters ending on the last day of the reporting period divided by our average inventory ( computed using each fiscal quarter-end balance ) for this same period . a higher level of inventory turnover reflects more efficient use of our capital . pricing in our industry can be volatile . using our and publicly available data , we analyze trends and changes in average selling prices to evaluate likely future pricing . the erosion of average selling prices of established products is typical for semiconductor products . we attempt to offset this deterioration with ongoing cost reduction activities and new product introductions . our specialty passive components are more resistant to average selling price erosion . all pricing is subject to governing market conditions . 33 the quarter-to-quarter trends in these financial metrics can also be an important indicator of the likely direction of our business . the following table shows net revenues , gross profit margin , operating margin , end-of-period backlog , book-to-bill ratio , inventory turnover , and changes in asp for our business as a whole during the five fiscal quarters beginning with the fourth fiscal quarter of 2014 through the fourth fiscal quarter of 2015 ( dollars in thousands ) : replace_table_token_6_th _ ( 1 ) operating margin for the fourth fiscal quarter of 2014 and the first , second , third , and fourth fiscal quarters of 2015 includes $ 2.0 million , $ 1.4 million , $ 5.7 million , $ 2.3 million and $ 9.8 million , respectively , of restructuring and severance expenses ( see note 4 to our consolidated financial statements ) . operating margin for the third fiscal quarter of 2015 includes $ 63.0 million of goodwill and depreciable and amortizable long-lived asset impairment charges ( see note 3 to our consolidated financial statements ) . see `` financial metrics by segment '' below for net revenues , book-to-bill ratio , and gross profit margin broken out by segment . revenues for the fourth fiscal quarter of 2015 were relatively flat versus the third fiscal quarter of 2015 , and within our expected range . foreign currency exchange rates negatively impacted revenues throughout 2015. our average selling prices continue to decline primarily due to our commodity semiconductor products and the effects of growing our resistors & inductors business in asia . gross margins decreased versus the prior fiscal quarter and the fourth fiscal quarter of 2014. the decreases are primarily due to the decrease in average selling prices and reduced volume . gross margins have been negatively impacted by additional depreciation associated with our cost reduction programs beginning with the fourth fiscal quarter of 2013 and will continue to be negatively impacted until the complete implementation of our cost reduction programs . the book-to-bill ratio increased to 0.97 in the fourth fiscal quarter of 2015 from 0.96 in the third fiscal quarter of 2015. the book-to-bill ratios for distributors and original equipment manufacturers ( `` oem '' ) were 1.02 and 0.91 , respectively , versus ratios of 0.96 and 0.96 , respectively , during the third fiscal quarter of 2015 .
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results of operations statement of operations ' captions as a percentage of net revenues and the effective tax rates were as follows : replace_table_token_9_th net revenues net revenues were as follows ( dollars in thousands ) : replace_table_token_10_th changes in net revenues were attributable to the following : replace_table_token_11_th our revenue results for 2015 were negatively affected by foreign currency effects . overall , the business conditions in 2014 were better than the conditions in both 2015 and 2013. our revenue results for 2014 were positively affected by increased demand for our products and overall higher demand compared to the prior year . we deduct , from the sales that we record to distributors , allowances for future credits that we expect to provide for returns , scrapped product , and price adjustments under various programs made available to the distributors . we make deductions corresponding to particular sales in the period in which the sales are made , although the corresponding credits may not be issued until future periods . we estimate the deductions based on sales levels to distributors , inventory levels at the distributors , current and projected market trends and conditions , recent and historical activity under the relevant programs , changes in program policies , and open requests for credits . we recorded deductions from gross sales under our distributor incentive programs of $ 83.1 million , $ 89.6 million , and $ 84.3 million , for the years ended december 31 , 2015 , 2014 , and 2013 , respectively , or , as a percentage of gross sales , 3.5 % , 3.5 % , and 3.4 % , respectively . actual credits issued under the programs for the years ended december 31 , 2015 , 2014 , and 2013 were approximately $ 84.0 million , $ 87.9 million , and $ 83.2 million , respectively . increases and decreases in these incentives are largely attributable to the then-current business climate .
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years for retransmission agreements ; 9.6 years for advertising client relationships ; and 16.9 years for income leases . goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and liabilities assumed , and represents the future economic story_separator_special_tag executive overview introduction the following discussion and analysis of the financial condition and results of operations of gray television , inc. and its consoldiated subsidiaries ( except as the context othewise provides , โ gray , โ the โ company , โ โ we , โ โ us โ or โ our โ ) should be read in conjunction with our audited consolidated financial statements and notes thereto included elsewhere herein . business overview we are a television broadcast company headquartered in atlanta , georgia , that owns and or operates television stations and leading digital assets in markets throughout the united states . as of february 19 , 2016 , we owned and or operated television stations in 50 television markets broadcasting approximately 180 separate programming streams , including 35 affiliates of the cbs network ( โ cbs โ ) , 26 affiliates of the nbc network ( โ nbc โ ) , 19 affiliates of the abc network ( โ abc โ ) and 13 affiliates of the fox network ( โ fox โ ) . in addition to our primary broadcast channels , we can also broadcast secondary digital channels within a market . our secondary digital channels are generally affiliated with networks different from those affiliated with our primary broadcast channels , and they are operated by us to make better use of our broadcast spectrum by providing supplemental and or alternative programming in addition to our primary channels . certain of our secondary digital channels are affiliated with more than one network simultaneously . in addition to affiliations with abc , cbs and fox , our secondary channels are affiliated with numerous smaller networks and program services including , among others , the cw network or the cw plus network ( collectively , โ cw โ ) , my network ( โ my โ or โ my network โ ) , the metv network ( โ metv โ ) , this tv network ( โ this tv โ ) , antenna tv ( โ ant. โ ) , telemundo ( โ tel. โ ) , heroes and icons ( โ h & i โ ) and movies ! network ( โ movies โ ) . we also broadcast local news/weather channels in certain of our existing markets ( โ news โ ) . our combined tv station group reaches approximately 9.4 % of total united states television households . based on the consolidated results of the four nielsen โ sweeps โ periods in 2015 , our television stations ( including those acquired in february 2016 ) achieved the # 1 ranking in overall audience in 39 of our 50 markets and the # 1 ranking in local news audience in 36 of our markets . in addition , our stations achieved the # 1 or # 2 ranking in both overall audience and news audience in 49 of our 50 markets . for further information please refer to our markets and stations table in item 1. recent acquisitions we continue our focus on strategic growth and acquisitions . consistent with that strategy , between october 31 , 2013 and december 31 , 2015 , we completed 16 acquisition transactions and two divestiture transactions . these transactions added a net total of 31 television stations in 20 television markets to our operations , including 15 new television markets being added to our operations . these transactions had a significant impact on our results of operations , our liquidity and our capital resources . the impact of these transactions also affects the comparability of our period-over-period results . during 2015 , we completed a number of acquisitions described in detail in note 2 โ acquisitions and dispositions โ of our audited consolidated financial statements included elsewhere herein , consisting of the following : the cedar rapids acquisition , the odessa acquisition , the twin falls acquisition , the wausau acquisition , the presque isle acquisition and the laredo acquisition ( collectively , the โ 2015 acquired stations โ ) . during 2014 , we completed seven acquisitions , which collectively added a total of 22 television stations and 12 markets to our operations ( 10 new markets ) at various times during that year ( collectively , โ 2014 acquired stations โ ) . in the fourth quarter of 2013 , we began providing services to one new full-power station and associated low-power stations , and in december 2014 , we acquired the programming streams of all of those stations ( collectively , the โ excalibur acquisition โ ) . also in the fourth quarter of 2013 , we acquired five stations in three new markets ( together with the stations acquired in the excalibur acquisition , the โ 2013 acquired stations โ ) . unless the context of the discussion requires otherwise , we refer to the 2015 acquired stations , the 2014 acquired stations and the 2013 acquired stations collectively as the โ acquired stations. โ 36 in addition , on september 14 , 2015 , we announced that we agreed to acquire the assets of all of the television and radio stations of schurz for approximately $ 442.5 million inclusive of working capital . on october 1 , 2015 , we announced the sale of the assets of certain television stations to facilitate regulatory approvals for the schurz acquisition , and we simultaneously announced the acquisition of the assets of two television stations through swap transactions as part of those divestitures . on november 2 , 2015 , we announced that we had reached agreements with three radio broadcasters to divest the assets of schurz 's radio stations to those third-parties upon the closing of the schurz acquisition . story_separator_special_tag our aggregate internet revenue is derived from two sources . the first is advertising or sponsorship opportunities directly on our websites , referred to as โ direct internet revenue. โ the other source is television advertising time purchased by our clients to directly promote their involvement in our websites , referred to as โ internet-related commercial time sales. โ we continue to monitor our operating expenses and reduce them where possible . our total operating expenses for the year ended december 31 , 2015 increased over 2014 amounts primarily due to the addition of the 2015 acquired stations and the 2014 acquired stations , as well as to increases in salaries , transaction expenses , non-cash compensation , severance , healthcare expense , pension expense and payroll taxes . as previously disclosed , we also accrued a special charge of $ 6.3 million in the year ended december 31 , 2015 reflecting the estimated termination fees that we estimated would be due and payable in future periods resulting from our decision to terminate essentially all of our national sales representation agreements effective on january 1 , 2016. in january 2016 , we paid the amount accrued which settled all of our obligations under these terminated agreements . 38 financing sources on march 31 , 2015 , we completed an underwritten offering of 13.5 million shares of our common stock at a price to the public of $ 13.00 per share pursuant to an effective shelf registration statement . the net proceeds from the offering were $ 167.3 million , after deducting underwriting discounts of $ 7.5 million and expenses of $ 0.9 million . we used the net proceeds from the offering to pay a significant portion of the consideration necessary to complete the acquisition of the 2015 acquired stations . on june 13 , 2014 , we entered into an amendment and restatement of our prior senior credit facility in the form of a new agreement and , on september 15 , 2014 , we further amended that agreement . we borrowed a total of $ 625.0 million under the senior credit facility to repay amounts outstanding under our prior senior credit facility and to finance the purchase several of the 2014 acquired stations . during the year ended december 31 , 2013 , we completed the offer and sale of an additional $ 375.0 million aggregate principal amount of our 7ยฝ % senior notes due 2020 , and used those proceeds to repay a portion of the principal outstanding under the prior senior credit facility . in connection with the completion of the schurz acquisition and related transactions , we entered into an amendment to the senior credit facility , pursuant to which , among other things , in february 2016 , we incurred an additional $ 425.0 million of debt under the 2016 term loan under the senior credit facility and the revolving loan commitment under the senior credit facility was increased by $ 10.0 million . see note 11 โ subsequent events โ of our audited consolidated financial statements as of and for the year ended december 31 , 2015 included in item 8 for a discussion of this amendment and the additional debt incurred . please see our โ results of operations โ and โ liquidity and capital resources โ sections below for further discussion of our operating results and refinancing activities . 39 revenue set forth below are the principal types of revenue , less agency commissions , earned by us for the periods indicated and the percentage contribution of each to our total revenue ( dollars in thousands ) : replace_table_token_7_th risk factors the broadcast television industry is reliant primarily on advertising revenue and faces significant competition . for a discussion of certain other presently known , significant factors that may affect our business , see โ item 1a . risk factors โ included herein . story_separator_special_tag acquired stations and the 2014 acquired stations . amortization of intangible assets amortization of intangible assets totaled $ 12.0 million and $ 8.3 million for 2015 and 2014 , respectively . amortization expense increased in 2015 compared to 2014 due to the amortization expense associated with the acquisition of definite-lived intangible assets of the 2015 acquired stations and the 2014 acquired stations . 41 interest expense interest expense increased $ 5.5 million , or 8 % , to $ 74.4 million for 2015 compared to 2014. interest expense increased due to an increase in our average principal outstanding . our average debt balance was $ 1.2 billion and $ 1.1 billion during the 2015 and 2014 , respectively . our average debt balance increased as a result of increased borrowings used to finance , in part , the acquisition of certain of the 2014 acquired stations . t he average interest rates on our total debt balances were 5.8 % and 6.2 % for 2015 and 2014 , respectively . income tax expense our effective income tax rate increased to 40.2 % for 2015 from 39.8 % for 2014. our effective income tax rates differed from the statutory rate due to the following items : replace_table_token_8_th year ended december 31 , 2014 compared to year ended december 31 , 2013 ( โ 2013 โ ) 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 2014 acquired stations and the 2013 acquired stations had a significant impact on our revenues . together , the stations acquired in those years accounted for approximately $ 88.2 million and $ 2.9 million of our total revenue in 2014 and 2013 , respectively .
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results of operations year ended december 31 , 2015 ( โ 2015 โ ) compared to year ended december 31 , 2014 ( โ 2014 โ ) revenue total revenue increased $ 89.2 million , or 18 % , to $ 597.4 million for 2015 compared to 2014. local advertising revenue increased approximately $ 62.4 million , or 25 % , to $ 308.2 million . national advertising revenue increased approximately $ 16.2 million , or 25 % , to $ 81.1 million . the 2015 acquired stations and the 2014 acquired stations had a significant impact on our revenues . together , the stations acquired in those years accounted for approximately $ 163.4 million and $ 72.1 million of our total revenue in 2015 and 2014 , respectively . local and national advertising revenue in 2014 benefited from approximately $ 3.8 million earned from the broadcast of the 2014 winter olympic games on our then 14 nbc channels . there were no corresponding olympic games advertising revenue during 2015. in 2015 , local and national advertising revenue included approximately $ 1.5 million of revenue from the broadcast of the 2015 super bowl on our then 24 nbc channels , an increase of approximately $ 1.3 million compared to the $ 0.2 million of revenue from the broadcast of the 2014 super bowl on our then five fox channels . retransmission consent revenue increased $ 77.1 million , or 103 % , to $ 152.0 million in 2015 compared to 2014 , primarily due to increased subscriber rates . political advertising revenue decreased $ 64.8 million , or 79 % , to $ 17.2 million , reflecting decreased advertising from political candidates and special interest groups during the โ off year โ of the two-year political advertising cycle .
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if the fair value is less than the carrying value , then a second step is performed in order to measure the amount of the impairment loss , if any , which is based on comparing the implied fair value of the reporting unit 's goodwill to the fair value of the net assets of the reporting unit . 117 gfi group inc. and subsidiaries notes to consolidated financial statements ( continued story_separator_special_tag the following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes thereof in part ii-item 8 hereof . this discussion contains forward-looking statements . actual results could differ materially from the results discussed in these forward-looking statements . please see `` forward-looking statements '' and `` risk factors '' for a discussion of some of the uncertainties , risks and assumptions associated with these statements . business environment as a leading provider of wholesale brokerage services , clearing services and electronic execution and trading support products for global financial markets , our results of operations are impacted by a number of external market factors , including market volatility and transactional volumes , the organic growth or contraction of the derivative and cash markets in which we provide our brokerage services , the particular mix of transactional activity in our various products , the competitive and regulatory environment in the various jurisdictions and markets in which we operate and the financial condition of the dealers , hedge funds , traders and other market participants to whom we provide our services . outlined below are management 's observations of these external market factors during the most recent fiscal period . the factors outlined below are not the only factors that impacted our results of operations for the most recent fiscal period , and additional or other factors may impact , or have different degrees of impact , on our results of operations in future periods . market volumes and volatility recent activity in underlying markets . we believe that overall market volatility was lower in the year ended december 31 , 2013 as compared to 2012 and that lower volatility led , in part , to decreased trading volumes for the year . we also believe that trading volumes were adversely impacted by the broad market uncertainties surrounding the cftc-regulated sefs compliance deadline in october 2013. these factors led to difficult trading conditions in the second half of 2013. the level of organic growth or contraction in the otc derivatives markets we serve , as well as our market share within any particular market , has historically been difficult to measure on a timely basis as there are only a few independent , objective measures of the outstanding notional amount of otc derivatives , all of which are published retrospectively and do not measure transactional volumes . therefore , to help gauge growth or contraction in any particular quarter or year , management has looked to the published results of large otc derivatives dealers and certain futures and derivative exchanges as potential indicators of transactional activity in the related otc derivative markets . in future periods , as sefs and swap data repositories report their daily trading volumes pursuant to applicable cftc regulations , management expects such data to provide an indication of overall market size and our relative market share within such derivative markets . otc market volumes generally declined across most asset classes during the year ended december 31 , 2013 , as compared to the year ended december 31 , 2012. otc markets continued to confront regulatory , market and economic uncertainties , as well as continuing low short-term interest rates globally . the level of the chicago board options exchange volatility index ( `` vix '' ) , on average , was approximately 20 % lower during the year ended december 31 , 2013 when compared to the prior year . similarly , the baml global financial stress index was , on average , substantially lower during 2013 when compared to 2012. we believe that these indexes provide valuable proxies for the overall volatility across our four brokerage product categories . however , it should be noted that volatility events can affect each of our product categories to varying degrees . fixed income volumes . our fixed income product category is comprised of revenues related to the brokerage of cash and derivative fixed income products . fixed income volumes typically correlate with 62 fluctuations in interest rates , market volatility and the level of bond issuances . brokertec , a leading electronic trading platform in the fixed income market , reported increased average daily volumes ( `` adv '' ) of 8 % in 2013 vs. 2012. similarly , the securities industry and financial markets association ( `` sifma '' ) reported an increase in the adv of u.s. corporate debt of 8 % and an increase in corporate bond issuance of 1 % for the year ended december 31 , 2013 , as compared to the prior year . however , ice reported a 15 % decline in its credit default swap trade execution revenues compared with the prior year . despite some of these positive metrics , dealer banks and wholesale brokers generally reported declines in their fixed income revenues for 2013 , as compared to the prior year , which they attributed to difficult trading conditions . in comparison , our brokerage revenues from fixed income products declined 7 % in the year ended december 31 , 2013 , as compared to the prior year . interest rate and foreign exchange volumes . our financial product category largely consists of revenues related to the brokerage of foreign exchange and interest rate derivative products . foreign exchange volumes generally increased for the year ended december 31 , 2013 , compared to the same period in the prior year , primarily driven by volatility in the first half of the year from diverging u.s. and japanese monetary policy . story_separator_special_tag our continued success will depend on our ability to enhance and improve our existing platforms and services , develop and or license new products and technologies that address the increasingly sophisticated needs of the markets and respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis . financial overview our results of operations are significantly impacted by the amount of revenues we generate and the amount of compensation and benefits we provide to our employees . the following factors had a 64 significant impact on our revenues and employee costs during the three year period ended december 31 , 2013 : our total revenues decreased 2.5 % to $ 901.5 million for the year ended december 31 , 2013 from $ 924.6 million for the year ended december 31 , 2012. the main factors contributing to this decrease in our revenues were : regulatory uncertainty surrounding the sef compliance deadline in october of 2013 , which we believe led to lower trading volumes in the second half of 2013 , compared to the same period in the prior year ; lower volatility in many of the markets in which we provide brokerage services which adversely impacted trading volumes ; and the reduction in brokerage personnel headcount and the closure of certain unprofitable brokerage desks globally . partially offsetting the above factors were the following factors that we believe positively affected our brokerage and other revenues : increased clearing services revenues due to a variation in the mix of products and exchanges utilized by our new and existing clearing service customers ; contributions from investments in new brokerage desks and offices focused on certain fixed income and financial products ; increased customer usage of our electronic trading platforms and matching sessions ; and the continued strong performance of our trayport and fenicsยฎ subsidiaries , which led to an increase in our software , analytics and market data revenue . the most significant component of our cost structure is employee compensation and benefits , which includes salaries , amortization of sign-on and retention bonuses , incentive compensation and related employee benefits and taxes . our employee compensation and benefits expense decreased 5.5 % to $ 516.2 million for the year ended december 31 , 2013 from $ 546.5 million for the year ended december 31 , 2012. our compensation and employee benefits for all employees have both a fixed and a variable component . base salaries and benefit costs are primarily fixed for all employees , while performance bonuses constitute the variable portion of our compensation and employee benefits . within overall compensation and employee benefits , the employment cost of our brokerage personnel is the key component . bonuses for brokerage personnel are primarily based on individual performance and or the operating results of their related brokerage desk . additionally , a portion of our bonus expense is subject to contractual guarantees that may require us to make bonus payments to brokers regardless of their performance in any particular period . for many of our brokerage employees , bonuses constitute a significant component of their overall compensation . broker performance bonuses decreased to $ 151.6 million for the year ended december 31 , 2013 from $ 170.4 million for the year ended december 31 , 2012. further , we may pay sign-on bonuses to certain newly-hired brokers and retention bonuses to certain of our existing brokers who agree to long-term employment agreements . these bonuses may be paid in the form of cash or restricted stock units ( `` rsus '' ) , or a combination of the two , and are typically expensed over the term of the related employment agreement for cash bonuses and the related service period for rsus , which is generally two to four years . these employment agreements typically contain provisions requiring the repayment of all or a portion of the cash payment and forfeiture provisions for unvested rsus should the employee voluntarily terminate his or her employment or if the employee 's employment is terminated for cause during the initial term of the agreement . sign-on 65 and retention bonuses , when granted , also increase the fixed component of our compensation and employee benefits expense for the remainder of the term over which such bonus is earned by the employee . compensation expense resulting from the amortization of broker sign-on and retention bonuses was $ 34.5 million for the year ended december 31 , 2013 , as compared to $ 34.6 million for the year ended december 31 , 2012. results of consolidated operations the following table sets forth our consolidated results of operations for the periods indicated : replace_table_token_4_th 66 the following table sets forth our consolidated results of operations as a percentage of our revenues , net of interest and transaction-based expenses for the periods indicated : replace_table_token_5_th year ended december 31 , 2013 compared to the year ended december 31 , 2012 net loss gfi 's net loss for the year ended december 31 , 2013 increased $ 10.0 million to $ 20.0 million from a net loss of $ 10.0 million for the year ended december 31 , 2012. total revenues decreased by $ 23.1 million , or 2.5 % , to $ 901.5 million in 2013 from $ 924.6 million in the prior year . the net decrease in total revenues was primarily due to lower brokerage revenues , which decreased $ 50.1 million , or 7.2 % , largely due to the factors set forth above under the `` financial overview '' section , partially offset by higher clearing services revenues due to increased trading activity and a 67 variation in the mix of products and exchanges utilized by new and existing clearing service customers of our kyte subsidiary .
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results of segment operations based on the nature of our operations , products and services in each geographic region , we determined that we have four reportable segments : ( i ) americas brokerage , ( ii ) europe , middle east and africa ( `` emea '' ) brokerage , ( iii ) asia brokerage and ( iv ) clearing and backed trading . our brokerage operations provide brokerage services in four broad product categories : fixed income , financial , equity and commodity . our clearing and backed trading segment encompasses our clearing , risk management , settlement and other back-office services , as well as the capital we provide to start-up trading groups , small hedge funds , market-makers and individual traders . all other includes the results of our software , analytics and market data operations . all other also includes revenues and expenses that are not directly assignable to one of our reportable segments , primarily consisting of indirect costs related to our brokerage segments as well as all our corporate business activities . 76 the following tables summarize our total revenues , revenues , net of interest and transaction-based expenses , other expenses and income ( loss ) before income taxes by segment : replace_table_token_12_th replace_table_token_13_th replace_table_token_14_th segment results for the year ended december 31 , 2013 compared to the year ended december 31 , 2012 total revenues total revenues for americas brokerage decreased $ 14.7 million , or 5.3 % , to $ 261.7 million in 2013. total revenues for emea brokerage decreased $ 32.0 million , or 9.5 % , to $ 306.5 million for the year .
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additionally , the asu clarifies that 1 ) an entity should not split a sales-based or usage-based royalty into a portion subject to the guidance on sales-based and usage-based royalties and a portion that is not subject to that guidance ; and 2 ) the guidance on sales-based and usage-based royalties applies whenever the predominant item to which the royalty relates is a license of ip . lastly , the amendments distinguish contractual provisions requiring the transfer of additional rights to use or access ip that the customer does not already control from provisions that are attributes of a license ( e.g . , restrictions of time , geography , or use ) . license attributes define the scope of the rights conveyed to the customer ; they do not determine when the entity satisfies a performance obligation . t he effective date and transition requirements for asu 2016-10 are the same as the effective date and transition requirements of asu 2014-09 ( topic 606 ) . the company is currently in the process of evaluating the impact of adoption of the asu on its consolidated financial statements . in february 2016 , the fasb issued asu 2016-02 , leases , in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous generally accepted accounting principles ( โ gaap โ ) . the asu 2016-02 requires that a lessee should recognize a liability to make lease payments ( the lease liability ) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet . asu 2016-02 is effective for fiscal years beginning after december 15 , 2018 ( including interim periods within those periods ) using a modified retrospective approach and early adoption is permitted . the company is currently in the process of evaluating the impact of adoption of the asu on its consolidated financial statements . 40 in may 2014 , the fasb issued asu 2014-09 , which provides guidance for revenue recognition . the standard 's core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services . in doing so , companies will need to use more judgment and make more estimates than under today 's guidance . in august 2015 , the fasb issued asu 2015-14 , which defers the effective date of asu 2014-09 for all entities by one year . accordingly , public business entities should apply the guidance in asu 2014-09 to annual reporting periods ( including interim periods within those periods ) beginning after december 15 , 2017. we will use the modified retrospective approach upon adoption of this guidance effective january 1 , 2018. we have utilized a comprehensive approach to assess the impact of the guidance on our contract portfolio . we have reviewed our current accounting policies and practices to identify potential differences resulting from the application of the new requirements to our revenue contracts , including evaluation of performance obligations in the contract , allocating the transaction price to each separate performance obligation and accounting treatment of costs to obtain and fulfill contracts . in addition , we will update certain disclosures , as applicable , included in our financial statements to meet the requirements of the new guidance . we are substantially complete with our review of contracts with our customers . we expect to record a cumulative effect adjustment to accumulated deficit upon adoption of the new revenue standard as of january 1 , 2018. the cumulative adjustment is related to incremental upfront contract acquisition costs ( such as sales commissions ) for customer contracts . the new standard requires these incremental costs to be capitalized and amortized over the estimated life of the asset . currently , our indirect sales commissions for the sales leadership team are expensed as incurred . we anticipate the resulting contract acquisition asset will be amortized over the average contract life 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 โ anticipate โ , โ expect โ , โ intend โ , โ believe โ 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 . 17 overview crexendo , inc. is a next-generation clec and an award-winning leader and provider of unified communications cloud telecom services , broadband internet services , and other cloud business services that are designed to provide enterprise-class cloud services to any size businesses at affordable monthly rates . the company has two operating segments , which consist of cloud telecommunications and web services . story_separator_special_tag we believe ebitda provides a useful metric to investors to compare us with other companies within our industry and across industries . we define adjusted ebitda as ebitda adjusted for share-based compensation , and rent expense paid with stock . we use adjusted ebitda as a supplemental measure to review and assess operating performance . we also believe use of adjusted ebitda facilitates investors ' use of operating performance comparisons from period to period , as well as across companies . in our march 6 , 2018 earnings press release , as furnished on form 8-k , we included non-gaap net loss , ebitda and adjusted ebitda . the terms non-gaap net loss , ebitda , and adjusted ebitda are not defined under u.s. gaap , and are not measures of operating income , operating performance or liquidity presented in analytical tools , and when assessing our operating performance , non-gaap net loss , ebitda , and adjusted ebitda should not be considered in isolation , or as a substitute for net loss or other consolidated income statement data prepared in accordance with u.s. gaap . some of these limitations include , but are not limited to : โ ebitda and adjusted ebitda do not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments ; โ they do not reflect changes in , or cash requirements for , our working capital needs ; โ they do not reflect the interest expense , or the cash requirements necessary to service interest or principal payments , on our debt that we may incur ; โ they do not reflect income taxes or the cash requirements for any tax payments ; โ although depreciation and amortization are non-cash charges , the assets being depreciated and amortized will be replaced sometime in the future , and ebitda and adjusted ebitda do not reflect any cash requirements for such replacements ; โ while share-based compensation is a component of operating expense , the impact on our financial statements compared to other companies can vary significantly due to such factors as the assumed life of the options and the assumed volatility of our common stock ; and โ other companies may calculate ebitda and adjusted ebitda differently than we do , limiting their usefulness as comparative measures . 19 we compensate for these limitations by relying primarily on our u.s. gaap results and using non-gaap net income ( loss ) , ebitda , and adjusted ebitda only as supplemental support for management 's analysis of business performance . non-gaap net income ( loss ) , ebitda and adjusted ebitda are calculated as follows for the periods presented . reconciliation of non-gaap financial measures in accordance with the requirements of regulation g issued by the sec , we are presenting the most directly comparable u.s. gaap financial measures and reconciling the unaudited non-gaap financial metrics to the comparable u.s. gaap measures . reconciliation of u.s. gaap net loss to non-gaap net income/ ( loss ) ( unaudited ) replace_table_token_4_th reconciliation of u.s. gaap net loss to ebitda to adjusted ebitda ( unaudited ) replace_table_token_5_th critical accounting policies and estimates the consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the united states . the following accounting policies are the most critical in understanding our consolidated financial position , results of operations or cash flows , and that may require management to make subjective or complex judgments about matters that are inherently uncertain . 20 goodwill โ goodwill is tested for impairment using a fair-value-based approach on an annual basis ( december 31 ) and between annual tests if indicators of potential impairment exist . intangible assets - our intangible assets consist primarily of customer relationships and developed technology . the intangible assets are amortized following the patterns in which the economic benefits are consumed . we periodically review the estimated useful lives of our intangible assets and review these assets for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable . the determination of impairment is based on estimates of future undiscounted cash flows . if an intangible asset is considered to be impaired , the amount of the impairment will be equal to the excess of the carrying value over the fair value of the asset . contingent liabilities - contingent liabilities require significant judgment in estimating potential payouts . contingent considerations arising from business combinations require management to estimate future payouts based on forecasted results , which are highly sensitive to the estimates of discount rates and future revenues . these estimates can change significantly from period to period and reviewed each reporting period to establish the fair value of the contingent liability . for additional information on use of estimates , see summary of significant accounting policies in the notes to the consolidated financial statements . story_separator_special_tag other expense primarily consists of interest expense , offset by sublease rental income . net other expense increased 408 % or $ 147,000 to $ 183,000 for the year ended december 31 , 2017 as compared to $ 36,000 for the year ended december 31 , 2016. we incurred interest expense on our related party note payable and a decrease in sublease income resulting from completion of our lease agreement obligation in the fourth quarter of 2016 and related sub-lease . operating results of our web services segment ( in thousands ) replace_table_token_9_th 24 quarterly financial information replace_table_token_10_th replace_table_token_11_th year ended december 31 , 2017 compared to year ended december 31 , 2016 service revenue service revenue from web services is generated primarily through website hosting , professional web management services , and extended payment term agreements ( eptas ) .
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segment operating results the company has two operating segments , which consist of cloud telecommunications and web services . the information below is organized in accordance with our two reportable segments . segment operating income ( loss ) is equal to segment net revenue less segment cost of service revenue , cost of product revenue , sales and marketing , research and development , and general and administrative expenses . operating results of our cloud telecommunications segment ( in thousands ) replace_table_token_6_th 21 quarterly financial information replace_table_token_7_th replace_table_token_8_th 22 year ended december 31 , 2017 compared to year ended december 31 , 2016 service revenue cloud telecommunications service revenue consists primarily of fees collected for cloud telecommunications services , professional services , interest from sales-type leases , and broadband internet services . service revenue increased 27 % or $ 1,691,000 , to $ 7,973,000 for the year ended december 31 , 2017 as compared to $ 6,282,000 for the year ended december 31 , 2016. the increase in service revenue is due to an increase in contracted service revenue , usage charges , and professional services revenue of $ 1,822,000 , offset by a decrease in equipment lease interest of $ 106,000 and a decrease in broadband internet services revenue of $ 25,000. a substantial portion of cloud telecommunications segment revenue is generated through thirty-six to sixty month service contracts . as such , we believe growth in cloud telecommunications segment will initially be seen through increases in our backlog . product revenue product revenue consists primarily of fees collected for the sale of desktop phone devices and third party equipment . product revenue decreased 9 % or $ 128,000 , to $ 1,347,000 for the year ended december 31 , 2017 as compared to $ 1,475,000 for the year ended december 31 , 2016. product revenue fluctuates from one period to the next based on timing of installations , as we recognize revenue when the installation is complete .
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this annual report on form 10-k and certain information incorporated herein by reference contain forward-looking statements within the ยsafe harborย provisions of the private securities litigation reform act of 1995. all statements contained in this annual report on form 10-k , other than statements that are purely historical , are forward-looking statements and are based upon management 's present expectations , objectives , anticipations , plans , hopes , beliefs , intentions or strategies regarding the future . we use words such as ยanticipate , ย ยestimate , ย ยplan , ย ยproject , ย ยcontinuing , ย ยongoing , ย ยexpect , ย ยbelieve , ย ยintend , ย ยmay , ย ยwill , ย ยshould , ย ยcould , ย and similar expressions to identify forwardยlooking statements . forward-looking statements in this annual report on form 10-k include , without limitation : ( 1 ) projections of revenue , earnings , capital structure and other financial items , ( 2 ) statements of our plans and objectives , ( 3 ) statements regarding the capabilities and capacities of our business operations , ( 4 ) statements of expected future economic performance and ( 5 ) assumptions underlying statements regarding us or our business . it is important to note that our actual results could differ materially from those included in such forward-looking statements due to a variety of factors including : ( 1 ) substantial deterioration in economic conditions , especially in the united states and europe ; ( 2 ) our customers ' diminished liquidity and credit availability ; ( 3 ) difficulties in implementing new systems , integrating acquired businesses , managing anticipated growth , and responding to technological change ; ( 4 ) our ability to negotiate extensions of our credit agreements and to obtain additional debt or equity financing when needed ; ( 5 ) the cyclical nature of the markets we operate in ; ( 6 ) increases in interest rates ; ( 7 ) government spending ; ( 8 ) fluctuations in the construction industry , and capital expenditures in the oil and gas industry ; ( 9 ) the performance of our competitors ; ( 10 ) shortages in supplies and raw materials or the increase in costs of materials ; ( 11 ) our level of indebtedness and our ability to meet financial covenants required by our debt agreements ; ( 12 ) product liability claims , intellectual property claims , and other liabilities ; ( 13 ) the volatility of our stock price ; ( 14 ) future sales of our common stock ; ( 15 ) the willingness of our stockholders and directors to approve mergers , acquisitions , and other business transactions ; ( 16 ) currency transactions ( foreign exchange ) risks and the risk related to forward currency contracts ; and ( 17 ) certain provisions of the michigan business corporation act and the company 's articles of incorporation , as amended , amended and restated bylaws , and the company 's preferred stock purchase rights may discourage or prevent a change in control of the company ( 18 ) a substantial portion of our revenues are attributed to a limited number of customers which may decrease or cease purchasing any time ; and ( 19 ) other risks described in the section entitled ยrisk factorsย and elsewhere in our annual report on form 10-k. the risks , described in our annual report on form 10-k , are not the only risks facing our company . additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business , financial condition or operating results . we do not undertake , and expressly disclaim , any obligation to update this forward-looking information , except as required under applicable law . overview the company is a leading provider of engineered lifting solutions . the company operates in two business segments : the lifting equipment segment and the equipment distribution segment . lifting equipment segment the company is a leading provider of engineered lifting solutions . the company designs , manufactures and distributes a diverse group of products that serve different functions and are used in a variety of industries . 24 through its manitex , inc. subsidiary it markets a comprehensive line of boom trucks and sign cranes . manitex 's boom trucks and crane products are primarily used for industrial projects , energy exploration and infrastructure development , including , roads , bridges and commercial construction . its badger equipment company ( ยbadgerย ) subsidiaryis a manufacturer of specialized rough terrain cranes and material handling products . badger primarily serves the needs of the construction , municipality , and railroad industries . the company 's manitex liftking ulc ( ยmanitex liftkingย or ยliftkingย ) subsidiary sells a complete line of rough terrain forklifts , a line of stand-up electric forklifts , cushioned tired forklifts with lifting capacities from 18 thousand to 40 thousand pounds , and special mission oriented vehicles , as well as other specialized carriers , heavy material handling transporters and steel mill equipment . manitex liftking 's rough terrain forklifts are used in both commercial and military applications . specialty mission oriented vehicles and specialized carriers are designed and built to meet the company 's unique customer needs and requirements . the company 's specialized lifting equipment has met the particular needs of customers in various industries that include utility , ship building and steel mill industries . the company 's manitex load king , inc. ( ยload kingย ) subsidiary manufactures specialized custom trailers and hauling systems typically used for transporting heavy equipment . load king trailers serve niche markets in the commercial construction , railroad , military , and equipment rental industries through a dealer network . story_separator_special_tag the increase in debt is the result of an increase in the amount outstanding on revolving credit facilities and working capital lines offset by significant retirement of term debt . the interest rate on our revolving credit facilities are much lower than the term debt that was retired during the year . foreign currency transaction gains and loss ยthe company attempts to purchase forward currency exchange contracts such that the exchange gains and losses on the assets and liabilities denominated in other than the reporting units ' functional currency will be offset by the changes in the market value of the forward currency exchange contracts it holds . the company records at the balance sheet date the forward currency exchange contracts at their market value with any associated gain or loss being recorded in current earnings as a currency gain or loss . for the year ended december 31 , 2012 , the company had a foreign currency loss of $ 0.1 million as compared to a $ 0.05 million foreign currency gain for the year ended december 31 , 2011. the aforementioned foreign currency gains and losses are net of forward currency contracts gains and losses . 28 income tax ยincome tax expense was $ 3.8 million and $ 1.4 million for the year ended december 31 , 2012 and 2011 , respectively . the increase in income tax is attributed to an increase in pre-tax income , as the company 's effective rate decreased to 32.1 % for 2012 from 34.0 % the effective tax rate for 2011. the decrease in the effective tax is primarily the result of being able to record a deduction in connection with the american jobs creation act of 2004 ( which affords a taxpayer a deduction for 9 % of qualifying production activities income ) and a remeasurement of the texas margin credit . in prior years , the company was not able to recognize a benefit under american jobs creation act of 2004 as it had unutilized net operating loss carryforwards . net income ยnet income for the year ended december 31 , 2012 was $ 8.1 million . this compares with a net income for the year ended december 31 , 2010 of $ 2.8 million . year ended december 31 , 2011 compared to year ended december 31 , 2010 financial results include the results for cvs ferrari , srl ( our italian subsidiary ) from the date the company was formed in june 2010. in the third quarter of 2010 using assets rented under a rental agreement with the predecessor company , cvs commenced manufacturing reach stackers and associated lifting equipment for the global container handling market . on july 1 , 2011 , the company purchased the assets previously being rented and the rental agreement was terminated . beginning on july 1 , 2011 , cvs results include amortization and depreciation related to intangible assets and manufacturing equipment that was purchased on that date . net income for the year ended december 31 , 2011 , net income was $ 2.8 million , which consists of revenue of $ 142.3 million , cost of sales of $ 113.0 million , research and development costs of $ 1.6 million , sg & a costs of $ 19.9 million , legal settlement of $ 1.2 million , interest expense of $ 2.5 million , other income of $ 0.1 million and income tax expense of $ 1.4 million . the legal settlement ( at net present value ) referred to above was recorded as a result of the recent fifth circuit appeals court ruling reversing the earlier district courts ruling in the company 's favor . the amount recorded , represents the net present value of twenty annual payments of ninety-five thousand dollars as provided for in a may 5 , 2011 contingent settlement for two product liability suits related to an accident that occurred in 2006. under the settlement agreement , the company only became liable when it was ultimately determined that there is no duty on the part of the liability insurance carriers to defend the company . this settlement is related to a liability for a product that was manufactured by a predecessor company of our manitex subsidiary . the product liability of this predecessor company was assumed by various acquiring companies and ultimately became the company 's liability when we acquired the company 's manitex subsidiary in 2006. this settlement is of an unusual nature and although it had a significant impact on our 2011 results , it is not related to on-going activities of the company . furthermore , the company is not aware of any other similar potential liabilities at the present time and has secured insurance coverage to explicitly cover such future instances , mitigating future business risks . for the year ended december 31 , 2010 , net income was $ 2.1 million , which consists of revenue of $ 95.9 million , cost of sales of $ 72.5 million , research and development costs of $ 1.2 million , sg & a costs of $ 16.6 million , interest expense of $ 2.4 million , foreign currency transaction loss of $ 0.1 million and income tax expense of $ 1.0 million . net revenue and gross profit ยfor the year ended december 31 , 2011 net revenue and gross profit were $ 142.3 million and $ 29.2 million , respectively . gross profit as a percent of sales was 20.6 % for the year ended december 31 , 2011. for the year ended december 31 , 2010 , net revenue and gross profit were $ 95.9 million and $ 23.3 million , respectively . gross profit as a percent of sales was 24.3 % for the year ended december 31 , 2010. approximately half of the increase in revenues is attributed to increased revenues at cvs and naee , two units that commenced operations mid-year 2010 . 29 the remaining increase in revenues is principally attributed to increased revenues for our boom trucks .
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results of consolidated operations manitex international , inc. ( thousands of dollars , except share data ) replace_table_token_6_th year ended december 31 , 2012 compared to year ended december 31 , 2011 financial results include the results for cvs ferrari , srl ( our italian subsidiary ) from the date the company was formed in june 2010. in the third quarter of 2010 using assets rented under a rental agreement with the predecessor company , cvs commenced manufacturing reach stackers and associated lifting equipment for the 26 global container handling market . on july 1 , 2011 , the company purchased the assets previously being rented and the rental agreement was terminated . beginning on july 1 , 2011 , cvs results includes amortization and depreciation related to intangible assets and manufacturing equipment that was purchased on that date . net income for the year ended december 31 , 2012 , net income was $ 8.1 million , which consists of revenue of $ 205.2 million , cost of sales of $ 164.8 million , research and development costs of $ 2.5 million , sg & a costs of $ 23.5 million , interest expense of $ 2.5 million , foreign currency transaction loss of $ 0.1 million and income tax expense of $ 3.8 million . for the year ended december 31 , 2011 , net income was $ 2.8 million , which consists of revenue of $ 142.3 million , cost of sales of $ 113.0 million , research and development costs of $ 1.6 million , sg & a costs of $ 19.9 million , legal settlement of $ 1.2 million , interest expense of $ 2.5 million , other income of $ 0.1 million and income tax expense of $ 1.4 million . net revenue and gross profit ยfor the year ended december 31 , 2012 net revenue and gross profit were $ 205.2 million and $ 40.5 million , respectively .
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f- 17 accounts payable and accrued liabilities accounts payable and accrued liabilities are comprised of the following : replace_table_token_10_th accrued compensation accrued compensation is comprised of the following : replace_table_token_11_th other long-term liabilities other long-term liabilities are comprised of the following : july 31 , 2018 july 31 , 2017 deferred rent $ 1,101,222 $ 1,140,953 separation costs 371,408 - total $ 1,472,630 $ 1,140,953 note 6โstockholders ' equity february 2018 offering on february 6 , 2018 , the company completed a follow-on public offering , selling 13,333,334 shares at an offering price of $ 1.50 per share . additionally , the underwriters exercised in full their over-allotment option to purchase an additional 2,000,000 shares at an offering price of $ 1.50 per share . aggregate gross proceeds from this follow-on public offering , including the exercise of the over-allotment option , were approximately $ 23 million , and net proceeds received , after underwriting fees of approximately $ 1.7 million and offering expenses of approximately $ 0.5 million , were approximately $ 20.8 million . f- 18 november 2017 warrant exercise inducement offering on november 13 , 2017 , the company entered into a warrant exercise agreement with certain holders of outstanding warrants ( the โ original warrants โ ) to purchase up to an aggregate of 5,509,642 shares of the company 's common stock at an exercise price of $ 1.69 per share . pursuant to the terms of the warrant exercise agreement , each holder agreed to exercise , from time to time and in accordance with the terms of the original warrants , including certain beneficial ownership limitations set forth therein , all original warrants held by it for cash . as a result of the exercise of all of the original warrants , the company received gross proceeds of approximately $ 9.3 million and net proceeds , after deducting estimated expenses paid or payable by the company , of approximately $ 9.1 million . pursuant to the terms of the warrant exercise agreement , and in order to induce each holder to exercise its original warrants , the company issued 1,377,411 new warrants to purchase a number of shares of its common stock which is equal to 25 % of the number of shares of common stock received by such holders upon the cash exercise of its original warrants . the terms of the inducement warrants are substantially similar to the terms of the original warrants , except that the inducement warrants : ( i ) have an initial exercise price of $ 2.26 per share ; ( ii ) become exercisable on may 13 , 2018 and expire on november 13 , 2019 ; and , ( iii ) contain certain additional transfer restrictions and limitations due to their offer and sale in a private placement offering . also on november 13 , 2017 , and in connection with its entry into the warrant exercise agreement , the company agreed to issue warrants to purchase up to an aggregate of 1,138,300 shares of its common stock to the accredited investors that participated in the company 's offerings completed in october 2017 , in consideration for such investors ' agreement to waive certain covenants made by the company to such investors and as an inducement to such investors to exercise certain other warrants to purchase the company 's common stock . the terms of the october 2017 investor warrants are substantially similar to the terms of the new warrants , except that the october 2017 investor warrants will become exercisable only if and when each october 2017 investor exercises in full and for cash the warrants to purchase the company 's common stock that were sold to such investors in the company 's offerings completed in october 2017. the warrants issued in connection with the warrant exercise agreement were considered inducement warrants and are classified in equity . the fair value of the warrants issued was approximately $ 2.5 million ( based on the black-scholes option valuation model assuming no dividend yield , a 2.0-year life , volatility of 73.12 % and a risk-free interest rate of 1.7 % ) . the fair value of the inducement warrants of $ 2.5 million was expensed as warrant inducement expense in the accompanying consolidated story_separator_special_tag this management 's discussion and analysis of financial conditions and results of operations and other portions of this report contain forward-looking information that involves risks and uncertainties . our actual results could differ materially from those anticipated by the forward-looking information . factors that may cause such differences include , but are not limited to , availability and cost of financial resources , product demand , market acceptance and other factors discussed in this report under the heading โ risk factors โ . this management 's discussion and analysis of financial condition and results of operations should be read in conjunction with our financial statements and the related notes included elsewhere in this report . overview we are a biotechnology company focused on designing , developing and commercializing innovative therapies and proprietary medical approaches to stimulate and to guide an anti-tumor immune response for the treatment of cancer . our core platform technology , immunopulseยฎ , is a drug-device therapeutic modality comprised of a proprietary intratumoral electroporation delivery device . the immunopulseยฎ platform is designed to deliver plasmid dna-encoded drugs directly into a solid tumor and promote an immunological response against cancer . the immunopulseยฎ device can be adapted to treat different tumor types , and consists of an electrical pulse generator , a reusable handle and disposable applicators . story_separator_special_tag the new warrants have an initial exercise price of $ 2.26 per share , become exercisable on may 13 , 2018 and expire on november 13 , 2019. as a result of the exercise of all of the outstanding warrants , we received gross proceeds of approximately $ 9.3 million and net proceeds , after deducting estimated expenses paid or payable by us , of approximately $ 9.1 million . also on november 13 , 2017 , and in connection with the warrant exercise agreement , we issued warrants to purchase up to an aggregate of 1,138,300 shares of our common stock to the investors that participated in our october 2017 offerings ( described below ) , in consideration for such investors ' agreement to waive certain covenants we made to such investors . these warrants are substantially similar to the exercise inducement warrants described above , except that they will become exercisable only if and when the warrants we issued and sold in the october 2017 offerings are exercised in full and for cash . the warrants issued in connection with the exercise agreement were considered inducement warrants and are classified in equity . the fair value of the inducement warrants of $ 2.5 million was expensed as warrant inducement expense in the accompanying consolidated statement of operations for the year ended july 31 , 2018 . 66 october 2017 offerings on october 25 , 2017 , we completed our offer and sale to certain accredited investors of , in a registered public offering , 5,270,934 shares of our common stock and , in a concurrent private placement , warrants to purchase an aggregate of up to 3,953,200 shares of our common stock , all at a purchase price of $ 1.34375 per share . the warrants have an initial exercise price of $ 1.25 per share , became exercisable on october 25 , 2017 and expire on april 25 , 2022. the gross proceeds of the offering were $ 7.1 million and the net proceeds , after deducting the placement agent 's fees and other estimated offering expenses paid by us ( and excluding the proceeds , if any , from any cash exercise of the warrants ) , were $ 6.2 million . at the closing of the offerings , we also issued warrants to purchase up to an aggregate of 316,256 shares of our common stock to the placement agent for the offerings , which have an exercise price of $ 1.68 , are immediately exercisable and expire on october 21 , 2022. on october 25 , 2017 , we also completed an offer and sale to one accredited investor of 800,000 shares of our common stock and warrants to purchase up to 600,000 shares of our common stock , all at a purchase price of $ 1.34375 per share and associated warrants . the warrants have an initial exercise price of $ 1.25 per share , become exercisable on april 27 , 2018 and expire on april 27 , 2022. the gross proceeds of the offering were $ 1.1 million and the net proceeds , after deducting the placement agent 's fee and other offering fees and expenses paid by the us ( and excluding the proceeds , if any , from any cash exercise of the warrants ) , were approximately $ 1.0 million . in connection with the offering , we paid the placement agent ( i ) a cash fee equal to 5.5 % of the gross proceeds of the offering , as well as offering expenses in a non-accountable sum of $ 15,000 , and ( ii ) warrants to purchase up to an aggregate of 48,000 shares of its common stock . the warrants issued to the placement agent are exercisable at an exercise price of $ 1.68 per share , became exercisable on their original issuance date and expire on october 25 , 2022. atm program on july 25 , 2017 , we entered into an equity distribution agreement with oppenheimer & co. inc. , or oppenheimer , to commence an โ at the market โ offering program , or the atm program , under which we were permitted to offer and sell , from time to time through or to oppenheimer , acting as sales agent or principal , shares of our common stock having an aggregate gross sales price of up to $ 8.4 million . an aggregate of 897,311 shares of our common stock were sold in the atm program during the year ended july 31 , 2018 , for net proceeds to us , after deducting oppenheimer 's commissions and other expenses paid or payable by us , of $ 1.1 million . effective as of october 22 , 2017 , we terminated the atm program . as a result of such termination , no further offers or sales of our common stock will be made in the atm program . warrant exercises during the year ended july 31 , 2018 , we received gross proceeds of $ 10.0 million related to the november 2017 warrant exercise inducement offering as well as an additional $ 0.7 million from other warrant exercises . if the holders of all our warrants that are outstanding as of the issuance of this report were to exercise all such warrants in full on a cash basis , we would receive an aggregate of approximately $ 26.4 million in net proceeds . however , the holders of these warrants may choose to exercise only a portion of the warrants they hold , may choose not to exercise any of the warrants they hold , or may choose to โ net โ exercise their warrants on a cashless basis to the extent permitted by the warrants .
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general and administrative our general and administrative expenses increased by $ 9.0 million , from $ 9.7 million in the year ended july 31 , 2017 to $ 18.7 million in the year ended july 31 , 2018. this increase was largely due to increases of : ( i ) $ 4.1 million in stock-based compensation expense primarily related to option and rsu grants to our current directors and executives , as well as acceleration of the vesting of stock based compensation to previous executives ; ( ii ) $ 2.5 million in cash for services and non-cash stock options granted to third-party firms to provide certain investor relations and advisory consulting services ; ( iii ) $ 2.3 million in compensation costs , including severance expense for former executives ; and , ( iv ) $ 0.2 million in other general and administrative-related costs . other income ( expense ) , net other income ( expense ) , net , increased by $ 0.1 million , from other income net of $ 0.2 million in the year ended july 31 , 2017 to other income net of $ 0.3 million in the year ended july 31 , 2018. this increase was primarily due to interest-bearing cash and marketable securities investment accounts . loss on disposal of property and equipment loss on disposal of property and equipment increased by $ 0.9 million , from $ 0 in the year ended july 31 , 2017 to $ 0.9 million in the year ended july 31 , 2018. this increase was due to the loss on disposal of property and equipment related to our move to a smaller facility in san diego , california . warrant inducement expense the warrants issued in connection with our november 2017 warrant exercise inducement offering were considered inducement warrants and the fair value of the inducement warrants of $ 2.5 million is classified as equity and expensed as warrant inducement expense . ( see note 6 ) .
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such statements relate to our intent , belief or current expectations primarily with respect to our future operating , financial and strategic performance . any such forward-looking statements are not guarantees of future performance and may involve risks and uncertainties . actual results may differ from those contained in or implied by the forward-looking statements as a result of various factors . for more information , see `` cautionary statements regarding forward-looking statements . '' for additional information about certain of the matters discussed and described in the following management 's discussion and analysis of financial condition and results of operations , including certain defined terms used herein , see the notes to the accompanying audited consolidated financial statements included elsewhere in this annual report . in addition , for information relating to our current expectations for liquidity and capital structure upon our emergence from chapter 11 of the bankruptcy code , see item 1 `` business - current bankruptcy proceedings . '' no assurances can be provided that our actual liquidity and capital structure will not differ materially from our expectations set out therein . 36 index to financial statements our business and operating overview a leader in the radio broadcasting industry , cumulus ( pink : cmlsq ) combines high-quality local programming with iconic , nationally syndicated media , sports and entertainment brands to deliver premium content choices to the 245 million people reached each week through its 445 owned-and-operated stations broadcasting in 90 us media markets ( including eight of the top 10 ) , approximately 8,000 broadcast radio stations affiliated with its westwood one network and numerous digital channels . together , the cumulus/westwood one platforms make cumulus one of the few media companies that can provide advertisers with national reach and local impact . cumulus/westwood one is the exclusive radio broadcast partner to some of the largest brands in sports , entertainment , news , and talk , including the nfl , the ncaa , the masters , the olympics , the grammys , the academy of country music awards , the american music awards , the billboard music awards , westwood one news , and more . additionally , cumulus is the nation 's leading provider of country music and lifestyle content through its nash brand , which serves country fans nationwide through radio programming , exclusive digital content , and live events . we generate revenue through monetization of our programming content and other sources across the following four major revenue streams : broadcast advertising revenue . most of our revenue is generated through the sale of terrestrial , also known as broadcast , radio advertising time to local , regional , and national clients . local spot and regional spot advertising is sold by cumulus employed sales executives . national spot advertising for our owned-and-operated stations is marketed and sold by both katz media in an outsourced arrangement as well as our own internal national sales team , which collectively markets to advertisers under the sales brand of westwood one media sales . network advertising airing across our owned , operated and affiliated stations is sold by our internal sales team located across the united states under the westwood one networks brand to predominantly national and regional advertisers . digital advertising revenue . we generate digital advertising revenue from the sale of advertising and promotional opportunities across our streaming audio network , digital commerce platform , websites and mobile applications . we operate one of the largest streaming audio advertising networks in the united states , including owned and operated internet radio simulcast stations , and other third party digital audio companies with whom we have advertising reseller agreements . through cumulus digital c-suite , a comprehensive portfolio of digital marketing solutions , we sell digital advertising adjacent to , or embedded in , podcasts through our network of owned and third party podcasts . additionally , our digital commerce platform utilizes couponing and discounted daily deals to create promotional opportunities for local , regional and national clients under our sweet deals and incentrev brands . we also sell banner and other display ads across more than 400 local radio station websites , mobile applications , and ancillary custom client microsites . political advertising revenue . political advertising revenue is generated across all of our broadcast and digital assets , but we highlight it as a separate category to distinguish its highly cyclical nature versus core revenue . political advertising is generally strongest during even-numbered years , especially in the fourth quarter of such years , when most national and state elections are conducted . in addition to candidate advertising revenue , we also receive advertising revenue from special interest and advocacy groups . license fees & other . all other non-advertising based revenue types in which the company participates are aggregated in our license fees & other revenue category . this includes fees we receive for content licensing , third party network compensation , proprietary software licensing , subleases and rents ( predominantly for owned towers ) , and all other revenue . current bankruptcy proceedings ; liquidity and going concern considerations on november 29 , 2017 ( the `` petition date '' ) , the company and certain of its direct and indirect subsidiaries ( collectively , the โ debtors โ ) filed voluntary petitions for relief ( the โ bankruptcy petitions โ ) under chapter 11 of title 11 of the united states code ( the โ bankruptcy code โ ) in the united states bankruptcy court for the southern district of new york ( the โ bankruptcy court โ . the debtors ' chapter 11 cases are being jointly administered under the caption in re cumulus media inc. , et al , case no . 17-13381 . story_separator_special_tag the other terms and conditions of the new first lien debt would generally be similar to those set forth in the credit agreement , except as set forth in the term sheet attached to the restructuring support agreement ( the `` term sheet '' ) . the new first lien debt would be secured by first priority security interests in substantially all the assets of reorganized cumulus and the guarantors ( as defined below ) in a manner substantially consistent with the credit agreement , subject to the terms of the term sheet . in addition , the direct parent of reorganized cumulus ( the โ parent โ ) and all present and future wholly-owned subsidiaries of the parent , subject to exceptions that are substantially consistent with those set forth in the credit agreement , would guarantee the new first lien debt ( the `` guarantors '' ) . the plan contemplates that the board of directors of reorganized cumulus would consist of the president and chief executive officer of the company and six directors chosen by the consenting creditors . even if the requisite acceptances of the plan are received , the bankruptcy court is not obligated to confirm the plan as proposed . 38 index to financial statements as of december 31 , 2017 , the company had $ 102.9 million of unrestricted cash and cash equivalents . the company has generated positive cash flows from operating activities of $ 86.6 million and $ 35.7 million for the years ended december 31 , 2017 and 2016 , respectively . prior to the filing of the bankruptcy petitions , our principal sources of funds had primarily been cash flow from operations and borrowings under credit facilities in existence from time to time . our cash flow from operations remains subject to factors such as fluctuations in advertising media preferences and changes in demand caused by shifts in population , station listenership , demographics , and audience tastes . in addition , our cash flows may be affected if customers are not able to pay , or delay payment of , accounts receivable that are owed to us , which risks may be exacerbated in challenging or otherwise uncertain economic periods . in recent periods , the company has experienced reductions in revenue and profitability from prior historical periods because of continuing market revenue pressures and cost escalations built into certain contracts . notwithstanding this , we believe that our national platform and extensive station portfolio representing a broad diversity in format , listener base , geography , and advertiser base helps us maintain a more stable revenue stream by reducing our dependence on any single demographic , region or industry . future reductions in revenue or profitability are possible and could have a material adverse effect on the company 's results of operations , financial condition or liquidity . from time to time we have evaluated , and expect that we will continue to evaluate , opportunities to obtain additional capital from the divestiture of radio stations or other assets where the net value accretion realized in a sale exceeds the value that management believes could be realized over time by continuing to operate the assets , that are not a part of , or do not complement , our strategic operations , subject to market and other conditions in existence at that time . as of december 31 , 2017 , the company had a $ 1.722 billion term loan outstanding under its amended and restated credit agreement , dated as of december 23 , 2013 ( the `` credit agreement '' ) which consists of a term loan ( the `` term loan '' ) and a $ 200.0 million revolving credit facility ( the `` revolving credit facility '' ) . on may 13 , 2011 , the company had $ 610.0 million of 7.75 % senior notes ( the `` senior notes '' ) outstanding . amounts outstanding under the term loan are scheduled to mature on december 23 , 2020 and the 7.75 % senior notes mature on may 1 , 2019. notwithstanding these maturity dates , and as disclosed further in note 6 , the credit agreement includes a springing maturity provision that provides that if on january 30 , 2019 the aggregate principal amount of 7.75 % senior notes outstanding exceeds $ 200.0 million , the maturity date of the term loan will be accelerated to january 30 , 2019. if the plan is not approved , or the company is unable to take other steps to create additional liquidity or otherwise avoid the occurrence of the springing maturity , forecasted cash flows would not be sufficient for the company to meet its obligations as of january 30 , 2019. in connection with the company 's chapter 11 cases , the company is required to make adequate protection payments on the term loan . the amounts of these payments are calculated under the terms described in note 6 in the consolidated financial statements included elsewhere in the form 10-k. during the pendency of the bankruptcy petitions , asc 852 requires the company to recognize the adequate protection payments as a reduction to the principal balance of the term loan . in the event amounts were outstanding under the revolving credit facility or any letters of credit were outstanding that had not been collateralized by cash as of the end of each quarter , the credit agreement required compliance with a consolidated first lien leverage ratio covenant . the required ratio at december 31 , 2017 and 2016 was 4.25 to 1 and 5.00 to 1 , respectively . the ratio was to decrease to 4.0 to 1 at march 31 , 2018. at december 31 , 2017 , the company 's actual leverage ratio would have been in excess of the required ratio . as a result of our bankruptcy petitions , the revolving credit facility was terminated , as such , at december 31 , 2017 we had no borrowings outstanding under the revolving credit facility .
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consolidated results of operations analysis of consolidated statements of operations the following selected data from our audited consolidated statements of operations and other supplementary data should be referred to while reading the results of operations discussion that follows ( dollars in thousands ) : replace_table_token_14_th * * calculation is not meaningful . year ended december 31 , 2017 compared to year ended december 31 , 2016 net revenue net revenue for the year ended december 31 , 2017 decreased $ 5.7 million , or 0.5 % , to $ 1,135.7 million compared to $ 1,141.4 million for the year ended december 31 , 2016 . the decrease resulted from declines of $ 12.1 million and $ 0.9 million in political advertising and broadcast advertising , respectively , partially offset by increases of $ 4.6 million and $ 2.7 million in digital advertising and license fees and other revenue , respectively . for a discussion of net revenue by segment and a comparison between the year ended december 31 , 2017 and the year ended december 31 , 2016 , see the discussion under `` segment results of operations . '' 43 index to financial statements content costs content costs for the year ended december 31 , 2017 decreased $ 24.8 million , or 5.8 % , to $ 403.0 million compared to $ 427.8 million for the year ended december 31 , 2016 . the decrease was primarily driven by the impact of an expense of $ 14.4 million at westwood one incurred during the third quarter of 2016 , related to payments to cbs to resolve previously disputed syndicated programming and network inventory expenses , and lower content costs at the station group , partially offset by higher content costs at westwood one associated with increased revenue . selling , general & administrative expenses selling , general & administrative expenses for the year ended december 31 , 2017 increased by $ 4.6 million , or 1.0
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the implied fair value of goodwill is then compared with the carrying amount of goodwill to determine if an impairment loss is necessary . see note 5. advertising we expense production and other costs of advertising as incurred as a component of selling , general and administrative expense . additionally , manufacturer cooperative advertising credits for qualifying , specifically-identified advertising expenditures are recognized as a reduction of advertising expense . advertising expense , net of manufacturer cooperative advertising credits , was $ 39.6 million , $ 31.9 million and $ 23.9 million for the years ended december 31 , story_separator_special_tag you should read the following discussion in conjunction with item 1 . โ business , โ item 1a . โ risk factors โ and our consolidated financial statements and notes thereto . overview we are a leading operator of automotive franchises and retailer of new and used vehicles and services . as of february 21 , 2014 , we offered 28 brands of new vehicles and all brands of used vehicles in 96 stores in the united states and online at lithia.com . we sell new and used cars and replacement parts ; provide vehicle maintenance , warranty , paint and repair services ; arrange related financing ; and sell service contracts , vehicle protection products and credit insurance . we believe that the fragmented nature of the automotive dealership sector provides us with the opportunity to achieve growth through consolidation . in 2013 , the top ten automotive retailers only represented 6 % of the stores in the united states . we target mid-sized regional markets for domestic and import franchises and metropolitan markets for luxury franchises . we believe this strategy enables brand exclusivity with minimal competition from other dealerships with the same franchise in the market . our acquisition strategy has been to acquire dealerships at prices that meet our internal investment targets and , through the application of our centralized operating structure , leverage costs and improve store profitability . we believe our disciplined approach and the current economic environment provides us with attractive acquisition opportunities . we also believe that we can continue to improve operations at our existing stores . by promoting entrepreneurial leadership within our general and department managers , we strive for continuous improvement to drive sales and capture market share in our local markets . our goal is to retail an average of 75 used vehicles per store per month and we believe we can make additional improvements in our used vehicle sales performance by offering lower-priced value vehicles and selling brands other than the new vehicle franchise at each location . our service , body and parts operations provide important repeat business for our stores . we continue to grow this business through increased marketing efforts , competitive pricing on routine maintenance items and diverse commodity product offerings . in 2013 , we continued to experience organic growth and profitability through increasing market share and maintaining a lean cost structure . as sales volume increases and we gain leverage in our cost structure , we anticipate maintaining sg & a as a percentage of gross profit in the upper 60 % range . as we focus on maintaining discipline in controlling costs , in 2014 we continue to target retaining , on a same store basis , 50 % of each incremental gross profit dollar after deducting sg & a expense . critical accounting policies and estimates the preparation of financial statements in conformity with u.s. generally accepted accounting principles requires us to make certain estimates , judgments and assumptions that affect the reported amounts of assets and liabilities , the disclosure of contingent assets and liabilities and reported amounts of revenues and expenses at the date of the financial statements . certain accounting policies require us to make difficult and subjective judgments on matters that are inherently uncertain . the following accounting policies involve critical accounting estimates because they are particularly dependent on assumptions made by management . while we have made our best estimates based on facts and circumstances available to us at the time , different estimates could have been used in the current period . changes in the accounting estimates we used are reasonably likely to occur from period to period , which may have a material impact on the presentation of our financial condition and results of operations . 31 our most critical accounting estimates include those related to goodwill and franchise value , long-lived assets , deferred tax assets , service contracts and other insurance contracts , and lifetime lube , oil and filter contracts and self-insurance programs . we also have other key accounting policies for valuation of accounts receivable , expense accruals and revenue recognition . however , these policies either do not meet the definition of critical accounting estimates described above or are not currently material items in our financial statements . we review our estimates , judgments and assumptions periodically and reflect the effects of revisions in the period that they are deemed to be necessary . we believe that these estimates are reasonable . however , actual results could differ materially from these estimates . goodwill and franchise value we are required to test our goodwill and franchise value for impairment at least annually , or more frequently if conditions indicate that an impairment may have occurred . we have determined that we operate as one reporting unit for evaluating goodwill . we have the option to qualitatively or quantitatively assess goodwill for impairment and , in 2013 , evaluated our goodwill using a quantitative assessment process . we test goodwill for impairment using the adjusted present value method ( โ apv โ ) to estimate the fair value of our reporting unit . under the apv method , future cash flows are based on recently prepared budget forecasts and business plans and are used to estimate the future economic benefits that the reporting unit will generate . an estimate of the appropriate discount rate is utilized to convert the future economic benefits to their present value equivalent . story_separator_special_tag we did not record any impairments related to long-lived assets in 2013. see notes 1 and 4 of notes to consolidated financial statements for additional information . deferred tax assets as of december 31 , 2013 , we had deferred tax assets of approximately $ 64.2 million and deferred tax liabilities of $ 41.3 million . the principal components of our deferred tax assets are related to goodwill , allowances and accruals , capital loss carryforwards , deferred revenue and cancellation reserves . the principal components of our deferred tax liabilities are related to depreciation on property and equipment and inventories . we consider 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 future taxable income during the periods in which those temporary differences become deductible . we consider the scheduled reversal of deferred tax liabilities ( including the impact of available carryback and carryforward periods ) , projected future taxable income , and tax-planning strategies in making this assessment . 33 based upon the scheduled reversal of deferred tax liabilities , and our projections of future taxable income over the periods in which the deferred tax assets are deductible , we believe it is more likely than not that we will realize the benefits of the unreserved deductible differences . as of december 31 , 2013 , we had an $ 11.1 million valuation allowance against our deferred tax assets . this valuation allowance was mainly associated with losses from the sale of corporate entities . as these amounts are characterized as capital losses , we evaluated the availability of projected capital gains and determined that it would be unlikely these amounts would be fully utilized . if we are unable to meet the projected taxable income levels utilized in our analysis , and depending on the availability of feasible tax planning strategies , we might record an additional valuation allowance on a portion or all of our deferred tax assets in the future . service contracts and other insurance contracts we receive commissions from the sale of vehicle service contracts and certain other insurance contracts . the contracts are sold through unrelated third parties , but we may be charged back for a portion of the commissions in the event of early termination of the contracts by customers . we sell these contracts on a straight commission basis ; in addition , we also participate in future underwriting profit pursuant to retrospective commission arrangements , which are recognized as income upon receipt . we record commissions at the time of sale of the vehicles , net of an estimated liability for future charge-backs . we have established a reserve for estimated future charge-backs based on an analysis of historical charge-backs in conjunction with estimated lives of the applicable contracts . if future cancellations are different than expected , we could have additional expense related to the cancellations in future periods , which could have a material adverse impact on our financial position and results of operations . at december 31 , 2013 and 2012 , the reserve for future cancellations totaled $ 18.2 million and $ 13.5 million , respectively , and is included in accrued liabilities and other long-term liabilities on our consolidated balance sheets . a 10 % increase in expected cancellations would result in an additional reserve of approximately $ 1.8 million . lifetime lube , oil and filter contracts we retain the obligation for lifetime lube , oil and filter service contracts sold to our customers and assumed the liability of certain existing lifetime , lube , oil and filter contracts . payments we receive upon sale of the lifetime oil contracts are deferred and recognized in revenue over the expected life of the service agreement to best match the expected timing of the costs to be incurred to perform the service . we estimate the timing and amount of future costs for claims and cancellations related to our lifetime oil contracts using historical experience rates and estimated future costs . if our estimates of future costs to perform under the contracts exceed the existing deferred revenue , we would record a reserve for the additional expected cost . the estimate of future costs to perform under the contract are mainly dependent on our estimated number of oil changes to be performed over a vehicle 's life and our assumptions about future costs expected to be incurred . significant increases to either of these assumptions could have a material adverse impact on our financial position and results of operations . at december 31 , 2013 , the deferred revenue related to these self-insured contracts was $ 50.1 million . 34 self-insurance programs we self-insure a portion of our property and casualty insurance , medical insurance and workers ' compensation insurance . we engage third-parties to assist in estimating the loss exposure related to the self-retained portion of the risk associated with these insurances . additionally , we analyze our historical loss and claims trends associated with these programs . the maximum exposure on any single claim under these programs is $ 1 million . although we believe we have sufficient insurance , exposure to uninsured or underinsured losses may result in the recognition of additional charges , which could have a material adverse impact on our financial position and results of operations . at december 31 , 2013 and 2012 , we had liabilities associated with these programs of $ 12.0 million and $ 12.4 million , respectively , recorded as a component of accrued liabilities and other long-term liabilities on our consolidated balance sheets . story_separator_special_tag per unit sold . similar to new vehicle sales , we focus on gross profit dollars earned per unit , not on gross margin percentage , in evaluating our sales performance . 38 used vehicle retail unit sales increased in 2012 compared to 2011 as we increased our volume of sales .
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results of continuing operations for the year ended december 31 , 2013 , we reported income from continuing operations , net of tax , of $ 105.2 million , or $ 4.02 per diluted share . for the years ended december 31 , 2012 and 2011 , we reported income from continuing operations , net of tax , of $ 79.4 million , or $ 3.03 per diluted share , and $ 55.2 million , or $ 2.07 per diluted share , respectively . discontinued operations the results of operations for stores that have been sold , closed , or are held for sale are presented as discontinued operations in our consolidated statements of operations if they qualify for reclassification under the applicable accounting guidance . as a result , our results from continuing operations are presented on a comparable basis for all periods . we realized income from discontinued operations , net of income tax expense , of $ 0.8 million , $ 1.0 million and $ 3.7 million for the years ended december 31 , 2013 , 2012 and 2011 , respectively . see notes 1 and 16 of notes to consolidated financial statements for additional information . key performance metrics certain key performance metrics for revenue and gross profit were as follows for 2013 , 2012 and 2011 ( dollars in thousands ) : replace_table_token_8_th replace_table_token_9_th 35 replace_table_token_10_th ( 1 ) commissions reported net of anticipated cancellations . same store operating data we believe that same store comparisons are an important indicator of our financial performance . same store measures demonstrate our ability to profitably grow our existing locations . as a result , same store measures have been integrated into the discussion below . same store measures reflect results for stores that were operating in each comparison period , and only includes the months when operations occurred in both periods .
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51 item 12 : security ownership of certain beneficial owners and management and related stockholder matters the following table sets story_separator_special_tag overview keytronicems is a leader in electronic manufacturing services and solutions to original equipment manufacturers of a broad range of products . we provide engineering services , worldwide procurement and distribution , materials management , world-class manufacturing and assembly services , in-house testing , and unparalleled customer service . our international production capability provides our customers with benefits of improved supply-chain management , reduced inventories , lower transportation costs , and reduced product fulfillment time . we continue to make investments in all of our operating facilities to give us the production capacity and logistical advantages to continue to win new business . the following information should be read in conjunction with the consolidated financial statements included herein and with item 1a , risk factors . our mission is to provide our customers with superior manufacturing and engineering services at the lowest total cost for the highest quality products , and create long-term mutually beneficial business relationships by employing our ยtrust , commitment , resultsย philosophy . story_separator_special_tag leveraging of our fixed costs as a percentage of sales during the fiscal year . we provide for obsolete and non-saleable inventories based on specific identification of inventory against current demand and recent usage . the amounts charged to expense for these inventories were approximately $ 0.3 million , and $ 2.2 million in fiscal years 2011 , and 2010 , respectively . the large provision in fiscal year 2010 was primarily due to a discontinuance of manufacturing for certain customers that became no longer viable . we provide warranties on certain products we sell and estimate warranty costs based on historical experience and anticipated product returns . the amounts charged to expense are determined based on an estimate of warranty exposure . the net warranty expense was approximately $ 158,000 and $ 45,000 in fiscal years 2011 , and 2010 , respectively . warranty expense for fiscal years 2011 and 2010 is related to workmanship claims on keyboards and ems products . gross profit gross profit as a percentage of net sales was 8.1 percent , and 9.6 percent in fiscal years 2011 , and 2010 , respectively . the 1.5 percentage point decrease in gross profit as a percentage of net sales during fiscal year 2011as compared to fiscal year 2010 is primarily related to a 6.4 percentage point increase in material costs , as a percent of sales , resulting from higher material content in certain new customer programs , partially offset by a 4.9 percentage point improvement in leveraging of certain overhead costs . we took early pay discounts to suppliers that totaled approximately $ 678,000 , and $ 364,000 , in fiscal years 2011 , and 2010 , respectively . early pay discounts will fluctuate based on our liquidity and changes in the discounts and terms offered by our suppliers . 18 changes in gross profit margins reflect the impact of a number of factors that can vary from period to period , including product mix , start-up costs and efficiencies associated with new programs , product life cycles , sales volumes , capacity utilization of our resources , management of inventories , component pricing and shortages , end market demand for customers ' products , fluctuations in and timing of customer orders , and competition within the ems industry . these and other factors can cause variations in operating results . there can be no assurance that gross margins will not decrease in future periods . research , development and engineering research , development and engineering expenses ( rd & e ) consists principally of employee related costs , third party development costs , program materials , depreciation and allocated information technology and facilities costs . total rd & e was $ 3.8 million , and $ 2.8 million in fiscal years 2011 , and 2010 , respectively . as a percentage of net sales , rd & e was 1.5 percent and 1.4 percent in fiscal years 2011 , and 2010 , respectively . the increase in rd & e in fiscal year 2011 is primarily the result of increased headcount and to a lesser extent higher incentive compensation . selling , general and administrative selling , general and administrative expenses ( sg & a ) consist principally of salaries and benefits , advertising and marketing programs , sales commissions , travel expenses , provision for doubtful accounts , facilities costs , and professional services . total sg & a expenses were $ 9.9 million , and $ 9.1 million in fiscal years 2011 , and 2010 , respectively . as a percentage of net sales sg & a was 3.9 percent , and 4.5 percent in fiscal years 2011 , and 2010 , respectively . approximately half of our sg & a expenses relates to salary costs of our employees . the $ 0.8 million increase in sg & a expenses in fiscal year 2011 as compared to fiscal year 2010 is primarily due to a $ 0.5 million increase in outside services and professional fees , a $ 0.4 million increase in salary related costs , and a $ 0.3 million increase related to other overhead costs . this was partially offset by an approximate $ 0.4 million decrease in incentive compensation expense . interest expense we had net interest expense of $ 0.5 million , and $ 0.1 million in fiscal years 2011 , and 2010 , respectively . interest expense increased in fiscal year 2011 when compared to fiscal year 2010 as the average balance of the revolving line of credit was higher in addition to interest expense incurred as a result of our capital lease obligations . we often utilize short-term fixed libor rates on portions of our revolving line of credit to limit the affect of interest rate volatilities . story_separator_special_tag the amounts charged to expense for these inventories were approximately $ 2.2 million , and $ 0.3 million in fiscal years 2010 , and 2009 , respectively . the increased provision in fiscal year 2010 was primarily due to no longer manufacturing for certain customers that were no longer viable . we provide warranties on certain products we sell and estimate warranty costs based on historical experience and anticipated product returns . the amounts charged to expense were determined based on an estimate of warranty exposure . the net warranty expense ( recovery ) was approximately $ 45,000 , and $ ( 93,000 ) in fiscal years 2010 , and 2009 , respectively . warranty expense for fiscal year 2010 is related to workmanship claims on keyboards and ems products . the recovery in fiscal year 2009 was related to the release of a warranty claim for a specific product that was identified in fiscal year 2008. gross profit gross profit as a percentage of net sales was 9.6 percent and 7.1 percent in fiscal years 2010 , and 2009 , respectively . the 2.5 percentage point increase in gross profit as a percentage of net sales during fiscal year 2010 as compared to fiscal year 2009 was primarily the result of a $ 14.7 million increase in net sales , while production and support cost decreased by $ 0.3 million due to favorable foreign exchange changes , a 21 decrease in headcount of overhead employees and severance costs incurred in fiscal year 2009 that did not recur in fiscal year 2010. this was partially offset by a $ 8.9 million increase in material costs . we took early pay discounts to suppliers that totaled approximately $ 364,000 , and $ 142,000 in fiscal years 2010 , and 2009 , respectively . early pay discounts will fluctuate based on our liquidity and changes in the discounts and terms offered by our suppliers . changes in gross profit margins reflect the impact of a number of factors that can vary from period to period , including product mix , start-up costs and efficiencies associated with new programs , product life cycles , sales volumes , capacity utilization of our resources , management of inventories , component pricing and shortages , end market demand for customers ' products , fluctuations in and timing of customer orders , and competition within the ems industry . these and other factors can cause variations in operating results . there can be no assurance that gross margins will not decrease in future periods . research , development and engineering research , development and engineering expenses ( rd & e ) consists principally of employee related costs , third party development costs , program materials , depreciation and allocated information technology and facilities costs . total rd & e was $ 2.8 million , and $ 2.3 million in fiscal years 2010 , and 2009 , respectively . as a percentage of net sales , rd & e was 1.4 percent , and 1.2 percent in fiscal years 2010 , and 2009 , respectively . the increase in rd & e expenses in fiscal year 2010 compared to fiscal year 2009 was primarily the result of higher incentive compensation expense and increased headcount . selling , general and administrative selling , general and administrative expenses ( sg & a ) consist principally of salaries and benefits , advertising and marketing programs , sales commissions , travel expenses , provision for doubtful accounts , facilities costs , and professional services . total sg & a expenses were $ 9.1 million , and $ 8.4 million in fiscal years 2010 , and 2009 , respectively . as a percentage of net sales sg & a was 4.5 percent , and 4.5 percent in fiscal years 2010 , and 2009 , respectively . approximately half of our sg & a expenses relates to salary costs of our employees . the $ 0.7 million increase in sg & a expenses in fiscal year 2010 as compared to fiscal year 2009 was primarily due to a $ 1.6 million increase in incentive compensation expense . this was partially offset by an approximate $ 0.3 million decrease in salaries in addition to an approximate $ 0.6 million decrease in expense related to the write off of a receivable in the prior year . goodwill impairment we recorded an impairment charge of $ 765,000 during fiscal year 2009. we did not record an impairment charge during fiscal year 2010. as of july 3 , 2010 , there was no goodwill recorded in the company 's consolidated balance sheet . interest expense we had net interest expense of $ 0.1 million , and $ 0.6 million in fiscal years 2010 , and 2009 , respectively . interest expense decreased in fiscal year 2010 when compared to fiscal year 2009 as the average balance of the revolving line of credit was lower along with a decrease in variable interest rates . we do not currently use derivatives to hedge interest rate risk . we often utilize short-term fixed libor rates on portions of our revolving line of credit to limit the affect of interest rate volatilities . income tax provision we had an income tax benefit of $ 1.4 million during fiscal year 2010 as compared to $ 130,000 of tax expense in fiscal year 2009. the income tax benefit of fiscal year 2010 was primarily related the release of the valuation allowance on our deferred tax assets related to domestic tax net operating loss carryforwards ( nols ) and foreign tax credits , partially offset by the recognition of domestic deferred tax liabilities for an unremitted portion of foreign earnings and the change of applicable tax regimes in mexico . due to increased profitability , revenue growth , and new customer programs , we determined that a valuation allowance against our domestic nols was not longer required . we anticipate that we will fully utilize our domestic nols prior to their expiration .
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executive summary our sales of $ 253.8 million in fiscal year 2011 increased by 27.2 percent as compared to sales of $ 199.6 million in fiscal year 2010. this increase in sales was primarily driven by new customer programs for both longstanding and new customers , partially offset by an unfavorable macroeconomic environment and industry-wide shortages in the global supply chain that occurred through most of fiscal year 2011. sales for the first quarter of fiscal year 2012 are expected to be within the range of $ 65 million to $ 69 million . future results will depend on actual levels of customers ' orders , the timing of the start up of production of new product programs and the potential impact of the macroeconomic uncertainty . we believe that we are well positioned in the ems industry to continue expansion of our customer base and continue long-term growth . the concentration of our largest customers increased during fiscal year 2011 with the top five customers ' sales increasing to 62 percent of total sales in 2011 from 57 percent in 2010 , and 52 percent in 2009. our current customer relationships involve a variety of products , including consumer electronics , electronic storage devices , plastics , household products , gaming devices , specialty printers , telecommunications , industrial equipment , computer accessories , and electronic whiteboards . at the end of fiscal year 2011 , we were generating revenue from 30 ems customers as compared with 20 at the end of fiscal year 2010. these new customers have programs that represent small annual sales while others have multi-million-dollar potential . gross profit as a percent of sales was 8.1 percent in fiscal year 2011 compared to 9.6 percent for the prior fiscal year .
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fair value measurements โ fair value is defined as the amount that would be received for the sale of an asset or paid for the transfer of a liability in an orderly transaction between unrelated third party market participants at the measurement date . in determination of fair value measurements for assets and liabilities we consider the principal , or most advantageous market , and assumptions that market participants would use when pricing the asset or liability . cash and cash equivalents โ cash and cash equivalents include all cash on hand , demand deposits and investments with original maturities of three months or less . we consider cash equivalents to include short-term , highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value . we have $ 2 thousand in cash in foreign banks as of december 28 , 2019. our cash balance at financial institutions may exceed federal deposit insurance corporation ( โ fdic โ ) insured amounts from time to time . receivables โ our components of trade receivables include amounts billed , amounts unbilled , retainage and allowance for uncollectible accounts . subject to our allowance for uncollectible accounts , all amounts are believed to be collectible within a year . there are no amounts unbilled representing claims or other similar items subject to uncertainty concerning their determination or ultimate realization . in estimating the allowance for uncollectible accounts , we consider the length of time receivable balances have been outstanding , historical collection experience , current economic conditions and customer specific information . when we ultimately conclude that a receivable is uncollectible , the balance is charged against the allowance for uncollectible accounts . concentration of credit risk โ financial instruments which potentially subject englobal to concentrations of credit risk consist primarily of trade accounts and notes receivable . although our services are provided largely to the energy sector , management believes the risk due to this concentration is limited because a significant portion of our services are provided under contracts with major integrated oil and gas companies and other industry leaders . when we enter into contracts with smaller customers , we may incur an increased credit risk . 28 our businesses or product lines are largely dependent on a few relatively large customers . although we believe we have an extensive customer base , the loss of one of these large customers or if such customers were to incur a prolonged period of decline in business , our financial condition and results of operations could be adversely affected . for the year ended december 28 , 2019 , two customers provided more than 10 % each of our consolidated operating revenues ( 23.3 % and 18.3 % ) . three customers provided more than 10 % each of our consolidated operating revenues for the year ended december 29 , 2018 ( 20.1 % , 14.7 % , and 10.1 % ) . amounts included in trade receivables related to these customers totaled $ 0.2 million and $ 0.7 million , respectively , at december 28 , 2019 and $ 1.3 million , $ 0.6 million and $ 1.3 million , respectively , at december 29 , 2018. we extend credit to customers in the normal course of business . we have established various procedures to manage our credit exposure , including initial credit approvals , credit limits and terms , letters of credit , and occasionally through rights of offset . we also use prepayments and guarantees to limit credit risk to ensure that our established credit criteria are met . our most significant exposure to credit risks relates to situations under which we provide services early in the life of a project that is dependent on financing . risks increase in times of general economic downturns and under conditions that threaten project feasibility . property and equipment โ property and equipment are stated at cost less accumulated depreciation and amortization . depreciation is computed using the straight-line method over the estimated useful lives of the assets . the estimated service lives of our asset groups are as follows : asset group years shop equipment 5 โ 10 furniture and fixtures 5 โ 7 computer equipment ; autos and trucks 3 โ 5 software 3 โ 5 leasehold improvements are amortized over the term of the related lease . see note 4 for details related to property and equipment and related depreciation . expenditures for maintenance and repairs are expensed as incurred . upon disposition or retirement of property and equipment , any gain or loss is charged to operations . goodwill โ goodwill represents the excess of the purchase price of acquisitions over the fair value of the net assets acquired and liabilities assumed . goodwill is not amortized but rather is tested and assessed for impairment annually , or more frequently if certain events or changes in circumstance indicate the carrying amount may exceed fair value . the annual test for goodwill impairment is performed in the fourth quarter of each year . in january 2017 , the financial accounting standards board ( โ fasb โ ) issued asu no . 2017-04 , intangiblesโgoodwill and other ( topic 350 ) : simplifying the test for goodwill impairment . the standard simplifies the subsequent measurement of goodwill by removing the requirement to perform a hypothetical purchase price allocation to compute the implied fair value of goodwill to measure impairment . instead , goodwill impairment is measured as the difference between the fair value of the reporting unit and the carrying value of the reporting unit . the standard also clarifies the treatment of the income tax effect of tax-deductible goodwill when measuring goodwill impairment loss . this standard is effective for annual or any interim goodwill impairment test in fiscal years beginning after december 15 , 2019 , with early adoption permitted for impairment tests performed after january story_separator_special_tag fair value measurements โ fair value is defined as the amount that would be received for the sale of an asset or paid for the transfer of a liability in an orderly transaction between unrelated third party market participants at the measurement date . in determination of fair value measurements for assets and liabilities we consider the principal , or most advantageous market , and assumptions that market participants would use when pricing the asset or liability . cash and cash equivalents โ cash and cash equivalents include all cash on hand , demand deposits and investments with original maturities of three months or less . we consider cash equivalents to include short-term , highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value . we have $ 2 thousand in cash in foreign banks as of december 28 , 2019. our cash balance at financial institutions may exceed federal deposit insurance corporation ( โ fdic โ ) insured amounts from time to time . receivables โ our components of trade receivables include amounts billed , amounts unbilled , retainage and allowance for uncollectible accounts . subject to our allowance for uncollectible accounts , all amounts are believed to be collectible within a year . there are no amounts unbilled representing claims or other similar items subject to uncertainty concerning their determination or ultimate realization . in estimating the allowance for uncollectible accounts , we consider the length of time receivable balances have been outstanding , historical collection experience , current economic conditions and customer specific information . when we ultimately conclude that a receivable is uncollectible , the balance is charged against the allowance for uncollectible accounts . concentration of credit risk โ financial instruments which potentially subject englobal to concentrations of credit risk consist primarily of trade accounts and notes receivable . although our services are provided largely to the energy sector , management believes the risk due to this concentration is limited because a significant portion of our services are provided under contracts with major integrated oil and gas companies and other industry leaders . when we enter into contracts with smaller customers , we may incur an increased credit risk . 28 our businesses or product lines are largely dependent on a few relatively large customers . although we believe we have an extensive customer base , the loss of one of these large customers or if such customers were to incur a prolonged period of decline in business , our financial condition and results of operations could be adversely affected . for the year ended december 28 , 2019 , two customers provided more than 10 % each of our consolidated operating revenues ( 23.3 % and 18.3 % ) . three customers provided more than 10 % each of our consolidated operating revenues for the year ended december 29 , 2018 ( 20.1 % , 14.7 % , and 10.1 % ) . amounts included in trade receivables related to these customers totaled $ 0.2 million and $ 0.7 million , respectively , at december 28 , 2019 and $ 1.3 million , $ 0.6 million and $ 1.3 million , respectively , at december 29 , 2018. we extend credit to customers in the normal course of business . we have established various procedures to manage our credit exposure , including initial credit approvals , credit limits and terms , letters of credit , and occasionally through rights of offset . we also use prepayments and guarantees to limit credit risk to ensure that our established credit criteria are met . our most significant exposure to credit risks relates to situations under which we provide services early in the life of a project that is dependent on financing . risks increase in times of general economic downturns and under conditions that threaten project feasibility . property and equipment โ property and equipment are stated at cost less accumulated depreciation and amortization . depreciation is computed using the straight-line method over the estimated useful lives of the assets . the estimated service lives of our asset groups are as follows : asset group years shop equipment 5 โ 10 furniture and fixtures 5 โ 7 computer equipment ; autos and trucks 3 โ 5 software 3 โ 5 leasehold improvements are amortized over the term of the related lease . see note 4 for details related to property and equipment and related depreciation . expenditures for maintenance and repairs are expensed as incurred . upon disposition or retirement of property and equipment , any gain or loss is charged to operations . goodwill โ goodwill represents the excess of the purchase price of acquisitions over the fair value of the net assets acquired and liabilities assumed . goodwill is not amortized but rather is tested and assessed for impairment annually , or more frequently if certain events or changes in circumstance indicate the carrying amount may exceed fair value . the annual test for goodwill impairment is performed in the fourth quarter of each year . in january 2017 , the financial accounting standards board ( โ fasb โ ) issued asu no . 2017-04 , intangiblesโgoodwill and other ( topic 350 ) : simplifying the test for goodwill impairment . the standard simplifies the subsequent measurement of goodwill by removing the requirement to perform a hypothetical purchase price allocation to compute the implied fair value of goodwill to measure impairment . instead , goodwill impairment is measured as the difference between the fair value of the reporting unit and the carrying value of the reporting unit . the standard also clarifies the treatment of the income tax effect of tax-deductible goodwill when measuring goodwill impairment loss . this standard is effective for annual or any interim goodwill impairment test in fiscal years beginning after december 15 , 2019 , with early adoption permitted for impairment tests performed after january
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results of operations our revenue is comprised of services revenue and the sale of engineered modular solutions . we generally recognize service revenue as soon as the services are performed . the majority of our engineering services have historically been provided through time-and-material contracts whereas a majority of our engineered modular solutions revenues are earned on fixed-price contracts . during 2019 , we worked on 540 projects ranging in size from $ 1 thousand to $ 22.6 million . the average size of the projects during 2019 was $ 345 thousand and we recorded an average revenue of $ 105 thousand per project . in the course of providing our services , we routinely provide materials and equipment and may provide construction management or construction services on a subcontractor basis . generally , these materials , equipment and subcontractor costs are passed through to our clients and reimbursed , along with handling fees , which in total are at margins much lower than those of our services business . in accordance with industry practice and generally accepted accounting principles , all such costs and fees are included in revenue . the use of subcontractor services can change significantly from project to project ; therefore , changes in revenue and gross profit , sg & a expense and operating income as a percent of revenue may not be indicative of our core business trends . segment operating sg & a expense includes management and staff compensation , office costs such as rents and utilities , depreciation , amortization , travel , bad debt and other expenses generally unrelated to specific client contracts , but directly related to the support of a segment 's operations . corporate sg & a expenses includes investor relations , business development , governance , finance , accounting , health , safety , environmental , human resources , legal and information technology which are unrelated to specific projects but which are incurred to support corporate activities .
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our multi-channel distribution model is diversified and includes substantial international and factory businesses , which reduces our reliance upon our full-price u.s. business . with an essentially debt-free balance sheet and significant cash position , we have a business model that generates significant cash flow and we are in a position to invest in our brand while continuing to return capital to shareholders through common stock repurchases and dividends . fiscal 2012 the key metrics of fiscal 2012 were : earnings per diluted share rose 20.9 % to $ 3.53. net sales increased 14.5 % to $ 4.76 billion . direct-to-consumer sales rose 16.1 % to $ 4.23 billion . comparable sales in coach 's north american stores increased 6.6 % . in north america , coach opened 9 net new retail stores and 26 new factory stores , including 16 men 's , bringing the total number of retail and factory stores to 354 and 169 , respectively , at the end of fiscal 2012. we also expanded 10 factory stores in north america . coach china results continued to be strong with double-digit growth in comparable stores . coach china opened 30 net new locations , bringing the total number of locations at the end of fiscal 2012 to 96. coach japan opened 11 net new locations , bringing the total number of locations at the end of fiscal 2012 to 180. in addition , we expanded three locations . the company acquired its domestic retail coach businesses in taiwan and singapore . as the result of these acquisitions and subsequent openings , the company operated 7 retail locations in singapore and 27 in taiwan as of the end of fiscal 2012. the company has assumed direct control of its domestic business in malaysia in july 2012 and its domestic retail business in korea in august 2012. coach 's board increased the company 's cash dividend by 33 % , to an expected annual rate of $ 1.20 per share starting with the dividend paid on july 2 , 2012 . 28 fiscal 2012 compared to fiscal 2011 the following table summarizes results of operations for fiscal 2012 compared to fiscal 2011 : replace_table_token_18_th net sales the following table presents net sales by operating segment for fiscal 2012 compared to fiscal 2011 : replace_table_token_19_th direct-to-consumer ย net sales increased 16.1 % to $ 4.23 billion during fiscal 2012 from $ 3.65 billion during fiscal 2011 , driven by sales increases in our company-operated stores in north america and china . comparable store sales measure sales performance at stores that have been open for at least 12 months , and includes sales from coach.com . coach excludes new locations from the comparable store base for the first year of operation . similarly , stores that are expanded by 15 % or more are also excluded from the comparable store base until the first anniversary of their reopening . stores that are closed for renovations are removed from the comparable store base . in north america , net sales increased 12.7 % driven by sales from new and expanded stores and by a 6.6 % increase in comparable store sales . during fiscal 2012 , coach opened 9 net new retail stores and 26 new factory stores , and expanded 10 factory stores in north america . in japan , net sales increased 11.7 % driven by an approximately $ 40.1 million , or 5.3 % , positive impact from foreign currency exchange . during fiscal 2012 , coach opened 11 net new locations and expanded three locations in japan . coach china results continued to be strong with double-digit percentage growth in comparable store sales . during fiscal 2012 , coach opened 30 net new stores in hong kong and mainland china . indirect ย net sales increased 3.8 % to $ 531.5 million from $ 512.1 million in fiscal 2011. the increase was driven primarily by a 7.9 % increase in coach international wholesale net revenue , partially offset by a 1.6 % decrease in u.s. wholesale net revenue . licensing revenue of approximately $ 28.5 million and $ 24.7 million in fiscal 2012 and fiscal 2011 , respectively , is included in indirect sales . 29 operating income operating income increased 15.9 % to $ 1.51 billion in fiscal 2012 as compared to $ 1.30 billion in fiscal 2011. excluding items affecting comparability of $ 39.2 million in fiscal 2012 and $ 25.7 million in fiscal 2011 , operating income increased 16.6 % to $ 1.55 billion . operating margin increased to 31.7 % as compared to 31.4 % in the prior year , as gross margin increased while selling , general , and administrative ( ยsg & aย ) expenses decreased as a percentage of sales . excluding items affecting comparability , operating margin was 32.6 % in fiscal 2012 as compared to 32.0 % in fiscal 2011. gross profit increased 14.6 % to $ 3.47 billion in fiscal 2012 from $ 3.02 billion in fiscal 2011. gross margin was 72.8 % in fiscal 2012 as compared to 72.7 % during fiscal 2011. coach 's gross profit is dependent upon a variety of factors , including changes in the relative sales mix among distribution channels , changes in the mix of products sold , foreign currency exchange rates and fluctuations in material costs . these factors , among others may cause gross profit to fluctuate from year to year . sg & a expenses are comprised of four categories : ( 1 ) selling ; ( 2 ) advertising , marketing and design ; ( 3 ) distribution and consumer service ; and ( 4 ) administrative . selling expenses include store employee compensation , store occupancy costs , store supply costs , wholesale account administration compensation and all coach japan , coach china , coach singapore and coach taiwan operating expenses . these expenses are affected by the number of coach-operated stores in north america ; japan ; hong kong , macau , mainland china ; taiwan and singapore open during any fiscal period . story_separator_special_tag coach excludes new locations from the comparable store base for the first year of operation . similarly , stores that are expanded by 15.0 % or more are also excluded from the comparable store base until the first anniversary of their reopening . stores that are closed for renovations are removed from the comparable store base . in north america , net sales increased 14.4 % driven by sales from new and expanded stores and by a 10.6 % increase in comparable store sales . during fiscal 2011 , coach opened three net new retail stores and 22 new factory stores , and expanded six factory stores in north america . in japan , net sales increased 5.1 % driven by an approximately $ 69.8 million , or 9.8 % , positive impact from foreign currency exchange . during fiscal 2011 , coach opened eight net new locations and expanded three locations in japan . coach china results continued to be strong with double-digit percentage growth in comparable store sales . during fiscal 2011 , coach opened 25 net new stores in hong kong and mainland china . indirect ย net sales increased 19.4 % to $ 512.1 million from $ 428.9 million in fiscal 2010. the increase was driven primarily by an 18.4 % increase in coach international wholesale and u.s. wholesale net revenue . the net sales increase was partially offset by an additional week of sales in fiscal 2010 , which represented approximately $ 8 million . licensing revenue of approximately $ 24.7 million and $ 19.2 million in fiscal 2011 and fiscal 2010 , respectively , is included in indirect sales . 32 operating income operating income increased 13.5 % to $ 1.30 billion in fiscal 2011 as compared to $ 1.15 billion in fiscal 2010. excluding items affecting comparability of $ 25.7 million in fiscal 2011 , operating income increased 15.7 % to $ 1.33 billion . operating margin decreased to 31.4 % as compared to 31.9 % in the prior year , as gross margin decreased while selling , general , and administrative ( ยsg & aย ) expenses slightly increased as a percentage of sales . excluding items affecting comparability , operating margin was 32.0 % in fiscal 2011. gross profit increased 14.8 % to $ 3.02 billion in fiscal 2011 from $ 2.63 billion in fiscal 2010. gross margin was 72.7 % in fiscal 2011 as compared to 73.0 % during fiscal 2010. coach 's gross profit is dependent upon a variety of factors , including changes in the relative sales mix among distribution channels , changes in the mix of products sold , foreign currency exchange rates and fluctuations in material costs . these factors , among , others may cause gross profit to fluctuate from year to year . sg & a expenses are comprised of four categories : ( 1 ) selling ; ( 2 ) advertising , marketing and design ; ( 3 ) distribution and consumer service ; and ( 4 ) administrative . selling expenses include store employee compensation , store occupancy costs , store supply costs , wholesale account administration compensation and all coach japan and coach china operating expenses . these expenses are affected by the number of coach-operated stores in north america ; japan ; hong kong , macau and mainland china open during any fiscal period . advertising , marketing and design expenses include employee compensation , media space and production , advertising agency fees , new product design costs , public relations and market research expenses . distribution and consumer service expenses include warehousing , order fulfillment , shipping and handling , customer service and bag repair costs . administrative expenses include compensation costs for the executive , finance , human resources , legal and information systems departments , corporate headquarters occupancy costs , consulting and software expenses . sg & a expenses increase as the number of coach-operated stores increase , although an increase in the number of stores generally results in the fixed portion of sg & a expenses being spread over a larger sales base . coach , similar to some companies , includes certain costs related to our distribution network in selling , general and administrative expenses rather than in cost of sales ; for this reason , our gross margins may not be comparable to that of entities that include all costs related to their distribution network in cost of sales . during fiscal 2011 , sg & a expenses increased 15.8 % to $ 1.72 billion , compared to $ 1.48 billion during fiscal 2010. excluding items affecting comparability of $ 25.7 million in fiscal 2011 , sg & a expenses were $ 1.69 billion . as a percentage of net sales , sg & a expenses were 41.3 % and 41.1 % during fiscal 2011 and fiscal 2010 , respectively . excluding items affecting comparability during fiscal 2011 , sg & a expenses as a percentage of net sales were 40.7 % as we leveraged our selling expense base on higher sales . selling expenses were $ 1.18 billion , or 28.5 % of net sales compared to $ 1.05 billion , or 29.1 % of net sales , during fiscal 2010. the dollar increase in selling expenses was due to higher operating expenses in coach china and north american stores due to higher sales and new store openings . additionally , selling expenses of reed krakoff stores contributed to the dollar increase since the brand was not launched until the beginning of fiscal 2011. coach china and north american store expenses as a percentage of sales decreased primarily due to operating efficiencies and sales leverage . the decrease in coach japan operating expenses in constant currency of $ 10.2 million was offset by the impact of foreign currency exchange rates which increased reported expenses by approximately $ 33.5 million .
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executive overview coach is a leading american marketer of fine accessories and gifts for women and men . our product offerings include women 's and men 's bags , accessories , business cases , footwear , wearables , jewelry , sunwear , travel bags , watches and fragrance . coach operates in two segments : direct-to-consumer and indirect . the direct-to-consumer segment includes sales to consumers through coach-operated stores in north america ; japan ; hong kong , macau and mainland china ; taiwan ; singapore and the internet . beginning with the first quarter of fiscal 2013 , this segment also includes coach-operated stores in malaysia and korea . the indirect segment includes sales to wholesale customers and distributors in over 20 countries , including the united states , and royalties earned on licensed product . as coach 's business model is based on multi-channel international distribution , our success does not depend solely on the performance of a single channel or geographic area . in order to sustain growth within our global framework , we continue to focus on two key growth strategies : increased global distribution , with an emphasis on north america and china , and improved store sales productivity . to that end we are focused on four key initiatives : growing our women 's business in north america through the growing accessories market and by increasing our north american retail store base by opening stores in new markets and adding stores in under-penetrated existing markets . we believe that north america can support about 500 retail stores in total , including up to 30 in canada . we expect to open about 10 net new retail stores and 18 factory outlets in fiscal 2013. the pace of our future retail store openings will depend upon the economic environment and will reflect opportunities in the marketplace .
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2017-11 , `` earnings per share ( topic 260 ) ; distinguishing liabilities from equity ( topic 480 ) ; derivatives and hedging ( topic 815 ) : ( part i ) accounting for certain financial instruments with down round features , ( part ii ) replacement of the indefinite deferral for mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable non-controlling interests with a scope exception `` ( `` asu 2017-11 `` ) , which addresses the complexity of accounting for certain financial instruments with 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 a commercial stage natural-products pharmaceuticals company focused on developing novel , sustainably derived gastrointestinal products for both human prescription use and animals on a global basis . our wholly-owned subsidiary , napo pharmaceuticals , inc. ( `` napo '' ) , focuses on developing and commercializing proprietary human gastrointestinal pharmaceuticals for the global marketplace from plants used traditionally in rainforest areas . our mytesi ( crofelemer ) product is approved by the u.s. food and drug administration ( `` fda '' ) for the symptomatic relief of noninfectious diarrhea in adults with hiv/aids on antiretroviral therapy . in the field of animal health , we are focused on developing and commercializing first-in-class gastrointestinal products for companion and production animals , foals , and high value horses . jaguar was founded in san francisco , california as a delaware corporation on june 6 , 2013. napo formed jaguar to develop and commercialize animal health products . effective as of december 31 , 2013 , jaguar was a wholly-owned subsidiary of napo , and , until may 13 , 2015 , jaguar was a majority-owned subsidiary of napo . on july 31 , 2017 , the merger of jaguar animal health , inc. and napo became effective , at which point jaguar animal health 's name changed to jaguar health , inc. and napo began operating as a wholly-owned subsidiary of jaguar focused on human health and the ongoing commercialization of , and development of follow-on indications for , mytesi . with the merger effective , we believe that our newly combined company is poised to realize a number of synergistic , value adding benefitsยand an expanded pipeline of potential blockbuster human follow-on indications , a second-generation anti-secretory agent , as well as a pipeline of important animal indications for crofelemer , upon which to build global partnerships . mytesi is a novel , first-in-class anti-secretory agent which has a basic normalizing effect locally on the gut , and this mechanism of action has the potential to benefit multiple disorders . jaguar , through napo , controls commercial rights for mytesi for all indications , territories and patient populations globally . mytesi is in development for multiple possible follow-on indications , including cancer therapy-related diarrhea ; orphan-drug indications for infants and children with congenital diarrheal disorders and short bowel syndrome ( sbs ) ; supportive care for inflammatory bowel disease ( ibd ) ; irritable bowel syndrome ( ibs ) ; and as a second-generation anti-secretory agent for use in cholera patients . mytesi has received orphan-drug designation for sbs . financial operations overview we were incorporated in june 2013 in delaware . napo formed our company to develop and commercialize animal health products . prior to our incorporation , the only activities of napo related to animal health were limited to the retention of consultants to evaluate potential strategic alternatives . we were previously a majority-owned subsidiary of napo . however , following the closing of our may 2015 initial public offering , we are no longer majority-owned by napo . on july 31 , 2017 , jaguar animal health , inc. , or jaguar , completed a merger with napo pursuant to the agreement and plan of merger dated march 31 , 2017 by and among jaguar , napo , napo acquisition corporation ( `` merger sub '' ) , and napo 's representative ( the `` merger agreement '' ) . in accordance with the terms of the merger agreement , upon the completion of the merger , merger sub merged with and into napo , with napo surviving as our wholly-owned subsidiary . immediately following the napo merger , jaguar changed its name from `` jaguar animal health , inc. '' to `` jaguar health , inc. '' napo now operates 80 as a wholly-owned subsidiary of jaguar focused on human health and the ongoing commercialization of mytesi , a napo drug product approved by the u.s. fda for the symptomatic relief of noninfectious diarrhea in adults with hiv/aids on antiretroviral therapy . on a consolidated basis , we have not yet generated enough revenue to date to achieve break even or positive cash flow , and we expect to continue to incur significant research and development and other expenses . our net loss and comprehensive loss was $ 22.0 million and $ 14.7 million for the years ended december 31 , 2017 and 2016 , respectively . as of december 31 , 2017 , we had total stockholders ' equity of $ 17.3 million and cash and cash equivalents of $ 520,698. we expect to continue to incur losses for the foreseeable future as we expand our product development activities , seek necessary approvals for our product candidates , conduct species-specific formulation studies for our non-prescription products , establish api manufacturing capabilities and begin commercialization activities . as a result , we expect to experience increased expenditures for 2018. revenue recognition we recognize revenue in accordance with asc 605 `` revenue recognition '' , subtopic asc 605-25 `` revenue with multiple element arrangements `` and subtopic asc 605-28 `` revenue recognitionยmilestone method `` , which provides accounting guidance for revenue recognition for arrangements with multiple deliverables and guidance on defining the milestone and determining when the use of the milestone method of revenue recognition for research and development transactions is appropriate , respectively . story_separator_special_tag on november 1 , 2017 , elanco executed its right to terminate the agreement effective january 30 , 2018. under the terms of the elanco agreement , we received an initial upfront payment of $ 2,548,689 , inclusive of reimbursement of past product and development expenses of $ 1,048,689 , and will receive additional payments upon achievement of certain development , regulatory and sales milestones in an aggregate amount of up to $ 61.0 million payable throughout the term of the elanco agreement , as well as product development expense reimbursement for any additional product development expenses incurred , and royalty payments on global sales . the $ 61.0 million development and commercial milestones consist of $ 1.0 million for successful completion of a dose ranging study ; $ 2.0 million for the first commercial sale of license product for acute indications of diarrhea ; $ 3.0 million for the first commercial sale of a license product for chronic indications of diarrhea ; $ 25.0 million for aggregate worldwide net sales of licensed products exceeding $ 100.0 million in a calendar year during the term of the agreement ; and $ 30.0 million 82 for aggregate worldwide net sales of licensed products exceeding $ 250.0 million in a calendar year during the terms of the agreement . each of the development and commercial milestones are considered substantive . no revenues associated with the achievement of the milestones has been recognized to date . the elanco agreement specifies that we will supply the licensed products to elanco , and that the parties will agree to set a minimum sales requirement that elanco must meet to maintain exclusivity . the $ 2,548,689 upfront payment , inclusive of reimbursement of past product and development expenses of $ 1,048,689 is recognized as revenue ratably over the estimated development period of one year resulting in $ 2,371,300 in collaboration revenue in the year ended december 31 , 2017 , which is included in the statements of operations and comprehensive loss . the difference of $ 177,389 is included in deferred collaboration revenue in the balance sheet . in addition to the upfront payments , elanco reimburses us for certain development and regulatory expenses related to our planned target animal safety study and the completion of the canalevia field study for acute diarrhea in dogs . these are recognized as revenue in the month in which the related expenses are incurred . we have $ 1,380 of unreimbursed expenses as of december 31 , 2017 , which is included in other receivables on the balance sheet . we included the $ 504,771 of reimbursements in collaboration revenue in the year ended december 31 , 2017 , which is included in the statements of operations and comprehensive loss . on november 1 , 2017 , the company received a letter ( the `` notice '' ) from elanco serving as formal notice of elanco 's decision to terminate the elanco agreement by giving the company 90 days written notice . pursuant to the terms of the elanco agreement , termination of the agreement became effective on january 30 , 2018 , which is 90 days after the date of the notice . on the effective date of termination of the elanco agreement , all licenses granted to elanco by the company under the elanco agreement will be revoked and the rights granted thereunder revert back to the company . cost of product revenue cost of product revenue expenses consist of costs to manufacture , package and distribute neonorm related to those products that prior to december 2017 distributors have sold through to their customers , and beginning december 2017 products sold to distributors and other customers . cost of product revenue also includes charges associated with inventory reserves . research and development expense research and development expenses consist primarily of clinical and contract manufacturing expense , personnel and related benefit expense , stock-based compensation expense , employee travel expense , reforestation expenses . clinical and contract manufacturing expense consists primarily of costs to conduct stability , safety and efficacy studies , and manufacturing startup expenses at an outsourced api provider in italy . we typically use our employee and infrastructure resources across multiple development programs . we track outsourced development costs by prescription drug product candidate and non-prescription product but do not allocate personnel or other internal costs related to development to specific programs or development compounds . the timing and amount of our research and development expenses will depend largely upon the outcomes of current and future trials for our prescription drug product candidates as well as the related regulatory requirements , the outcomes of current and future species-specific formulation studies for our non-prescription products , manufacturing costs and any costs associated with the advancement of our line extension programs . we can not determine with certainty the duration and completion costs of the current or future development activities . 83 the duration , costs and timing of trials , formulation studies and development of our prescription drug and non-prescription products will depend on a variety of factors , including : the scope , rate of progress , and expense of our ongoing , as well as any additional clinical trials , formulation studies and other research and development activities ; future clinical trial and formulation study results ; potential changes in government regulations ; and the timing and receipt of any regulatory approvals . a change in the outcome of any of these variables with respect to the development of a prescription drug product candidate or non-prescription product could mean a significant change in the costs and timing associated with our development activities . we expect research and development expense to increase significantly as we add personnel , commence additional clinical studies and other activities to develop our prescription drug product candidates and non-prescription products . sales and marketing expense sales and marketing expenses consist of personnel and related benefit expense , stock-based compensation expense , direct sales and marketing expense , employee travel expense , and management consulting expense .
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results of operations comparison of the years ended december 31 , 2017 and 2016 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 , 2017 and 2016 together with the change in such items in dollars and as a percentage : replace_table_token_2_th revenue and cost of revenue product revenue our product revenue of $ 1,485,114 and $ 141,523 and related cost of revenue of $ 880,405 and $ 51,966 for the years ended december 31 , 2017 and 2016 reflects revenue from the sale of our human drug mytesi , our animal products branded as neonorm calf and neonorm foal and botanical extract . sales of our human drug mytesi are recognized as revenue when the products are delivered to the wholesalers . we had mytesi revenues of $ 1,062,920 and $ 0 for the years ended december 31 , 2017 and 2016 , respectively . we record a reserve for estimated product returns under terms of agreements with wholesalers based on its historical returns experience . reserves for returns at december 31 , 2017 were immaterial . if actual returns differed from our historical experience , changes to the reserved could be required in future periods . sales of our neonorm calf and foal animal products to distributors are made under agreements that may provide distributor price adjustments and rights of return under certain circumstances . beginning december 2017 , we developed sufficient sales history and pipeline visibility to recognize revenue when products are delivered to the distributors .
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these subsidiaries provide wireless personal communications services ( as a sprint pcs affiliate ) , local exchange telephone services , video , internet and data services , long distance services , fiber optics facilities and leased tower facilities . we have three reportable segments , which we operate and manage as strategic business units organized by lines of business : ( 1 ) wireless , ( 2 ) cable and ( 3 ) wireline . * the wireless segment has historically provided digital wireless service as a sprint pcs affiliate to a portion of a four-state area covering the region from harrisburg , york and altoona , pennsylvania , to harrisonburg , virginia . following the acquisition of ntelos , the company 's wireless service area expanded to include south-central and western virginia , west virginia , and small portions of kentucky and ohio . in these areas , we are the exclusive provider of sprint-branded wireless mobility communications network products and services on the 800 mhz , 1900 mhz and 2.5 ghz spectrum bands . this segment also owns cell site towers built on leased land , and leases space on these towers to both affiliates and non-affiliated service providers . * the cable segment provides video , internet and voice services in franchise areas in portions of virginia , west virginia and western maryland , and leases fiber optic facilities throughout its service area . it does not include video , internet and voice services provided to customers in shenandoah county , virginia . * the wireline segment provides regulated and unregulated voice services , dsl internet access and long distance access services throughout shenandoah county and portions of rockingham , frederick , warren and augusta counties , virginia . the segment also provides video and cable modem internet access services in portions of shenandoah county , and leases fiber optic facilities throughout the northern shenandoah valley of virginia , northern virginia and adjacent areas along the interstate 81 corridor through west virginia , maryland and portions of central and southern pennsylvania . a fourth segment , other , primarily includes shenandoah telecommunications company , the parent holding company , and includes corporate costs of executive management , information technology , legal , finance and human resources . this segment also includes certain acquisition and integration costs primarily consisting of severance accruals for short-term ntelos employees to be separated as integration activities wind down and transaction related expenses such as investment advisor , legal and other professional fees . acquisition of ntelos and exchange with sprint : on may 6 , 2016 , we completed our previously announced acquisition of ntelos holdings corp. ( โ ntelos โ ) for $ 667.8 million , net of cash acquired . the purchase price was financed by a credit facility arranged by cobank , acb . we have included the operations of ntelos for financial reporting purposes for periods subsequent to the acquisition . immediately after acquiring ntelos , we exchanged spectrum licenses valued at $ 198.2 million , and customer based contract rights valued at $ 206.7 million , acquired from ntelos with sprint , and received an expansion of our affiliate service territory to include most of the service area served by ntelos , valued at $ 284.1 million , as well as customer based contract rights , valued at $ 120.9 million , relating to ntelos ' and sprint 's legacy customers in the our affiliate service territory . the value of the affiliate agreement expansion is based on changes to the amended affiliate agreement that include an increase in the price to be paid by sprint from 80 % to 90 % of the entire business value of pcs if the affiliate agreement is not renewed and an extension of the affiliate agreement with sprint by five years to 2029. also included in the value is the expanded territory in the ntelos service area and the accompanying right to serve all future sprint customers in the expanded territory , our commitment to upgrade certain coverage and capacity in the newly acquired service area , the waiver of a portion of the management fee charged by sprint , as well as other items defined in the amended affiliate agreement . 38 the company expects to incur a total of approximately $ 90 million of integration and acquisition expenses associated with this transaction , excluding approximately $ 23.0 million of debt issuance costs . in connection with the acquisition , the company also chose to proactively migrate former ntelos customers to devices that can interact with the sprint billing and network systems . expected costs also include the ntelos back office staff and support functions until the ntelos legacy customers are migrated to the sprint billing platform ; cost of the handsets to be provided to ntelos legacy customers as they migrate to the sprint billing platform ; severance costs for back office and other former ntelos employees who will not be retained permanently ; and transaction related fees . we have incurred $ 54.7 million of these costs in the year ended december 31 , 2016. these costs include $ 1.3 million reflected in cost of goods and services and $ 11.1 million reflected in selling , general and administrative costs in the year ended december 31 , 2016. critical accounting policies the company relies on the use of estimates and makes assumptions that affect its financial condition and operating results . these estimates and assumptions are based on historical results and trends as well as the company 's forecasts as to how these might change in the future . the most critical accounting policies that materially affect the company 's results of operations include the following : revenue recognition the company recognizes revenue when persuasive evidence of an arrangement exists , services have been rendered or products have been delivered , the price to the buyer is fixed and determinable and collectability is reasonably assured . revenues are recognized by the company based on the various types of transactions generating the revenue . story_separator_special_tag the testing is performed on the value as of november 1 each year , and is generally composed of comparing the book value of the assets to their estimated fair value . cable franchises are tested for impairment on an aggregate basis , consistent with the management of the cable segment as a whole , utilizing a greenfield valuation approach . it is the company 's practice to engage an independent appraiser to prepare these fair value analyses . intangible assets that have finite useful lives are amortized over their useful lives . acquired subscriber base assets are amortized using accelerated amortization methods over the expected period in which those relationships are expected to contribute to our future cash flows . other finite-lived intangible assets , including the affiliate expansion asset , are generally amortized using the straight-line method of amortization . the initial establishment of many intangible assets , as well as subsequent impairment tests for intangibles with indefinite lives , is generally dependent upon forecasts and projections of future activity , and such estimates can be subjective and variable over time as market conditions and operating results change . other the company does not have any unrecorded off-balance sheet transactions or arrangements ; however , the company has significant commitments under operating leases . goodwill goodwill is not amortized but is tested for impairment on at least an annual basis . impairment testing is required more often than annually if an event or circumstance indicates that impairment is more likely than not to have occurred . in conducting our 40 annual impairment testing , we may first perform a qualitative assessment of whether it is more likely than not that a reporting unit 's fair value is less than its carrying amount . if not , no further goodwill impairment testing is required . if it is more likely than not that a reporting unit 's fair value is less than its carrying amount , or if we elect not to perform a qualitative assessment of a reporting unit , we then compare the fair value of the reporting unit to the related net book value . if the net book value of a reporting unit exceeds its fair value , an impairment loss is measured and recognized . we elected not to perform the qualitative assessment and performed a quantitative test comparing the fair value with the carrying amounts and concluded that no impairment existed as of october 1. pension benefits and retirement benefits other than pensions through our acquisition of ntelos , we assumed ntelos ' non-contributory defined benefit pension plan ( โ pension plan โ ) covering all employees who met eligibility requirements and were employed by ntelos prior to october 1 , 2003. the pension plan was closed to ntelos employees hired on or after october 1 , 2003. pension benefits vest after five years of plan service and are based on years of service and an average of the five highest consecutive years of compensation subject to certain reductions if the employee retires before reaching age 65 and elects to receive the benefit prior to age 65. effective december 31 , 2012 , ntelos froze future benefit accruals . we use updated mortality tables published by the society of actuaries that predict increasing life expectancies in the united states . irc sections 412 and 430 and sections 302 and 303 of the employee retirement income security act of 1974 , as amended establish minimum funding requirements for defined benefit pension plans . the minimum required contribution is generally equal to the target normal cost plus the shortfall amortization installments for the current plan year and each of the six preceding plan years less any calculated credit balance . if plan assets ( less calculated credits ) are equal to or exceed the funding target , the minimum required contribution is the target normal cost reduced by the excess funding , but not below zero . our policy is to make contributions to stay at or above the threshold required in order to prevent benefit restrictions and related additional notice requirements and is intended to provide not only for benefits based on service to date , but also for those expected to be earned in the future . we also assumed two qualified nonpension postretirement benefit plans that provide certain health care and life benefits for ntelos retired employees that meet eligibility requirements . the health care plan is contributory , with participants ' contributions adjusted annually . the life insurance plan also is contributory . these obligations , along with all of the pension plans and other postretirement benefit plans , are obligations assumed by us . eligibility for the life insurance plan is restricted to active pension participants age 50-64 as of january 5 , 1994. neither plan is eligible to employees hired after april 1993. the accounting for the plans anticipates that we will maintain a consistent level of cost sharing for the benefits with the retirees . our share of the projected costs of benefits that will be paid after retirement is generally being accrued by charges to expense over the eligible employees ' service periods to the dates they are fully eligible for benefits . we record annual amounts relating to the pension plan and postretirement benefit plans based on calculations that incorporate various actuarial and other assumptions , including discount rates , mortality , assumed rates of return , turnover rates and health care cost trend rates . we review our assumptions on an annual basis and make modifications to the assumptions based on current rates and trend when it is appropriate to do so . we recognize gains and losses on pension and postretirement plan assets and obligations immediately in our operating results . these gains and losses are measured annually at december 31 and accordingly will be recorded during the fourth quarter , unless earlier re-measurements are required .
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consolidated results the company 's consolidated results from continuing operations for the years ended december 31 , 2015 and 2014 are summarized as follows : replace_table_token_16_th operating revenues operating revenues increased $ 15.5 million , or 4.8 % . cable segment revenue grew $ 13.1 million , primarily as a result of a 5.4 % growth in average subscriber counts and an increase in revenue per subscriber . wireless segment revenues increased $ 1.3 million compared to 2014. net prepaid service revenue increased $ 4.3 million , primarily due to 4.5 % growth in average prepaid subscribers over 2014 and higher average revenue per subscriber due to improvements in product mix . net postpaid service revenues decreased $ 2.7 million as a 6.7 % increase in average postpaid subscribers was more than offset by lower revenue service plans associated with handset financing and leasing programs . wireline segment revenue increased $ 4.4 million , led by growth in carrier access fees , fiber revenues , and internet service revenues . affiliate revenues increased $ 3.3 million . affiliate revenues are eliminated from the consolidated totals shown in the table above . operating expenses total operating expenses increased $ 3.4 million , or 1.3 % , in 2015 compared to 2014. cost of goods and services sold decreased $ 8.4 million , primarily due to an $ 11.8 million decrease in pcs postpaid and prepaid handset costs , partially offset by a $ 4.1 million increase in cable programming and retransmission consent costs . selling , general and administrative expenses increased $ 3.4 million , driven primarily by a $ 1.8 million increase to support growth of the wireless prepaid business .
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these statements include , among other things , statements concerning our expectations regarding : continued growth and market share gains ; variability in sales in certain product categories from year to year and between quarters ; expected impact of sales of certain products and services ; the impact of macro-economic and geopolitical factors on our international sales ; the proportion of our revenue that consists of our product and service revenue , and the mix of billings between products and services , and the duration of service contracts ; the impact of our product innovation strategy ; drivers of long-term growth and operating leverage , such as increased sales productivity , functionality and value in our standalone and bundled subscription service offerings ; growing our sales to businesses , service providers and government organizations , the impact of sales to these organizations on our long-term growth , expansion and operating results , and the effectiveness of our internal sales organization ; trends in revenue , costs of revenue and gross margin ; trends in our operating expenses , including sales and marketing expense , research and development expense , general and administrative expense , and expectations regarding these expenses as a percentage of total revenue ; continued investments in research and development ; managing our continued investments in sales and marketing , and the impact of those investments ; expectations regarding uncertain tax benefits and our effective tax rate ; the impact of the 2017 tax act ; expectations regarding spending related to real estate and other capital expenditures and to the impact on free cash flows ; competition in our markets ; our intentions regarding repatriation of cash , cash equivalents and investments held by our international subsidiaries and the sufficiency of our existing cash , cash equivalents and investments to meet our cash needs for at least the next 12 months ; other statements regarding our future operations , financial condition and prospects and business strategies ; and adoption and impact of new accounting standards , including those related to revenue recognition and accounting for leases . 41 these forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those reflected in the forward-looking statements . factors that could cause or contribute to such differences include , but are not limited to , those discussed in this annual report on form 10-k and , in particular , the risks discussed under the heading โ risk factors โ in part i , item 1a of this annual report on form 10-k and those discussed in other documents we file with the securities and exchange commission ( the โ sec โ ) . we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements . given these risks and uncertainties , readers are cautioned not to place undue reliance on such forward-looking statements . business overview fortinet is a global leader in broad , automated and integrated cybersecurity solutions . we provide high performance cybersecurity solutions to a wide variety of businesses , such as enterprises , data centers and distributed offices , including majority of the fortune 100 companies . our cybersecurity solutions are designed to provide broad , automated and integrated protection against dynamic and sophisticated security threats , while simplifying the it and security infrastructure of our end-customers . we have four current focus areas for our business . first , we derive a majority of product sales from our fortigate network security appliances . we continue to develop and improve our offerings , which provide opportunities for market share gains . second , the fortinet security fabric has been developed to provide unified security across the entire digital attack surface , including network core , endpoints , applications , data centers , access and private and public cloud , and is designed to enable traditionally disparate security devices to work together as an integrated and collaborative whole . as a result of the increased success in selling the security fabric , billings for non-fortigate products and services grew significantly in 2017. third , cloud security provides opportunity for growth and was one of the fastest growing parts of our business in 2017. we help customers secure their cloud implementations by offering integration , visibility and automation across multi-cloud and hybrid deployments . our forticasb extends the core capabilities of our security fabric architecture to provide businesses the same level of cybersecurity and threat intelligence in cloud environments as they do on their physical networks . the fortinet cloud security is available across all major cloud providers , including microsoft azure , amazon web services , google cloud , ibm cloud and oracle cloud . fourth , the emergence of the iot has created an environment where data move freely between devices across locations , network environments , remote offices , mobile workers and public cloud environments , making it difficult to consistently track and secure . story_separator_special_tag style= '' font-family : inherit ; font-size:10pt ; '' > , from december 31 , 2016 . billings ( non-gaap ) . we define billings as revenue recognized in accordance with generally accepted accounting principles in the united states ( โ gaap โ ) plus the change in deferred revenue from the beginning to the end of the period less any deferred revenue balances acquired from business combination ( s ) during the period . we consider billings to be a useful metric for management and investors because billings drive future revenue , which is an important indicator of the health and viability of our business . there are a number of limitations related to the use of billings instead of gaap revenue . first , billings include amounts that have not yet been recognized as revenue and are impacted by the term of security and support agreements . second , we may calculate billings in a manner that is different from peer companies that report similar financial measures . story_separator_special_tag service revenue and software licenses have had a positive effect on our total gross margin given the higher gross margins compared to product gross margins . during 2017 , service gross margin benefited from the shift to higher-margin service revenue . product gross margin was negatively impacted as longer term deals and higher priced service bundles resulted in allocating a lower percentage of contract values to product and allocating a larger percentage of contact values to services . as a result , the service margin expansion was partially offset by a decline in product gross margin in 2017. we believe our overall gross margin will remain at a relatively comparable level in 2018. operating expenses . our operating expenses consist of research and development , sales and marketing , general and administrative expenses , and restructuring charges . personnel costs are the most significant component of operating expenses and consist primarily of salaries , benefits , bonuses , stock-based compensation , and sales commissions , as applicable . we expect personnel costs to continue to increase in absolute dollars as we expand our workforce . we expect sales commission expense recognized at the time of sale to decrease as a percentage of revenue due to the adoption of asu 2014-09โrevenue from contracts with customers . research and development . research and development expense consists primarily of personnel costs . additional research and development expenses include asic and system prototypes and certification-related expenses , depreciation of capital equipment and facility-related expenses . the majority of our research and development is focused on both software development and the ongoing development of our hardware platform . we record all research and development expenses as incurred . our research and development teams are primarily located in canada and the united states . sales and marketing . sales and marketing expense is the largest component of our operating expenses and primarily consists of personnel costs . additional sales and marketing expenses include promotional lead generation and other marketing expenses , travel , depreciation of capital equipment and facility-related expenses . we intend to hire additional personnel focused on sales and marketing and expand our sales and marketing efforts worldwide in order to capture additional market share in the high-return enterprise market , where customers tend to provide a higher lifetime value . general and administrative . general and administrative expense consists of personnel costs , as well as professional fees , depreciation of capital equipment and software , facility-related expenses , expenses associated with the erp system implementation and business acquisition costs . general and administrative personnel include our executive , finance , human resources , information technology and legal organizations . our professional fees principally consist of outside legal , auditing , accounting , tax , information technology and other consulting costs . restructuring charges . restructuring charges relate to alignment activities performed in connection with the meru networks , inc. ( โ meru โ ) and accelops , inc. ( โ accelops โ ) acquisitions to reduce our cost structure and improve operational efficiencies , resulting in workforce reductions , contract terminations and other charges . interest income . interest income consists of income earned on our cash , cash equivalents and investments . we have historically invested our cash in corporate debt securities , money market funds , certificates of deposit , commercial paper , u.s. government and agency securities and municipal bonds . other income ( expense ) โ net . other income ( expense ) โnet consists primarily of foreign exchange gains and losses related to foreign currency exchange remeasurement . provision for income taxes . we are subject to tax in the united states , as well as other tax jurisdictions or countries in which we conduct business . earnings from our non-u.s. activities are subject to income taxes in the local country , which are generally lower than u.s. tax rates , and may be subject to u.s. income taxes . our effective tax rate differs from the u.s. statutory rate primarily due to foreign income subject to different tax rates than in the u.s. , research and development tax credits , withholding taxes , nondeductible stock-based compensation expense and the tax impact of the 2017 tax act . 46 in december , 2017 , the u.s. federal government enacted the 2017 tax act . the 2017 tax act decreased the federal corporate income tax rate from 35 % to 21 % effective january 1 , 2018 and created a territorial tax system with a one-time mandatory tax on foreign earnings of u.s. subsidiaries not previously subject to u.s. income tax . under gaap , changes in tax rates and tax law are accounted for in the period of enactment and deferred tax assets and liabilities are measured at the enacted tax rate . as such , we provisionally recorded a $ 47.9 million expense on the remeasurement of deferred assets due to the reduction of the federal corporate income tax rate , and a $ 15.2 million expense for the one-time transition tax on the deemed repatriation related to the 2017 tax act . our effective tax rate approximates the federal corporate income tax rates plus the impact of state taxes , excess tax benefits related to stock-based compensation expense , research and development tax credits , foreign withholding tax , nondeductible stock-based compensation expense , foreign income subject to lower tax rates than income earned in the united states , deferred tax assets remeasurement and a one-time transition tax . critical accounting policies and estimates our discussion and analysis of our financial condition and results of operations are based upon our financial statements , which have been prepared in accordance with gaap . these principles require us to make estimates and judgments that affect the reported amounts of assets , liabilities , revenue , cost of revenue and expenses , and related disclosures . we base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances .
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financial highlights we recorded total revenue of $ 1.49 billion in 2017 , an increase of 17 % compared to $ 1.28 billion in 2016 . product revenue was $ 577.2 million in 2017 , an increase of 5 % compared to $ 548.1 million in 2016 . service revenue was $ 917.8 million in 2017 , an increase of 26 % compared to $ 727.3 million in 2016 . we generated operating income of $ 109.8 million in 2017 , an increase of 156 % compared to $ 42.9 million in 2016. cash , cash equivalents and investments were $ 1.35 billion as of december 31 , 2017 , an increase of $ 38.8 million , or 3 % , from december 31 , 2016 . deferred revenue was $ 1.34 billion as of december 31 , 2017 , an increase of $ 301.0 million , or 29 % , from december 31 , 2016 . we generated cash flows from operating activities of $ 594.4 million in 2017 , an increase of $ 248.7 million , or 72 % , compared to 2016 . in 2017 , we repurchased 11.2 million shares of common stock under the repurchase program for an aggregate purchase price of $ 446.3 million . in 2016 , we repurchased 3.9 million shares of common stock for a total purchase price of $ 110.8 million . our revenue growth was driven by the strength in sales of our fortigate and non-fortigate products and the sale of new , and the renewal and upgrade of existing , forticare technical support and fortiguard security subscription service contracts . revenue grew in 2017 as the investment made in sales and marketing enabled us to continue to gain enterprise customers . 42 we continue to see a shift in our revenue mix from product revenues to higher-margin , recurring service revenues , reflecting our success in driving higher-priced subscription bundles and services .
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statements that are not historical facts , without limitation , including statements that use terms such as `` anticipates , '' `` believes , '' `` expects , '' `` estimates , '' `` intends , '' `` may , '' `` plans , '' `` potential , '' `` projects , '' and `` will '' and that relate to our future revenues , expenditures and business trends ; future accounting estimates ; future conversions of backlog ; future capital allocation priorities including share repurchases , trade receivables , debt pay downs ; future post-retirement expenses ; future tax benefits and expenses ; future compliance with regulations ; future legal claims and insurance coverage ; future effectiveness of our disclosure and internal controls over financial reporting ; and other future economic and industry conditions , are forward-looking statements . in light of the risks and uncertainties inherent in all forward-looking statements , the inclusion of such statements in this annual report should not be considered as a representation by us or any other person that our objectives or plans will be achieved . although management believes that the assumptions underlying the forward-looking statements are reasonable , these assumptions and the forward-looking statements are subject to various factors , risks and uncertainties , many of which are beyond our control , including , but not limited to , the fact that our business is cyclical and vulnerable to economic downturns and client spending reductions ; we are dependent on long-term government contracts and subject to uncertainties related to government contract appropriations ; governmental agencies may modify , curtail or terminate our contracts ; government contracts are subject to audits and adjustments of contractual terms ; we may experience losses under fixed-price contracts ; we have limited control over operations run through our joint venture entities ; we may be liable for misconduct by our employees or consultants or our failure to comply with laws or regulations applicable to our business ; we may not maintain adequate surety and financial capacity ; we are highly leveraged and may not be able to service our debt and guarantees ; we have exposure to political and economic risks in different countries where we operate as well as currency exchange rate fluctuations ; we may not be able to retain and recruit key technical and management personnel ; we may be subject to legal claims ; we may have inadequate insurance coverage ; we are subject to environmental law compliance and may not have adequate nuclear indemnification ; there may be unexpected adjustments and cancellations related to our backlog ; we are dependent on partners and third parties who may fail to satisfy their obligations ; we may not be able to manage pension costs ; we may face cybersecurity issues and data loss ; as well as other additional risks and factors discussed in this annual report on form 10-k and any subsequent reports we file with the sec . accordingly , actual results could differ materially from those contemplated by any forward-looking statement . all subsequent written and oral forward-looking statements concerning the company or other matters attributable to the company or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements above . you are cautioned not to place undue reliance on these forward-looking statements , which speak only to the date they are made . the company is under no obligation ( and expressly disclaims any such obligation ) to update or revise any forward-looking statement that may be made from time to time , whether as a result of new information , future developments or otherwise . please review `` part i , item 1aยrisk factors '' in this annual report for a discussion of the factors , risks and uncertainties that could affect our future results . our fiscal year consists of 52 or 53 weeks , ending on the friday closest to september 30. for clarity of presentation , we present all periods as if the year ended on september 30. we refer to the fiscal year ended september 30 , 2016 as `` fiscal 2016 '' and the fiscal year ended september 30 , 2017 as `` fiscal 2017 . '' 36 overview we are a leading fully integrated firm positioned to design , build , finance and operate infrastructure assets for governments , businesses and organizations in more than 150 countries . we provide planning , consulting , architectural and engineering design services to commercial and government clients worldwide in major end markets such as transportation , facilities , environmental , energy , water and government markets . we also provide construction services , including building construction and energy , infrastructure and industrial construction . in addition , we provide program and facilities management and maintenance , training , logistics , consulting , technical assistance , and systems integration and information technology services , primarily for agencies of the u.s. government and also for national governments around the world . our business focuses primarily on providing fee-based planning , consulting , architectural and engineering design services and , therefore , our business is labor intensive . we primarily derive income from our ability to generate revenue and collect cash from our clients through the billing of our employees ' time spent on client projects and our ability to manage our costs . aecom capital primarily derives its income from real estate development sales . we report our business through four segments : design and consulting services ( dcs ) , construction services ( cs ) , management services ( ms ) , and aecom capital ( acap ) . such segments are organized by the types of services provided , the differing specialized needs of the respective clients , and how we manage the business . we have aggregated various operating segments into our reportable segments based on their similar characteristics , including similar long-term financial performance , the nature of services provided , internal processes for delivering those services , and types of customers . story_separator_special_tag 38 components of income and expense replace_table_token_10_th revenue we generate revenue primarily by providing planning , consulting , architectural and engineering design services to commercial and government clients around the world . our revenue consists of both services provided by our employees and pass-through fees from subcontractors and other direct costs . we generally utilize a cost-to-cost approach in applying the percentage-of-completion method of revenue recognition . under this approach , revenue is earned in proportion to total costs incurred , divided by total costs expected to be incurred . cost of revenue cost of revenue reflects the cost of our own personnel ( including fringe benefits and overhead expense ) associated with revenue . amortization expense of acquired intangible assets included in our cost of revenue is amortization of acquired intangible assets . we have ascribed value to identifiable intangible assets other than goodwill in our purchase price allocations for companies we have acquired . these assets include , but are not limited to , backlog and customer relationships . to the extent we ascribe value to identifiable intangible assets that have finite lives , we amortize those values over the estimated useful lives of the assets . such amortization expense , although non-cash in the period expensed , directly impacts our results of operations . it is difficult to predict with any precision the amount of expense we may record relating to acquired intangible assets . equity in earnings of joint ventures equity in earnings of joint ventures includes our portion of fees charged by our unconsolidated joint ventures to clients for services performed by us and other joint venture partners along with earnings we receive from our return on investments in unconsolidated joint ventures . general and administrative expenses general and administrative expenses include corporate expenses , including personnel , occupancy , and administrative expenses . 39 acquisition and integration expenses acquisition and integration expenses are comprised of transaction costs , professional fees , and personnel costs , including due diligence and integration activities , primarily related to business acquisitions . goodwill impairment see critical accounting policies and consolidated results below . income tax ( benefit ) expense as a global enterprise , income tax ( benefit ) /expense and our effective tax rates can be affected by many factors , including changes in our worldwide mix of pre-tax losses/earnings , the effect of non-controlling interest in income of consolidated subsidiaries , the extent to which the earnings are indefinitely reinvested outside of the united states , our acquisition strategy , tax incentives and credits available to us , changes in judgment regarding the realizability of our deferred tax assets , changes in existing tax laws and our assessment of uncertain tax positions . our tax returns are routinely audited by the taxing authorities and settlements of issues raised in these audits can also sometimes affect our effective tax rate . critical accounting policies our financial statements are presented in accordance with accounting principles generally accepted in the united states ( gaap ) . highlighted below are the accounting policies that management considers significant to understanding the operations of our business . revenue recognition we generally utilize a cost-to-cost approach in applying the percentage-of-completion method of revenue recognition , under which revenue is earned in proportion to total costs incurred , divided by total costs expected to be incurred . recognition of revenue and profit under this method is dependent upon a number of factors , including the accuracy of a variety of estimates , including engineering progress , material quantities , the achievement of milestones , penalty provisions , labor productivity and cost estimates . due to uncertainties inherent in the estimation process , it is possible that actual completion costs may vary from estimates . if estimated total costs on contracts indicate a loss , we recognize that estimated loss within cost of revenue in the period the estimated loss first becomes known . claims recognition claims are amounts in excess of the agreed contract price ( or amounts not included in the original contract price ) that we seek to collect from customers or others for delays , errors in specifications and designs , contract terminations , change orders in dispute or unapproved contracts as to both scope and price or other causes of unanticipated additional costs . we record contract revenue related to claims only if it is probable that the claim will result in additional contract revenue and if the amount can be reliably estimated . in such cases , we record revenue only to the extent that contract costs relating to the claim have been incurred . the amounts recorded , if material , are disclosed in the notes to the financial statements . costs attributable to claims are treated as costs of contract performance as incurred . government contract matters our federal government and certain state and local agency contracts are subject to , among other regulations , regulations issued under the federal acquisition regulations ( far ) . these regulations can limit the recovery of certain specified indirect costs on contracts and subject us to ongoing multiple audits 40 by government agencies such as the defense contract audit agency ( dcaa ) . in addition , most of our federal and state and local contracts are subject to termination at the discretion of the client . audits by the dcaa and other agencies consist of reviews of our overhead rates , operating systems and cost proposals to ensure that we account for such costs in accordance with the cost accounting standards of the far ( cas ) . if the dcaa determines we have not accounted for such costs consistent with cas , the dcaa may disallow these costs . there can be no assurance that audits by the dcaa or other governmental agencies will not result in material cost disallowances in the future . allowance for doubtful accounts we record accounts receivable net of an allowance for doubtful accounts .
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results of operations by reportable segment design and consulting services replace_table_token_24_th the following table presents the percentage relationship of certain items to revenue : replace_table_token_25_th revenue revenue for our dcs segment for the year ended september 30 , 2016 decreased $ 307.1 million , or 3.9 % , to $ 7,655.8 million as compared to $ 7,962.9 million for the year ended september 30 , 2015. revenue provided by acquired companies was $ 119.2 million . excluding revenue provided by acquired companies , revenue decreased $ 426.3 million , or 5.4 % , from the year ended september 30 , 2015. the decrease in revenue , excluding revenue provided by acquired companies , for the year ended september 30 , 2016 was primarily attributable to a negative foreign currency impact of $ 200 million , mostly due to the strengthening of the u.s. dollar against the australian and canadian dollars and the british pound . additionally , we experienced a decrease in the europe , middle east , and africa region of approximately $ 120 million and in the americas region of approximately $ 90 million across its end markets , including the transportation , water , and environment segments due to a decrease in public spending on capital projects . gross profit gross profit for our dcs segment for the year ended september 30 , 2016 increased $ 83.2 million , or 27.8 % , to $ 382.5 million as compared to $ 299.3 million for the year ended september 30 , 2015. as a percentage of revenue , gross profit increased to 5.0 % of revenue for the year ended september 30 , 2016 from 3.8 % in the year ended september 30 , 2015. the increase in gross profit and gross profit as a percentage of revenue for the year ended september 30 , 2016 was primarily attributable to decreased intangible amortization expense , net of the margin fair value adjustment of $ 71.7 million , primarily from urs .
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altisource entered into an agreement with ocwen on april 12 , 2013 to establish additional terms related to our services in connection with the rescap fee-based businesses ( see note 5 ) . correspondent one and hlss in july 2011 , we acquired an equity interest in correspondent one s.a. ( โ correspondent one story_separator_special_tag operations management 's discussion and analysis of financial condition and results of operations ( โ md & a โ ) is a supplement to the accompanying consolidated financial statements and is intended to provide a reader of our financial statements with a narrative from the perspective of management on our businesses , current developments , financial condition , results of operations and liquidity . significant sections of the md & a are as follows : overview . this section , beginning below , provides a description of recent developments we believe are important in understanding our results of operations and financial condition as well as understanding anticipated future trends . it also provides a brief description of significant transactions and events that affect the comparability of financial results and a discussion of the progress being made on our growth initiatives . consolidated results of operations . this section , beginning on page 27 , provides an analysis of our consolidated results of operations for the three years ended december 31 , 2014. segment results of operations . this section , beginning on page 30 , provides an analysis of each business segment for the three years ended december 31 , 2014 as well as corporate items and eliminations . in addition , we discuss significant transactions , events and trends that may affect the comparability of the results being analyzed . liquidity and capital resources . this section , beginning on page 39 , provides an analysis of our cash flows for the three years ended december 31 , 2014. we also discuss restrictions on cash movements , future commitments and capital resources . critical accounting policies . this section , beginning on page 42 , identifies those accounting principles we believe are most important to our financial results and that require significant judgment and estimates on the part of management in application . we provide all of our significant accounting policies in note 2 to the accompanying consolidated financial statements . other matters . this section , beginning on page 45 , provides a discussion of off-balance sheet arrangements to the extent they exist . in addition , we provide a tabular discussion of contractual obligations , discuss any significant commitments or contingencies and related parties . overview our business we are a premier marketplace and transaction solutions provider for the real estate , mortgage and consumer debt industries offering both distribution and content . we leverage proprietary business process , vendor and electronic payment management software and behavioral science based analytics to improve outcomes for marketplace participants . our business segments are based upon our organizational structure , which focuses primarily on the services offered , and are consistent with the internal reporting used by our chief executive officer to evaluate operating performance and to assess the allocation of our resources . we classify our businesses into three reportable segments . the mortgage services segment provides services that span the mortgage and real estate lifecycle and are typically outsourced by loan servicers , loan originators and investors and other sellers of single family homes . the financial services segment provides collection and customer relationship management services primarily to debt originators and servicers ( e.g. , credit card , auto lending , retail credit and mortgage ) and the utility , insurance and hotel industries . the technology services segment principally consists of our realsuite software applications , equator 's software applications , mortgage builder 's software applications and our it infrastructure services . the realsuite platform provides a fully integrated set of software applications and technologies that manage the end-to-end lifecycle for residential and commercial mortgage loan servicing including the automated management and payment of a distributed network of vendors . equator 's software applications provide comprehensive , end-to-end workflow and transaction services to manage real estate and foreclosure related activities and purchase related services from vendors . mortgage builder provides mortgage origination and servicing software applications . in addition , corporate items and eliminations include eliminations of transactions between the reportable segments , interest expense and costs related to corporate support functions including executive , finance , legal , compliance , human resources , vendor management , risk and operational effectiveness and marketing . 23 we classify revenue in three categories : service revenue , revenue from reimbursable expenses and non-controlling interests . in evaluating our performance , we focus on service revenue . service revenue consists of amounts attributable to our fee-based services . reimbursable expenses and non-controlling interests are pass-through items for which we earn no margin . reimbursable expenses consist of amounts we incur on behalf of our customers in performing our fee-based services , but we pass such costs directly on to our customers without any additional markup . non-controlling interests represent the earnings of lenders one , a consolidated entity not owned by altisource , and are included in revenue and reduced from net income to arrive at net income attributable to altisource . we have prepared our consolidated financial statements in accordance with accounting principles generally accepted in the united states of america . altisource 's vision and growth initiatives altisource provides a suite of mortgage , real estate and consumer debt services , leveraging our technology and global operations . our relationship with ocwen provided a foundation on which we built our business and ocwen , as our largest customer , remains an important priority for us . leveraging the services we have built through the ocwen and other relationships , altisource is focused on becoming the premier provider of real estate and mortgage marketplaces offering both distribution and content to a diversified customer base . story_separator_special_tag the year ended december 31 , 2013 ( no adjustment for the year ended december 31 , 2012 ) . correcting these items on the face of the consolidated statements of operations resulted in the disclosure of related party cost of revenue of $ 20.0 million and $ 13.5 million for the years ended december 31 , 2013 and 2012 , respectively , and a decrease in previously disclosed related party sg & a by $ 2.4 million and $ 3.0 million for the years ended december 31 , 2013 and 2012 , respectively . in accordance with the financial accounting standards board 's accounting standards codification ( โ asc โ ) topic 250 , accounting changes and error corrections , the company evaluated the effect of the disclosure and presentation errors on its previously issued annual and quarterly financial statements , both qualitatively and quantitatively , and concluded that the related party disclosures in the company 's previously issued annual and quarterly financial statements are not materially misstated . 25 factors affecting comparability the following items may impact the comparability of our results : the average number of loans serviced by ocwen on realservicing was 2.2 million for the year ended december 31 , 2014 compared to 1.2 million and 0.7 million for the years ended december 31 , 2013 and 2012 , respectively . the average number of delinquent non-gse loans serviced by ocwen on realservicing was 352 thousand for the year ended december 31 , 2014 compared to 296 thousand and 211 thousand for the years ended december 31 , 2013 and 2012 , respectively ; on november 21 , 2014 , we acquired owners.com , a leading self-directed online real estate marketplace , for an initial purchase price of $ 19.8 million plus contingent earn out consideration of up to an additional $ 7.0 million over two years , subject to owners.com achieving annual performance targets ; in the fourth quarter of 2014 , we discontinued our lender placed insurance brokerage line of business ; on september 12 , 2014 , we completed the acquisition of mortgage builder , a provider of mortgage loan origination and servicing software systems , for an initial purchase price of $ 15.7 million plus contingent earn out consideration of up to an additional $ 7.0 million over three years , subject to mortgage builder achieving annual performance targets ; bad debt expense increased during 2014 , driven primarily from the default management services business . a change in our customers ' business model and fourth quarter 2014 discussions with these customers led us to believe that a portion of the accounts receivable balance is no longer collectible ; on november 15 , 2013 , we acquired equator for an initial purchase price of $ 63.4 million plus contingent earn out consideration of up to an additional $ 80 million over three years , subject to equator achieving annual performance targets . during 2014 , the fair value of the equator contingent consideration was reduced by $ 37.9 million with a corresponding increase in earnings . as a result of the adjustment in the fair value of the equator contingent consideration , we determined that the equator goodwill was impaired and recorded an estimated impairment loss of $ 37.5 million in 2014. the net impact on earnings was an increase of $ 0.5 million ; on april 12 , 2013 , we completed the residential capital , llc ( โ rescap โ ) fee-based business transaction with ocwen for an aggregate purchase price of $ 128.8 million ; on march 29 , 2013 , we completed the acquisition of the homeward residential capital , inc. ( โ homeward โ ) fee-based businesses from ocwen for an aggregate purchase price of $ 75.8 million ; and in november 2012 , we borrowed $ 200.0 million under a senior secured term loan agreement and increased our borrowings to $ 400.0 million on may 7 , 2013. on december 9 , 2013 , we refinanced the senior secured term loan which included , among other changes , lowering the interest rate of the term loans . on august 1 , 2014 , we amended our senior secured term loan agreement and increased our borrowings by $ 200.0 million to $ 594.5 million . interest expense totaled $ 23.4 million for the year ended december 31 , 2014 compared to $ 20.3 million and $ 1.2 million for the years ended december 31 , 2013 and 2012 , respectively . 26 consolidated results of operations summary consolidated results following is a discussion of our consolidated results of operations for the years ended december 31 , 2014 , 2013 and 2012. for a more detailed discussion of the factors that affected the results of our business segments in these periods , see โ segment results of operations โ below . the following table sets forth information on our results of operations for the years ended december 31 : replace_table_token_9_th n/m โ not meaningful . revenue we recognized service revenue of $ 938.7 million , $ 662.1 million and $ 466.9 million for the years ended december 31 , 2014 , 2013 and 2012 , respectively . the continued growth in service revenue over the three year period was primarily driven by ocwen 's growth , higher auction mix for houses sold on hubzu , revenue from equator which we acquired in november 2013 and growth in our financial services business from new customer relationship management customers . these increases were partially offset by ( 1 ) a decline in the default management services business driven by lower levels of foreclosure starts and ( 2 ) the fourth quarter of 2013 loss of an origination management services customer which eliminated its affinity relationship with altisource and its other similar vendor partners . 27 the increase in revenue from reimbursable expenses during the three year period is due primarily to the growth of ocwen 's loan servicing portfolio , although reimbursable expenses can vary significantly from period to period based on the mix of services ordered .
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segment results of operations the following section provides a discussion of results of operations of our business segments . transactions between segments are accounted for as third party arrangements for purposes of presenting segment results of operations . intercompany transactions primarily consist of it infrastructure services . we reflect these as service revenue in the technology services segment and technology and telecommunications expense within cost of revenue and sg & a in the segment receiving the services . financial information for our segments is as follows : replace_table_token_10_th n/m โ not meaningful . 30 replace_table_token_11_th n/m โ not meaningful . replace_table_token_12_th n/m โ not meaningful . 31 mortgage services revenue revenue by service line was as follows for the years ended december 31 : replace_table_token_13_th n/m โ not meaningful . we recognized service revenue of $ 650.0 million for the year ended december 31 , 2014 , a 33 % increase compared to the year ended december 31 , 2013. the growth in asset management services and insurance services was primarily due to ocwen 's growth as loans from its servicing acquisitions are boarded on realservicing . the growth in asset management services is also from the higher auction mix of houses sold on hubzu . growth in the insurance services business was partially offset by the discontinuation of the lender placed insurance brokerage line of business in the fourth quarter of 2014. the decline in default management services revenue was driven primarily by lower levels of foreclosure starts . the lower origination management services revenue was primarily due to the loss of a customer in the fourth quarter of 2013 who eliminated its affinity relationship with altisource and its other similar vendor partners along with a close to 40 % decline in u.s. origination volume .
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in some cases , forward-looking statements can be identified by terminology such as ยmay , ย ยwill , ย ยshould , ย ยcould , ย ยwould , ย ยexpect , ย ยplan , ย ยanticipate , ย ยbelieve , ย ยestimate , ย ยcontinue , ย ยproject , ย or the negative of such terms or other similar expressions . these forward-looking statements are not historical facts , but rather are based on management 's current expectations , assumptions , and projections about future events . although management believes that the expectations , assumptions , and projections on which these forward-looking statements are based are reasonable , they nonetheless could prove to be inaccurate , and as a result , the forward-looking statements based on those expectations , assumptions , and projections also could be inaccurate . forward-looking statements are not guarantees of future performance . instead , forward-looking statements are subject to known and unknown risks , uncertainties , and assumptions that may cause the company 's strategy , planning , actual results , levels of activity , performance , or achievements to be materially different from any strategy , planning , future results , levels of activity , performance , or achievements expressed or implied by such forward-looking statements . actual results could differ materially from those currently anticipated as a result of a number of factors , including the risks and uncertainties discussed under the caption ยrisk factorsย set forth in item 1a of this annual report . given these uncertainties , current or prospective investors are cautioned not to place undue reliance on any such forward-looking statements . all forward-looking statements attributable to the company or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements included in this annual report ; they should not be regarded as a representation by the company or any other individual . we undertake no obligation to publicly update or revise any forward-looking statements , whether as a result of new information , future events , or otherwise . in light of these risks , uncertainties , and assumptions , the forward-looking events discussed in this annual report might not occur or might be materially different from those discussed . general hillman is one of the largest providers of hardware-related products and related merchandising services to retail markets in north america . the company 's principal business is operated through our wholly-owned subsidiary , the hillman group , inc. ( the ยhillman groupย ) , which had net sales of approximately $ 701.6 million in 2013. the hillman group sells our products to hardware stores , home centers , mass merchants , pet supply stores , and other retail outlets principally in the united states , canada , mexico , australia , latin america , and the caribbean . product lines include thousands of small parts such as fasteners and related hardware items ; threaded rod and metal shapes ; keys , key duplication systems , and accessories ; builder 's hardware ; and identification items , such as tags and letters , numbers , and signs . the company supports our product sales with value added services including design and installation of merchandising systems and maintenance of appropriate in-store inventory levels . 21 merger transaction on may 28 , 2010 , hillman was acquired by affiliates of ohcp and certain members of hillman 's management and board of directors . pursuant to the terms and conditions of an agreement and plan of merger dated as of april 21 , 2010 , the company was merged with an affiliate of ohcp with the company surviving the merger transaction . as a result of the merger transaction , hillman is a wholly-owned subsidiary of holdco . the total consideration paid in the merger transaction was $ 832.7 million which includes $ 11.5 million for the quick tag license and related patents , repayment of outstanding debt , and the net value of the company 's outstanding junior subordinated debentures ( $ 105.4 million liquidation value , net of $ 3.3 million in trust common securities , at the time of the merger ) . financing arrangements on may 28 , 2010 , the company and certain of our subsidiaries closed on a $ 320.0 million senior secured first lien credit facility ( the ยsenior facilitiesย ) , consisting of a $ 290.0 million term loan and a $ 30.0 million revolving credit facility ( ยrevolverย ) . the term loan portion of the senior facilities had a six year term and the revolver had a five year term . the senior facilities provide borrowings at interest rates based on a eurodollar rate plus a margin of 3.75 % ( the ยeurodollar marginย ) , or a base rate ( the ยbase rateย ) plus a margin of 2.75 % ( the ยbase rate marginย ) . the eurodollar rate was subject to a minimum floor of 1.75 % and the base rate was subject to a minimum floor of 2.75 % . concurrently with the merger transaction , hillman group issued $ 150.0 million aggregate principal amount of senior notes due 2018 ( the ย10.875 % senior notesย ) . on march 16 , 2011 , hillman group completed an offering of $ 50.0 million aggregate principal amount of 10.875 % senior notes . hillman group received a premium of approximately $ 4.6 million on the $ 50.0 million 10.875 % senior notes offering . on december 21 , 2012 , hillman group completed an offering of $ 65.0 million aggregate principal amount of 10.875 % senior notes . hillman group received a premium of approximately $ 4.2 million on the $ 65.0 million 10.875 % senior notes offering . the 10.875 % senior notes are guaranteed by the hillman companies , inc. , hillman investment company , and all of the domestic subsidiaries of hillman group . hillman group pays interest on the 10.875 % senior notes semi-annually on june 1 and december 1 of each year . the senior facilities contain financial and operating covenants . story_separator_special_tag in conjunction with this agreement , hillman group entered into an agreement with keyworks , a company affiliated with tagworks , to assign its patent-pending retail key program technology to hillman group . effective december 31 , 2011 , tagworks was merged with and into hillman group , with hillman group as the surviving entity . on december 1 , 2011 , the hillman group purchased certain assets of micasa trading corporation ( ยmicasaย ) , a florida based producer of the ook brand of picture hangers and related products ( the ยook acquisitionย ) . the aggregate purchase price was $ 14.8 million paid in cash . on february 19 , 2013 , the company acquired all of the issued and outstanding class a common shares of h. paulin & co. , limited ( the ยpaulin acquisitionย ) . the aggregate purchase price of the paulin acquisition was $ 103.4 million paid in cash . on march 31 , 2013 , h. paulin & co. , limited was amalgamated with the hillman group canada ulc and continues as a division operating under the trade name of h. paulin & co. ( ยpaulinย ) . product revenues the following is revenue based on products for the company 's significant product categories ( in thousands ) : replace_table_token_2_th 24 story_separator_special_tag additional amortization expense of certain intangible assets acquired as a result of the paulin acquisition . interest expense , net , was $ 48.1 million for the year ended december 31 , 2013 compared to $ 41.1 million in the prior year . the increase in interest expense was primarily the result of the company 's higher borrowing levels in both the $ 265.0 million aggregate principal amount of the 10.875 % senior notes and the senior facilities during 2013 compared to 2012. other ( income ) expense , net was $ 4.6 million for the year ended december 31 , 2013 compared to $ 4.2 million for the year ended december 31 , 2012. the other expenses incurred in 2013 and 2012 were primarily the result of the restructuring costs incurred to streamline the warehouse distribution system . 27 results of operations sales and profitability for the year ended december 31 , 2012 and december 31 , 2011 : replace_table_token_4_th 28 year ended december 31 , 2012 vs year ended december 31 , 2011 revenues net sales for the year ended december 31 , 2012 were $ 555.5 million compared to net sales for the year ended december 31 , 2011 of $ 506.5. the increase in revenues of $ 49.0 million was primarily attributable to an improvement in retail activity and certain pricing actions taken in early 2012 resulted in further revenue improvement over the prior year in our f & i hardware accounts , regional accounts , the all points division , and for home depot . in addition , revenue increased from having a full year of the newly acquired tagworks and ook businesses which contributed approximately $ 16.3 million in incremental net sales to 2012. expenses operating expenses were substantially higher for the year ended december 31 , 2012 than for the year ended december 31 , 2011. the primary reasons for the increase in operating expenses were the settlement of the hy-ko antitrust case and increase in legal costs related to the hy-ko patent infringement and antitrust litigation together with the inclusion of the newly acquired ook business in the full year of 2012. in addition , the tagworks business was acquired in march 2011 and therefore contributed approximately nine months of operating expenses to 2011 and twelve months of operating expenses to 2012. the following changes in underlying trends also impacted the change in operating expenses : the company 's cost of sales was $ 275.0 million , or 49.5 % of net sales , in the year ended december 31 , 2012 compared to $ 252.5 million , or 49.8 % of net sales , in the year ended december 31 , 2011. the cost of sales percentage was comparable for the two periods as unfavorable changes in product cost and sales mix have been offset by pricing actions . selling expense was $ 90.5 million , or 16.3 % of net sales , in the year ended december 31 , 2012 compared to $ 85.3 million , or 16.8 % of net sales , in the year ended december 31 , 2011. the tagworks acquisition and ook acquisition contributed to the higher sales volume in 2012 , which resulted in higher variable service cost than 2011. the 2012 selling expense was less than 2011 when expressed as a percentage of net sales . warehouse and delivery expense was $ 58.1 million , or 10.5 % of net sales , in 2012 compared to $ 55.1 million , or 10.9 % of net sales , in 2011. the higher sales volume in 2012 resulted in higher overall costs for warehouse labor and freight used to process and deliver customer orders . however , as a result of operating efficiencies , these costs decreased from 2011 when expressed as a percentage of net sales . g & a expenses were $ 39.7 million in 2012 compared to $ 29.4 million in 2011. the increase in g & a expenses was primarily the result of the settlement cost of the previously pending hy-ko antitrust case and higher legal expense on the hy-ko patent infringement and antitrust cases . acquisition and integration expense of $ 3.0 million for the year ended december 31 , 2012 represents charges for investment banking , legal and other expenses incurred in connection with the acquisitions of paulin and ook . the company incurred $ 2.8 million for the year ended december 31 , 2011 for banking , legal , and other professional fees incurred in connection with the merger transaction , servalite acquisition , tagworks acquisition , ook acquisition , and start-up of operations for the hillman group australia pty , ltd. ( ยhillman australiaย ) .
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results of operations sales and profitability for the years ended december 31 , 2013 and 2012 : replace_table_token_3_th 25 current economic conditions the company 's business is impacted by general economic conditions in the u.s. and international markets , particularly the u.s. retail markets including hardware stores , home centers , mass merchants , and other retailers . in recent quarters , operations have been negatively impacted by the uneven recovery of the u.s. economy and high unemployment figures . conditions are not expected to improve significantly in the near term and there still exists concern about downside risk to future growth and the high unemployment rate . these factors may have the effect of reducing consumer spending which could adversely affect our results of operations during the current year and beyond . the company is sensitive to inflation or deflation present in the economies of the united states and foreign suppliers located primarily in taiwan and china . unfavorable exchange rate fluctuations have increased the costs for many of our products . the company took pricing action in 2011 and 2012 in an attempt to offset a portion of the product cost increases . the ability of the company 's operating divisions to institute price increases and seek price concessions , as appropriate , is dependent on competitive market conditions . year ended december 31 , 2013 vs year ended december 31 , 2012 revenues net sales for the year ended december 31 , 2013 were $ 701.6 million , an increase of $ 146.1 million compared to net sales of $ 555.5 million for the year ended december 31 , 2012. the increase in revenue was primarily attributable to the acquisition of the paulin business in 2013 which contributed approximately $ 130.4 million in incremental net sales to the 2013 period .
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2018 - 19 , 2019 - 04 , 2019 - 05 and 2019 story_separator_special_tag you should read the following discussion in conjunction with the section titled `` selected consolidated financial data '' and our consolidated financial statements and the related notes included elsewhere in this annual report on form 10-k. you should carefully review and consider the information regarding our financial condition and results of operations set forth under part i-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 , 2019 , filed with the sec on february 21 , 2020 , for an understanding of our results of operations and liquidity discussions and analysis comparing fiscal year 2019 to fiscal year 2018. in addition to historical information , this discussion contains forward-looking statements that involve risks and uncertainties that could cause our actual results to differ materially from our expectations , as discussed in `` forward-looking statements '' in part i of this annual report on form 10-k. factors that could cause such differences include , but are not limited to , those described in the section titled `` risk factors '' and elsewhere in this annual report on form 10-k. overview we are a pioneer and leading provider of a cloud-based platform delivering it , security and compliance solutions that enable organizations to identify security risks to their information technology ( it ) infrastructures , help protect their it systems and applications from ever-evolving cyber-attacks and achieve compliance with internal policies and external regulations . our cloud solutions address the growing security and compliance complexities and risks that are amplified by the dissolving boundaries between internal and external it infrastructures and web environments , the rapid adoption of cloud computing , containers and serverless it models , and the proliferation of geographically dispersed it assets . our integrated suite of security and compliance solutions delivered on our qualys cloud platform enables our customers to identify and manage their it assets , collect and analyze large amounts of it security data , discover and prioritize vulnerabilities , recommend remediation actions and verify the implementation of such actions . organizations use our integrated suite of solutions delivered on our qualys cloud platform to cost-effectively obtain a unified view of their it asset inventory as well as security and compliance posture across globally-distributed it infrastructures as our solution offers a single platform for information technology , information security , application security , endpoint , developer security and cloud teams . we were founded and incorporated in december 1999 with a vision of transforming the way organizations secure and protect their it infrastructure and applications and initially launched our first cloud solution , vulnerability management ( vm ) , in 2000. as vm gained acceptance , we introduced additional solutions to help customers manage increasing it , security and compliance requirements . today , the suite of solutions that we offer on our cloud platform and refer to as the qualys cloud apps helps our customers protect a range of assets across on-premises , endpoints , cloud , containers , and mobile environments . these cloud apps address and include : it security : vulnerability management ( vm ) , vulnerability management , detection and response ( vmdr ) , threat protection ( tp ) , continuous monitoring ( cm ) , patch management ( pm ) , multi-vector endpoint detection and response ( edr ) , indication of compromise ( ioc ) , certificate assessment ( cra ) ; compliance : policy compliance ( pc ) , security configuration assessment ( sca ) , pci compliance ( pci ) , file integrity monitoring ( fim ) , security assessment questionnaire ( saq ) , out of-band configuration assessment ( oca ) ; web application security : web application scanning ( was ) , web application firewall ( waf ) ; asset management : global it asset inventory ( ai ) , cmdb sync ( syn ) , certificate inventory ( cri ) ; and , cloud/container security : cloud inventory ( ci ) , cloud security assessment ( csa ) , container security ( cs ) . we provide our solutions through a software-as-a-service model , primarily with renewable annual subscriptions . these subscriptions require customers to pay a fee in order to access each of our cloud solutions . we generally invoice our customers for the entire subscription amount at the start of the subscription term , and the invoiced amounts are treated as deferred revenues and are recognized ratably over the term of each subscription . we continue to experience revenue growth from our existing customers as they renew and purchase additional subscriptions . we market and sell our solutions to enterprises , government entities and small and medium-sized businesses across a broad range of industries , including education , financial services , government , healthcare , insurance , manufacturing , media , retail , technology and utilities . in 2020 , 2019 and 2018 , approximately 63 % , 64 % and 67 % , respectively , of our revenues were derived from customers in the united states based on our customers billing address . we sell our solutions to enterprises and government entities primarily through our field sales force and to small and medium-sized businesses through our inside sales force . we generate a significant portion of sales through our channel partners , including managed service providers , value-added resellers and consulting firms in the united states and internationally . 40 impacts of covid-19 in march 2020 , the world health organization declared the outbreak of covid-19 as a pandemic . as a result of covid-19 , we have modified certain aspects of our business , including restricting employee travel , requiring employees to work from home , and canceling certain events and meetings , among other modifications . story_separator_special_tag provision for income taxes we are subject to federal , state and foreign income taxes for jurisdictions in which we operate , and we use estimates in determining our provision for these income taxes and deferred tax assets . earnings from our non-u.s. activities are subject to income taxes in the local countries at rates which were generally similar to the u.s. statutory tax rate . income taxes are accounted for under the asset and liability method . deferred tax assets and liabilities are recognized for the tax impact of timing differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards . deferred tax assets and liabilities are measured using statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled . the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the statutory rate change is enacted into law . we assess the likelihood that deferred tax assets will be realized , and we recognize a valuation allowance if it is more likely than not that some portion of the deferred tax assets will not be recognized . this assessment requires judgment as to the likelihood and amounts of future taxable income . 42 story_separator_special_tag year ended december 31 , 2020 2019 ( in thousands ) adjusted ebitda $ 169,534 $ 138,346 adjusted ebitda we monitor adjusted ebitda , a non-gaap financial measure , to analyze our financial results and believe that it is useful to investors , as a supplement to u.s. gaap measures , in evaluating our ongoing operational performance and enhancing an overall understanding of our past financial performance . we believe that adjusted ebitda helps illustrate underlying trends in our business that could otherwise be masked by the effect of the income or expenses that we exclude in adjusted ebitda . furthermore , we use this measure to establish budgets and operational goals for managing our business and evaluating our performance . we also believe that adjusted ebitda provides an additional tool for investors to use in comparing our recurring core business operating results over multiple periods with other companies in our industry . adjusted ebitda should not be considered in isolation from , or as a substitute for , financial information prepared in accordance with u.s. gaap . we calculate adjusted ebitda as net income before ( 1 ) other ( income ) expense , net , which includes interest income , interest expense and other income and expense , ( 2 ) provision for ( benefit from ) income taxes , ( 3 ) depreciation of property and equipment , ( 4 ) amortization of intangible assets , ( 5 ) stock-based compensation and ( 6 ) non-recurring expenses that do not reflect ongoing costs of operating the business . adjusted ebitda has limitations as an analytical tool , and should not be considered in isolation from or as a substitute for the measures presented in accordance with u.s. gaap . some of these limitations are : adjusted ebitda does not reflect certain cash and non-cash charges that are recurring ; adjusted ebitda does not reflect income tax payments that reduce cash available to us ; adjusted ebitda excludes depreciation of property and equipment and amortization of intangible assets , although these are non-cash charges , the assets being depreciated and amortized may have to be replaced in the future ; and other companies , including companies in our industry , may calculate adjusted ebitda differently or not at all , which reduces its usefulness as a comparative measure . because of these limitations , adjusted ebitda should be considered alongside other financial performance measures , including revenues , net income , cash flows from operating activities and our financial results presented in accordance with u.s. gaap . the following unaudited table presents the reconciliation of net income to adjusted ebitda for the years ended december 31 , 2020 and 2019. replace_table_token_10_th 46 liquidity and capital resources at december 31 , 2020 , our principal source of liquidity was cash , cash equivalents and marketable securities of $ 454.5 million , including $ 30.7 million of cash held outside of the united states . we do not anticipate that we will need funds generated from foreign operations to fund our domestic operations . however , if we repatriate these funds , we could be subject to foreign withholding taxes . we generated positive cash flows from operations during the years ended december 31 , 2020 and 2019. we believe our existing cash , cash equivalents , marketable securities and cash from operations will be sufficient to fund our operations for at least the next twel ve months . in 2021 , we expect capital expenditures to be in a range of $ 30.0 million to $ 35.0 million . our future capital requirements will depend on many factors , including our rate of revenue growth , the expansion of our sales and marketing activities , the timing , type and extent of our spending on research and development efforts , international expansion and investment in data centers . we may also seek to invest in or acquire complementary businesses or technologies . while the covid-19 pandemic has not had a material adverse financial impact on our operations to date , the future impact of the pandemic can not be predicted with certainty and may increase our costs of capital and otherwise adversely affect our business , result of operations , financial condition and liquidity .
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results of operations the following table sets forth selected consolidated statements of operations data for each of the periods presented as a percentage of revenues : replace_table_token_3_th comparison of years ended december 31 , 2020 and 2019 revenues year ended december 31 , change 2020 2019 $ % ( in thousands , except percentages ) revenues $ 362,963 $ 321,607 $ 41,356 13 % revenues increased $ 41.4 million in 2020 compared to 2019 due to an increase in the subscriptions from existing customers and new customer subscriptions entered into in 2020. revenues from customers existing at or prior to december 31 , 2019 grew by $ 31.0 million to $ 352.6 million during 2020. subscriptions from new customers added in 2020 contributed $ 10.4 million to the increase in revenues . revenues from customers in the united states increased by $ 23.9 million , or 12 % , from $ 206.6 million in 2019 to $ 230.4 million in 2020 and revenues from customers in foreign countries increased by $ 17.5 million , or 15 % , from $ 115.1 million in 2019 to $ 132.5 million in 2020. we expect revenue growth from existing and new customers to continue . the growth in revenues reflects the continued demand for our solutions .
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you can identify these forward-looking statements by words such as โ may , โ โ will , โ โ would , โ โ should , โ โ could , โ โ expect , โ โ anticipate , โ โ believe , โ โ estimate , โ โ intend , โ โ plan โ and other similar expressions . these forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements . such risks and uncertainties include , among others , those discussed in โ item 1a : risk factors โ of this annual report on form 10-k , as well as in our consolidated financial statements , related notes , and the other information appearing elsewhere in this report and our other filings with the sec . we do not intend , and undertake no obligation , to update any of our forward-looking statements after the date of this report to reflect actual results or future events or circumstances . given these risks and uncertainties , readers are cautioned not to place undue reliance on such 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 included in this report . you should read the following `` management 's discussion and analysis of financial condition and results of operations '' in conjunction with the audited consolidated financial statements and the related notes that appear elsewhere in this report . overview we are a global technology company that enables commerce through three reportable segments : marketplaces , payments and enterprise . our marketplaces segment includes our ebay.com platform and its localized counterparts and our other online platforms , such as our online classifieds sites and stubhub . our payments segment is comprised of our paypal business . our enterprise segment includes our magento business and provides commerce technologies , omnichannel operations and marketing solutions for merchants of all sizes that operate in general merchandise categories . on january 21 , 2015 , we announced that we will be exploring strategic options , including a possible sale or ipo , of ebay enterprise . on september 30 , 2014 , we announced that our board of directors , following a strategic review of our growth strategies and structure , had approved a plan to separate paypal ( consisting primarily of our payments segment ) into an independent publicly traded company . we expect to complete the transaction as a tax-free spin-off in the second half of 2015 , subject to market , regulatory , and certain other conditions . we also announced that dan schulman has been appointed as president of paypal and ceo-designee of the standalone paypal company following separation , and that devin wenig , currently president of ebay marketplaces , will become ceo of ebay following separation . the separation is subject to risks , uncertainties and conditions and there can be no assurance that the separation will be completed on the terms or on the timing currently contemplated , or at all . please see the information in โ item 1a : risk factors โ under the heading โ risk factors related to the planned separation , โ which describes some of the risks and uncertainties associated with the proposed separation . we expect to incur significant costs in connection with our planned separation of our paypal business . these costs relate primarily to third-party advisory and consulting services , retention payments to certain employees , incremental stock-based compensation and other costs directly related to the separation . costs related to employees for retention or stock-based compensation are classified on a basis consistent with their regular compensation charges and included within cost of net revenues , sales and marketing , product development or general and administrative in our consolidated statement of income as applicable . costs other than those paid to employees are included within general and administrative in our consolidated statement of income . during 2014 , we incurred approximately $ 35 million related to separation costs . we expect to continue to incur additional separation costs in 2015 until we complete the separation of our paypal business . we currently estimate that such additional separation costs will exceed $ 250 million , although that estimate is subject to a number of assumptions and uncertainties . in 2014 , net revenues increased 12 % to $ 17.9 billion compared to $ 16.0 billion in 2013 , driven primarily by increases in net revenues from each of our business segments . we achieved an operating margin of 20 % in 2014 compared to 21 % in 2013 . our diluted earnings per share decreased to $ 0.04 in 2014 , a $ 2.14 decrease per share compared to 2013 , driven primarily by the accrual of deferred taxes on $ 9.0 billion of undistributed foreign earnings for 2013 and prior years , partially offset by growth in net revenues and a lower share count . we generated cash flow from operations of approximately $ 5.7 billion in 2014 compared to $ 5.0 billion in 2013 . 48 our marketplaces segment total net revenues increased $ 533 million , or 6 % , in 2014 compared to 2013 . the increase in total net revenues was driven primarily by an increase in gross merchandise volume ( gmv ) ( as defined below ) of 9 % , which was due to continued growth internationally and in the u.s. and a favorable impact from foreign currency movements relative to the u.s. dollar . we believe that during 2014 , gmv was negatively impacted by declines in volume caused by lower organic traffic and our second quarter cyberattack described below . our marketplaces segment operating margin decreased 2.7 percentage points in 2014 compared to 2013 due primarily to continued investments in our marketing programs , site operations and business initiatives . story_separator_special_tag story_separator_special_tag style= '' line-height:120 % ; text-align : left ; padding-left:48px ; text-indent : -6px ; font-size:10pt ; '' > we expect transaction activity patterns on our websites to mirror general consumer buying patterns . our enterprise segment is highly seasonal . the fourth calendar quarter typically accounts for a disproportionate amount of enterprise 's total annual revenues because consumers increase their purchases and businesses increase their advertising to consumers during the fourth quarter holiday season . we expect these trends to continue . marketplaces net transaction revenues marketplaces net transaction revenues increased $ 426 million , or 6 % , in 2014 compared to 2013 , while gmv increased 9 % in 2014 compared to 2013 . the increase in net transaction revenues was due primarily to continued growth in volume , as well as a benefit from foreign currency movements against the u.s. dollar . our net transaction revenue growth was negatively impacted by declines in volume caused by a reduction in traffic from lower organic traffic , such as google 's search engine algorithm changes and our second quarter cyberattack described above . the growth in net transaction revenues was lower than the growth in gmv due primarily a lower marketplaces transaction take rate as we invested in our buyer loyalty programs and seller incentives , which are accounted for as a reduction of revenue , and to a lesser extent , due to pricing changes at our stubhub business . marketplaces net transaction revenues increased $ 735 million , or 13 % , in 2013 compared to 2012 , consistent with the increase in gmv of 13 % in 2013 compared to 2012. the increase in net transaction revenues and gmv was due to continued growth in active users , growth in mobile volume and the continued improvements in the customer experience . in addition , seller discounts and buyer loyalty programs had a negative impact on revenue growth . marketplaces net transaction revenues earned internationally totaled $ 4.0 billion , $ 3.7 billion and $ 3.3 billion in 2014 , 2013 and 2012 , respectively , representing 57 % , 56 % and 56 % of total marketplaces net transaction revenues in the respective periods . payments net transaction revenues payments net transaction revenues increased $ 1.1 billion , or 18 % , during 2014 compared to 2013 , due primarily to an increase in net tpv of 27 % . the growth in payments net transaction revenues was lower than the growth in net tpv due to a lower take rate . the increase in net tpv was due primarily to growth in consumer and merchant use of paypal both on and off ebay and growth in volume through our braintree products . the lower take rate was due primarily to a higher portion of merchant services volume . merchant services volume includes a higher concentration of net tpv from larger merchants who generate higher volume at lower rates . additionally , merchant services volume includes net tpv generated through our unbranded products such as braintree where we generally earn lower take rates . we expect the concentration of merchant services volume to continue to increase . our merchant services net tpv increased 34 % during 2014 compared to 2013 and represented 74 % of paypal 's net tpv in 2014 , compared with 70 % in 2013 . on ebay net tpv increased 10 % during 2014 compared to 2013 , and represented 26 % of paypal 's net tpv in 2014 . 53 payments net transaction revenues increased $ 950 million , or 18 % , during 2013 compared to 2012 , due primarily to an increase in net tpv of 24 % . the growth in payments net transaction revenues was lower than the growth in net tpv due to a lower take rate . the increase in net tpv was due primarily to growth in consumer and merchant adoption and use of paypal both on and off ebay . the lower take rate was due primarily to a shift to larger merchants who pay lower rates . our merchant services net tpv increased 29 % during 2013 compared to 2012 and represented 70 % of paypal 's net tpv in 2013 , compared with 67 % in 2012. on ebay net tpv increased 14 % during 2013 compared to 2012 , and represented 30 % of paypal 's net tpv in 2013. payments net transaction revenues earned internationally totaled $ 4.1 billion , $ 3.4 billion and $ 2.8 billion in 2014 , 2013 and 2012 , representing 56 % , 56 % and 55 % of total payments net transaction revenues , respectively . enterprise net transaction revenues enterprise net transaction revenues increased $ 87 million , or 10 % , in 2014 compared to 2013 , due primarily to an increase in gross merchandise sales of 13 % . the growth in enterprise net transaction revenues was lower than the growth in gross merchandise sales due to a lower transaction take rate . the lower transaction take rate was due to increases in gross merchandise sales for certain merchants that triggered lower contractual take rates . enterprise net transaction revenues increased $ 48 million , or 6 % , in 2013 compared to 2012 , due primarily to an increase in gross merchandise sales of 14 % , partially offset by a lower transaction take rate . marketing services and other revenues marketing services and other revenues increased $ 246 million , or 10 % , in 2014 compared to 2013 , and represented 15 % in 2014 and 16 % in 2013 of total net revenues . the increase in marketing services and other revenues was due primarily to growth in our paypal credit portfolio of receivables from loans , as well as increased revenue from advertising . marketing services and other revenues increased $ 252 million , or 11 % , in 2013 compared to 2012 , and represented 16 % of total net revenues for both periods .
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results of operations summary of net revenues we generate two types of net revenues : net transaction revenues and marketing services and other revenues . our net transaction revenues are derived principally from listing fees and final value fees ( which are fees payable on transactions closed on our marketplaces platforms ) , fees paid by merchants for payment processing services and ecommerce service fees . our marketing services revenues are derived principally from the sale of advertisements , revenue sharing arrangements , classifieds fees , marketing service fees and lead referral fees . other revenues are derived principally from interest and fees earned on the paypal credit portfolio of receivables from loans , interest earned on certain paypal customer account balances and fees from contractual arrangements with third parties that provide services to our users . the following table sets forth the breakdown of net revenues by type and geography for the periods presented . ( 1 ) replace_table_token_6_th ( 1 ) during the first quarter of 2014 , we changed our reportable segments based upon changes in our organizational structure which reflect the integration of our magento platform into our enterprise segment . prior to this change , magento was reported in corporate and other . also during the first quarter of 2014 , we revised our internal management reporting of certain marketplaces transactions to align more closely with our related operating metrics . related to this change , we reclassified our marketplaces vehicles and real estate revenues from net transaction revenues to marketing services and other revenues . prior period amounts have been revised to conform to the current period segment reporting structure . ( 2 ) represents net revenue generated between our reportable segments . revenues are attributed to u.s. and international geographies based primarily upon the country in which the seller , payment recipient , customer , website that displays advertising , or other service provider , as the case may be , is located .
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these complementary segments provide different services and products and utilize different technologies for improving reservoir performance and increasing oil and gas recovery from new and existing fields : reservoir description : encompasses the characterization of petroleum reservoir rock , fluid and gas samples to increase production and improve recovery of oil and gas from our clients ' reservoirs . we provide laboratory-based analytical and field services to characterize properties of crude oil and petroleum products to the oil and gas industry . we also provide proprietary and joint industry studies based on these types of analyses . production enhancement : includes services and products relating to reservoir well completions , perforations , stimulations and production . we provide integrated diagnostic services to evaluate and monitor the effectiveness of well completions and to develop solutions aimed at increasing the effectiveness of enhanced oil recovery projects . general overview we provide services as well as design and produce products which enable our clients to evaluate reservoir performance and increase oil and gas recovery from new and existing fields . these services and products are generally in higher demand when our clients are investing capital in their field development programs that are designed to increase productivity from existing fields or when exploring for new fields . our clients ' investment in capital expenditure programs tends to correlate over the longer term to oil and natural gas commodity prices . during periods of higher , stable prices , our clients generally invest more in capital expenditures and , during periods of lower or volatile commodity prices , they tend to invest less . consequently , the level of capital expenditures by our clients impacts the demand for our services and products . the following table summarizes the annual average and year-end worldwide and u.s. rig counts for the years ended december 31 , 2018 , 2017 and 2016 , as well as the annual average and year-end spot price of a barrel of wti crude , europe brent crude and an mmbtu of natural gas : 2018 2017 2016 baker hughes worldwide average rig count ( 1 ) 2,211 2,029 1,593 baker hughes u.s. average rig count ( 1 ) 1,032 875 510 baker hughes worldwide year-end rig count ( 2 ) 2,244 2,089 1,772 baker hughes u.s. year-end rig count ( 2 ) 1,078 930 634 average crude oil price per barrel wti ( 3 ) $ 65.23 $ 50.80 $ 43.29 average crude oil price per barrel brent ( 4 ) $ 71.34 $ 54.12 $ 43.67 average natural gas price per mmbtu ( 5 ) $ 3.15 $ 2.99 $ 2.52 year-end crude oil price per barrel wti ( 3 ) $ 45.15 $ 60.46 $ 53.75 year-end crude oil price per barrel brent ( 4 ) $ 50.57 $ 66.73 $ 54.96 year-end natural gas price per mmbtu ( 5 ) $ 3.25 $ 3.69 $ 3.71 ( 1 ) twelve month average rig count as reported by baker hughes , a ge company - worldwide rig count . ( 2 ) year-end rig count as reported by baker hughes , a ge company - worldwide rig count . ( 3 ) average daily and year-end west texas intermediate crude spot price as reported by the u.s. energy information administration . ( 4 ) average daily and year-end europe brent crude spot price as reported by the u.s. energy information administration . ( 5 ) average daily and year-end henry hub natural gas spot price as reported by the u.s. energy information administration . the prices for both wti and brent crude oil showed improvement during 2017 and continued to strengthen through most of 2018 ; however , they decreased significantly during the last quarter of 2018 to end the year at levels not seen since mid-2016 . 18 the improvement in crude oil prices over this two-year period led to elevated levels in u.s. onshore activities associated with both the exploration and production of oil ; however , levels of activity outside the u.s. have remained relatively flat . in north america , the land-based rig count increased 45 % during 2017 and another 19 % during 2018 , which had a positive impact for both services and product sales to this market over this time period . although the north america rig count had improved by the end of 2018 it still remained almost 50 % below 2014 levels . the build in levels of activities on development projects and producing fields in the u.s. unconventional reservoirs during 2017 continued to strengthen during most of 2018 , until october 2018 when the commodity price weakened significantly and activity levels decreased . outside of north america , activities associated with the exploration for and production of oil dropped to current lower levels during the industry downturn which began at the end of 2014 and remained relatively flat during 2017 and 2018. our clients ' activities in the international and deepwater markets remained at these lower levels in 2017 and 2018 , and although activities have not yet increased , we believe these markets have shown signs of recovery for 2019 and beyond as our clients have announced new capital investment projects throughout 2017 and 2018. story_separator_special_tag style= '' padding-left:0px ; text-indent:0px ; line-height : normal ; padding-top:10px ; '' > replace_table_token_4_th in 2018 , we received settlement of a claim for business interruption and damages incurred as a result of hurricane harvey in 2017 . 21 foreign exchange gains and losses for the years ended december 31 , 2018 , 2017 and 2016 are summarized in the following table ( in thousands ) : replace_table_token_5_th interest expense interest expense increased by $ 2.6 million to $ 13.3 million in 2018 compared to 2017 primarily due to increased average borrowings on our revolving credit facility which was used to fund an acquisition for $ 49.1 million in september 2018. income tax expense our effective tax rate was 24.2 % , 18.4 % , and 14.3 % for 2018 , 2017 , and 2016 , respectively . story_separator_special_tag ( `` u.s. gaap '' or `` gaap '' ) . we utilize the non-gaap financial measure of free cash flow to evaluate our cash flows and results of operations . free cash flow is defined as net cash provided by operating activities ( which is the most directly comparable gaap measure ) less cash paid for capital expenditures . management believes that free cash flow provides useful information to investors regarding the cash that was available in the period that was in excess of our needs to fund our capital expenditures and operating activities . free cash flow is not a measure of operating performance under gaap , and should not be considered in isolation nor construed as an alternative to operating profit , net income ( loss ) or cash flows from operating , investing or financing activities , each as determined in accordance with gaap . free cash flow does not represent residual cash available for distribution because we may have other non-discretionary expenditures that are not deducted from the measure . moreover , since free cash flow is not a measure determined in accordance with gaap and thus is susceptible to varying interpretations and calculations , free cash flow , as presented , may not be comparable to similarly titled measures presented by other companies . the following table reconciles this non-gaap financial measure to the most directly comparable measure calculated and presented in accordance with u.s. gaap for the years ended december 31 , 2018 , 2017 and 2016 ( in thousands ) : replace_table_token_7_th 24 free cash flow as a percent of income from continuing operations of 113.3 % continued to be strong in 2018. the decrease in free cash flow in 2018 compared to 2017 was primarily due to increases in both working capital and capital expenditures in 2018 as the activity levels in the oil industry improved . the decrease in free cash flow in 2017 compared to 2016 was primarily due to increases in both working capital and capital expenditures in 2017 as the activity levels in the oil industry improved . cash flows the following table summarizes cash flows for the years ended december 31 , 2018 , 2017 and 2016 ( in thousands ) : replace_table_token_8_th the decreases in cash provided by operating activities in 2018 compared to 2017 and 2017 compared to 2016 was primarily due to increases in working capital and changes in net income as the activity levels in the oil industry improved . working capital was impacted by the increase in inventories during 2018 which was due to more raw materials and finished goods being held in our distribution network to support the anticipated growth in product sales . cash used in investing activities in 2018 increased $ 50.1 million compared to 2017 primarily as a result of an acquisition for $ 49.1 million in 2018 as well as increased capital expenditures in 2018 as activity levels in the oil industry improved . cash used in investing activities in 2017 increased $ 5.8 million compared to 2016 primarily as a result of increased capital expenditures . cash used in financing activities in 2018 decreased $ 61.6 million compared to 2017 . cash used in financing activities in 2017 decreased $ 20.8 million compared to 2016 . during 2018 , we used $ 7.5 million to repurchase our common shares , $ 97.3 million to pay dividends , and increased our debt balance by $ 64 million . during 2017 , we used $ 16.9 million to repurchase our common shares , $ 97.1 million to pay dividends , and increased our debt balance by $ 10 million . during 2016 , we used $ 7.2 million to repurchase our common shares , $ 95.1 million to pay dividends , and decreased our debt balance by $ 215 million through the issuance of new shares . during the year ended december 31 , 2018 , we repurchased 85,985 shares of our common stock for an aggregate amount of $ 7.5 million , or an average price of $ 86.66 per share . the repurchase of shares in the open market is at the discretion of management pursuant to shareholder authorization . we regard these treasury shares as a temporary investment which may be used to fund restricted shares that vest or to finance future acquisitions . under dutch law and subject to certain dutch statutory provisions and shareholder approval , we can hold a maximum of 50 % of our issued shares in treasury . we currently have shareholder approval to hold 10 % of our issued share capital in treasury . on may 24 , 2018 at our annual shareholders meeting , our shareholders authorized the extension of our share repurchase program until november 24 , 2019 to purchase up to 10 % of our issued share capital . we believe this share repurchase program has been beneficial to our shareholders . our share price has increased from $ 4.03 per share in 2002 , when we began to repurchase shares , to $ 59.66 per share on december 31 , 2018 , an increase of over 1,380 % . credit facility and available future liquidity in 2011 , we issued two series of senior notes with an aggregate principal amount of $ 150 million ( `` senior notes '' ) in a private placement transaction . series a consists of $ 75 million in aggregate principal amount of notes that bear interest at a fixed rate of 4.01 % and are due in full on september 30 , 2021. series b consists of $ 75 million in aggregate principal amount of notes that bear interest at a fixed rate of 4.11 % and are due in full on september 30 , 2023. interest on each series of the senior notes is payable semi-annually on march 30 and september 30. on june 18 , 2018 , we entered into an agreement to amend our revolving credit facility ( `` credit facility '' ) .
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results of operations operating results for the year ended december 31 , 2018 compared to the years ended december 31 , 2017 and 2016 we evaluate our operating results by analyzing revenue , operating income and operating income margin ( defined as operating income divided by total revenue ) . since we have a relatively fixed cost structure , increases in revenue generally translate into higher operating income results . results for the years ended december 31 , 2018 , 2017 and 2016 are summarized in the following chart : 19 results of operations as a percentage of applicable revenue for the years ended december 31 , 2018 , 2017 and 2016 are as follows ( in thousands , except for per share information ) : replace_table_token_3_th services revenue services revenue , which is tied more to activities associated with the exploration and production of oil and gas outside the u.s. , increased 1.4 % to $ 486.8 million in 2018 from $ 480.3 million in 2017 which increased 2.5 % from $ 468.4 million in 2016 . the increase in revenue was driven by a stronger u.s. market for most of 2018 , which was partially offset by a weaker market outside the u.s. crude oil prices continued to strengthen throughout 2018 until early october when crude oil prices peaked and decreased over 40 % by december 2018. the improvement in crude oil prices continued to support elevated activity levels in the u.s. onshore market for most of 2018 , however activities outside the u.s. have remained flat . although our clients have announced final investment decisions ( `` fids '' ) for several projects outside the u.s. and in offshore environments , significant activity on these projects did not start in 2018 and wells must be drilled and or completed , stimulated , cored and have reservoir fluid samples collected , before we see a revenue opportunity .
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our financial condition and results of operations should be read together with โ selected financial data โ 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 โ risk factors โ 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 2016 , we generated net sales of $ 3,171.4 million , gross profit of $ 1,728.1 million or 54.5 % of sales , and net income of $ 586.4 million . we believe we have achieved steady , long-term growth in sales and improvements in operating performance since our formation in 1993 due to our competitive strengths and through execution of our value-driven operating strategy . more specifically , focusing our businesses on our value-driven operating strategy of obtaining profitable new business , carefully controlling the cost structure and pricing our highly engineered value-added products to fairly reflect the value we provide and the resources required to do so has historically resulted in improvements in gross profit and income from operations over the long term . our selective acquisition strategy has also contributed to the growth of our business . the integration of certain acquisitions into our existing businesses combined with implementing our proven operating strategy has historically resulted in improvements of the financial performance of the acquired business . our key competitive strengths and the elements of our business strategy are set forth in more detail below . we believe our key competitive strengths include : large and growing installed product base with aftermarket revenue stream . we provide components to a large and growing installed base of aircraft to which we supply aftermarket products . we estimate that our products are installed on approximately 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 . significant barriers to entry . we believe that the niche nature of our markets , the industry 's stringent regulatory and certification requirements , the large number of products that we sell and the investments necessary to develop and certify products create barriers to entry for potential competitors . our business strategy is made up of two key elements : ( 1 ) a value-driven operating strategy focused around our three core value drivers and ( 2 ) a selective acquisition strategy . value-driven operating strategy . our three core value drivers are : obtaining profitable new business . we attempt to obtain profitable new business by using our technical expertise 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 58 businesses and or product lines since our formation in 1993. many of these acquisitions have been 24 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 . acquisitions and divestitures during the previous three fiscal years are more fully described in note 2 , โ acquisitions โ in the notes to the consolidated financial statements included herein . critical accounting policies our consolidated financial statements have been prepared in conformity with gaap , which often requires the judgment of management in the selection and application of certain accounting principles and methods . management believes that the quality and reasonableness of our most critical policies enable the fair presentation of our financial position and results of operations . however , investors are cautioned that the sensitivity of financial statements to these methods , assumptions and estimates could create materially different results under different conditions or using different assumptions . below are those policies applied in preparing our financial statements that management believes are the most dependent on the application of estimates and assumptions . for additional accounting policies , see note 3 , โ summary of significant accounting policies โ in the notes to the consolidated financial statements included herein . story_separator_special_tag discount rates are set by using the weighted average cost of capital ( โ wacc โ ) 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 32 reporting units with goodwill as of the first day of the fourth quarter of fiscal 2016 , 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 , 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 , โ stock compensation. โ 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 . 26 story_separator_special_tag primarily to excess tax benefits on equity compensation , foreign earnings taxed at rates lower than the u.s. statutory rates , and the domestic manufacturing deduction . the decrease in the effective tax rate for the fiscal year ended september 30 , 2016 compared to the fiscal year ended september 30 , 2015 was primarily due to the excess tax benefits on equity compensation and foreign earnings taxed at rates lower than the u.s. statutory rate . net income . net income increased $ 139.2 million , or 31.1 % , to $ 586.4 million for the fiscal year ended september 30 , 2016 compared to net income of $ 447.2 million for the year ended september 30 , 2015 , primarily as a result of the factors referred to above . earnings per share . the basic and diluted earnings per share were $ 10.39 for the fiscal year ended september 30 , 2016 and $ 7.84 per share for the fiscal year ended september 30 , 2015 . net income for the fiscal year ended september 30 , 2016 of $ 586.4 million was decreased by dividend equivalent payments of $ 3.0 million resulting in net income available to common shareholders of $ 583.4 million .
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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 , 2016 compared with fiscal year ended september 30 , 2015 total company net sales . net organic sales and acquisition sales and the related dollar and percentage changes for the fiscal years ended september 30 , 2016 and 2015 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 acquisitions of breeze-eastern and data device corporation in fiscal year 2016 and the acquisitions of pneudraulics , pexco aerospace , adams rite aerospace gmbh and telair cargo group in fiscal year 2015. commercial aftermarket organic sales increased by $ 61.3 million , or 6.1 % , commercial oem organic sales decreased by $ 8.8 million , or 1.1 % , and defense organic sales were flat when comparing the fiscal year ended september 30 , 2016 to the fiscal year ended september 30 , 2015 . cost of sales and gross profit . cost of sales increased by $ 186.0 million , or 14.8 % , to $ 1,443.3 million for the fiscal year ended september 30 , 2016 compared to $ 1,257.3 million for the fiscal year ended september 30 , 2015 . cost of sales and the related percentage of total sales for the fiscal years ended september 30 , 2016 and 2015 were as follows ( amounts in millions ) : replace_table_token_12_th the increase in the dollar amount of cost of sales during the fiscal year ended september 30 , 2016 was primarily due to increased volume associated with the sales from acquisitions and organic sales growth .
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forward-looking statements are often identified by the use of words such as , but not limited to , โ anticipate , โ โ believe , โ โ can , โ โ continue , โ โ could , โ โ estimate , โ โ expect , โ โ intend , โ โ may , โ โ plan , โ โ project , โ โ seek , โ โ should , โ โ strategy , โ โ target , โ โ will , โ โ would โ and similar expressions or variations intended to identify forward-looking statements . these statements are based on the beliefs and assumptions of our management based on information currently available to management . such forward-looking statements are subject to risks , uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements . factors that could cause or contribute to such differences include , but are not limited to , those identified below . furthermore , such forward-looking statements speak only as of the date of this report . except as required by law , we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements . โ arcadia biosciences , '' `` sonova , '' `` sonova gla safflower oil and design , '' โ goodhemp โ and `` goodwheat '' are our registered trademarks in the united states and , in some cases , in certain other countries . this report may also contain trademarks , service marks , and trade names of other companies . solely for convenience , the trademarks , service marks and trade names referred to in this report may appear without the ยฎ , tm , or sm symbols , but such references do not constitute a waiver of any rights that might be associated with the respective trademarks , service marks , or trade names . overview we are a leader in science-based approaches to developing high value crop productivity traits primarily in hemp , wheat , and soybean , designed to enhance farm economics by improving the performance of crops in the field , as well as their value as food ingredients , health and wellness products , and their viability for industrial applications . we use state of the art gene-editing technology and advanced breeding techniques to develop these proprietary innovations which we are beginning to monetize through a number of methods including seed and grain sales , product extract sales , trait licensing and royalty agreements . our commercial strategy is to link consumer 's nutrition , health and wellness demands with the superior functional benefits our crops deliver directly from the farm , enabling us to share premium economics throughout the ag-food supply chain and to build a world-class estate of high value traits and varieties . in particular , we believe the recent legalization of hemp in the u.s. and many other areas of the world has created a significant agricultural and financial opportunity . the demonstrated broad demand for industrial , nutritional , health and wellness products from hemp , coupled with its poor genetics represent a vast , new opportunity for arcadia to add substantial value to its existing high value trait and seed estate . we are applying our proprietary , rapid prototyping technology platform , arcatech , to deliver innovations addressing the many challenges farmers face in growing what is essentially an undomesticated crop . as such , our forward discovery research is focused on non-gm hemp innovations . the passage of the u.s. agriculture improvement act of 2018 โ also known as the farm bill โ confirmed the federal legalization of hemp , the term given to non-psychoactive cannabis containing less than 0.3 % tetrahydrocannabinol ( thc ) . it also included provisions for legalizing on a federal level hemp 's cultivation , transport and sale for the first time in more than 75 years . hemp , not previously distinguished by the federal government from cannabis , a schedule 1 drug and banned as an agricultural crop , lacks substantive plant biology research and suffers from suboptimal genetics , highly fragmented germplasm and rampant inconsistencies . we are targeting hemp-based solutions that allow farmers to reliably and consistently achieve compliance with usda regulations , through varieties with improved functionality and application of specific attributes such as select cannabinoid contents for health and wellness , enhanced proteins profiles for plant-based dietary applications and industrial applications such as clothing and hempcrete . arcadia conducts its business in only federal and state markets in which its activities are legal . 44 on october 31 , 2019 , the usda published the i nterim f inal r ul e as authorized by the agriculture improvement act of 2018 for hemp cultivation , which mandates that states test hemp crops and dispose of `` hot '' crops that exceed 0.3 % thc . while hemp farmers will have acc ess to crop protection options , the destruction of hot crops that fail these stringent inspections will not be a covered loss under crop insurance programs . in 2019 alone , more than 20 % of u.s. hemp crops were non-compliant , representing over $ 2 billion in losses for growers . arcadia goodhemp in december 2019 , we announced the launch of a new product line , goodhemp , as the company 's new commercial brand for delivering genetically superior hemp seeds , transplants , flower and extracts . the first variety in goodhemp 's catalog , complia bot+ , is a widely adapted cannabis strain that delivers high cannabinoid ( cbd ) content ( more than 10 % ) with ultra-low thc , the psychoactive compound in cannabis . it is part of the complia hemp seed line arcadia is bringing to market through goodhemp , with six additional proprietary varieties in early adopter farmer trials with sales expected in the 2020 season . story_separator_special_tag the results of these trials demonstrate that the hb4 ยฎ trait can provide yield advantages under stress conditions โ including drought and low-water conditions โ found in several soybean production areas . verdeca introduced a trait stack combining hb4 ยฎ with an herbicide tolerance trait to deliver two layers of value for growers . hb4 ยฎ is the first trait offering tolerance to drought and salinity in soybeans , with 30 international patents . hb4 ยฎ is currently approved in the four main countries producing this strategic crop โ the u.s. , brazil , argentina and paraguay - representing 80 % of the global soybean market . regulatory submissions are under consideration by china , canada , bolivia and uruguay . import approval by china is required for commercial launch and the expectation to obtain such approval in late 2020 is under review in light of the recent coronavirus . soybeans are the world 's fourth largest crop , grown on more than 120 million hectares annually . global population growth , combined with a growing middle class in countries like china and india , have resulted in increased demand for this important protein source . more than 50 million of the world 's soybean hectares are grown in argentina and brazil , a region that has experienced significant drought conditions in recent years . since our inception , we have devoted substantially all our efforts to research and development activities , including the discovery , development , and testing of our traits and products in development incorporating our traits . to date , we have not generated revenues from sales of commercial products , other than limited revenues from our goodwheat and sonova products . we do receive revenues from fees associated with the licensing of our traits to commercial partners . our long-term business plan and growth strategy is based in part on our expectation that revenues from products that incorporate our traits will comprise a significant portion of our future revenues . 46 we have nev er been profitable and had an accumulated deficit of $ 207.2 million as of december 31 , 201 9 . we incurred net losses of $ 28.9 million and $ 13.5 million for the years ended december 31 , 2019 and 2018 , respectively . we expect to incur substantial costs and expenses before we obtain any revenues from the sale of seeds incorporating our traits . as a result , our losses in future periods could become even more significant , and we will need additional funding to support our operating activities . impact of novel coronavirus we are closely monitoring how the spread of the novel coronavirus is affecting our employees and business operations . we have developed preparedness plans to help protect the safety of our employees while safely continuing business operations . due to the spread of the outbreak in california and elsewhere where we have corporate offices , we have temporarily restricted access to our offices until at least april 1 , 2020 and implemented a mandatory remote work policy during this period . at this time , there is significant uncertainty relating to the trajectory of the novel coronavirus outbreak and impact of related responses . the continued spread of the outbreak may further impact our business , results of operations , and financial condition . see `` risk factorsโ risks related to our business and our other industriesโthe novel coronavirus outbreak could adversely impact our business , financial condition and results of operations . '' components of our statements of operations data revenues we derive our revenues from product revenues , licensing agreements , royalties , contract research agreements , and government grants . given our acute focus on selling our goodwheat and goodhemp products , we do not intend to continue pursuing contract research agreements and government grant projects . product revenues our product revenues to date have consisted primarily of sales of our sonova products , with initial goodwheat seed sale revenues recognized in the fourth quarter of 2019. we recognize revenue from product sales when control of the product is transferred to third-party distributors and manufacturers , collectively โ our customers , โ which generally occurs upon shipment . our revenues fluctuate depending on the timing of shipments of product to our customers . license revenues our license revenues to date consist of up-front , nonrefundable license fees , annual license fees , and subsequent milestone payments that we receive under our research and license agreements . milestone fees are variable consideration that is initially constrained and recognized only when it is probable that such amounts would not be reversed . given the seasonality of agriculture and time required to progress from one milestone to the next , achievement of milestones is inherently uneven , and our license revenues are likely to fluctuate significantly from period to period . contract research and government grant revenues contract research and government grant revenues consist of amounts earned from performing contracted research primarily related to breeding programs or the genetic engineering of plants for third parties . contract research revenue is accounted for as a single performance obligation for which revenues are recognized over time using the input method ( e.g . costs incurred to date relative to the total estimated costs at completion ) . we have received payments from government entities in the form of government grants . government grant revenue is accounted for as a single performance obligation for which revenues are recognized over time using the input method ( e.g . costs incurred to date relative to the total estimated costs at completion ) . our obligation with respect to these agreements is to perform the research on a best-efforts basis .
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results of operations comparison of the years ended december 31 , 2019 and 2018 replace_table_token_1_th 49 revenues product revenues accounted for 70 % and 45 % of our total revenues for the years ended december 31 , 2019 and 2018 , respectively . the $ 157,000 , or 24 % , increase in product revenues from sales of our sonova products was primarily driven by additional volume of encapsulated orders . license revenues accounted for 6 % and 10 % of our total revenues for the years ended december 31 , 2019 and 2018 , respectively . there were no license agreements executed in 2018 and 2019. contract research and government grant revenues accounted for 25 % and 45 % of our total revenues for the years ended december 31 , 2019 and 2018 , respectively . the $ 369,000 , or 56 % , decrease in contract research and government grant revenues was primarily driven by the completion of agreements and grants . given our acute focus on selling our goodwheat and goodhemp products , we do not intend to continue pursuing contract research agreements and government grant projects . cost of product revenues cost of product revenues increased by $ 224,000 , or 34 % , for the year ended december 31 , 2019 compared to the year ended december 31 , 2018. the increase is primarily due to increased product revenues and the write-down of wheat inventory . research and development research and development expenses increased by $ 1.0 million , or 17 % , for the year ended december 31 , 2019 compared to the year ended december 31 , 2018. the increase was primarily driven by additional soybean pre-commercial activities and higher employee-related expenses as we expand our research teams , as well as external hemp-related costs . the increase was partially offset by the reduction in goodwheat field research costs as our commercial efforts progress , as well as reduced subcontracting expenses related to government grants .
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incentive compensation white mountains story_separator_special_tag the following discussion contains โ forward-looking statements โ . white mountains intends statements that are not historical in nature , which are hereby identified as forward-looking statements , to be covered by the safe harbor provisions of the private securities litigation reform act of 1995. white mountains can not promise that its expectations in such forward-looking statements will turn out to be correct . white mountains 's actual results could be materially different from and worse than its expectations . see โ forward-looking statements โ on page 72 for specific important factors that could cause actual results to differ materially from those contained in forward-looking statements . the following discussion also includes eight non-gaap financial measures ( i ) adjusted book value per share , ( ii ) gross written premiums and msc from new business , ( iii ) adjusted capital , ( iv ) nsm 's earnings before interest , taxes , depreciation and amortization ( โ ebitda โ ) , ( v ) nsm 's adjusted ebitda , ( vi ) kudu 's ebitda , ( vii ) kudu 's adjusted ebitda and ( viii ) total consolidated portfolio returns excluding mediaalpha , that have been reconciled from their most comparable gaap financial measures on page 63. white mountains believes these measures to be useful in evaluating white mountains 's financial performance and condition . results of operations for the years ended december 31 , 2020 , 2019 and 2018 overviewโyear ended december 31 , 2020 versus year ended december 31 , 2019 white mountains ended 2020 with book value per share of $ 1,259 and adjusted book value per share of $ 1,264 , an increase of 23.1 % and 24.2 % for the year , including dividends . comprehensive income attributable to common shareholders was $ 716 million in 2020 compared to $ 413 million in 2019. the results in 2020 included $ 746 million of net investment income and net realized and unrealized investment gains from white mountains 's investment in mediaalpha . the results in 2020 also included $ 131 million from the release of a deferred tax liability as a result of an internal reorganization in connection with the mediaalpha ipo . the results in 2019 included $ 256 million of net investment income , realized gains and net unrealized investment gains from white mountains 's investment in mediaalpha , $ 182 million of which was from the 2019 mediaalpha transaction . on october 30 , 2020 , mediaalpha completed the mediaalpha ipo . in the offering , white mountains sold 3,609,894 shares and received total proceeds of $ 64 million . following the completion of the mediaalpha ipo , white mountains owns 20,532,202 mediaalpha shares , representing a 35.0 % ownership interest ( 32.3 % on a fully-diluted , fully converted basis ) . at the december 31 , 2020 mediaalpha closing price of $ 39.07 per share , the value of white mountains 's remaining investment in mediaalpha was $ 802 million . based on white mountains 's ownership of 20,532,202 shares of mediaalpha as of december 31 , 2020 , each $ 1.00 per share increase or decrease in the stock price of mediaalpha subsequent to the mediaalpha ipo will result in an approximate $ 7 per share increase or decrease in white mountains 's book value per share and adjusted book value per share . on october 1 , 2020 , white mountains entered into the ark spa and the ark acquisition agreement . under the terms of the ark acquisition agreement , white mountains agreed to contribute $ 605 million of equity capital to ark , at a pre-money valuation of $ 300 million , and to purchase $ 41 million of shares from the ark sellers . white mountains also agreed to contribute up to an additional $ 200 million of equity capital to ark in 2021. in accordance with the ark spa , in the fourth quarter of 2020 white mountains pre-funded/placed in escrow a total of $ 646 million in preparation for closing the transaction , which is reflected on the balance sheet within the other operations segment as of december 31 , 2020. on january 1 , 2021 , white mountains closed the transaction in accordance with the terms of the ark spa . at closing , white mountains owned 72 % of ark on a basic shares outstanding basis ( 63 % on a fully-diluted , fully-converted basis , taking account of management 's equity incentives ) . if the additional $ 200 million is contributed in full , white mountains will own 77 % of ark on a basic shares outstanding basis ( 68 % on a fully-diluted , fully-converted basis ) . management 's equity incentives are subject to an 8 % rate of return threshold with no catch-up . the remaining shares are owned by employees . in the future , management rollover shareholders could earn additional shares in the company if and to the extent that white mountains achieves certain multiple of invested capital return thresholds . these additional shares are generally eligible to vest in three equal tranches at multiple on invested capital ( โ moic โ ) thresholds of 2.0x , 2.5x and 3.0x . if fully earned , these additional shares would represent 13 % of the shares outstanding at closing . in the january 2021 renewal season , ark wrote gross written premiums in excess of $ 270 million . during 2020 , white mountains deployed approximately $ 1.0 billion in new business opportunities , including commitments related to the ark transaction , which closed on january 1 , 2021. also during 2020 , white mountains repurchased and retired 99,087 of its common shares for $ 85 million . as a result , white mountains 's capital base is , for the time being , more or less fully deployed . story_separator_special_tag also during 2019 , white mountains repurchased and retired $ 5 million of its common shares and ended the year with approximately $ 1.0 billion of undeployed capital . gross written premiums and msc collected in the hg global/bam segment totaled $ 107 million in both 2019 and 2018. bam insured municipal bonds with par value of $ 12.8 billion in 2019 , compared to $ 12.0 billion in 2018. total pricing was 83 basis points in 2019 , compared to 93 basis points in 2018. during 2019 , bam completed assumed reinsurance transactions to insure municipal bonds with a par value of $ 1.1 billion and , during 2018 , bam completed assumed reinsurance transactions to insure municipal bonds with a par value of $ 2.2 billion . 32 in december 2019 , bam made a $ 32 million cash payment ( which included a one-time $ 10 million cash payment ) of principal and interest on the bam surplus notes held by hg global . bam 's total claims paying resources were $ 938 million as of december 31 , 2019 , compared to $ 871 million as of december 31 , 2018. in january 2020 , white mountains updated its debt service model for the bam surplus notes to reflect ( i ) the cash payments of principal and interest on the bam surplus notes made in december 2019 and january 2020 , ( ii ) the amendments made to the terms of the bam surplus notes in january 2020 , including an extension of the variable interest rate period , and ( iii ) in light of the current interest rate environment , a more conservative forecast of future operating results for bam . the changes in the debt service model resulted in slower modeled future payments on the bam surplus notes and , in turn , a $ 20 million increase to the time value of money discount on the bam surplus notes as reflected in adjusted book value per share as of december 31 , 2019. nsm reported pre-tax loss of $ 2 million , adjusted ebitda of $ 48 million , and commission and other revenues of $ 233 million in the year ended december 31 , 2019. for the period from may 11 , 2018 , the date white mountains acquired nsm , to december 31 , 2018 , nsm reported pre-tax loss of $ 5 million , adjusted ebitda of $ 18 million , and commission and other revenues of $ 102 million . results for the year ended december 31 , 2019 include the results , from the date of acquisition , of embrace , a nationwide provider of pet health insurance for dogs and cats , which nsm acquired on april 1 , 2019 , and kbk , a specialized mgu focused on the towing and transportation space , which nsm acquired on december 3 , 2018. on april 4 , 2019 , white mountains completed the kudu transaction . for the period from april 4 , 2019 , the date of the kudu transaction , through december 31 , 2019 , kudu reported total revenues of $ 21 million and pretax income of $ 11 million . for the twelve months ended december 31 , 2019 , kudu deployed $ 203 million , including transaction costs , in seven asset management firms . white mountains 's pre-tax total return on invested assets was 20.4 % in 2019. this return included $ 188 million of net investment income and net unrealized investment gains from mediaalpha . excluding mediaalpha , the total return on invested assets was 13.0 % in 2019 , compared to -1.7 % in 2018. white mountains 's portfolio of common equity securities and other long-term investments returned 20.8 % in 2019 , compared to -3.6 % in 2018. white mountains 's portfolio of its investment in mediaalpha , common equity securities and other long-term investments returned 36.9 % for 2019. white mountains 's fixed income portfolio returned 6.1 % for 2019 , compared to 1.2 % for 2018. adjusted book value per share the following table presents white mountains 's adjusted book value per share , a non-gaap financial measure , as of december 31 , 2020 , 2019 and 2018 and reconciles this non-gaap measure to book value per share , the most comparable gaap measure . see โ non-gaap financial measures โ on page 63. replace_table_token_9_th ( 1 ) amounts reflects white mountains 's preferred share ownership in hg global of 96.9 % . 33 the following tables presents goodwill and other intangible assets that are included in white mountains 's adjusted book value as of december 31 , 2020 , 2019 and 2018 : replace_table_token_10_th ( 1 ) the relative fair values of goodwill and other intangible assets recognized in connection with the acquisition of kbk had not yet been finalized as of december 31 , 2018 . ( 2 ) see note 4 โ โ goodwill and other intangible assets โ on page f-31 for details of other intangible assets . 34 story_separator_special_tag 2021 have been made by insureds . bam currently has no insured bonds on its insured credit watchlist . hg global/bam resultsโyear ended december 31 , 2019 versus year ended december 31 , 2018 gross written premiums and msc collected in the hg global/bam segment totaled $ 107 million in both 2019 and 2018. bam insured $ 12.8 billion of municipal bonds , $ 10.4 billion of which were in the primary market , in 2019 , compared to $ 12 billion of municipal bonds , $ 8.8 billion of which were in the primary market , in 2018. during 2019 and 2018 , bam completed assumed reinsurance transactions to insure municipal bonds with a par value of $ 1.1 billion and $ 2.2 billion , respectively .
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summary of consolidated results the following table presents white mountains 's consolidated financial results by industry for the years ended december 31 , 2020 , 2019 and 2018 : replace_table_token_11_th 35 i. summary of operations by segment as of december 31 , 2020 , white mountains conducted its operations through four segments : ( 1 ) hg global/bam , ( 2 ) nsm , ( 3 ) kudu and ( 4 ) other operations . in addition , mediaalpha was consolidated as a reportable segment until the date of the 2019 mediaalpha transaction . a discussion of white mountains 's consolidated investment operations is included after the discussion of operations by segment . white mountains 's segment information is presented in note 14 โ โ segment information โ on page f-52 . as a result of the kudu transaction , white mountains began consolidating kudu in its financial statements in the second quarter of 2019. white mountains 's segment disclosures for the year ended december 31 , 2019 include kudu 's results of operations for the period from april 4 , 2019 , the date of the kudu transaction , to december 31 , 2019. see note 2 โ โ significant transactions โ on page f-16 . as a result of the 2019 mediaalpha transaction , white mountains no longer consolidated mediaalpha , and consequently it was no longer a reportable segment . white mountains 's segment disclosures for the year ended december 31 , 2019 include mediaalpha 's results of operations for the period from january 1 , 2019 to february 26 , 2019 , the date of the 2019 mediaalpha transaction . see note 2 โ โ significant transactions โ on page f-16 .
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the implementation resulted with no cumulative-effect adjustment to retained earnings as of january 1 , 2017. f-12 rewalk robotics ltd. and subsidiaries notes to consolidated financial statements additionally story_separator_special_tag the following discussion and analysis should be read in conjunction with โ part i. item 6. selected financial data โ and our consolidated financial statements and the related notes included elsewhere in this annual report . this discussion contains forward-looking statements that are based on our management 's current expectations , estimates and projections for our business , which are subject to a number of risks and uncertainties . our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors , including those set forth under โ special note regarding forward-looking statements and โ part i. item 1a . risk factors. โ overview we are an innovative medical device company that is designing , developing and commercializing exoskeletons that allow individuals with mobility impairments or other medical conditions the ability to stand and walk once again . we have developed and are continuing to commercialize rewalk , an exoskeleton that uses our patented tilt-sensor technology and an onboard computer and motion sensors to drive motorized legs that power movement . additionally , we are developing and intend to commercialize a lightweight soft suit exoskeleton , designed to support mobility for individuals suffering from other lower limb disabilities such as stroke , multiple sclerosis , cerebral palsy , parkinson 's disease and elderly assistance . we have in the past generated and in the future expect to generate revenues from a combination of third-party payors , self-payors , including private and government employers , and institutions . while a broad uniform policy of coverage and reimbursement by third-party commercial payors currently does not exist for electronic exoskeleton technologies such as rewalk , we are pursuing various paths of reimbursement and support fundraising efforts by institutions and clinics . in december 2015 , the veterans ' administration ( the โ va โ ) issued a national policy for the evaluation , training and procurement of rewalk personal exoskeleton systems for all qualifying veterans across the united states . the va policy is the first national coverage policy in the united states for qualifying individuals who have suffered spinal cord injury . additionally , to date several private insurers in the united states and europe have provided reimbursement for rewalk in certain cases , and in september 2017 , each of german insurer barmer gek ( `` barmer '' ) and national social accident insurance provider deutsche gesetzliche unfallversicherung ( โ dguv โ ) , signed a confirmation and letter of agreement , respectively , regarding the provision of rewalk systems for all qualifying beneficiaries . in february 2018 , the head office of german statutory health insurance , or shi , spitzenverband ( โ gkv โ ) confirmed their decision to list the rewalk personal 6.0 exoskeleton system in the german medical device directory . this decision means that rewalk will be listed among all medical devices for compensation , which shi providers can procure for any approved beneficiary on a case-by-case basis . we have incurred net losses and negative cash flow from operations since inception and anticipate this to continue in the near term . in early 2017 we initiated a process to reduce expenses by up to 30 % as compared to 2016. during 2017 our gross profit as a percentage of revenue increased to 40 % as compared to 13 % in 2016 and operating expenses decreased by 20 % versus 2016. in 2018 we will continue to evaluate spending to reduce where possible while continuing to focus resources on achieving commercial reimbursement coverage decisions , commercialization activities , clinical studies including the fda 522 postmarket study and the restore clinical studies to support regulatory clearance and activities to commercialize the restore device for stroke patients in the first half of 2019. components of our statements of operations revenues we currently rely , and in the future will rely , on sales and rentals of our rewalk systems and related service contracts and extended warranties for our revenue . our revenue is generated from a combination of third-party payors , institutions and self-payors , including private and government employers . payments for our products by third party payors have been made primarily through case-by-case determinations . third-party payors include , without limitation , private insurance plans and managed care programs , government programs including the us department of veterans affairs , worker 's compensation and medicare and medicaid . we expect that third-party payors will be an increasingly important source of revenue in the future . in december 2015 , the va issued a national policy for the evaluation , training and procurement of rewalk personal exoskeleton systems for all qualifying veterans across the united states . the va policy is the first national coverage policy in the united states for qualifying individuals who have suffered spinal cord injury . all of our rewalk systems sold until the end of the current year are covered by a two-year warranty from the date of purchase , which is included in the purchase price . we offer customers the ability to purchase , any time during the initial warranty period , an extended warranty for up to three additional years . both warranties cover all elements of the rewalk system , including the batteries , other than normal wear and tear . in the beginning of 2018 we updated our service policy for new devices sold to include a five-year warranty . 64 revenues are presented net of the amounts of any provision we record for expected future product returns . cost of revenues and gross profit ( loss ) cost of revenue consists primarily of systems purchased from our outsourced manufacturer , sanmina , salaries , personnel costs including non-cash share based compensation , associated with manufacturing and inventory management , training and inspection , warranty and service costs , shipping and handling and manufacturing startup and transition costs . story_separator_special_tag after we utilize our net operating loss carry forwards , we are eligible for certain tax benefits in israel under the law for the encouragement of capital investments , 1959. our benefit period currently ends ten years after the year in which we first have taxable income in israel provided that the benefit period will not extend beyond 2024. our taxable income generated outside of israel will be subject to the regular corporate tax rate in the applicable jurisdictions . as a result , our effective tax rate will be a function of the relative proportion of our taxable income that is generated in those locations compared to our overall net income . grants and other funding bird foundation and ao & p in july 2009 , we entered into a grant agreement with the bird foundation and allied orthotics & prosthetics inc. , or the ao & p . ao & p was the distributor of our products at the time . we received $ 500 thousand and ao & p received $ 60 thousand . the agreement with the bird foundation required us to pay a royalty at a rate of 5 % on sales of rewalk systems and related services . the repayment requirement is equal to the amount of the grant multiplied by an increasing contractual percentage in an amount up to 150 % . under the agreement ao & p is responsible for repayment of its grant . however , pursuant to the agreement , we are required to make any payments on which ao & p defaults . as of december 31 , 2015 and through december 31 , 2017 , there was no contingent liability to the bird foundation . in 2014 , we recorded an expense of $ 466 thousand as a settlement for the prepayment , at a discount , of amounts due under the agreement . israel innovation authority ( formerly known as office of the chief scientist ) from our inception through december 31 , 2017 we have received a total of $ 1.77 million in funding from the iia , $ 1.37 million of which are royalty-bearing grants , while $ 400 thousand were received in consideration for an investment in our preferred shares . out of the royalty-bearing grants received , we have paid royalties to the iia in the total amount of $ 50 thousand . we may apply to receive additional grants to support our research and development activities in 2017. the agreements with iia require us to pay royalties at a rate of 3 % - 3.5 % on sales of rewalk systems and related services up to the total amount of funding received , linked to the dollar and bearing interest at an annual rate of libor applicable to dollar deposits . if we transfer iia-supported technology or know-how outside of israel , we will be liable for additional payments to iia depending upon the value of the transferred technology or know-how , the amount of iia support , the time of completion of the iia-supported research project and other factors . as of december 31 , 2017 , the aggregate contingent liability to the iia was $ 1.4 million . for more information , see โ part i , item 1a . risk factors-we have received israeli government grants for certain of our research and development activities and we may receive additional grants in the future . the terms of those grants restrict our ability to manufacture products or transfer technologies outside of israel ... โ 66 story_separator_special_tag year ended december 31 , 2016 compared to year ended december 31 , 2015 revenues our revenues for 2016 and 2015 were as follows ( dollars in thousands , except unit amounts ) : replace_table_token_11_th revenues increased $ 2.1 million , or 57 % , during 2016 compared to 2015 explained by our increased sales of rewalk personal devices of $ 2.4 million , or 88 % , derived primarily from 22 rewalk personal devices placed with the va for use in the va 's clinical studies . this increase also reflects 51 positive reimbursement coverage decisions in 2016 compared to 23 in 2015. revenues from rewalk rehabilitation units decreased by $ 308 thousand , or 31 % during 2016 compared to 2015 , primarily driven by the personal market and third-party payors . 69 gross profit our gross profit for 2016 and 2015 were as follows ( in thousands ) : replace_table_token_12_th gross profit was 13 % of revenue for the year 2016 , compared to gross profit of 6 % of revenue for the year 2015 . the increase in gross profit was driven by the increase in units sales , as described in `` revenues '' above , partially offset by increased service costs and personnel and personnel-related costs . research and development expenses , net our research and development expenses , net for 2016 and 2015 were as follows ( in thousands ) : replace_table_token_13_th research and development expenses , net , increased $ 3.1 million , or 52 % , during 2016 compared to 2015 . the increase in expenses was primarily attributable to costs associated with the harvard license agreement and collaboration agreement with harvard to develop the โ soft suit โ exoskeleton , increased personnel and personnel-related expenses and increased expenses for our 522 post-market surveillance study . sales and marketing expenses our sales and marketing expenses for 2016 and 2015 were as follows ( in thousands ) : replace_table_token_14_th sales and marketing expenses increased $ 0.9 million , or 7 % , during 2016 compared to 2015 . this increase is attributable to an increase in personnel and personnel-related costs , as well as reimbursement related costs for expanding the commercialization of the rewalk personal device . general and administrative expenses our general and administrative expenses for 2016 and 2015 were as follows ( in thousands ) : replace_table_token_15_th general and administrative expenses increased $ 1.8 million , or 28 % , during 2016 compared to 2015 .
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results of operations year ended december 31 , 2017 compared to year ended december 31 , 2016 revenues our revenues for 2017 and 2016 were as follows ( dollars in thousands , except unit amounts ) replace_table_token_4_th revenues increased by $ 1.9 million , or 32 % , during 2017 compared to 2016 driven by our increased sales of rewalk personal devices of $ 2.3 million , or 44 % , offset by decrease in revenues from rewalk rehabilitation units of $ 382 thousand , or 57 % during 2017 compared to 2016 , the increase in revenue was primarily due to sales mix , including higher sales to the va for use in an ongoing clinical study , reaching , as of december 31 , 2017 , 60 units placed as part of the study since its inception in the fourth quarter of 2015 , and an increase in conversion of rental units into purchases . in the future we expect our growth to be driven by sales of our rewalk personal device to third-party payors as we continue to focus our resources on broader commercial coverage policies with third-party payors as well as sales of the restore device to rehabilitation institutes . gross profit our gross profit for 2017 and 2016 were as follows ( in thousands ) : replace_table_token_5_th gross profit was 40 % of revenue for 2017 , compared to gross profit of 13 % of revenue for 2016 . the increase in gross profit was driven by sales mix , the increase in the conversion of rental units into purchases , our cost reduction efforts and lower product costs . we expect our gross profit to gradually improve as we increase our sales volumes and decrease the product manufacturing costs , which may be partially offset by potential price increases .
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56 china hgs real estate , inc. notes to consolidated financial statements note 12. taxes ( a ) business sales tax story_separator_special_tag the following discussion and analysis of financial condition and results of operations relates to the operations and financial condition reported in the financial statements of china hgs real estate inc. for the fiscal years ended september 30 , 2011 and 2010 and should be read in conjunction with such financial statements and related notes included in this report . as used in this report , the terms โ company , โ โ we , โ โ our , โ โ us โ and โ hgs โ refer to china hgs real estate , inc. and its subsidiaries . preliminary note regarding forward-looking statements . we make forward-looking statements in management 's discussion and analysis of financial condition and results of operations and elsewhere in this report based on the beliefs and assumptions of our management and on information currently available to us . forward-looking statements include information about our possible or assumed future results of operations which follow under the headings โ business and overview , โ โ liquidity and capital resources , โ and other statements throughout this report preceded by , followed by or that include the words โ believes , โ โ expects , โ โ anticipates , โ โ intends , โ โ plans , โ โ estimates โ or similar expressions . forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in these forward-looking statements , including the risks and uncertainties described below and other factors we describe from time to time in our periodic filings with the u.s. securities and exchange commission ( the โ sec โ ) . we therefore caution you not to rely unduly on any forward-looking statements . the forward-looking statements in this report speak only as of the date of this report , and we undertake no obligation to update or revise any forward-looking statement , whether as a result of new information , future developments or otherwise . these forward-looking statements include , among other things , statements relating to : ยท our ability to expand in 2012 ; ยท our ability to obtain additional land use rights at favorable prices ; ยท the market for real estate in tier 3 and 4 cities and counties ; ยท our ability to obtain additional capital in future years to fund our planned expansion ; or 26 ยท economic , political , regulatory , legal and foreign exchange risks associated with our operations . our business overview we conduct substantially all of our business through shaanxi guangsha investment and development group co. , ltd , in hanzhong , shaanxi province . all of our businesses are conducted in mainland china . we were founded by mr. xiaojun zhu , our chairman and chief executive officer and commenced operations in 1995 in hanzhong , a prefecture-level city of shaanxi province . since the initiation of our business , we have been focused on expanding our business in certain tier 3 and tier 4 cities and counties in china which we strategically selected based on a set of criteria . our selection criteria includes population and urbanization growth rate , general economic condition and growth rate , income and purchasing power of resident consumers , anticipated demand for private residential properties , availability of future land supply and land prices and governmental urban planning and development policies . as of september 30 , 2011 , we have established operations in the city of hanzhong , and yang county in shaanxi province . we are a fast-growing residential real estate developer that focuses on tier 3 and tier 4 cities and counties in china . we utilize a standardized and scalable model that emphasizes rapid asset turnover , efficient capital management and strict cost control . we plan to expand into strategically selected tier 3 and tier 4 cities and counties with real estate development potential in shaanxi province , and expect to benefit from rising residential housing demand as a result of increasing income levels of consumers and growing populations . we intend to continue our expansion into additional selected tier 3 and tier 4 cities and counties as suitable opportunities arise . overview the real estate market plodded forward amid increasingly restrictive policies in the first half of 2011. in january 2011 , shanghai and chongqing officially started to levy property tax . in february 2011 , beijing issued a purchase restriction order , and more than 40 cities nationwide soon followed suit . in march 2011 , the national development and reform commission announced that from may 2011 , each residential house must be marked clearly with a specific price as the ceiling price . apart from administrative measures , to further tighten liquidity , the people 's bank of china increased banks ' required reserve ratios six consecutive times and raised the benchmark interest rate three times since the beginning of the year , leaving a profound impact on the residential housing transaction volume . in 2011 , residential housing transaction volume in major cities nationwide recorded a decrease compared with that of the same period of 2010. the first-tier cities with stricter policies witnessed a more extensive decrease in transaction volume . under such changing policies and market environment , the company actively followed the macroeconomic control trends , strengthened the intensive corporate management and optimized the operating model of premium standardized housing . a number of key indicators continued to record substantial growth . during fiscal 2011 , the company achieved a total sales revenue amount of $ 56.9 million , an increase of 20 % over fiscal 2010 's total sales revenue of $ 47.3 million . our average selling price in fiscal 2011 was approximately $ 436 per square meter , increased by 22 % over fiscal 2010. our sales in fiscal 2011 were mainly generated from four projects , namely yanzhou pear garden , nandajie , mingzhu garden and central plaza . story_separator_special_tag our construction contracts provide a fixed payment which covers substantially all labor , other materials and equipment costs , subject to adjustments for some types of excess , such as design changes during construction or changes in government-suggested steel prices . our construction costs consist primarily of payments to our third-party contractors , which are paid over the construction period based on specified milestones . in addition , we purchase and supply a limited range of fittings and equipment , including elevators , window frames and door frames . our construction costs for the year ended september 30 , 2011 were $ 27,464,745 , as compared to $ 18,603,402 for the twelve months ended september 30 , 2010 , representing an increase of $ 8,866,864 or 47.68 % compared to those of the year ended september 30 , 2010. the increase in the construction costs was mainly attributable to the following factors : ( a ) certain newly completed projects for the year ended september 30 , 2011 required deeper foundations ; ( b ) we upgraded the type of steel used in certain newly completed projects in 2011 ; and ( c ) we bought and used premixed concrete in certain newly completed projects to improve the construction efficiency . total cost of real estate sales increased by 34 % or $ 7,903,464 to $ 31,477,449 for the year ended september 30 , 2011 , compared to $ 23,579,497 for the year ended september 30 , 2010. total cost of real estate sales as a percentage of revenue for the year ended september 30 , 2011 was 55 % , compared to 50 % for the year ended september 30 , 2010. the increase in cost of real estate sales as a percentage of revenue was mainly due to a significant increase in the cost of construction . gross profits gross profit was approximately $ 21.8 million for the twelve months ended september 30 , 2011 compared to $ 20.9 million for the twelve months ended september 30 , 2010 , an increase of approximately $ 0.9 million primarily as a result of increased sales . our overall gross profit as a percentage of revenue decreased to 38 % for the for the twelve months ended september 30 , 2011 as compared to 44 % for the twelve months ended september 30 , 2010 , mainly due to a significant rise in the cost of construction in hanzhong city , which mainly affected the construction costs for the mingzhu nanyuan , mingzhu beiyuan and nandajie projects located in downtown hanzhong city . in addition , the gross profits of the mingzhu nanyuan and beiyuan projects decreased 10 % in 2011 compared to 2010 mainly because the sales in 2010 were mostly commercial units and parking lots which both have higher margins ; the gross profit of the central plaza project increased 21 % in 2011 compared to 2010 mainly because the sales in 2011 were mostly commercial units which have higher margins compared to most of sales in 2010 which were related to parking lots with lower margins . the following table sets forth the gross margin of each of our projects for the indicated period : 30 replace_table_token_4_th operating expenses total operating expenses decreased to approximately $ 2.0 million for the twelve months ended september 30 , 2011 from $ 2.73 million for the twelve months ended september 30 , 2010. the operating expenses as a percentage of revenues remain relatively stable at around 4-6 % . the $ 0.73 million decrease in total operating expenses was mainly due to the government 's waiver of the company 's certain municipal fund accruals and a recovery from settlement of payables related to the company 's reverse acquisition in 2009. these changes are summarized below : replace_table_token_5_th selling and distribution expenses selling and distribution expenses increased by $ 57,946 , or 9.67 % , to $ 657,089 for the year ended september 30 , 2011 from $ 599,143 for the year ended september 30 , 2010. the selling and distribution expenses as a percentage of revenues remain relatively stable at around 1 % in both years . selling and distribution expenses include : ( 1 ) advertising and promotion expenses , such as billboard and other physical advertising costs , and costs associated with our showrooms and model apartments ; ( 2 ) staff costs , which primarily consist of salaries and sales commissions ; ( 3 ) other related expenses . 31 as of september 30 , 2011 we employed 60 full time sales and marketing personnel including 50 in hanzhong city and 10 in yang county . we expect our selling and marketing expenses to increase as we increase our sales efforts , launch more projects and expand our operations . general and administrative expenses for the year ended september 30 , 2011 , general and administrative expenses were $ 1,372,345 , a decrease of $ 754,529 or 35 % , compared to general and administrative expenses of $ 2,126,874 for the year ended september 30 , 2010. the decrease is primarily due to the government 's waiver of certain of the company 's municipal fund accruals of $ 653,470 for the period from october 1 , 2008 to september 30 , 2011 , which resulted in a recovery of expense . in addition , the company entered into a settlement agreement in december 2010 with respect to fees owed in connection with its reverse acquisition in 2009 , pursuant to which approximately $ 167,000 of general and administrative expenses were recovered . our general and administrative expenses principally include : ( 1 ) staff salaries and benefits ; ( 2 ) traveling and entertainment expenses ; ( 3 ) professional fees , such as audit and legal fees ; ( 4 ) stock based compensation expense , and ( 5 ) other associated fees . we expect that general and administrative expenses will increase as we expand our business and operations .
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results of operation revenues we recognize revenue from the sales of real property in accordance with the full accrual method at the time of the closing of an individual unit sale . this occurs when title to or possession of the property is transferred to the buyer . a sale is not considered consummated until ( a ) the parties are bound by the terms of a contract , ( b ) all consideration has been exchanged , ( c ) any permanent financing of which the seller is responsible has been arranged , ( d ) all conditions precedent to closing have been performed , ( e ) the seller does not have substantial continuing involvement with the property , and ( f ) the usual risks and rewards of ownership have been transferred to the buyer . further , the buyer 's initial and continuing investment is adequate to demonstrate a commitment to pay for the property , and the buyer 's receivable , if any , is not subject to future subordination . sales transactions not meeting all the conditions of the full accrual method are accounted for using the deposit method in which all costs are capitalized as incurred , and payments received from the buyer are recorded as a deposit liability . we provide โ mortgage loan guarantees โ only with respect to buyers who make down-payments of 30 % -50 % of the total purchase price of the property . the period of the mortgage loan guarantee begins on the date the bank approves the buyer 's mortgage and we receive the loan proceeds in our bank account and ends on the date the โ certificate of ownership โ evidencing that title to the property has been transferred to the buyer . the procedures to obtain the certificate of ownership take six to twelve months ( the โ mortgage loan guarantee period โ ) .
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executive overview our business performance in 2014 grew in line with our expectations , as we delivered on our strategy to expand our oilfield specialties business . sales in our growth businesses of fuel specialties and personal care reflected the strength of our product portfolio and research and development pipeline in these markets , while the decline in octane additives was in line with the final stages of transition to unleaded gasoline . we have managed our investments in capital equipment , working capital and recruitment of additional skilled personnel in line with these market factors . our capital program and expenses during 2014 included the continued investment in a new information system platform , which we expect to add value to our business in future years . during 2014 , we completed the acquisition of independence oilfield specialties llc to further build out our presence in this market . critical accounting estimates note 2 of the notes to the consolidated financial statements includes a summary of the significant accounting policies and methods used in the preparation of the consolidated financial statements . contingencies we are subject to legal , regulatory and other proceedings and claims . the company discloses information concerning contingent liabilities in respect of these claims and proceedings for which an unfavorable outcome is more than remote and the potential loss could materially impact our results of operations , financial position and cash flows . we recognize within selling , general and administrative expenses liabilities for these claims and proceedings when it is probable that the company has incurred a loss based on an unfavorable outcome and the amount of the loss can be reasonably estimated and we endeavor to fairly present , in conjunction with the disclosures of these matters in our consolidated financial statements , management 's view of our exposure . we review outstanding claims and proceedings with external counsel as appropriate to assess probability and estimates of loss . when the reasonable estimate is a range , the recognized liability will be the best estimate within the range . if no amount in the range is a better estimate than any other amount then the minimum amount of the range will be recognized . we re-evaluate our assessments each quarter or as new and significant information becomes available . the actual cost of ultimately resolving a claim or proceeding may be significantly different from the amount of the recognized liability . in addition , because it is not permissible 24 to recognize a liability until the loss is both probable and estimable , in some cases there may be insufficient time to recognize a liability prior to the actual incurrence of the loss ( upon verdict and judgment at trial , for example , or in the case of a quickly negotiated settlement ) . environmental liabilities remediation provisions at december 31 , 2014 amounted to $ 34.1 million and relate principally to our ellesmere port site in the united kingdom . we recognize environmental liabilities when they are probable and costs can be reasonably estimated , and asset retirement obligations when there is a legal obligation and costs can be reasonably estimated . the company has to anticipate the program of work required and the associated future expected costs , and comply with environmental legislation in the countries in which it operates or has operated in . the company views the costs of vacating our ellesmere port site as contingent upon if and when it vacates the site because there is no present intention to do so . the company has further determined that , due to the uncertain product life of tel particularly in the market for aviation gasoline and other products being manufactured on site , there are uncertainties as to the probability and timing of the expected costs . such uncertainties have been considered in estimating the provision . pensions the company maintains a defined benefit pension plan covering a number of its current and former employees in the united kingdom . the company also has other much smaller pension arrangements in the u.s. and overseas , but the obligations under those plans are not material . the united kingdom plan is closed to future service accrual , but has a large number of deferred and current pensioners . movements in the underlying plan asset value and projected benefit obligation ( ยpboย ) are dependent on actual return on investments as well as our assumptions in respect of the discount rate , annual member mortality rates , future return on assets and future inflation . a change in any one of these assumptions could impact the plan asset value , pbo and pension charge recognized in the income statement . such changes could adversely impact our results of operations and financial position . for example , a 0.25 % change in the discount rate assumption would change the pbo by approximately $ 29 million and the net pension credit for 2015 by approximately $ 0.3 million . a 0.25 % change in the level of price inflation assumption would change the pbo by approximately $ 22 million and the net pension credit for 2015 would not be significantly changed . further information is provided in note 9 of the notes to the consolidated financial statements . deferred tax and uncertain income tax positions at december 31 , 2014 , no valuation allowance is required against our foreign tax credit carry forwards within deferred tax as management believes that all the foreign tax credit carry forwards can be utilized in future periods prior to their expiration . 25 no deferred taxes have been provided for on the unremitted earnings of our overseas subsidiaries as any tax basis differences relating to investments in these overseas subsidiaries are considered to be permanent in duration . we have no current intention to repatriate past or future earnings of our overseas subsidiaries and consider that these earnings have been reinvested overseas . story_separator_special_tag these types of events or changes in circumstances could include , but are not limited to : introduction of new products with enhanced features by our competitors ; loss of , material reduction in purchases by , or non-renewal of a contract by , a significant customer ; prolonged decline in business or consumer spending ; sharp and unexpected rise in raw material , chemical or energy costs ; and new laws or regulations inhibiting the development , manufacture , distribution or sale of our products . in order to facilitate this testing the company groups together assets at the lowest possible level for which cash flow information is available . undiscounted future cash flows expected to result from the asset groups are compared with the carrying value of the assets and , if such cash flows are lower , an impairment loss may be recognized . the amount of the impairment loss is the difference between the fair value and the carrying value of the assets . fair values are determined using post-tax cash flows discounted at the company 's weighted average cost of capital . if events occur or circumstances change it may cause a reduction in periods over which these long-lived assets are amortized or depreciated , or result in a non-cash impairment of a portion of their carrying value . a reduction in amortization or depreciation periods would have no effect on cash flows . in 2014 we continued with the process of developing a new , company-wide , information system platform . the platform provider is well established in the market . the implementation is a phased , risk-managed , site deployment and follows a multistage user acceptance program with the existing platform providing a fallback position . we implemented the new platform at the majority of our u.s. sites in the third quarter of 2013. our next phase of implementation includes the majority of reporting units outside of the u.s .. internally developed software and other costs capitalized at december 31 , 2014 were $ 27.8 million ( 2013 ย $ 19.5 million ) . an amortization expense of $ 3.8 million was recognized in 2014 ( 2013 ย $ 1.0 million ) in selling , general and administrative expenses . 28 story_separator_special_tag following the final impairment charge in the fourth quarter of 2013. other net income/ ( expense ) : other net income of $ 1.8 million primarily related to net gains of $ 3.4 million on foreign currency forward exchange contracts , partly offset by $ 1.6 million of losses on translation of net assets denominated in non-functional currencies in our european businesses . in 2013 , other net income of $ 4.1 million primarily related to gains of $ 5.8 million on translation of net assets denominated in non-functional currencies in our european businesses , partly offset by net foreign exchange losses on foreign currency forward exchange contracts of $ 1.6 million . interest expense , net : was $ 3.4 million in 2014 and $ 1.9 million in 2013 due to the higher level of borrowing during 2014 , used primarily to fund our acquisition activity in the second half of 2013. income taxes : the effective tax rate was 24.2 % and 16.2 % in 2014 and 2013 , respectively . the effective tax rate , once adjusted for income tax provisions and for the tax impact of other discrete items , was 24.9 % in 2014 compared with 15.9 % in 2013. the company believes that 32 this adjusted effective tax rate , a non-gaap financial measure , provides useful information to investors and may assist them in evaluating the company 's underlying performance and identifying operating trends . in addition , management uses this non-gaap financial measure internally to evaluate the performance of the company 's operations and for planning and forecasting in subsequent periods . replace_table_token_12_th in addition to those mentioned above , the following factors had a significant impact on the company 's effective tax rate as compared to the u.s. federal income tax rate of 35 % : replace_table_token_13_th the impact on the effective tax rate from profits earned in foreign jurisdictions with lower tax rates varies as the geographical mix of the company 's profits changes year on year . in 2014 , the company 's income tax expense benefited to a greater degree from a proportion of its overall profits arising in switzerland than in 2013. this resulted in a $ 9.4 million benefit in switzerland ( 2013 ย $ 9.3 million ) . in addition , there was a $ 7.9 million benefit in relation to the united kingdom ( 2013 ย $ 3.9 million ) and a $ 0.4 million benefit in relation to germany ( 2013 ย $ 0.3 million ) . foreign income inclusions arise each year from certain types of income earned overseas being taxable under u.s. tax regulations . these types of income include subpart f income , principally from foreign based company sales in the united kingdom , including the associated section 78 tax gross up , and also from the income earned by certain overseas subsidiaries taxable under the u.s. tax regime . in 2014 , the amount of subpart f income and the associated section 78 gross up amounted to $ 5.0 million ( 2013 ย $ 4.3 million ) . the income earned by certain overseas subsidiaries taxable under the u.s. tax regime increased to $ 2.1 million from $ 1.2 million in 2013. foreign tax credits can fully or partially offset these incremental u.s. taxes from foreign income inclusions . the utilization of foreign tax credits varies year on year as this is dependent on a number of variable factors which are difficult to predict and may in certain years prevent any offset of foreign tax credits . in total , $ 4.8 million of foreign tax credits were 33 utilized during 2014 to partially offset the incremental u.s. taxes arising from foreign income inclusions in the year ( 2013 ย $ 4.2 million ) .
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results of operations the following table provides operating income by reporting segment : replace_table_token_8_th 29 results of operations ย fiscal 2014 compared to fiscal 2013 : replace_table_token_9_th fuel specialties net sales : the table below details the components which comprise the year on year change in net sales spread across the markets in which we operate : replace_table_token_10_th americas saw an increase in volumes as a result of higher demand , while benefiting from an improved price and product mix . acquisitions in the americas , relating to bachman and independence , generated additional sales compared to the prior year . emea volumes decreased from the prior year due to weaker trading conditions and the impact of government 30 sanctions related to russia , partly offset by an improved price and product mix . volumes were lower in aspac due to the loss of a contract in 2013 which offset increased underlying volumes , together with an adverse price and product mix as a result of lower sales of higher margin products . avtel volumes were higher due to the timing of shipments to customers as opposed to any change in the long-term outlook for that market , while the price and product mix was negatively impacted by an adverse customer mix . gross margin : the year on year increase of 0.2 percentage points primarily reflected a mix of increased sales from higher margin products and a higher margin contribution from our oilfield specialties acquisitions . operating expenses : the year on year increase of 30 % , or $ 26.2 million , was due to $ 20.8 million of additional costs for the bachman businesses ; $ 6.3 million of additional costs for the independence business ; a $ 1.4 million increase in bad debt provisions , excluding recent acquisitions ; partly offset by a $ 1.0 million decrease in personnel-related compensation costs , primarily due to lower accruals for share-based compensation expense ; a $ 0.8
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in april 2016 , the jhu agreement was further amended to include a third patent family which discloses a method for reducing neuronal damage in the eye that includes administration of a sustained release formulation of a dual leucine kinase inhibitor in a polymeric particle , and wherein the dual leucine kinase inhibitor may be sunitinib story_separator_special_tag story_separator_special_tag clinical trials . however , we are continuing to assess the potential impact of the covid-19 pandemic on our business and operations , including our expenses , our clinical trials , and our ability to hire and retain employees . while we are currently continuing to monitor patients in our altissimo clinical trial at sites across the united states , we expect that covid-19 precautions may directly or indirectly impact the timeline for some of our clinical trial activities due to the inability of patients to come to their monitoring visits , the closing of eye clinics , and or diversion of resources that are necessary to conduct our observational study to care for covid-19 patients . the covid-19 pandemic has caused us to modify our business practices including , but not limited to , curtailing or modifying employee travel , moving to partial remote work , and cancelling physical participation in meetings , events and conferences . we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees , patients , clinicians , and business partners . the majority of our office-based employees have been working from home since march 2020 , while ensuring essential staffing levels to support our operations remain in place , including maintaining key personnel in our laboratories . for additional information on the various risks posed by the covid-19 pandemic , please read item 1a . risk factors . components of operating results research and development expenses our research and development expenses include : personnel costs , which include salaries , benefits and stock-based compensation ; expenses incurred under agreements with consultants and third-party contract organizations that conduct research and development activities on our behalf ; costs related to sponsored research service agreements ; costs related to production of preclinical and clinical materials , including fees paid to contract manufacturers ; laboratory and vendor expenses related to the execution of preclinical studies and planned clinical trials ; milestones and royalty expense from our johns hopkins university exclusive license agreement ; laboratory supplies and materials used for internal research and development activities ; and facilities and equipment costs . most of our research and development expenses have been related to the preclinical and clinical development of gb-102 . we have not reported program costs since inception because we have not historically tracked or recorded our research and development expenses on a program-by-program basis . we use our personnel and infrastructure resources across the breadth of our research and development activities , which are directed toward identifying and developing product candidates . we expense all research and development costs in the periods in which they are incurred . costs for certain research and development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and third-party service providers . we expect our research and development expenditures to increase substantially for the foreseeable future as we continue to invest in research and development activities related to developing our product candidates , including investments in manufacturing , as we 78 advance our programs and conduct clinical trials . the process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming , and the successful development of our product candidates is highly uncertain . because of the numerous risks and uncertainties associated with product development , we can not determine with certainty the duration and completion costs of the current or future preclinical studies and clinical trials or if , when , or to what extent we will generate revenues from the commercialization and sale of our product candidates . we may never succeed in achieving regulatory approval for our product candidates . the duration , costs and timing of preclinical studies and clinical trials and development of our product candidates will depend on a variety of factors , including : successful completion of preclinical studies and clinical trials to the satisfaction of the u.s. food and drug administration , or fda , european medicines agency , or ema , or other regulatory authorities ; that our product candidates are safe and effective for any of their proposed indications ; acceptance of our products , if and when approved , by patients , the medical community and third-party payors ; effectively competing with other therapies ; maintaining a continued acceptable safety profile of our products following approval ; obtaining and maintaining coverage and adequate reimbursement from third-party payors ; applying for and receiving marketing approvals from applicable regulatory authorities for our product candidates ; scaling up our manufacturing processes and capabilities to support additional or larger clinical trials of our product candidates and commercialization of any of our product candidates for which we obtain marketing approval ; developing , validating and maintaining a commercially viable manufacturing process that is compliant with current good manufacturing practices ; developing and expanding our sales , marketing and distribution capabilities and launching commercial sales of our product candidates , if and when approved , whether alone or in collaboration with others ; minimizing and managing any delay or disruption to our ongoing or planned clinical trials , and any adverse impacts to the u.s. and global market for pharmaceutical products , including as a result of the current covid-19 pandemic ; obtaining and maintaining patent and trade secret protection and regulatory exclusivity ; protecting our rights in our intellectual property portfolio ; and the impact of the covid-19 pandemic and the corresponding responses of businesses and governments . we may never succeed in achieving regulatory approval for any of our product candidates . story_separator_special_tag in connection with our ipo , we issued and sold an aggregate of 6,468,750 shares of common stock ( inclusive of 843,750 shares of common stock issued and sold pursuant to the exercise of the underwriters ' option to purchase additional shares ) at a price of $ 16.00 per share for net proceeds of $ 92.0 million , after deducting underwriters ' discounts and commissions and offering costs . funding requirements any product candidates we may develop may never achieve commercialization and we anticipate that we will continue to incur losses for the foreseeable future . we expect that our research and development expenses , general and administrative expenses , and capital expenditures will continue to increase . as a result , until such time , if ever , as we can generate substantial product revenue , we expect to finance our cash needs through a combination of equity offerings , debt financings or other capital sources , including potentially collaborations , licenses and other similar arrangements . our primary uses of capital are , and we expect will continue to be , compensation and related expenses , third-party clinical research , manufacturing and development services , costs relating to the build-out of our headquarters , laboratories and manufacturing facility , license payments or milestone obligations that may arise , laboratory and related supplies , clinical costs , manufacturing costs , legal and other regulatory expenses and general overhead costs . our current operating plan , which includes initiating two phase 3 clinical trials in the fourth quarter of 2021 , raises substantial doubt that our existing cash , cash equivalents and short-term investments will be sufficient for us to fund our operating expenses and capital expenditure requirements for the next 12 months . based upon our current operating plan , we believe our existing cash , cash equivalents and short-term investments will enable us to fund our operating expenses and capital expenditure requirements into the first quarter of 2022. we base this estimate on assumptions 81 that may prove to be wrong , and we could utilize our available capital resources sooner than we currently expect . as noted in our audited financial statements , there are conditions that raise substantial doubt about our ability to continue as a going concern for a period of one year from the date of the issuance of our financial statements . our ability to continue as a going concern is dependent upon our ability to successfully secure sources of financing and ultimately achieve profitable operations . our independent registered public accounting firm included an explanatory paragraph in their audit report on the financial statements as of and for the years ended december 31 , 2020 and 2019 stating that our recurring losses from operations and negative cash flows since inception and our need to raise additional funding to finance our operations raise substantial doubt about our ability to continue as a going concern . we will continue to require additional financing to advance our current product candidates through clinical development , to develop , acquire or in-license other potential product candidates and to fund operations for the foreseeable future . we will continue to seek funds through equity offerings , debt financings or other capital sources , potentially including collaborations , licenses and other similar arrangements . we may , however , be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all . if we do raise additional capital through public or private equity offerings , the ownership interest of our existing stockholders will be diluted , and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders ' rights . if we raise additional capital through debt financing , we may be subject to covenants limiting or restricting our ability to take specific actions , such as incurring additional debt , making capital expenditures or declaring dividends . any failure to raise capital as and when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies . if we are unable to raise capital , we will need to delay , reduce or terminate planned activities to reduce costs . because of the numerous risks and uncertainties associated with research , development and commercialization of pharmaceutical products , we are unable to estimate the exact amount of our operating capital requirements . our future funding requirements will depend on many factors , including , but not limited to : the scope , progress , results and costs of researching , developing and manufacturing our product candidates or any future product candidates , and conducting preclinical studies and clinical trials ; the timing of , and the costs involved in , obtaining regulatory approvals or clearances for our product candidates or any future product candidates ; the number and characteristics of any additional product candidates we develop or acquire ; the cost of manufacturing our product candidates or any future product candidates and any products we successfully commercialize , including costs associated with building-out our manufacturing capabilities ; our ability to establish and maintain strategic collaborations , licensing or other arrangements and the financial terms of any such agreements that we may enter into ; the expenses needed to attract and retain skilled personnel ; the costs associated with being a public company ; the timing , receipt and amount of sales of any future approved or cleared products , if any ; and the impact of the covid-19 pandemic and the corresponding responses of businesses and governments . further , our operating plans may change , and we may need additional funds to meet operational needs and capital requirements for clinical trials and other research and development activities . we currently have no credit facility or committed sources of capital .
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financial condition and results of operations . you should read the following discussion and analysis of our financial condition and results of operations in conjunction with our financial statements and related notes included elsewhere in this annual report . in addition to historical financial information , the following discussion contains forward-looking statements that involve risks and uncertainties . you should carefully read the sections entitled โ special note regarding forward-looking statements โ and โ risk factors โ to gain an understanding of the important factors that could cause our actual results to differ materially from those expressed or implied in any forward-looking statements . overview we are a clinical-stage biopharmaceutical company focused on developing transformative medicines for the treatment of diseases of the retina and optic nerve . our novel proprietary technologies are designed to release drugs in ocular tissue at a controlled rate for up to 12 months in order to improve patient compliance , reduce healthcare burdens and , ultimately , deliver better clinical outcomes . our lead product candidate , gb-102 , is an intravitreal injection of a microparticle depot formulation of sunitinib , a potent inhibitor of neovascular growth and permeability , which are leading causes of retinal disease . we are developing gb-102 as a once-every-six months intravitreal injection for the treatment of wet age-related macular degeneration , or wet amd , and diabetic macular edema , or dme . in our phase 1/2a clinical trial , gb-102 administered as a single 1 mg dose was well-tolerated in wet amd patients and demonstrated durable clinical evidence of disease control of at least six months in approximately 88 % of patients in this cohort . gb-102 has completed the treatment phase of a dose-ranging , controlled and masked safety and efficacy phase 2b clinical trial in patients with wet amd .
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common stock โat december 31 , 2016 and 2017 , the company was authorized to issue 290,081,638 and 500,000,000 shares of common stock with a par value of $ 0.001 per share story_separator_special_tag the following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements , the accompanying notes , and other financial information included elsewhere in this annual report on form 10-k. the following discussion contains forward-looking statements that involve risks and uncertainties such as our plans , estimates , and beliefs . our actual results could differ materially from those discussed in the forward-looking statements below . the following discussion also contains information using industry publications that generally state that the information contained therein has been obtained from sources believed to be reliable , but such information may not be accurate or complete . we have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied on therein . we are not aware of any misstatements regarding the industry , survey or research data provided herein , our estimates involve risks and uncertainties and are subject to change based upon various factors . factors that could cause or contribute to those differences in our actual results and factors that may affect industry , survey or research data include , but are not limited to , those discussed below and those discussed elsewhere in this annual report on form 10-k , particularly in the sections โ special note regarding forward-looking statements โ above and part i , item 1a . โ risk factors โ above . in the below discussion , we use the term basis points to refer to units of oneโhundredth of one percent . overview redfin is a technology-powered residential real estate brokerage . we represent people buying and selling homes in over 80 markets throughout the united states . our mission is to redefine real estate in the consumer 's favor . in a commission-driven industry , we put the customer first . we do this by pairing our own agents with our own technology to create a service that is faster , better , and costs less . 35 we earn substantially all of our revenue helping our customers buy and sell homes . our key revenue components are : brokerage revenue . we earn brokerage revenue from commissions we receive from representing homebuyers . traditional brokerage buy-side commissions typically range from 2.5 % to 3 % of a home 's sale price , depending on the market . we typically return a portion of this commission to our homebuyer through a commission refund or closing-cost reduction . we recognize the remaining commission amount as revenue . we also earn revenue from commissions we receive from representing home sellers . typical traditional brokerage sell-side commissions range from 2.5 % to 3 % of a home 's sale price . our sell-side commissions , which we recognize as revenue , are typically 1 % to 1.5 % of a home 's sale price , depending on the market and subject to market-by-market minimums . partner revenue . through the redfin partner program , we refer customers to partner agents when we do not have a lead agent available to serve the customer due to high demand or geographic limitations . partner agents pay us a fee representing a portion of the commission they receive when they close a referred transaction . for the years ended december 31 , 2015 , 2016 and 2017 , we gave a portion of this referral fee to the customer in certain circumstances and recognized the remaining amount as revenue . in december 2017 , we stopped giving a portion of our referral fee to the customer . other revenue . we offer services beyond helping customers buy and sell homes . for example , we currently provide title and settlement services in ten states and mortgage services in three states . we also license data and analytics from walk score , our neighborhood walk-ability tool . we operate an experimental business , redfin now , where we buy homes directly from homeowners and resell them to homebuyers . we strive to be frugal with every expense , including capital expenditures and stock-based compensation . at the same time , we intend to continue to invest thoughtfully for long-term growth , with a focus on growing share in the markets we currently serve . we 've invested , and expect to continue to invest , in marketing to promote the redfin brand and in technology development to make the homebuying and home selling experience better and faster for our customers and our agents , while continuing to lower costs . our growth has been significant . for the years ended december 31 , 2015 , 2016 , and 2017 , we generated revenue of $ 187.3 million , $ 267.2 million , and $ 370.0 million , respectively , representing annual growth of 49 % , 43 % , and 38 % , respectively . we generated net losses of $ 30.2 million , $ 22.5 million , and $ 15.0 million for the years ended december 31 , 2015 , 2016 , and 2017 , respectively initial public offering on august 2 , 2017 , we completed our initial public offering , or ipo , in which we issued and sold 10,615,650 shares of our common stock ( including 1,384,650 shares pursuant to the underwriters ' option to purchase additional shares ) at a public offering price of $ 15.00 per share . the aggregate gross proceeds were approximately $ 159.2 million . we received $ 144.4 million in net proceeds after deducting $ 11.1 million of underwriting discounts and commissions and $ 3.7 million in offering costs . upon the closing of the ipo , all of the outstanding shares of our redeemable convertible preferred stock automatically converted into 55,422,002 shares of common stock on a one-for-one basis . story_separator_special_tag revenue from top-10 markets as a percentage of real estate revenue our top-10 markets by real estate revenue are the metropolitan areas of boston , chicago , los angeles , maryland , orange county , portland , san diego , san francisco , seattle , and virginia . we plan to continue to diversify our growth and to increase our market share in our newer markets . we expect our revenue from top-10 markets to decline as a percentage of our real estate revenue over time . average number of lead agents the average number of lead agents , in combination with our other key metrics such as the number of brokerage transactions , is a basis for calculating agent productivity and is one indicator of the potential future growth of our business . we systematically evaluate traffic to our website and mobile application and 38 customer activity to anticipate changes in customer demand , helping determine when and where to hire lead agents . we calculate the average number of lead agents by taking the average of the number of lead agents at the end of each month included in the period . components of our results of operations revenue we generate revenue primarily from commissions and fees charged on real estate transactions closed by our lead agents or partner agents . real estate revenue brokerage revenue โ brokerage revenue consists of commissions earned on real estate transactions closed by our lead agents . we recognize commission-based revenue on the closing of a transaction , less the amount of any commission refund or any closing-cost reduction , commission discount , or transaction-fee adjustment . brokerage revenue is affected by the number of real estate transactions we close , the mix of brokerage transactions , home-sale prices , commission rates , and the amount we give to customers . partner revenue โ partner revenue consists of fees partner agents pay us when they close referred transactions , less the amount of any payments we make to customers . we recognize these fees as revenue on the closing of a transaction . partner revenue is affected by the number of partner transactions closed , home-sale prices , commission rates , and the amount we give to customers . other revenue other revenue consists of fees charged for title and settlement services , mortgage operations , licensing and analytics fees from our walk score service , homes sold by redfin now , and other services . revenue is recognized when the service is provided . redfin now is our experimental new service where we buy homes directly from homeowners and resell them to homebuyers . revenue earned from homes previously purchased by redfin now is recorded at closing on a gross basis , representing the sales price of the home . cost of revenue and gross margin cost of revenue consists primarily of personnel costs ( including base pay and benefits ) , stock- based compensation , transaction bonuses , home-touring and field expenses , listing expenses , office and occupancy expenses , depreciation and amortization related to fixed assets and acquired intangible assets , and , for redfin now , the cost of homes including the purchase price and capitalized improvements . we expect our personnel expenses to increase as we continue to hire more lead agents to reduce the number of homebuying customers that each lead agent serves . gross profit is revenue less cost of revenue . gross margin is gross profit expressed as a percentage of revenue . our gross margin has and will continue to be affected by a number of factors , but the most important are real estate revenue per real estate transaction , agent and support-staff productivity , personnel costs and transaction bonuses , and , for redfin now , the cost of homes . operating expenses technology and development 39 our primary technology and development expenses are building software for our customers , lead agents , and support staff to work together on a transaction , and building a website and mobile application to meet customers looking to move . these expenses consist primarily of personnel costs , stock-based compensation , data-license expenses , software costs , and equipment and infrastructure costs , such as for data centers and hosted services . technology and development expenses also include amortization of capitalized internal-use software and website and mobile application development costs . marketing marketing expenses consist primarily of media costs for online and traditional advertising , as well as personnel costs and stock-based compensation . general and administrative general and administrative expenses consist primarily of personnel costs , stock-based compensation , facilities costs and related expenses for our executive , finance , human resources , and legal organizations , depreciation related to the company 's fixed assets , and fees for outside services . outside services are principally comprised of external legal , audit , and tax services . story_separator_special_tag presented . the information for each quarter has been prepared on a basis consistent with our audited consolidated financial statements included elsewhere in this 10-k , and reflect , in the opinion of management , all adjustments of a normal , recurring nature that are necessary for a fair presentation of the financial information contained in those statements . our historical results are not necessarily indicative of the results that may be expected in the future . the following quarterly financial data should be read in conjunction with our audited consolidated financial statements included elsewhere in this 10-k. quarterly results 45 replace_table_token_16_th ( 1 ) includes stock-based compensation as follows : replace_table_token_17_th replace_table_token_18_th ( 1 ) includes stock-based compensation as follows : 46 replace_table_token_19_th revenue for the periods above has followed a seasonal pattern consistent with the residential real estate industry . accordingly , revenue in 2016 and 2017 increased sequentially from the first quarter through the third quarter . revenue in the fourth quarters of 2016 and 2017 , as well as the first quarters of 2016 and 2017 , declined sequentially . cost of revenue has also reflected seasonality .
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results of operations the following tables set forth our results of operations for the periods presented and as a percentage of our revenue for those periods . the period-to-period comparisons of our historical results are not necessarily indicative of the results that may be expected in the future . replace_table_token_6_th ( 1 ) includes stock-based compensation as follows : replace_table_token_7_th 40 replace_table_token_8_th ( 1 ) includes stock-based compensation as follows : replace_table_token_9_th comparison of the years ended december 31 , 2016 and 2017 revenue replace_table_token_10_th 41 in 2017 , revenue increased by $ 102.8 million , or 38 % , as compared with 2016. brokerage revenue represented $ 86.3 million , or 84 % , of the increase . brokerage revenue grew 35 % during the period , driven by a 35 % increase in brokerage real estate transactions and offset by a 0.1 % decrease in real estate revenue per brokerage transaction . the increase in brokerage transactions was attributable to higher levels of customer awareness of redfin and increasing customer demand . other revenue increased $ 11.7 million , or 171 % , as compared with 2016 . $ 10.5 million of the $ 11.7 million increase was attributed to redfin now . there was no redfin now revenue in 2016. cost of revenue and gross margin replace_table_token_11_th in 2017 , total cost of revenue increased by $ 73.8 million , or 40 % , as compared with 2016. this increase in cost of revenue was primarily attributable to a $ 27.1 million increase in personnel costs and stock-based compensation due to increased lead agent and related support-staff headcount , a $ 15.6 million increase in transaction bonuses , an $ 11.9 million increase in home-touring and field costs and a $ 9.5 million increase in the cost of homes purchased through redfin now .
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a financial instrument 's classification within the fair value hierarchy is based upon the lowest level of story_separator_special_tag financial condition and results of operations you should read the following discussion and analysis of our financial condition and results of operations in conjunction with the audited and unaudited consolidated financial statements and related notes included elsewhere in this annual report on form 10-k. the following discussion contains forward-looking statements that are subject to risks and uncertainties . see part i โ special note regarding forward-looking statements โ for a discussion of the uncertainties , risks , and assumptions associated with those statements . actual results could differ materially from those discussed in or implied by forward- looking statements as a result of various factors , including those discussed below and elsewhere in this annual report on form 10-k , particularly in the section entitled โ risk factors. โ unless we state otherwise or the context otherwise requires , the terms โ we , โ โ us , โ โ our โ and the โ company โ refer , prior to the 2014 reorganization ( as defined below ) , to paycom payroll holdings , llc and its consolidated subsidiaries ( โ holdings โ ) and wcas paycom holdings , inc. ( โ wcas holdings โ ) collectively , and , after the 2014 reorganization , to paycom software , inc. ( โ software โ ) and its consolidated subsidiaries . overview we are a leading provider of comprehensive , cloud-based human capital management ( โ hcm โ ) software delivered as software-as-a-service . we provide functionality and data analytics that businesses need to manage the complete employment life cycle from recruitment to retirement . our solution requires virtually no customization and is based on a core system of record maintained in a single database for all hcm functions , including talent acquisition , time and labor management , payroll , talent management and human resources ( โ hr โ ) management applications . our user-friendly software allows for easy adoption of our solution by employees , enabling self-management of their hcm activities in the cloud , which reduces the administrative burden on employers and increases employee productivity . we serve a diverse client base in terms of size and industry . we have over 15,000 clients , none of which constituted more than one-half of one percent of our revenues for the year ended december 31 , 2015. we stored data for more than 2.1 million persons employed by our clients during the year ended december 31 , 2015. our revenues are primarily generated through our sales force that solicits new clients and our client relations representatives who sell new applications to existing clients . we have 42 sales teams located in 24 states and plan to open additional sales offices to further expand our presence in the u.s. market . during the year ended december 31 , 2015 , we opened five new sales offices , with one sales office located in each of brooklyn , cincinnati , kansas city , nashville and pittsburgh , and in january 2016 , we opened an additional six new sales offices , with one new sales office located in each of chicago , cleveland , pasadena , sacramento , san antonio and stamford . our continued growth depends on attracting new clients through geographic expansion , further penetration of our existing markets and the introduction of new applications to our existing client base . we also expect that changes in certain factors affecting our performance will correlate with improvement or deterioration in the labor market . our principal marketing programs include telemarketing and email campaigns , search engine marketing methods and tradeshows . during the last three years , we have developed several new applications . we believe our ability to continue to develop new applications and to improve existing applications will enable us to increase revenues in the future , and the number of our new applications adopted by our clients has been a significant factor in our revenue growth over the last three years . recent developments registered block trade transactions on november 18 , 2015 , we closed an underwritten secondary offering of 4,500,000 shares of our common stock by welsh , carson , anderson & stowe x , l.p. ( โ wcas x โ ) , wcas capital partners iv , l.p. ( โ wcas capital iv โ ) , each of our executive officers and certain other selling stockholders at a public offering price of $ 42.15 per share . on november 19 , 2015 , the underwriter exercised its overallotment option and subsequently purchased an additional 585,697 shares from wcas x and wcas capital iv . we did not receive any proceeds from the sales of these shares . on september 15 , 2015 , we closed an underwritten secondary offering of 4,500,000 shares of our common stock by wcas x , wcas capital partners iv , each of our executive officers and certain other selling stockholders at a public offering price of $ 37.95 per share . on september 23 , 2015 , the underwriter exercised its option to purchase an additional 675,000 shares from wcas x and wcas capital iv . we did not receive any proceeds from the sales of these shares . on may 20 , 2015 , we closed an underwritten secondary offering of 8,000,000 shares of our common stock by wcas x , wcas capital iv , each of our executive officers and certain other selling stockholders at a public offering price of $ 36.25 per share . we did not receive any proceeds from the sale of these shares . 33 follow-on offering on january 21 , 2015 , we closed a follow-on public offering of 6,422,750 shares of our common stock by certain selling stockholders at a public offering price of $ 22.50 per share . we did not receive any proceeds from the sale of these shares . story_separator_special_tag based on our total revenues , we have grown at an approximately 41 % cagr from january 1 , 2011 through december 31 , 2015. because we charge our clients on a per employee basis for certain services we provide , any increase or decrease in the number of employees that our clients have will have a positive or negative impact on our results of operations . our solution requires no adjustment to serve larger clients . we believe larger employers represent a substantial opportunity to increase the number of potential clients and to increase our revenue per client , with limited incremental cost to us . we believe the challenges of managing the ever-changing complexity of payroll and human resources will continue to drive companies to turn to outsourced providers for help with their hcm needs . the hcm industry historically has been driven , in part , by legislation and regulatory action , including cobra , changes to the minimum wage laws or overtime rules , and legislation from federal , state or municipal taxation authorities . the implementation of the affordable care act ( the โ aca โ ) is the most recent example of legislation that has created demand in the hcm industry . for the year ended december 31 , 2015 , aca revenue represented less than 2 % of total revenues and we estimate that revenues from enhanced aca will only represent approximately 5 % of revenues for the year ending december 31 , 2016. we have extended until march 18 , 2016 the ability of clients and prospective clients to , subject to certain conditions , implement enhanced aca for purposes of filing their forms 1094 and 1095 for the 2015 fiscal year . throughout our history , we have built strong relationships with our clients . as the hcm needs of our clients evolve , we believe that we are well-positioned to gain additional share of the hcm spending of our clients , and we believe this opportunity is significant . to be successful , we must continue to demonstrate the operational and economic benefits of our solution , as well as effectively hire , train , motivate and retain qualified personnel and executive officers . key metrics in addition to the accounting principles generally accepted in the united states ( โ u.s . gaap โ ) metrics that we regularly monitor , we also monitor the following metrics to evaluate our business , measure our performance and identify trends affecting our business : replace_table_token_6_th ยท clients . when we calculate the number of clients at period end , we treat client accounts with separate taxpayer identification numbers as separate clients , which often separates client accounts that are affiliated with the same parent organization . we track the number of our clients to provide an accurate gauge of the size of our business . unless we state otherwise or the context otherwise requires , references to clients throughout this annual report on form 10-k refer to this metric . ยท clients ( based on parent company grouping ) . when we calculate the number of clients based on parent company grouping at period end , we combine client accounts that have identified the same person ( s ) as their decision-maker regardless of whether the client accounts have separate taxpayer identification numbers , which often combines client accounts that are affiliated with the same parent organization . we track the number of our clients based on parent company grouping to provide an alternate measure of the size of our business and clients . ยท sales teams . we monitor our sales professionals by the number of sales teams at period end . each team consists of approximately six to nine sales professionals . certain larger metropolitan areas can support more than one sales team . we believe that the number of sales teams is an indicator of potential revenues for future periods . 35 ยท annualized new recurring revenue . while we do not enter into long-term contractual commitments with our clients , we monitor annualized new recurring revenue as we believe it is an indicator of potential revenues for future periods . annualized new recurring revenue is an estimate based on the annualized amount of the first full month of revenues attributable to new clients that were added or existing clients that purchased additional applications during the period presented . annualized new recurring revenue only includes revenues from clients who have used our solution for at least one month during the period . because annualized new recurring revenue is only recorded after a client us es our solution for one month , it includes revenue that has been recognized in historical periods . ยท revenue retention rate . our average annual revenue retention rate tracks the percentage of revenue that we retain from our existing clients . we monitor this metric because it is an indicator of client satisfaction and revenues for future periods . components of results of operations sources of revenues revenues are comprised of recurring revenues , and implementation and other revenues . we expect our revenues to increase as we introduce new applications , expand our client base and renew and expand relationships with existing clients . as a percentage of total revenues , we expect our mix of recurring revenues , and implementation and other revenues to remain relatively constant . recurring . recurring revenues include fees for our talent acquisition , time and labor management , payroll , talent management and hr management applications as well as fees charged for delivery of client payroll checks and reports . these revenues are derived from ( i ) fixed amounts charged per billing period plus a fee per employee or transaction processed or ( ii ) fixed amounts charged per billing period . because recurring revenues are based in part on fees for use of our applications and the delivery of checks and reports that are levied on a per-employee basis , our recurring revenues increase as our clients hire more employees .
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results of operations years ended december 31 , 2015 , 2014 and 2013 the following tables set forth selected consolidated statements of income data and such data as a percentage of total revenues for each of the periods indicated : replace_table_token_7_th 37 consolidated statement s of income data as a percentage of revenues replace_table_token_8_th year ended december 31 , 2015 compared to the year ended december 31 , 2014 and the year ended december 31 , 2014 compared to the year ended december 31 , 2013 revenues replace_table_token_9_th total revenues were $ 224.7 million for the year ended december 31 , 2015 , compared to $ 150.9 million for the year ended december 31 , 2014 , representing an increase of $ 73.8 million , or 49 % . the increase in total revenues was due to several factors , including ( i ) the addition of clients in mature sales offices , which are offices that have been open for at least 24 months , as well as contributions from sales offices that are reaching maturity , ( ii ) the addition of new clients in more recently opened sales offices , ( iii ) the introduction and sale of additional applications to our existing clients , ( iv ) growth in the number of employees of our clients , ( v ) an increase in average revenue per client as we continued to sell our applications to larger clients , ( vi ) additional revenues in the first quarter attributable to the strong performance of our tax form filing business and ( vii ) additional revenues in the fourth quarter resulting from clients seeking to accelerate implementation of our enhanced aca application that we believe would have typically deferred implementation until after year-end . as a result of increased sales , implementation and other revenues , a component of total revenues , increased to $ 4.7 million for the year ended december 31 , 2015 from $ 2.7 million for the year ended december 31 , 2014 , representing an increase of $ 2.0
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( a ) the following documents are filed as part of this form 10-k : ( 1 ) consolidated financial statements : page report of independent registered public accounting firm 37 balance sheets 38 statements of operations 39 statements of changes in shareholders ' ( deficit ) equity 40 statements of cash flows 41 notes to financial statements 42-56 ( 2 ) financial statement schedules : none . ( 3 ) the following exhibits are filed as part of this registration statement : replace_table_token_3_th 34 exhibit no . description included form filing date 10.2 form of investment management trust agreement between continental stock transfer & trust company and the registrant . by reference s-1/a march 15 , 2012 10.3 form of escrow agreement between the registrant , continental stock transfer & trust company and the initial shareholders . by reference s-1/a march 12 , 2012 10.4 promissory note issued to a. lorne weil . by reference s-1/a november 18 , 2011 10.5 form of registration rights agreement among the registrant and the initial shareholders . by reference s-1/a march 7 , 2012 10.6 form of subscription agreements among the registrant , graubard miller and the purchasers of private placement warrants . by reference s-1/a march 7 , 2012 10.7 merger and acquisition agreement between the company and earlybirdcapital , inc. by reference s-1/a march 12 , 2012 10.8 advisory services agreement between the company and morgan joseph triartisan llc to be filed by amendment 10.9 promissory note issued to a. lorne weil 2006 irrevocable trust - family investment trust . herewith 24 power of attorney ( included on signature page of this form 10-k ) . herewith 31 certification of principal executive officer and principal financial and accounting officer pursuant to section 302 of the sarbanes-oxley act of 2002. herewith 32 certification pursuant to 18 u.s.c . section 1350 , as adopted pursuant to section 906 of the sarbanes-oxley act of 2002 herewith 99.1 form of audit committee charter . by reference s-1/a january 23 , 2012 99.2 form of nominating committee charter . by reference s-1/a january 23 , 2012 101.ins xbrl instance document herewith 101.sch xbrl taxonomy extension schema herewith 101.cal xbrl taxonomy extension calculation linkbase herewith 101.def xbrl taxonomy extension definition linkbase herewith 101.lab xbrl taxonomy extension label linkbase herewith 35 signatures pursuant to the requirements of the section 13 or 15 or 15 ( d ) of the securities exchange act of 1934 , the registrant has duly caused this report to be signed on its behalf by the undersigned , thereunto duly authorized on the 13 th day of june , 2013. andina acquisition corporation by : b. luke weil b. luke weil chief executive officer ( principal executive officer and principal financial and accounting officer ) power of attorney the undersigned directors and officers of andina acquisition corporation hereby constitute and appoint b. luke weil with full power to act as our true and lawful attorney-in-fact with full power to execute in our name and behalf in the capacities indicated below , this annual report on form 10-k and any and all amendments thereto and to file the same , with all exhibits thereto and other documents in connection therewith , with the securities and exchange commission , and hereby ratify and confirm all that such attorneys-in-fact , or any of them , or their substitutes shall lawfully do or cause to be done by virtue hereof . in accordance with the securities exchange act of 1934 , this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated . name title date b. luke weil chief executive officer june 13 , 2013 b. luke weil julio a. torres director june 13 , 2013 julio a. torres eduardo robayo director june 13 , 2013 eduardo robayo director rudolf m. hommes martha byorum director june 13 , 2013 martha byorum a. lorne weil director ( non-executive chairman ) june 13 , 2013 a. lorne weil 36 report of independent registered public accounting firm to the board of directors and shareholders of andina acquisition corporation we have audited the accompanying balance sheets of andina acquisition corporation ( a company in the development stage ) ( the โ company โ ) as of february 28 , 2013 and february 29 , 2012 story_separator_special_tag forward-looking statements 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 , as amended ( the โ exchange act โ ) . we have based these forward-looking statements on our current expectations and projections about future events . these forward-looking statements are subject to known and unknown risks , uncertainties and assumptions about us that may cause our actual results , levels of activity , performance or achievements to be materially different from any future results , levels of activity , performance or achievements expressed or implied by such forward-looking statements . in some cases , you can identify forward-looking statements by terminology such as โ may , โ โ should , โ โ could , โ โ would , โ โ expect , โ โ plan , โ โ anticipate , โ โ believe , โ โ estimate , โ โ continue , โ or the negative of such terms or other similar expressions . factors that might cause or contribute to such a discrepancy include , but are not limited to , those described in our other securities and exchange commission ( โ sec โ ) filings . references to โ we โ , โ us โ , โ our โ or the โ company โ are to andina acquisition corporation , except where the context requires otherwise . the following discussion should be read in conjunction with our condensed financial statements and related notes thereto included elsewhere in this report . overview story_separator_special_tag ( a ) the following documents are filed as part of this form 10-k : ( 1 ) consolidated financial statements : page report of independent registered public accounting firm 37 balance sheets 38 statements of operations 39 statements of changes in shareholders ' ( deficit ) equity 40 statements of cash flows 41 notes to financial statements 42-56 ( 2 ) financial statement schedules : none . ( 3 ) the following exhibits are filed as part of this registration statement : replace_table_token_3_th 34 exhibit no . description included form filing date 10.2 form of investment management trust agreement between continental stock transfer & trust company and the registrant . by reference s-1/a march 15 , 2012 10.3 form of escrow agreement between the registrant , continental stock transfer & trust company and the initial shareholders . by reference s-1/a march 12 , 2012 10.4 promissory note issued to a. lorne weil . by reference s-1/a november 18 , 2011 10.5 form of registration rights agreement among the registrant and the initial shareholders . by reference s-1/a march 7 , 2012 10.6 form of subscription agreements among the registrant , graubard miller and the purchasers of private placement warrants . by reference s-1/a march 7 , 2012 10.7 merger and acquisition agreement between the company and earlybirdcapital , inc. by reference s-1/a march 12 , 2012 10.8 advisory services agreement between the company and morgan joseph triartisan llc to be filed by amendment 10.9 promissory note issued to a. lorne weil 2006 irrevocable trust - family investment trust . herewith 24 power of attorney ( included on signature page of this form 10-k ) . herewith 31 certification of principal executive officer and principal financial and accounting officer pursuant to section 302 of the sarbanes-oxley act of 2002. herewith 32 certification pursuant to 18 u.s.c . section 1350 , as adopted pursuant to section 906 of the sarbanes-oxley act of 2002 herewith 99.1 form of audit committee charter . by reference s-1/a january 23 , 2012 99.2 form of nominating committee charter . by reference s-1/a january 23 , 2012 101.ins xbrl instance document herewith 101.sch xbrl taxonomy extension schema herewith 101.cal xbrl taxonomy extension calculation linkbase herewith 101.def xbrl taxonomy extension definition linkbase herewith 101.lab xbrl taxonomy extension label linkbase herewith 35 signatures pursuant to the requirements of the section 13 or 15 or 15 ( d ) of the securities exchange act of 1934 , the registrant has duly caused this report to be signed on its behalf by the undersigned , thereunto duly authorized on the 13 th day of june , 2013. andina acquisition corporation by : b. luke weil b. luke weil chief executive officer ( principal executive officer and principal financial and accounting officer ) power of attorney the undersigned directors and officers of andina acquisition corporation hereby constitute and appoint b. luke weil with full power to act as our true and lawful attorney-in-fact with full power to execute in our name and behalf in the capacities indicated below , this annual report on form 10-k and any and all amendments thereto and to file the same , with all exhibits thereto and other documents in connection therewith , with the securities and exchange commission , and hereby ratify and confirm all that such attorneys-in-fact , or any of them , or their substitutes shall lawfully do or cause to be done by virtue hereof . in accordance with the securities exchange act of 1934 , this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated . name title date b. luke weil chief executive officer june 13 , 2013 b. luke weil julio a. torres director june 13 , 2013 julio a. torres eduardo robayo director june 13 , 2013 eduardo robayo director rudolf m. hommes martha byorum director june 13 , 2013 martha byorum a. lorne weil director ( non-executive chairman ) june 13 , 2013 a. lorne weil 36 report of independent registered public accounting firm to the board of directors and shareholders of andina acquisition corporation we have audited the accompanying balance sheets of andina acquisition corporation ( a company in the development stage ) ( the โ company โ ) as of february 28 , 2013 and february 29 , 2012 story_separator_special_tag forward-looking statements 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 , as amended ( the โ exchange act โ ) . we have based these forward-looking statements on our current expectations and projections about future events . these forward-looking statements are subject to known and unknown risks , uncertainties and assumptions about us that may cause our actual results , levels of activity , performance or achievements to be materially different from any future results , levels of activity , performance or achievements expressed or implied by such forward-looking statements . in some cases , you can identify forward-looking statements by terminology such as โ may , โ โ should , โ โ could , โ โ would , โ โ expect , โ โ plan , โ โ anticipate , โ โ believe , โ โ estimate , โ โ continue , โ or the negative of such terms or other similar expressions . factors that might cause or contribute to such a discrepancy include , but are not limited to , those described in our other securities and exchange commission ( โ sec โ ) filings . references to โ we โ , โ us โ , โ our โ or the โ company โ are to andina acquisition corporation , except where the context requires otherwise . the following discussion should be read in conjunction with our condensed financial statements and related notes thereto included elsewhere in this report . overview
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results of operations our entire activity since inception up to the closing of our initial public offering on march 22 , 2012 was in preparation for that event . since the offering , our activity has been limited to the evaluation of business combination candidates , and we will not be generating any operating revenues until the closing and completion of our initial business combination . we expect to generate small amounts of non-operating income in the form of interest income on cash and cash equivalents . interest income is not expected to be significant in view of current low interest rates on risk-free investments ( treasury securities ) . we incurred a net loss of $ 11,379,280 for the year ended february 28 , 2013 . this net loss was a result of operating and formation expenses largely composed of approximately $ 11,000,000 warrant expense , $ 153,000 of professional fees , $ 32,000 of nasdaq expenses , insurance of $ 100,000 , $ 54,000 of printing and travel of $ 75,000 offset by interest income of approximately $ 28,000. during the period from september 21 , 2011 ( inception ) to february 28 , 2013 we incurred a net loss of $ 11,396,607. this net loss was a result of operating and formation expenses largely composed of approximately $ 11,000,000 warrant expense , $ 153,000 of professional fees , $ 32,000 of nasdaq expenses , insurance of $ 100,000 , $ 54,000 of printing and travel of $ 92,000 offset by interest income of approximately $ 28,000. during the period from september 21 , 2011 ( inception ) to february 29 , 2012 we incurred a net loss of $ 17,327 , which was largely composed of professional fees , travel expenses and business startup costs . liquidity and capital resources as of february 28 , 2013 , we had $ 48,959 in our operating bank account .
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during the last fifteen years , the company has worked continuously to significantly reduce and control its cost structure while concurrently expanding its product offering , expanding manufacturing process capabilities and more fully automating its facilities . for example , headcount of permanent employees as of january 31 , 2019 , was approximately 840 compared to a peak of nearly 2,950 in august 2000. factory overhead in fiscal 2019 declined by more than 50 % compared to fiscal 2001. the company accomplished this without closing a factory and while continuing to add new production processes , including flat metal forming , and other capabilities to support its ambitious product development program . our domestic fabrication allowed the company to develop significant product variety , color choices and custom products that are very difficult to replicate with a supply chain extending to china . finally , many education furniture products are bulky , with a large cube relative to the selling price . the cost of ocean freight from overseas for these bulky items offsets the cost advantages for overseas production . the company 's operating results can be impacted significantly by cost and volatility of commodities , especially steel , plastic , wood and energy . because a majority of the company 's sales are generated under annual contracts in which the company has limited ability to raise the price of its products during the term of the contract , if the costs of the company 's raw materials increase suddenly or unexpectedly , the company can not be certain that it will be able to implement corresponding increases in its sales prices in order to offset such increased costs . the company moderates this exposure by building significant quantities of finished goods and component parts during the first and second quarters . in the year ended january 31 , 2017 commodity costs , particularly steel , increased significantly but the company had already sourced and produced the majority of the product delivered during the summer . during the year ended january 31 , 2018 , commodity costs increased throughout the year , but without volatile spikes . in the year ended january 31 , 2019 commodity costs were volatile , in large part due to tariffs on imported steel and chinese furniture components . the majority of virco 's sales include freight to the customer facility and the cost or availability of transportation equipment can adversely impact both profitability and customer service . significant cost increases in manufacturing or distributing products during a given contract period can adversely impact operating results and have done so during prior years . the company typically benefits from any decreases in raw material or distribution costs under the contracts described above . during the year ending january 31 , 2020 , the company anticipates continued uncertainty and volatility in commodity costs , particularly with respect to certain raw materials , transportation and energy . in fiscal 2019 , tariffs on imported steel and furniture components introduced significant volatility and cost increases as prices on domestic steel also increased . in fiscal 2018 , the cost of commodities increased during the year . while the company anticipates challenging economic conditions to continue to impact its core customer base in the near term , there are certain underlying demographics , customer responses and changes in the competitive landscape that provide opportunities . first , the underlying demographics of the student population are stable compared to the volatility of school budgets and the related level of furniture and equipment purchases . this volatility is attributable to the financial health of the school systems . virco management believes that there is a pent-up demand for quality school furniture ( though it is unclear when and to what extent that pent-up demand will be converted into a meaningful increase in purchases ) . second , management believes that parents and voters will make quality education an ongoing priority for future government spending . third , many schools have responded to the budget strains by reducing their support infrastructure . this change provides opportunities to provide services to schools , such as project management for new or renovated schools , delivery to individual school sites rather than truckload deliveries to central warehouses and delivery of furniture into classrooms . moreover , this change offers opportunities for virco to promote its complete product assortment which allows one-stop shopping as opposed to sourcing furniture needs from a variety of suppliers . fourth , many suppliers previously shut down or dramatically curtailed their domestic manufacturing capabilities , making it difficult for competitors to adapt to dynamic fluctuations in demand or provide custom colors or finishes during a narrow seasonal summer delivery window when they are reliant upon a supply chain extending to asia or elsewhere . meanwhile , virco has continued to invest in automation at its domestic manufacturing facilities , adding flat metal forming processes to its manufacturing capabilities and bringing production into its factories of 23 items formerly sourced from other suppliers ( both domestic and international ) . domestic production facilitates our product development process , enabling the company to more rapidly develop new products , release extensions of product families and offer customized variants of our product offering . virco views its domestic factories as a strategic resource for providing its customers with timely delivery of a broad selection of colors , finishes , laminates , and product styles . critical accounting policies and estimates this discussion and analysis of virco 's financial condition and results of operations is based upon the company 's consolidated financial statements ( the โ financial statements โ ) , which have been prepared in accordance with u.s. generally accepted accounting principles . the preparation of these financial statements requires virco management to make estimates and judgments that affect the company 's reported assets , liabilities , revenues and expenses , and related disclosure of contingent assets and liabilities . story_separator_special_tag the ultimate realization of deferred tax assets is dependent upon the generation of future taxable income or reversal of deferred tax liabilities during the periods in which those temporary differences become deductible . the company considers the scheduled reversal of deferred tax liabilities , projected future taxable income and tax planning strategies in making this assessment . the company has a valuation allowance of $ 1,756,000 against certain state deferred tax assets that the company does not believe it is more-likely-than-not to realize . at january 31 , 2019 , the company has net operating loss carryforwards of approximately $ 15,299,000 for federal and $ 33,429,000 for state income tax purposes , expiring at various dates through january 31 , 2039. results of operations ( 2019 vs. 2018 ) financial results and cash flow the company incurred a pre-tax loss of ( $ 1,117,000 ) on net sales of $ 200,716,000 for fiscal 2019 , compared to pre-tax profit of $ 2,414,000 on net sales of $ 189,287,000 in fiscal 2018. net loss improved to a loss of ( $ 1,614,000 ) for fiscal 2019 from ( $ 3,209,000 ) in fiscal 2018. the fiscal 2019 tax provision included a valuation allowance for certain deductions . the fiscal 2018 tax provision includes a $ 4.4 million unfavorable rate adjustment from the tax cuts and jobs act ( tcja ) passed on december 22 , 2017. net loss per basic share improved to a loss of $ 0.10 for the fiscal 2019 , compared to a loss of $ 0.21 in the prior year , due primarily to the income tax effects described above . cash flow provided by operations was $ 2,363,000 in fiscal 2019 , compared to $ 1,682,000 in fiscal 2018. net sales virco 's net sales increased by 6.0 % in fiscal 2019 to $ 200,716,000 compared to $ 189,287,000 in fiscal 2018. the increase in net sales was attributable to growth in project business , which included larger more complex orders . in effort to grow sales and market share , list selling prices were increased moderately during the fiscal year ended january 31 , 2019. growth in sales was substantially due to increases in project business . project business has many characteristics that differ from orders funded from school operating budgets . project business is usually bond funded , typically includes product that virco procures from vendor partners to complete an entire school and always includes virco full service . project orders are typically large more complicated orders and are usually subject to a greater level of competition from other suppliers . for fiscal 2020 , the company anticipates that the budgetary challenges for state and local governments will continue to affect growth in net sales . the company intends to significantly increase selling prices to recover increased commodity costs and the costs of tariffs on imported steel and furniture components . the increased costs may have an adverse impact on sales volume . recent elections have resulted in an increased level of bond passages , but there is typically a delay between when a bond is passed and when it translates into furniture orders . increased bond funding favorably impacted business for fiscal 2019 and is anticipated to be beneficial for fiscal 2020. as we have throughout this economic cycle , the company continues to focus on strategies to develop and strengthen its brand with an aggressive product development campaign . we will continue to use our domestic factories to provide greater flexibility for custom specifications such as laminates , colors and on-time delivery . the company will continue to emphasize the value , design , variety of its products , the value of its distribution , delivery , classroom delivery and project management capabilities , and the importance of timely deliveries during the peak seasonal delivery period . the company plans to increase selling prices to recover increased costs of commodities and to improve gross margins . to increase or maintain market share during fiscal 2020 , when market conditions warrant , the company may selectively compete based on direct prices to build or maintain its market share . cost of sales 25 cost of sales was 66.6 % of net sales in fiscal 2019 and 65.4 % of sales in fiscal 2018. the increase in cost of sales as a percentage of sales was primarily attributable to increased material costs . in the first quarter of fiscal 2019 , the federal government imposed a 25 % tariff on imported steel . the company sources most of its steel domestically , but domestic steel increased by a like amount concurrently with the tariffs on foreign steel . in the third quarter of fiscal 2019 , the federal government imposed a 10 % tariff on imported chinese furniture components . in addition to the tariffs , the company incurred increased costs for imported components , increased costs for plastic and finally increased cost for packaging . the company also incurred increased manufacturing expenses , primarily for employee compensation . the company has been required to increase salaries and wages in response to a very competitive labor market . the company increased selling prices at the beginning of the year in an effort to improve margins but did not fully recover the increased costs during fiscal 2019. during fiscal 2020 , the company anticipates continued uncertainty and volatility in commodity costs , particularly with respect to certain raw materials , transportation , energy and tariffs due to potential macroeconomic events . due in part to volatile transportation and energy costs , we may incur higher commodity costs in fiscal 2020. for more information , please see the section below entitled โ inflation and future change in prices .
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executive overview the markets that virco serves include the education market ( the company 's primary market ) , which is made up of public and private schools ( preschool through 12th grade ) , junior and community colleges , four-year colleges and universities ; and trade , technical and vocational schools . virco also serves convention centers and arenas ; the hospitality industry , with respect to their banquet and meeting facilities ; government facilities at the federal , state , county and municipal levels ; and places of worship . in addition , the company sells to wholesalers , distributors , retailers , catalog retailers , and internet retailers that serve these 21 same markets . these institutions are frequently characterized by extreme seasonality and or a bid-based purchasing function . the company 's business model , which is designed to support this strategy , is highly integrated . the company purchases coils of steel , plastic resin , particle board , and other raw materials and fabricated finished goods for education market . the company markets and sells direct to the schools and provides project management and logistics . the company also sells to schools fob destination , with more than 50 % of sales delivered fob classroom . as part of this integrated business model , the company has developed several competencies to enable superior service to the markets in which virco competes . an important element of virco 's business model is the company 's emphasis on developing and maintaining key manufacturing , warehousing , distribution , delivery , project management and service capabilities . the company has developed a comprehensive product offering for the furniture , fixtures and equipment needs of the k-12 education market , enabling a school to procure all of its furniture , fixtures and equipment ( โ ff & e โ ) requirements from one source . virco 's product offering consists primarily of items manufactured by virco , complemented with products sourced from other furniture manufacturers .
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as of december 31 , 2017 we had $ 17.2 million in short-term financing obligations and $ 103.4 million of unused credit . as of december 31 , 2016 we had $ 15.6 million in short-term financing obligations and $ 90.0 million of unused credit . stock-based compensation we account for share-based employee compensation plans under the fair value recognition and measurement provisions in accordance with applicable accounting standards , which require all share-based payments to employees , including grants of stock options and restricted stock units ( rsus ) , to be measured based on the grant date fair value of the awards , with the resulting expense generally recognized on a straight-line basis over the period during which the employee is required to perform service in exchange for the award . as described in further detail below under ยshare-based payment transactions to employees , ย we adopted asu 2016-09 , which among other items , provides an accounting policy election to account for forfeitures as they occur , story_separator_special_tag results of operations . the following discussion and analysis of our financial condition and results of operations should be read in conjunction with item 6 . ยselected financial dataย of this report and our financial statements and the related notes thereto included in this report . this discussion contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from historical results or anticipated results including those set forth in item 1a . ยrisk factorsย of this report . we call your attention to the discussion of forward-looking statements on page 1 of part i of this report , which is incorporated into , and is intended to accompany , this item 7. overview stamps.comยฎ is a leading provider of internet-based mailing and shipping solutions in the united states . under the stamps.com and endiciaยฎ brands , customers use our usps only solutions to mail and ship a variety of mail pieces and packages through the usps . customers using our solutions receive discounted postage rates compared to usps.com and usps retail locations on certain mail pieces such as first class letters and domestic and international priority mailยฎ and priority mail expressยฎ packages . stamps.com was the first ever usps-approved pc postage vendor to offer a software only mailing and shipping solution in 1999. endicia became a usps-approved pc postage vendor in 2000. under the shipstationยฎ , shipworksยฎ and shippingeasyยฎ brands , customers use our multi-carrier solutions to ship packages through multiple carriers such as the usps , ups , fedex and others . our customers include individuals , small businesses , home offices , medium-size businesses , large enterprises , e-commerce merchants and warehouse shippers . mailing and shipping business references when we refer to our ยmailing and shipping business , ย we are referring to our mailing and shipping products and services including our usps and multi-carrier mailing and shipping solutions , mailing and shipping integrations , mailing and shipping supplies stores and branded insurance offerings . we do not include our customized postage business when we refer to our mailing and shipping business . when we refer to our ยmailing and shipping revenue , ย we are referring to our service , product and insurance revenue generated by our mailing and shipping customers . we do not include our customized postage revenue generated by our customized postage business in our ยmailing and shipping revenue.ย acquisitions shippingeasy on july 1 , 2016 , we completed our acquisition of shippingeasy . the net purchase price including adjustments for net working capital totaled approximately $ 55.4 million and was funded from current cash and investment balances . in connection with the acquisition , we issued performance based inducement equity awards to the general manager and chief technology officer of shippingeasy . these inducement awards cover an aggregate of up to 43,567 common shares each to the general manager and chief technology officer if earnings targets for shippingeasy are achieved over a two and one-half year period which began july 1 , 2016. the awards are subject to proration if at least 75 % of the applicable target is achieved and are subject to forfeiture or acceleration based on changes in employment circumstances over the performance period . we also issued inducement stock option grants for an aggregate of 62,000 shares of stamps.com common stock to 48 new employees in connection with our acquisition of shippingeasy . please see note 3 โ ยacquisitionsย in our notes to consolidated financial statements for further description . story_separator_special_tag directly by the usps for certain qualifying customers under our usps partnership ; ( 3 ) we may earn transaction related revenue based on customers purchasing postage or printing shipping labels ; ( 4 ) we may earn compensation by offering customers a discounted postage rate that is provided to the customers by our integration partners ; and ( 5 ) we may earn other types of revenue shares or other compensation from specific customers or integration partners . service revenue increased 31 % to $ 411.3 million in 2017 from $ 313.1 million in 2016. the increase in service revenue consisted of a 12 % increase in our annual average paid customers and an 18 % increase in our average service revenue per paid customer ( service revenue arpu ) . the increase in the number of our paid customers was attributable to the factors described in the previous section . the increase in our service revenue arpu was attributable to ( 1 ) the factors that resulted in an increase in the average total mailing and shipping revenue per paid customer described in the previous section and ( 2 ) the renewal of two of our agreements with the usps with improved economics . product revenue increased 2 % to $ 20.7 million in 2017 from $ 20.2 million in 2016. product revenue is primarily driven by labels , such as netstamps and dymo stamps , which are used for mailing . story_separator_special_tag general and administrative expense as a percent of total revenue was approximately 19 % in 2017 which was consistent with 2016 . 40 interest and other income interest and other income primarily consists of interest income from cash , cash equivalents and short-term and long-term investments . interest and other income increased to $ 414,000 in 2017 from $ 306,000 in 2016. the increase in interest and other income is primarily attributable to higher average cash balances in 2017 compared to 2016. interest expense interest expense consists of interest expense from the debt under our credit facility and the associated accretion of debt issuance costs . interest expense was $ 3.7 million in 2017 compared to $ 3.6 million in 2016. the increase in interest expense is primarily attributable to higher average interest rates in the 2017 compared to 2016 , partially offset by lower outstanding debt balances under our credit facility . see note 7 โ ยdebtย in our notes to consolidated financial statements for further discussion . provision for income taxes for the years ended december 31 , 2017 and 2016 , income tax expense was $ 9.6 million and $ 41.7 million , respectively . the decrease in income tax expense in the current year period is primarily due to excess tax benefits related to the exercise of stock options , partially offset by the re-measurement of the company 's deferred tax assets and liabilities as a result of the tax cuts and jobs act enacted on december 22 , 2017. see note 10 โ ยincome taxesย in our notes to consolidated financial statements for further discussion . as of december 31 , 2017 and 2016 , we had net deferred tax assets of approximately $ 43.1 million and $ 48.8 million , respectively . we evaluated the appropriateness of our deferred tax assets and related valuation allowance in accordance with asc 740 , income taxes based on all available positive and negative evidence , including our recent earnings trend and expected future income . trend analysis we expect our mailing and shipping revenue to increase in 2018 compared to 2017. we expect our mailing and shipping revenue growth in 2018 to be less than the growth we achieved in 2017 now that we have passed the one year anniversary of our shippingeasy acquisition . our ability to grow our mailing and shipping revenue is partly dependent on our ability to increase our sales and marketing spend to acquire new customers and to retain our existing customers . to the extent we are not able to achieve our target increase in spending and acquire or retain customers , this would negatively impact our 2018 mailing and shipping revenue growth expectations . we expect customized postage revenue to decline in 2018 compared to 2017 , due to certain high volume business purchases occurring in 2017 , which may not be repeated in 2018. high volume business orders for customized postage can fluctuate significantly from quarter to quarter and therefore historical trends may not be indicative of future results for customized postage revenue . we expect our sales and marketing expense to increase in 2018 compared to 2017. we expect the percent increase in sales and marketing expense in 2018 to be greater than the percent increase in 2017. we plan to increase our investments in headcount and non-headcount resources in 2018 to drive growth . we will continue to monitor our customer metrics and the state of the economy and adjust our level of spending accordingly . sales and marketing spend is expensed in the period incurred , while the revenue and profits associated with the acquired customers are earned over the customers ' lifetimes . as a result , increased sales and marketing spend in future periods could result in a reduction in operating profit and cash flow compared to past periods . we expect research and development expenses to be higher in 2018 as compared to 2017. we expect the percent increase in research and development expense in 2018 to be greater than the percent increase in 2017 , as 2017 reflected a full year of shippingeasy results , as opposed to six months in 2016. we expect to hire additional research and development personnel in 2018. we expect general and administrative expenses to be higher in 2018 as compared to 2017. we expect the percent increase in general and administrative expense in 2018 to be less than the percent increase in 2017. we expect to hire additional general and administrative personnel in 2018 and continue to incur sales tax expense . 41 we expect our stock-based compensation expense to be higher in 2018 compared to 2017 based on stock-based compensation expense incurred in the fourth quarter and the expectation of stock option grants to new hires in 2018. we expect our interest expense in 2018 to be lower than 2017 due to lower outstanding debt balances under our credit facility . we expect our effective tax rate for 2018 to be higher than 2017 as we benefitted from excess tax benefits related to the exercise of stock options in 2017 which we do not expect to recur at the same levels in 2018. however , there are other factors that impact taxable income compared to book income which can be difficult to predict and can change from quarter-to-quarter . as discussed earlier in this report , our expectations are subject to substantial uncertainty and our results are subject to macro-economic factors and other factors which could cause these trends to be worse than our current expectation or which could cause actual results to be materially different than our current expectations .
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results of operations the results of our operations during the year ended december 31 , 2017 include the operations of shippingeasy . the results of our operations during the year ended december 31 , 2016 include the operations of shippingeasy for the period from july 1 , 2016 through december 31 , 2016. the results of our operations during 36 the years ended december 31 , 2017 and 2016 include the operations of endicia . the results of our operations during the year ended december 31 , 2015 include the operations of endicia for the period from november 18 , 2015 through december 31 , 2015. please see note 3 โ ยacquisitionsย in our notes to consolidated financial statements for further description . accordingly , care should be used in comparing periods that include the operations of shippingeasy with those that do not include such operations . years ended december 31 , 2017 and 2016 total revenue increased 29 % to $ 468.7 million in 2017 from $ 364.3 million in 2016. mailing and shipping revenue , which includes service revenue , product revenue and insurance revenue , was $ 449.4 million in 2017 , an increase of 28 % from $ 350.6 million in 2016. customized postage revenue increased 41 % to $ 19.2 million in 2017 from $ 13.6 million in 2016. the following table sets forth the breakdown of revenue for 2017 and 2016 and the resulting percent change ( revenue in thousands ) : replace_table_token_5_th we define ยpaid customersย for the quarter as ones from whom we successfully collected service fees or otherwise earned revenue at least once during that quarter , and we define arpu as mailing and shipping revenue divided by paid customers . we define lost paid customers ( lost paid customers ) as customers from whom we successfully collected service fees or otherwise earned revenue at least once during the previous quarter but not during the current quarter , less recaptured paid customers .
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the primary items that generated the goodwill recognized were the premiums paid by the company for the future earnings potential of the businesses acquired and the value of their assembled workforces that do not qualify for separate recognition , which , in the case of blue aerospace , csi aerospace and action research , benefit both the company and the noncontrolling interest holders . based on the factors comprising the goodwill recognized and consideration of an insignificant control premium , the fair value story_separator_special_tag overview our business is comprised of two operating segments , the flight support group ( โ fsg โ ) and the electronic technologies group ( โ etg โ ) . the flight support group consists of heico aerospace holdings corp. ( โ heico aerospace โ ) , which is 80 % owned , and heico flight support corp. , which is wholly owned , and their collective subsidiaries , which primarily : designs , manufactures , repairs , overhauls and distributes jet engine and aircraft component replacement parts . the flight support group designs , manufactures , repairs , overhauls and distributes jet engine and aircraft component replacement parts . the parts and services are approved by the federal aviation administration ( โ faa โ ) . the flight support group also manufactures and sells specialty parts as a subcontractor for aerospace and industrial original equipment manufacturers and the united states government . additionally , the flight support group is a leading supplier , distributor , and integrator of military aircraft parts and support services primarily to foreign military organizations allied with the united states and a leading manufacturer of advanced niche components and complex composite assemblies for commercial aviation , defense and space applications . the electronic technologies group consists of heico electronic technologies corp. ( โ heico electronic โ ) and its subsidiaries , which primarily : designs and manufactures electronic , microwave and electro-optical equipment , high-speed interface products , high voltage interconnection devices and high voltage advanced power electronics . the electronic technologies group designs , manufactures and sells various types of electronic , microwave and electro-optical equipment and components , including power supplies , laser rangefinder receivers , infrared simulation , calibration and testing equipment ; power conversion products serving the high-reliability military , space and commercial avionics end-markets ; underwater locator beacons used to locate data and voice recorders utilized on aircraft and marine vessels ; electromagnetic interference shielding for commercial and military aircraft operators , traveling wave tube amplifiers and microwave power modules used in radar , electronic warfare , on-board jamming and countermeasure systems , electronics companies and telecommunication equipment suppliers ; advanced high-technology interface products that link devices such as telemetry receivers , digital cameras , high resolution scanners , simulation systems and test systems to computers ; high voltage energy generators interconnection devices , cable assemblies and wire for the medical equipment , defense and other industrial markets ; high frequency power delivery systems for the commercial sign industry ; high voltage power supplies found in satellite communications , ct scanners and in medical and industrial x-ray systems ; three-dimensional microelectronic and stacked memory products that are principally integrated into larger subsystems equipping satellites and spacecraft ; harsh 28 index environment connectivity products and custom molded cable assemblies ; rf and microwave amplifiers , transmitters and receivers used to support military communications on unmanned aerial systems , other aircraft , helicopters and ground-based data/communications systems , wireless cabin control systems , solid state power distribution and management systems and fuel level sensing systems for business jets and for general aviation , as well as for the military/defense market and microwave modules , units and integrated sub-systems for commercial and military satellites . our results of operations during each of the past three fiscal years have been affected by a number of transactions . this discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto included herein . all applicable share and per share information has been adjusted retrospectively to reflect the 5-for-4 stock splits effected in october 2013 , april 2012 and april 2011. see note 1 , summary of significant accounting policies โ stock splits , of the notes to consolidated financial statements for additional information regarding these stock splits . for further information regarding the acquisitions discussed below , see note 2 , acquisitions , of the notes to consolidated financial statements . acquisitions are included in our results of operations from the effective dates of acquisition . in october 2013 , we acquired , through heico electronic , all of the outstanding stock of lucix corporation ( `` lucix '' ) in a transaction carried out by means of a merger . lucix is a leading designer and manufacturer of high performance , high reliability microwave modules , units , and integrated sub-systems for commercial and military satellites . on may 31 , 2013 , we acquired , through heico flight support corp. , reinhold industries , inc. ( `` reinhold '' ) through the acquisition of all of the outstanding stock of reinhold 's parent company in a transaction carried out by means of a merger . reinhold is a leading manufacturer of advanced niche components and complex composite assemblies for commercial aviation , defense and space applications . in october 2012 , we acquired , through heico flight support corp. , 80.1 % of the assets and assumed certain liabilities of action research corporation ( โ action research โ ) . action research is an faa-approved repair station that has developed unique proprietary repairs that extend the lives of certain engine and airframe components . the remaining 19.9 % interest continues to be owned by an existing member of action research 's management team . the purchase price of this acquisition was paid using cash provided by operating activities . story_separator_special_tag we periodically evaluate the carrying value of inventory , giving consideration to factors such as its physical condition , sales patterns and expected future demand in order to estimate the amount necessary to write down any slow moving , obsolete or damaged inventory . these estimates could vary significantly from actual amounts based upon future economic conditions , 31 index customer inventory levels , or competitive factors that were not foreseen or did not exist when the estimated write-downs were made . in accordance with industry practice , all inventories are classified as a current asset including portions with long production cycles , some of which may not be realized within one year . business combinations we allocate the purchase price of acquired entities to the underlying tangible and identifiable intangible assets acquired and liabilities and any noncontrolling interests assumed based on their estimated fair values , with any excess recorded as goodwill . determining the fair value of assets acquired and liabilities assumed requires management 's judgment and often involves the use of significant estimates and assumptions , including assumptions with respect to future cash inflows and outflows , discount rates , asset lives and market multiples , among other items . we determine the fair values of such assets , principally intangible assets , generally in consultation with third-party valuation advisors . as part of the agreement to acquire certain subsidiaries , we may be obligated to pay contingent consideration should the acquired entity meet certain earnings objectives subsequent to the date of acquisition . as of the acquisition date , contingent consideration is recorded at fair value as determined through the use of a probability-based scenario analysis approach . under this method , a set of discrete potential future subsidiary earnings is determined using internal estimates based on various revenue growth rate assumptions for each scenario . a probability of likelihood is then assigned to each discrete potential future earnings estimate and the resultant contingent consideration is calculated and discounted using a weighted average discount rate reflecting the credit risk of a market participant . subsequent to the acquisition date , the fair value of such contingent consideration is measured each reporting period and any changes are recorded within our consolidated statements of operations . changes in either the revenue growth rates , related earnings or the discount rate could result in a material change to the amount of contingent consideration accrued . as of october 31 , 2013 and 2012 , $ 29.3 million and $ 10.9 million of such contingent consideration was accrued within our consolidated balance sheets , respectively . during fiscal 2013 , 2012 and 2011 , such fair value measurement adjustments resulted in a net gain of $ 1.6 million , a loss of $ .1 million and a gain of $ 1.2 million , respectively . valuation of goodwill and other intangible assets we test goodwill for impairment annually as of october 31 , or more frequently if events or changes in circumstances indicate that the carrying amount of goodwill may not be fully recoverable . in evaluating the recoverability of goodwill , we compare the fair value of each of our reporting units to its carrying value to determine potential impairment . if the carrying value of a reporting unit exceeds its fair value , the implied fair value of that reporting unit 's goodwill is to be calculated and an impairment loss is recognized in the amount by which the carrying value of the reporting unit 's goodwill exceeds its implied fair value , if any . the fair values of our 32 index reporting units were determined using a weighted average of a market approach and an income approach . under the market approach , fair values are estimated using published market multiples for comparable companies . we calculate fair values under the income approach by taking estimated future cash flows that are based on internal projections and other assumptions deemed reasonable by management and discounting them using an estimated weighted average cost of capital . based on the annual goodwill impairment test as of october 31 , 2013 , 2012 and 2011 , we determined there was no impairment of our goodwill . the fair value of each of our reporting units as of october 31 , 2013 significantly exceeded its carrying value . we test each non-amortizing intangible asset ( principally trade names ) for impairment annually as of october 31 , or more frequently if events or changes in circumstances indicate that the asset might be impaired . to derive the fair value of our trade names , we utilize an income approach , which relies upon management 's assumptions of royalty rates , projected revenues and discount rates . we also test each amortizing intangible asset for impairment if events or circumstances indicate that the asset might be impaired . the test consists of determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows . if the total of the undiscounted future cash flows is less than the carrying amount of those assets , we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets . the determination of fair value requires us to make a number of estimates , assumptions and judgments of such factors as projected revenues and earnings and discount rates . based on the intangible impairment tests conducted , we did not recognize any impairment losses in fiscal 2013 and 2012 ; however , we recognized pre-tax impairment losses related to the write-down of certain customer relationships , intellectual property and trade names of $ 4.3 million , $ .5 million and $ .2 million , respectively , during fiscal 2011 , within the etg to their estimated fair values .
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results of operations the following table sets forth the results of our operations , net sales and operating income by segment and the percentage of net sales represented by the respective items in our consolidated statements of operations ( in thousands ) : replace_table_token_8_th 34 index comparison of fiscal 2013 to fiscal 2012 net sales our net sales in fiscal 2013 increased by 12 % to a record $ 1,008.8 million , as compared to net sales of $ 897.3 million in fiscal 2012. the increase in net sales reflects an increase of $ 94.8 million ( a 17 % increase ) to a record $ 665.1 million within the fsg as well as an increase of $ 18.4 million ( a 6 % increase ) to a record $ 350.0 million within the etg . the net sales increase in the fsg reflects organic growth of approximately 9 % as well as additional net sales of $ 42.3 million from the fiscal 2013 and 2012 acquisitions . the organic growth in the fsg principally reflects an increase in net sales from new product offerings and improving market conditions resulting in a $ 40.7 million increase in net sales within our aftermarket replacement parts and repair and overhaul services product lines and an $ 11.8 million increase in net sales within our specialty products lines . the net sales increase in the etg reflects organic growth of approximately 3 % as well as additional net sales of $ 8.0 million from fiscal 2013 and 2012 acquisitions . the organic growth in the etg principally reflects increased demand for certain space and aerospace products resulting in a $ 12.2 million and $ 3.3 million increase in net sales from these product lines , respectively , partially offset by a decrease in demand for certain of our defense and medical products resulting in a $ 3.1 million and $ 1.9 million decrease in net sales from these product lines , respectively .
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you should read this discussion in conjunction with our consolidated financial statements and related notes included in this annual report on form 10-k. historical results and percentage relationships are not necessarily indicative of operating results for future periods . references to `` gartner , '' the `` company , โ โ we , โ โ our โ and โ us โ in this md & a are to gartner , inc. and its consolidated subsidiaries . acquisitions of ceb inc. and other businesses on april 5 , 2017 , the company completed its acquisition of ceb inc. ( `` ceb '' ) . note 2 โ acquisitions and divestiture in the notes to consolidated financial statements provides additional information regarding the ceb acquisition . our operating results discussed below for the year ended december 31 , 2017 include the results of ceb beginning on the acquisition date . references to `` heritage gartner '' operating results and business measurements below refer to gartner excluding ceb . references to `` ceb '' below refer to the operating results and business measurements of ceb subsequent to the acquisition . we also acquired other businesses in 2017 , 2016 and 2015 , which are also described in note 2 โ acquisitions and divestiture in the notes to consolidated financial statements included in this annual report on form 10-k. the operating results of these other acquired businesses were not material to our consolidated or segment results . talent assessment business - announcement of a definitive agreement to sell on february 6 , 2018 , the company announced that it had reached a definitive agreement to sell its ceb talent assessment business to exponent private equity , a uk-based private equity firm , for $ 400.0 million . the agreement comes at the end of a previously announced process to evaluate strategic alternatives for ceb talent assessment , formerly shl , which was acquired by gartner as part of the ceb acquisition . the transaction is expected to close in the first half of 2018 and is subject to customary closing conditions . forward-looking statements in addition to historical information , this annual report on form 10-k contains certain forward-looking statements within the meaning of section 27a of the securities act of 1933 , as amended , and section 21e of the securities exchange act of 1934 , as amended . forward-looking statements are any statements other than statements of historical fact , including statements regarding our expectations , beliefs , hopes , intentions or strategies regarding the future . in some cases , forward-looking statements can be identified by the use of words such as โ may , โ โ will , โ โ expect , โ โ should , โ โ could , โ โ believe , โ โ plan , โ โ anticipate , โ โ estimate , โ โ predict , โ โ potential , โ โ continue โ or other words of similar meaning . forward-looking statements are subject to risks , estimates and uncertainties that could cause actual results to differ materially from those discussed in , or implied by , the forward-looking statements . factors that might cause such a difference include , but are not limited to , those discussed in part 1 , item 1a , risk factors included in this annual report on form 10-k. readers should not place undue reliance on these forward-looking statements , which reflect management 's opinion only as of the date on which they were made . except as required by law , we disclaim any obligation to review or update these forward-looking statements to reflect events or circumstances as they occur . readers should carefully review our risk factors described in this annual report on form 10-k. 17 business overview gartner , inc. ( nyse : it ) is the world 's leading research and advisory company and a member of the s & p 500. we equip business leaders with indispensable insights , advice and tools to achieve their mission-critical priorities and build the successful organizations of tomorrow . we believe our unmatched combination of expert-led , practitioner-sourced and data-driven research steers clients toward the right decisions on the issues that matter most . we 're trusted as an objective resource and critical partner by more than 12,000 organizations in more than 100 countries across all major functions , in every industry and enterprise size . gartner is headquartered in stamford , connecticut , u.s.a. and , as of december 31 , 2017 , we had more than 15,000 associates , including 2,650 research analysts and consultants . gartner delivers its products and services globally through four business segments : research , consulting , events , and talent assessment & other : research provides trusted , objective insights and advice on the mission-critical priorities of leaders across all functional areas of the enterprise through research and other reports , briefings , proprietary tools , access to our analysts , peer networking services and membership programs that enable our clients to make better decisions . gartner 's traditional strengths in it , marketing and supply chain research were enhanced in 2017 with gartner 's acquisition of ceb , inc. , which added ceb 's best practice and talent management research insights across a range of business functions , to include human resources , sales , legal and finance . consulting provides customized solutions to unique client needs through on-site , day-to-day support , as well as proprietary tools for measuring and improving it performance with a focus on cost , performance , efficiency and quality . events provides business professionals across the organization the opportunity to learn , share and network . from our flagship cio event gartner symposium/itxpo , to industry-leading conferences focused on specific business roles and topics , to member-driven sessions , our events enable attendees to experience the best of gartner insight and advice live . talent assessment & other helps organizations assess , engage , manage and improve talent . story_separator_special_tag heritage gartner revenues increased $ 30.7 million in 2017 compared to 2016 , an 11 % increase on a reported basis and 10 % adjusted for the foreign exchange impact . ceb contributed $ 38.6 million of the revenue increase on a reported basis . the heritage gartner events gross contribution margin was 49 % and 51 % for 2017 and 2016 , respectively . in the heritage gartner business , we held 65 events and 66 events in 2017 and 2016 , respectively , while the number of attendees for 2017 increased 17 % and exhibitors increased 3 % compared to 2016 , with average revenue per exhibitor up by 5 % while average revenue per attendee was flat . ceb held four events during 2017 with 3,578 attendees . as a result of the ceb acquisition , we added a new reportable segment in second quarter 2017 called talent assessment & other , which contributed $ 174.7 million of revenues during 2017. for a more complete discussion of our results by segment , see segment results below . cash provided by operating activities was $ 254.5 million and $ 365.6 million during 2017 and 2016 , respectively . as of december 31 , 2017 , we had $ 538.9 million of cash and cash equivalents , which excludes amounts deemed to be held-for-sale , and $ 558.0 million of available borrowing capacity on our revolving credit facility . for a more complete discussion of our cash flows and financial position , see liquidity and capital resources below . fluctuations in quarterly results our quarterly and annual revenues , operating income ( loss ) and cash flows fluctuate as a result of many factors , including : the timing of our symposium/itxpo series that normally occurs during the fourth quarter , as well as our other events ; the timing and amount of new business generated , including from acquisitions ; the mix of domestic and international business ; domestic and international economic conditions ; changes in market demand for our products and services ; changes in foreign currency rates ; the timing of the development , introduction and marketing of new products and services ; competition in the industry ; the payment of performance compensation ; and other factors that are beyond our control . the potential fluctuations in our operating income ( loss ) could cause period-to-period comparisons of operating results not to be meaningful and could provide an unreliable indication of future operating results and cash flows . 20 critical accounting policies and estimates the preparation of our consolidated financial statements requires the application of appropriate accounting policies and the use of estimates . our significant accounting policies are described in note 1 โ business and significant accounting policies in the notes to consolidated financial statements included in this annual report on form 10-k. management considers the policies discussed below to be critical to an understanding of our financial statements because their application requires complex and subjective management judgments and estimates . specific risks for these critical accounting policies are also described below . the preparation of our consolidated financial statements requires us to make estimates and assumptions about future events . we develop our estimates using both current and historical experience , as well as other factors , including the general economic environment and actions we may take in the future . we adjust such estimates when facts and circumstances dictate . however , our estimates may involve significant uncertainties and judgments and can not be determined with precision . in addition , these estimates are based on our best judgment at a point in time and , as such , these estimates may ultimately differ materially from actual results . ongoing changes in our estimates could be material and would be reflected in the company 's consolidated financial statements in future periods . our critical accounting policies pertaining to the years presented in the consolidated financial statements included in this annual report on form 10-k are as follows : revenue recognition โ revenue is recognized in accordance with the requirements of u.s. gaap , as well as sec staff accounting bulletin no . 104 , revenue recognition . revenue is only recognized when all required criteria for revenue recognition have been met . revenue by significant source is accounted for as follows : research revenues are mainly derived from subscription contracts for research products . the related revenues are deferred and recognized ratably over the applicable contract term . fees derived from assisting organizations in selecting the right business software for their needs are recognized when the leads are provided to vendors . consulting revenues are principally generated from fixed fee and time and material engagements . revenues from fixed fee contracts are recognized on a proportional performance basis . revenues from time and materials engagements are recognized as work is delivered and or services are provided . revenues related to contract optimization contracts are contingent in nature and are only recognized upon satisfaction of all conditions related to their payment . events revenues are deferred and recognized upon the completion of the related symposium , conference or exhibition . talent assessment & other revenues arising from knowledge and skill assessment services are recognized depending on the nature of the underlying contract : ( i ) ratably over the term of the service period ; ( ii ) upon delivery ; or ( iii ) on a proportional performance basis . revenues from training programs and survey and questionnaire products are primarily recognized upon delivery of the service . the majority of research contracts are billable upon signing , absent special terms granted on a limited basis from time to time . all research contracts are non-cancelable and non-refundable , except for government contracts that may have cancellation or fiscal funding clauses . it is our policy to record the amount of the contract that is billable as a fee receivable at the time the contract is signed with a corresponding amount as deferred revenue because the contract represents a legally enforceable claim .
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consolidated results 2017 versus 2016 the table below presents an analysis of selected line items and year-over-year changes in our consolidated statements of operations for the two years ended december 31 , 2017 ( in thousands ) . the operating results of ceb are included beginning on april 5 , 2017 , the date of the acquisition . replace_table_token_5_th total revenues for the year ended december 31 , 2017 increased $ 867.0 million , to $ 3.3 billion , an increase of 35 % compared to the year ended december 31 , 2016 on both a reported basis and adjusted for foreign exchange impact . ceb contributed approximately $ 522.9 million of the revenue increase . the table below presents total revenues by geographic region for the years indicated ( in thousands ) : replace_table_token_6_th the table below presents our revenues by segment for the years indicated ( in thousands ) : replace_table_token_7_th please refer to the section of this md & a below entitled โ segment results โ for a discussion of revenues and results by segment . 24 cost of services and product development was $ 1.3 billion in 2017 , an increase of $ 374.6 million compared to 2016 , or 40 % on both a reported basis and excluding the impact of foreign exchange . approximately $ 238.0 million of the increase was attributable to ceb . the $ 136.6 million increase attributable to heritage gartner was primarily due to higher payroll and related benefits costs resulting from increased headcount , which increased 20 % . cost of services and product development as a percentage of revenues was 40 % and 39 % for 2017 and 2016 , respectively . selling , general and administrative ( โ sg & a โ ) expense was $ 1.6 billion in 2017 , an increase of $ 509.8 million compared to 2016 , or 47 % on both a reported basis and excluding the impact of foreign exchange . approximately $ 283.8 million of the increase was attributable to ceb .
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unrealized gains and unrealized losses deemed to be temporary are excluded from earnings ( losses ) , net of applicable taxes , as a component of other comprehensive income ( loss ) . factors considered in judging whether an impairment is other than temporary include the financial condition , business prospects and creditworthiness of the issuer , the length of time that fair value has been less than cost , the relative amount of decline , and the company 's ability and intent to hold the investment until the fair value recovers . realized gains and losses and decline in value judged to be other than temporary on available-for-sale securities are included in the statements of operations . the cost of securities sold or disposed is determined on first-in first-out , or fifo method . capitalized software development costs software development costs related to the development of the company 's electronic payment platform software , which is developed for internal use , falls under the accounting guidance of asc topic 350-40 , intangibles goodwill and otherโinternal use software , in which computer software costs are expensed as incurred during the preliminary project stage and capitalization begins in the application development stage once the capitalization criteria are met . costs associated with post implementation activities are expensed as incurred . costs capitalized during the application development stage include external direct costs of materials and services consumed in developing or obtaining internal-use software and payroll and payroll-related costs for employees who are directly associated with , and who devote time to , the internal-use computer software . once the project is substantially complete and ready for its intended use these costs are amortized on a straight-line basis over the technology 's estimated useful life of three years . f- 10 gh capital inc. notes to financial statements september 30 , 2017 note 2 - summary of significant accounting policies ( continued ) intangible assets intangible assets with finite lives primarily consist of licensed technology and are amortized on a straight-line basis over the expected period to be benefited by future cash flows of two years and reviewed for impairment . derivative liabilities the company evaluates all its financial instruments to determine if those contracts or any potential embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with fasb asc 815-10-05-4 and 815-40. this accounting treatment requires that the carrying amount of any embedded derivatives be recorded at fair value at issuance and marked-to-market at each balance sheet date . in the event that the fair value is recorded as a liability , as is the case with the company , the change in the fair value during the period is recorded as either income or expense . upon conversion or exercise , the derivative liability is marked to fair value at the conversion date and then the related fair value is reclassified to equity . impairment of long-lived assets in accordance with asc topic 360 , the company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable , or at least annually . the company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset . the amount of impairment is measured as the difference between the asset 's estimated fair value and its book value . revenue recognition the company recognizes revenue when persuasive evidence of a sale arrangement exists , services have been rendered , the sales price is fixed and determinable and collectability is reasonably assured . revenues consists of fees generated through the electronic processing of payment transactions and related services , story_separator_special_tag forward looking statements see forward statements โ cautionary factors in item 1 herein business overview we were incorporated on may 5 , 2014 in the state of florida . we intend to generate revenue through licensing our technology to third parties in europe . more specifically , we will focus our sales efforts in germany , austria , and spain . at this time , we have no significant assets . for the years ended september 30 , 2017 and 2016 , we generated revenues of $ 28,039 and $ 27,585 , including revenues from a related party of $ 17,279 and $ 12,585 , respectively . all of the related party revenues were a result of a related party service contract entered into with global humax cyprus ltd. ( โ cyprus โ ) . additionally , for the year ended september 30 , 2017 and 2016 , net loss amounted to $ 5,051,835 and $ 142,463 , respectively . since inception , our business activity has focused on the development of our corporate entity , business plan , marketing strategy , contact development , website design and product design , and development of our payment gateway called โ clickdirectpay โ . plan of operations the company 's strategy is to engage as many third-party merchants to rely on its payment system . the company charges each merchant a percentage of revenues , in addition to transaction fees . the company 's president will personally attempt to acquire as many merchants to use the company 's clickdirectpay application to drive revenues . critical accounting policies and estimates while our significant accounting policies are more fully described in note 2 to our financial statements , we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this management 's discussion and analysis . story_separator_special_tag stock-based compensation stock-based compensation is accounted for based on the requirements of the asc 718 , share-based payment , which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award ( presumptively , the vesting period ) . the financial accounting standards board ( โ fasb โ ) also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award . pursuant to asc topic 505-50 , for share-based payments to consultants and other third-parties , compensation expense is determined at the โ measurement date. โ the expense is recognized over the vesting period of the award . until the measurement date is reached , the total amount of compensation expense remains uncertain . we record compensation expense based on the fair value of the award at the reporting date . - 17 - recent accounting pronouncements in may 2014 , the fasb issued accounting standards update no . 2014-09 , โ revenue from contracts with customers ( topic 606 ) , โ ( โ asu 2014-09 โ ) . asu 2014-09 outlines a new , single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance , including industry-specific guidance . this new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized . the new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services . asu 2014-09 is effective for public entities for annual reporting periods beginning after december 15 , 2016 and interim periods within those periods . early adoption is not permitted . the fasb has approved a one-year deferral of the effective date with the option to early adopt using the original effective date . entities may use either a full retrospective or a modified retrospective approach to adopt asu 2014-09. in december 2016 , the fasb issued accounting standards update no . 2016-20 , technical corrections and improvements to topic 606 , revenue from contracts with customers , or asu 2016-20. in may 2016 , the fasb issued accounting standards update no . 2016-12 , revenue from contracts with customers ( topic 606 ) : narrow-scope improvements and practical expedients , or asu 2016-12. in april 2016 , the fasb issued accounting standards update no . 2016-10 , revenue from contracts with customers ( topic 606 ) : identifying performance obligations and licensing , or asu 2016-10. in march 2016 , the fasb issued accounting standards update no . 2016-08 , revenue from contracts with customers ( topic 606 ) : principal versus agent considerations ( reporting revenue gross ) , or asu 2016-08. these updates provide additional clarification and implementation guidance on the previously issued accounting standards update no . 2014-09 , revenue from contracts with customers ( topic 606 ) , or asu 2014-09. the amendments in asu 2016-20 provide technical corrections to various implementation examples and clarifying guidance on the treatment of capitalized advertising costs , impairment testing of capitalized contract costs , performance obligation disclosures and scope exceptions . the amendments in asu 2016-12 provide clarifying guidance on assessing collectability ; noncash consideration ; presentation of sales taxes ; and transition . the amendments in asu 2016-10 provide clarifying guidance on the materiality and evaluation of performance obligations ; treatment of shipping and handling costs ; and determining whether an entity 's promise to grant a license provides a customer with either a right to use or a right to access an entity 's intellectual property . the amendments in asu 2016-08 clarify how an entity should identify the specified good or service for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements . collectively , these updates will require a company to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services . the adoption of asu 2016-20 , asu 2016-12 , asu 2016-10 and asu 2016-08 is to coincide with an entity 's adoption of asu 2014-09. the new guidance permits adoption through either a full retrospective approach or a modified retrospective approach with a cumulative effect adjustment to retained earnings . the company has assessed the impact that adopting this new accounting guidance will have on its financial statements and footnote disclosures and believes such impact will not be material . in january 2016 , the fasb issued asu 2016-01 , `` financial instrumentsโoverall ( topic 825-10 ) : `` recognition and measurement of financial assets and financial liabilities . '' asu 2016-01 amends the guidance on the classification and measurement of financial instruments . some of the amendments in asu 2016-01 include the following : 1 ) requires equity investments ( except those accounted for under the equity method of accounting or those that result in consolidation of the investee ) to be measured at fair value with changes in fair value recognized in net income ; 2 ) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment ; 3 ) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes ; and 4 ) requires an entity to present separately in other comprehensive income the portion of the
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results of operations revenues for the years ended september 30 , 2017 and 2016 , we had $ 28,039 and $ 27,585 in revenues , including revenues from a related party of $ 17,279 and $ 12,585 , respectively . revenues increased due to an increase in related party revenue of $ 4,694. all of the related party revenues were from global humax cyprus ltd. ( โ cyprus โ ) . cost of revenues for the year ended september 30 , 2017 , we had $ 29,527 in cost of revenues as compared to $ 21,813 for the year ended september 30 , 2016 , an increase of $ 7,714. cost of revenues increased primarily due to an increase in hosting and software maintenance fees , operating expenses for the year ended september 30 , 2017 , we incurred $ 5,049,196 in operating expenses as compared to $ 144,701 for the year ended september 30 , 2016 , an increase of $ 4,904,495. operating expenses consisted of the following : replace_table_token_0_th operating expenses increased primarily due to ยท for the year ended september 30 , 2017 , we had an increase in compensation of $ 3,043,350 , primarily due to stock based compensation to our directors and ceo for $ 3,045,000 . ยท we had an increase in professional fees of $ 1,754,498 , primarily due to an increase in consulting fees of $ 1,622,700 from stock based compensation , increase in investor relations fees of $ 99,100 , primarily due to stock based consulting fees of $ 51,000 , an increase in accounting and audit fees of $ 14,635 , due to the hiring of an accounting consultant , an increase in fees incurred to become a trading company of $ 12,000 , offset by a decrease in legal fees of $ 6,948 . ยท we had an increase in amortization of development costs of $ 10,089 .
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forward-looking statements statements in this report and the annual report to stockholders that are not purely historical facts , including , without limitation , statements about our expected future financial position , results of operations or cash flows , as well as other statements including , without limitation , words such as โ anticipate , โ โ forecast โ , โ explore , โ โ believe , โ โ plan , โ โ estimate , โ โ expect , โ โ intend , โ โ should , โ โ could , โ โ goal , โ โ may , โ โ target , โ โ designed , โ โ on track , โ โ comfortable with , โ โ optimistic โ and other similar expressions , constitute forward-looking statements within the meaning of section 27a of the securities act of 1933 , as amended , and section 21e of the exchange act . because forward-looking statements relate to the future , they are subject to inherent uncertainties , risks and changes in circumstances that are difficult to predict and many of which are outside of our control . actual results , our financial condition , and the timing of some events could differ materially from those projected in or contemplated by the forward-looking statements . therefore you should not rely on any of these forward-looking statements . important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include , among others : the composition and market value of our assets under management ; regulations adversely affecting the financial services industry ; competition in the investment management industry ; our assets under management include investments in foreign companies ; our ability to develop and market new investment strategies successfully ; our reputation and our relationships with current and potential customers ; our ability to attract and retain qualified personnel ; our ability to maintain effective cyber security ; our ability to perform operational tasks ; our ability to identify and execute on our strategic initiatives ; our ability to maintain effective information systems ; our ability to select and oversee third-party vendors ; litigation risks ; our ability to properly address conflicts of interest ; our ability to maintain adequate insurance coverage ; our ability to maintain an effective system of internal controls ; our ability to maintain our fee structure in light of competitive fee pressures ; our relationships with investment consulting firms ; and the significant concentration of our revenues in a small number of customers . additional factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements are discussed under the section entitled โ item 1a . risk factors โ and elsewhere in this report . the forward-looking statements are based only on currently available information and speak only as of the date of this report . we are not obligated and do not undertake an obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances occurring after the date of this report or to reflect the occurrence of unanticipated events or otherwise . 24 overview we manage investment assets and provide services for our clients through our subsidiaries , westwood management , westwood trust and westwood international advisors . westwood management and westwood international advisors provide investment advisory services to institutional clients , the westwood fundsยฎ , other mutual funds , an irish investment company authorized pursuant to the european communities ( undertakings for collective investment in transferable securities ) regulation 2011 ( as amended ) ( the โ ucits fund โ ) , individuals and clients of westwood trust . westwood trust provides trust and custodial services and participation in common trust funds to institutions and high net worth individuals . our revenues are generally derived from fees based on a percentage of assets under management , and at december 31 , 2018 , westwood management , westwood international advisors and westwood trust collectively managed assets valued at approximately $ 16.6 billion . we have established a track record of delivering competitive , risk-adjusted returns for our clients . with respect to most of our client assets under management , we utilize a โ value โ investment style focused on achieving superior long-term , risk-adjusted returns by investing in companies with high levels of free cash flow , improving returns on equity and strengthening balance sheets that are well positioned for growth but whose value is not fully recognized in the marketplace . this investment approach is designed to preserve capital during unfavorable periods and provide superior real returns over the long term . our investment teams have significant industry experience . our investment team members have average investment experience of seventeen years . we have focused on building a foundation in terms of personnel and infrastructure to support a potentially much larger business . we have also developed investment strategies that we believe will be desirable within our target institutional , wealth management and mutual fund markets . the cost of developing new products and growing the organization as a whole has resulted in our incurring expenses that , in some cases , do not currently have significant offsetting revenues . while we continue to evolve our products , we believe that the appropriate foundation and products are in place such that investors will recognize the value in these products , thereby generating new revenue streams for westwood . 2018 highlights the following items are highlights for the year ended december 31 , 2018 : assets under management as of december 31 , 2018 were $ 16.6 billion , a 31 % decrease compared to december 31 , 2017 . quarterly average assets under management decreased 8 % to $ 21.4 billion for 2018 compared to 2017 , which contributed to the 9 % decrease in total revenue from 2017. our largecap value , emerging markets plus , smidcap , smidcap plus , emerging markets , and emerging markets smidcap strategies exhibited strong performance . story_separator_special_tag the increase in average assets under management is due principally to market appreciation over the preceding twelve months and $ 713 million in a long-only convertibles fund that transitioned from assets under advisement ( โ aua โ ) to aum during the third quarter of 2017. the following table presents our assets under management as of december 31 , 2018 , 2017 and 2016 : replace_table_token_5_th ( 1 ) aum for 2018 , 2017 and 2016 excludes approximately $ 228 million , $ 382 million and $ 1.0 billion of aua , respectively , related to our model portfolios , for which we provide consulting advice but do not have direct discretionary investment authority . during the third quarter of 2017 , approximately $ 713 million related to a long-only convertibles fund transitioned from aua to aum . our assets under management disclosure reflects management 's view of our three types of accounts : institutional , wealth management and mutual funds . institutional includes separate accounts of corporate pension and profit sharing plans , public employee retirement funds , taft-hartley plans , endowments , foundations and individuals ; subadvisory relationships where westwood provides investment management services for funds offered by other financial institutions ; pooled investment vehicles , including the ucits fund and collective investment trusts ; and managed account relationships with brokerage firms and other registered investment advisors that offer westwood products to their customers . wealth management includes assets for which westwood trust provides trust and custodial services and participation in common trust funds that it sponsors to institutions and high net worth individuals pursuant to trust or agency agreements and assets for which westwood advisors , l.l.c . provided advisory services to high net worth individuals . prior to 2018 , it also included assets for which westwood advisors , l.l.c . provided advisory services in ten limited liability companies to high net worth individuals . investment subadvisory services are provided for the common trust funds by westwood management , westwood international advisors and external unaffiliated subadvisors . for certain assets in this category westwood trust currently provides limited custody services for a minimal or no fee , viewing these assets as potentially converting to fee-generating managed assets in the future . as an example , some assets in this category consist of low-basis stock currently held in custody for clients where we believe such assets may convert to fee-generating managed assets following an inter-generational transfer of wealth . mutual funds include the westwood fundsยฎ , a family of mutual funds for which westwood management serves as advisor . these funds are available to individual investors , as well as offered as part of our investment strategies for institutional and wealth management accounts . 27 roll-forward of assets under management replace_table_token_6_th ( 1 ) wealth management outflows include approximately $ 1.1 billion of assets related to the sale of our omaha-based component of our wealth management business . the decrease in assets under management for the year ended december 31 , 2018 was due to net outflows of $ 6.2 billion , which included approximately $ 1.1 billion of outflows related to the divestiture of our omaha operations , and market depreciation of $ 1.4 billion . flows were primarily related to net outflows in our smidcap strategies , emerging markets strategies , largecap value strategy and income opportunity strategy . replace_table_token_7_th ( 1 ) institutional inflows include approximately $ 713 million of assets related to a long-only convertibles fund , which transitioned from aua to aum during the third quarter of 2017 . ( 2 ) wealth management outflows include approximately $ 397 million of assets related to the sale of our omaha-based component of our wealth management business . the increase in assets under management for the year ended december 31 , 2017 was due to market appreciation of $ 3.4 billion , partially offset by net outflows of $ 398 million , which included approximately $ 713 million of inflows in our strategic global convertibles strategy that transitioned from aua to aum in the third quarter of 2017. flows were primarily driven by net outflows in our smidcap strategies and largecap value strategy , partially offset by net inflows in our smallcap value and market neutral income strategies . 28 replace_table_token_8_th ( 1 ) institutional outflows include approximately $ 30 million in an account that transitioned to our model portfolio for which we no longer have direct discretionary investment authority . this account is included in aua aggregating $ 1.0 billion as of december 31 , 2016. the increase in assets under management for the year ended december 31 , 2016 was due to market appreciation of $ 2.0 billion , partially offset by net outflows of $ 1.5 billion . flows were primarily related to net outflows in our smidcap , income opportunity , largecap value , allcap value and market neutral income strategies , partially offset by net inflows in our emerging markets plus and smallcap value strategies . 29 story_separator_special_tag style= '' font-family : inherit ; font-size:10pt ; '' > $ 106.6 million , respectively . as required by the finance code , westwood trust is subject to a minimum capital requirement of $ 4.0 million . at december 31 , 32 2018 , westwood trust had approximately $ 18.6 million in excess of its minimum capital requirement . we had no debt at december 31 , 2018 or december 31 , 2017 . replace_table_token_12_th historically we have funded our operations and cash requirements with cash generated from operating activities . we may also use cash from operations to pay dividends to our stockholders . as of december 31 , 2018 and 2017 , we had no debt . the changes in net cash provided by operating activities generally reflect the changes in earnings plus the effects of non-cash items and changes in working capital . changes in working capital , especially accounts receivable and accounts payable , generally result from timing differences between collection of fees billed and payment of operating expenses .
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results of operations the following table and discussion of our results of operations is based upon data derived from our consolidated statements of comprehensive income contained in our consolidated financial statements and should be read in conjunction with these statements included elsewhere in this report . replace_table_token_9_th year ended december 31 , 2018 compared to year ended december 31 , 2017 total revenues . total revenues decreased $ 11.5 million , or 9 % , to $ 122.3 million compared with $ 133.8 million for 2017 . the decrease was attributable to a $ 9.8 million decrease in asset-based advisory fees and a $ 2.7 million decrease in trust fees , partially offset by a $ 1.6 million increase in performance-based fees . advisory-based fees decreased as a result of lower average assets under management compared to 2017. trust fees decreased primarily due to the sale of the omaha-based component of our wealth management business . 30 employee compensation and benefits . employee compensation and benefit costs decreased $ 5.0 million , or 8 % , to $ 60.0 million compared with $ 65.0 million in 2017 primarily due to the elimination of compensation following the sale of the omaha-based component of our wealth management business and decreases in short- and long-term incentive compensation as a result of lower assets-based fees compared to the prior year . information technology . information technology costs increased $ 1.3 million , or 17 % , to $ 9.1 million compared with $ 7.8 million in 2017 primarily due to implementation costs as we continue to invest in our technology infrastructure and increased research expenses . professional services .
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this md & a should be read in conjunction with our consolidated financial statements and accompanying notes included in this form 10-k. when reviewing the discussion , you should keep in mind the substantial risks and uncertainties that characterize our business . in particular , we encourage you to review the risk and uncertainties described under item 1a โ risk factors , โ of this form 10-k. these risks and uncertainties could cause actual results to differ materially from those forecasted in forward-looking statements or implied by past results and trends . forward-looking statements are statements that attempt to project or anticipate future developments in our business ; we encourage you to review the discussion of forward-looking statements under โ cautionary statement for purposes of the โ safe harbor โ provisions of the private securities litigation reform act of 1995 , โ at the beginning of this report . these statements , like all statements in this report , speak only as of the date of this report ( unless another date is indicated ) , and we undertake no obligation to update or revise the statements in light of future developments . unless otherwise specified , any reference to a โ year โ is to the year ended december 31. overview we manufacture and market semi-finished and finished specialty steel products , including stainless steel , nickel alloys , tool steel and certain other alloyed steels . our manufacturing process involves melting , remelting , heat treating , hot and cold rolling , forging , machining and cold drawing of semi-finished and finished specialty steels . our products are sold to service centers , forgers , rerollers , original equipment manufacturers and wire redrawers . our customers further process our products for use in a variety of industries , including the aerospace , power generation , oil and gas and general industrial markets . we also perform conversion services on materials supplied by customers . our end markets continued to strengthen throughout 2018. nearly all of our end markets were up in 2018 compared with 2017 , and total net sales increased more than 26 % to a record $ 255.9 million . our largest end market , aerospace , increased 33 % to $ 148.9 million or 58 % of total net sales . the growth in aerospace was due to strong customer demand , driven by increasing airplane production and growing backlog among the market leaders . sales in each quarter of 2018 were higher than the comparable 2017 period . backlog at the end of 2018 was $ 126.2 million , a record level and an increase of 63 % compared to the end of 2017. we received three new customer approvals that are critical to our continued growth in the aerospace end market , and we added three new products in 2018 , with an additional 15 new products in the development process . new product introductions are essential as we continue our transition to a higher value product mix . our 2018 gross margin was 14.8 % of net sales , improved from 11.4 % of net sales in 2017. this was due to increased sales volume combined with operational productivity enhancements and selling price increases . this represents the second consecutive year of gross margin expansion , after 2017 increased from 8.8 % of net sales in 2016. selling , general and administrative ( โ sg & a โ ) expenses increased by $ 2.9 million in 2018. the increase in sg & a was driven by higher employee related costs , including incentive compensation , associated with the increased business levels . overall , our operating income in 2018 was $ 16.1 million , compared to $ 4.2 million in 2017 , reflecting overall improved operational results . during 2018 , we generated $ 16.6 million of cash from operating activities , and used $ 15.4 million on capital expenditures , a significant portion of which was strategic capital spending related to finished bar production at our dunkirk facility . 15 our financing activities provide d net cash of $ 2.7 million . the company completed an equity offering in the second quarter of 2018 , which included the sale of 1 .4 million shares of common stock and raised $ 32.2 million of net proceeds . the proceeds were used to pay down our revolving cre dit facility . we entered into a new credit agreement that provide d a revolving credit facility of up to $ 110.0 million and a term loan facility of $ 10.0 million . we also entered into a new markets tax credit ( โ nmtc โ ) financing agreement , which provided low interest financing for our mid-size bar cell capital project at our dunkirk , ny facility . our operating facilities are integrated , and therefore our chief operating decision maker ( โ codm โ ) views the company as one business unit . our codm sets performance goals , assesses performance and makes decisions about resource allocations on a consolidated basis . as a result of these factors , as well as the nature of the financial information available which is reviewed by our codm , we maintain one reportable segment . story_separator_special_tag year ended december 31 , 2016. approximately $ 1.0 million is due to increased employee costs , $ 0.2 million is due to higher share-based compensation expense , and $ 0.6 million of the increase is due to higher legal costs , reflecting external legal expenses related to a lawsuit against a supplier for unauthorized substitution of material and defense of a claim of non-compliant material . these increases in sg & a were partially offset by $ 0.6 million reduction in variable compensation . as a percentage of sales , our sg & a expenses were 9.3 % and 11.3 % , respectively , for the years ended december 31 , 2017 and 2016 , respectively . story_separator_special_tag inventories increased by $ 27.4 million primarily due to increased demand , accounts receivable increased by $ 5.6 million due to increased sales in the fourth quarter of 2017 , compared to the fourth quarter of 2016 , and accounts payable increased by $ 14.2 million due to increased activity levels in the fourth quarter of 2017 , compared to the fourth quarter of 2016. net income adjusted for non-cash expenses generated $ 20.3 million and all other operating activities used approximately $ 0.4 million of cash in 2017. net cash used in investing activities our capital spending was $ 15.4 million during 2018 and $ 8.0 million during 2017. the increase is due to strategic capital spending at our dunkirk , ny facility to install a new mid-size bar finishing operation . net cash used in financing activities during 2018 , financing activities provided $ 2.7 million in cash . we generated $ 32.2 million of cash through net proceeds from the equity offering , which we used to repay amounts outstanding under the company 's credit facility . we decreased borrowings under our credit agreement , notes and capital leases by $ 32.2 million , and entered into the new credit agreement during the year . financing activities were also impacted by borrowings related to the mid-size bar cell capital project at our dunkirk , ny facility . these borrowings were made in conjunction with utilization of the nmtc financing program and higher working capital levels . during 2017 , financing activities provided $ 7.0 million in cash . we increased borrowings under the credit facility by $ 11.5 million , paid $ 5.1 million on the term loan and capital leases , and received $ 0.6 million in proceeds from the issuance of common stock . we believe that our cash flows from continuing operations , as well as available borrowings under our credit facility , are adequate to satisfy our working capital , capital expenditure requirements , and other contractual obligations for the foreseeable future , including at least the next 12 months . 22 raw materials the cost of raw materials represents approximately 40 % of the cost of products sold in 2018. the major raw materials used in our operations include nickel , chrome , molybdenum and carbon scrap . the average price per pound of nickel in 2018 was $ 5.95 , which was 26 % higher than in 2017. the average price per pound of molybdenum in 2018 was $ 11.96 , which was 45 % higher than in 2017. the average price per pound of carbon scrap in 2018 was $ 0.19 , which was 12 % higher than in 2017. the average price per pound of chrome decreased 6 % compared to 2017 to $ 1.37. we maintain sales price surcharge mechanisms on certain of our products , priced at time of order or shipment , to mitigate the risk of substantial raw material cost fluctuations . the market values for these raw materials and others continue to fluctuate based on supply and demand , market disruptions and other factors . capital resources including off-balance sheet arrangements we do not maintain off-balance sheet arrangements , nor do we participate in non-exchange traded contracts requiring fair value accounting treatment , or material related-party transaction arrangements . credit facility on august 3 , 2018 , we entered into the first amended and restated revolving credit , term loan and security agreement ( โ credit agreement โ ) with pnc bank , national association , as administrative agent and co-collateral agent , bank of america , n.a. , as co-collateral agent , and pnc capital markets llc , as sole lead arranger and sole bookrunner . the credit agreement amended the prior revolving credit , term loan and security agreement ( โ prior agreement โ ) , and provides for a senior secured revolving credit facility not to exceed $ 110.0 million ( โ revolving credit facility โ ) and a senior secured term loan facility ( โ term loan โ ) in the amount of $ 10.0 million ( together with the revolving credit facility , the โ facilities โ ) . the facilities , which expire on august 3 , 2023 ( the โ expiration date โ ) , are collateralized by a first lien in substantially all of the assets of the company and its subsidiaries , except that no real property is collateral under the facilities other than company 's real property in north jackson , ohio . availability under the credit agreement is based on eligible accounts receivable and inventory . further , the company must maintain undrawn availability under the credit agreement of at least an amount equal to payments due on the notes issue d in connection with the acquisition of the north jackson facility , as defined in the credit agreement , plus 12.5 % of the maximum borrowing amount of $ 110.0 million ( โ minimum liquidity โ ) . at december 31 , 2018 , the amount of payments due on the notes relevant to the minimum liquidity calculation was $ 2 million . this requirement exists until the notes are paid in full , refinanced or extended . the company is required to pay a commitment fee of 0.25 % based on the daily unused portion of the revolving credit facility . with respect to the term loan , the company will pay quarterly installments of the principal of approximately $ 0.4 million , plus accrued and unpaid interest , on the first day of each fiscal quarter beginning on september 30 , 2018. to the extent not previously paid , the term loan will become due and payable in full on the expiration date . amounts outstanding under the facilities , at the company 's option , will bear interest at either a base rate or a libor based rate , in either case calculated in accordance with the terms of the credit agreement . interest under the credit agreement is payable monthly .
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results of operations 2018 results compared to 2017 replace_table_token_6_th 16 market segment information : replace_table_token_7_th melt type information : replace_table_token_8_th the majority of our products are sold to service centers rather than the ultimate end market customers . the end market information in this annual report is our estimate based upon our knowledge of our customers and the grade of material sold to them , which they will in-turn sell to the ultimate end market customer . end market information : replace_table_token_9_th net sales : net sales for the year ended december 31 , 2018 increased $ 53.3 million , or 26.3 % , compared to 2017. the increase in our sales reflects a 13.5 % increase in consolidated tons shipped , as demand for our products increased as a result of strengthening market conditions throughout 2018 , and a 11.3 % increase in sales dollars per shipped ton . the increase in sales dollars per shipped ton was driven by improved product mix , increased surcharges , and base price increases implemented during the year . 17 our product sales to all of our end markets except power generation increased as shown in the above table . our premium alloy sales reached a record level of $ 41.1 mill ion , or 16.1 % of total sales , for the year ended december 31 , 201 8 , compared to $ 27.3 million , or 13.5 % of total sales , for the year ended december 31 , 201 7 . our premium alloy sales are primarily for the a erospace end market . gross margin : our gross margin , as a percentage of net sales , increased to 14.8 % in 2018 from 11.4 % in 2017. the increase in gross margin is a result of better alignment of melt costs and surcharges for the majority of the current year , and the realization of manufacturing and productivity savings .
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in some cases , you can identify forward-looking statements by terminology including , `` could '' `` may '' , `` will '' , `` should '' , `` expect '' , `` plan '' , `` anticipate '' , `` believe '' , `` estimate '' , `` predict '' , `` potential '' and the negative of these terms or other comparable terminology . these statements are only predictions . actual events or results may differ materially . while these forward-looking statements , and any assumptions upon which they are based , are made in good faith and reflect our current judgment regarding the direction of our business , actual results will almost always vary , sometimes materially , from any estimates , predictions , projections , assumptions or other future performance suggested in this annual report . the following discussion should be read in conjunction with the consolidated financial statements and the related notes contained elsewhere in this annual report . in addition to historical information , the following discussion contains forward looking statements based upon current expectations that are subject to risks and uncertainties . actual results may differ substantially from those referred to herein due to a number of factors , including , but not limited to , risks described in the section entitled โ risk factors โ . overview of our business in the discussion below , when we use the terms โ we โ , โ us โ and โ our โ , we are referring to viveve medical , inc. and our wholly-owned subsidiaries , viveve , inc. and viveve bv . we design , develop , manufacture and market a platform medical technology , which we refer to as cryogen-cooled monopolar radiofrequency , or cmrf . our proprietary cmrf technology is delivered through a radiofrequency generator , handpiece and treatment tip that , collectively , we refer to as the viveveยฎ system . the viveve system is currently marketed and sold for a number of indications , depending on the relevant country-specific clearance or approval . currently , the viveve system is cleared for marketing in 57 countries throughout the world under the following indications for use : indication for use : no . of countries : general surgical procedures for electrocoagulation and hemostasis 4 ( including the u.s. ) general surgical procedures for electrocoagulation and hemostasis of vaginal tissue and the treatment of vaginal laxity 32 for treatment of vaginal laxity 4 for treatment of the vaginal introitus , after vaginal childbirth , to improve sexual function 14 general surgical procedures for electrocoagulation and hemostasis as well as for the treatment of vaginal laxity 1 for vaginal rejuvenation 1 for treatment of vaginal laxity and to improve mild urinary incontinence and sexual function 1 in the u.s. , the viveve system is indicated for use in general surgical procedures for electrocoagulation and hemostasis and we market and sell primarily through a direct sales force . outside the u.s. , we primarily market and sell through distribution partners . as of december 31 , 2019 , we have sold 840 viveve systems and approximately 41,150 single-use treatment tips worldwide . because the revenues we have earned to date have not been sufficient to support our operations , we have relied on sales of our securities , bank term loans and loans from related parties to fund our operations . we are subject to risks , expenses and uncertainties frequently encountered by companies in the medical device industry . these risks include , but are not limited to , intense competition , whether we can be successful in obtaining fda and other governmental clearance or approval for the sale of our product for all desired indications and whether there will be a demand for the viveve system , given that the cost of the procedure will likely not be reimbursed by the government or private health insurers . in addition , we will continue to require substantial funds to support our clinical trials and fund our efforts to expand regulatory clearance or approval for our products , including in the u.s. we can not be certain that any additional required financing will be available when needed or on terms which are favorable to us . as noted above , our operations to date have been primarily funded through the sales of our securities , bank term loans and loans from related parties . various factors , including our limited operating history with limited revenues to date and our limited ability to market and sell our products have resulted in limited working capital available to fund our operations . there are no assurances that we will be successful in securing additional financing in the future to fund our operations going forward . failure to generate sufficient cash flows from operations , raise additional capital or reduce certain discretionary spending could have a material adverse effect on our ability to achieve our intended business objectives . 39 recent events 2019 public offering and debt conversion in november 2019 , the company closed an underwritten public offering of units ( the โ november 2019 offering โ ) for gross proceeds of approximately $ 11,500,000 , which included the full exercise of the underwriter 's overallotment option to purchase additional shares and warrants . the net proceeds to the company , after deducting underwriting discounts and commissions and other offering expenses and payable by the company , were approximately $ 9,952,000. the offering comprised of : ( 1 ) class a units , priced at a public offering price of $ 1.55 per unit , with each unit consisting of one share of common stock , a series a warrant to purchase one share of common stock at an exercise price of $ 1.55 per share that expires on the first anniversary of the date of issuance and a series b warrant to purchase one share of common stock at an exercise price of $ 1.55 per share that expires on the fifth anniversary of the issuance ; and ( 2 ) class b units , priced at a public offering story_separator_special_tag a hearing was requested before the panel , which stayed the delisting action by nasdaq . the company also made submissions to the panel demonstrating its compliance with the alternative stockholders ' equity requirement under nasdaq listing rule 5550 ( b ) ( 1 ) . on december 30 , 2019 , the company received a formal determination from the panel indicating that the company has evidenced compliance with all applicable requirements for continued listing on the nasdaq capital market . accordingly , the company 's hearing before the panel scheduled for january 16 , 2020 was cancelled and the company 's common stock will continue to be listed and trade on the nasdaq capital market . โ at-the-market โ offering the company established an โ at-the-market โ equity offering program through the filing of a prospectus supplement on august 16 , 2019 to its shelf registration statement on form s-3filed on november 8 , 2017 , under which the company could offer and sell , from time-to-time , up to $ 6,760,000 aggregate offering price of shares of its common stock ( the โ august 2019 atm facility โ ) . the company 's offering of $ 6,760,000 of its common stock under the august 2019 atm facility was completed in late september 2019. during the year ended december 31 , 2019 , the company sold 1,004,171 shares of common stock under the august 2019 atm facility for net proceeds , after deducting sales commissions and other offering costs , of approximately $ 6,322,000. as of december 31 , 2019 , the company had no remaining capacity to issue shares under the august 2019 atm facility . the company had previously established an โ at-the-market โ equity offering program through the filing of a prospectus supplement on november 28 , 2017 to its shelf registration statement on form s-3 filed on november 8 , 2017 , under which the company could offer and sell , from time-to-time , up to $ 25,000,000 aggregate offering price of shares of its common stock ( the โ november 2017 atm facility โ ) . on august 16 , 2019 , the company suspended and subsequently terminated the november 2017 atm facility . the company will no longer make any sales of its common stock under the november 2017 atm facility . during the years ended december 31 , 2019 and 2018 , the company sold zero and 2,771 shares of common stock under the november 2017 atm facility , respectively . through the termination of the november 2017 atm facility in august 2019 , the company sold 3,364 shares of common stock under the equity offering program for net proceeds , after deducting sales commissions and other offering costs , of approximately $ 1,318,000. effective shelf registration statements in november 2017 , we filed a universal shelf registration statement with the sec on form s-3 for the proposed offering from time to time of up to $ 50,000,000 of our securities , including common stock , preferred stock , and or warrants ( the โ 2017 shelf registration statement โ ) . the 2017 shelf registration statement currently has a balance of $ 35,016,000 available for future issuance . however , as a result of the limitations of general instruction i.b.6 . of form s-3 , or the so-called โ baby shelf rules โ , the amount of shares of our common stock available for sale under a registration statement on form s-3 is limited to one-third of the aggregate market value of our common equity held by non-affiliates of the company over any rolling 12-month period . as of december 31 , 2019 , the company had no capacity for sales under the 2017 shelf registration statement due to the baby shelf rules . 41 ita approval and initiation of 3-arm feasibility study in sui in december 2019 , the company received approval of an investigational testing application ( ita ) from the canadian ministry of health and in january 2020 initiated a three-arm , three-month feasibility study to compare viveve 's cryogen-cooled monopolar radiofrequency ( cmrf ) treatment and a cryogen-only sham to an inert sham treatment for the improvement of stress urinary incontinence ( sui ) in women . this three-month study may provide us with a strategic path forward in our pursuit of global label expansion for sui . study subjects will be randomized in a 1:1:1 ratio to the three arms and assessed using the 1-hour pad weight test , 3-day voiding diary , the 24-hour pad weight test and i-qol at three months post treatment . completion of subject enrollment in the study was reported in march 2020. the three-arm feasibility study is targeted for read-out in the third quarter of 2020. launch of next generation 2.0 platform south korea : in december 2019 , viveve received registration clearance by the korean ministry of food and drug safety for its next generation viveve 2.0 cmrf system for use in general surgical procedures for electrocoagulation and hemostasis as well as for the treatment of vaginal laxity . clearance of the viveve 2.0 system in south korea represents an important milestone in the company 's ongoing regulatory strategy to expand the global commercial footprint of its next generation cmrf technology platform and consumable treatment tips that are currently available in the u.s. , european union , china , and south korea . china : in december 2019 , viveve reported the launch of its next generation 2.0 system and consumable treatment tips in mainland china , hong kong and macau with paragon meditech , the company 's exclusive distribution partner in the region . the paragon hosted launch event included more than 70 key opinion leader customers in dalian , china . the comprehensive event was enthusiastically received by participating women 's health and aesthetic practitioners from mainland china and other asian markets across paragon 's territories .
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results of operations comparison of the year ended december 31 , 2019 and 2018 revenue year ended december 31 , change 2019 2018 $ % ( in thousands , except percentages ) revenue $ 6,567 $ 18,517 $ ( 11,950 ) ( 65 ) % we recorded revenue of $ 6,567,000 for the year ended december 31 , 2019 , compared to revenue of $ 18,517,000 for the year ended december 31 , 2018 , a decrease of $ 11,950,000 , or approximately 65 % . the decrease in revenue was primarily due to our shift in our u.s. commercial sales model to a recurring revenue rental model versus selling systems under a capital equipment sales model . sales in 2019 included 137 viveve systems and approximately 7,850 disposable treatment tips . under the new u.s. recurring revenue rental model , which was launched in june 2019 , the company placed 82 viveve systems . rental revenue on these leases is recognized on a straight-line basis over the term of the lease , which is initiated upon completion of system installation and training . rental revenue recognized in 2019 was not material . sales in 2018 included 259 viveve systems , and approximately 18,450 disposable treatment tips .
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a discussion of the year ended december 31 , 2019 compared to the year ended december 31 , 2018 has been reported previously in our final prospectus , dated july 29 , 2020 , filed with the sec pursuant to rule 424 ( b ) ( 4 ) ( file no . 333-240115 ) , under the heading `` management 's discussion and analysis of financial condition and results of operations . '' overview we are a clinical-stage biopharmaceutical company focused on discovering and developing small molecule therapeutics targeting fundamental biological pathways of cancers . we use our highly efficient drug discovery engine , which we refer to as our โ integrated discovery engine โ , to identify targets and develop small molecule new chemical entities , or nces , with properties that we believe could result in potentially differentiated product profiles . our discovery engine combines our extensive experience and capabilities across cancer biology and medicinal chemistry . we are developing a broad pipeline of product candidates with an initial focus on validated oncology targets with the potential to address large patient populations . we believe our product candidates are differentiated from current programs targeting similar pathways and have the potential to significantly impact the lives of patients with cancer . zn-c5 โour lead product candidate , zn-c5 , is an oral selective estrogen receptor degrader , or serd , currently in a phase 1/2 clinical trial for the treatment of estrogen receptor-positive , human epidermal growth factor receptor 2-negative , or er+/her2- , advanced or metastatic breast cancer . we have designed zn-c5 to have high potency and selectivity , as well as favorable tolerability and pharmacokinetic , or pk , properties . we intend to initiate the phase 2 monotherapy and combination ( with palbociclib ) portions of this phase 1/2 trial in the first half of 2021. in addition , we initiated a phase 1b open label , multi-center trial evaluating zn-c5 in combination with abemaciclib ( marketed as verzenio ยฎ by lilly ) in patients with er+/her2- advanced or metastatic breast cancer in november 2020 as part of a clinical research collaboration with lilly . abemaciclib is a cdk 4/6 inhibitor fda approved for the treatment of hormone receptor-positive , human epidermal growth factor receptor 2-negative , or hr+/her2- , advanced or metastatic breast cancer in combination with fulvestrant , aromatase inhibitors or as a single agent in certain patients with disease progression following treatment with prior endocrine therapy or chemotherapy regimens . we also intend to initiate , subject to feedback from the fda , a phase 2/3 clinical trial evaluating zn-c5 in earlier stage breast cancer patients in 2021 and to initiate a phase 1b clinical trial evaluating zn-c5 in combination with zn-d5 , our bcl-2 inhibitor product candidate , in patients with er+/her2- breast cancer in 2021. zn-c3 โour lead product candidate zn-c3 , an inhibitor of wee1 , a protein tyrosine kinase , currently in a phase 1 clinical trial for the treatment of advanced solid tumors and in a phase 1b in combination with chemotherapy in patients with advanced ovarian cancer . we plan to report initial results from the phase 1 portion of the ongoing trial of zn-c3 at the aacr annual meeting in april 2021. in addition , we initiated a phase 1b clinical trial evaluating zn-c3 in combination with chemotherapy in patients with advanced ovarian cancer in the october 2020 and plan to initiate a phase 2 trial evaluating zn-c3 as monotherapy in patients with uterine serous carcinoma , or usc , in 2021. usc comprises 10 % , and has the highest mortality rate , of all endometrial cancers , with approximately 6,000 new cases and 4,500 deaths in the united states per year . we continue to actively evaluate other potential combinations for the future clinical development of zn-c3 , and intend to initiate two ( 2 ) additional phase 1 clinical trials evaluating zn-c3 in combination with chemotherapy and parp inhibitor in ovarian cancer and other targeted indications in 2021. zn-d5 โour other product candidate zn-d5 is a selective inhibitor of b-cell lymphoma 2 , or bcl-2 , initially in development for the treatment of hematological malignancies . we initiated a phase 1 clinical trial of zn-d5 in patients with acute myeloid leukemia , or aml , or b-cell lymphoma in october 2021. in addition , we intend to initiate a phase 1b clinical trial evaluating zn-d5 in combination with zn-c5 , our oral serd product candidate in patients with er+/her2- breast cancer in 2021. zn-e4 โ zn-e4 is an irreversible inhibitor of epidermal growth factor receptor , or egfr , currently in a phase 1/2 clinical trial for the treatment of advanced non-small cell lung cancer , or nsclc . we expect to report initial results from the phase 1 portion of the ongoing trial of zn-e4 in 2021 we currently own worldwide development and commercialization rights to each of our product candidates , other than in select asian countries ( including china ) for each of zn-c5 , zn-c3 and zn-d5 , for which we have out-licensed these rights to 100 our majority-owned joint venture , zentera therapeutics ( cayman ) , ltd. , or zentera , and for zn-e4 for which we have out-licensed these rights to sciclone pharmaceuticals international ( cayman ) development ltd. zentera submitted an investigational new drug application , or ind , in china for zn-c5 in december 2020 , for zn-c3 in february 2021 and intends to submit for zn-d5 in 2021. other preclinical programs โwe are also currently advancing multiple small molecule programs in preclinical development for other cancer indications , including select solid tumors and hematological malignancies . we are now in lead optimization for our fifth product candidate and plan to submit an ind to the fda in 2021. since our inception , our operations have been limited to organizing and staffing our company , business planning , raising capital , establishing our intellectual property portfolio and performing research and development of our product pipeline . story_separator_special_tag see โ risk factorsโthe outbreak of the covid-19 pandemic has adversely impacted and we expect will continue to adversely impact our business , including our preclinical studies and clinical trials. โ in part i , item 1a . of this annual report on form 10-k. license agreements and strategic collaborations agreements recurium ip holdings , llc in december 2014 , and as amended and restated effective as of december 2017 and september 2019 and as amended in may 2020 , we entered into a license agreement , or the recurium agreement , with recurium ip holdings , llc , or recurium ip , under which we were granted an exclusive worldwide license to certain intellectual property rights owned or controlled by recurium ip to develop and commercialize pharmaceutical products for the treatment or prevention of disease , other than for pain . in connection with the may 2020 amendment , we clarified certain aspects of the sublicensing payment provisions . we have the right to sublicense our rights under the recurium agreement , subject to certain conditions . we are required to use commercially reasonable efforts to develop and commercialize at least one product that comprises or contains a licensed compound and to execute certain development activities . under the terms of the recurium agreement , we are obligated to make development and regulatory milestone payments , pay royalties for net sales and make sublicensing payments with respect to certain licensed products directed to one of ten specific biological targets , including zn-c5 , zn-c3 and zn-e4 . we are obligated to make development and regulatory milestone payments for such licensed products of up to $ 44.5 million . in addition , we are obligated to make milestone payments up to $ 150,000 for certain licensed products used in animals . we are also obligated to pay royalties on sales of such licensed products at a mid- to high-single digit percentage . in addition , if we choose to sublicense or assign to any third parties our rights under the recurium agreement with respect to such licensed products , we must pay to recurium ip 20 % of sublicensing income received in connection with such transaction . mayo foundation for medical education and research in february 2016 , and as amended in april 2017 and december 2017 , we entered into an option agreement , or the mayo agreement , with mayo foundation for medical education and research under which we were granted an exclusive option to obtain a nonexclusive worldwide license to know-how and an exclusive worldwide license to related patent rights created by mayo under the mayo agreement . the mayo agreement provided that it will expire on the date of the last to expire of the mayo patent rights or , if no mayo patent rights arise , on february 11 , 2021. no mayo patent rights were created under the mayo agreement and therefore the agreement expired on february 11 , 2021. in consideration for the grant of know-how we provided grants of common stock on the first anniversary and class a common units on the second and third anniversaries following entry into the mayo agreement . as of december 31 , 2020 , we have granted equity securities which amount to 15,435 shares of common stock under the mayo agreement . sciclone pharmaceuticals international ( cayman ) development ltd. in december 2014 , and as amended in december 2016 and december 2017 , we entered into a collaboration and license agreement , or the sciclone agreement , with sciclone pharmaceuticals international ( cayman ) development ltd. , or sciclone , under which we granted an exclusive license certain intellectual property rights in the people 's republic of china ( including the territories of macao and hong kong ) , south korea , taiwan and vietnam , or the sciclone territory , for sciclone to develop and commercialize a licensed product for the treatment or prevention of oncologic diseases and an exclusive option to obtain a similar license for up to two ( 2 ) additional licensed products . under the sciclone agreement , sciclone is responsible for clinical development activities required in order to obtain regulatory approval in the sciclone territory . sciclone paid to us a 102 one-time upfront payment of $ 1.0 million upon entering into the sciclone agreement , and $ 4.0 million in aggregate milestone payments . no additional development or commercial milestones or reimbursement for research and development expenses are payable under the sciclone agreement , as amended . we are entitled to receive a mid-single digit royalty on net sales of licensed products in the sciclone territory , which royalty is subject to certain reductions in the event that sciclone is unable to achieve certain gross margins or if generic products are sold or if technology covering a licensed product is licensed from a third party . we have also agreed to pay sciclone tiered royalties pursuant to the terms of the sciclone agreement , the applicable rate of which are determined based on whether a compound is developed to a successful dual ind submission and the costs incurred by sciclone for the development of such product candidate . following the december 2016 amendment to the sciclone agreement , sciclone retains the exclusive license to develop and commercialize our egfr inhibitor product candidate , zn-e4 , in the sciclone territory , and the exclusive option to obtain an exclusive license to develop up to two ( 2 ) specified compounds under the sciclone agreement for which we submit an ind by providing notice and paying $ 5 million to us . sciclone 's and our royalty obligations will expire on a licensed product-by-licensed product and country-by-country basis on the later of fifteen years from the date of first commercial sale or when there is no longer a valid patent claim covering such licensed product in such country .
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results of operations comparison of years ended december 31 , 2020 and 2019 the following table summarizes our results of operations for the years ended december 31 , 2020 and 2019 , together with the changes in those items in dollars : replace_table_token_11_th revenue we did not generate any revenue for the years ended december 31 , 2020 and 2019 . 106 research and development expenses research and development expenses for the year ended december 31 , 2020 were $ 84.9 million , compared to $ 38.4 million for the year ended december 31 , 2019. the increase of $ 46.5 million was primarily due to increases in external research and development expenses related to our lead product candidates , as we advanced our phase 1/2 clinical trials for each of zn-c5 , zn-c3 and zn-d5 in 2020. in addition , in 2020 , we conducted additional preclinical studies , incurred additional manufacturing costs , and incurred increased costs for study and lab materials . unallocated research and development expenses increased by $ 22.7 million primarily due to $ 14.8 million of additional employee related costs of which $ 6.4 million was driven by non-cash stock-based compensation from incentive grants and increased headcount to support our platform development , and $ 3.7 million of facilities and other allocated overhead expenses , $ 2.2 million of consulting and outside services , $ 1.3 million of collaboration and licensing related costs and decreased federal grant reimbursements of $ 0.7 million .
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million during the year ended december 31 , 2019 to record excess tax benefits . since the company has a full valuation allowance on all deferred taxes , this has no impact on retained earnings or the tax position of the company . on december 22 , 2017 , h.r . 1 , known as the tax cuts and jobs act , was signed into law , which includes a broad range of topics affecting corporations โ including corporate tax rates , business deductions and international provisions . the effect of the tax law changes has been recognized in the company 's december 31 , 2018 financial statements . stock-based compensation the company accounts for stock-based compensation in accordance with asc 718 , stock based compensation . asc 718 requires all stock-based payments to employees and consultants , including grants of stock options , to be recognized in the consolidated statements of operations based on their story_separator_special_tag the following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this annual report on form 10-k. some of the information contained in this discussion and analysis or set forth elsewhere in this annual report on form 10-k , including information with respect to our plans and strategy for our business , includes forward looking statements that involve risks and uncertainties . as a result of many factors , including those factors set forth in the โ โ risk factors '' section of this annual report on form10-k , our actual results could differ materially from the results described , in or implied , by these forward-looking statements . overview we are a medical technology company that uses our proprietary ifit image-to-implant technology platform to develop , manufacture and sell joint replacement implants that are individually sized and shaped , which we refer to as personalized , to fit each patient 's unique anatomy . the worldwide market for joint replacement products is approximately $ 18.9 billion annually and growing , and we believe our ifit technology platform is applicable to all major joints in this market . we offer a broad line of personalized knee implants designed to restore the natural shape of a patient 's knee . we have sold a total of more than 110,000 knee implants , more than 87,000 total knee implants and 22,000 partial knee implants . in clinical studies , itotal cr , our cruciate-retaining total knee replacement implant and best-selling product , demonstrated superior clinical outcomes , including better function and greater patient satisfaction compared to off-the-shelf implants . in march 2016 , we initiated the broad commercial launch of the itotal ps , our posterior-stabilized total knee replacement implant which addresses the largest segment of the knee replacement market . on july 31 , 2018 , our first conformis hip systems were implanted . on november 7 , 2019 , we announced fda clearance of the next generation conformis hip system , and initiated the full commercial launch of the conformis hip system . our ifit technology platform comprises three key elements : ifit design , our proprietary algorithms and computer software that we use to design personalized implants and associated single-use patient-specific instrumentation , which we refer to as ijigs , based on computed tomography , or ct scans of the patient and to prepare a surgical plan customized for the patient that we call iview . ifit printing , a three-dimensional , or 3d , printing technology that we use to manufacture ijigs and that we may extend to manufacture certain components of our personalized knee replacement implants . ifit just-in-time delivery , our just-in-time manufacturing and delivery capabilities . we believe our ifit technology platform enables a scalable business model that greatly lowers our inventory requirements , reduces the amount of working capital required to support our operations and allows us to launch new products and product improvements more rapidly , as compared to manufacturers of off-the-shelf implants . all of our joint replacement products have been cleared by the fda under the premarket notification process of section 510 ( k ) of the federal food , drug , and cosmetic act , or the fdca , and have received certification to ce mark . we market our products to orthopedic surgeons , hospitals and other medical facilities and patients . we use direct sales representatives , independent sales representatives and distributors to market and sell our products in the united states , germany , the united kingdom and other markets . we were incorporated in delaware and commenced operations in 2004 . 68 components of our results of operations the following is a description of factors that may influence our results of operations , including significant trends and challenges that we believe are important to an understanding of our business and results of operations . revenue our product revenue is generated from sales to hospitals and other medical facilities that are served through a direct sales force , independent sales representatives and distributors in the united states , germany , the united kingdom , austria , ireland , switzerland , singapore , hong kong , malaysia , monaco , hungary , spain , australia , argentina , benelux , united arab emirates , italy and other markets . in order for surgeons to use our products , the medical facilities where these surgeons treat patients typically require us to enter into pricing agreements . the process of negotiating a pricing agreement can be lengthy and time-consuming , require extensive management time and may not be successful . revenue from sales of our products fluctuates principally based on the selling price of the joint replacement product , as the sales price of our products varies among hospitals and other medical facilities as well as health insurance coverage and reimbursement rates . in addition , our product revenue may fluctuate based on the product sales mix and mix of sales by geography . story_separator_special_tag sales and marketing expense consists primarily of personnel costs , including salary , employee benefits and stock-based compensation for personnel employed in sales , marketing , customer service , medical education and training , as well as investments in surgeon training programs , industry events and other promotional activities . in addition , our sales and marketing expense includes sales commissions and bonuses , generally based on a percentage of sales , to our sales managers , direct sales representatives and independent sales representatives . recruiting , training and retaining productive sales representatives and educating surgeons about the benefits of our products are required to generate and grow revenue . we expect sales and marketing expense to increase as we build up our sales and support personnel and expand our marketing efforts . our sales and marketing expense may fluctuate from period to period due to the seasonality of our revenue and the timing and extent of our expenses . research and development . research and development expense consists primarily of personnel costs , including salary , employee benefits and stock-based compensation for personnel employed in research and development , regulatory and clinical areas . research and development expense also includes costs associated with product design , product refinement and improvement efforts before and after receipt of regulatory clearance , development of prototypes , testing , clinical study programs and regulatory activities , contractors and consultants , and equipment and software to support our development . as our revenue increases , we will also incur additional expense for revenue share payments to our past and present scientific advisory board members , including one of our past directors . we expect research and development expense to increase in absolute dollars as we develop new products to expand our product pipeline , add research and development personnel and conduct clinical activities . general and administrative . general and administrative expense consists primarily of personnel costs , including salary , employee benefits and stock-based compensation for our administrative personnel that support our general operations , including executive management , general legal and intellectual property , finance and accounting , information technology and human resources personnel . general and administrative expense also includes outside legal costs associated with intellectual property and general legal matters , financial audit fees , insurance , fees for other consulting services , depreciation expense , long-lived asset impairment charges , freight , facilities expense , and severance expense . we expect our general and administrative expense will increase in 70 absolute dollars as we increase our headcount and expand our infrastructure to support growth in our business and our operations as a public company . as our revenue increases we also will incur additional expenses for freight . our general and administrative expense may fluctuate from period to period due to the timing and extent of the expenses . goodwill impairment . goodwill impairment expense consists of non-cash impairment charges incurred during the third-quarter ended september 30 , 2018 related to the full impairment of goodwill derived from the acquisition of imatx , inc. in 2009 and the acquisition of broad peak manufacturing , llc in august 2017. total other income ( expenses ) , net total other income ( expense ) , net consists primarily of interest expense and amortization of debt discount associated with our term loans outstanding during the year , debt extinguishment loss , and gains ( losses ) from foreign currency transactions . the effect of exchange rates on our foreign currency-denominated asset and liability balances are recorded as foreign currency translation adjustments in the consolidated statements of comprehensive loss . income tax provision income tax provision consists primarily of a provision for income taxes in foreign jurisdictions in which we conduct business . we maintain a full valuation allowance for deferred tax assets including net operating loss carryforwards and research and development credits and other tax credits . 71 story_separator_special_tag style= '' font-family : arial ; font-size:10pt ; '' > , which was attributable to the effect of exchange rate change on non-permanent intercompany debt with our foreign subsidiaries , a decrease of $ 0.9 million in interest expense associated with our term debt , a reduction in interest income from investments of $ 0.3 million , and an increase of $ 0.5 million related to expenses incurred related to early payoff of the oxford term loans . income taxes . income tax provision was $ 45,000 for the year ended december 31 , 2019 and $ 61,000 for the year ended december 31 , 2018 . we continue to generate losses for u.s. federal and state tax purposes and have net operating loss carryforwards creating a deferred tax asset . we maintain a full valuation allowance for deferred tax assets . 73 liquidity , capital resources and plan of operations sources of liquidity and funding requirements since our inception in 2004 , we have financed our operations primarily through private placements of preferred stock , our initial public offering in 2015 and secondary public offering in january 2018 , patent licenses , debt and convertible debt financings , equipment purchase loans , and product revenue beginning in 2007. we have not yet attained profitability and continue to incur operating losses and negative operating cash flows , which adversely impacts our ability to continue as a going concern . at december 31 , 2019 , we had an accumulated deficit of $ 504.1 million . on january 6 , 2017 , we entered into the 2017 secured loan agreement with oxford . through the secured loan agreement with oxford , the company accessed $ 15 million of borrowings on january 6 , 2017 and a second $ 15 million of borrowings on june 30 , 2017. on december 13 , 2018 , we pre-paid $ 15 million principal amount of the $ 30 million outstanding principal amount using short-term investment maturities and cash and cash equivalents .
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consolidated results of operations comparison of the years ended december 31 , 2019 and 2018 the following table sets forth our results of operations expressed as dollar amounts , percentage of total revenue and year-over-year change ( in thousands ) : replace_table_token_1_th product revenue . product revenue was $ 76.6 million for the year ended december 31 , 2019 compared to $ 78.6 million for the year ended december 31 , 2018 , a decrease of $ 2.0 million or 3 % , due principally to decreased sales of our itotal cr and partial knee products , partially offset by increased sales of our itotal ps and hip systems . our sales during the second half of 2019 were negatively impacted by denials in coverage from aetna . the following table sets forth , for the periods indicated , our product revenue by geography expressed as u.s. dollar amounts , percentage of product revenue and year-over-year change ( in thousands ) : replace_table_token_2_th product revenue in the united states was generated through our direct sales force and independent sales representatives . product revenue outside the united states was generated through our direct sales force and distributors . the percentage of product revenue generated in the united states was 88 % for the year ended december 31 , 2019 compared to 87 % for the year ended december 31 , 2018 . we believe the higher level of revenue as a percentage of product revenue inside the united states in 2019 was due to the growth of the itotal ps and hip in the united states , coupled with the continued weakness primarily due to reimbursement challenges in our itotal cr and partial knee product in germany . 72 royalty revenue .
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acquisition costs are capitalized in accordance with story_separator_special_tag story_separator_special_tag b ut no assurance can be given that we will operate in a manner so as to qualify as a reit . taxable income from certain non-reit activities is managed through a trs and is subject to applicable federal , state , and local income and margin taxes . we had no sig nificant taxes associated with our trs for the years ended december 31 , 2019 , 2018 and 2017 . components of our revenues and expenses revenues rental income . our earnings are primarily attributable to the rental revenue from our multifamily properties . we anticipate that the leases we enter into for our multifamily properties will typically be for one year or less on average . also included are utility reimbursements , late fees , pet fees , and other rental fees charged to tenants . other income . other income includes ancillary income earned from tenants such as non-refundable fees , application fees , laundry fees , cable tv income , and other miscellaneous fees charged to tenants . expenses property operating expenses . property operating expenses include property maintenance costs , salary and employee benefit costs , utilities , casualty-related expenses and recoveries and other property operating costs . real estate taxes and insurance . real estate taxes include the property taxes assessed by local and state authorities depending on the location of each property . insurance includes the cost of commercial , general liability , and other needed insurance for each property . property management fees . property management fees include fees paid to bh , our property manager , or other third party management companies for managing each property ( see note 10 to our consolidated financial statements ) . advisory and administrative fees . advisory and administrative fees include the fees paid to our adviser pursuant to the advisory agreement ( see note 11 to our consolidated financial statements ) . corporate general and administrative expenses . corporate general and administrative expenses include , but are not limited to , audit fees , legal fees , listing fees , board of director fees , equity-based compensation expense , investor relations costs and payments of reimbursements to our adviser for operating expenses . corporate general and administrative expenses and the advisory and administrative fees paid to our adviser ( including advisory and administrative fees on properties defined in the advisory agreement as new assets ) will not exceed 1.5 % of average real estate assets per calendar year ( or part thereof that the advisory agreement is in effect ) , calculated in accordance with the advisory agreement , or the expense cap . the expense cap does not limit the reimbursement by us of expenses related to securities offerings paid by our adviser . the expense cap also does not apply to legal , accounting , financial , due diligence , and other service fees incurred in connection with mergers and acquisitions , extraordinary litigation , or other events outside our ordinary course of business or any out-of-pocket acquisition or due diligence expenses incurred in connection with the acquisition or disposition of real estate assets . additionally , in the sole discretion of the adviser , the adviser may elect to waive certain advisory and administrative fees otherwise due . if advisory and administrative fees are waived in a period , the waived fees for that period are considered to be waived permanently and the adviser may not be reimbursed in the future . property general and administrative expenses . property general and administrative expenses include the costs of marketing , professional fees , general office supplies , and other administrative related costs of each property . depreciation and amortization . depreciation and amortization costs primarily include depreciation of our multifamily properties and amortization of acquired in-place leases . other income and expense interest expense . interest expense primarily includes the cost of interest expense on debt , the amortization of deferred financing costs and the related impact of interest rate derivatives used to manage our interest rate risk . 43 loss on extinguishment of debt and modification costs . loss on extinguishment of debt and modification costs includes prepayment penalties and defeasance costs , the write-off of unamortized deferred financing costs and fair market value adjustments of assumed debt related to the early repayment of debt , costs incurred in a debt modification that are not capitalized as deferred financing costs and other costs incurred in a debt extinguishment . casualty losses . casualty losses include expenses resulting from damages from an unexpected and unusual event such as a natural disaster . expenses can include additional payments on insurance premiums , impairment recognized on a property , and other abnormal expenses arising from the related event . miscellaneous income . miscellaneous income includes proceeds received from insurance for business interruption involving the loss of rental income at a property that has temporarily suspended operations due to an unexpected and unusual event . gain on sales of real estate . gain on sales of real estate includes the gain recognized upon sales of properties . gain on sales of real estate is calculated by deducting the carrying value of the real estate and costs incurred to sell the properties from the sales prices of the properties . results of operations for the years ended december 31 , 2019 , 2018 and 2017 the year ended december 31 , 2019 as compared to the year ended december 31 , 2018 the following table sets forth a summary of our operating results for the years ended december 31 , 2019 and 2018 ( in thousands ) : replace_table_token_7_th ( 1 ) casualty losses for the year ended december 31 , 2019 are related to tornado damage incurred at cutter 's point on october 20 , 2019 ( see note 5 ) . story_separator_special_tag the increase between the periods was primarily due to approximately $ 5.1 million of equity-based compensation expense recognized during the year ended december 31 , 2019 related to the grants of restricted stock units to our directors , officers , employees and certain key employees of our adviser pursuant to our long-term incentive plan ( the โ 2016 ltip โ ) , compared to $ 4.2 million of equity-based compensation expense recognized during the year ended december 31 , 2018 ( see note 8 to our consolidated financial statements ) . subject to the expense cap , corporate general and administrative expenses may increase in future periods as we acquire additional properties . property general and administrative expenses . property general and administrative expenses were $ 6.8 million for the year ended december 31 , 2019 compared to $ 6.1 million for the year ended december 31 , 2018 , which was an increase of approximately $ 0.7 million . the increase between the periods was primarily due to our acquisition and disposition activity in 2018 and 2019 and the timing of the transactions , as described above . depreciation and amortization . depreciation and amortization costs were $ 69.1 million for the year ended december 31 , 2019 compared to $ 47.5 million for the year ended december 31 , 2018 , which was an increase of approximately $ 21.6 million . the increase between the periods was primarily due to the amortization of intangible lease assets of $ 12.7 million related to 14 properties for the year ended december 31 , 2019 compared to $ 2.5 million related to four properties for the year ended december 31 , 2018 , which was an increase of approximately $ 10.3 million . the amortization of intangible lease assets over a six-month period from the date of acquisition is expected to increase the amortization expense during the initial year of operations for each property . 45 other income and expense interest expense . interest expense was $ 37.4 million for the year ended december 31 , 2019 compared to $ 28.6 million for the year ended december 31 , 2018 , which was an increase of approximately $ 8.8 million . the increase between the periods was primarily due to an increase in interest on debt of approximately $ 10.9 million , partially offset by a decrease in interest rate swap expense of $ 2.2 million . the following table details the various costs included in interest expense for the years ended december 31 , 2019 and 2018 ( in thousands ) : replace_table_token_8_th loss on extinguishment of debt and modification costs . loss on extinguishment of debt and modification costs was $ 2.9 million for the year ended december 31 , 2019 compared to $ 3.6 million for the year ended december 31 , 2018 , which was a decrease of approximately $ 0.7 million . the decrease between periods was primarily due to a decrease in debt modification and other extinguishment costs of $ 0.5 million . the following table details the various costs included in loss on extinguishment of debt and modification costs for the years ended december 31 , 2019 and 2018 ( in thousands ) : replace_table_token_9_th casualty losses . casualty losses were $ 3.5 million for the year ended december 31 , 2019 ; there were no casualty losses for the year ended december 31 , 2018. this is related to significant damages sustained at cutter 's point due to a tornado hitting the property ( see note 5 ) . miscellaneous income . miscellaneous income was $ 0.6 million for the year ended december 31 , 2019 ; there was no miscellaneous income for the year ended december 31 , 2018. this is related to business interruption proceeds received from insurance for lost rents at cutter 's point ( see note 5 ) . gain on sales of real estate . gain on sales of real estate was $ 127.7 million for the year ended december 31 , 2019 compared to $ 13.7 million for the year ended december 31 , 2018 , which was an increase of approximately $ 114.0 million . during the year ended december 31 , 2019 , we sold six properties ; during the year ended december 31 , 2018 , we sold one property . 46 the year ended december 31 , 2018 as compared to the year ended december 31 , 2017 the following table sets forth a summary of our operating results for the years ended december 31 , 2018 and 2017 ( in thousands ) : replace_table_token_10_th the change in our net income ( loss ) for the year ended december 31 , 2018 as compared to the year ended december 31 , 2017 primarily relates to a decrease in gain on sales of real estate , and was partially offset by an increase in total revenues and decreases in total property operating expenses , depreciation and amortization expense and loss on extinguishment of debt and modification costs . the change in our net income ( loss ) between the periods was also due to our acquisition and disposition activity in 2017 and 2018 and the timing of the transactions ( we acquired one property in the first quarter of 2017 , one property in the second quarter of 2017 , one property in the fourth quarter of 2017 and three properties in the third quarter of 2018 ; we sold four properties in the second quarter of 2017 , five properties in the third quarter of 2017 and one property in the first quarter of 2018 ) . revenues rental income . rental income was $ 143.2 million for the year ended december 31 , 2018 compared to $ 140.9 million for the year ended december 31 , 2017 , which was an increase of approximately $ 2.3 million .
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f financial condition and results of operations the following is a discussion and analysis of our financial condition and our historical results of operations . the following should be read in conjunction with our financial statements and accompanying notes . this discussion contains forward-looking statements that involve risks and uncertainties . our actual results could differ materially from those projected , forecasted , or expected in these forward-looking statements as a result of various factors , including , but not limited to , those discussed below and elsewhere in this annual report . see โ cautionary statement regarding forward-looking statements โ and โ risk factors โ in this annual report . our management believes the assumptions underlying the company 's financial statements and accompanying notes are reasonable . however , the company 's financial statements and accompanying notes may not be an indication of our financial condition and results of operations in the future . overview as of december 31 , 2019 , our portfolio consisted of 40 multifamily properties primarily located in the southeastern and southwestern united states encompassing 14,724 units of apartment space that was approximately 94.2 % leased with a weighted average monthly effective rent per occupied apartment unit of $ 1,103. substantially all of our business is conducted through the op . we own the portfolio through the op and our trs . the op owns approximately 99.9 % of the portfolio ; our trs owns approximately 0.1 % of the portfolio . the op gp is the sole general partner of the op . as of december 31 , 2019 , there were 23,819,402 op units outstanding , of which 23,746,169 , or 99.7 % , were owned by us and 73,233 , or 0.3 % , were owned by an unaffiliated limited partner ( see note 10 to our consolidated financial statements ) .
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this maintains long-term occupancy rights , helps control related costs and assists in alignment with franchisees . in certain circumstances , the company participates in reinvestment for conventional franchised restaurants . under our developmental license arrangement , licensees provide capital for the entire business , including the real estate interest , and the company has no capital invested . in addition , the company has an equity investment in a limited number of affiliates that invest in real estate and operate and or franchise restaurants within a market . we view ourselves primarily as a franchisor and believe franchising is important to delivering great , locally-relevant customer experiences and driving profitability . however , directly operating restaurants is paramount to being a credible franchisor and is essential to providing company personnel with restaurant operations experience . in our company-operated restaurants , and in collaboration with franchisees , we further develop and refine operating standards , marketing concepts and product and pricing strategies , so that only those that we believe are most beneficial are introduced in the restaurants . we continually review , and as appropriate adjust , our mix of company-operated and franchised ( conventional franchised , developmental licensed and foreign affiliated ) restaurants to help optimize overall performance . the company 's revenues consist of sales by company-operated restaurants and fees from restaurants operated by franchisees . revenues from conventional franchised restaurants include rent and royalties based on a percent of sales along with minimum rent payments , and initial fees . revenues from restaurants licensed to affiliates and developmental licensees include a royalty based on a percent of sales , and generally include initial fees . fees vary by type of site , amount of company investment , if any , and local business conditions . these fees , along with occupancy and operating rights , are stipulated in franchise/license agreements that generally have 20-year terms . the business is managed as distinct geographic segments . significant reportable segments include the united states ( u.s. ) , europe , and asia/pacific , middle east and africa ( apmea ) . in addition , throughout this report we present ยother countries & corporateย that includes operations in canada and latin america , as well as corporate activities . the u.s. , europe and apmea segments account for 34 % , 40 % and 21 % of total revenues , respectively . the united kingdom ( u.k. ) , france and germany , collectively , account for over 50 % of europe 's revenues ; and china , australia and japan ( a 50 % -owned affiliate accounted for under the equity method ) , collectively , account for over 50 % of apmea 's revenues . these six markets along with the u.s. and canada are referred to as ยmajor marketsย throughout this report and comprise approximately 70 % of total revenues . the company continues to focus its management and financial resources on the mcdonald 's restaurant business as we believe significant opportunities remain for long-term growth . accordingly , in 2009 , the company sold its minority ownership interest in redbox automated retail , llc ( redbox ) for total consideration of $ 140 million . in 2008 , the company sold its minority ownership interest in u.k.-based pret a manger for cash proceeds of $ 229 million . in connection with both sales , the company recognized nonoperating gains . in analyzing business trends , management considers a variety of performance and financial measures , including comparable sales and comparable guest count growth , systemwide sales growth and returns . constant currency results exclude the effects of foreign currency translation and are calculated by translating current year results at prior year average exchange rates . management reviews and analyzes business results in constant currencies and bases certain incentive compensation plans on these results because we believe this better represents the company 's underlying business trends . comparable sales and comparable guest counts are key performance indicators used within the retail industry and are indicative of acceptance of the company 's initiatives as well as local economic and consumer trends . increases or decreases in comparable sales and comparable guest counts represent the percent change in sales and transactions , respectively , from the same period in the prior year for all restaurants in operation at least thirteen months , including those temporarily closed . some of the reasons restaurants may be temporarily closed include reimaging or remodeling , rebuilding , road construction and natural disasters . comparable sales exclude the impact of currency translation . mcdonald 's reports on a calendar basis and therefore the comparability of the same month , quarter and year with the corresponding period of the prior year will be impacted by the mix of days . the number of weekdays and weekend days in a given timeframe can have a positive or negative impact on comparable sales and guest counts . the company refers to these impacts as calendar shift/trading day adjustments . in addition , the timing of holidays can impact comparable sales and guest counts . these impacts vary geographically due to consumer spending patterns and have the greatest effect on monthly comparable sales and guest counts while the annual impacts are typically minimal . in 2008 , there was an incremental full day of sales and guest counts due to leap year . systemwide sales include sales at all restaurants , whether operated by the company or by franchisees . while franchised sales are not recorded as revenues by the company , management believes the information is important in understanding the company 's financial performance because these sales are the basis on which the company calculates and records franchised revenues and are indicative of the financial health of the franchisee base . 10 return on incremental invested capital ( roiic ) is a measure reviewed by management over one-year and three-year time periods to evaluate the overall profitability of the business units , the effectiveness of capital deployed and the future allocation of capital . story_separator_special_tag new menu items such as a third angus burger option in australia and the extension of the spicy wings line in china were popular with consumers . japan executed a successful u.s.-themed burger promotion and a chicken festival promotion featuring several products . our dessert strategy is introducing consumers to the mcdonald 's brand with products such as mcflurries and dessert kiosks in china , where we have become one of the largest retailers of ice cream . our breakfast business continues to develop and is now offered in approximately 75 % of apmea restaurants . in japan , value breakfast items , including the sausage mcmuffin and mcgriddle , were rotated across several months , while australia launched new breakfast menu items . 11 nearly two-thirds of apmea restaurants are now offering some form of extended hours and over 4,800 restaurants are open 24 hours . delivery is offered in many apmea markets and is now in approximately 1,600 restaurants , including nearly 400 in china . we continue to offer value to our customers by utilizing a strategic menu pricing tool that optimizes price , product mix , and promotions . this approach is complemented by a focus on driving operating efficiencies and effectively managing restaurant-level food and paper costs by leveraging our scale , supply chain infrastructure and risk management practices . our ability to execute our strategies successfully in every area of the world , grow comparable sales , leverage a low commodity cost environment and control selling , general & administrative expenses resulted in consolidated combined operating margin ( operating income as a percent of total revenues ) of 31.0 % in 2010 , an improvement of 0.9 percentage points over 2009. in 2010 , strong global sales and margin performance grew cash from operations , which rose $ 591 million to $ 6.3 billion . our substantial cash flow , strong credit rating and continued access to credit provide us significant flexibility to fund capital expenditures and debt repayments as well as return cash to shareholders . capital expenditures of approximately $ 2.1 billion were invested in our business primarily to open and reimage restaurants . across the system , nearly 1,000 restaurants were opened and nearly 1,800 existing locations were reimaged . we returned $ 5.1 billion to shareholders consisting of $ 2.4 billion in dividends and nearly $ 2.7 billion in share repurchases . cash from operations continues to benefit from our heavily franchised business model as the rent and royalty income received from owner/operators provides a very stable revenue stream that has relatively low costs . in addition , the franchise business model is less capital intensive than the company-owned model . we believe locally-owned and operated restaurants maximize brand performance and are at the core of our competitive advantage , making mcdonald 's not just a global brand , but also a locally relevant one . story_separator_special_tag href= '' https : //www.sec.gov/archives/edgar/data/0000063908/000119312511046701/ # toc '' > items , food events and limited-time offerings to present a balanced mix of products to our customers . value will continue to be a key growth driver as we reinforce the affordability of our menu to consumers and build on our successful value lunch platforms . we will invest in our business primarily by opening over 600 new restaurants and reimaging over 500 existing restaurants while elevating our focus on service and operations to drive efficiencies . in china , we will continue to build a foundation for long-term growth by increasing our base of restaurants by approximately 15 % in 2011 toward our goal of nearly 2,000 restaurants by the end of 2013. convenience initiatives include expanding delivery service across the region and building on the success of our extended operating hours . mcdonald 's has an ongoing commitment to optimize our restaurant ownership structure . a heavily franchised , less capital-intensive business model has favorable implications for the strength and stability of our cash flow , the amount of capital we invest and long-term returns . we continue to maintain a strong culture of financial discipline by effectively managing all spending in order to maximize business performance . in making capital allocation decisions , our goal is to elevate the mcdonald 's experience by driving sustainable growth in sales and market share while earning strong returns . we remain committed to returning all of our free cash flow ( cash from operations less capital expenditures ) to shareholders over the long term via dividends and share repurchases . mcdonald 's does not provide specific guidance on diluted earnings per share . the following information is provided to assist in analyzing the company 's results : changes in systemwide sales are driven by comparable sales and net restaurant unit expansion . the company expects net restaurant additions to add approximately 1.5 percentage points to 2011 systemwide sales growth ( in constant currencies ) , most of which will be due to the 541 net traditional restaurants added in 2010. the company does not generally provide specific guidance on changes in comparable sales . however , as a perspective , assuming no change in cost structure , a 1 percentage point increase in comparable sales for either the u.s. or europe would increase annual diluted earnings per share by about 3 cents . with about 75 % of mcdonald 's grocery bill comprised of 10 different commodities , a basket of goods approach is the most comprehensive way to look at the company 's commodity costs . for the full year 2011 , the total basket of goods cost is expected to increase 2-2.5 % in the u.s. and to increase 3.5-4.5 % in europe as compared to 2010. some volatility may be experienced between quarters in the normal course of business . the company expects full-year 2011 selling , general & administrative expenses to decrease 2-3 % , in constant currencies , partly due to higher incentive compensation in 2010 based on performance .
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highlights from the year included : comparable sales grew 5.0 % and guest counts rose 4.9 % , building on 2009 increases of 3.8 % and 1.4 % , respectively . revenues increased 6 % ( 5 % in constant currencies ) . company-operated margins improved to 19.6 % and franchised margins improved to 82.4 % . operating income increased 9 % ( 9 % in constant currencies ) . earnings per share was $ 4.58 , an increase of 11 % . cash provided by operations increased $ 591 million to $ 6.3 billion . the company increased the quarterly cash dividend per share 11 % to $ 0.61 for the fourth quarterยbringing our current annual dividend rate to $ 2.44 per share . one-year roiic was 37.3 % and three-year roiic was 38.3 % for the period ended december 31 , 2010 ( see reconciliation on page 25 ) . the company returned $ 5.1 billion to shareholders through share repurchases and dividends paid . outlook for 2011 we will continue to drive success in 2011 and beyond by enhancing customer relevance across all elements of our plan to winย people , products , place , price and promotion . our global system continues to be energized by our ongoing momentum and significant growth opportunities . we continue to hold a strong competitive position in the market place , and we intend to further differentiate our brand by striving to become our customers ' favorite place and way to eat and drink . we will continue growing market share by executing our key strategies in the following areas : optimizing our menu , modernizing the customer experience and broadening our accessibility . these efforts will include increasing menu choice , expanding destination beverages and desserts , enhancing our food image , accelerating our interior and exterior reimaging efforts and increasing the level and variety of conveniences provided to our customers .
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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 strategies for our business , statements regarding the industry outlook , our expectations regarding the future performance of our business , and the other non-historical statements contained herein are forward-looking statements . see โ cautionary note regarding forward-looking statements. โ you should also review item 1a โ โ risk factors โ for a discussion of important factors that could cause actual results to differ materially from the results described herein or implied by such forward-looking statements . general overview we are a leading vertically integrated company engaged primarily in the geothermal and recovered energy power business . we design , develop , build , sell , own , and operate clean , environmentally friendly geothermal and recovered energy-based power plants , in most cases using equipment that we design and manufacture . our geothermal power plants include both power plants that we have built and power plants that we have acquired , while all of our recovered energy-based plants have been constructed by us . we conduct our business activities in two business segments : โ the electricity segment โ in this segment , we develop , build , own and operate geothermal and recovered energy-based power plants in the united states and geothermal power plants in other countries around the world , and sell the electricity they generate ; and โ the product segment โ in this segment we design , manufacture and sell equipment for geothermal and recovered energy-based electricity generation , remote power units and other power generating units and provide services relating to the engineering , procurement , construction , operation and maintenance of geothermal and recovered energy-based power plants . both our electricity segment and product segment operations are conducted in the united states and throughout the world . our current generating portfolio includes geothermal plants in the united states , guatemala , and kenya , as well as reg plants in the united states . for the year ended december 31 , 2014 , our total revenues increased by 4.9 % ( from $ 533.2 million to $ 559.5 million ) over the previous year . for the year ended december 31 , 2014 , electricity segment revenues were $ 382.3 million , compared to $ 329.7 million for the year ended december 31 , 2013 , an increase of 15.9 % , and product segment revenues for the year ended december 31 , 2014 were $ 177.2 million , compared to $ 203.5 million during the year ended december 31 , 2013 , a decrease of 12.9 % . during the years ended december 31 , 2014 and 2013 , our consolidated power plants generated 4,450,910 mwh and 4,253,489 mwh , respectively , an increase of 4.6 % for the year ended december 31 , 2014 , our electricity segment represented approximately 68.3 % of our total revenues ( 61.8 % in 2013 ) , while our product segment represented approximately 31.7 % of our total revenues ( 38.2 % in 2013 ) . 87 in the year ended december 31 , 2014 , approximately 70.0 % of our electricity segment revenues were derived from ppas with fixed energy rates which are not affected by fluctuations in energy commodity prices . we have variable price ppas in california and hawaii , which provide for payments based on the local utilities ' avoided cost , which is the incremental cost that the power purchaser avoids by not having to generate such electrical energy itself or purchase it from others , as follows : โ the energy rates under the ppas in california for each of the ormesa complex , the heber 1 and heber 2 power plants in the heber complex and the g2 power plant in the mammoth complex change primarily based on fluctuations in natural gas prices ; and โ the prices paid for the electricity pursuant to the 25 mw ppa for the puna complex in hawaii change primarily due to variations in the price of oil . we reduced our economic exposure to fluctuations in the price of oil until december 31 , 2014 and in the price of natural gas until march 31 , 2015 , by entering into derivatives transactions . in the year ended december 31 , 2014 , we recorded a gain of $ 5.7 million in electricity revenues related to these transactions . electricity segment revenues are also subject to seasonal variations and can be affected by higher-than-average ambient temperatures , as described below under โ seasonality โ . in addition , the revenues we report in our financial statements may show more variation due to our increased use of derivatives in connection with our variable price ppas and the accounting principles associated with our use of those derivatives . to comply with obligations under their respective ppas , certain of our project subsidiaries are structured as special purpose , bankruptcy remote entities and their assets and liabilities are ring-fenced , and such assets are not generally available to pay the corporate debt ( other than debt at the respective project subsidiary level ) . however , these project subsidiaries are allowed to pay dividends and make distributions to us of all available and unrestricted cash flows generated by their assets . revenues attributable to our product segment are based on the sale of equipment and the provision of various services to our customers . these revenues may vary from period to period because of the timing of our receipt of purchase orders and the progress of our execution of each project . our management assesses the performance of our two segments of operation differently . in the case of our electricity segment , when making decisions about potential acquisitions or the development of new projects , we typically focus on the internal rate of return of the relevant investment , technical and geological matters and other business considerations . story_separator_special_tag on april 12 , 2011 , the california senate bill x1-2 ( sbx1-2 ) was signed into law , and increased california 's rps to 33 % by december 31 , 2020 and instituted a tradable rec program . sbx1-2 is expected to foster a liquid tradable rec market and lead to more creative off-take arrangements . although we can not predict at this time whether the tradable rec program under sbx1-2 and its implementing regulations will have a significant impact on our operations or revenue , it may facilitate additional options when negotiating ppas and selling electricity from our projects . in june 2013 , the nevada state legislature passed three bills that were signed by nevada 's governor and are expected to support renewable energy development in the state . senate bill ( sb ) no . 123 calls for the retirement or elimination of not less than 800 mw of coal-fired electric generating capacity on or before december 31 , 2019 and the construction or acquisition of , or contracting for , 350 mw of electric generating capacity from renewable energy facilities . senate bill 252 revises provisions relating to the renewable portfolio standard by removing energy efficiency , solar multipliers , and station usage from generating portfolio energy credits . finally , assembly bill ( ab ) no . 239 revised statutes 701a.340 defines geothermal energy as renewable energy for purposes of tax abatements and makes geothermal projects eligible for partial sales and property tax abatements , with property tax abatements for a period of twenty years and local sales and use tax abatements for three years . in september 26 , 2014 governor brown signed into law assembly bill no . 2363 ( ab-2363 ) , which requires the california public utilities commission to adopt , by december 31 , 2015 , a methodology for determining the costs of integrating eligible renewable energy resources . 89 โ outside of the united states , in november 2012 , the united states , brunei , and indonesia formed the asia-pacific comprehensive partnership and president obama announced the allocation of $ 6.0 billion for green energy development in asia . also , on june 30 , 2013 , president obama announced the โ power africa โ initiative pursuant to which the united states will invest $ 7.0 billion in sub-saharan africa over the following five years , with the aim of doubling access to power . the sub-sahara africa includes three countries ( ethiopia , kenya and tanzania ) that have large geothermal potential as well as operating geothermal power plants . we accelerated our efforts to expand business development activities in those areas by , among other things , participating in new applicable bids . in addition , we expect that a variety of governmental initiatives will create new opportunities for the development of new projects , as well as create additional markets for our products . these initiatives include the award of long-term contracts to independent power generators , the creation of competitive wholesale markets for selling and trading energy , capacity and related energy products and the adoption of programs designed to encourage โ clean โ renewable and sustainable energy sources . โ in the electricity segment , we expect competition from the wind and solar power generation industry to continue . while we believe the expected demand for renewable energy will be large enough to accommodate increased competition , any such increase and the amount of renewable energy under contract may contribute to a reduction in electricity prices . despite increased competition from the wind and solar power generation industry , we believe that base load electricity , such as geothermal-based energy , will continue to be an important source of renewable energy in areas with commercially viable geothermal resource . also , geothermal power plants positively impact electrical grid stability and provide valuable ancillary services because of their base load nature while the intermittent renewables create integration costs . in the geothermal industry , we are experiencing a notable decrease in competition , specifically in the acquisition of geothermal leases . the reduced level of competition has contributed to a decrease in lease costs . โ in the product segment , we expect increased competition from binary power plant equipment suppliers including the major steam turbine manufacturers . while we believe that we have a distinct competitive advantage based on our accumulated experience and current worldwide share of installed binary generation capacity , an increase in competition may impact our ability to secure new purchase orders from potential customers . the increased competition may also lead to a reduction in the prices that we are able to charge for our binary equipment , which in turn may impact our profitability . โ the changing natural gas landscape , the resulting effect on natural gas pricing ( in either direction ) and the corresponding implications for electric utilities and other producers of electricity in terms of planning for and choosing a source of fuel , will affect the pricing under our ppas that have srac pricing , as described below . โ the 38 mw puna complex has three ppas , of which the 25 mw ppa has a monthly variable energy rate based on the local utility 's avoided costs . a decrease in the price of oil will result in a decrease in the incremental cost that the power purchaser avoids by not generating its electrical energy needs from oil , which will result in a reduction of the energy rate that we may charge under this ppa . in order to reduce our exposure to oil , we recently signed a fixed rate ppas for the rest of the complex . in the meantime , we have entered into put and swap contracts to reduce our exposure to fluctuations in the energy rate caused by fluctuations in oil prices through december 31 , 2014. our use of derivative instruments for this purpose has increased , and may continue to be used to manage our economic exposure .
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results of operations our historical operating results in dollars and as a percentage of total revenues are presented below . a comparison of the different years described below may be of limited utility due to ( i ) our recent construction or disposition of new power plants and enhancement of acquired power plants and ( ii ) fluctuation in revenues from our product segment . replace_table_token_10_th 97 replace_table_token_11_th comparison of the year ended december 31 , 2014 and the year ended december 31 , 2013 total revenues total revenues for the year ended december 31 , 2014 were $ 559.5 million , compared to $ 533.2 million for the year ended december 31 , 2013 , which represented a 4.9 % increase in total revenues . this increase was attributable to our electricity segment , in which revenues increased by 15.9 % over the corresponding period in 2013. this increase was offset due to a 12.9 % decrease in our product segment over the corresponding period in 2013. electricity segment revenues attributable to our electricity segment for the year ended december 31 , 2014 were $ 382.3 million , compared to $ 329.7 million for the year ended december 31 , 2013 , which represented a 15.9 % increase in such revenues . this increase was primarily due to : ( i ) the increase in generation as a result of the commencement of operations of our plant 2 and 3 at the olkaria iii complex in kenya , which commenced commercial operations in may 2013 and january 2014 , respectively , and our don a. campbell power plant in nevada , which commenced commercial operation in december 2013 ; ( ii ) higher energy rates under the so # 4 contracts ; and ( iii ) net gain on derivative contracts on oil and natural gas prices of $ 5.7 million in the year ended december 31 , 2014 , compared to a net loss of $ 5.0 million over the corresponding period in 2013 .
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these forward-looking statements reflect our views and assumptions only as of the date such forward-looking statements are made . except as required by law , we assume no responsibility for updating any forward-looking statements , whether as a result of new information , future events or otherwise . the following discussion should be read in conjunction with our audited consolidated financial statements and the related notes and other financial information appearing elsewhere in this annual report and other reports and filings made with the sec . overview we are a specialized security technology business providing mission critical products , solutions and services for domestic and international customers , with our principal customers being agencies of the u.s. government . our core capabilities are sophisticated engineering , manufacturing , technology development , system integration , and test and evaluation offerings for national security platforms and programs . our principal products and solutions are related to command , control , communications , computing , combat systems , intelligence , surveillance and reconnaissance ( โ c5isr โ ) . we offer our customers products , solutions , services and expertise to support their mission-critical needs by leveraging our skills across our core offering areas in c5isr . we design , engineer , and manufacture specialized electronic components , subsystems and systems for electronic attack , electronic warfare , radar , and missile system platforms ; integrated technology solutions for satellite communications ; products and solutions for unmanned systems ; products and services related to cybersecurity and cyberwarfare ; products and solutions for ballistic missile defense ; weapons systems trainers ; advanced network engineering and information technology services ; weapons systems lifecycle support and sustainment ; military weapon range operations and technical services ; and public safety , critical infrastructure security and surveillance systems . our primary end customers are u.s. government agencies , including the dod , classified agencies , intelligence agencies , other national security agencies and homeland security related agencies . we also conduct business with local , state and foreign governments and domestic and international commercial customers . in fiscal 2012 , 2013 and 2014 , we generated 65 % , 64 % and 59 % , respectively , of our total revenues from contracts with the u.s. government ( including all branches of the u.s. military ) , either as a prime contractor or a subcontractor . we believe our stable customer base , strong customer relationships , intellectual property , broad array of contract vehicles , `` designed in '' positions on strategic national security platforms , large employee base possessing specialized skills , specialized manufacturing facilities and equipment , extensive list of past performance qualifications , and significant management and operational capabilities position us for success . we were incorporated in the state of new york on december 19 , 1994 and began operations in march 1995. we reincorporated in the state of delaware in 1998 . 35 industry background faced with significant budget pressures , in recent years the u.s. government has implemented reductions in government spending , including reductions in appropriations for the u.s. department of defense ( dod ) and other federal agencies , pursuant to the budget control act of 2011 ( `` bca '' ) , as amended by the american taxpayer relief act of 2012 and the bipartisan budget act of 2013. pursuant to the terms of the bca , a sequestration went into effect in march 2013 resulting in a 7.8 % reduction to the dod budget for fiscal year ( the period running from october 1st to september 30th , a `` fy '' ) 2013 to $ 495.5 billion , excluding funding for military personnel . the dod budget was approximately $ 496 billion in fy 2014 and remains at a similar level in fy 2015. the dod base budget excludes funding for overseas contingency operations , such as afghanistan , iraq and syria , which are appropriated separately and are not currently subject to the bca . under the bca , funding for the dod base budget is expected to increase very modestly to approximately $ 500 billion for fy 2016. in the years beyond fy 2016 , the bca permits annual increases for dod base budget funding of about 2.4 % with such caps remaining in force through fy 2023. the administration has publicly signaled its intent to submit dod budget requests that are significantly higher than the bca caps , as it did in submitting the fy 2016 budget request and the associated fy 2016 future year defense program ( `` fydp '' ) on february 2 , 2015 with all years exceeding the caps under the bca . such levels of dod budget funding would require the congress to enact legislation to raise the bca caps . in the event dod appropriations exceed the bca caps in any fiscal year through fy 2023 , across-the-board sequestration would go into effect , as occurred in 2013. u.s. government appropriations have and likely will continue to be affected by larger u.s. government budgetary issues and related legislation . when a formal appropriation bill has not been signed into law before the end of the fiscal year , congress may pass a continuing resolution ( `` cr '' ) that authorizes agencies of the u.s. government to continue to operate , generally at the same funding levels from the prior year , but typically does not authorize new spending initiatives during this period . if congress fails to enact a cr , the u.s. government may shut down , which likely would result in the closure of government offices and furlough of government workers , as well as impact the availability of funds to pay its contractors for work performed . in addition , if the national debt reaches the statutory debt ceiling , which is currently expected to occur in the first half of 2015 , the congress must enact legislation to increase the statutory debt ceiling . story_separator_special_tag we have manufactured the air frame for the miniature air launched decoy ( mald ) unmanned aerial system . we are currently in development of a high performance unmanned combat aerial system ( ucas ) utilizing our existing uas . public safety & security segment our pss segment provides independent integrated security solutions for homeland security , public safety , critical infrastructure , and strategic assets for government , industrial and commercial customers . our solutions include designing , engineering , installing , operating and servicing physical security systems and technologies that protect people , critical infrastructure , strategic assets , and property and make facilities more secure and efficient . we provide solutions in such areas as the design , engineering and operation of command and control centers , the design , engineering , deployment and integration of access control , building automation and control , communications , digital and closed circuit television security and surveillance , fire and life safety , maintenance , services and product support services . we provide solutions for customers in the critical infrastructure , power generation , power transport , nuclear energy , financial , it , healthcare , education , transportation and petro-chemical industries , as well as certain government and military customers . for example , we provide biometrics and other access control technologies to customers such as pipelines , electrical grids , municipal port authorities , power plants , communication centers , large data centers , government installations and other commercial enterprises . 37 strategic acquisitions we have supplemented our organic growth by identifying , acquiring and integrating businesses that meet our primary objective of providing us with enhanced capabilities to pursue a broader cross section of the dod , department of homeland security and other government and critical infrastructure markets , complement and broaden our existing customer base and expand our primary service offerings . our senior management team has significant acquisition experience . acquisition of cei on july 2 , 2012 , we completed the acquisition of composite engineering , inc. ( โ cei โ ) for approximately $ 164.0 million . the purchase price , including an adjustment for working capital and cash paid to the shareholders for an internal revenue code ( `` irc '' ) section 338 ( h ) ( 10 ) election , included $ 135.0 million in cash and 4.0 million shares of the company 's common stock , valued at $ 5.94 per share on july 2 , 2012 , or $ 23.8 million . $ 10.7 million of the cash paid was placed into an escrow account as security for cei 's indemnification obligations as set forth in the cei purchase agreement and was reduced by $ 1.0 million for the working capital adjustment paid to the company in july 2013 , at which time the remaining escrow was released to the cei shareholders . in addition , we paid $ 2.5 million to retire certain pre-existing cei debt and settle pre-existing accounts receivable from cei at its carrying and fair value of $ 3.0 million . the company made an election under section 338 ( h ) ( 10 ) of the irc , which resulted in tax deductible goodwill related to this transaction , and paid approximately $ 1.6 million in additional tax liability incurred by the shareholders of cei for this election . the company estimates that the tax deductible goodwill and intangibles is approximately $ 136.3 million and can be deducted for federal and california state income taxes over a 15-year period . in connection with the cei acquisition , certain cei personnel entered into long-term employment agreements with us . on july 2 , 2012 , we granted restricted stock units ( โ rsus โ ) for an aggregate of 2.0 million shares of our common stock as long-term retention inducement grants to certain employees of cei who joined kratos . the rsus had an estimated value of $ 11.9 million on the grant date , cliff vest on the fourth anniversary of the closing of the cei acquisition , or earlier upon the occurrence of certain events , and are being accounted for as compensation expense over this four year period . as of december 28 , 2014 , 520,000 shares remain unvested and not forfeited . to fund the acquisition of cei , on may 14 , 2012 , we sold 20.0 million shares of our common stock at a purchase price of $ 5.00 per share in an underwritten public offering . we received gross proceeds of approximately $ 100.0 million and net proceeds of approximately $ 97.0 million after deducting underwriting fees and other offering expenses . we used the net proceeds from this offering to fund a portion of the purchase price for the acquisition of cei . in addition , we borrowed $ 40.0 million from our revolving line of credit to partially fund the purchase price of cei . cei is a vertically integrated manufacturer and developer of unmanned aerial target systems and composite structures used for national security programs . its drones are designed to replicate some of the most lethal aerial threats facing warfighters and strategic assets . cei 's customers include u.s. and foreign governments . acquisition of critical infrastructure business on december 30 , 2011 , we acquired selected assets of a critical infrastructure business for approximately $ 18.8 million , which includes a final agreement on the working capital adjustment . the critical infrastructure business designs , engineers , deploys , manages and maintains specialty security systems at some of the united states ' most strategic asset and critical infrastructure locations . additionally , these security systems are typically integrated into command and control system infrastructure or command centers . approximately 15 % of the revenues of the critical infrastructure business are recurring in nature due to the operation , maintenance or sustainment of the security systems once deployed . key financial statement concepts as of december 28 , 2014 , we consider the following factors to be important in understanding our financial statements .
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results of operations comparison of results for the year ended december 29 , 2013 to the year ended december 28 , 2014 revenues . revenues by reportable segment for the years ended december 29 , 2013 and december 28 , 2014 are as follows ( in millions ) : replace_table_token_4_th revenues decreased $ 82.6 million from $ 950.6 million in 2013 to $ 868.0 million in 2014 . the decrease in revenues was primarily due to contract delays as a result of competitor protests on awards made to kratos , a decline in shipments of our defense products , and delays in orders and awards as a result of the challenging federal government and dod funding environment , all of which adversely impacted the timing of new contract awards , bookings and the company 's revenues . additionally , revenues in our kgs segment were also adversely impacted by a decrease resulting from the expected completion of two sizable satellite communications projects as the scope of work completed its natural contract life cycle transitioning from production to sustainment , which impacted revenue by approximately $ 18.5 million , and continued ongoing weakness and increased competition and commoditization in our legacy government services businesses of approximately $ 26.1 million . revenues in our us segment were impacted by the reduction of shipments of certain of our aerial target products due primarily to delays in the timing of follow-on and new international contract awards . these reductions in our kgs and us segments were partially offset by growth in our simulation and training business of $ 18.8 million in our kgs segment . pss segment revenue decreased by $ 13.3 million , which was primarily due to the delay in contract awards and project starts in 2014 offset by the delivery of security related communication equipment of $ 13.0 million .
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we assess effectiveness of our cash flow hedges both at inception and on an ongoing basis . the effective portion of changes in fair value of the interest rate swaps associated with our cash flow hedges is recorded in accumulated other comprehensive loss and is subsequently reclassified into interest expense as interest is incurred on the related variable rate debt . within the next 12 months , we expect to reclassify $ 3.6 million as an increase to interest expense . our cash flow hedges story_separator_special_tag forward-looking statements certain statements in this section or elsewhere in this report may be deemed โ forward-looking statements โ . see โ item 1a . risk factors โ in this report for important information regarding these forward-looking statements and certain risk and uncertainties that may affect us . the following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing in โ item 8. financial statements and supplementary data โ of this report . overview we are an equity real estate investment trust ( โ reit โ ) specializing in the ownership , management , and redevelopment of high quality retail and mixed-use properties located primarily in densely populated and affluent communities in strategically selected metropolitan markets in the northeast and mid-atlantic regions of the united states , as well as in california . as of december 31 , 2011 , we owned or had a majority interest in community and neighborhood shopping centers and mixed-use properties which are operated as 87 predominantly retail real estate projects comprising approximately 19.3 million square feet . in total , the real estate projects were 93.4 % leased and 92.4 % occupied at december 31 , 2011 . a joint venture in which we own a 30 % interest owned seven retail real estate projects totaling approximately 1.0 million square feet as of december 31 , 2011 . in total , the joint venture properties in which we own a 30 % interest were 90.9 % leased and occupied at december 31 , 2011 . we have paid quarterly dividends to our shareholders continuously since our founding in 1962 and have increased our dividends per common share for 44 consecutive years . critical accounting policies the preparation of financial statements in conformity with accounting principles generally accepted in the united states of america , referred to as โ gaap โ , requires management to make estimates and assumptions that in certain circumstances affect the reported amounts of assets and liabilities , disclosure of contingent assets and liabilities , and revenues and expenses . these estimates are prepared using management 's best judgment , after considering past and current events and economic conditions . in addition , information relied upon by management in preparing such estimates includes internally generated financial and operating information , external market information , when available , and when necessary , information obtained from consultations with third party experts . actual results could differ from these estimates . a discussion of possible risks which may affect these estimates is included in โ item 1a . risk factors โ of this report . management considers an accounting estimate to be 28 critical if changes in the estimate could have a material impact on our consolidated results of operations or financial condition . our significant accounting policies are more fully described in note 2 to the consolidated financial statements ; 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 : revenue recognition and accounts receivable our leases with tenants are classified as operating leases . substantially all such leases contain fixed escalations which occur at specified times during the term of the lease . base rents are recognized on a straight-line basis from when the tenant controls the space through the term of the related lease , net of valuation adjustments , based on management 's assessment of credit , collection and other business risk . percentage rents , which represent additional rents based upon the level of sales achieved by certain tenants , are recognized at the end of the lease year or earlier if we have determined the required sales level is achieved and the percentage rents are collectible . real estate tax and other cost reimbursements are recognized on an accrual basis over the periods in which the related expenditures are incurred . for a tenant to terminate its lease agreement prior to the end of the agreed term , we may require that they pay a fee to cancel the lease agreement . lease termination fees for which the tenant has relinquished control of the space are generally recognized on the termination date . when a lease is terminated early but the tenant continues to control the space under a modified lease agreement , the lease termination fee is generally recognized evenly over the remaining term of the modified lease agreement . current accounts receivable from tenants primarily relate to contractual minimum rent and percentage rent as well as real estate tax and other cost reimbursements . accounts receivable from straight-line rent is typically longer term in nature and relates to the cumulative amount by which straight-line rental income recorded to date exceeds cash rents billed to date under the contractual lease agreement . we make estimates of the collectability of our current accounts receivable and straight-line rents receivable which requires significant judgment by management . the collectability of receivables is affected by numerous factors including current economic conditions , bankruptcies , and the ability of the tenant to perform under the terms of their lease agreement . while we make estimates of potentially uncollectible amounts and provide an allowance for them through bad debt expense , actual collectability could differ from those estimates which could affect our net income . story_separator_special_tag certain external and internal costs directly related to the development , redevelopment and leasing of real estate , including pre-construction costs , real estate taxes , insurance , construction costs and salaries and related costs of personnel directly involved , are capitalized . we capitalized external and internal costs related to both development and redevelopment activities of $ 96 million and $ 4 million , respectively , for 2011 and $ 54 million and $ 3 million , respectively , for 2010 . we capitalized external and internal costs related to other property improvements of $ 46 million and $ 1 million , respectively , for 2011 and $ 39 million and $ 1 million , respectively , for 2010 . we capitalized external and internal costs related to leasing activities of $ 8 million and $ 5 million , respectively , for 2011 and $ 7 million and $ 4 million , respectively , for 2010 . the amount of capitalized internal costs for salaries and related benefits for development and redevelopment activities , other property improvements , and leasing activities were $ 4 million , $ 1 million , and $ 5 million , respectively , for 2011 and $ 3 million , $ 1 million , and $ 4 million , respectively , for 2010 . additionally , interest costs on developments and major redevelopments are capitalized as part of developments and redevelopments not yet placed in service . capitalization of interest commences when development activities and expenditures begin and end upon completion , which is when the asset is ready for its intended use . generally , rental property is considered substantially complete 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 . if the time period for capitalizing interest is extended , more interest is capitalized , thereby decreasing interest expense and increasing net income during that period . real estate acquisitions upon acquisition of operating real estate properties , we estimate the fair value of assets and liabilities acquired including land , building , improvements , leasing costs , intangibles such as in-place leases , assumed debt , and current assets and liabilities , if any . based on these estimates , we allocate the purchase price to the applicable assets and liabilities . we utilize methods similar to those used by independent appraisers in estimating the fair value of acquired assets and liabilities . the value allocated to in-place leases is amortized over the related lease term and reflected as rental income in the statement of operations . 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 lease value when we consider these to be bargain renewal options . if the value of below market lease intangibles includes renewal option periods , we include such renewal periods in the amortization period utilized . if a tenant vacates its space prior to contractual termination of its lease , the unamortized balance of any in-place lease value is written off to rental income . 30 long-lived assets and impairment there are estimates and assumptions made by management in preparing the consolidated financial statements for which the actual results will be determined over long periods of time . this includes the recoverability of long-lived assets , including our properties that have been acquired or redeveloped and our investment in certain joint ventures . management 's evaluation of impairment includes review for possible indicators of impairment as well as , in certain circumstances , undiscounted and discounted cash flow analysis . since most of our investments in real estate are wholly-owned or controlled assets which are held for use , a property with impairment indicators is first tested for impairment by comparing the undiscounted cash flows , including residual value , to the current net book value of the property . if the undiscounted cash flows are less than the net book value , the property is written down to expected fair value . the calculation of both discounted and undiscounted cash flows requires management to make estimates of future cash flows including revenues , operating expenses , required maintenance and development expenditures , market conditions , demand for space by tenants and rental rates over long periods . because our properties typically have a long life , the assumptions used to estimate the future recoverability of book value requires significant management judgment . actual results could be significantly different from the estimates . these estimates have a direct impact on net income , because recording an impairment charge results in a negative adjustment to net income . contingencies we are sometimes involved in lawsuits , warranty claims , and environmental matters arising in the ordinary course of business . management makes assumptions and estimates concerning the likelihood and amount of any potential loss relating to these matters . we accrue a liability for litigation if an unfavorable outcome is probable and the amount of loss can be reasonably estimated . if an unfavorable outcome is probable and a reasonable estimate of the loss is a range , we accrue the best estimate within the range ; however , if no amount within the range is a better estimate than any other amount , the minimum within the range is accrued . any difference between our estimate of a potential loss and the actual outcome would result in an increase or decrease to net income . in addition , we reserve for estimated losses , if any , associated with warranties given to a buyer at the time an asset is sold or other potential liabilities relating to that sale , taking any insurance policies into account .
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summary of cash flows replace_table_token_15_th net cash provided by operating activities decreased $ 12.0 million to $ 244.7 million during 2011 from $ 256.7 million during 2010 . the decrease was primarily attributable to the $ 16.2 million payment of the final judgment related to a previously disclosed lawsuit offset by higher net income before certain non-cash items . net cash used in investing activities increased $ 9.3 million to $ 196.4 million during 2011 from $ 187.1 million during 2010 . 42 the increase was primarily attributable to : $ 53.4 million increase in capital investments , and $ 46.4 million increase in acquisitions of real estate primarily due to the december 2011 montrose crossing acquisition , partially offset by $ 34.6 million cash received from our newbury street partnership due to the sale of its properties in october 2011 , $ 23.7 million in proceeds from sales of real estate primarily from the sale of feasterville shopping center in july 2011 , $ 10.5 million acquisition of a first mortgage loan in march 2010 , $ 10.0 million decrease in contributions to the newbury street partnership due to the $ 16.7 million initial investment in 2010 , and $ 8.7 million payment received in june 2011 related to the refinancing of a mortgage loan receivable . net cash provided by financing activities increased $ 192.9 million to $ 3.7 million during 2011 from $ 189.2 million used in 2010 .
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asc 820 establishes a hierarchy of valuation inputs based on the extent to which the inputs are observable in the marketplace . observable inputs reflect market data obtained from sources independent of the reporting entity and unobservable inputs reflect the entity 's own assumptions about how market participants would value an asset or liability based on the best information available . valuation techniques used to measure fair value under asc 820 must maximize the use of observable inputs and minimize the use of unobservable inputs . the standard describes a fair value hierarchy based on three levels of inputs , of which the first two are considered observable and the last unobservable , that may be used to measure fair value . the following describes the hierarchy of inputs used to measure fair value and the primary valuation methodologies used by the company for financial instruments measured at fair value on a recurring basis . the three levels of inputs are as follows : level 1 quoted prices in active markets for identical assets or liabilities that the company has an ability to access as of the measurement date . level 2 inputs that are observable , either directly or indirectly , such as quoted prices for similar assets or liabilities , quoted prices in markets that are not active , or other inputs that are observable or can be corroborated by observable market data for substantially the same term of the assets or liabilities . level 3 unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities . a financial instrument 's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement . our financial instruments include cash and cash equivalents , restricted cash , short-term financial instruments , short-term loans , accounts receivable , investments , accounts payables and debt . the carrying values of these financial instruments approximate their fair value due to their short maturities . the carrying amount of our debt approximates fair value because the interest rates on these instruments approximate the interest rate on debt with similar terms available to us . 13 i-on digital corp. and subsidiary notes to consolidated financial statements the company has financial instruments classified within the fair value hierarchy , which consists of the following : โ investments in privately-held companies , where quoted market prices are not available , accounted for as available-for-sale securities , classified as level 3 within the fair value hierarchy , and are recorded as an asset on the consolidated balance sheet โ an equity purchase put option that meets the definition of a derivative , classified as level 3 within the fair value hierarchy , which is recorded as an asset on the consolidated balance sheet the derivatives are evaluated under the hierarchy of asc 480-10 , asc paragraph 815-25-1 and asc subparagraph 815-10-15-74 addressing embedded derivatives . the fair value of the level 3 financial instruments was determined with the assistance of an independent third-party valuation specialist using an option pricing model . the following table summarize the company 's fair value story_separator_special_tag the following discussion should be read in conjunction with the information contained in the consolidated financial statements of the company and the notes thereto appearing elsewhere herein and in conjunction with the management 's discussion and analysis of financial condition and results of operations set forth in the company 's annual report on form 10-k for the year ended december 31 , 2019. readers should carefully review the risk factors disclosed in this form 10-k and other documents filed by the company with the sec . as used in this report , the terms โ company โ , โ we โ , โ our โ , and โ us โ refer to i-on digital corp. , a delaware corporation . preliminary note regarding forward-looking statements this annual report contains forward-looking statements within the meaning of the federal securities laws . these forward-looking statements can be identified by the use of words such as โ believes , โ โ estimates , โ โ intends โ , โ plans โ , โ could , โ โ possibly , โ โ probably , โ anticipates , โ โ projects , โ โ expects , โ โ may , โ โ will , โ or โ should , โ โ designed to , โ โ designed for , โ or other variations or similar words or language . the forward-looking statements are based on the current expectations of the company and are subject to certain risks , uncertainties and assumptions , including those set forth in the discussion under โ management 's discussion and analysis of financial condition and results of operations โ in this report . actual results may differ materially from results anticipated in these forward-looking statements . we base the forward-looking statements on information currently available to us , and we assume no obligation to update them 23 business history of company i-on digital corp. ( the โ company โ ) was incorporated under the laws of the state of delaware on june 18 , 2013. on april 4 , 2014 , the michael j. rapport trust ( the โ trust โ ) purchased 10,000,000 shares of the company 's common stock which was all of the outstanding shares of alpine 3 , inc. , and subsequently changed the name to evans brewing company inc. ( โ ebc โ ) on may 29 , 2014. on october 9 , 2014 , the trust agreed to the cancellation of 9,600,000 of the shares of common stock that it had acquired and retained 400,000 shares of common stock . story_separator_special_tag from april 2014 through december 2015 , ebc has been in the process of acquiring the bayhawk brands and related assets , as discussed in more detail below . on october 15 , 2014 , ebc entered into an asset purchase and share exchange agreement ( the โ agreement โ ) , with bayhawk ales , inc. ( โ bayhawk โ ) whereby bayhawk sold to ebc , and ebc purchased from bayhawk , assets of bayhawk , in exchange for 4,033,863 shares of ebc common stock upon the terms and subject to the conditions set forth in the asset purchase and share exchange agreement . on september 29 , 2016 , evans brewing company , inc. , closed the acquisition of a restaurant business located in the downtown soco district of fullerton , california , through the acquisition of all the outstanding stock of ebc public house , inc. , which the company now operates as its first branded restaurant and taproom under the trade name โ the public house by evans brewing company โ . the public house features the company 's beers โ as well as beers from other selected local orange county , california breweries , -- food and , occasional entertainment . in connection with such closing , the company acquired 100 % of the outstanding shares of ebc public house from mr. rapport and issued 1,000,000 shares of the company 's series a preferred stock to mr. rapport . the asset purchase and share exchange have been treated as business combination as both companies are controlled by the same management . on january 25 , 2018 , the company consummated an agreement of merger and plan of reorganization ( the โ merger agreement โ ) , with i-on digital corp .. , a company organized under the laws of the republic of korea ( south korea ) ( โ i-on โ ) and i-on acquisition corp. , a wholly-owned subsidiary of the registrant ( โ acquisition โ ) . pursuant to the terms of the merger agreement , acquisition merged with and into i-on in a statutory reverse triangular merger ( the โ merger โ ) with i-on surviving as a wholly-owned subsidiary of the registrant . as consideration for the merger , the registrant agreed to issue the shareholders of i-on ( the โ i-on holders โ ) an aggregate of 26,000,000 shares of our common stock . following the merger , the registrant adopted the business plan of i-on in information technology consultancy and software development . on december 14 , 2017 , in connection with the merger , the registrant 's board of directors approved an amendment to its certificate of incorporation ( the โ amendment โ ) to change its name to i-on digital corp. on april 2 , 2019 , the company amended its certificate of incorporation to change the name of the company to โ i-on digital corp. โ overview prior to the merger , the company operated a craft brewery based on orange county , california that produces and sells premium craft beers , including a variety of ales and lagers . ebc 's beers are currently produced in its 17-barrel brewery in irvine , california , the oldest continuously operating brewing facility in orange county and one of the oldest in all of southern california . this facility has been producing craft beers since january 1995. following the merger , the company adopted the business plan of i-on . i-on was founded by jae cheol james oh , who currently serves as ceo , the company 's roots of which are in it consultancy and software development . i-on services south korea 's enterprise content management system 's market and specializes in advancing market-leading internet software applications to capitalize on rapidly growing market sectors . 24 after being awarded its first of 6 patents in 2003 , i-on has since evolved into an industry-leading and recognized software developer and provider of enterprise-class unstructured data management and digital marketing software and solutions . i-on services over 1,000 blue-chip and middle-market clients across virtually all verticals in both private and public sectors . the company has meaningfully expanded its reach over the past decade and now currently licenses and sells its products and services directly to clients in south korea and japan , as well as in singapore , malaysia , indonesia , thailand , vietnam , and the u.s. through value-added resellers and partnerships . i-on 's portfolio of software and solutions serves the digital marketing and technology needs of organizations , enabling clients to create , measure , and optimizes digital experiences for their audiences across marketing channels and devices . we believe these solutions help clients reduce the cost of content management and delivery and increase the return on their investments in digital communication . on currently holds 6 international patents for both products and methodologies ( with 3 more pending ) built into the 11 product offerings the company currently has at market . these encompass enterprise web content management ( cms ) , web experience and service delivery software , digital marketing , smart mobility and analytics tools , and , more recently , energy management solutions . the company has designed and developed industry-leading technologies that are compliant with global standards including gs ( good software ) and net ( new excellent technology ) . i-on also holds numerous domestic and global industry awards , earning high rankings and recognition from the likes of gartner ( magic quadrant 2014 ) and red herring ( 2014 asia top 100 winner ) , among many others . basis of presentation the financial statements of the company are presented in united states dollars and have been prepared in accordance with accounting principles generally accepted in the united states . story_separator_special_tag > 189,445 or -68 .6 % , to $ 86,570 for the year ended december 31 , 20 20 from tax benefit of $ 276,015
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summary of significant accounting policies our significant accounting policies are more fully described in the notes to our consolidated financial statements included in this annual report on form 10-k for the fiscal year ended december 31 , 2019. we believe that the accounting policies below are critical for one to fully understand and evaluate our financial condition and results of operations . results of operations for the year ended december 31 , 2020 as compared to the year ended december 31 , 2019 replace_table_token_2_th 25 net sales net sales increased by $ 2,517,487 or 31 .7 % , to $ 10,471,502 for the year ended december 31 , 20 20 from $ 7,954,015 for the year ended december 31 , 201 9 . the net increase in net sales was primarily due the following : โ revenue from customization increased by $ 710,087 or 15.8 % , to $ 5,209,443 for the year ended december 31 , 20 20 from $ 4,499,346 for the year ended december 31 , 201 9 . the increase was due to increase in amount of customer contract revenue which was $ 9,578,588 for year ended december 31 , 20 20 compared to $ 6,980,876 for the year ended december 31 , 201 9 . โ revenue from maintenance increased by $ 338,571 or 23.1 % , to $ 1,802,032 for the year ended december 31 , 2020 from $ 1,463,461 for the year ended december 31 , 2019. the increase was due to increase in maintenance and development contracts and increase in number of customers to 91 in 2020 from 65 in 2019 . โ revenue from installation in creased by $ 1,140,802 or 144.2 % , to $ 1,931,765 for the year ended december 31 , 20 20 from $ 790,963 for the year ended december 31 , 201 9 .
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