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overview we are a clinical stage pharmaceutical company focused on developing and commercializing innovative therapeutics to treat patients suffering from rare seizure disorders . our clinical stage product candidate , ganaxolone , is a positive allosteric modulator of gaba a that is being developed in formulations for two different routes of administration : intravenous ( iv ) and oral . ganaxolone is a synthetic analog of allopregnanolone , an endogenous neurosteroid . the different formulations are intended to maximize potential therapeutic applications of ganaxolone for adult and pediatric patient populations , in both acute and chronic care , and for both in-patient and self-administered settings . ganaxolone acts at both synaptic and extrasynaptic gaba a receptors , a target known for its anti-seizure , antidepressant and anxiolytic potential . our operations to date have consisted primarily of organizing and staffing our company , developing ganaxolone , including conducting preclinical studies and clinical trials , and raising capital . we have funded our operations primarily through sales of equity and debt securities . at december 31 , 2020 , we had cash , cash equivalents and investment balances of $ 140.0 million . we have no products currently available for sale , have incurred operating losses since inception , have not generated any product sales revenue and have not achieved profitable operations . we incurred a net loss of $ 67.5 million for the year ended december 31 , 2020. our accumulated deficit as of december 31 , 2020 was $ 311.9 million , and we expect to continue to incur substantial losses in future periods . we anticipate that our operating expenses will increase substantially as we continue to advance our clinical-stage product candidate , ganaxolone . we anticipate that our expenses will increase substantially as we : · conduct later stage clinical trials in targeted indications , which could include se , cdd , tsc , pcdh19-re and possibly other indications ; ● continue the research , development and scale-up manufacturing capabilities to optimize ganaxolone and dose forms for which we may obtain regulatory approval ; ● conduct other preclinical studies and clinical trials to support the filing of ndas with the fda , maas with the ema and other marketing authorization filings with regulatory agencies in other countries ; ● acquire the rights to other product candidates and fund their development ; ● maintain , expand and protect our global intellectual property portfolio ; ● hire additional clinical , manufacturing and scientific personnel ; and ● add operational , financial and management information systems and personnel , including personnel to support our drug development efforts . 78 we believe that our cash , cash equivalents and investment balances as of december 31 , 2020 will enable us to fund our operating expenses and capital expenditure requirements into the second quarter of 2022. however , we will need to secure additional funding in the future , from one or more equity or debt financings , government funding , collaborations , licensing transactions , other commercial transactions or other sources , in order to carry out all of our planned research and development activities with respect to ganaxolone . covid-19 in december 2019 , an outbreak of a novel strain of coronavirus ( covid-19 ) was identified in wuhan , china . this virus was declared a pandemic by the world health organization in march 2020 and has spread to nearly every country in the world , including the u.s. efforts to contain the spread of covid-19 have intensified and many countries , including the u.s. , have implemented severe travel restrictions , business shutdowns and social distancing measures that have impacted clinical development through supply chain shortages and clinical trial enrollment difficulties as hospitals reduce and redeploy staff , divert resources to patients suffering covid-19 and limit hospital access for non-patients . the pandemic poses the risk that we , our contractors , suppliers , or other partners may be prevented from conducting normal business activities for an indefinite period of time , including those due to shutdowns that may be requested or mandated by governmental authorities . the continued global spread of covid-19 has affected our operations but did not had a material impact on our business , operating results , financial condition or cash flows as of and for the year ended december 31 , 2020. for example , several of our phase 1 trials of oral ganaxolone to support the cdd indication have continued enrollment and are expected to be completed by the end of the second quarter of 2021 , despite experiencing delays in enrollment due to covid-19 . further , in response to covid-19 , for our ongoing clinical trials , we have implemented multiple measures consistent with guidance of the fda on the conduct of clinical trials of medical products during the covid-19 pandemic , including implementing remote site monitoring and remote visits using telemedicine where needed . however , covid-19 may still adversely impact our clinical trials . for example , our raise trial in rse is being conducted in hospitals , and resources related to the covid-19 pandemic may divert staffing in hospitals , taking resources away from our clinical trial . our ganaxolone clinical trials in the outpatient setting may be negatively impacted if patients and their caregivers do not want to participate in a clinical trial while the covid-19 pandemic continues to severely affect the world . story_separator_special_tag further , the continued spread of covid-19 has also led to severe disruption and volatility in the global capital markets , which could increase our cost of capital and adversely affect our ability to access the capital markets in the future . our failure to obtain sufficient funds on acceptable terms when needed could have a negative impact on our business , results of operations , and financial condition . our future capital requirements will depend on many factors , including : ● the effects of the covid-19 pandemic on our business , the medical community and the global economy ; ● the results of our preclinical studies and clinical trials ; ● the development , formulation and commercialization activities related to ganaxolone ; ● the scope , progress , results and costs of researching and developing ganaxolone or any other future product candidates , and conducting preclinical studies and clinical trials ; ● the timing of , and the costs involved in , obtaining regulatory approvals for ganaxolone or any other future product candidates ; ● the cost of commercialization activities if ganaxolone or any other future product candidates are approved for sale , including marketing , sales and distribution costs ; ● the cost of manufacturing and formulating ganaxolone , or any other future product candidates , to internal and regulatory standards for use in preclinical studies , clinical trials and , if approved , commercial sale ; ● our ability to establish and maintain strategic collaborations , licensing or other arrangements and the financial terms of such agreements ; ● our ability to receive funding under the barda contract ; ● any product liability , infringement or other lawsuits related to our product candidates and , if approved , products ; ● capital needed to attract and retain skilled personnel ; ● the costs involved in preparing , filing , prosecuting , maintaining , defending and enforcing patent claims , including litigation costs and the outcome of such litigation ; and ● the timing , receipt and amount of sales of , or royalties on , future approved products , if any . please see “ risk factors ” for additional risks associated with our substantial capital requirements . off-balance sheet arrangements we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition , changes in financial condition , revenues or expenses , results of operations , liquidity , capital expenditures or capital resources that are material to investors . 84 discussion of critical accounting policies and significant judgments and estimates we base this management 's discussion and analysis of our financial condition and results of operations on our financial statements , which we have prepared in accordance with accounting principles generally accepted in the united states ( gaap ) . the preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets , liabilities , revenue and expenses and the disclosure of contingent assets and liabilities in our financial statements . we evaluate our estimates and judgments , including those related to accrued clinical trial expenses on an ongoing basis . we base our estimates on historical experience , known trends and events and various other factors that we believe to be reasonable under the circumstances , the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources . actual results may differ from these estimates under different assumptions or conditions . you should consider your evaluation of our financial condition and results of operations with these policies , judgments and estimates in mind . while we describe our significant accounting policies in the notes to our financial statements appearing elsewhere in this annual report on form 10-k , we believe the following accounting policies are the most critical to the judgments and estimates we use in the preparation of our financial statements . clinical trial expenses as part of the process of preparing our financial statements , we are required to estimate our clinical trial expenses . our clinical trial accrual process seeks to account for expenses resulting from our obligations under contracts with vendors , consultants and cros and clinical site agreements in connection with conducting clinical trials . the financial terms of these contracts are subject to negotiations , which vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided to us under such contracts . our objective is to reflect the appropriate clinical trial expenses in our financial statements by matching the appropriate expenses with the period in which services and efforts are expended . we account for these expenses according to the progress of the trial as measured by subject progression and the timing of various aspects of the trial . we determine accrual estimates based on estimates of the services received and efforts expended that take into account discussion with applicable personnel and outside service providers as to the progress or state of completion of trials . during the course of a clinical trial , we adjust our clinical expense recognition if actual results differ from our estimates . we make estimates of our accrued expenses and prepaid assets as of each balance sheet date in our financial statements based on the facts and circumstances known to us at that time . our clinical trial accrual and prepaid assets are dependent , in part , upon the receipt of timely and accurate reporting from cros and other third-party vendors . although we do not expect our estimates to differ materially from amounts we actually incur , our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in us reporting amounts that are too high

sources of liquidity since inception , we have incurred net losses and negative cash flows from our operations . we incurred a net loss of $ 67.5 million for the year ended december 31 , 2020. our cash used in operating activities was $ 60.9 million for year ended december 31 , 2020 compared to $ 48.6 million for the same period a year ago . historically , we have financed our operations principally through the sale of common stock , notes payable , preferred stock and convertible debt . at december 31 , 2020 , we had cash , cash equivalents and investment balances of $ 140.0 million . in september 2020 , we entered into the barda contract . under the barda contract , we receive d an award of up to an estimated $ 51 million for development of iv- administered ganaxolone for the treatment of rse . the barda contract provides for f unding to support , on a cost-sharing basis , the completion of the raise trial , funding of pre-clinical studies to provide support that iv-administered ganaxolone could be an effective treatment for rse due to chemical nerve gas agent exposure , and funding of certain manufacturing scale-up and regulatory activities . the barda contract consists of an approximately two-year base period-during which barda will provide approximately $ 21 million of funding for the raise trial on a cost share basis and funding of additional preclinical studies of ganaxolone in nerve agent exposure models . following successful completion of the raise trial and preclinical studies in the base period , the barda contract provides for approximately $ 30 million of additional barda funding for three options in support of manufacturing , supply chain , clinical , regulatory and toxicology activities . under the barda contract , we will be responsible for cost sharing in the amount of approximately $ 33 million and barda will be responsible for approximately $ 51 million , if all development options are completed .

2. fees charged for recycling and replacing old appliances with new energy star ® appliances for energy efficiency programs sponsored by utilities . 23 3. income generated through the processing of recyclable appliances purchased at our rpcs by selling the raw material separated during the recycling process . over the last twelve months , recycling-only programs have continued to report declining revenues and volumes . we believe factors impacting this reduction include intense competition on pricing in the industry and a declining number of utility program-eligible refrigerators manufactured before 1993 energy standards took effect . we also experienced declining revenues and volumes from our appliance replacement programs . the reduction in our appliance replacement program revenues can be attributed to delays in customers obtaining puc approval to continue their programs , timing of advertising to support their programs and the management of our customers ' overall energy efficiency programs resulting in later deliveries of the replacement units under such programs . our recycling segment , and to a lesser degree our retail segment , has been materially impacted by the rapid and prolonged decline in the selling prices of the commodity byproducts that we sell . overall , we have experienced a $ 7.7 million decline in our byproduct revenues . in response to this significant decline in revenues we have been working with our utility customers to adjust our selling prices for the programs that we offer them . we have been successful with many of our contract renewals with implementing new pricing that reduces our dependence on the recovery of the commodity markets in which we sell byproducts of our recycling operations . our retail segment is similar to many other retailers in that it is seasonal in nature . historically , the fourth quarter is our weakest quarter in terms of both revenues and earnings . we believe this is primarily because the fourth quarter includes several holidays during which consumers tend to focus less on purchasing major household appliances . we derive revenues from the sale of carbon offsets created by the destruction of ozone-depleting cfcs captured at our arca and aap regional processing centers . we expect to create carbon offsets and derive revenues in the future through california 's market , but can not predict the amount or frequency of carbon offset sales . carbon offset sales are dependent on market conditions , including demand and acceptable market prices . during the year ended january 2 , 2016 , the combination of arca and aap recognized $ 0.8 million in carbon offset revenues compared to $ 1.0 million during the year ended january 3 , 2015. we are currently working on the sale of carbon offsets and expect to complete these transactions in early 2016. this is anticipated to result in carbon offset revenues of approximately $ 1.7 million if the carbon offsets are approved in 2016. in addition we have accumulated refrigerants for destruction under our carbon offset program which is expected to result in further carbon offset revenues of approximately $ 0.9 million by the end of 2016. we monitor specific economic factors such as retail trends , consumer confidence , manufacturing by the major appliance companies , sales of existing homes and mortgage interest rates as key indicators of industry demand , particularly in our retail segment . competition in the home appliance industry is intense in the four retail markets we serve . this includes competition not only from independent retailers , but also from such major retailers as sears , best buy , the home depot and lowe 's . we also closely monitor the metals and various other scrap markets because of the type of components recovered in our recycling process . this includes monitoring the american metal market and the regions throughout the u.s. where we have our recycling centers . reporting period . we report on a 52- or 53-week fiscal year . our 2015 fiscal year ( “ 2015 ” ) ended on january 2 , 2016 , and included 52 weeks . our 2014 fiscal year ( “ 2014 ” ) ended on january 3 , 2015 , and included 53 weeks . 24 results of operations the following table sets forth our consolidated financial data as a percentage of total revenues for fiscal years 2015 and 2014 : replace_table_token_2_th the following table sets forth the key results of operations by segment for fiscal years 2015 and 2014 ( dollars in millions ) : replace_table_token_3_th our total revenues of $ 111.8 million for 2015 decreased $ ( 19.1 ) million , or 15 % , from $ 130.9 million in 2014 . the change in revenues was attributed primarily to the following factors : retail segment same-store sales declined by $ 1.4 million compared with the prior year . sales were lower in fiscal 2015 as there were 52 weeks as compared with 53 weeks in fiscal 2014. byproduct revenues from our retail segment activity declined $ 0.4 million compared to the prior year . 25 recycling segment appliance replacement program revenues decreased by $ 9.6 million compared with the prior year . recycling-only program revenues declined $ 0.5 million compared with the prior year . carbon offset revenues decreased $ 0.1 million in 2015. other byproduct revenues from our recycling segment activity declined by $ 2.8 million compared to the prior year . aap revenues , excluding carbon offsets , decreased by $ 4.3 million compared with the prior year . recycling segment revenues accounted for 41 % of total revenues in 2015 compared with 48 % in 2014 . recycling segment revenues and retail segment revenues each include a portion of byproduct revenues . in both 2015 and 2014 , the recycling segment accounted for approximately 94 % of byproduct revenues . story_separator_special_tag consequently , foreign buyers have shifted their purchases from the u.s. to european countries and elsewhere . at the same time , u.s. steel mills have been finding it more advantageous to import high-quality billets of steel made from virgin iron ore than to purchase u.s.-generated scrap . as a result , our scrap revenues per ton declined further in 2015. it is unclear when scrap prices will recover and what the impact will be on our byproduct revenues . we expect that our 2016 financial results may be adversely affected by the low scrap prices and , as a result , it is possible that we may not be in compliance with certain covenants of the revolving credit agreement at some point in 2016 if we experience unanticipated declines in our byproduct revenues . off balance sheet arrangements and contractual obligations other than operating leases , we do not have any off balance sheet financing . a summary of our operating lease obligations by fiscal year is included in “ note 9. commitments and contingencies ” of the notes to consolidated financial statements included in “ item 8. financial statements and supplementary data . ” application of critical accounting policies our discussion of the financial condition and results of operations is based upon our consolidated financial statements , which have been prepared in conformity with accounting principles generally accepted in the united states . the preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities , revenues and expenses , and related disclosure of any contingent assets and liabilities at the date of the financial statements . management regularly reviews its estimates and assumptions , which are based on historical factors and other factors believed to be relevant under the circumstances . actual results may differ from these estimates under different assumptions , estimates or conditions . critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and potentially result in materially different results under different assumptions and conditions . see note 2 of “ notes to consolidated financial statements ” for additional disclosure of the application of these and other accounting policies . inventories . our inventories , consisting principally of appliances , are stated at the lower of cost , determined on a specific identification basis , or market . we provide estimated provisions for the obsolescence of our appliance inventories , including adjustments to market , based on various factors , including the age of such inventory and our management 's assessment of the need for such provisions . we look at historical inventory agings and margin analyses in determining our provision estimate . historically , our actual experience has not differed significantly from our estimates . long-lived assets . we review our long-lived assets for impairment whenever events or changes in circumstances indicate that our carrying value of long-lived assets may not be recoverable . long-lived assets are considered not recoverable when the carrying amount of a long-lived asset ( asset group ) exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset ( asset group ) . if it is determined that a long-lived asset ( asset group ) is not recoverable , an impairment loss is recorded equal to the excess of the carrying amount of the long-lived asset ( asset group ) over the long-lived asset 's ( asset group 's ) fair value . fair value is the amount at which the long-lived asset ( asset group ) could be bought or sold in a current transaction between a willing buyer and seller , other than in a forced or liquidation sale . 30 income taxes . we account for income taxes under the liability method . deferred tax liabilities are recognized for temporary differences that will result in taxable amounts in future years . deferred tax assets are recognized for deductible temporary differences and tax operating loss and tax credit carryforwards . deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be realized or settled . we assess the likelihood that our deferred tax assets will be recovered from future taxable income and record a valuation allowance to reduce our deferred tax assets to the amounts we believe to be realizable . we regularly evaluate both positive and negative evidence related to either recording or retaining a valuation allowance against our deferred tax assets . share-based compensation . we recognize compensation expense on a straight-line basis over the vesting period for all share-based awards granted . we use the black-scholes option pricing model to determine the fair value of awards at the grant date . we calculate the expected volatility for stock options and awards using historical volatility . we estimate a 0 % -5 % forfeiture rate for stock options issued to employees and board of directors members , but will continue to review these estimates in future periods . the risk-free rates for the expected terms of the stock options are based on the u.s. treasury yield curve in effect at the time of the grant . the expected life represents the period that the stock option awards are expected to be outstanding . the expected dividend yield is zero as we have not paid or declared any cash dividends on our common stock . revenue recognition . we recognize revenue from appliance sales in the period the consumer purchases and pays for the appliance , net of an allowance for estimated returns . we recognize revenue from appliance recycling when we collect and process a unit . we recognize revenue generated from appliance replacement programs when we deliver the new appliance and collect and process the old appliance . the delivery , collection and processing activities under

sources of liquidity since inception , we have incurred net losses and negative cash flows from our operations . we incurred a net loss of $ 67.5 million for the year ended december 31 , 2020. our cash used in operating activities was $ 60.9 million for year ended december 31 , 2020 compared to $ 48.6 million for the same period a year ago . historically , we have financed our operations principally through the sale of common stock , notes payable , preferred stock and convertible debt . at december 31 , 2020 , we had cash , cash equivalents and investment balances of $ 140.0 million . in september 2020 , we entered into the barda contract . under the barda contract , we receive d an award of up to an estimated $ 51 million for development of iv- administered ganaxolone for the treatment of rse . the barda contract provides for f unding to support , on a cost-sharing basis , the completion of the raise trial , funding of pre-clinical studies to provide support that iv-administered ganaxolone could be an effective treatment for rse due to chemical nerve gas agent exposure , and funding of certain manufacturing scale-up and regulatory activities . the barda contract consists of an approximately two-year base period-during which barda will provide approximately $ 21 million of funding for the raise trial on a cost share basis and funding of additional preclinical studies of ganaxolone in nerve agent exposure models . following successful completion of the raise trial and preclinical studies in the base period , the barda contract provides for approximately $ 30 million of additional barda funding for three options in support of manufacturing , supply chain , clinical , regulatory and toxicology activities . under the barda contract , we will be responsible for cost sharing in the amount of approximately $ 33 million and barda will be responsible for approximately $ 51 million , if all development options are completed .

2. fees charged for recycling and replacing old appliances with new energy star ® appliances for energy efficiency programs sponsored by utilities . 23 3. income generated through the processing of recyclable appliances purchased at our rpcs by selling the raw material separated during the recycling process . over the last twelve months , recycling-only programs have continued to report declining revenues and volumes . we believe factors impacting this reduction include intense competition on pricing in the industry and a declining number of utility program-eligible refrigerators manufactured before 1993 energy standards took effect . we also experienced declining revenues and volumes from our appliance replacement programs . the reduction in our appliance replacement program revenues can be attributed to delays in customers obtaining puc approval to continue their programs , timing of advertising to support their programs and the management of our customers ' overall energy efficiency programs resulting in later deliveries of the replacement units under such programs . our recycling segment , and to a lesser degree our retail segment , has been materially impacted by the rapid and prolonged decline in the selling prices of the commodity byproducts that we sell . overall , we have experienced a $ 7.7 million decline in our byproduct revenues . in response to this significant decline in revenues we have been working with our utility customers to adjust our selling prices for the programs that we offer them . we have been successful with many of our contract renewals with implementing new pricing that reduces our dependence on the recovery of the commodity markets in which we sell byproducts of our recycling operations . our retail segment is similar to many other retailers in that it is seasonal in nature . historically , the fourth quarter is our weakest quarter in terms of both revenues and earnings . we believe this is primarily because the fourth quarter includes several holidays during which consumers tend to focus less on purchasing major household appliances . we derive revenues from the sale of carbon offsets created by the destruction of ozone-depleting cfcs captured at our arca and aap regional processing centers . we expect to create carbon offsets and derive revenues in the future through california 's market , but can not predict the amount or frequency of carbon offset sales . carbon offset sales are dependent on market conditions , including demand and acceptable market prices . during the year ended january 2 , 2016 , the combination of arca and aap recognized $ 0.8 million in carbon offset revenues compared to $ 1.0 million during the year ended january 3 , 2015. we are currently working on the sale of carbon offsets and expect to complete these transactions in early 2016. this is anticipated to result in carbon offset revenues of approximately $ 1.7 million if the carbon offsets are approved in 2016. in addition we have accumulated refrigerants for destruction under our carbon offset program which is expected to result in further carbon offset revenues of approximately $ 0.9 million by the end of 2016. we monitor specific economic factors such as retail trends , consumer confidence , manufacturing by the major appliance companies , sales of existing homes and mortgage interest rates as key indicators of industry demand , particularly in our retail segment . competition in the home appliance industry is intense in the four retail markets we serve . this includes competition not only from independent retailers , but also from such major retailers as sears , best buy , the home depot and lowe 's . we also closely monitor the metals and various other scrap markets because of the type of components recovered in our recycling process . this includes monitoring the american metal market and the regions throughout the u.s. where we have our recycling centers . reporting period . we report on a 52- or 53-week fiscal year . our 2015 fiscal year ( “ 2015 ” ) ended on january 2 , 2016 , and included 52 weeks . our 2014 fiscal year ( “ 2014 ” ) ended on january 3 , 2015 , and included 53 weeks . 24 results of operations the following table sets forth our consolidated financial data as a percentage of total revenues for fiscal years 2015 and 2014 : replace_table_token_2_th the following table sets forth the key results of operations by segment for fiscal years 2015 and 2014 ( dollars in millions ) : replace_table_token_3_th our total revenues of $ 111.8 million for 2015 decreased $ ( 19.1 ) million , or 15 % , from $ 130.9 million in 2014 . the change in revenues was attributed primarily to the following factors : retail segment same-store sales declined by $ 1.4 million compared with the prior year . sales were lower in fiscal 2015 as there were 52 weeks as compared with 53 weeks in fiscal 2014. byproduct revenues from our retail segment activity declined $ 0.4 million compared to the prior year . 25 recycling segment appliance replacement program revenues decreased by $ 9.6 million compared with the prior year . recycling-only program revenues declined $ 0.5 million compared with the prior year . carbon offset revenues decreased $ 0.1 million in 2015. other byproduct revenues from our recycling segment activity declined by $ 2.8 million compared to the prior year . aap revenues , excluding carbon offsets , decreased by $ 4.3 million compared with the prior year . recycling segment revenues accounted for 41 % of total revenues in 2015 compared with 48 % in 2014 . recycling segment revenues and retail segment revenues each include a portion of byproduct revenues . in both 2015 and 2014 , the recycling segment accounted for approximately 94 % of byproduct revenues . story_separator_special_tag consequently , foreign buyers have shifted their purchases from the u.s. to european countries and elsewhere . at the same time , u.s. steel mills have been finding it more advantageous to import high-quality billets of steel made from virgin iron ore than to purchase u.s.-generated scrap . as a result , our scrap revenues per ton declined further in 2015. it is unclear when scrap prices will recover and what the impact will be on our byproduct revenues . we expect that our 2016 financial results may be adversely affected by the low scrap prices and , as a result , it is possible that we may not be in compliance with certain covenants of the revolving credit agreement at some point in 2016 if we experience unanticipated declines in our byproduct revenues . off balance sheet arrangements and contractual obligations other than operating leases , we do not have any off balance sheet financing . a summary of our operating lease obligations by fiscal year is included in “ note 9. commitments and contingencies ” of the notes to consolidated financial statements included in “ item 8. financial statements and supplementary data . ” application of critical accounting policies our discussion of the financial condition and results of operations is based upon our consolidated financial statements , which have been prepared in conformity with accounting principles generally accepted in the united states . the preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities , revenues and expenses , and related disclosure of any contingent assets and liabilities at the date of the financial statements . management regularly reviews its estimates and assumptions , which are based on historical factors and other factors believed to be relevant under the circumstances . actual results may differ from these estimates under different assumptions , estimates or conditions . critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and potentially result in materially different results under different assumptions and conditions . see note 2 of “ notes to consolidated financial statements ” for additional disclosure of the application of these and other accounting policies . inventories . our inventories , consisting principally of appliances , are stated at the lower of cost , determined on a specific identification basis , or market . we provide estimated provisions for the obsolescence of our appliance inventories , including adjustments to market , based on various factors , including the age of such inventory and our management 's assessment of the need for such provisions . we look at historical inventory agings and margin analyses in determining our provision estimate . historically , our actual experience has not differed significantly from our estimates . long-lived assets . we review our long-lived assets for impairment whenever events or changes in circumstances indicate that our carrying value of long-lived assets may not be recoverable . long-lived assets are considered not recoverable when the carrying amount of a long-lived asset ( asset group ) exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset ( asset group ) . if it is determined that a long-lived asset ( asset group ) is not recoverable , an impairment loss is recorded equal to the excess of the carrying amount of the long-lived asset ( asset group ) over the long-lived asset 's ( asset group 's ) fair value . fair value is the amount at which the long-lived asset ( asset group ) could be bought or sold in a current transaction between a willing buyer and seller , other than in a forced or liquidation sale . 30 income taxes . we account for income taxes under the liability method . deferred tax liabilities are recognized for temporary differences that will result in taxable amounts in future years . deferred tax assets are recognized for deductible temporary differences and tax operating loss and tax credit carryforwards . deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be realized or settled . we assess the likelihood that our deferred tax assets will be recovered from future taxable income and record a valuation allowance to reduce our deferred tax assets to the amounts we believe to be realizable . we regularly evaluate both positive and negative evidence related to either recording or retaining a valuation allowance against our deferred tax assets . share-based compensation . we recognize compensation expense on a straight-line basis over the vesting period for all share-based awards granted . we use the black-scholes option pricing model to determine the fair value of awards at the grant date . we calculate the expected volatility for stock options and awards using historical volatility . we estimate a 0 % -5 % forfeiture rate for stock options issued to employees and board of directors members , but will continue to review these estimates in future periods . the risk-free rates for the expected terms of the stock options are based on the u.s. treasury yield curve in effect at the time of the grant . the expected life represents the period that the stock option awards are expected to be outstanding . the expected dividend yield is zero as we have not paid or declared any cash dividends on our common stock . revenue recognition . we recognize revenue from appliance sales in the period the consumer purchases and pays for the appliance , net of an allowance for estimated returns . we recognize revenue from appliance recycling when we collect and process a unit . we recognize revenue generated from appliance replacement programs when we deliver the new appliance and collect and process the old appliance . the delivery , collection and processing activities under

sources of liquidity . our principal sources of liquidity are cash from operations and borrowings under our revolving line of credit . our principal liquidity requirements consist of long-term debt obligations , capital expenditures and working capital . our total capital requirements for the next twelve months will depend upon , among other things , the number and size of appliancesmart stores operating during the period , the volumes generated from recycling and appliance replacement contracts during the period 28 and our needs related to aap . currently , we have eighteen appliancesmart stores and twelve recycling centers , including aap , in operation . we believe , based on the anticipated revenues from our recycling and appliance replacement contracts , the anticipated sales per retail store , and our anticipated gross profit , that our cash balance , anticipated funds generated from operations ( including income tax loss carryback refunds of approximately $ 1.0 million ) and our revolving line of credit will be sufficient to finance our operations , long-term debt obligations and capital expenditures through at least the next twelve months . we anticipate improvements in our operating results in 2016 as compared to 2015 to be derived from higher expected revenues under our carbon offset program by approximately $ 1.8 million , increased revenue from our business development activities that resulted from the receivership of jaco environmental and operating cost reductions that are expected as a result of our cost rationalization initiatives . we may need additional capital to finance our operations if our revenues are lower than anticipated , our expenses are higher than anticipated or we pursue new opportunities . sources of additional financing , if needed in the future , may include further debt financing or the sale of equity ( common or preferred stock ) or other financing opportunities . there can be no assurance that such additional sources of financing will be available on terms satisfactory to us or permitted by our credit agreement . outstanding indebtedness .

our business environment and current outlook current conditions in the global capital markets remain volatile as the world 's economic growth has been affected by geopolitical and economic events . in addition , there is uncertainty surrounding the policy stance of the new u.s. administration and its global ramifications . in the united states , the overall economic environment continued to improve in 2016. during 2016 , the u.s. real gross domestic product increased 1.6 % to $ 16.66 trillion , the unemployment rate decreased 0.3 percentage points to 4.7 % , and core cpi , a measure of inflation which removes food and energy prices and is seasonally adjusted , increased 2.2 % , as compared to the same period a year earlier . economic trends and government policies affect global and regional commercial real estate markets as well as our operations directly . these include : overall economic activity and employment growth , interest rate levels , the cost and availability of credit and the impact of tax and regulatory policies . 57 critical accounting policies and significant accounting estimates our accounting policies have been established to conform with gaap . the preparation of financial statements in conformity with gaap requires us to use judgment in the application of accounting policies , including making estimates and assumptions . these judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods . management believes that we have made these estimates and assumptions in an appropriate manner and in a way that accurately reflects our financial condition . we continually test and evaluate these estimates and assumptions using our historical knowledge of the business , as well as other factors , to ensure that they are reasonable for reporting purposes . however , actual results may differ from these estimates and assumptions . if our judgment or interpretation of the facts and circumstances relating to the various transactions had been different , it is possible that different accounting policies would have been applied , thus resulting in a different presentation of the financial statements . additionally , other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses . we believe the following critical accounting policies govern the significant judgments and estimates used in the preparation of our financial statements , which should be read in conjunction with the more complete discussion of our accounting policies and procedures included in note 3 — summary of significant accounting policies to our consolidated financial statements in this annual report on form 10-k. recoverability of real estate assets we invest in real estate assets and subsequently monitor those investments quarterly for impairment , including the review of real estate properties subject to direct financing leases , if applicable . additionally , we record depreciation and amortization related to our investments . the risks and uncertainties involved in applying the principles related to real estate investments include , but are not limited to , the following : the estimated useful lives of our depreciable assets affects the amount of depreciation and amortization recognized on our investments ; the review of impairment indicators and subsequent determination of the undiscounted future cash flows could require us to reduce the value of assets and recognize an impairment loss ; the fair value of held for sale assets is estimated by management . this estimated value could result in a reduction of the carrying value of the asset ; and changes in assumptions based on actual results may have a material impact on our financial results . consolidation of equity investment we must continually evaluate non-controlling interests for consolidation based on standards set forth in gaap . for legal entities being evaluated , we must first determine whether the interests that we hold and fees we receive qualify as variable interests in the entity , as discussed in note 3 – summary of significant accounting policies to our consolidated financial statements in this annual report on form 10-k. the difference between consolidating the variable interest entity ( “ vie ” ) and accounting for it using the equity method could be material to our consolidated financial statements . the risks and uncertainties involved in applying the principles related to equity investments include , but are not limited to , the following : consideration for vies involves determining their ability to finance their operations without additional subordinated financial support , whether the equity holders lack the characteristic of controlling financial interest , or whether the entity is established with non-substantive voting rights . we perform significance calculations based on investments , total assets and income , on an individual basis or on an aggregated basis , by any combination of unconsolidated subsidiaries and equity-method investees . 58 allocation of purchase price of real estate assets in connection with our acquisition of properties , we allocate the purchase price to the tangible and intangible assets and liabilities acquired based on their respective estimated fair values . tangible assets consist of land , buildings , and tenant improvements . intangible assets consist of above- and below-market lease values and the value of in-place leases . our purchase price allocations are developed utilizing third-party appraisal reports , industry standards and management experience . the risks and uncertainties involved in applying the principles related to purchase price allocations include , but are not limited to , the following : the value allocated to land , as opposed to buildings and tenant improvements , affects the amount of depreciation expense we record . story_separator_special_tag the following table shows the contract rental revenue from properties owned for both of the entire years ended december 31 , 2016 and 2015 , along with a reconciliation to rental income , calculated in accordance with gaap ( dollar amounts in thousands ) : replace_table_token_14_th ( 1 ) the company disposed of five properties during the year ended december 31 , 2015 . ( 2 ) includes amortization of above- and below-market lease intangibles and deferred lease incentives . “ non-same store , ” as reflected in the table below , includes properties acquired on or after january 1 , 2014 . as shown in the table below , contract rental revenue on the 27 same store properties for the year ended december 31 , 2015 increased 0.2 % compared to the year ended december 31 , 2014 . the same store properties were 100 % occupied as of both december 31 , 2015 and 2014 . the following table shows the contract rental revenue from properties owned for both of the entire years ended december 31 , 2015 and 2014 , along with a reconciliation to rental income , calculated in accordance with gaap ( dollar amounts in thousands ) : replace_table_token_15_th ( 1 ) the company disposed of five properties during the year ended december 31 , 2015 . ( 2 ) includes amortization of above- and below-market lease intangibles and deferred lease incentives . 65 distributions our board of directors authorized a daily distribution , based on 365 days in the calendar year , of $ 0.002678083 per share for stockholders of record as of the close of business on each day of the period commencing on january 1 , 2016 and ending on june 30 , 2017 . the daily distribution amount for each class of outstanding common stock is adjusted based on the relative nav of the various classes each day so that , from day to day , distributions constitute a uniform percentage of the nav per share of all classes . as a result , from day to day , the per share daily distribution for each outstanding class of common stock may be higher or lower than the daily distribution amount authorized by our board of directors based on the relative nav of each class of common stock on that day . during the years ended december 31 , 2016 and 2015 , we paid distributions of $ 12.5 million and $ 7.5 million , respectively , including $ 6.0 million and $ 3.3 million , respectively , through the issuance of shares pursuant to the drip . distributions paid during the year ended december 31 , 2016 were funded by cash flows from operations , including cash flows in excess of distributions from the prior year , of $ 10.0 million , or 80 % , and proceeds from the offering of $ 2.5 million , or 20 % . net cash flows for the year ended december 31 , 2016 reflect a reduction of $ 2.5 million for real estate acquisition related expenses incurred and expensed . we treat our real estate acquisition expenses as funded by proceeds from the offering of our shares . therefore , for consistency , proceeds from the issuance of common stock have been reported as a source of distributions to the extent that acquisition expenses have reduced net cash flows from operating activities in the current and prior periods . our distributions for the year ended december 31 , 2015 were fully covered by cash flows from operating activities . we may pay distributions from sources other than cash flow from operations , including from the proceeds of this offering , from borrowings or from the sale of properties or other investments , among others , and we have no limit on the amounts we may pay from such sources . as of december 31 , 2016 , cumulative since inception , we have declared $ 29.7 million of distributions and we have paid $ 28.2 million , of which $ 15.9 million was paid in cash and $ 12.3 million was reinvested in shares of our common stock pursuant to the distribution reinvestment plan . as of december 31 , 2016 , cumulative since inception , our distributions were funded by net cash provided by operating activities of $ 25.4 million and proceeds from our offering of $ 2.8 million . share redemptions we have adopted a share redemption plan to provide limited liquidity whereby , on a daily basis , stockholders may request that we redeem all or any portion of their shares . our share redemption plan provides that , on each business day , stockholders may request that we redeem all or any portion of their shares , subject to a minimum redemption amount and certain short-term trading fees . the redemption price per share for each class on any business day will be our nav per share for such class for that day , calculated by the independent fund accountant in accordance with our valuation policies . our share redemption plan includes certain redemption limits , including a quarterly limit and , in some cases , a stockholder by stockholder limit . during the year ended december 31 , 2016 , we received redemption requests for , and redeemed approximately 782,000 w shares and 104,000 a shares for $ 14.3 million and $ 1.9 million , respectively . see note 14 —stockholders ' equity summary of significant accounting policies to our consolidated financial statements included in this annual report on form 10-k for additional terms of the share redemption program , including the share redemption plan limits . we intend to fund share redemptions with available cash , proceeds from our liquid investments and proceeds from the sale of additional shares . we may , after taking the interests of our company as a whole and the interests of our remaining stockholders into consideration , use proceeds from

sources of liquidity . our principal sources of liquidity are cash from operations and borrowings under our revolving line of credit . our principal liquidity requirements consist of long-term debt obligations , capital expenditures and working capital . our total capital requirements for the next twelve months will depend upon , among other things , the number and size of appliancesmart stores operating during the period , the volumes generated from recycling and appliance replacement contracts during the period 28 and our needs related to aap . currently , we have eighteen appliancesmart stores and twelve recycling centers , including aap , in operation . we believe , based on the anticipated revenues from our recycling and appliance replacement contracts , the anticipated sales per retail store , and our anticipated gross profit , that our cash balance , anticipated funds generated from operations ( including income tax loss carryback refunds of approximately $ 1.0 million ) and our revolving line of credit will be sufficient to finance our operations , long-term debt obligations and capital expenditures through at least the next twelve months . we anticipate improvements in our operating results in 2016 as compared to 2015 to be derived from higher expected revenues under our carbon offset program by approximately $ 1.8 million , increased revenue from our business development activities that resulted from the receivership of jaco environmental and operating cost reductions that are expected as a result of our cost rationalization initiatives . we may need additional capital to finance our operations if our revenues are lower than anticipated , our expenses are higher than anticipated or we pursue new opportunities . sources of additional financing , if needed in the future , may include further debt financing or the sale of equity ( common or preferred stock ) or other financing opportunities . there can be no assurance that such additional sources of financing will be available on terms satisfactory to us or permitted by our credit agreement . outstanding indebtedness .

our business environment and current outlook current conditions in the global capital markets remain volatile as the world 's economic growth has been affected by geopolitical and economic events . in addition , there is uncertainty surrounding the policy stance of the new u.s. administration and its global ramifications . in the united states , the overall economic environment continued to improve in 2016. during 2016 , the u.s. real gross domestic product increased 1.6 % to $ 16.66 trillion , the unemployment rate decreased 0.3 percentage points to 4.7 % , and core cpi , a measure of inflation which removes food and energy prices and is seasonally adjusted , increased 2.2 % , as compared to the same period a year earlier . economic trends and government policies affect global and regional commercial real estate markets as well as our operations directly . these include : overall economic activity and employment growth , interest rate levels , the cost and availability of credit and the impact of tax and regulatory policies . 57 critical accounting policies and significant accounting estimates our accounting policies have been established to conform with gaap . the preparation of financial statements in conformity with gaap requires us to use judgment in the application of accounting policies , including making estimates and assumptions . these judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods . management believes that we have made these estimates and assumptions in an appropriate manner and in a way that accurately reflects our financial condition . we continually test and evaluate these estimates and assumptions using our historical knowledge of the business , as well as other factors , to ensure that they are reasonable for reporting purposes . however , actual results may differ from these estimates and assumptions . if our judgment or interpretation of the facts and circumstances relating to the various transactions had been different , it is possible that different accounting policies would have been applied , thus resulting in a different presentation of the financial statements . additionally , other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses . we believe the following critical accounting policies govern the significant judgments and estimates used in the preparation of our financial statements , which should be read in conjunction with the more complete discussion of our accounting policies and procedures included in note 3 — summary of significant accounting policies to our consolidated financial statements in this annual report on form 10-k. recoverability of real estate assets we invest in real estate assets and subsequently monitor those investments quarterly for impairment , including the review of real estate properties subject to direct financing leases , if applicable . additionally , we record depreciation and amortization related to our investments . the risks and uncertainties involved in applying the principles related to real estate investments include , but are not limited to , the following : the estimated useful lives of our depreciable assets affects the amount of depreciation and amortization recognized on our investments ; the review of impairment indicators and subsequent determination of the undiscounted future cash flows could require us to reduce the value of assets and recognize an impairment loss ; the fair value of held for sale assets is estimated by management . this estimated value could result in a reduction of the carrying value of the asset ; and changes in assumptions based on actual results may have a material impact on our financial results . consolidation of equity investment we must continually evaluate non-controlling interests for consolidation based on standards set forth in gaap . for legal entities being evaluated , we must first determine whether the interests that we hold and fees we receive qualify as variable interests in the entity , as discussed in note 3 – summary of significant accounting policies to our consolidated financial statements in this annual report on form 10-k. the difference between consolidating the variable interest entity ( “ vie ” ) and accounting for it using the equity method could be material to our consolidated financial statements . the risks and uncertainties involved in applying the principles related to equity investments include , but are not limited to , the following : consideration for vies involves determining their ability to finance their operations without additional subordinated financial support , whether the equity holders lack the characteristic of controlling financial interest , or whether the entity is established with non-substantive voting rights . we perform significance calculations based on investments , total assets and income , on an individual basis or on an aggregated basis , by any combination of unconsolidated subsidiaries and equity-method investees . 58 allocation of purchase price of real estate assets in connection with our acquisition of properties , we allocate the purchase price to the tangible and intangible assets and liabilities acquired based on their respective estimated fair values . tangible assets consist of land , buildings , and tenant improvements . intangible assets consist of above- and below-market lease values and the value of in-place leases . our purchase price allocations are developed utilizing third-party appraisal reports , industry standards and management experience . the risks and uncertainties involved in applying the principles related to purchase price allocations include , but are not limited to , the following : the value allocated to land , as opposed to buildings and tenant improvements , affects the amount of depreciation expense we record . story_separator_special_tag the following table shows the contract rental revenue from properties owned for both of the entire years ended december 31 , 2016 and 2015 , along with a reconciliation to rental income , calculated in accordance with gaap ( dollar amounts in thousands ) : replace_table_token_14_th ( 1 ) the company disposed of five properties during the year ended december 31 , 2015 . ( 2 ) includes amortization of above- and below-market lease intangibles and deferred lease incentives . “ non-same store , ” as reflected in the table below , includes properties acquired on or after january 1 , 2014 . as shown in the table below , contract rental revenue on the 27 same store properties for the year ended december 31 , 2015 increased 0.2 % compared to the year ended december 31 , 2014 . the same store properties were 100 % occupied as of both december 31 , 2015 and 2014 . the following table shows the contract rental revenue from properties owned for both of the entire years ended december 31 , 2015 and 2014 , along with a reconciliation to rental income , calculated in accordance with gaap ( dollar amounts in thousands ) : replace_table_token_15_th ( 1 ) the company disposed of five properties during the year ended december 31 , 2015 . ( 2 ) includes amortization of above- and below-market lease intangibles and deferred lease incentives . 65 distributions our board of directors authorized a daily distribution , based on 365 days in the calendar year , of $ 0.002678083 per share for stockholders of record as of the close of business on each day of the period commencing on january 1 , 2016 and ending on june 30 , 2017 . the daily distribution amount for each class of outstanding common stock is adjusted based on the relative nav of the various classes each day so that , from day to day , distributions constitute a uniform percentage of the nav per share of all classes . as a result , from day to day , the per share daily distribution for each outstanding class of common stock may be higher or lower than the daily distribution amount authorized by our board of directors based on the relative nav of each class of common stock on that day . during the years ended december 31 , 2016 and 2015 , we paid distributions of $ 12.5 million and $ 7.5 million , respectively , including $ 6.0 million and $ 3.3 million , respectively , through the issuance of shares pursuant to the drip . distributions paid during the year ended december 31 , 2016 were funded by cash flows from operations , including cash flows in excess of distributions from the prior year , of $ 10.0 million , or 80 % , and proceeds from the offering of $ 2.5 million , or 20 % . net cash flows for the year ended december 31 , 2016 reflect a reduction of $ 2.5 million for real estate acquisition related expenses incurred and expensed . we treat our real estate acquisition expenses as funded by proceeds from the offering of our shares . therefore , for consistency , proceeds from the issuance of common stock have been reported as a source of distributions to the extent that acquisition expenses have reduced net cash flows from operating activities in the current and prior periods . our distributions for the year ended december 31 , 2015 were fully covered by cash flows from operating activities . we may pay distributions from sources other than cash flow from operations , including from the proceeds of this offering , from borrowings or from the sale of properties or other investments , among others , and we have no limit on the amounts we may pay from such sources . as of december 31 , 2016 , cumulative since inception , we have declared $ 29.7 million of distributions and we have paid $ 28.2 million , of which $ 15.9 million was paid in cash and $ 12.3 million was reinvested in shares of our common stock pursuant to the distribution reinvestment plan . as of december 31 , 2016 , cumulative since inception , our distributions were funded by net cash provided by operating activities of $ 25.4 million and proceeds from our offering of $ 2.8 million . share redemptions we have adopted a share redemption plan to provide limited liquidity whereby , on a daily basis , stockholders may request that we redeem all or any portion of their shares . our share redemption plan provides that , on each business day , stockholders may request that we redeem all or any portion of their shares , subject to a minimum redemption amount and certain short-term trading fees . the redemption price per share for each class on any business day will be our nav per share for such class for that day , calculated by the independent fund accountant in accordance with our valuation policies . our share redemption plan includes certain redemption limits , including a quarterly limit and , in some cases , a stockholder by stockholder limit . during the year ended december 31 , 2016 , we received redemption requests for , and redeemed approximately 782,000 w shares and 104,000 a shares for $ 14.3 million and $ 1.9 million , respectively . see note 14 —stockholders ' equity summary of significant accounting policies to our consolidated financial statements included in this annual report on form 10-k for additional terms of the share redemption program , including the share redemption plan limits . we intend to fund share redemptions with available cash , proceeds from our liquid investments and proceeds from the sale of additional shares . we may , after taking the interests of our company as a whole and the interests of our remaining stockholders into consideration , use proceeds from

net cash provided by operating activities was $ 8.3 million for the year ended december 31 , 2016 , compared to $ 8.2 million for the year ended december 31 , 2015 . the increase was primarily due to an increase in gain on disposition of property of $ 5.6 million , offset by an increase in net loss before non-cash adjustments for depreciation , amortization of intangibles , amortization of deferred financing costs , and amortization of discounts on marketable securities of $ 5.5 million . investing activities . net cash used in investing activities increased $ 151.5 million to $ 187.6 million for the year ended december 31 , 2016 , compared to $ 36.1 million for the year ended december 31 , 2015 . the increase was primarily due to the acquisition of 31 commercial properties during the year ended december 31 , 2016 . we acquired seven commercial properties , and disposed of five during the year ended december 31 , 2015 . financing activities . net cash provided by financing activities increased $ 131.0 million to $ 169.2 million for the year ended december 31 , 2016 , compared to $ 38.2 million for the year ended december 31 , 2015 . the increase was primarily due to an increase in net proceeds from borrowing facilities and notes payable of $ 42.5 million and an increase in net proceeds from the issuance of common stock of $ 93.1 million , offset by an increase in redemptions of common stock of $ 3.2 million . year ended december 31 , 2015 compared to the year ended december 31 , 2014 operating activities . net cash provided by operating activities increased $ 1.6 million to $ 8.2 million for the year ended december 31 , 2015 , compared to $ 6.6 million for the year ended december 31 , 2014 .

the average sales price of homes may increase or decrease depending on the mix of homes delivered and sold during such period and local market conditions . these changes in the average sales price of homes are part of our natural business cycle . new home orders and backlog the table below represents new home orders and backlog related to our builder operations segments : replace_table_token_6_th our cancellation rate was 14.9 % for the year ended december 31 , 2018 , compared to 15.0 % for the year ended december 31 , 2017 . management believes a cancellation rate in the range of 15 % to 20 % is representative of an industry average cancellation rate . on average , our cancellation rate is on the lower end of the industry average , which we believe is due to our target buyer demographics which generally does not include first time homebuyers . the $ 112.8 million increase in value of backlog was primarily driven by an increase in the number of homes in backlog which was significantly impacted by the acquisition of grbk gho with 197 homes in backlog as of december 31 , 2018 . the increase in the number of homes in backlog was partially offset by a decrease of the average sales price of homes in backlog by $ 34,509 , of which $ 41,808 was the result of change in product mix related to the acquisition of grbk gho . residential units gross margin the table below represents the components of residential units gross margin ( dollars in thousands ) : replace_table_token_7_th cost of homebuilding units for the year ended december 31 , 2018 increased by $ 109.0 million , or 31.9 % , primarily due to the 30.0 % increase in the number of homes delivered . residential units gross margin for the year ended december 31 , 2018 decreased to 21.0 % , compared to 21.4 % for the year ended december 31 , 2017 . the decrease was driven by an increase in capitalized interest , the sale of inventory acquired in the 23 grbk gho business combination which had an increased basis when measured at fair value at the date of acquisition , and a reduction in homes sold on lots developed by the company . land and lots revenue the table below represents lots closed and land and lots revenue : replace_table_token_8_th of the 239 lots closed to third parties during the year ended december 31 , 2018 , 29 were closed by our controlled builders , resulting in revenue of $ 4.9 million which is included in builder operations segments ' revenue . the 96.4 % increase in lots revenue was driven by a 67.1 % increase in the number of lots closed , as well as by a 17.5 % increase in the average lot sales price . four land parcels were closed during the year ended december 31 , 2018 , resulting in revenue of $ 9.7 million compared to one parcel closed during the year ended december 31 , 2017 . selling , general and administrative expense the table below represents the components of selling , general and administrative expense ( dollars in thousands ) : replace_table_token_9_th builder operations selling , general and administrative expense for the year ended december 31 , 2018 for builder operations was $ 49.2 million , compared to $ 32.2 million for the year ended december 31 , 2017 . the increase was primarily attributable to increases in expenditures to support the growth in home sales , as well as the acquisition of grbk gho . builder operations expenditures include salary expenses and community costs such as advertising and marketing expenses , rent , professional fees , and non-capitalized property taxes . selling , general and administrative expense as a percentage of related revenue increased primarily because of an increase in technology improvements and increased salaries , in addition to a reclassification of depreciation on model home furnishings . land development selling , general and administrative expense for land development for the year ended december 31 , 2018 was $ 3.1 million , compared to $ 1.1 million for the year ended december 31 , 2017 . the increase in expense as a percentage of related revenue was primarily due to an increase in compensation and non-capitalized pursuit costs , as well as an increase of non-capitalized property taxes driven by an increase in finished lots . corporate and other selling , general and administrative expense for the corporate and other non-operating segment for the year ended december 31 , 2018 was $ 4.5 million , compared to $ 5.6 million for the year ended december 31 , 2017 . the decrease was primarily due to higher share-based compensation expense during the year ended december 31 , 2017 driven by a higher amount of restricted stock awards ( “ rsas ” ) granted under the 2014 omnibus equity incentive plan to certain named executive officers . 24 equity in income of unconsolidated entities equity in income of unconsolidated entities increased to $ 7.3 million for the year ended december 31 , 2018 , compared to $ 2.7 million during the year ended december 31 , 2017 , due primarily to our purchase of 49.9 % interest in gb challenger , llc ( “ challenger ” ) in august 2017. in addition , the formation of providence title in march 2018 had a positive impact on earnings . other income , net other income , net , increased to $ 2.6 million for the year ended december 31 , 2018 , compared to $ 1.5 million for the year ended december 31 , 2017 . the increase was primarily due to an increase in title closing and settlement services provided by green brick title , llc . story_separator_special_tag 31 management believes that the following accounting policies are among the most important to the portrayal of our financial condition and results of operations and require the most subjective or complex judgments . inventory and cost of revenues inventory consists of undeveloped land , raw land scheduled for development , land in the process of development , land held for sale , developed lots , homes completed and under construction , and model homes . inventory is valued at cost unless the carrying value is determined to be not recoverable in which case the affected inventory is written down to fair value . cost includes any related pre-acquisition costs that are directly identifiable with a specific property so long as those pre-acquisition costs are anticipated to be recoverable at the sale of the property . residential lots held for sale and lots held for development include the initial cost of acquiring the land as well as certain costs capitalized related to developing the land into individual residential lots including direct overhead , interest and real estate taxes . land development and other project costs , including direct overhead , interest and property taxes incurred during development and home construction , are capitalized . land development and other common costs that benefit an entire community are allocated to individual lots or homes based on relative sales value . the costs of completed lots are transferred to work in process when home construction begins . home construction costs and related carrying charges ( principally interest and real estate taxes ) are allocated to the cost of individual homes . inventory costs for completed homes are expensed upon closing and delivery of the homes . changes to estimated total land development costs subsequent to initial home closings in a community are generally allocated to the unsold homes in the community on a pro-rata basis . the life cycle of a community generally ranges from two to six years , commencing with the acquisition of land , continuing through the land development phase , construction , and concluding with the sale and delivery of homes . we recognize costs as incurred on our mechanic 's lien contracts . impairment of inventory in accordance with the accounting standards codification ( “ asc ” ) 360 , property , plant , and equipment , we evaluate our inventory for indicators of impairment by individual community and development during each reporting period . for our builder operations segments , during each reporting period , community gross margins are reviewed by management . in the event that homebuilding inventory in an individual community is moving at a slower than anticipated absorption pace or the average sales prices or margins within an individual community are trending downward and are anticipated to continue to trend downward over the life of the community , the company will further investigate the community and evaluate it for impairment . for our land development segment , we perform a quarterly review for indicators of impairment for each project which involves projecting future lot closings based on executed contracts and comparing these revenues to projected costs . in determining the allocation of costs to a particular land parcel , we rely on project budgets which are based on a variety of assumptions , including assumptions about development schedules and future costs to be incurred . it is common that actual results differ from budgeted amounts for various reasons , including delays , increases in costs that have not been committed , unforeseen issues encountered during project development that fall outside the scope of existing contracts , or items that ultimately cost more or less than the budgeted amount . we apply procedures to maintain best estimates in our budgets , including assessing and revising project budgets on a periodic basis , obtaining commitments from subcontractors and vendors for future costs to be incurred and utilizing the most recent information available to estimate costs . each reporting period , management reviews the real estate assets , including land held for sale , to determine whether the estimated remaining undiscounted future cash flows are more or less than the asset 's carrying value . the estimated cash flows are determined by projecting the remaining revenue from lot closings based on the contractual lot takedowns remaining or historical/projected home sales/delivery absorptions for homebuilding operations and then comparing such projections to the remaining projected expenditures for development or home construction . remaining projected expenditures are based on the most current pricing/bids received from subcontractors for current phases or homes under development . for future phases of land development , management uses its judgment to project potential cost increases . in determining the estimated cash flows for land held for sale , management considers recent comparisons to market comparable transactions , bona fide letters of intent from outside parties , executed sales contracts , broker quotes , and similar information . when projecting revenue , management does not assume improvement in market conditions . 32 if the estimated undiscounted cash flows are more than the asset 's carrying value , no impairment adjustment is required . however , if the estimated undiscounted cash flows are less than the asset 's carrying value , the asset is deemed impaired and will be written down to fair value less associated costs to sell . these impairment evaluations require us to make estimates and assumptions regarding future conditions , including the timing and amounts of development costs and sales prices of real estate assets , to determine if expected future cash flows will be sufficient to recover the asset 's carrying value . fair value is determined based on estimated future cash flows discounted for inherent risks associated with real estate assets . these discounted cash flows are impacted by expected risk based on estimated land development activities , construction and delivery timelines , market risk of price erosion , uncertainty of development or construction cost increases , and other risks specific to

net cash provided by operating activities was $ 8.3 million for the year ended december 31 , 2016 , compared to $ 8.2 million for the year ended december 31 , 2015 . the increase was primarily due to an increase in gain on disposition of property of $ 5.6 million , offset by an increase in net loss before non-cash adjustments for depreciation , amortization of intangibles , amortization of deferred financing costs , and amortization of discounts on marketable securities of $ 5.5 million . investing activities . net cash used in investing activities increased $ 151.5 million to $ 187.6 million for the year ended december 31 , 2016 , compared to $ 36.1 million for the year ended december 31 , 2015 . the increase was primarily due to the acquisition of 31 commercial properties during the year ended december 31 , 2016 . we acquired seven commercial properties , and disposed of five during the year ended december 31 , 2015 . financing activities . net cash provided by financing activities increased $ 131.0 million to $ 169.2 million for the year ended december 31 , 2016 , compared to $ 38.2 million for the year ended december 31 , 2015 . the increase was primarily due to an increase in net proceeds from borrowing facilities and notes payable of $ 42.5 million and an increase in net proceeds from the issuance of common stock of $ 93.1 million , offset by an increase in redemptions of common stock of $ 3.2 million . year ended december 31 , 2015 compared to the year ended december 31 , 2014 operating activities . net cash provided by operating activities increased $ 1.6 million to $ 8.2 million for the year ended december 31 , 2015 , compared to $ 6.6 million for the year ended december 31 , 2014 .

the average sales price of homes may increase or decrease depending on the mix of homes delivered and sold during such period and local market conditions . these changes in the average sales price of homes are part of our natural business cycle . new home orders and backlog the table below represents new home orders and backlog related to our builder operations segments : replace_table_token_6_th our cancellation rate was 14.9 % for the year ended december 31 , 2018 , compared to 15.0 % for the year ended december 31 , 2017 . management believes a cancellation rate in the range of 15 % to 20 % is representative of an industry average cancellation rate . on average , our cancellation rate is on the lower end of the industry average , which we believe is due to our target buyer demographics which generally does not include first time homebuyers . the $ 112.8 million increase in value of backlog was primarily driven by an increase in the number of homes in backlog which was significantly impacted by the acquisition of grbk gho with 197 homes in backlog as of december 31 , 2018 . the increase in the number of homes in backlog was partially offset by a decrease of the average sales price of homes in backlog by $ 34,509 , of which $ 41,808 was the result of change in product mix related to the acquisition of grbk gho . residential units gross margin the table below represents the components of residential units gross margin ( dollars in thousands ) : replace_table_token_7_th cost of homebuilding units for the year ended december 31 , 2018 increased by $ 109.0 million , or 31.9 % , primarily due to the 30.0 % increase in the number of homes delivered . residential units gross margin for the year ended december 31 , 2018 decreased to 21.0 % , compared to 21.4 % for the year ended december 31 , 2017 . the decrease was driven by an increase in capitalized interest , the sale of inventory acquired in the 23 grbk gho business combination which had an increased basis when measured at fair value at the date of acquisition , and a reduction in homes sold on lots developed by the company . land and lots revenue the table below represents lots closed and land and lots revenue : replace_table_token_8_th of the 239 lots closed to third parties during the year ended december 31 , 2018 , 29 were closed by our controlled builders , resulting in revenue of $ 4.9 million which is included in builder operations segments ' revenue . the 96.4 % increase in lots revenue was driven by a 67.1 % increase in the number of lots closed , as well as by a 17.5 % increase in the average lot sales price . four land parcels were closed during the year ended december 31 , 2018 , resulting in revenue of $ 9.7 million compared to one parcel closed during the year ended december 31 , 2017 . selling , general and administrative expense the table below represents the components of selling , general and administrative expense ( dollars in thousands ) : replace_table_token_9_th builder operations selling , general and administrative expense for the year ended december 31 , 2018 for builder operations was $ 49.2 million , compared to $ 32.2 million for the year ended december 31 , 2017 . the increase was primarily attributable to increases in expenditures to support the growth in home sales , as well as the acquisition of grbk gho . builder operations expenditures include salary expenses and community costs such as advertising and marketing expenses , rent , professional fees , and non-capitalized property taxes . selling , general and administrative expense as a percentage of related revenue increased primarily because of an increase in technology improvements and increased salaries , in addition to a reclassification of depreciation on model home furnishings . land development selling , general and administrative expense for land development for the year ended december 31 , 2018 was $ 3.1 million , compared to $ 1.1 million for the year ended december 31 , 2017 . the increase in expense as a percentage of related revenue was primarily due to an increase in compensation and non-capitalized pursuit costs , as well as an increase of non-capitalized property taxes driven by an increase in finished lots . corporate and other selling , general and administrative expense for the corporate and other non-operating segment for the year ended december 31 , 2018 was $ 4.5 million , compared to $ 5.6 million for the year ended december 31 , 2017 . the decrease was primarily due to higher share-based compensation expense during the year ended december 31 , 2017 driven by a higher amount of restricted stock awards ( “ rsas ” ) granted under the 2014 omnibus equity incentive plan to certain named executive officers . 24 equity in income of unconsolidated entities equity in income of unconsolidated entities increased to $ 7.3 million for the year ended december 31 , 2018 , compared to $ 2.7 million during the year ended december 31 , 2017 , due primarily to our purchase of 49.9 % interest in gb challenger , llc ( “ challenger ” ) in august 2017. in addition , the formation of providence title in march 2018 had a positive impact on earnings . other income , net other income , net , increased to $ 2.6 million for the year ended december 31 , 2018 , compared to $ 1.5 million for the year ended december 31 , 2017 . the increase was primarily due to an increase in title closing and settlement services provided by green brick title , llc . story_separator_special_tag 31 management believes that the following accounting policies are among the most important to the portrayal of our financial condition and results of operations and require the most subjective or complex judgments . inventory and cost of revenues inventory consists of undeveloped land , raw land scheduled for development , land in the process of development , land held for sale , developed lots , homes completed and under construction , and model homes . inventory is valued at cost unless the carrying value is determined to be not recoverable in which case the affected inventory is written down to fair value . cost includes any related pre-acquisition costs that are directly identifiable with a specific property so long as those pre-acquisition costs are anticipated to be recoverable at the sale of the property . residential lots held for sale and lots held for development include the initial cost of acquiring the land as well as certain costs capitalized related to developing the land into individual residential lots including direct overhead , interest and real estate taxes . land development and other project costs , including direct overhead , interest and property taxes incurred during development and home construction , are capitalized . land development and other common costs that benefit an entire community are allocated to individual lots or homes based on relative sales value . the costs of completed lots are transferred to work in process when home construction begins . home construction costs and related carrying charges ( principally interest and real estate taxes ) are allocated to the cost of individual homes . inventory costs for completed homes are expensed upon closing and delivery of the homes . changes to estimated total land development costs subsequent to initial home closings in a community are generally allocated to the unsold homes in the community on a pro-rata basis . the life cycle of a community generally ranges from two to six years , commencing with the acquisition of land , continuing through the land development phase , construction , and concluding with the sale and delivery of homes . we recognize costs as incurred on our mechanic 's lien contracts . impairment of inventory in accordance with the accounting standards codification ( “ asc ” ) 360 , property , plant , and equipment , we evaluate our inventory for indicators of impairment by individual community and development during each reporting period . for our builder operations segments , during each reporting period , community gross margins are reviewed by management . in the event that homebuilding inventory in an individual community is moving at a slower than anticipated absorption pace or the average sales prices or margins within an individual community are trending downward and are anticipated to continue to trend downward over the life of the community , the company will further investigate the community and evaluate it for impairment . for our land development segment , we perform a quarterly review for indicators of impairment for each project which involves projecting future lot closings based on executed contracts and comparing these revenues to projected costs . in determining the allocation of costs to a particular land parcel , we rely on project budgets which are based on a variety of assumptions , including assumptions about development schedules and future costs to be incurred . it is common that actual results differ from budgeted amounts for various reasons , including delays , increases in costs that have not been committed , unforeseen issues encountered during project development that fall outside the scope of existing contracts , or items that ultimately cost more or less than the budgeted amount . we apply procedures to maintain best estimates in our budgets , including assessing and revising project budgets on a periodic basis , obtaining commitments from subcontractors and vendors for future costs to be incurred and utilizing the most recent information available to estimate costs . each reporting period , management reviews the real estate assets , including land held for sale , to determine whether the estimated remaining undiscounted future cash flows are more or less than the asset 's carrying value . the estimated cash flows are determined by projecting the remaining revenue from lot closings based on the contractual lot takedowns remaining or historical/projected home sales/delivery absorptions for homebuilding operations and then comparing such projections to the remaining projected expenditures for development or home construction . remaining projected expenditures are based on the most current pricing/bids received from subcontractors for current phases or homes under development . for future phases of land development , management uses its judgment to project potential cost increases . in determining the estimated cash flows for land held for sale , management considers recent comparisons to market comparable transactions , bona fide letters of intent from outside parties , executed sales contracts , broker quotes , and similar information . when projecting revenue , management does not assume improvement in market conditions . 32 if the estimated undiscounted cash flows are more than the asset 's carrying value , no impairment adjustment is required . however , if the estimated undiscounted cash flows are less than the asset 's carrying value , the asset is deemed impaired and will be written down to fair value less associated costs to sell . these impairment evaluations require us to make estimates and assumptions regarding future conditions , including the timing and amounts of development costs and sales prices of real estate assets , to determine if expected future cash flows will be sufficient to recover the asset 's carrying value . fair value is determined based on estimated future cash flows discounted for inherent risks associated with real estate assets . these discounted cash flows are impacted by expected risk based on estimated land development activities , construction and delivery timelines , market risk of price erosion , uncertainty of development or construction cost increases , and other risks specific to

liquidity and capital resources overview as of december 31 , 2018 and 2017 , we had $ 38.3 million and $ 36.7 million of unrestricted cash , respectively . management believes that we have a prudent cash management strategy , including consideration of cash outlays for land and lot acquisition and development . we intend to generate and redeploy net cash from the sale of inventory to acquire and develop land and lots that represent opportunities to generate desired margins . we may also use cash to make additional investments in business acquisitions , joint ventures , or other strategic activities . our principal uses of capital for the year ended december 31 , 2018 were home construction , land purchases , land development , operating expenses , payment of routine liabilities , and the acquisition of grbk gho . we used funds generated by operations and available borrowings to meet our short-term working capital requirements . we remain focused on generating positive margins in our builder operations segments and acquiring desirable land positions in order to maintain a strong balance sheet and remain poised for continued growth . cash flows for each of our communities depend on the community 's stage in the development cycle and can differ substantially from reported earnings . early stages of development or expansion require significant cash outlays for land acquisitions , entitlements and other approvals , roads , utilities , general landscaping and other amenities . these costs are a component of our inventory and are not recognized in our statement of income until a home closes . in the later stages of community development , cash inflows may significantly exceed earnings reported for financial statement purposes , as the cash outflow associated with home construction and land development previously occurred . our debt to total capitalization and net debt to total capitalization ratios were 30 % and 26 % , respectively , as of december 31 , 2018 .

in executing on our growth strategy , we have completed three strategic acquisitions : ( 1 ) in january 2017 , we acquired the principal operating assets of diversified silicone products , inc. ( dsp ) , a custom silicone product development and manufacturing business , serving a wide range of high reliability applications , ( 2 ) in november 2016 , we acquired dewal industries llc ( dewal ) , a leading manufacturer of polytetrafluoroethylene and ultra-high molecular weight polyethylene films , pressure sensitive tapes and specialty products for the industrial , aerospace , automotive , and electronics markets , and ( 3 ) in january 2015 , we acquired arlon llc and its subsidiaries , other than arlon india ( pvt ) limited ( the acquired entities , collectively , arlon ) , a leading manufacturer of high performance materials for the printed circuit board industry and silicone rubber-based materials . 2017 executive summary in 2017 as compared to 2016 , our net sales increased 25.1 % to $ 821.0 million , gross margin increased 79 basis points to 38.8 % , operating margin increased 315 basis points to 15.9 % and operating income increased 56.0 % to $ 130.8 million . the following key factors should be considered when reviewing our results of operations , financial condition and liquidity for the periods discussed : our net sales increase in 2017 was attributable to increases in net sales across all of our strategic operating segments , reflecting both growth attributable to our recent acquisitions and organic growth within each operating segment . each of acs , ems and pes recorded net sales growth . acs experienced continued growth in automotive radar applications , consumer electronics , and aerospace and defense , partially offset by lower demand in wireless infrastructure applications and satellite tv dish applications . ems net sales increased primarily from the recent acquisitions of dewal and dsp , and from higher end-market demand from core markets , including automotive , mass transit , portable electronics , general 21 industrial , and consumer products applications . pes saw strength across most of its traditional markets , including laser diode cooler applications , renewable energy , mass transit , electric and hybrid electric vehicles and variable frequency motor drives . see “ segment sales and operations . ” our gross margin improved 79 basis points and our operating margin increased 315 basis points in 2017 compared to 2016 primarily as a result of increased demand and our operational excellence initiatives . gross margin and operating margin were favorably impacted by the increase in net sales , combined with operational excellence initiatives across our operating segments including increased capacity utilization , operational process enhancements and automation , conversion of fixed cost structure to variable , benefits from low cost country manufacturing expansion , and synergies from the recent acquisitions of dewal and dsp . see “ results of operations . ” we continue to execute on our synergistic acquisition strategy . the acquisitions of dewal and dsp , and their subsequent integration into our ems operating segment , have enabled us to extend the product portfolio and technology capabilities with complementary high-end , high performance elastomeric materials . during 2017 , we refinanced our borrowings under our revolving credit facility and as a result of strong financial performance , we made discretionary principal payments of $ 110.2 million . our outstanding borrowings under our credit facility decreased to $ 131.0 million as of december 31 , 2017 . we are an innovation company and in 2017 spent 3.6 % of our net sales on research and development . research and development ( r & d ) expenses were $ 29.5 million in 2017 , an increase of 3.4 % from $ 28.6 million in 2016 . the increased spending was due to continued investments that are targeted at developing new platforms and technologies . we have made concerted efforts to realign our r & d organization to better fit the future direction of our company , including dedicating resources to focus on current product extensions and enhancements to meet our short-term and long-term technology needs . 22 results of operations the following table sets forth , for the periods indicated , selected operations data expressed as a percentage of net sales . replace_table_token_4_th 2017 vs. 2016 net sales ( dollars in thousands ) 2017 2016 percent change net sales $ 821,043 $ 656,314 25.1 % net sales increased by 25.1 % in 2017 compared to 2016 . this increase was driven by the net sales from our recent acquisitions of dewal and dsp , as well as higher organic net sales in our three strategic operating segments ( acs , ems and pes ) . the acs operating segment had an increase in net sales of 8.4 % due to higher end-market demand in automotive radar applications , consumer electronics , and aerospace and defense , partially offset by lower demand in wireless infrastructure applications and satellite tv dish applications . ems net sales increased 53.9 % primarily due to the recent acquisitions of dewal and dsp , and from higher end-market product demand from core markets , including automotive , mass transit , portable electronics , general industrial and consumer products applications . pes had increased net sales of 21.4 % due to higher end-market demand in laser diode cooler applications , renewable energy , mass transit , electric and hybrid electric vehicles and variable frequency motor drives . net sales were unfavorably impacted by 0.1 % due to currency fluctuations primarily as a result of the depreciation in value of the renminbi relative to the u.s. dollar , offset in part by appreciation in value of the euro relative to the u.s. dollar . see “ segment sales and operations ” below for further discussion on operating segment performance . gross margin replace_table_token_5_th gross margin as a percentage of net sales increased by 79 basis points to 38.8 story_separator_special_tag operating income declined by 2.6 % in 2016 from 2015. as a percentage of net sales , 2016 operating income was 15.8 % , a 110 basis point decrease as compared to the 16.9 % reported in 2015. operating income in 2016 was positively impacted by higher sales , however this increase was offset by unfavorable mix , unfavorable volume pricing and absorption , higher incentive compensation and additional corporate selling , general and administrative expense allocations . 2015 results included $ 5.3 million of charges comprised of $ 2.6 million of integration expenses related to the arlon acquisition , $ 1.0 million of arlon purchase accounting expenses related to the non-recurring fair value adjustment for inventory , $ 1.4 million of allocated environmental charge and $ 0.4 million of allocated severance related charges . elastomeric material solutions replace_table_token_14_th the ems operating segment is comprised of polyurethane and silicone foam products , which are sold into a wide variety of applications and markets , including general industrial , portable electronics , automotive , mass transit and consumer applications . in november 2016 , we completed the acquisition of dewal , a leading manufacturer of polytetrafluoroethylene , ultra-high molecular weight polyethylene films , pressure sensitive tapes and specialty products for the industrial , aerospace , automotive , and electronics markets . in january 2017 , we acquired the principal operating assets of dsp , a custom silicone product development and manufacturing business , serving a wide range of high reliability applications . the integration of dewal and dsp into our ems operating segment has enabled us to extend the product portfolio and technology capabilities with complementary high-end , high performance elastomeric materials . 2017 vs. 2016 net sales in this segment increased 53.9 % in 2017 compared to 2016 . the increase in net sales was primarily driven by the acquisitions of dewal and dsp 38.8 % , as well as an increase in organic net sales 15.1 % . ems experienced higher end-market demand in core markets including automotive 28.0 % , mass transit 23.5 % , portable electronics 22.6 % , general industrial 13.6 % and consumer products applications 8.1 % . net sales were unfavorably impacted by 0.4 % due to currency fluctuations , primarily as a result of the depreciation in value of the renminbi relative to the u.s. dollar , partially offset by the appreciation in value of the korean won and euro relative to the u.s. dollar . operating income improved 93.3 % in 2017 compared to 2016 . as a percentage of net sales , 2017 operating income was 16.4 % , a 340 basis point increase compared to 13.1 % in 2016 . this increase is primarily due to higher net sales attributable to both acquisitions and organic growth , as well as lower costs from continued operational efficiencies . operating income in 2017 included a $ 1.6 million charge to reflect a purchase accounting fair value adjustment for inventory related to the dewal and dsp acquisitions and $ 3.2 million of acquisition and integration costs . operating income in 2017 also included increased other intangible assets amortization and depreciation expense of $ 4.9 million related to the dewal and dsp acquisitions . 28 2016 vs. 2015 net sales in this segment increased by 12.3 % in 2016 from 2015. currency fluctuations decreased net sales by 1.8 % . the increase in net sales was driven primarily by portable electronics applications 23.9 % , automotive applications 41.4 % and general industrial 1.6 % . these increases were partially offset by declines in demand in consumer applications 15.2 % and mass transit 1.9 % . the results of dewal have been included in our consolidated financial statements only for the period subsequent to the completion of our acquisition . during this period , net sales attributable to dewal totaled $ 5.4 million . operating income increased by 33.1 % in 2016 from 2015. as a percentage of net sales , 2016 operating income was 13.1 % , a 210 basis point increase as compared to the 11.0 % reported in 2015. the increase in operating income in 2016 is primarily due to an increase in net sales , partially offset by corporate selling , general and administrative expense allocations and higher incentive compensation . 2016 results also include $ 3.8 million of acquisition costs related to the dewal and dsp acquisitions , along with $ 0.9 million of expenses related to the non-recurring fair value adjustment for dewal inventory . the results of dewal have been included in our consolidated financial statements only for the period subsequent to the completion of our acquisition . during this period , operating income attributable to dewal totaled $ 2.0 million . 2015 results included $ 3.2 million of charges comprised of $ 1.6 million of integration expenses related to the arlon acquisition , $ 0.5 million of arlon purchase accounting expenses related to the non-recurring fair value adjustment for inventory , $ 0.8 million of allocated environmental charge and $ 0.3 million of allocated severance related charges . power electronics solutions replace_table_token_15_th the pes operating segment is comprised of two product lines - curamik ® direct-bonded copper ( dbc ) substrates that are used primarily in the design of intelligent power management devices , such as igbt ( insulated gate bipolar transistor ) modules that enable a wide range of products including highly efficient industrial motor drives , wind and solar energy converters and electrical systems in automobiles , and rolinx ® busbars that are used primarily in power distribution systems products in electric and hybrid electric vehicles and clean technology applications . 2017 vs. 2016 net sales in this segment increased 21.4 % in 2017 compared to 2016 . the increase in net sales was driven by higher demand for laser diode cooler applications 44.6 % , renewable energy 40.3 % , mass transit 23.4 % , electric and hybrid electric vehicles 18.5 % and variable

liquidity and capital resources overview as of december 31 , 2018 and 2017 , we had $ 38.3 million and $ 36.7 million of unrestricted cash , respectively . management believes that we have a prudent cash management strategy , including consideration of cash outlays for land and lot acquisition and development . we intend to generate and redeploy net cash from the sale of inventory to acquire and develop land and lots that represent opportunities to generate desired margins . we may also use cash to make additional investments in business acquisitions , joint ventures , or other strategic activities . our principal uses of capital for the year ended december 31 , 2018 were home construction , land purchases , land development , operating expenses , payment of routine liabilities , and the acquisition of grbk gho . we used funds generated by operations and available borrowings to meet our short-term working capital requirements . we remain focused on generating positive margins in our builder operations segments and acquiring desirable land positions in order to maintain a strong balance sheet and remain poised for continued growth . cash flows for each of our communities depend on the community 's stage in the development cycle and can differ substantially from reported earnings . early stages of development or expansion require significant cash outlays for land acquisitions , entitlements and other approvals , roads , utilities , general landscaping and other amenities . these costs are a component of our inventory and are not recognized in our statement of income until a home closes . in the later stages of community development , cash inflows may significantly exceed earnings reported for financial statement purposes , as the cash outflow associated with home construction and land development previously occurred . our debt to total capitalization and net debt to total capitalization ratios were 30 % and 26 % , respectively , as of december 31 , 2018 .

in executing on our growth strategy , we have completed three strategic acquisitions : ( 1 ) in january 2017 , we acquired the principal operating assets of diversified silicone products , inc. ( dsp ) , a custom silicone product development and manufacturing business , serving a wide range of high reliability applications , ( 2 ) in november 2016 , we acquired dewal industries llc ( dewal ) , a leading manufacturer of polytetrafluoroethylene and ultra-high molecular weight polyethylene films , pressure sensitive tapes and specialty products for the industrial , aerospace , automotive , and electronics markets , and ( 3 ) in january 2015 , we acquired arlon llc and its subsidiaries , other than arlon india ( pvt ) limited ( the acquired entities , collectively , arlon ) , a leading manufacturer of high performance materials for the printed circuit board industry and silicone rubber-based materials . 2017 executive summary in 2017 as compared to 2016 , our net sales increased 25.1 % to $ 821.0 million , gross margin increased 79 basis points to 38.8 % , operating margin increased 315 basis points to 15.9 % and operating income increased 56.0 % to $ 130.8 million . the following key factors should be considered when reviewing our results of operations , financial condition and liquidity for the periods discussed : our net sales increase in 2017 was attributable to increases in net sales across all of our strategic operating segments , reflecting both growth attributable to our recent acquisitions and organic growth within each operating segment . each of acs , ems and pes recorded net sales growth . acs experienced continued growth in automotive radar applications , consumer electronics , and aerospace and defense , partially offset by lower demand in wireless infrastructure applications and satellite tv dish applications . ems net sales increased primarily from the recent acquisitions of dewal and dsp , and from higher end-market demand from core markets , including automotive , mass transit , portable electronics , general 21 industrial , and consumer products applications . pes saw strength across most of its traditional markets , including laser diode cooler applications , renewable energy , mass transit , electric and hybrid electric vehicles and variable frequency motor drives . see “ segment sales and operations . ” our gross margin improved 79 basis points and our operating margin increased 315 basis points in 2017 compared to 2016 primarily as a result of increased demand and our operational excellence initiatives . gross margin and operating margin were favorably impacted by the increase in net sales , combined with operational excellence initiatives across our operating segments including increased capacity utilization , operational process enhancements and automation , conversion of fixed cost structure to variable , benefits from low cost country manufacturing expansion , and synergies from the recent acquisitions of dewal and dsp . see “ results of operations . ” we continue to execute on our synergistic acquisition strategy . the acquisitions of dewal and dsp , and their subsequent integration into our ems operating segment , have enabled us to extend the product portfolio and technology capabilities with complementary high-end , high performance elastomeric materials . during 2017 , we refinanced our borrowings under our revolving credit facility and as a result of strong financial performance , we made discretionary principal payments of $ 110.2 million . our outstanding borrowings under our credit facility decreased to $ 131.0 million as of december 31 , 2017 . we are an innovation company and in 2017 spent 3.6 % of our net sales on research and development . research and development ( r & d ) expenses were $ 29.5 million in 2017 , an increase of 3.4 % from $ 28.6 million in 2016 . the increased spending was due to continued investments that are targeted at developing new platforms and technologies . we have made concerted efforts to realign our r & d organization to better fit the future direction of our company , including dedicating resources to focus on current product extensions and enhancements to meet our short-term and long-term technology needs . 22 results of operations the following table sets forth , for the periods indicated , selected operations data expressed as a percentage of net sales . replace_table_token_4_th 2017 vs. 2016 net sales ( dollars in thousands ) 2017 2016 percent change net sales $ 821,043 $ 656,314 25.1 % net sales increased by 25.1 % in 2017 compared to 2016 . this increase was driven by the net sales from our recent acquisitions of dewal and dsp , as well as higher organic net sales in our three strategic operating segments ( acs , ems and pes ) . the acs operating segment had an increase in net sales of 8.4 % due to higher end-market demand in automotive radar applications , consumer electronics , and aerospace and defense , partially offset by lower demand in wireless infrastructure applications and satellite tv dish applications . ems net sales increased 53.9 % primarily due to the recent acquisitions of dewal and dsp , and from higher end-market product demand from core markets , including automotive , mass transit , portable electronics , general industrial and consumer products applications . pes had increased net sales of 21.4 % due to higher end-market demand in laser diode cooler applications , renewable energy , mass transit , electric and hybrid electric vehicles and variable frequency motor drives . net sales were unfavorably impacted by 0.1 % due to currency fluctuations primarily as a result of the depreciation in value of the renminbi relative to the u.s. dollar , offset in part by appreciation in value of the euro relative to the u.s. dollar . see “ segment sales and operations ” below for further discussion on operating segment performance . gross margin replace_table_token_5_th gross margin as a percentage of net sales increased by 79 basis points to 38.8 story_separator_special_tag operating income declined by 2.6 % in 2016 from 2015. as a percentage of net sales , 2016 operating income was 15.8 % , a 110 basis point decrease as compared to the 16.9 % reported in 2015. operating income in 2016 was positively impacted by higher sales , however this increase was offset by unfavorable mix , unfavorable volume pricing and absorption , higher incentive compensation and additional corporate selling , general and administrative expense allocations . 2015 results included $ 5.3 million of charges comprised of $ 2.6 million of integration expenses related to the arlon acquisition , $ 1.0 million of arlon purchase accounting expenses related to the non-recurring fair value adjustment for inventory , $ 1.4 million of allocated environmental charge and $ 0.4 million of allocated severance related charges . elastomeric material solutions replace_table_token_14_th the ems operating segment is comprised of polyurethane and silicone foam products , which are sold into a wide variety of applications and markets , including general industrial , portable electronics , automotive , mass transit and consumer applications . in november 2016 , we completed the acquisition of dewal , a leading manufacturer of polytetrafluoroethylene , ultra-high molecular weight polyethylene films , pressure sensitive tapes and specialty products for the industrial , aerospace , automotive , and electronics markets . in january 2017 , we acquired the principal operating assets of dsp , a custom silicone product development and manufacturing business , serving a wide range of high reliability applications . the integration of dewal and dsp into our ems operating segment has enabled us to extend the product portfolio and technology capabilities with complementary high-end , high performance elastomeric materials . 2017 vs. 2016 net sales in this segment increased 53.9 % in 2017 compared to 2016 . the increase in net sales was primarily driven by the acquisitions of dewal and dsp 38.8 % , as well as an increase in organic net sales 15.1 % . ems experienced higher end-market demand in core markets including automotive 28.0 % , mass transit 23.5 % , portable electronics 22.6 % , general industrial 13.6 % and consumer products applications 8.1 % . net sales were unfavorably impacted by 0.4 % due to currency fluctuations , primarily as a result of the depreciation in value of the renminbi relative to the u.s. dollar , partially offset by the appreciation in value of the korean won and euro relative to the u.s. dollar . operating income improved 93.3 % in 2017 compared to 2016 . as a percentage of net sales , 2017 operating income was 16.4 % , a 340 basis point increase compared to 13.1 % in 2016 . this increase is primarily due to higher net sales attributable to both acquisitions and organic growth , as well as lower costs from continued operational efficiencies . operating income in 2017 included a $ 1.6 million charge to reflect a purchase accounting fair value adjustment for inventory related to the dewal and dsp acquisitions and $ 3.2 million of acquisition and integration costs . operating income in 2017 also included increased other intangible assets amortization and depreciation expense of $ 4.9 million related to the dewal and dsp acquisitions . 28 2016 vs. 2015 net sales in this segment increased by 12.3 % in 2016 from 2015. currency fluctuations decreased net sales by 1.8 % . the increase in net sales was driven primarily by portable electronics applications 23.9 % , automotive applications 41.4 % and general industrial 1.6 % . these increases were partially offset by declines in demand in consumer applications 15.2 % and mass transit 1.9 % . the results of dewal have been included in our consolidated financial statements only for the period subsequent to the completion of our acquisition . during this period , net sales attributable to dewal totaled $ 5.4 million . operating income increased by 33.1 % in 2016 from 2015. as a percentage of net sales , 2016 operating income was 13.1 % , a 210 basis point increase as compared to the 11.0 % reported in 2015. the increase in operating income in 2016 is primarily due to an increase in net sales , partially offset by corporate selling , general and administrative expense allocations and higher incentive compensation . 2016 results also include $ 3.8 million of acquisition costs related to the dewal and dsp acquisitions , along with $ 0.9 million of expenses related to the non-recurring fair value adjustment for dewal inventory . the results of dewal have been included in our consolidated financial statements only for the period subsequent to the completion of our acquisition . during this period , operating income attributable to dewal totaled $ 2.0 million . 2015 results included $ 3.2 million of charges comprised of $ 1.6 million of integration expenses related to the arlon acquisition , $ 0.5 million of arlon purchase accounting expenses related to the non-recurring fair value adjustment for inventory , $ 0.8 million of allocated environmental charge and $ 0.3 million of allocated severance related charges . power electronics solutions replace_table_token_15_th the pes operating segment is comprised of two product lines - curamik ® direct-bonded copper ( dbc ) substrates that are used primarily in the design of intelligent power management devices , such as igbt ( insulated gate bipolar transistor ) modules that enable a wide range of products including highly efficient industrial motor drives , wind and solar energy converters and electrical systems in automobiles , and rolinx ® busbars that are used primarily in power distribution systems products in electric and hybrid electric vehicles and clean technology applications . 2017 vs. 2016 net sales in this segment increased 21.4 % in 2017 compared to 2016 . the increase in net sales was driven by higher demand for laser diode cooler applications 44.6 % , renewable energy 40.3 % , mass transit 23.4 % , electric and hybrid electric vehicles 18.5 % and variable

net cash used in financing activities was $ 113.2 million in 2017 , compared to $ 57.9 million and $ 83.0 million in 2016 and 2015 , respectively . the increase is due primarily to the $ 110.2 million in payments on our outstanding credit facility and $ 0.5 million payments on capital leases during 2017. financing activities in 2016 and 2015 included borrowings of $ 166.0 million and $ 125.0 million , respectively , to finance the acquisitions of dewal , dsp and arlon . credit facilities on june 18 , 2015 , we entered into a secured five year credit agreement with jpmorgan chase bank , n.a , as administrative agent , and the lenders party thereto ( the “ second amended credit agreement ” ) . the second amended credit agreement provided ( 1 ) a $ 55.0 million term loan ; ( 2 ) up to $ 295.0 million of revolving loans , with sublimits for multicurrency borrowings , letters of credit and swing-line notes ; and ( 3 ) a $ 50.0 million expansion feature . 31 on february 17 , 2017 , we entered into a secured five-year credit agreement with jpmorgan chase bank , n.a. , as administrative agent , and the lenders party thereto ( the “ third amended credit agreement ” ) , which amended and restated the second amended credit agreement . the third amended credit agreement refinanced the second amended credit agreement , eliminated the term loan under the second amended credit agreement , and increased the principal amount of the revolving credit facility to up to $ 450.0 million borrowing capacity with sublimits for multicurrency borrowings , letters of credit and swing-line notes , and provided an additional $ 175.0 million accordion feature . all revolving loans under the third amended credit agreement are due on the maturity date , february 17 , 2022. we are not required to make any quarterly principal payments under the third amended credit agreement . during 2017 , we made discretionary principal payments of $ 110.2 million to reduce the amount outstanding on our credit facility . as of december 31 , 2017 , we had $ 131.0 million in outstanding borrowings under our credit facility .

this can also impact our future revenue recognized with respect to the number of air miles reward miles redeemed and the amount of breakage for those air miles reward miles expected to remain unredeemed . the estimated breakage rate changed from 28 % to 27 % effective december 31 , 2012 and from 27 % to 26 % effective december 31 , 2013. as of december 31 , 2014 , the estimated breakage rate remained at 26 % . for those sponsor contracts not yet subject to accounting standards update , or asu , 2009‑13 , `` multiple-deliverable revenue arrangements , `` the fees received from air miles reward miles issued are allocated between the redemption element based on the fair value of the redemption element and the service element based on the residual method . for sponsor contracts subject to asu 2009‑13 , we determine the selling price for all of the deliverables in the arrangement , and use the relative selling price method to allocate the arrangement consideration among the deliverables . proceeds from the issuance of air miles reward miles under these contracts are allocated to three elements : the redemption element , the service element and the brand element . revenue for the redemption element is recognized at the time an air miles reward mile is redeemed . for the service element , revenue is recognized over the estimated life of an air miles reward mile . revenue attributable to the brand element is recognized at the time an air miles reward mile is issued . air miles reward miles issued during the year ended december 31 , 2014 increased 1.5 % compared to 2013 due to an increase in air miles reward miles issued under the air miles cash program option . the merger of two of our top grocery sponsors and newly enacted regulations related to prescription drug purchases negatively impacted growth of our air miles reward miles issued in 2014. air miles reward miles redeemed during the year ended december 31 , 2014 increased 2.1 % compared to the same period in the prior year due to increased redemptions through the air miles cash program option as well as increased redemptions for travel rewards . for the year ended december 31 , 2014 , the air miles cash program option represented approximately 15.5 % of the air miles reward miles issued as compared to 12.1 % in the prior year . during the year ended december 31 , 2014 , loyaltyone signed a cross-canada , long-term agreement with sobeys inc , a national grocery retailer in canada that acquired canada safeway in late 2013 , to continue its participation and expand its sobeys-owned banners as sponsors in the air miles reward program . we signed a new , long-term agreement with katz group canada ltd. , a leading retail drugstore operator in canada and an air miles reward program sponsor in ontario , to continue its participation to issue air miles reward miles in ontario and expand to its katz group-owned banners in other areas of canada . we also signed new multi-year agreements with kent building supplies , a canadian home improvement products retailer , and moneris solutions corporation , a canadian credit and debit card processor , to participate as sponsors in the air miles reward program . finally , we signed a new multi-year consulting agreement with loblaw companies limited to develop and execute merchandising and marketing strategies . we also own approximately 37 % of cbsm-companhia brasileira de servicos de marketing , the operator of the dotz coalition loyalty program in brazil . dotz operates in 12 regions with more than 14 million collectors enrolled in the program . our investment in dotz had minimal impact on our results of operations in 2014 and 2013 , and we are not expecting it to have an impact on our results of operations in 2015 . 24 index epsilon epsilon is a leading marketing services firm providing end-to-end , integrated marketing solutions that leverage transactional data to help clients more effectively acquire and build stronger relationships with their customers . services include strategic consulting , customer database technologies , loyalty management , proprietary data , predictive modeling and a full range of direct and digital agency services . revenue increased $ 142.1 million , or 10.3 % , to $ 1.5 billion and adjusted ebitda , net increased $ 19.4 million , or 6.7 % , to $ 309.1 million for the year ended december 31 , 2014 as compared to the same period in 2013. revenue growth was driven by additional services provided to both new and existing clients , increased demand in the automotive vertical and the acquisition of conversant . on december 10 , 2014 , we completed the acquisition of conversant , a digital marketing services company offering unique end-to-end digital marketing solutions that empower clients to more effectively market to their customers across all channels . conversant 's solution and capabilities are complementary to and enhance epsilon 's existing offline and online data set , allowing for more effective targeted marketing programs across an expanded distribution network . conversant also provides scale in the rapidly growing display , mobile , video and social digital channels , and adds essential capabilities to epsilon 's digital loyalty platform , agility harmony . conversant is consolidated in our financial statements and included in our results of operations as of the date of acquisition . for additional information on the acquisition of conversant , see note 3 , `` acquisitions , `` of the notes to consolidated financial statements . story_separator_special_tag adjusted ebitda and adjusted ebitda , net are not intended to be performance measures that should be regarded as an alternative to , or more meaningful than , either operating income or net income as indicators of operating performance or to cash flows from operating activities as a measure of liquidity . in addition , adjusted ebitda and adjusted ebitda , net are not intended to represent funds available for dividends , reinvestment or other discretionary uses , and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with gaap . the adjusted ebitda and adjusted ebitda , net measures presented in this annual report on form 10-k may not be comparable to similarly titled measures presented by other companies , and may not be identical to corresponding measures used in our various agreements . replace_table_token_8_th ( 1 ) represents expenditures directly associated with the acquisition of conversant . ( 2 ) represents additional contingent consideration as a result of the earn-out obligation associated with the acquisition of our 60 percent ownership interest in brandloyalty . 28 index consolidated results of operations replace_table_token_9_th 29 index year ended december 31 , 2014 compared to the year ended december 31 , 2013 revenue . total revenue increased $ 983.9 million , or 22.8 % , to $ 5.3 billion for the year ended december 31 , 2014 from $ 4.3 billion for the year ended december 31 , 2013. the net increase was due to the following : transaction . revenue increased $ 8.4 million , or 2.5 % , to $ 337.4 million for the year ended december 31 , 2014 . other servicing fees charged to our credit cardholders increased $ 26.7 million due to increased volumes . this increase was offset by a decline of $ 12.3 million in merchant fees , which are transaction fees charged to the retailer , due to increased royalty payments associated with new clients and the increase in associated credit sales . air miles reward miles issuance fees , for which we provide marketing and administrative services , also decreased $ 7.6 million due to the impact of an unfavorable canadian exchange rate . redemption . revenue increased $ 466.1 million , or 79.4 % , to $ 1.1 billion for the year ended december 31 , 2014 due to the brandloyalty acquisition , which added $ 538.9 million . these increases were offset by an unfavorable canadian exchange rate , which negatively impacted redemption revenue by $ 36.6 million , and the change in estimate of our breakage rate in prior years . finance charges , net . revenue increased $ 347.0 million , or 17.7 % , to $ 2.3 billion for the year ended december 31 , 2014 due to a 21.3 % increase in average credit card and loan receivables , which increased revenue $ 417.0 million through a combination of recent credit card portfolio acquisitions and strong credit cardholder spending . this increase was offset in part by an 80 basis point decline in yield due to the onboarding of new programs , which decreased revenue $ 70.0 million . database marketing fees and direct marketing . revenue increased $ 149.3 million , or 11.6 % , to $ 1.4 billion for the year ended december 31 , 2014. revenue was driven by the acquisition of conversant and by marketing technology revenue , which increased $ 35.7 million as a result of both database builds completed for new clients being placed in production , and an expansion of services provided to existing clients . agency revenue increased $ 43.1 million due to demand in the automotive vertical . marketing analytic services provided by loyaltyone also increased $ 25.1 million due to new client signings . other revenue . revenue increased $ 13.1 million , or 8.3 % , to $ 169.9 million for the year ended december 31 , 2014 due to the brandloyalty acquisition , which added $ 6.8 million , and additional consulting services provided by epsilon . cost of operations . cost of operations increased $ 669.6 million , or 26.3 % , to $ 3.2 billion for the year ended december 31 , 2014 as compared to $ 2.5 billion for the year ended december 31 , 2013. the increase resulted from growth across each of our segments , including the following : within the loyaltyone segment , cost of operations increased $ 396.1 million due to the brandloyalty acquisition , which added $ 438.2 million . this increase was offset by a decrease in operating expenses in our canadian operations of $ 42.0 million due to the decline in the canadian exchange rate . within the epsilon segment , cost of operations increased $ 129.6 million due to the conversant acquisition , an increase in payroll and benefits expense of $ 52.9 million associated with an increase in the number of associates to support growth , including the onboarding of new clients , and an increase of $ 44.4 million in direct processing expenses , associated with the increase in revenue . within the private label services and credit segment , cost of operations increased by $ 150.3 million . payroll and benefits expense increased $ 76.3 million associated with an increase in the number of associates to support growth , and marketing expenses increased $ 23.4 million due to the increase in credit sales . other operating expenses increased by $ 50.6 million , as credit card processing expenses were higher due to an increase in the number of statements generated , and data processing costs increased due to growth in volumes . earn-out obligation . on january 2 , 2014 , we acquired a 60 % ownership interest in brandloyalty . the share purchase agreement contained an earn-out provision which resulted in an increase in contingent consideration of $ 105.9 million , which is included in operating expenses in our consolidated statements of

net cash used in financing activities was $ 113.2 million in 2017 , compared to $ 57.9 million and $ 83.0 million in 2016 and 2015 , respectively . the increase is due primarily to the $ 110.2 million in payments on our outstanding credit facility and $ 0.5 million payments on capital leases during 2017. financing activities in 2016 and 2015 included borrowings of $ 166.0 million and $ 125.0 million , respectively , to finance the acquisitions of dewal , dsp and arlon . credit facilities on june 18 , 2015 , we entered into a secured five year credit agreement with jpmorgan chase bank , n.a , as administrative agent , and the lenders party thereto ( the “ second amended credit agreement ” ) . the second amended credit agreement provided ( 1 ) a $ 55.0 million term loan ; ( 2 ) up to $ 295.0 million of revolving loans , with sublimits for multicurrency borrowings , letters of credit and swing-line notes ; and ( 3 ) a $ 50.0 million expansion feature . 31 on february 17 , 2017 , we entered into a secured five-year credit agreement with jpmorgan chase bank , n.a. , as administrative agent , and the lenders party thereto ( the “ third amended credit agreement ” ) , which amended and restated the second amended credit agreement . the third amended credit agreement refinanced the second amended credit agreement , eliminated the term loan under the second amended credit agreement , and increased the principal amount of the revolving credit facility to up to $ 450.0 million borrowing capacity with sublimits for multicurrency borrowings , letters of credit and swing-line notes , and provided an additional $ 175.0 million accordion feature . all revolving loans under the third amended credit agreement are due on the maturity date , february 17 , 2022. we are not required to make any quarterly principal payments under the third amended credit agreement . during 2017 , we made discretionary principal payments of $ 110.2 million to reduce the amount outstanding on our credit facility . as of december 31 , 2017 , we had $ 131.0 million in outstanding borrowings under our credit facility .

this can also impact our future revenue recognized with respect to the number of air miles reward miles redeemed and the amount of breakage for those air miles reward miles expected to remain unredeemed . the estimated breakage rate changed from 28 % to 27 % effective december 31 , 2012 and from 27 % to 26 % effective december 31 , 2013. as of december 31 , 2014 , the estimated breakage rate remained at 26 % . for those sponsor contracts not yet subject to accounting standards update , or asu , 2009‑13 , `` multiple-deliverable revenue arrangements , `` the fees received from air miles reward miles issued are allocated between the redemption element based on the fair value of the redemption element and the service element based on the residual method . for sponsor contracts subject to asu 2009‑13 , we determine the selling price for all of the deliverables in the arrangement , and use the relative selling price method to allocate the arrangement consideration among the deliverables . proceeds from the issuance of air miles reward miles under these contracts are allocated to three elements : the redemption element , the service element and the brand element . revenue for the redemption element is recognized at the time an air miles reward mile is redeemed . for the service element , revenue is recognized over the estimated life of an air miles reward mile . revenue attributable to the brand element is recognized at the time an air miles reward mile is issued . air miles reward miles issued during the year ended december 31 , 2014 increased 1.5 % compared to 2013 due to an increase in air miles reward miles issued under the air miles cash program option . the merger of two of our top grocery sponsors and newly enacted regulations related to prescription drug purchases negatively impacted growth of our air miles reward miles issued in 2014. air miles reward miles redeemed during the year ended december 31 , 2014 increased 2.1 % compared to the same period in the prior year due to increased redemptions through the air miles cash program option as well as increased redemptions for travel rewards . for the year ended december 31 , 2014 , the air miles cash program option represented approximately 15.5 % of the air miles reward miles issued as compared to 12.1 % in the prior year . during the year ended december 31 , 2014 , loyaltyone signed a cross-canada , long-term agreement with sobeys inc , a national grocery retailer in canada that acquired canada safeway in late 2013 , to continue its participation and expand its sobeys-owned banners as sponsors in the air miles reward program . we signed a new , long-term agreement with katz group canada ltd. , a leading retail drugstore operator in canada and an air miles reward program sponsor in ontario , to continue its participation to issue air miles reward miles in ontario and expand to its katz group-owned banners in other areas of canada . we also signed new multi-year agreements with kent building supplies , a canadian home improvement products retailer , and moneris solutions corporation , a canadian credit and debit card processor , to participate as sponsors in the air miles reward program . finally , we signed a new multi-year consulting agreement with loblaw companies limited to develop and execute merchandising and marketing strategies . we also own approximately 37 % of cbsm-companhia brasileira de servicos de marketing , the operator of the dotz coalition loyalty program in brazil . dotz operates in 12 regions with more than 14 million collectors enrolled in the program . our investment in dotz had minimal impact on our results of operations in 2014 and 2013 , and we are not expecting it to have an impact on our results of operations in 2015 . 24 index epsilon epsilon is a leading marketing services firm providing end-to-end , integrated marketing solutions that leverage transactional data to help clients more effectively acquire and build stronger relationships with their customers . services include strategic consulting , customer database technologies , loyalty management , proprietary data , predictive modeling and a full range of direct and digital agency services . revenue increased $ 142.1 million , or 10.3 % , to $ 1.5 billion and adjusted ebitda , net increased $ 19.4 million , or 6.7 % , to $ 309.1 million for the year ended december 31 , 2014 as compared to the same period in 2013. revenue growth was driven by additional services provided to both new and existing clients , increased demand in the automotive vertical and the acquisition of conversant . on december 10 , 2014 , we completed the acquisition of conversant , a digital marketing services company offering unique end-to-end digital marketing solutions that empower clients to more effectively market to their customers across all channels . conversant 's solution and capabilities are complementary to and enhance epsilon 's existing offline and online data set , allowing for more effective targeted marketing programs across an expanded distribution network . conversant also provides scale in the rapidly growing display , mobile , video and social digital channels , and adds essential capabilities to epsilon 's digital loyalty platform , agility harmony . conversant is consolidated in our financial statements and included in our results of operations as of the date of acquisition . for additional information on the acquisition of conversant , see note 3 , `` acquisitions , `` of the notes to consolidated financial statements . story_separator_special_tag adjusted ebitda and adjusted ebitda , net are not intended to be performance measures that should be regarded as an alternative to , or more meaningful than , either operating income or net income as indicators of operating performance or to cash flows from operating activities as a measure of liquidity . in addition , adjusted ebitda and adjusted ebitda , net are not intended to represent funds available for dividends , reinvestment or other discretionary uses , and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with gaap . the adjusted ebitda and adjusted ebitda , net measures presented in this annual report on form 10-k may not be comparable to similarly titled measures presented by other companies , and may not be identical to corresponding measures used in our various agreements . replace_table_token_8_th ( 1 ) represents expenditures directly associated with the acquisition of conversant . ( 2 ) represents additional contingent consideration as a result of the earn-out obligation associated with the acquisition of our 60 percent ownership interest in brandloyalty . 28 index consolidated results of operations replace_table_token_9_th 29 index year ended december 31 , 2014 compared to the year ended december 31 , 2013 revenue . total revenue increased $ 983.9 million , or 22.8 % , to $ 5.3 billion for the year ended december 31 , 2014 from $ 4.3 billion for the year ended december 31 , 2013. the net increase was due to the following : transaction . revenue increased $ 8.4 million , or 2.5 % , to $ 337.4 million for the year ended december 31 , 2014 . other servicing fees charged to our credit cardholders increased $ 26.7 million due to increased volumes . this increase was offset by a decline of $ 12.3 million in merchant fees , which are transaction fees charged to the retailer , due to increased royalty payments associated with new clients and the increase in associated credit sales . air miles reward miles issuance fees , for which we provide marketing and administrative services , also decreased $ 7.6 million due to the impact of an unfavorable canadian exchange rate . redemption . revenue increased $ 466.1 million , or 79.4 % , to $ 1.1 billion for the year ended december 31 , 2014 due to the brandloyalty acquisition , which added $ 538.9 million . these increases were offset by an unfavorable canadian exchange rate , which negatively impacted redemption revenue by $ 36.6 million , and the change in estimate of our breakage rate in prior years . finance charges , net . revenue increased $ 347.0 million , or 17.7 % , to $ 2.3 billion for the year ended december 31 , 2014 due to a 21.3 % increase in average credit card and loan receivables , which increased revenue $ 417.0 million through a combination of recent credit card portfolio acquisitions and strong credit cardholder spending . this increase was offset in part by an 80 basis point decline in yield due to the onboarding of new programs , which decreased revenue $ 70.0 million . database marketing fees and direct marketing . revenue increased $ 149.3 million , or 11.6 % , to $ 1.4 billion for the year ended december 31 , 2014. revenue was driven by the acquisition of conversant and by marketing technology revenue , which increased $ 35.7 million as a result of both database builds completed for new clients being placed in production , and an expansion of services provided to existing clients . agency revenue increased $ 43.1 million due to demand in the automotive vertical . marketing analytic services provided by loyaltyone also increased $ 25.1 million due to new client signings . other revenue . revenue increased $ 13.1 million , or 8.3 % , to $ 169.9 million for the year ended december 31 , 2014 due to the brandloyalty acquisition , which added $ 6.8 million , and additional consulting services provided by epsilon . cost of operations . cost of operations increased $ 669.6 million , or 26.3 % , to $ 3.2 billion for the year ended december 31 , 2014 as compared to $ 2.5 billion for the year ended december 31 , 2013. the increase resulted from growth across each of our segments , including the following : within the loyaltyone segment , cost of operations increased $ 396.1 million due to the brandloyalty acquisition , which added $ 438.2 million . this increase was offset by a decrease in operating expenses in our canadian operations of $ 42.0 million due to the decline in the canadian exchange rate . within the epsilon segment , cost of operations increased $ 129.6 million due to the conversant acquisition , an increase in payroll and benefits expense of $ 52.9 million associated with an increase in the number of associates to support growth , including the onboarding of new clients , and an increase of $ 44.4 million in direct processing expenses , associated with the increase in revenue . within the private label services and credit segment , cost of operations increased by $ 150.3 million . payroll and benefits expense increased $ 76.3 million associated with an increase in the number of associates to support growth , and marketing expenses increased $ 23.4 million due to the increase in credit sales . other operating expenses increased by $ 50.6 million , as credit card processing expenses were higher due to an increase in the number of statements generated , and data processing costs increased due to growth in volumes . earn-out obligation . on january 2 , 2014 , we acquired a 60 % ownership interest in brandloyalty . the share purchase agreement contained an earn-out provision which resulted in an increase in contingent consideration of $ 105.9 million , which is included in operating expenses in our consolidated statements of

liquidity sources . in addition to cash generated from operating activities , our primary sources of liquidity include our credit card securitization program , deposits issued by comenity bank and comenity capital bank , our credit agreement and issuances of debt and equity securities . in addition to our efforts to renew and expand our current liquidity sources , we continue to seek new funding sources . we continue to expand our brokered certificates of deposits and our money market deposits to supplement liquidity for our credit card and loan receivables . we believe that internally generated funds and other sources of liquidity discussed above will be sufficient to meet working capital needs , capital expenditures , and other business requirements for at least the next 12 months , including the 347.1 million ( $ 392.9 million as of february 10 , 2015 ) due as contingent consideration associated with the acquisition of our 60 % ownership interest in brandloyalty and the additional 10 % ownership interest acquired effective january 1 , 2015 in accordance with the terms of the brandloyalty share purchase agreement , and amounts due under the brandloyalty credit agreement that mature on december 31 , 2015. debt 2013 credit agreement . we entered into a credit agreement dated july 10 , 2013 , or the 2013 credit agreement , among us as borrower , and ads alliance data systems , inc. , ads foreign holdings , inc. , alliance data foreign holdings , inc. , epsilon data management , llc , comenity llc , comenity servicing llc and aspen marketing services , llc , as guarantors , with various agents and lenders . at december 31 , 2013 , the 2013 credit agreement provided for a $ 1.25 billion term loan , or the 2013 term loan , subject to certain principal repayments , and a $ 1.25 billion revolving line of credit with a u.s. $ 65.0 million sublimit for canadian dollar borrowings and a $ 65.0 million sublimit for swing line loans . in july 2014 , we exercised in part the accordion feature of the 2013 credit agreement and increased the capacity under the 2013 credit facility by $ 50.0 million to $ 1.3 billion .

capital expenditures for the year were $ 194.2 million , including $ 80.6 million for the erp implementation , compared to $ 130.8 million in 2018 , including $ 18.0 million for the erp implementation . during 2019 , we completed the following debt related transactions : a ) issued $ 600.0 million at par of aggregate principal senior notes , due july 2024 , which are unsecured and bear interest at 5.375 % per annum , payable on january 15 and july 15 of each year . b ) executed the fourth amendment which amended the credit agreement to , among other things , ( i ) provide an incremental term loan of $ 365.0 million , ( ii ) modify the definition of “ consolidated ebitda ” , ( iii ) revise the financial covenant requirement for our consolidated leverage ratio and ( iv ) make certain other modifications to negative covenants related to restricted payments and investments that we may make . c ) repaid in full $ 1.075 billion of the outstanding private placement notes using the net proceeds from the senior notes and the incremental term loan together with additional borrowings under the senior credit facility . on february 25 , 2020 , we executed the fifth amendment which amended the credit agreement to , among other things : increase the maximum allowable consolidated leverage ratio to 5.00 to 1.00 until the end of the first quarter of 2022 and 4.50 to 1.00 thereafter . upon the consummation of the divesture of the esol disposal group , each of the foregoing maximum permitted consolidated leverage ratio levels will step down to 4.75 to 1.00 and 4.25 to 1.00 , respectively . allow for continuation of the $ 200 million of cash add backs to ebitda through december 31 , 2020 , and addbacks of $ 100 million until december 31 , 2021 , with no further addbacks thereafter . increase the leverage ratio pricing tier of greater than 4.50 to 1.00 by 0.125 % . grant a first-priority security interest to the administrative agent for the benefit of the lenders in substantially all of the personal property of the company and certain of its material domestic subsidiaries , including certain equity interests held by those entities . for additional information , see part ii , item 8 , financial statements and supplementary data ; note 9 – debt in the consolidated financial statements . over the course of 2019 , we divested a texting business based in the uk , a telephone answering services business and pharmaceutical returns business in north america , and substantially all of our operations in mexico and chile . the five transactions combined generated $ 83.7 million in gross proceeds during 2019. as a result of these divestitures we recorded total non-cash divestiture losses , net of gains , of $ 103.0 million . ( for additional information , see part ii , item 8 , financial statements and supplementary data ; note 4 – restructuring and divestitures in the consolidated financial statements ) . on february 6 , 2020 , we entered into the purchase agreement to sell our domestic environmental solutions business to harsco corporation , exclusive of the retained business . 2019 10-k annual report stericycle , inc. 37 part ii subject to the terms and conditions of the purchase agreement , the buyer has agreed to purchase all of the outstanding equity interests of our domestic environmental solutions subsidiary . both we and buyer have agreed to indemnify the other party for losses arising from certain breaches of the purchase agreement and other liabilities , subject to certain limitations . the purchase price for the transaction is approximately $ 462.5 million , and subject to adjustment based on the esol disposal group 's net working capital at closing and other adjustments as defined in the purchase agreement . the transaction is anticipated to result in a loss which is currently not estimable . the expected charge is based on our current estimate of the proceeds that will be allocated to the disposal transaction as we evaluate the terms of the hsa agreement negotiated with the buyer concurrently with the transaction , the net assets that will be disposed of and an allocation of goodwill based on the relative fair value of the esol disposal group to the domestic environmental solutions reporting unit . the remaining goodwill will be allocated to the retained business which we anticipate will become part of the domestic healthcare compliance services reporting unit once the transaction closes . the purchase agreement contains customary representations , warranties and covenants related to the business and the transaction . between the date of the purchase agreement and the completion of the transaction , we have agreed to conduct the ordinary course of the esol disposal group business consistent with past practices in all material respects and have agreed to certain other operating covenants with respect to the esol disposal group business as set forth more fully in the purchase agreement . the purchase agreement includes customary termination provisions , including if the closing of the transaction has not occurred on or before november 6 , 2020 ( which may be extended until february 6 , 2021 , if needed , to obtain applicable regulatory approvals ) . both we and the buyer have agreed to indemnify the other party for losses arising from certain breaches of the purchase agreement and other liabilities , subject to certain limitations . in connection with the closing of the transaction , we and buyer will enter into certain additional ancillary agreements , including a transition services agreement . we and buyer will also enter into a long-term subcontracted hsa with respect to our retained business . we currently provide integrated waste compliance services to healthcare customers , including medical and hazardous waste disposal services . story_separator_special_tag ” asset and goodwill impairments asset impairment charges comprise the following : replace_table_token_12_th for the year ended december 31 , 2019 , impairment charges primarily consisted of $ 1.6 million related to software as a result of rationalization of system applications primarily in all other , $ 1.0 million related to permits in mexico due to site closures prior to the mexico operations divestiture , $ 0.7 million related to customer list intangibles in the netherlands , and $ 18.3 million associated with property and equipment and customer relationship , permits and other intangibles in our brazil operations , both , which are part of our international rwcs reportable segment and $ 0.5 million associated with a site closure in our north 2019 10-k annual report stericycle , inc. 47 part ii america rwcs reportable segment . for the year ended december 31 , 2018 , the impairment charges were primarily associated to software in connection with our evolving future information systems strategy including rationalization of applications used within each reportable segment . the impairment charges included in sg & a and cor for the year ended december 31 , 2019 and 2018 , respectively are further described in part ii , item 8. financial statements and supplementary data ; note 5 – property , plant a nd equipment and note 7 – goodwill and other intangible assets in the consolidated financial statements . as a result of our annual goodwill impairment assessments on october 1 and interim assessments , as applicable , we recognized goodwill impairment charges which are discussed below in the impairment section of part ii , item 7. management 's discussion and analysis of financial condition and results of operations – goodwill impairment . ( for additional information , see part ii , item 8. financial statements and supplementary data ; note 7 – goodwill and other intangible assets in the consolidated financial statements ) . impairment charges may be recognized in future periods to the extent changes in factors or circumstances occur , including deterioration in the macroeconomic environment or in the equity markets , including the market value of our common shares , deterioration in our performance or our future projections , or changes in our plans for one or more reporting units or specified long-lived assets , among other factors . other during the years ended december 31 , 2019 , 2018 , and 2017 , we recognized $ 39.7 million , $ 29.1 million , and $ 24.8 million , respectively , of consulting and professional fees related to internal control remediation activities as well as the implementation of new accounting standards . for the years ended december 31 , 2019 and 2018 , we recognized foreign exchange losses of $ 3.3 million and $ 3.8 million , respectively , related to the re-measurement of net monetary assets held in argentina as a result of its designation as a highly inflationary economy . capital allocation stericycle aims to maintain a structured capital allocation strategy that balances investment in the business , debt reduction , and returns to shareholders . our capital allocation items include the following types of activities : stock issuance costs , dividends on preferred stock , debt modification costs in connection with related non-recurring matters , losses on early extinguishment of debt , and other related expenses . for the year ended december 31 , 2019 , we incurred a pre-tax loss on early extinguishment of debt of $ 23.1 million , comprising a “ make-whole ” premium of $ 20.4 million , due under the terms of certain of the private placement notes , and $ 2.7 million related to unamortized debt issuance costs , associated with repayments of our private placement notes . we also incurred $ 0.2 million of debt modification charges associated with the execution of the fourth amendment , which are recorded in interest expense , net and charges of $ 3.4 million related to the write- 2019 10-k annual report stericycle , inc. 48 part ii off of the unamortized portion of premiums associated with interest rate locks executed in connection with the issuance of certain of the private placement notes , which are recorded in interest expense , net . during the year ended december 31 , 2018 , we recognized $ 2.7 million of debt modification charges related to amending our credit agreements . these charges have been recognized as interest expense , net in the consolidated statements of ( loss ) income . we declared and paid dividends of $ 25.5 million and $ 36.3 million , to the series a preferred stock shareholders during the years ended december 31 , 2018 and 2017 , respectively . on september 14 , 2018 , in accordance with their terms of issuance , all of the series a preferred stock was converted into common stock and all then outstanding shares of preferred stock and the associated depositary shares were cancelled . tax reform we analyzed the provisional impact of the tax act on our year end 2017 income tax benefit/provision and as a result recognized $ 129.8 million as an income tax benefit in 2017. consistent with the requirements of staff accounting bulletin no . 118 ( “ sab 118 ” ) , the analysis and determination of provisional impact was finalized during 2018 , resulting in a charge of $ 8.8 million . for further discussion , see part ii , item 8. financial statements and supplementary data ; note 10 – income taxes in the consolidated financial statements . results of operations revenues ( including segment revenue ) : in analyzing our company 's performance , it is necessary to understand that our various regulated services share a common infrastructure and customer base . we market our regulated and compliance services by offering various pricing options to meet our customers ' preferences , and customers move between these different billing paradigms . for example , our customers may contract with

liquidity sources . in addition to cash generated from operating activities , our primary sources of liquidity include our credit card securitization program , deposits issued by comenity bank and comenity capital bank , our credit agreement and issuances of debt and equity securities . in addition to our efforts to renew and expand our current liquidity sources , we continue to seek new funding sources . we continue to expand our brokered certificates of deposits and our money market deposits to supplement liquidity for our credit card and loan receivables . we believe that internally generated funds and other sources of liquidity discussed above will be sufficient to meet working capital needs , capital expenditures , and other business requirements for at least the next 12 months , including the 347.1 million ( $ 392.9 million as of february 10 , 2015 ) due as contingent consideration associated with the acquisition of our 60 % ownership interest in brandloyalty and the additional 10 % ownership interest acquired effective january 1 , 2015 in accordance with the terms of the brandloyalty share purchase agreement , and amounts due under the brandloyalty credit agreement that mature on december 31 , 2015. debt 2013 credit agreement . we entered into a credit agreement dated july 10 , 2013 , or the 2013 credit agreement , among us as borrower , and ads alliance data systems , inc. , ads foreign holdings , inc. , alliance data foreign holdings , inc. , epsilon data management , llc , comenity llc , comenity servicing llc and aspen marketing services , llc , as guarantors , with various agents and lenders . at december 31 , 2013 , the 2013 credit agreement provided for a $ 1.25 billion term loan , or the 2013 term loan , subject to certain principal repayments , and a $ 1.25 billion revolving line of credit with a u.s. $ 65.0 million sublimit for canadian dollar borrowings and a $ 65.0 million sublimit for swing line loans . in july 2014 , we exercised in part the accordion feature of the 2013 credit agreement and increased the capacity under the 2013 credit facility by $ 50.0 million to $ 1.3 billion .

capital expenditures for the year were $ 194.2 million , including $ 80.6 million for the erp implementation , compared to $ 130.8 million in 2018 , including $ 18.0 million for the erp implementation . during 2019 , we completed the following debt related transactions : a ) issued $ 600.0 million at par of aggregate principal senior notes , due july 2024 , which are unsecured and bear interest at 5.375 % per annum , payable on january 15 and july 15 of each year . b ) executed the fourth amendment which amended the credit agreement to , among other things , ( i ) provide an incremental term loan of $ 365.0 million , ( ii ) modify the definition of “ consolidated ebitda ” , ( iii ) revise the financial covenant requirement for our consolidated leverage ratio and ( iv ) make certain other modifications to negative covenants related to restricted payments and investments that we may make . c ) repaid in full $ 1.075 billion of the outstanding private placement notes using the net proceeds from the senior notes and the incremental term loan together with additional borrowings under the senior credit facility . on february 25 , 2020 , we executed the fifth amendment which amended the credit agreement to , among other things : increase the maximum allowable consolidated leverage ratio to 5.00 to 1.00 until the end of the first quarter of 2022 and 4.50 to 1.00 thereafter . upon the consummation of the divesture of the esol disposal group , each of the foregoing maximum permitted consolidated leverage ratio levels will step down to 4.75 to 1.00 and 4.25 to 1.00 , respectively . allow for continuation of the $ 200 million of cash add backs to ebitda through december 31 , 2020 , and addbacks of $ 100 million until december 31 , 2021 , with no further addbacks thereafter . increase the leverage ratio pricing tier of greater than 4.50 to 1.00 by 0.125 % . grant a first-priority security interest to the administrative agent for the benefit of the lenders in substantially all of the personal property of the company and certain of its material domestic subsidiaries , including certain equity interests held by those entities . for additional information , see part ii , item 8 , financial statements and supplementary data ; note 9 – debt in the consolidated financial statements . over the course of 2019 , we divested a texting business based in the uk , a telephone answering services business and pharmaceutical returns business in north america , and substantially all of our operations in mexico and chile . the five transactions combined generated $ 83.7 million in gross proceeds during 2019. as a result of these divestitures we recorded total non-cash divestiture losses , net of gains , of $ 103.0 million . ( for additional information , see part ii , item 8 , financial statements and supplementary data ; note 4 – restructuring and divestitures in the consolidated financial statements ) . on february 6 , 2020 , we entered into the purchase agreement to sell our domestic environmental solutions business to harsco corporation , exclusive of the retained business . 2019 10-k annual report stericycle , inc. 37 part ii subject to the terms and conditions of the purchase agreement , the buyer has agreed to purchase all of the outstanding equity interests of our domestic environmental solutions subsidiary . both we and buyer have agreed to indemnify the other party for losses arising from certain breaches of the purchase agreement and other liabilities , subject to certain limitations . the purchase price for the transaction is approximately $ 462.5 million , and subject to adjustment based on the esol disposal group 's net working capital at closing and other adjustments as defined in the purchase agreement . the transaction is anticipated to result in a loss which is currently not estimable . the expected charge is based on our current estimate of the proceeds that will be allocated to the disposal transaction as we evaluate the terms of the hsa agreement negotiated with the buyer concurrently with the transaction , the net assets that will be disposed of and an allocation of goodwill based on the relative fair value of the esol disposal group to the domestic environmental solutions reporting unit . the remaining goodwill will be allocated to the retained business which we anticipate will become part of the domestic healthcare compliance services reporting unit once the transaction closes . the purchase agreement contains customary representations , warranties and covenants related to the business and the transaction . between the date of the purchase agreement and the completion of the transaction , we have agreed to conduct the ordinary course of the esol disposal group business consistent with past practices in all material respects and have agreed to certain other operating covenants with respect to the esol disposal group business as set forth more fully in the purchase agreement . the purchase agreement includes customary termination provisions , including if the closing of the transaction has not occurred on or before november 6 , 2020 ( which may be extended until february 6 , 2021 , if needed , to obtain applicable regulatory approvals ) . both we and the buyer have agreed to indemnify the other party for losses arising from certain breaches of the purchase agreement and other liabilities , subject to certain limitations . in connection with the closing of the transaction , we and buyer will enter into certain additional ancillary agreements , including a transition services agreement . we and buyer will also enter into a long-term subcontracted hsa with respect to our retained business . we currently provide integrated waste compliance services to healthcare customers , including medical and hazardous waste disposal services . story_separator_special_tag ” asset and goodwill impairments asset impairment charges comprise the following : replace_table_token_12_th for the year ended december 31 , 2019 , impairment charges primarily consisted of $ 1.6 million related to software as a result of rationalization of system applications primarily in all other , $ 1.0 million related to permits in mexico due to site closures prior to the mexico operations divestiture , $ 0.7 million related to customer list intangibles in the netherlands , and $ 18.3 million associated with property and equipment and customer relationship , permits and other intangibles in our brazil operations , both , which are part of our international rwcs reportable segment and $ 0.5 million associated with a site closure in our north 2019 10-k annual report stericycle , inc. 47 part ii america rwcs reportable segment . for the year ended december 31 , 2018 , the impairment charges were primarily associated to software in connection with our evolving future information systems strategy including rationalization of applications used within each reportable segment . the impairment charges included in sg & a and cor for the year ended december 31 , 2019 and 2018 , respectively are further described in part ii , item 8. financial statements and supplementary data ; note 5 – property , plant a nd equipment and note 7 – goodwill and other intangible assets in the consolidated financial statements . as a result of our annual goodwill impairment assessments on october 1 and interim assessments , as applicable , we recognized goodwill impairment charges which are discussed below in the impairment section of part ii , item 7. management 's discussion and analysis of financial condition and results of operations – goodwill impairment . ( for additional information , see part ii , item 8. financial statements and supplementary data ; note 7 – goodwill and other intangible assets in the consolidated financial statements ) . impairment charges may be recognized in future periods to the extent changes in factors or circumstances occur , including deterioration in the macroeconomic environment or in the equity markets , including the market value of our common shares , deterioration in our performance or our future projections , or changes in our plans for one or more reporting units or specified long-lived assets , among other factors . other during the years ended december 31 , 2019 , 2018 , and 2017 , we recognized $ 39.7 million , $ 29.1 million , and $ 24.8 million , respectively , of consulting and professional fees related to internal control remediation activities as well as the implementation of new accounting standards . for the years ended december 31 , 2019 and 2018 , we recognized foreign exchange losses of $ 3.3 million and $ 3.8 million , respectively , related to the re-measurement of net monetary assets held in argentina as a result of its designation as a highly inflationary economy . capital allocation stericycle aims to maintain a structured capital allocation strategy that balances investment in the business , debt reduction , and returns to shareholders . our capital allocation items include the following types of activities : stock issuance costs , dividends on preferred stock , debt modification costs in connection with related non-recurring matters , losses on early extinguishment of debt , and other related expenses . for the year ended december 31 , 2019 , we incurred a pre-tax loss on early extinguishment of debt of $ 23.1 million , comprising a “ make-whole ” premium of $ 20.4 million , due under the terms of certain of the private placement notes , and $ 2.7 million related to unamortized debt issuance costs , associated with repayments of our private placement notes . we also incurred $ 0.2 million of debt modification charges associated with the execution of the fourth amendment , which are recorded in interest expense , net and charges of $ 3.4 million related to the write- 2019 10-k annual report stericycle , inc. 48 part ii off of the unamortized portion of premiums associated with interest rate locks executed in connection with the issuance of certain of the private placement notes , which are recorded in interest expense , net . during the year ended december 31 , 2018 , we recognized $ 2.7 million of debt modification charges related to amending our credit agreements . these charges have been recognized as interest expense , net in the consolidated statements of ( loss ) income . we declared and paid dividends of $ 25.5 million and $ 36.3 million , to the series a preferred stock shareholders during the years ended december 31 , 2018 and 2017 , respectively . on september 14 , 2018 , in accordance with their terms of issuance , all of the series a preferred stock was converted into common stock and all then outstanding shares of preferred stock and the associated depositary shares were cancelled . tax reform we analyzed the provisional impact of the tax act on our year end 2017 income tax benefit/provision and as a result recognized $ 129.8 million as an income tax benefit in 2017. consistent with the requirements of staff accounting bulletin no . 118 ( “ sab 118 ” ) , the analysis and determination of provisional impact was finalized during 2018 , resulting in a charge of $ 8.8 million . for further discussion , see part ii , item 8. financial statements and supplementary data ; note 10 – income taxes in the consolidated financial statements . results of operations revenues ( including segment revenue ) : in analyzing our company 's performance , it is necessary to understand that our various regulated services share a common infrastructure and customer base . we market our regulated and compliance services by offering various pricing options to meet our customers ' preferences , and customers move between these different billing paradigms . for example , our customers may contract with

liquidity and capital resources details of our outstanding debt obligations can be found in part ii , item 8. financial statements and supplementary data ; note 9 – debt in the consolidated financial statements . we believe that we have sufficient liquidity to support our ongoing operations , including the erp implementation , and to invest in future growth to create value for our shareholders . operating cash flows and the $ 1.2 billion senior credit facility are our primary sources of liquidity and are expected to be used for , among other things , payment of interest and principal on our long-term debt obligations and capital expenditures necessary to support growth and productivity improvements , including those associated with our erp implementation . to the extent our liquidity needs prove to be greater than expected or cash generated from operations is less than anticipated , and cash on hand or credit availability is insufficient or we are in breach under the existing credit agreement , we would need to seek additional financing from alternative sources , including approaching the capital markets , in order to provide additional liquidity . on february 25 , 2020 , we executed the fifth amendment which amended the credit agreement to , among other things : increase the maximum allowable consolidated leverage ratio to 5.00 to 1.00 until the end of the first quarter of 2022 and 4.50 to 1.00 thereafter . upon the consummation of the divesture of the esol disposal group , each of the foregoing maximum permitted consolidated leverage ratio levels will step down to 4.75 to 1.00 and 4.25 to 1.00 , respectively . 2019 10-k annual report stericycle , inc. 57 part ii allow for continuation of the $ 200 million of cash add backs to ebitda through december 31 , 2020 , and addbacks of $ 100 million until december 31 , 2021 , with no further addbacks thereafter .

refinance existing debt as it matures ; · because of our holding company structure , the inability of our subsidiaries to pay dividends to the holding company in sufficient amounts could harm the holding company 's ability to meet its obligations ; · legislative , regulatory or tax changes , both domestic and foreign , that affect the cost of , or demand for , our subsidiaries ' products , the required amount of reserves and or surplus , or otherwise affect our ability to conduct business , including changes to statutory reserve requirements related to secondary guarantees under universal life , such as a change to reserve calculations under actuarial guideline 38 ( also known as the application of the valuation of life insurance policies model regulation , or “ ag38 ” ) , and variable annuity products under actuarial guideline 43 ( also known as commissioners annuity reserve valuation method for variable annuities , or “ ag43 ” ) ; restrictions on revenue sharing and 12b-1 payments ; and the potential for u.s. federal tax reform ; · uncertainty about the effect of rules and regulations to be promulgated under the dodd-frank wall street reform and consumer protection act on us and the economy and the financial services sector in particular ; · the initiation of legal or regulatory proceedings against us , and the outcome of any legal or regulatory proceedings , such as : adverse actions related to present or past business practices common in businesses in which we compete ; adverse decisions in 35 significant actions including , but not limited to , actions brought by federal and state authorities and class action cases ; new decisions that result in changes in law ; and unexpected trial court rulings ; · changes in or sustained low interest rates causing a reduction in investment income , the interest margins of our businesses , estimated gross profits and demand for our products ; · a decline in the equity markets causing a reduction in the sales of our subsidiaries ' products , a reduction of asset-based fees that our subsidiaries charge on various investment and insurance products , an acceleration of the net amortization of deferred acquisition costs ( “ dac ” ) , value of business acquired ( “ voba ” ) , deferred sales inducements ( “ dsi ” ) and deferred front-end loads ( “ dfel ” ) and an increase in liabilities related to guaranteed benefit features of our subsidiaries ' variable annuity products ; · ineffectiveness of our risk management policies and procedures , including various hedging strategies used to offset the effect of changes in the value of liabilities due to changes in the level and volatility of the equity markets and interest rates ; · a deviation in actual experience regarding future persistency , mortality , morbidity , interest rates or equity market returns from the assumptions used in pricing our subsidiaries ' products , in establishing related insurance reserves and in the net amortization of dac , voba , dsi and dfel , which may reduce future earnings ; · changes in gaap , including the potential incorporation of international financial reporting standards ( “ ifrs ” ) into the u.s. financial reporting system , that may result in unanticipated changes to our net income ; · lowering of one or more of our debt ratings issued by nationally recognized statistical rating organizations and the adverse effect such action may have on our ability to raise capital and on our liquidity and financial condition ; · lowering of one or more of the insurer financial strength ratings of our insurance subsidiaries and the adverse effect such action may have on the premium writings , policy retention , profitability of our insurance subsidiaries and liquidity ; · significant credit , accounting , fraud , corporate governance or other issues that may adversely affect the value of certain investments in our portfolios , as well as counterparties to which we are exposed to credit risk , requiring that we realize losses on investments ; · the effect of acquisitions and divestitures , restructurings , product withdrawals and other unusual items ; · the adequacy and collectibility of reinsurance that we have purchased ; · acts of terrorism , a pandemic , war or other man-made and natural catastrophes that may adversely affect our businesses and the cost and availability of reinsurance ; · competitive conditions , including pricing pressures , new product offerings and the emergence of new competitors , that may affect the level of premiums and fees that our subsidiaries can charge for their products ; · the unknown effect on our subsidiaries ' businesses resulting from changes in the demographics of their client base , as aging baby-boomers move from the asset-accumulation stage to the asset-distribution stage of life ; and · loss of key management , financial planners or wholesalers . the risks included here are not exhaustive . other sections of this report , our quarterly reports on form 10-q , current reports on form 8-k and other documents filed with the securities and exchange commission ( “ sec ” ) include additional factors that could affect our businesses and financial performance , including “ part i – item 1a . risk factors , ” “ part ii – item 7a . quantitative and qualitative disclosures about market risk ” and the risk discussions included in this section under “ critical accounting policies and estimates , ” “ consolidated investments ” and “ reinsurance , ” which are incorporated herein by reference . moreover , we operate in a rapidly changing and competitive environment . new risk factors emerge from time to time , and it is not possible for management to predict all such risk factors . story_separator_special_tag 2010-26 , “ accounting for costs associated with acquiring or renewing insurance contracts ” ( referred to herein as the “ new dac methodology ” ) , which clarifies the types of costs incurred by an insurance entity that can be capitalized in the acquisition of insurance contracts . only those costs incurred that result directly from and are essential to the successful acquisition of new or renewal insurance contracts may be capitalized as deferrable acquisition costs . this determination of deferability must be made on a contract-level basis . this new dac methodology contrasts to the existing guidance we follow that defines deferrable acquisition costs as costs that vary with and are related primarily to new or renewal business , regardless of whether the acquisition efforts were successful or unsuccessful . some examples of acquisition costs that remain subject to deferral as part of the new dac methodology include the following : · employee , agent or broker commissions for successful contract acquisitions ; · wholesaler production bonuses for successful contract acquisitions ; · renewal commissions and bonuses to agents or brokers ; · medical and inspection fees for successful contract acquisitions ; · premium-related taxes and assessments ; and · a portion of the salaries and benefits of certain employees involved in the underwriting , contract issuance and processing , medical and inspection and sales force contract selling functions related to the successful issuance or renewal of an insurance contract . all other acquisition-related costs , including costs incurred by the insurer for soliciting potential customers , market research , training , administration , management of distribution and underwriting functions , unsuccessful acquisition or renewal efforts and product development , are considered non-deferrable acquisition costs and must be expensed in the period incurred . in addition , the following indirect costs are considered non-deferrable acquisition costs as part of the new dac methodology and must be charged to expense in the period incurred : · administrative costs ; · rent ; · depreciation ; · occupancy costs ; · equipment costs ( including data processing equipment dedicated to acquiring insurance contracts ) ; and · other general overhead . we will adopt the new dac methodology effective january 1 , 2012 , and have elected to apply the guidance retrospectively . we expect that our adoption of the new dac methodology will result in an overall reduction in deferrable acquisition costs , partially offset by lower dac amortization , in each of our business segments . we currently estimate that retrospective adoption will result in the restatement of all years presented with a cumulative effect adjustment to the opening balance of retained earnings for the earliest period presented of approximately $ 950 million to $ 1.15 billion . in addition , the adoption of this accounting guidance will result in a lower dac adjustment associated with unrealized gains and losses on afs securities and certain derivatives ; therefore , we will also adjust these dac balances through a cumulative effect adjustment to the opening balance of accumulated other comprehensive income ( loss ) ( “ aoci ” ) . this adjustment is dependent on our unrealized position as of the date of adoption . we believe that the total of our segment results would have declined by approximately 5 % to 7 % for 2011 had we applied the provisions of the new dac methodology during 2011. this decline would not have been uniform across our segments as the effect on the life insurance segment would have been greater due to its products having longer contract lives and its more significant voba balance that is not affected by the new methodology . this estimate does not include changes that management may make to mitigate the effects of this new dac methodology . amortization deferrable acquisition costs for variable annuity and deferred fixed annuity contracts and ul and vul policies are amortized over the lives of the contracts in relation to the incidence of estimated gross profits ( “ egps ” ) derived from the contracts . broker commissions or broker-dealer expenses , which vary with and are related to sales of mutual fund products , respectively , are expensed as incurred . for our traditional products , we amortized deferrable acquisition costs either on a straight-line basis or as a level percent of premium of the related contracts , depending on the block of business . egps vary based on a number of sources including policy persistency , mortality , fee income , investment margins , expense margins and realized gains and losses on investments , including assumptions about the expected level of credit-related losses . each of these sources of profit is , in turn , driven by other factors . for example , assets under management and the spread between earned and 41 credited rates drive investment margins ; net amount at risk ( “ nar ” ) drives the level of cost of insurance ( “ coi ” ) charges and reinsurance premiums . the level of separate account assets under management is driven by changes in the financial markets ( equity and bond markets , hereafter referred to collectively as “ equity markets ” ) and net flows . realized gains and losses on investments include amounts resulting from differences in the actual level of impairments and the levels assumed in calculating egps . we amortize dac , voba , dsi and dfel in proportion to our egps for interest-sensitive products . when actual gross profits are higher in the period than egps , we recognize more amortization than planned . when actual gross profits are lower in the period than egps , we recognize less amortization than planned . in a calendar year where the gross profits for a certain group of policies , or “ cohorts , ” are negative , our actuarial process limits , or floors , the amortization expense offset to zero . for a discussion of the periods

liquidity and capital resources details of our outstanding debt obligations can be found in part ii , item 8. financial statements and supplementary data ; note 9 – debt in the consolidated financial statements . we believe that we have sufficient liquidity to support our ongoing operations , including the erp implementation , and to invest in future growth to create value for our shareholders . operating cash flows and the $ 1.2 billion senior credit facility are our primary sources of liquidity and are expected to be used for , among other things , payment of interest and principal on our long-term debt obligations and capital expenditures necessary to support growth and productivity improvements , including those associated with our erp implementation . to the extent our liquidity needs prove to be greater than expected or cash generated from operations is less than anticipated , and cash on hand or credit availability is insufficient or we are in breach under the existing credit agreement , we would need to seek additional financing from alternative sources , including approaching the capital markets , in order to provide additional liquidity . on february 25 , 2020 , we executed the fifth amendment which amended the credit agreement to , among other things : increase the maximum allowable consolidated leverage ratio to 5.00 to 1.00 until the end of the first quarter of 2022 and 4.50 to 1.00 thereafter . upon the consummation of the divesture of the esol disposal group , each of the foregoing maximum permitted consolidated leverage ratio levels will step down to 4.75 to 1.00 and 4.25 to 1.00 , respectively . 2019 10-k annual report stericycle , inc. 57 part ii allow for continuation of the $ 200 million of cash add backs to ebitda through december 31 , 2020 , and addbacks of $ 100 million until december 31 , 2021 , with no further addbacks thereafter .

refinance existing debt as it matures ; · because of our holding company structure , the inability of our subsidiaries to pay dividends to the holding company in sufficient amounts could harm the holding company 's ability to meet its obligations ; · legislative , regulatory or tax changes , both domestic and foreign , that affect the cost of , or demand for , our subsidiaries ' products , the required amount of reserves and or surplus , or otherwise affect our ability to conduct business , including changes to statutory reserve requirements related to secondary guarantees under universal life , such as a change to reserve calculations under actuarial guideline 38 ( also known as the application of the valuation of life insurance policies model regulation , or “ ag38 ” ) , and variable annuity products under actuarial guideline 43 ( also known as commissioners annuity reserve valuation method for variable annuities , or “ ag43 ” ) ; restrictions on revenue sharing and 12b-1 payments ; and the potential for u.s. federal tax reform ; · uncertainty about the effect of rules and regulations to be promulgated under the dodd-frank wall street reform and consumer protection act on us and the economy and the financial services sector in particular ; · the initiation of legal or regulatory proceedings against us , and the outcome of any legal or regulatory proceedings , such as : adverse actions related to present or past business practices common in businesses in which we compete ; adverse decisions in 35 significant actions including , but not limited to , actions brought by federal and state authorities and class action cases ; new decisions that result in changes in law ; and unexpected trial court rulings ; · changes in or sustained low interest rates causing a reduction in investment income , the interest margins of our businesses , estimated gross profits and demand for our products ; · a decline in the equity markets causing a reduction in the sales of our subsidiaries ' products , a reduction of asset-based fees that our subsidiaries charge on various investment and insurance products , an acceleration of the net amortization of deferred acquisition costs ( “ dac ” ) , value of business acquired ( “ voba ” ) , deferred sales inducements ( “ dsi ” ) and deferred front-end loads ( “ dfel ” ) and an increase in liabilities related to guaranteed benefit features of our subsidiaries ' variable annuity products ; · ineffectiveness of our risk management policies and procedures , including various hedging strategies used to offset the effect of changes in the value of liabilities due to changes in the level and volatility of the equity markets and interest rates ; · a deviation in actual experience regarding future persistency , mortality , morbidity , interest rates or equity market returns from the assumptions used in pricing our subsidiaries ' products , in establishing related insurance reserves and in the net amortization of dac , voba , dsi and dfel , which may reduce future earnings ; · changes in gaap , including the potential incorporation of international financial reporting standards ( “ ifrs ” ) into the u.s. financial reporting system , that may result in unanticipated changes to our net income ; · lowering of one or more of our debt ratings issued by nationally recognized statistical rating organizations and the adverse effect such action may have on our ability to raise capital and on our liquidity and financial condition ; · lowering of one or more of the insurer financial strength ratings of our insurance subsidiaries and the adverse effect such action may have on the premium writings , policy retention , profitability of our insurance subsidiaries and liquidity ; · significant credit , accounting , fraud , corporate governance or other issues that may adversely affect the value of certain investments in our portfolios , as well as counterparties to which we are exposed to credit risk , requiring that we realize losses on investments ; · the effect of acquisitions and divestitures , restructurings , product withdrawals and other unusual items ; · the adequacy and collectibility of reinsurance that we have purchased ; · acts of terrorism , a pandemic , war or other man-made and natural catastrophes that may adversely affect our businesses and the cost and availability of reinsurance ; · competitive conditions , including pricing pressures , new product offerings and the emergence of new competitors , that may affect the level of premiums and fees that our subsidiaries can charge for their products ; · the unknown effect on our subsidiaries ' businesses resulting from changes in the demographics of their client base , as aging baby-boomers move from the asset-accumulation stage to the asset-distribution stage of life ; and · loss of key management , financial planners or wholesalers . the risks included here are not exhaustive . other sections of this report , our quarterly reports on form 10-q , current reports on form 8-k and other documents filed with the securities and exchange commission ( “ sec ” ) include additional factors that could affect our businesses and financial performance , including “ part i – item 1a . risk factors , ” “ part ii – item 7a . quantitative and qualitative disclosures about market risk ” and the risk discussions included in this section under “ critical accounting policies and estimates , ” “ consolidated investments ” and “ reinsurance , ” which are incorporated herein by reference . moreover , we operate in a rapidly changing and competitive environment . new risk factors emerge from time to time , and it is not possible for management to predict all such risk factors . story_separator_special_tag 2010-26 , “ accounting for costs associated with acquiring or renewing insurance contracts ” ( referred to herein as the “ new dac methodology ” ) , which clarifies the types of costs incurred by an insurance entity that can be capitalized in the acquisition of insurance contracts . only those costs incurred that result directly from and are essential to the successful acquisition of new or renewal insurance contracts may be capitalized as deferrable acquisition costs . this determination of deferability must be made on a contract-level basis . this new dac methodology contrasts to the existing guidance we follow that defines deferrable acquisition costs as costs that vary with and are related primarily to new or renewal business , regardless of whether the acquisition efforts were successful or unsuccessful . some examples of acquisition costs that remain subject to deferral as part of the new dac methodology include the following : · employee , agent or broker commissions for successful contract acquisitions ; · wholesaler production bonuses for successful contract acquisitions ; · renewal commissions and bonuses to agents or brokers ; · medical and inspection fees for successful contract acquisitions ; · premium-related taxes and assessments ; and · a portion of the salaries and benefits of certain employees involved in the underwriting , contract issuance and processing , medical and inspection and sales force contract selling functions related to the successful issuance or renewal of an insurance contract . all other acquisition-related costs , including costs incurred by the insurer for soliciting potential customers , market research , training , administration , management of distribution and underwriting functions , unsuccessful acquisition or renewal efforts and product development , are considered non-deferrable acquisition costs and must be expensed in the period incurred . in addition , the following indirect costs are considered non-deferrable acquisition costs as part of the new dac methodology and must be charged to expense in the period incurred : · administrative costs ; · rent ; · depreciation ; · occupancy costs ; · equipment costs ( including data processing equipment dedicated to acquiring insurance contracts ) ; and · other general overhead . we will adopt the new dac methodology effective january 1 , 2012 , and have elected to apply the guidance retrospectively . we expect that our adoption of the new dac methodology will result in an overall reduction in deferrable acquisition costs , partially offset by lower dac amortization , in each of our business segments . we currently estimate that retrospective adoption will result in the restatement of all years presented with a cumulative effect adjustment to the opening balance of retained earnings for the earliest period presented of approximately $ 950 million to $ 1.15 billion . in addition , the adoption of this accounting guidance will result in a lower dac adjustment associated with unrealized gains and losses on afs securities and certain derivatives ; therefore , we will also adjust these dac balances through a cumulative effect adjustment to the opening balance of accumulated other comprehensive income ( loss ) ( “ aoci ” ) . this adjustment is dependent on our unrealized position as of the date of adoption . we believe that the total of our segment results would have declined by approximately 5 % to 7 % for 2011 had we applied the provisions of the new dac methodology during 2011. this decline would not have been uniform across our segments as the effect on the life insurance segment would have been greater due to its products having longer contract lives and its more significant voba balance that is not affected by the new methodology . this estimate does not include changes that management may make to mitigate the effects of this new dac methodology . amortization deferrable acquisition costs for variable annuity and deferred fixed annuity contracts and ul and vul policies are amortized over the lives of the contracts in relation to the incidence of estimated gross profits ( “ egps ” ) derived from the contracts . broker commissions or broker-dealer expenses , which vary with and are related to sales of mutual fund products , respectively , are expensed as incurred . for our traditional products , we amortized deferrable acquisition costs either on a straight-line basis or as a level percent of premium of the related contracts , depending on the block of business . egps vary based on a number of sources including policy persistency , mortality , fee income , investment margins , expense margins and realized gains and losses on investments , including assumptions about the expected level of credit-related losses . each of these sources of profit is , in turn , driven by other factors . for example , assets under management and the spread between earned and 41 credited rates drive investment margins ; net amount at risk ( “ nar ” ) drives the level of cost of insurance ( “ coi ” ) charges and reinsurance premiums . the level of separate account assets under management is driven by changes in the financial markets ( equity and bond markets , hereafter referred to collectively as “ equity markets ” ) and net flows . realized gains and losses on investments include amounts resulting from differences in the actual level of impairments and the levels assumed in calculating egps . we amortize dac , voba , dsi and dfel in proportion to our egps for interest-sensitive products . when actual gross profits are higher in the period than egps , we recognize more amortization than planned . when actual gross profits are lower in the period than egps , we recognize less amortization than planned . in a calendar year where the gross profits for a certain group of policies , or “ cohorts , ” are negative , our actuarial process limits , or floors , the amortization expense offset to zero . for a discussion of the periods

liquidity and capital resources sources of liquidity and cash flow liquidity refers to the ability of an enterprise to generate adequate amounts of cash from its normal operations to meet cash requirements with a prudent margin of safety . our principal sources of cash flow from operating activities are insurance premiums and fees and investment income , while sources of cash flows from investing activities result from maturities and sales of invested assets . our operating activities provided cash of $ 1.3 billion , $ 1.7 billion and $ 937 million in 2011 , 2010 and 2009 , respectively . when considering our liquidity and cash flow , it is important to distinguish between the needs of our insurance subsidiaries and the needs of the holding company , lnc . as a holding company with no operations of its own , lnc derives its cash primarily from its operating subsidiaries . the sources of liquidity of the holding company are principally comprised of dividends and interest payments from subsidiaries , augmented by holding company short-term investments , bank lines of credit and the ongoing availability of long-term public financing under an sec-filed shelf registration statement . these sources of liquidity and cash flow support the general corporate needs of the holding company , including its common and preferred stock dividends , interest and debt service , funding of callable securities , securities repurchases , acquisitions and investment in core businesses . our cash flows associated with collateral received from and posted with counterparties change as the market value of the underlying derivative contract changes . as the value of a derivative asset declines ( or increases ) , the collateral required to be posted by our counterparties would also decline ( or increase ) .

this segment also includes the results of j. alexander 's , inc. ( `` j. alexander 's `` ) through september 28 , 2015 , the date it was distributed to fnfv shareholders . see the recent developments section below for further discussion of the distribution of j. alexander 's . on january 25 , 2016 , substantially all of the assets of the max & erma 's restaurant concept were sold pursuant to an asset purchase agreement . fnfv corporate and other . this segment primarily consists of our share in the operations of certain equity investments , including ceridian , as well as consolidated investments , including digital insurance in which we own 96 % , and other smaller operations which are not title related . recent developments on february 18 , 2016 , our board of directors approved a new fnfv group three-year stock repurchase program , effective march 1 , 2016 , under which we may repurchase up to 15 million shares of fnfv group common stock . purchases may be made from time to time by us in the open market at prevailing market prices or in privately negotiated transactions through february 28 , 2019. on february 11 , 2016 , we announced that we are considering alternatives to the spin-off of abrh to fnfv shareholders previously announced on july 30 , 2015 . 36 on january 20 , 2016 , we entered into two interest rate swap agreements to hedge forecasted monthly interest rate payments on $ 400.0 million of our floating rate debt ( $ 200.0 million notional value each ) ( the “ swap agreements ” ) . the swap agreements have been designated as cash flow hedging instruments . under the terms of the swap agreements , we receive payments based on the 1-month libor rate and pay a weighted average fixed rate of 1.01 % . the effective term for the swap agreements is february 1 , 2016 through january 31 , 2019. beginning in october 2015 through december 31 , 2015 , we purchased approximately 2.2 million shares of del frisco restaurant group ( `` del frisco 's `` , nasdaq : dfrg ) common stock for a total investment of $ 32 million . subsequent to year-end through february 19 , 2016 , we purchased approximately 0.8 million shares of del frisco 's common stock for $ 12 million . we currently own approximately 13 % of the outstanding common stock of del frisco 's . on september 16 , 2015 , j. alexander 's and fnf entered into a separation and distribution agreement , pursuant to which fnf agreed to distribute one hundred percent ( 100 % ) of its shares of j. alexander 's common stock , on a pro rata basis , to the holders of fnfv common stock . holders of fnfv common stock received , as a distribution from fnf , approximately 0.17272 shares of j. alexander 's common stock for every one share of fnfv common stock held at the close of business on september 22 , 2015 , the record date for the distribution ( the “ distribution ” ) . the distribution was made on september 28 , 2015 . as a result of the distribution , j. alexander 's is now an independent public company and its common stock is listed under the symbol “ jax ” on the new york stock exchange . the distribution was generally tax-free to fnfv shareholders for u.s. federal income tax purposes , except to the extent of any cash received in lieu of j. alexander 's fractional shares . on july 20 , 2015 , we completed the recapitalization of servicelink holdings , llc through a conversion ( the `` servicelink conversion `` ) of $ 505 million of the $ 566 million aggregate preference amount associated with its class a1 participating preferred units into slightly more than 67.3 million class a common units . as a result of the servicelink conversion , our ownership percentage in servicelink holdings , llc increased from 65 % to 79 % . on july 20 , 2015 , our board of directors approved a new fnf group three-year stock repurchase program , effective august 1 , 2015 , under which we may repurchase up to 25 million shares of fnf group common stock . purchases may be made from time to time by us in the open market at prevailing market prices or in privately negotiated transactions through july 31 , 2018. on may 29 , 2015 , black knight completed a redemption ( the `` redemption `` ) of $ 205 million in aggregate principal of its senior notes ( `` black knight senior notes `` ) at a price of 105.750 % . black knight incurred a charge on the redemption of $ 12 million and also reduced the bond premium by $ 7 million for the portion of the premium that relates to the redeemed black knight senior notes , resulting in a net charge on the redemption of $ 5 million . following the redemption , $ 390 million in aggregate principal of black knight senior notes remained outstanding . on may 27 , 2015 , black knight infoserv , llc ( “ bkis ” ) , a subsidiary of black knight , entered into a credit and guaranty agreement ( the “ bkis credit agreement ” ) with an aggregate borrowing capacity of $ 1.6 billion , dated as of may 27 , 2015 , with jpmorgan chase bank , n.a . as administrative agent , the guarantors party thereto , the other agents party thereto and the lenders party thereto . fnf does not provide any guaranty or stock pledge under the bkis credit agreement . story_separator_special_tag restaurant profitability can also be negatively affected by inflationary and regulatory increases in operating costs and other factors . the most significant commodities that may affect our cost of food and beverage are beef , seafood , poultry , and dairy , which accounted for approximately half of our overall cost of food and beverage in the past . generally , temporary increases in these costs are not passed on to guests ; however , in the past , we have adjusted menu prices to compensate for increased costs of a more permanent nature . average weekly sales per restaurant are typically higher in the first and fourth quarters than in other quarters , and we typically generate a disproportionate share of our earnings from operations in the first and fourth quarters . holidays , severe weather and other disruptive conditions may impact sales volumes seasonally in some operating regions . our revenues in future periods will continue to be subject to these and other factors that are beyond our control and , as a result , are likely to fluctuate . critical accounting estimates the accounting estimates described below are those we consider critical in preparing our consolidated financial statements . management is required to make estimates and assumptions that can affect the reported amounts of assets and liabilities and disclosures with respect to contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period . actual amounts could differ from those estimates . see note a of notes to the consolidated financial statements for additional description of the significant accounting policies that have been followed in preparing our consolidated financial statements . reserve for title claim losses . title companies issue two types of policies , owner 's and lender 's policies , since both the new owner and the lender in real estate transactions want to know that their interest in the property is insured against certain title defects outlined in the policy . an owner 's policy insures the buyer against such defects for as long as he or she owns the property ( as well as against warranty claims arising out of the sale of the property by such owner ) . a lender 's policy insures the priority of the 40 lender 's security interest over the claims that other parties may have in the property . the maximum amount of liability under a title insurance policy is generally the face amount of the policy plus the cost of defending the insured 's title against an adverse claim , however , occasionally we do incur losses in excess of policy limits . while most non-title forms of insurance , including property and casualty , provide for the assumption of risk of loss arising out of unforeseen future events , title insurance serves to protect the policyholder from risk of loss for events that predate the issuance of the policy . unlike many other forms of insurance , title insurance requires only a one-time premium for continuous coverage until another policy is warranted due to changes in property circumstances arising from refinance , resale , additional liens , or other events . unless we issue the subsequent policy , we receive no notice that our exposure under our policy has ended and , as a result , we are unable to track the actual terminations of our exposures . our reserve for title claim losses includes reserves for known claims as well as for losses that have been incurred but not yet reported to us ( “ ibnr ” ) , net of recoupments . we reserve for each known claim based on our review of the estimated amount of the claim and the costs required to settle the claim . reserves for ibnr claims are estimates that are established at the time the premium revenue is recognized and are based upon historical experience and other factors , including industry trends , claim loss history , legal environment , geographic considerations , and the types of policies written . we also reserve for losses arising from closing and disbursement functions due to fraud or operational error . the table below summarizes our reserves for known claims and incurred but not reported claims related to title insurance : replace_table_token_16_th although claims against title insurance policies can be reported relatively soon after the policy has been issued , claims may be reported many years later . historically , approximately 60 % of claims are paid within approximately five years of the policy being written . by their nature , claims are often complex , vary greatly in dollar amounts and are affected by economic and market conditions , as well as the legal environment existing at the time of settlement of the claims . estimating future title loss payments is difficult because of the complex nature of title claims , the long periods of time over which claims are paid , significantly varying dollar amounts of individual claims and other factors . our process for recording our reserves for title claim losses begins with analysis of our loss provision rate . we forecast ultimate losses for each policy year based upon historical policy year loss emergence and development patterns and adjust these to reflect policy year and policy type differences which affect the timing , frequency and severity of claims . we also use a technique that relies on historical loss emergence and on a premium-based exposure measurement . the latter technique is particularly applicable to the most recent policy years , which have few reported claims relative to an expected ultimate claim volume . after considering historical claim losses , reporting patterns and current market information , and analyzing quantitative and qualitative data provided by our legal , claims and underwriting departments , we determine a loss provision rate , which is recorded as a percentage of current title premiums . this loss

liquidity and capital resources sources of liquidity and cash flow liquidity refers to the ability of an enterprise to generate adequate amounts of cash from its normal operations to meet cash requirements with a prudent margin of safety . our principal sources of cash flow from operating activities are insurance premiums and fees and investment income , while sources of cash flows from investing activities result from maturities and sales of invested assets . our operating activities provided cash of $ 1.3 billion , $ 1.7 billion and $ 937 million in 2011 , 2010 and 2009 , respectively . when considering our liquidity and cash flow , it is important to distinguish between the needs of our insurance subsidiaries and the needs of the holding company , lnc . as a holding company with no operations of its own , lnc derives its cash primarily from its operating subsidiaries . the sources of liquidity of the holding company are principally comprised of dividends and interest payments from subsidiaries , augmented by holding company short-term investments , bank lines of credit and the ongoing availability of long-term public financing under an sec-filed shelf registration statement . these sources of liquidity and cash flow support the general corporate needs of the holding company , including its common and preferred stock dividends , interest and debt service , funding of callable securities , securities repurchases , acquisitions and investment in core businesses . our cash flows associated with collateral received from and posted with counterparties change as the market value of the underlying derivative contract changes . as the value of a derivative asset declines ( or increases ) , the collateral required to be posted by our counterparties would also decline ( or increase ) .

this segment also includes the results of j. alexander 's , inc. ( `` j. alexander 's `` ) through september 28 , 2015 , the date it was distributed to fnfv shareholders . see the recent developments section below for further discussion of the distribution of j. alexander 's . on january 25 , 2016 , substantially all of the assets of the max & erma 's restaurant concept were sold pursuant to an asset purchase agreement . fnfv corporate and other . this segment primarily consists of our share in the operations of certain equity investments , including ceridian , as well as consolidated investments , including digital insurance in which we own 96 % , and other smaller operations which are not title related . recent developments on february 18 , 2016 , our board of directors approved a new fnfv group three-year stock repurchase program , effective march 1 , 2016 , under which we may repurchase up to 15 million shares of fnfv group common stock . purchases may be made from time to time by us in the open market at prevailing market prices or in privately negotiated transactions through february 28 , 2019. on february 11 , 2016 , we announced that we are considering alternatives to the spin-off of abrh to fnfv shareholders previously announced on july 30 , 2015 . 36 on january 20 , 2016 , we entered into two interest rate swap agreements to hedge forecasted monthly interest rate payments on $ 400.0 million of our floating rate debt ( $ 200.0 million notional value each ) ( the “ swap agreements ” ) . the swap agreements have been designated as cash flow hedging instruments . under the terms of the swap agreements , we receive payments based on the 1-month libor rate and pay a weighted average fixed rate of 1.01 % . the effective term for the swap agreements is february 1 , 2016 through january 31 , 2019. beginning in october 2015 through december 31 , 2015 , we purchased approximately 2.2 million shares of del frisco restaurant group ( `` del frisco 's `` , nasdaq : dfrg ) common stock for a total investment of $ 32 million . subsequent to year-end through february 19 , 2016 , we purchased approximately 0.8 million shares of del frisco 's common stock for $ 12 million . we currently own approximately 13 % of the outstanding common stock of del frisco 's . on september 16 , 2015 , j. alexander 's and fnf entered into a separation and distribution agreement , pursuant to which fnf agreed to distribute one hundred percent ( 100 % ) of its shares of j. alexander 's common stock , on a pro rata basis , to the holders of fnfv common stock . holders of fnfv common stock received , as a distribution from fnf , approximately 0.17272 shares of j. alexander 's common stock for every one share of fnfv common stock held at the close of business on september 22 , 2015 , the record date for the distribution ( the “ distribution ” ) . the distribution was made on september 28 , 2015 . as a result of the distribution , j. alexander 's is now an independent public company and its common stock is listed under the symbol “ jax ” on the new york stock exchange . the distribution was generally tax-free to fnfv shareholders for u.s. federal income tax purposes , except to the extent of any cash received in lieu of j. alexander 's fractional shares . on july 20 , 2015 , we completed the recapitalization of servicelink holdings , llc through a conversion ( the `` servicelink conversion `` ) of $ 505 million of the $ 566 million aggregate preference amount associated with its class a1 participating preferred units into slightly more than 67.3 million class a common units . as a result of the servicelink conversion , our ownership percentage in servicelink holdings , llc increased from 65 % to 79 % . on july 20 , 2015 , our board of directors approved a new fnf group three-year stock repurchase program , effective august 1 , 2015 , under which we may repurchase up to 25 million shares of fnf group common stock . purchases may be made from time to time by us in the open market at prevailing market prices or in privately negotiated transactions through july 31 , 2018. on may 29 , 2015 , black knight completed a redemption ( the `` redemption `` ) of $ 205 million in aggregate principal of its senior notes ( `` black knight senior notes `` ) at a price of 105.750 % . black knight incurred a charge on the redemption of $ 12 million and also reduced the bond premium by $ 7 million for the portion of the premium that relates to the redeemed black knight senior notes , resulting in a net charge on the redemption of $ 5 million . following the redemption , $ 390 million in aggregate principal of black knight senior notes remained outstanding . on may 27 , 2015 , black knight infoserv , llc ( “ bkis ” ) , a subsidiary of black knight , entered into a credit and guaranty agreement ( the “ bkis credit agreement ” ) with an aggregate borrowing capacity of $ 1.6 billion , dated as of may 27 , 2015 , with jpmorgan chase bank , n.a . as administrative agent , the guarantors party thereto , the other agents party thereto and the lenders party thereto . fnf does not provide any guaranty or stock pledge under the bkis credit agreement . story_separator_special_tag restaurant profitability can also be negatively affected by inflationary and regulatory increases in operating costs and other factors . the most significant commodities that may affect our cost of food and beverage are beef , seafood , poultry , and dairy , which accounted for approximately half of our overall cost of food and beverage in the past . generally , temporary increases in these costs are not passed on to guests ; however , in the past , we have adjusted menu prices to compensate for increased costs of a more permanent nature . average weekly sales per restaurant are typically higher in the first and fourth quarters than in other quarters , and we typically generate a disproportionate share of our earnings from operations in the first and fourth quarters . holidays , severe weather and other disruptive conditions may impact sales volumes seasonally in some operating regions . our revenues in future periods will continue to be subject to these and other factors that are beyond our control and , as a result , are likely to fluctuate . critical accounting estimates the accounting estimates described below are those we consider critical in preparing our consolidated financial statements . management is required to make estimates and assumptions that can affect the reported amounts of assets and liabilities and disclosures with respect to contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period . actual amounts could differ from those estimates . see note a of notes to the consolidated financial statements for additional description of the significant accounting policies that have been followed in preparing our consolidated financial statements . reserve for title claim losses . title companies issue two types of policies , owner 's and lender 's policies , since both the new owner and the lender in real estate transactions want to know that their interest in the property is insured against certain title defects outlined in the policy . an owner 's policy insures the buyer against such defects for as long as he or she owns the property ( as well as against warranty claims arising out of the sale of the property by such owner ) . a lender 's policy insures the priority of the 40 lender 's security interest over the claims that other parties may have in the property . the maximum amount of liability under a title insurance policy is generally the face amount of the policy plus the cost of defending the insured 's title against an adverse claim , however , occasionally we do incur losses in excess of policy limits . while most non-title forms of insurance , including property and casualty , provide for the assumption of risk of loss arising out of unforeseen future events , title insurance serves to protect the policyholder from risk of loss for events that predate the issuance of the policy . unlike many other forms of insurance , title insurance requires only a one-time premium for continuous coverage until another policy is warranted due to changes in property circumstances arising from refinance , resale , additional liens , or other events . unless we issue the subsequent policy , we receive no notice that our exposure under our policy has ended and , as a result , we are unable to track the actual terminations of our exposures . our reserve for title claim losses includes reserves for known claims as well as for losses that have been incurred but not yet reported to us ( “ ibnr ” ) , net of recoupments . we reserve for each known claim based on our review of the estimated amount of the claim and the costs required to settle the claim . reserves for ibnr claims are estimates that are established at the time the premium revenue is recognized and are based upon historical experience and other factors , including industry trends , claim loss history , legal environment , geographic considerations , and the types of policies written . we also reserve for losses arising from closing and disbursement functions due to fraud or operational error . the table below summarizes our reserves for known claims and incurred but not reported claims related to title insurance : replace_table_token_16_th although claims against title insurance policies can be reported relatively soon after the policy has been issued , claims may be reported many years later . historically , approximately 60 % of claims are paid within approximately five years of the policy being written . by their nature , claims are often complex , vary greatly in dollar amounts and are affected by economic and market conditions , as well as the legal environment existing at the time of settlement of the claims . estimating future title loss payments is difficult because of the complex nature of title claims , the long periods of time over which claims are paid , significantly varying dollar amounts of individual claims and other factors . our process for recording our reserves for title claim losses begins with analysis of our loss provision rate . we forecast ultimate losses for each policy year based upon historical policy year loss emergence and development patterns and adjust these to reflect policy year and policy type differences which affect the timing , frequency and severity of claims . we also use a technique that relies on historical loss emergence and on a premium-based exposure measurement . the latter technique is particularly applicable to the most recent policy years , which have few reported claims relative to an expected ultimate claim volume . after considering historical claim losses , reporting patterns and current market information , and analyzing quantitative and qualitative data provided by our legal , claims and underwriting departments , we determine a loss provision rate , which is recorded as a percentage of current title premiums . this loss

cash requirements . our current cash requirements include personnel costs , operating expenses , claim payments , taxes , payments of interest and principal on our debt , capital expenditures , business acquisitions , stock repurchases and dividends on our common stock . we paid dividends of $ 0.80 per share during 2015 , or approximately $ 220 million . on february 3 , 2016 , our board of directors formally declared a $ 0.21 per share cash dividend that is payable on march 31 , 2016 to fnf group shareholders of record as of march 17 , 2016 . there are no restrictions on our retained earnings regarding our ability to pay dividends to shareholders , although there are limits on the ability of certain subsidiaries to pay dividends to us , as described below . the declaration of any future dividends is at the discretion of our board of directors . additional uses of cash flow are expected to include stock repurchases , acquisitions , and debt repayments . we continually assess our capital allocation strategy , including decisions relating to the amount of our dividend , reducing debt , repurchasing our stock , and or conserving cash . we believe that all anticipated cash requirements for current operations will be met from internally generated funds , through cash dividends from subsidiaries , cash generated by investment securities , potential sales of non-strategic assets , and borrowings on existing credit facilities . our short-term and long-term liquidity requirements are monitored regularly to ensure that we can meet our cash requirements . we forecast the needs of all of our subsidiaries and periodically review their short-term and long-term projected sources and uses of funds , as well as the asset , liability , investment and cash flow assumptions underlying such forecasts .

at december 31 , 2016 , the rbc ratio for our traditional u.s. insurance subsidiaries , calculated on a weighted average basis using the naic company action level formula , was above 400 percent , in line with our expectations and generally consistent with the prior year end . during 2016 , we repurchased 11.9 million shares of unum group common stock under our share repurchase program , at a cost of approximately $ 403 million . our weighted average common shares outstanding , assuming dilution , equaled 236.0 million for 2016 compared to 247.9 million for 2015 , reflecting our capital management strategy of returning capital to shareholders through repurchases of our common stock . during 2016 we also increased our dividends to shareholders 8.1 percent on an annualized basis . as of december 31 , 2016 , unum group and our intermediate holding companies held fixed maturity securities , short-term investments , and cash of $ 594 million , excluding amounts committed for subsidiary contributions . 33 u.k. referendum during 2016 , the u.k. held a referendum and voted to leave the eu . the u.k. subsequently indicated that it will initiate the withdrawal process by the end of march 2017. assuming the u.k. initiates the withdrawal process by giving notice that it is withdrawing from the eu , the u.k. and the eu will negotiate a withdrawal agreement during a maximum two-year period . we may see some dampening of growth in the u.k. due to the current disruption and uncertainty in the u.k. economy . we may experience volatility in the fair values of our investments in u.k. and eu-based issuers , but we do not expect a material increase in other-than-temporary impairments or defaults , nor do we believe this volatility will impact our ability to hold these investments . the magnitude and longevity of potential negative economic impacts on our growth will depend on the agreements reached by the u.k. and eu as a result of exit negotiations and the resulting response of the u.k. marketplace . there are currently no indications that capital requirements for our u.k. operations will change , but economic conditions may cause volatility in our solvency ratios . our reported consolidated financial results may continue to be unfavorably impacted by the weakening of the british pound sterling . further discussion is contained herein in this item 7 . 2016 and 2015 acquisitions of business in august 2016 , we acquired 100 percent of the shares and voting interests in h & j capital , l.l.c . , parent of starmount life insurance company and alwayscare benefits ( which collectively we refer to as starmount ) , for a total cash purchase price of $ 140.3 million plus contingent cash consideration of $ 10.0 million to be paid in two increments of $ 5.0 million each , at 18 and 24 months from the date of acquisition upon satisfaction of certain conditions . starmount life insurance company is an independent provider of dental and vision insurance in the u.s. workplace , and alwayscare benefits is a nationally licensed , third-party administrator . the acquisition of starmount will broaden our employee benefit offerings in the u.s. starmount 's dental and vision products and new dental and vision products to be marketed by unum us are reported in our unum us segment within our supplemental and voluntary product lines . colonial life dental and vision products are expected to be introduced in 2018 and will be reported in our colonial life segment . this acquisition , the results of which are included in our consolidated financial statements for the period subsequent to the date of acquisition , did not have a material impact on revenue , operating results , or sales for 2016. in september 2015 , we acquired 100 percent of the common shares and voting interests in national dental plan limited and associated companies ( national dental ) for a total cash purchase price of £35.9 million or $ 54.3 million . national dental , a leading provider of dental insurance in the u.k. workplace , is reported in our unum uk segment as part of our supplemental product line . the acquisition of national dental extends our market reach , broadening our employee benefit offerings in the u.k. this acquisition , the results of which are included in our financial results and sales for the period subsequent to the date of acquisition , did not have a material impact on revenue , operating results , or sales for 2015. see note 13 of the `` notes to consolidated financial statements `` contained herein in item 8 for further details on the acquisitions . 2014 long-term care reserve increase policy reserves for our long-term care block of business are determined using the gross premium valuation method and , prior to the fourth quarter of 2014 , were valued based on assumptions established as of december 31 , 2011 , the date of the initial loss recognition . gross premium valuation assumptions do not change after the date of loss recognition unless reserves are again determined to be deficient . we undertake a review of policy reserve adequacy annually during the fourth quarter of each year , or more frequently if appropriate , using best estimate assumptions as of the date of the review . included in our fourth quarter of 2014 review was an analysis of our reserve assumptions , including those for the discount rate , mortality and morbidity rates , persistency , and premium rate increases . our analysis of reserve discount rate assumptions considered the continued historic low interest rate environment , future market expectations , and our view of future portfolio yields . the assumptions we established in 2011 were set at a level that we estimated would be sustainable in a low interest rate environment for three to five years , with improvements in market yields beginning after the third year . story_separator_special_tag claim reserves claim reserves are established when a claim is incurred or is estimated to have been incurred but not yet reported ( ibnr ) to us and , as prescribed by gaap , equals our long-term best estimate of the present value of the liability for future claim payments and claim adjustment expenses . a claim reserve is based on actual known facts regarding the claim , such as the benefits available under the applicable policy , the covered benefit period , the age , and , as appropriate , the occupation and cause of disability of the claimant , as well as assumptions derived from our actual historical experience and expected future changes in experience for factors such as the claim duration , discount rate , and policy benefit offsets , including those for social security and other government-based welfare benefits . reserves for ibnr claims , similar to incurred claim reserves , include our assumptions for claim duration and discount rates , but because we do not yet know the facts regarding the specific claims , these reserves are also established based on historical incidence rate assumptions , including claim reporting patterns , the average cost of claims , and the expected volumes of incurred claims . our incurred claim reserves and ibnr claim reserves do not include any provision for the risk of adverse deviation from our assumptions . claim reserves , unlike policy reserves , are subject to revision as current claim experience and projections of future factors affecting claim experience change . each quarter we review our emerging experience to ensure that our claim reserves are appropriate . if we believe , based on our actual experience and our view of future events , that our long-term assumptions need to be modified , we adjust our reserves accordingly with a charge or credit to our current period income . multiple estimation methods exist to establish claim reserve liabilities , with each method having its own advantages and disadvantages . available reserving methods utilized to calculate claim reserves include the tabular reserve method , the paid loss development method , the incurred loss development method , the count and severity method , and the expected claim cost method . no single method is better than the others in all situations and for all product lines . the estimation methods we have chosen are those that we believe produce the most reliable reserves . we use a tabular reserve methodology for our unum us group and individual long-term disability claims and for our closed block group and individual long-term care claims that have been reported . under the tabular reserve methodology , reserves for reported claims are based on certain characteristics of the actual reported claimants , such as age , length of time disabled , and medical diagnosis , as well as assumptions regarding claim duration , discount rate , and policy benefit offsets . we believe the tabular reserve method is the most accurate to calculate long-term liabilities and allows us to use the most available known facts about each claim . ibnr claim reserves for our long-term products are calculated using the count and severity method using historical patterns of the claims to be reported and the associated claim costs . for unum us group short-term disability products , an estimate of the value of future payments to be made on claims already submitted , as well as on ibnr claims , is determined in aggregate using a paid loss development method rather than on the individual claimant basis that we use for reported claims on long-term products . the average length of time between the event triggering a claim under a policy and the final resolution of those claims is much shorter for these products than for our long-term liabilities and results in less estimation variability . claim reserves for unum us group life and accidental death and dismemberment products are related primarily to death claims reported but not yet paid , ibnr death claims , and a liability for waiver of premium benefits . the death claim reserve is based on the actual face amount to be paid , the ibnr reserve is calculated using the paid loss development method , and the waiver of premium benefits reserve is calculated using the tabular reserve methodology . claim reserves supporting the group and individual dental and vision products reported in our unum us segment have a short claim payout period . as a result , the reserves , which primarily represent ibnr and a small amount of claims pending payment , are calculated using the paid loss development method . claim reserves supporting our unum uk segment are calculated using generally the same methodology that we use for unum us disability and group term life reserves . claim reserves for our unum uk group dependent life product are calculated using discounted cash flows , based on our assumptions for claim duration and discount rates . the assumptions used in calculating claim reserves for this segment are based on standard united kingdom industry experience , adjusted for unum uk 's own experience . 39 the majority of the colonial life segment lines of business have short-term benefits , which generally have less estimation variability than our long-term products because of the shorter claim payout period . our claim reserves for colonial life 's lines of business are predominantly determined using the incurred loss development method based on our own experience . the incurred loss development method uses the historical patterns of payments by loss date to predict future claim payments for each loss date . where the incurred loss development method may not be appropriate , we estimate the incurred claims using an expected claim cost per policy or other measure of exposure . the key assumptions for claim reserves for the colonial life lines of business are : ( 1 ) the timing , rate , and amount of estimated future claim

cash requirements . our current cash requirements include personnel costs , operating expenses , claim payments , taxes , payments of interest and principal on our debt , capital expenditures , business acquisitions , stock repurchases and dividends on our common stock . we paid dividends of $ 0.80 per share during 2015 , or approximately $ 220 million . on february 3 , 2016 , our board of directors formally declared a $ 0.21 per share cash dividend that is payable on march 31 , 2016 to fnf group shareholders of record as of march 17 , 2016 . there are no restrictions on our retained earnings regarding our ability to pay dividends to shareholders , although there are limits on the ability of certain subsidiaries to pay dividends to us , as described below . the declaration of any future dividends is at the discretion of our board of directors . additional uses of cash flow are expected to include stock repurchases , acquisitions , and debt repayments . we continually assess our capital allocation strategy , including decisions relating to the amount of our dividend , reducing debt , repurchasing our stock , and or conserving cash . we believe that all anticipated cash requirements for current operations will be met from internally generated funds , through cash dividends from subsidiaries , cash generated by investment securities , potential sales of non-strategic assets , and borrowings on existing credit facilities . our short-term and long-term liquidity requirements are monitored regularly to ensure that we can meet our cash requirements . we forecast the needs of all of our subsidiaries and periodically review their short-term and long-term projected sources and uses of funds , as well as the asset , liability , investment and cash flow assumptions underlying such forecasts .

at december 31 , 2016 , the rbc ratio for our traditional u.s. insurance subsidiaries , calculated on a weighted average basis using the naic company action level formula , was above 400 percent , in line with our expectations and generally consistent with the prior year end . during 2016 , we repurchased 11.9 million shares of unum group common stock under our share repurchase program , at a cost of approximately $ 403 million . our weighted average common shares outstanding , assuming dilution , equaled 236.0 million for 2016 compared to 247.9 million for 2015 , reflecting our capital management strategy of returning capital to shareholders through repurchases of our common stock . during 2016 we also increased our dividends to shareholders 8.1 percent on an annualized basis . as of december 31 , 2016 , unum group and our intermediate holding companies held fixed maturity securities , short-term investments , and cash of $ 594 million , excluding amounts committed for subsidiary contributions . 33 u.k. referendum during 2016 , the u.k. held a referendum and voted to leave the eu . the u.k. subsequently indicated that it will initiate the withdrawal process by the end of march 2017. assuming the u.k. initiates the withdrawal process by giving notice that it is withdrawing from the eu , the u.k. and the eu will negotiate a withdrawal agreement during a maximum two-year period . we may see some dampening of growth in the u.k. due to the current disruption and uncertainty in the u.k. economy . we may experience volatility in the fair values of our investments in u.k. and eu-based issuers , but we do not expect a material increase in other-than-temporary impairments or defaults , nor do we believe this volatility will impact our ability to hold these investments . the magnitude and longevity of potential negative economic impacts on our growth will depend on the agreements reached by the u.k. and eu as a result of exit negotiations and the resulting response of the u.k. marketplace . there are currently no indications that capital requirements for our u.k. operations will change , but economic conditions may cause volatility in our solvency ratios . our reported consolidated financial results may continue to be unfavorably impacted by the weakening of the british pound sterling . further discussion is contained herein in this item 7 . 2016 and 2015 acquisitions of business in august 2016 , we acquired 100 percent of the shares and voting interests in h & j capital , l.l.c . , parent of starmount life insurance company and alwayscare benefits ( which collectively we refer to as starmount ) , for a total cash purchase price of $ 140.3 million plus contingent cash consideration of $ 10.0 million to be paid in two increments of $ 5.0 million each , at 18 and 24 months from the date of acquisition upon satisfaction of certain conditions . starmount life insurance company is an independent provider of dental and vision insurance in the u.s. workplace , and alwayscare benefits is a nationally licensed , third-party administrator . the acquisition of starmount will broaden our employee benefit offerings in the u.s. starmount 's dental and vision products and new dental and vision products to be marketed by unum us are reported in our unum us segment within our supplemental and voluntary product lines . colonial life dental and vision products are expected to be introduced in 2018 and will be reported in our colonial life segment . this acquisition , the results of which are included in our consolidated financial statements for the period subsequent to the date of acquisition , did not have a material impact on revenue , operating results , or sales for 2016. in september 2015 , we acquired 100 percent of the common shares and voting interests in national dental plan limited and associated companies ( national dental ) for a total cash purchase price of £35.9 million or $ 54.3 million . national dental , a leading provider of dental insurance in the u.k. workplace , is reported in our unum uk segment as part of our supplemental product line . the acquisition of national dental extends our market reach , broadening our employee benefit offerings in the u.k. this acquisition , the results of which are included in our financial results and sales for the period subsequent to the date of acquisition , did not have a material impact on revenue , operating results , or sales for 2015. see note 13 of the `` notes to consolidated financial statements `` contained herein in item 8 for further details on the acquisitions . 2014 long-term care reserve increase policy reserves for our long-term care block of business are determined using the gross premium valuation method and , prior to the fourth quarter of 2014 , were valued based on assumptions established as of december 31 , 2011 , the date of the initial loss recognition . gross premium valuation assumptions do not change after the date of loss recognition unless reserves are again determined to be deficient . we undertake a review of policy reserve adequacy annually during the fourth quarter of each year , or more frequently if appropriate , using best estimate assumptions as of the date of the review . included in our fourth quarter of 2014 review was an analysis of our reserve assumptions , including those for the discount rate , mortality and morbidity rates , persistency , and premium rate increases . our analysis of reserve discount rate assumptions considered the continued historic low interest rate environment , future market expectations , and our view of future portfolio yields . the assumptions we established in 2011 were set at a level that we estimated would be sustainable in a low interest rate environment for three to five years , with improvements in market yields beginning after the third year . story_separator_special_tag claim reserves claim reserves are established when a claim is incurred or is estimated to have been incurred but not yet reported ( ibnr ) to us and , as prescribed by gaap , equals our long-term best estimate of the present value of the liability for future claim payments and claim adjustment expenses . a claim reserve is based on actual known facts regarding the claim , such as the benefits available under the applicable policy , the covered benefit period , the age , and , as appropriate , the occupation and cause of disability of the claimant , as well as assumptions derived from our actual historical experience and expected future changes in experience for factors such as the claim duration , discount rate , and policy benefit offsets , including those for social security and other government-based welfare benefits . reserves for ibnr claims , similar to incurred claim reserves , include our assumptions for claim duration and discount rates , but because we do not yet know the facts regarding the specific claims , these reserves are also established based on historical incidence rate assumptions , including claim reporting patterns , the average cost of claims , and the expected volumes of incurred claims . our incurred claim reserves and ibnr claim reserves do not include any provision for the risk of adverse deviation from our assumptions . claim reserves , unlike policy reserves , are subject to revision as current claim experience and projections of future factors affecting claim experience change . each quarter we review our emerging experience to ensure that our claim reserves are appropriate . if we believe , based on our actual experience and our view of future events , that our long-term assumptions need to be modified , we adjust our reserves accordingly with a charge or credit to our current period income . multiple estimation methods exist to establish claim reserve liabilities , with each method having its own advantages and disadvantages . available reserving methods utilized to calculate claim reserves include the tabular reserve method , the paid loss development method , the incurred loss development method , the count and severity method , and the expected claim cost method . no single method is better than the others in all situations and for all product lines . the estimation methods we have chosen are those that we believe produce the most reliable reserves . we use a tabular reserve methodology for our unum us group and individual long-term disability claims and for our closed block group and individual long-term care claims that have been reported . under the tabular reserve methodology , reserves for reported claims are based on certain characteristics of the actual reported claimants , such as age , length of time disabled , and medical diagnosis , as well as assumptions regarding claim duration , discount rate , and policy benefit offsets . we believe the tabular reserve method is the most accurate to calculate long-term liabilities and allows us to use the most available known facts about each claim . ibnr claim reserves for our long-term products are calculated using the count and severity method using historical patterns of the claims to be reported and the associated claim costs . for unum us group short-term disability products , an estimate of the value of future payments to be made on claims already submitted , as well as on ibnr claims , is determined in aggregate using a paid loss development method rather than on the individual claimant basis that we use for reported claims on long-term products . the average length of time between the event triggering a claim under a policy and the final resolution of those claims is much shorter for these products than for our long-term liabilities and results in less estimation variability . claim reserves for unum us group life and accidental death and dismemberment products are related primarily to death claims reported but not yet paid , ibnr death claims , and a liability for waiver of premium benefits . the death claim reserve is based on the actual face amount to be paid , the ibnr reserve is calculated using the paid loss development method , and the waiver of premium benefits reserve is calculated using the tabular reserve methodology . claim reserves supporting the group and individual dental and vision products reported in our unum us segment have a short claim payout period . as a result , the reserves , which primarily represent ibnr and a small amount of claims pending payment , are calculated using the paid loss development method . claim reserves supporting our unum uk segment are calculated using generally the same methodology that we use for unum us disability and group term life reserves . claim reserves for our unum uk group dependent life product are calculated using discounted cash flows , based on our assumptions for claim duration and discount rates . the assumptions used in calculating claim reserves for this segment are based on standard united kingdom industry experience , adjusted for unum uk 's own experience . 39 the majority of the colonial life segment lines of business have short-term benefits , which generally have less estimation variability than our long-term products because of the shorter claim payout period . our claim reserves for colonial life 's lines of business are predominantly determined using the incurred loss development method based on our own experience . the incurred loss development method uses the historical patterns of payments by loss date to predict future claim payments for each loss date . where the incurred loss development method may not be appropriate , we estimate the incurred claims using an expected claim cost per policy or other measure of exposure . the key assumptions for claim reserves for the colonial life lines of business are : ( 1 ) the timing , rate , and amount of estimated future claim

debt there are no significant financial covenants associated with any of our outstanding debt obligations . we continually monitor our debt covenants to ensure we remain in compliance . we have not observed any current trends that would cause a breach of any debt covenants . maturities , purchases , and retirement of debt our $ 350.0 million 7.125 % senior unsecured notes matured during 2016 , and the remaining balance of our $ 151.9 million 6.85 % senior secured notes matured during 2015. in 2014 , we purchased and retired $ 145.0 million principal of the 6.85 % notes , including a make-whole amount of $ 13.2 million , for a total cost of $ 158.2 million . northwind holdings made principal payments on its floating rate , senior secured notes of $ 64.0 million , $ 74.4 million , and $ 41.6 million in 2016 , 2015 , and 2014 , respectively . issuance of debt in 2016 , we issued a total of $ 600.0 million aggregate principal amount of senior notes : ( i ) $ 350.0 million aggregate principal amount of senior notes due in 2021 with an annual coupon rate of 3.00 % , and ( ii ) $ 250.0 million aggregate principal amount of senior notes due in 2042 with an annual coupon rate of 5.75 % , pursuant to a reopening of the $ 250.0 million aggregate principal amount outstanding of our 5.75 % senior notes due 2042 issued in 2012. both issuances are callable at or above par and rank equally in right of payment with all of our otherunsecured and unsubordinated debt .

excluding the revenue related to the contract buy-out fee , 2006 revenue decreased $ 5.0 million , or 9.7 % , from 2005. the custom folding cartons product line had sales of $ 29.0 million in 2006 , up $ 5.3 million , or 22.6 % , from $ 23.6 million in 2005. the company 's ability to provide short run , highly variable print at competitive prices continues to attract new customers as well as increased sales from existing customers . approximately 57 % of this increase came from new customers , while 43 % came from higher volumes with existing customers . the stock box product line had net sales of $ 10.8 million in 2006 , up $ 1.0 million , or 10.4 % from $ 9.8 million in 2005. stock boxes are primarily sold to confectioners , which drove most of this growth in 2006 . 11 the commercial print-on-demand product line had sales of $ 1.4 million in 2006 , down $ 13.0 million , or 90 % from $ 14.4 million in 2005. until the fourth quarter of 2005 , commercial print product sales were , for the most part , to vistaprint . sales within this product line are primarily the result of the relationships formed in 2006 with nationwide print distributors . the personalized print line had sales of $ 4.8 million in 2006 , up $ 1.4 million , or 41.4 % from $ 3.4 million in 2005. sales growth in the personalized print line was mainly the result of web-based sales from partnerships and other internet stores . cost of products sold as a percentage of revenue , the cost of products sold were 90.7 % , 90.7 % , and 60.3 % for the years 2007 , 2006 , and 2005 , respectively . excluding the amortization of the contract buy-out fee , the cost of products sold was 83.2 % for 2005. cost of products sold remained relatively flat from 2006 to 2007 as the factory remains under-utilized . improvements in yield and lower depreciation expense were offset by higher labor , repair , paperboard and utility cost . during 2007 , we purchased the assets of ddm along with additional mailing services related equipment . we began using the assets purchased from ddm late in the first half of 2007 , and most of the additional mailing services equipment was purchased in late 2007 for anticipated use during 2008. the increase in cost of products sold in 2006 to 90.7 % of revenue from 83.2 % of revenue , excluding the amortization of the contract buy-out fee in 2005 was primarily the result of under-utilization of the factory caused by the decrease in revenue in the commercial print product line due to the loss of the vistaprint business . during 2005 , we added additional capacity for finishing including a stitchmaster , folder , and cutter that allowed us to enlarge our portfolio of commercial print products . during the latter half of 2005 and throughout 2006 , print capacity was underutilized and pressure was placed on our cost of products sold . changing sales mix also contributed to the increase in costs . selling , general and administrative costs selling , general and administrative ( sg & a ) costs were $ 9.9 million in 2007 compared with $ 9.5 million in 2006 , and $ 10.5 million in 2005. as a percentage of total revenue , sg & a costs were 20.4 % , 20.4 % , and 14.7 % , for the years 2007 , 2006 and 2005 respectively . excluding the amortization of the contract buy-out fee , selling , general , and administrative costs were 20.3 % for 2005. the majority of sg & a costs were related to salaries and benefits for sales and administrative personnel . included in 2007 sg & a was $ 0.4 million in costs associated with workforce reduction and $ 0.2 million of accelerated depreciation related to the reduction in useful lives of certain software assets . 2007 sg & a without the workforce reduction costs and accelerated depreciation cost was lower than 2006 due to lower advertising expense , stock option expense and bad debt reserve , partially offset by higher wages due the increased number of employees subsequent to the ddm asset purchase in may 2007. reductions in advertising for website promotion were the primary reason for the decline from 2005 to 2006 , partially offset by stock-based compensation expense of $ 0.4 million due to the adoption of sfas 123 ( r ) in the first quarter of 2006. interest expense interest expense was $ 248 thousand , $ 205 thousand , and $ 216 thousand , respectively , in 2007 , 2006 , and 2005. provision for income taxes our effective income tax rate was 31.2 % in 2007 , 33.8 % in 2006 , and 38.0 % in 2005. we recorded income tax benefits in 2007 and 2006 due to our losses . the 2007 tax benefit was recorded at a rate lower than customary due to the company 's goodwill impairment charge which is a permanent non-deductible expense for income tax purposes . 12 the 2005 tax rate was higher than would be customary due to an increase in the valuation allowance for deferred tax assets related to new york state tax credits . new york state enacted tax legislation resulting in a change to the new york state apportionment methodology . the enacted legislation will lower the apportionment of the company 's taxable income to new york state and should result in lower new york state income taxes in future years . story_separator_special_tag the scope of this consensus includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include , but is not limited to sales , use , value added and some excise taxes . additionally , this consensus seeks to address how a company should address the disclosure of such items in interim and annual financial statements , either gross or net pursuant to apb opinion no . 22 , disclosure of accounting policies . eitf issue 06-3 is effective for all financial reports for interim and annual reporting periods beginning after december 15 , 2006. the company presents sales net of sales taxes in its consolidated statement of operations . no change in presentation resulted from the adoption of eitf 06-3. in july 2006 , the financial accounting standards board issued financial interpretation no . 48 ( “fin 48” ) , accounting for uncertainty in income taxes , which applies to all tax positions related to income taxes subject to sfas 109 , accounting for income taxes . fin 48 requires a new evaluation process for all tax positions taken . if the probability for sustaining said tax position is greater than 50 % , then the tax position is warranted and recognition should be at the highest amount which would be expected to be realized upon ultimate settlement . interpretation 48 requires expanded disclosure at each annual reporting period unless a significant change occurs in an interim period . differences between the amounts recognized in the statements of financial position prior to the adoption of interpretation 48 and the amounts reported after adoption are to be accounted for as an adjustment to the beginning balance of retained earnings . the adoption of fin 48 did not have an impact on the company 's consolidated financial statements . in september 2006 , the fasb issued sfas no . 157 , “fair value measurements.” this statement establishes a framework for measuring fair value in generally accepted accounting principles ( gaap ) , clarifies the definition of fair value within that framework , and expands disclosures about the use of fair value measurement . sfas no . 157 is 15 effective for fiscal years beginning after november 15 , 2007 and interim periods within those fiscal years . the company is currently evaluating the impact of sfas no . 157 on its consolidated financial statements . in february 2007 , the fasb issued sfas no . 159 , “the fair value option for financial assets and financial liabilities.” this statement permits entities to choose to measure many financial instruments and certain other items at fair value . the objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedging accounting provisions . sfas no . 159 is effective for fiscal years beginning after november 15 , 2007. the company is currently evaluating the impact of adopting sfas no . 159 on its consolidated financial statements . in december 2007 , the fasb statement 141r , “business combinations” ( “sfas 141r” ) was issued . sfas 141r replaces sfas 141. sfas 141r requires the acquirer of a business to recognize and measure the identifiable assets acquired , the liabilities assumed , and any non-controlling interest in the acquiree at fair value . sfas 141r also requires transactions costs related to the business combination to be expensed as incurred . sfas 141r applies prospectively to business combinations ; the effective date for the company will be january 1 , 2009. the company has not yet determined the impact of sfas 141r related to future acquisitions , if any , on the company 's consolidated financial statements . critical accounting policies our financial statements and accompanying notes are prepared in accordance with u.s. generally accepted accounting principles . the preparation of the company 's financial statements requires management to make estimates , assumptions and judgments that affect the amounts reported . these estimates , assumptions and judgments are affected by management 's application of accounting policies , which are discussed in note 2 of item 8 , financial statements and supplementary data of this report . the critical accounting policies have been reviewed with the audit committee of our board of directors . revenue recognition revenue is recognized on the accrual basis , which is at the time of shipment of goods or acceptance at the united states postal service . accounts receivable and allowance for doubtful accounts a trade receivable is recorded at the value of the sale . the company performs periodic credit evaluations of its customers ' financial condition and generally does not require collateral . generally , amounts not collected from customers within 120 days of the due date of the invoice are credited to an allowance for doubtful accounts . after collection efforts have been exhausted , uncollected balances are charged off to the allowance . inventory valuation inventories are stated at the lower of cost or market , with cost being determined in accordance with the first-in , first-out method . costs included in inventory are the cost to purchase the raw material , the direct labor incurred on work in progress and finished goods , and an overhead factor based on other indirect manufacturing costs incurred . deferred tax asset and liability valuation allowances the company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities . deferred tax assets are reduced , if deemed necessary , by a valuation allowance for the amount of tax benefits not expected to be realized . investment tax credits are recognized on the flow through method . specifically and with respect to deferred tax assets , the company had gross deferred assets at december 31 , 2007 of $ 4.3

debt there are no significant financial covenants associated with any of our outstanding debt obligations . we continually monitor our debt covenants to ensure we remain in compliance . we have not observed any current trends that would cause a breach of any debt covenants . maturities , purchases , and retirement of debt our $ 350.0 million 7.125 % senior unsecured notes matured during 2016 , and the remaining balance of our $ 151.9 million 6.85 % senior secured notes matured during 2015. in 2014 , we purchased and retired $ 145.0 million principal of the 6.85 % notes , including a make-whole amount of $ 13.2 million , for a total cost of $ 158.2 million . northwind holdings made principal payments on its floating rate , senior secured notes of $ 64.0 million , $ 74.4 million , and $ 41.6 million in 2016 , 2015 , and 2014 , respectively . issuance of debt in 2016 , we issued a total of $ 600.0 million aggregate principal amount of senior notes : ( i ) $ 350.0 million aggregate principal amount of senior notes due in 2021 with an annual coupon rate of 3.00 % , and ( ii ) $ 250.0 million aggregate principal amount of senior notes due in 2042 with an annual coupon rate of 5.75 % , pursuant to a reopening of the $ 250.0 million aggregate principal amount outstanding of our 5.75 % senior notes due 2042 issued in 2012. both issuances are callable at or above par and rank equally in right of payment with all of our otherunsecured and unsubordinated debt .

excluding the revenue related to the contract buy-out fee , 2006 revenue decreased $ 5.0 million , or 9.7 % , from 2005. the custom folding cartons product line had sales of $ 29.0 million in 2006 , up $ 5.3 million , or 22.6 % , from $ 23.6 million in 2005. the company 's ability to provide short run , highly variable print at competitive prices continues to attract new customers as well as increased sales from existing customers . approximately 57 % of this increase came from new customers , while 43 % came from higher volumes with existing customers . the stock box product line had net sales of $ 10.8 million in 2006 , up $ 1.0 million , or 10.4 % from $ 9.8 million in 2005. stock boxes are primarily sold to confectioners , which drove most of this growth in 2006 . 11 the commercial print-on-demand product line had sales of $ 1.4 million in 2006 , down $ 13.0 million , or 90 % from $ 14.4 million in 2005. until the fourth quarter of 2005 , commercial print product sales were , for the most part , to vistaprint . sales within this product line are primarily the result of the relationships formed in 2006 with nationwide print distributors . the personalized print line had sales of $ 4.8 million in 2006 , up $ 1.4 million , or 41.4 % from $ 3.4 million in 2005. sales growth in the personalized print line was mainly the result of web-based sales from partnerships and other internet stores . cost of products sold as a percentage of revenue , the cost of products sold were 90.7 % , 90.7 % , and 60.3 % for the years 2007 , 2006 , and 2005 , respectively . excluding the amortization of the contract buy-out fee , the cost of products sold was 83.2 % for 2005. cost of products sold remained relatively flat from 2006 to 2007 as the factory remains under-utilized . improvements in yield and lower depreciation expense were offset by higher labor , repair , paperboard and utility cost . during 2007 , we purchased the assets of ddm along with additional mailing services related equipment . we began using the assets purchased from ddm late in the first half of 2007 , and most of the additional mailing services equipment was purchased in late 2007 for anticipated use during 2008. the increase in cost of products sold in 2006 to 90.7 % of revenue from 83.2 % of revenue , excluding the amortization of the contract buy-out fee in 2005 was primarily the result of under-utilization of the factory caused by the decrease in revenue in the commercial print product line due to the loss of the vistaprint business . during 2005 , we added additional capacity for finishing including a stitchmaster , folder , and cutter that allowed us to enlarge our portfolio of commercial print products . during the latter half of 2005 and throughout 2006 , print capacity was underutilized and pressure was placed on our cost of products sold . changing sales mix also contributed to the increase in costs . selling , general and administrative costs selling , general and administrative ( sg & a ) costs were $ 9.9 million in 2007 compared with $ 9.5 million in 2006 , and $ 10.5 million in 2005. as a percentage of total revenue , sg & a costs were 20.4 % , 20.4 % , and 14.7 % , for the years 2007 , 2006 and 2005 respectively . excluding the amortization of the contract buy-out fee , selling , general , and administrative costs were 20.3 % for 2005. the majority of sg & a costs were related to salaries and benefits for sales and administrative personnel . included in 2007 sg & a was $ 0.4 million in costs associated with workforce reduction and $ 0.2 million of accelerated depreciation related to the reduction in useful lives of certain software assets . 2007 sg & a without the workforce reduction costs and accelerated depreciation cost was lower than 2006 due to lower advertising expense , stock option expense and bad debt reserve , partially offset by higher wages due the increased number of employees subsequent to the ddm asset purchase in may 2007. reductions in advertising for website promotion were the primary reason for the decline from 2005 to 2006 , partially offset by stock-based compensation expense of $ 0.4 million due to the adoption of sfas 123 ( r ) in the first quarter of 2006. interest expense interest expense was $ 248 thousand , $ 205 thousand , and $ 216 thousand , respectively , in 2007 , 2006 , and 2005. provision for income taxes our effective income tax rate was 31.2 % in 2007 , 33.8 % in 2006 , and 38.0 % in 2005. we recorded income tax benefits in 2007 and 2006 due to our losses . the 2007 tax benefit was recorded at a rate lower than customary due to the company 's goodwill impairment charge which is a permanent non-deductible expense for income tax purposes . 12 the 2005 tax rate was higher than would be customary due to an increase in the valuation allowance for deferred tax assets related to new york state tax credits . new york state enacted tax legislation resulting in a change to the new york state apportionment methodology . the enacted legislation will lower the apportionment of the company 's taxable income to new york state and should result in lower new york state income taxes in future years . story_separator_special_tag the scope of this consensus includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include , but is not limited to sales , use , value added and some excise taxes . additionally , this consensus seeks to address how a company should address the disclosure of such items in interim and annual financial statements , either gross or net pursuant to apb opinion no . 22 , disclosure of accounting policies . eitf issue 06-3 is effective for all financial reports for interim and annual reporting periods beginning after december 15 , 2006. the company presents sales net of sales taxes in its consolidated statement of operations . no change in presentation resulted from the adoption of eitf 06-3. in july 2006 , the financial accounting standards board issued financial interpretation no . 48 ( “fin 48” ) , accounting for uncertainty in income taxes , which applies to all tax positions related to income taxes subject to sfas 109 , accounting for income taxes . fin 48 requires a new evaluation process for all tax positions taken . if the probability for sustaining said tax position is greater than 50 % , then the tax position is warranted and recognition should be at the highest amount which would be expected to be realized upon ultimate settlement . interpretation 48 requires expanded disclosure at each annual reporting period unless a significant change occurs in an interim period . differences between the amounts recognized in the statements of financial position prior to the adoption of interpretation 48 and the amounts reported after adoption are to be accounted for as an adjustment to the beginning balance of retained earnings . the adoption of fin 48 did not have an impact on the company 's consolidated financial statements . in september 2006 , the fasb issued sfas no . 157 , “fair value measurements.” this statement establishes a framework for measuring fair value in generally accepted accounting principles ( gaap ) , clarifies the definition of fair value within that framework , and expands disclosures about the use of fair value measurement . sfas no . 157 is 15 effective for fiscal years beginning after november 15 , 2007 and interim periods within those fiscal years . the company is currently evaluating the impact of sfas no . 157 on its consolidated financial statements . in february 2007 , the fasb issued sfas no . 159 , “the fair value option for financial assets and financial liabilities.” this statement permits entities to choose to measure many financial instruments and certain other items at fair value . the objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedging accounting provisions . sfas no . 159 is effective for fiscal years beginning after november 15 , 2007. the company is currently evaluating the impact of adopting sfas no . 159 on its consolidated financial statements . in december 2007 , the fasb statement 141r , “business combinations” ( “sfas 141r” ) was issued . sfas 141r replaces sfas 141. sfas 141r requires the acquirer of a business to recognize and measure the identifiable assets acquired , the liabilities assumed , and any non-controlling interest in the acquiree at fair value . sfas 141r also requires transactions costs related to the business combination to be expensed as incurred . sfas 141r applies prospectively to business combinations ; the effective date for the company will be january 1 , 2009. the company has not yet determined the impact of sfas 141r related to future acquisitions , if any , on the company 's consolidated financial statements . critical accounting policies our financial statements and accompanying notes are prepared in accordance with u.s. generally accepted accounting principles . the preparation of the company 's financial statements requires management to make estimates , assumptions and judgments that affect the amounts reported . these estimates , assumptions and judgments are affected by management 's application of accounting policies , which are discussed in note 2 of item 8 , financial statements and supplementary data of this report . the critical accounting policies have been reviewed with the audit committee of our board of directors . revenue recognition revenue is recognized on the accrual basis , which is at the time of shipment of goods or acceptance at the united states postal service . accounts receivable and allowance for doubtful accounts a trade receivable is recorded at the value of the sale . the company performs periodic credit evaluations of its customers ' financial condition and generally does not require collateral . generally , amounts not collected from customers within 120 days of the due date of the invoice are credited to an allowance for doubtful accounts . after collection efforts have been exhausted , uncollected balances are charged off to the allowance . inventory valuation inventories are stated at the lower of cost or market , with cost being determined in accordance with the first-in , first-out method . costs included in inventory are the cost to purchase the raw material , the direct labor incurred on work in progress and finished goods , and an overhead factor based on other indirect manufacturing costs incurred . deferred tax asset and liability valuation allowances the company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities . deferred tax assets are reduced , if deemed necessary , by a valuation allowance for the amount of tax benefits not expected to be realized . investment tax credits are recognized on the flow through method . specifically and with respect to deferred tax assets , the company had gross deferred assets at december 31 , 2007 of $ 4.3

liquidity and capital resources in 2007 , cash used in operations was $ 1.0 million , compared with $ 0.8 million provided by operations in 2006. this decrease was primarily the result of higher working capital requirements during 2007. in 2006 , cash provided by operating activities was $ 3.6 million more than the $ 2.8 million in cash used in 2005. this increase was mainly the result of $ 7.5 million of income taxes paid in 2005 , exclusive of the impact of the contract-buy-out , and by higher 2005 cash flows from other working capital accounts and higher depreciation and amortization expense . capital expenditures for 2007 were $ 2.7 million compared with $ 1.0 million in 2006 and $ 4.7 million in 2005. expenditures in 2007 were primarily for mailing services equipment , including the ddm asset purchase , along with additional investment in systems and building improvements . expenditures in 2006 were primarily related to building improvements ; certain productivity improvement equipment ; and software , used for on-line proofing , order fulfillment and warehouse management . expenditures in 2005 of $ 4.7 million primarily related to additional production equipment and , to a lesser extent , additional production facilities . the company anticipates up to approximately $ 1.5 million in capital spending for 2008. temporary investments , along with cash and equivalents , declined in 2007 to fund operations , capital expenditures and the ddm asset purchase . temporary investments declined $ 1.7 million in 2006 and primarily resulted in an increase to cash and cash equivalents .

reporting segment changes in the third quarter of 2010 , our chief executive officer , in the role of chief operating decision maker ( codm ) , completed the reorganization of hcc 's management structure in order to manage and evaluate the company 's operations from an insurance underwriting perspective , in line with our portfolio of insurance products . we have changed our segment reporting structure to reflect these changes . previously , we reported our results in the insurance company , agency , and other operations segments . we now report our results in the six operating segments identified above , each of which reports to an hcc executive who is responsible for the segment results . see note 12 , “segments” to the consolidated financial statements for additional discussion of our new reporting segments . in connection with our resegmentation , we changed the presentation of our consolidated income statement and redefined the calculation of our expense ratio . we previously presented reinsurance ceding commissions that exceeded policy acquisition costs as a component of fee and commission income , within total revenue . we now present all ceding commissions as an offset to policy acquisition costs , within total expense . we also now present an expense ratio for each reportable segment . all of our expense ratios are calculated using amounts included in our gaap consolidated financial statements . the formulas are as follows : consolidated expense ratio – sum of other expense for each of our insurance segments , divided by the sum of segment revenue for each of our insurance segments . segment expense ratio – segment other expense divided by segment revenue . results of operations our results and key metrics for the past three years were as follows : replace_table_token_15_th in 2010 , we had $ 22.7 million of favorable development of our prior years ' net loss reserves , primarily from our : 1 ) u.k. professional liability business , 2 ) an assumed quota share contract , 3 ) aviation and 4 ) prior years ' hurricanes . we had favorable development of $ 53.5 million in 2009 and $ 82.4 million in 2008 , primarily from those same lines of businesses , as well as our directors ' and officers ' liability business in 2008. the redundancies in the three-year period primarily related to our 2002 – 2007 underwriting years . 39 in late 2009 , we began to write property treaty reinsurance business that covers catastrophic risks worldwide . in 2010 , we wrote $ 59.9 million of net premium , which generated $ 47.6 million of earned premium . this line , which is susceptible to catastrophic events and large losses such as those described in the next paragraph , had a net loss ratio of 58.2 % for 2010. in 2010 , we recognized gross losses of $ 44.0 million from various catastrophic events , the most significant of which was the chilean earthquake . after reinsurance , our pretax losses were $ 22.5 million . in 2008 , we incurred gross losses of $ 98.2 million from hurricanes gustav and ike ( referred to herein as the 2008 hurricanes ) . our 2008 pretax losses after reinsurance were $ 22.3 million , which included $ 19.4 million of losses reported in loss and loss adjustment expense and $ 2.9 million of premiums to reinstate our excess of loss reinsurance protection , which reduced net earned premium . over the last three years , we had an average combined ratio below 85 % . our net loss ratios reflected the favorable development and catastrophic losses mentioned above . our expense ratio represents expenses incurred by our insurance segments . the lower expense ratios in 2009 and 2008 primarily related to the benefit of $ 10.5 million and $ 11.9 million , respectively , of profit commissions from reinsurance , which offset our insurance companies ' operating expenses . these items are discussed in greater detail below and in the following “segment operations” section . revenue we generate our revenue from five primary sources : risk-bearing earned premium produced by our underwriting segments , investment income earned on our consolidated investment portfolio by our investing segment , fee and commission income received from third party insurers for premium produced for them by our underwriting agencies , recurring , but less frequent , transaction-based revenues , primarily related to various financial products in our u.s. property & casualty segment , and realized investment gains and losses and other-than-temporary impairment ( otti ) credit losses related to our fixed income securities portfolio . total revenue decreased $ 16.3 million in 2010 , compared to 2009 , primarily due to lower other operating income , partially offset by increased investment income from growth in our investment portfolio . other operating income in 2009 included $ 25.0 million related to dissolution of a reinsurance contract with mortgage guarantee insurance company ( mgic ) , which is discussed below . total revenue increased $ 111.9 million in 2009 , compared to 2008 , due to higher net earned premium , increased investment income and the $ 25.0 million mgic fee . in addition , there were losses in 2008 on fixed income investments , alternative investments and trading securities , mainly due to the credit crisis . 40 gross written premium , net written premium and net earned premium are detailed below by segment . replace_table_token_16_th the 2010 growth in premium from our insurance segments occurred primarily in the international segment , directly related to our new property treaty business that we began to write in late 2009. there were offsetting increases and decreases in premium in our other segments , which partially offset the reduction of premium in our exited lines . story_separator_special_tag the segment had $ 9.6 million of adverse loss development in 2010 , minimal development in 2009 and $ 18.7 million of favorable development in 2008. the 2010 development related to our diversified financial products business , which is included in other , for the 2005 and 2008 underwriting years . in 2009 , for our d & o products , we re-estimated our exposure on the 2004 – 2007 underwriting years . as a result , the international d & o reserves had favorable development , which was substantially offset by adverse development in the u.s. d & o reserves . the 2008 favorable development primarily related to the 2004 – 2006 underwriting years for international d & o , but was substantially offset by an increase in the 2007 underwriting year , primarily for our u.s. d & o business . the loss ratio for the products included in other was higher in 2008 due to both 2008 accident year losses and adverse development from our diversified financial products business . the segment generated minimal profit commissions in 2010 , compared to $ 10.5 million in 2009 and $ 11.9 million in 2008. these profit commissions are reported as a reduction of other expense for segment and consolidated reporting purposes . the effect of these profit commissions decreased the segment 's 2009 and 2008 expense ratios by 2.4 percentage points and 3.3 percentage points , respectively . the higher expense ratio in 2010 related to higher operating costs relative to the lower net earned premium level . accident & health segment our accident & health segment includes medical stop-loss , short-term domestic and international medical , hmo reinsurance and medical excess coverages . the products are written in the united states through our underwriting agencies , third party agents and brokers , and an internet portal . medical stop-loss , which represents the majority of the segment 's business , provides catastrophic coverage to groups of employees who have primary coverage through employer sponsored self-funded plans . due to the nature of this business , claims are reported and settled quickly , with minimal catastrophic exposure to us . 49 the following tables summarize the operations of the accident & health segment . replace_table_token_23_th the accident & health segment pretax earnings were relatively flat during the three-year period . segment earnings in 2010 reflected higher net earned premium related to rate increases on our medical stop-loss product to cover the cost of inflation . in addition , our medical stop-loss premium increased in 2010 and 2009 due to the 2008 acquisition of an agency that writes medical stop-loss insurance . we also acquired an agency in 2008 that writes short-term medical insurance , which is reported in other above . our short-term medical premium increased in 2010 , offset by a reduction related to products in this same category . the segment had adverse loss development of $ 9.8 million and $ 3.1 million in 2010 and 2009 , respectively , compared to $ 12.3 million of favorable development in 2008. the 2010 adverse development primarily related to the 2008 and 2009 underwriting years for our medical excess , short-term medical and hmo reinsurance products . the higher segment loss ratio in 2010 compared to 2009 reflected increased losses in our medical stop-loss product . the 2008 favorable reserve development primarily related to medical stop-loss . the segment 's accident year losses have declined over the past three years . 50 u.s. surety & credit segment our u.s. surety & credit segment includes surety products written in the united states and credit insurance managed in the united states . our surety book includes contract surety bonds , commercial surety bonds , and bail bonds written by independent agents . our credit insurance covers payments for export trade and structured trade transactions , political risk insurance and letters of credit . surety bonds serve as financial protection to a third party in the event a principal is unable to honor an obligation , rather than as an insurance policy that pays on behalf of a policyholder . claims for surety and credit products are reported quickly , but subrogation recovery frequently takes extended periods of time , resulting in medium-tailed business . the following tables summarize the operations of the u.s. surety & credit segment . replace_table_token_24_th the u.s. surety & credit segment pretax earnings increased 27 % in 2010 compared to 2009 due to higher net earned premium and favorable accident year loss experience in 2010 , partially offset by higher expenses . segment earnings decreased 26 % in 2009 compared to 2008 due to increased losses and substantially higher expenses , which more than offset the increase in net earned premium . 51 in early 2009 , we purchased a surety insurance company , which increased our written and earned surety premium in 2009. in 2010 , increased pricing for commercial surety bonds written by the acquired company contributed to the growth in the 2010 gross written premium . in addition , our large commercial surety team , hired in 2009 , wrote more premium in 2010. our credit premium grew in 2009 and 2010 due to improved market pricing following the 2008 world-wide credit market crisis . the segment had favorable loss development of $ 7.2 million in 2010 , compared to $ 10.5 million in 2009 and $ 3.9 million in 2008. the favorable development was offset by higher accident year losses and lower subrogation in 2010 and 2009 , due to the impact of the current economic environment on the construction industry and economic strain on principals on commercial surety bonds . the credit line experienced large losses in 2009 and 2008 , due to weak economic conditions in the world credit markets , for which a substantial amount of subrogation was collected in 2010. historically , surety bonds and credit insurance have lower net loss ratios and higher expense ratios than other types

liquidity and capital resources in 2007 , cash used in operations was $ 1.0 million , compared with $ 0.8 million provided by operations in 2006. this decrease was primarily the result of higher working capital requirements during 2007. in 2006 , cash provided by operating activities was $ 3.6 million more than the $ 2.8 million in cash used in 2005. this increase was mainly the result of $ 7.5 million of income taxes paid in 2005 , exclusive of the impact of the contract-buy-out , and by higher 2005 cash flows from other working capital accounts and higher depreciation and amortization expense . capital expenditures for 2007 were $ 2.7 million compared with $ 1.0 million in 2006 and $ 4.7 million in 2005. expenditures in 2007 were primarily for mailing services equipment , including the ddm asset purchase , along with additional investment in systems and building improvements . expenditures in 2006 were primarily related to building improvements ; certain productivity improvement equipment ; and software , used for on-line proofing , order fulfillment and warehouse management . expenditures in 2005 of $ 4.7 million primarily related to additional production equipment and , to a lesser extent , additional production facilities . the company anticipates up to approximately $ 1.5 million in capital spending for 2008. temporary investments , along with cash and equivalents , declined in 2007 to fund operations , capital expenditures and the ddm asset purchase . temporary investments declined $ 1.7 million in 2006 and primarily resulted in an increase to cash and cash equivalents .

reporting segment changes in the third quarter of 2010 , our chief executive officer , in the role of chief operating decision maker ( codm ) , completed the reorganization of hcc 's management structure in order to manage and evaluate the company 's operations from an insurance underwriting perspective , in line with our portfolio of insurance products . we have changed our segment reporting structure to reflect these changes . previously , we reported our results in the insurance company , agency , and other operations segments . we now report our results in the six operating segments identified above , each of which reports to an hcc executive who is responsible for the segment results . see note 12 , “segments” to the consolidated financial statements for additional discussion of our new reporting segments . in connection with our resegmentation , we changed the presentation of our consolidated income statement and redefined the calculation of our expense ratio . we previously presented reinsurance ceding commissions that exceeded policy acquisition costs as a component of fee and commission income , within total revenue . we now present all ceding commissions as an offset to policy acquisition costs , within total expense . we also now present an expense ratio for each reportable segment . all of our expense ratios are calculated using amounts included in our gaap consolidated financial statements . the formulas are as follows : consolidated expense ratio – sum of other expense for each of our insurance segments , divided by the sum of segment revenue for each of our insurance segments . segment expense ratio – segment other expense divided by segment revenue . results of operations our results and key metrics for the past three years were as follows : replace_table_token_15_th in 2010 , we had $ 22.7 million of favorable development of our prior years ' net loss reserves , primarily from our : 1 ) u.k. professional liability business , 2 ) an assumed quota share contract , 3 ) aviation and 4 ) prior years ' hurricanes . we had favorable development of $ 53.5 million in 2009 and $ 82.4 million in 2008 , primarily from those same lines of businesses , as well as our directors ' and officers ' liability business in 2008. the redundancies in the three-year period primarily related to our 2002 – 2007 underwriting years . 39 in late 2009 , we began to write property treaty reinsurance business that covers catastrophic risks worldwide . in 2010 , we wrote $ 59.9 million of net premium , which generated $ 47.6 million of earned premium . this line , which is susceptible to catastrophic events and large losses such as those described in the next paragraph , had a net loss ratio of 58.2 % for 2010. in 2010 , we recognized gross losses of $ 44.0 million from various catastrophic events , the most significant of which was the chilean earthquake . after reinsurance , our pretax losses were $ 22.5 million . in 2008 , we incurred gross losses of $ 98.2 million from hurricanes gustav and ike ( referred to herein as the 2008 hurricanes ) . our 2008 pretax losses after reinsurance were $ 22.3 million , which included $ 19.4 million of losses reported in loss and loss adjustment expense and $ 2.9 million of premiums to reinstate our excess of loss reinsurance protection , which reduced net earned premium . over the last three years , we had an average combined ratio below 85 % . our net loss ratios reflected the favorable development and catastrophic losses mentioned above . our expense ratio represents expenses incurred by our insurance segments . the lower expense ratios in 2009 and 2008 primarily related to the benefit of $ 10.5 million and $ 11.9 million , respectively , of profit commissions from reinsurance , which offset our insurance companies ' operating expenses . these items are discussed in greater detail below and in the following “segment operations” section . revenue we generate our revenue from five primary sources : risk-bearing earned premium produced by our underwriting segments , investment income earned on our consolidated investment portfolio by our investing segment , fee and commission income received from third party insurers for premium produced for them by our underwriting agencies , recurring , but less frequent , transaction-based revenues , primarily related to various financial products in our u.s. property & casualty segment , and realized investment gains and losses and other-than-temporary impairment ( otti ) credit losses related to our fixed income securities portfolio . total revenue decreased $ 16.3 million in 2010 , compared to 2009 , primarily due to lower other operating income , partially offset by increased investment income from growth in our investment portfolio . other operating income in 2009 included $ 25.0 million related to dissolution of a reinsurance contract with mortgage guarantee insurance company ( mgic ) , which is discussed below . total revenue increased $ 111.9 million in 2009 , compared to 2008 , due to higher net earned premium , increased investment income and the $ 25.0 million mgic fee . in addition , there were losses in 2008 on fixed income investments , alternative investments and trading securities , mainly due to the credit crisis . 40 gross written premium , net written premium and net earned premium are detailed below by segment . replace_table_token_16_th the 2010 growth in premium from our insurance segments occurred primarily in the international segment , directly related to our new property treaty business that we began to write in late 2009. there were offsetting increases and decreases in premium in our other segments , which partially offset the reduction of premium in our exited lines . story_separator_special_tag the segment had $ 9.6 million of adverse loss development in 2010 , minimal development in 2009 and $ 18.7 million of favorable development in 2008. the 2010 development related to our diversified financial products business , which is included in other , for the 2005 and 2008 underwriting years . in 2009 , for our d & o products , we re-estimated our exposure on the 2004 – 2007 underwriting years . as a result , the international d & o reserves had favorable development , which was substantially offset by adverse development in the u.s. d & o reserves . the 2008 favorable development primarily related to the 2004 – 2006 underwriting years for international d & o , but was substantially offset by an increase in the 2007 underwriting year , primarily for our u.s. d & o business . the loss ratio for the products included in other was higher in 2008 due to both 2008 accident year losses and adverse development from our diversified financial products business . the segment generated minimal profit commissions in 2010 , compared to $ 10.5 million in 2009 and $ 11.9 million in 2008. these profit commissions are reported as a reduction of other expense for segment and consolidated reporting purposes . the effect of these profit commissions decreased the segment 's 2009 and 2008 expense ratios by 2.4 percentage points and 3.3 percentage points , respectively . the higher expense ratio in 2010 related to higher operating costs relative to the lower net earned premium level . accident & health segment our accident & health segment includes medical stop-loss , short-term domestic and international medical , hmo reinsurance and medical excess coverages . the products are written in the united states through our underwriting agencies , third party agents and brokers , and an internet portal . medical stop-loss , which represents the majority of the segment 's business , provides catastrophic coverage to groups of employees who have primary coverage through employer sponsored self-funded plans . due to the nature of this business , claims are reported and settled quickly , with minimal catastrophic exposure to us . 49 the following tables summarize the operations of the accident & health segment . replace_table_token_23_th the accident & health segment pretax earnings were relatively flat during the three-year period . segment earnings in 2010 reflected higher net earned premium related to rate increases on our medical stop-loss product to cover the cost of inflation . in addition , our medical stop-loss premium increased in 2010 and 2009 due to the 2008 acquisition of an agency that writes medical stop-loss insurance . we also acquired an agency in 2008 that writes short-term medical insurance , which is reported in other above . our short-term medical premium increased in 2010 , offset by a reduction related to products in this same category . the segment had adverse loss development of $ 9.8 million and $ 3.1 million in 2010 and 2009 , respectively , compared to $ 12.3 million of favorable development in 2008. the 2010 adverse development primarily related to the 2008 and 2009 underwriting years for our medical excess , short-term medical and hmo reinsurance products . the higher segment loss ratio in 2010 compared to 2009 reflected increased losses in our medical stop-loss product . the 2008 favorable reserve development primarily related to medical stop-loss . the segment 's accident year losses have declined over the past three years . 50 u.s. surety & credit segment our u.s. surety & credit segment includes surety products written in the united states and credit insurance managed in the united states . our surety book includes contract surety bonds , commercial surety bonds , and bail bonds written by independent agents . our credit insurance covers payments for export trade and structured trade transactions , political risk insurance and letters of credit . surety bonds serve as financial protection to a third party in the event a principal is unable to honor an obligation , rather than as an insurance policy that pays on behalf of a policyholder . claims for surety and credit products are reported quickly , but subrogation recovery frequently takes extended periods of time , resulting in medium-tailed business . the following tables summarize the operations of the u.s. surety & credit segment . replace_table_token_24_th the u.s. surety & credit segment pretax earnings increased 27 % in 2010 compared to 2009 due to higher net earned premium and favorable accident year loss experience in 2010 , partially offset by higher expenses . segment earnings decreased 26 % in 2009 compared to 2008 due to increased losses and substantially higher expenses , which more than offset the increase in net earned premium . 51 in early 2009 , we purchased a surety insurance company , which increased our written and earned surety premium in 2009. in 2010 , increased pricing for commercial surety bonds written by the acquired company contributed to the growth in the 2010 gross written premium . in addition , our large commercial surety team , hired in 2009 , wrote more premium in 2010. our credit premium grew in 2009 and 2010 due to improved market pricing following the 2008 world-wide credit market crisis . the segment had favorable loss development of $ 7.2 million in 2010 , compared to $ 10.5 million in 2009 and $ 3.9 million in 2008. the favorable development was offset by higher accident year losses and lower subrogation in 2010 and 2009 , due to the impact of the current economic environment on the construction industry and economic strain on principals on commercial surety bonds . the credit line experienced large losses in 2009 and 2008 , due to weak economic conditions in the world credit markets , for which a substantial amount of subrogation was collected in 2010. historically , surety bonds and credit insurance have lower net loss ratios and higher expense ratios than other types

liquidity and capital resources credit market disruptions in recent years have resulted in a tightening of available sources of credit and significant liquidity concerns for many companies . we believe we have sufficient sources of liquidity at a reasonable cost at the present time , based on the following : we held $ 585.9 million of cash and liquid short-term investments at december 31 , 2010 , compared to $ 940.1 million at december 31 , 2009. we reinvested a substantial portion of our short-term investments in higher yielding fixed income securities during 2010 to maximize our net investment income . in addition , in early 2010 , we used cash held at year-end 2009 to pay the final $ 64.5 million due for conversion of our 1.3 % convertible notes . during the three years ended december 31 , 2010 , we have averaged $ 501.3 million in cash provided by operating activities . our available for sale bond portfolio had a fair value of $ 5.0 billion at december 31 , 2010 , compared to $ 4.5 billion at december 31 , 2009 , and an average rating of aa+ . we intend to hold these securities until their maturity , but we would be able to sell securities to generate cash if the need arises . our insurance companies have sufficient resources to pay potential claims . we project that our insurance companies will pay approximately $ 1.3 billion of claims in 2011 , based on historical payment patterns and claims history .

the safety and service measures currently in place include : ( 1 ) creating and implementing a safety training program for all associates ; ( 2 ) maintaining a three-month supply of masks , gloves , shoe covers , and hand sanitizer for field teams ; ( 3 ) continuing to leverage self-show and virtual-tour technology as both safety measures and competitive advantages ; ( 4 ) adhering to strict safety protocols for maintenance service trips ; and ( 5 ) adapting to offer virtual options for resident move-in orientations and pre-move-out visits . neither these procedural adjustments nor the overall impact of the covid-19 pandemic created significant disruptions to our business model during the year ended december 31 , 2020. however , the pandemic did impact our business , including operating , investment management , and capital markets activities as more fully described below . operations the direct impacts on our results of operations and key operating metrics from the effects of the covid-19 pandemic include , but are not limited to : ( 1 ) a decrease in gross rental revenues and other property income ( before concessions and bad debt ) due to jurisdictional restrictions on rent increases and late fees and or forgiveness of late fees for residents who have requested leniency ; ( 2 ) an increase in occupancy due to lower turnover partially driven by residents ' decisions not to relocate during the pandemic , strong demand for homes that become vacant , and the impact of eviction moratoriums ; ( 3 ) an increase in uncollectible revenues ( or decline in rent collections percentages ) due to resident hardships and eviction moratoriums ; and ( 4 ) a decrease in property operating and maintenance expenses for turnover costs ( lower turnover rates ) and property administrative fees ( eviction moratoriums ) . in march 2020 , to act on our core values of `` genuine care `` and `` standout citizenship , `` we began to offer solutions for residents experiencing financial hardship when requested , including the ongoing creation of payment plans , without late fees , for residents requiring flexibility to meet rental obligations over time . additionally , we continue to adhere to federal , state , and local restrictions on items such as evictions , collections , rent increases , and late fees as appropriate . the ongoing covid-19 outbreak in the united states has led entities directed by , or notionally affiliated with , the federal government as well as certain states and cities , including those in which we own properties and where our principal places of business are located , to impose and continue to implement measures intended to control the spread of covid-19 , including instituting quarantines , restrictions on travel , “ shelter in place ” rules , and restrictions on types of business that may continue to operate . we depend on rental revenues and other property income from residents for substantially all of our revenues . overall revenue collections as a percentage of monthly billings was 96 % for the period from april 2020 through december 2020 , compared to a historical average of 99 % . while collection of revenues has remained near historical levels thus far through the pandemic , the covid-19 outbreak , as well as continuing measures taken by governmental authorities and private actors to limit the spread of this virus or mitigate its impact , are interfering with the ability of some of our residents to meet their lease obligations and make their rent payments on time or at all . in addition , entities directed by , or notionally affiliated with , the federal government as well as some state and local jurisdictions across the united states , have imposed temporary eviction moratoriums if certain criteria are met by residents , are allowing residents to defer missed rent payments without incurring late fees , and are prohibiting rent increases . jurisdictions and other local and national authorities may expand or extend measures imposing restrictions on our ability to enforce residents ' contractual rental obligations and limiting our ability to increase rents . we can not predict if states , municipalities , local , and or national authorities will expand existing restrictions , if additional states or municipalities will implement similar restrictions , or when restrictions currently in place will expire . such measures are likely to enable residents to stay in their homes despite an inability to pay because of financial or other hardship stemming from the pandemic . certain other restrictions imposed by jurisdictions across the united states are intended to limit operations by businesses not deemed “ essential businesses . ” while none of the current restrictions have materially impacted our ability to provide services to our residents or homes , future measures may negatively impact our ability to access our homes , complete service requests , or make our homes ready for new residents . unless the residents report symptoms of or exposure to covid-19 , we are completing all service calls . in all cases , we work with the residents to ensure service requests are addressed in a timely and safe manner . while covid-19 and related containment measures may interfere with the ability of our associates , suppliers , and other business partners to carry out their assigned tasks or to supply materials and services at ordinary levels of performance relative to the conduct of our business in the future , to date we have not experienced significant disruptions of these types . 56 the majority of our office-based associates continue to work from home and will do so until we determine it is in our and their best interests to fully return to our offices . additionally , changes to the working environment have not had a material effect on our internal controls over financial reporting since the pandemic began ( see part ii . item 9a . story_separator_special_tag property management expense property management expense represents personnel and other costs associated with the oversight and management of our portfolio of homes , including those within our unconsolidated joint ventures . all of our homes are managed through our internal property manager . general and administrative general and administrative expense represents personnel costs , professional fees , and other costs associated with our day-to-day activities . general and administrative expense also includes merger and transaction-related expenses , among other things , that are of a non-recurring nature . share-based compensation expense all share-based compensation expense is recognized in our consolidated statements of operations as components of general and administrative expense and property management expense . we issue share-based awards to align the interests of our associates with those of our investors . interest expense interest expense includes interest payable on our debt instruments , payments and receipts related to our interest rate swap agreements , amortization of discounts and deferred financing costs , unrealized gains ( losses ) on non-designated hedging instruments , and non-cash interest expense related to our interest rate swap agreements . depreciation and amortization we recognize depreciation and amortization expense associated with our homes and other capital expenditures over their expected useful lives . impairment and other impairment and other represents provisions for impairment when the carrying amount of our single-family residential properties is not recoverable and casualty ( gains ) losses , net of any insurance recoveries . unrealized gains on investments in equity securities unrealized gains on investments in equity securities includes gains resulting from mark to market adjustments made for our equity securities . other , net other , net includes interest income , asset and property management fee income , income ( loss ) from investments in unconsolidated joint ventures , and other miscellaneous income and expenses . gain on sale of property , net of tax gain on sale of property , net of tax consists of net gains and losses resulting from sales of our homes . 62 results of operations year ended december 31 , 2020 compared to year ended december 31 , 2019 the following table sets forth a comparison of the results of operations for the years ended december 31 , 2020 , and 2019 : replace_table_token_3_th portfolio information as of december 31 , 2020 and 2019 , we owned 80,177 and 79,505 single-family rental homes , respectively , in our total portfolio . during the years ended december 31 , 2020 , and 2019 , we acquired 2,252 and 2,153 homes , respectively , and sold 1,580 and 3,455 homes , respectively . during the years ended december 31 , 2020 , and 2019 , we owned an average of 79,530 and 80,372 single-family rental homes , respectively . we believe presenting information about the portion of our total portfolio that has been fully operational for the entirety of both a given reporting period and its prior year comparison period provides investors with meaningful information about the performance of our comparable homes across periods , and about trends in our organic business . to do so , we provide information regarding the performance of our same store portfolio . as of december 31 , 2020 , our same store portfolio consisted of 71,433 single-family rental homes . rental revenues and other property income for the years ended december 31 , 2020 , and 2019 , total portfolio rental revenues and other property income totaled $ 1,822.8 million and $ 1,764.7 million , respectively , an increase of 3.3 % , driven by an increase in average occupancy , average monthly rent per occupied home , and utilities reimbursements , partially offset by an increase in bad debt , reduced fee income , and a 842 home decrease between periods in the average number of homes owned . average occupancy for the years ended december 31 , 2020 , and 2019 for the total portfolio was 96.1 % and 94.2 % , respectively . average monthly rent per occupied home for the total portfolio for the years ended december 31 , 2020 , and 2019 was $ 1,875 and $ 1,809 , respectively , a 3.6 % increase . for our same store portfolio , average occupancy was 97.5 % and 96.2 % for the years ended december 31 , 2020 , and 2019 , respectively , and average monthly rent per occupied home for the years ended december 31 , 2020 , and 2019 was $ 1,874 and $ 1,810 , respectively , a 3.5 % increase . 63 the annual turnover rate for the same store portfolio for the years ended december 31 , 2020 , and 2019 was 26.1 % and 29.7 % , respectively . for the same store portfolio , an average home remained unoccupied for 36 and 46 days between residents for the years ended december 31 , 2020 , and 2019 , respectively . the decreases in these two metrics contributed to our increase in occupancy on a year over year basis . furthermore , we believe the decrease in turnover is partially attributable to the effects of the covid-19 pandemic ( e.g . , eviction moratoriums and residents who are not inclined to relocate during this period ) . we can not predict how long eviction moratoriums will remain in place nor when the general effects of the pandemic will subside and how those items may affect our turnover and occupancy rates . to monitor prospective changes in average monthly rent per occupied home , we compare the monthly rent from an expiring lease to the monthly rent from the next lease for the same home , in each case , net of any amortized non-service concessions , to calculate net effective rental rate growth . leases are either renewal leases , where our current resident stays for a subsequent lease term , or new leases , where our previous resident moves out and a new resident signs a

liquidity and capital resources credit market disruptions in recent years have resulted in a tightening of available sources of credit and significant liquidity concerns for many companies . we believe we have sufficient sources of liquidity at a reasonable cost at the present time , based on the following : we held $ 585.9 million of cash and liquid short-term investments at december 31 , 2010 , compared to $ 940.1 million at december 31 , 2009. we reinvested a substantial portion of our short-term investments in higher yielding fixed income securities during 2010 to maximize our net investment income . in addition , in early 2010 , we used cash held at year-end 2009 to pay the final $ 64.5 million due for conversion of our 1.3 % convertible notes . during the three years ended december 31 , 2010 , we have averaged $ 501.3 million in cash provided by operating activities . our available for sale bond portfolio had a fair value of $ 5.0 billion at december 31 , 2010 , compared to $ 4.5 billion at december 31 , 2009 , and an average rating of aa+ . we intend to hold these securities until their maturity , but we would be able to sell securities to generate cash if the need arises . our insurance companies have sufficient resources to pay potential claims . we project that our insurance companies will pay approximately $ 1.3 billion of claims in 2011 , based on historical payment patterns and claims history .

the safety and service measures currently in place include : ( 1 ) creating and implementing a safety training program for all associates ; ( 2 ) maintaining a three-month supply of masks , gloves , shoe covers , and hand sanitizer for field teams ; ( 3 ) continuing to leverage self-show and virtual-tour technology as both safety measures and competitive advantages ; ( 4 ) adhering to strict safety protocols for maintenance service trips ; and ( 5 ) adapting to offer virtual options for resident move-in orientations and pre-move-out visits . neither these procedural adjustments nor the overall impact of the covid-19 pandemic created significant disruptions to our business model during the year ended december 31 , 2020. however , the pandemic did impact our business , including operating , investment management , and capital markets activities as more fully described below . operations the direct impacts on our results of operations and key operating metrics from the effects of the covid-19 pandemic include , but are not limited to : ( 1 ) a decrease in gross rental revenues and other property income ( before concessions and bad debt ) due to jurisdictional restrictions on rent increases and late fees and or forgiveness of late fees for residents who have requested leniency ; ( 2 ) an increase in occupancy due to lower turnover partially driven by residents ' decisions not to relocate during the pandemic , strong demand for homes that become vacant , and the impact of eviction moratoriums ; ( 3 ) an increase in uncollectible revenues ( or decline in rent collections percentages ) due to resident hardships and eviction moratoriums ; and ( 4 ) a decrease in property operating and maintenance expenses for turnover costs ( lower turnover rates ) and property administrative fees ( eviction moratoriums ) . in march 2020 , to act on our core values of `` genuine care `` and `` standout citizenship , `` we began to offer solutions for residents experiencing financial hardship when requested , including the ongoing creation of payment plans , without late fees , for residents requiring flexibility to meet rental obligations over time . additionally , we continue to adhere to federal , state , and local restrictions on items such as evictions , collections , rent increases , and late fees as appropriate . the ongoing covid-19 outbreak in the united states has led entities directed by , or notionally affiliated with , the federal government as well as certain states and cities , including those in which we own properties and where our principal places of business are located , to impose and continue to implement measures intended to control the spread of covid-19 , including instituting quarantines , restrictions on travel , “ shelter in place ” rules , and restrictions on types of business that may continue to operate . we depend on rental revenues and other property income from residents for substantially all of our revenues . overall revenue collections as a percentage of monthly billings was 96 % for the period from april 2020 through december 2020 , compared to a historical average of 99 % . while collection of revenues has remained near historical levels thus far through the pandemic , the covid-19 outbreak , as well as continuing measures taken by governmental authorities and private actors to limit the spread of this virus or mitigate its impact , are interfering with the ability of some of our residents to meet their lease obligations and make their rent payments on time or at all . in addition , entities directed by , or notionally affiliated with , the federal government as well as some state and local jurisdictions across the united states , have imposed temporary eviction moratoriums if certain criteria are met by residents , are allowing residents to defer missed rent payments without incurring late fees , and are prohibiting rent increases . jurisdictions and other local and national authorities may expand or extend measures imposing restrictions on our ability to enforce residents ' contractual rental obligations and limiting our ability to increase rents . we can not predict if states , municipalities , local , and or national authorities will expand existing restrictions , if additional states or municipalities will implement similar restrictions , or when restrictions currently in place will expire . such measures are likely to enable residents to stay in their homes despite an inability to pay because of financial or other hardship stemming from the pandemic . certain other restrictions imposed by jurisdictions across the united states are intended to limit operations by businesses not deemed “ essential businesses . ” while none of the current restrictions have materially impacted our ability to provide services to our residents or homes , future measures may negatively impact our ability to access our homes , complete service requests , or make our homes ready for new residents . unless the residents report symptoms of or exposure to covid-19 , we are completing all service calls . in all cases , we work with the residents to ensure service requests are addressed in a timely and safe manner . while covid-19 and related containment measures may interfere with the ability of our associates , suppliers , and other business partners to carry out their assigned tasks or to supply materials and services at ordinary levels of performance relative to the conduct of our business in the future , to date we have not experienced significant disruptions of these types . 56 the majority of our office-based associates continue to work from home and will do so until we determine it is in our and their best interests to fully return to our offices . additionally , changes to the working environment have not had a material effect on our internal controls over financial reporting since the pandemic began ( see part ii . item 9a . story_separator_special_tag property management expense property management expense represents personnel and other costs associated with the oversight and management of our portfolio of homes , including those within our unconsolidated joint ventures . all of our homes are managed through our internal property manager . general and administrative general and administrative expense represents personnel costs , professional fees , and other costs associated with our day-to-day activities . general and administrative expense also includes merger and transaction-related expenses , among other things , that are of a non-recurring nature . share-based compensation expense all share-based compensation expense is recognized in our consolidated statements of operations as components of general and administrative expense and property management expense . we issue share-based awards to align the interests of our associates with those of our investors . interest expense interest expense includes interest payable on our debt instruments , payments and receipts related to our interest rate swap agreements , amortization of discounts and deferred financing costs , unrealized gains ( losses ) on non-designated hedging instruments , and non-cash interest expense related to our interest rate swap agreements . depreciation and amortization we recognize depreciation and amortization expense associated with our homes and other capital expenditures over their expected useful lives . impairment and other impairment and other represents provisions for impairment when the carrying amount of our single-family residential properties is not recoverable and casualty ( gains ) losses , net of any insurance recoveries . unrealized gains on investments in equity securities unrealized gains on investments in equity securities includes gains resulting from mark to market adjustments made for our equity securities . other , net other , net includes interest income , asset and property management fee income , income ( loss ) from investments in unconsolidated joint ventures , and other miscellaneous income and expenses . gain on sale of property , net of tax gain on sale of property , net of tax consists of net gains and losses resulting from sales of our homes . 62 results of operations year ended december 31 , 2020 compared to year ended december 31 , 2019 the following table sets forth a comparison of the results of operations for the years ended december 31 , 2020 , and 2019 : replace_table_token_3_th portfolio information as of december 31 , 2020 and 2019 , we owned 80,177 and 79,505 single-family rental homes , respectively , in our total portfolio . during the years ended december 31 , 2020 , and 2019 , we acquired 2,252 and 2,153 homes , respectively , and sold 1,580 and 3,455 homes , respectively . during the years ended december 31 , 2020 , and 2019 , we owned an average of 79,530 and 80,372 single-family rental homes , respectively . we believe presenting information about the portion of our total portfolio that has been fully operational for the entirety of both a given reporting period and its prior year comparison period provides investors with meaningful information about the performance of our comparable homes across periods , and about trends in our organic business . to do so , we provide information regarding the performance of our same store portfolio . as of december 31 , 2020 , our same store portfolio consisted of 71,433 single-family rental homes . rental revenues and other property income for the years ended december 31 , 2020 , and 2019 , total portfolio rental revenues and other property income totaled $ 1,822.8 million and $ 1,764.7 million , respectively , an increase of 3.3 % , driven by an increase in average occupancy , average monthly rent per occupied home , and utilities reimbursements , partially offset by an increase in bad debt , reduced fee income , and a 842 home decrease between periods in the average number of homes owned . average occupancy for the years ended december 31 , 2020 , and 2019 for the total portfolio was 96.1 % and 94.2 % , respectively . average monthly rent per occupied home for the total portfolio for the years ended december 31 , 2020 , and 2019 was $ 1,875 and $ 1,809 , respectively , a 3.6 % increase . for our same store portfolio , average occupancy was 97.5 % and 96.2 % for the years ended december 31 , 2020 , and 2019 , respectively , and average monthly rent per occupied home for the years ended december 31 , 2020 , and 2019 was $ 1,874 and $ 1,810 , respectively , a 3.5 % increase . 63 the annual turnover rate for the same store portfolio for the years ended december 31 , 2020 , and 2019 was 26.1 % and 29.7 % , respectively . for the same store portfolio , an average home remained unoccupied for 36 and 46 days between residents for the years ended december 31 , 2020 , and 2019 , respectively . the decreases in these two metrics contributed to our increase in occupancy on a year over year basis . furthermore , we believe the decrease in turnover is partially attributable to the effects of the covid-19 pandemic ( e.g . , eviction moratoriums and residents who are not inclined to relocate during this period ) . we can not predict how long eviction moratoriums will remain in place nor when the general effects of the pandemic will subside and how those items may affect our turnover and occupancy rates . to monitor prospective changes in average monthly rent per occupied home , we compare the monthly rent from an expiring lease to the monthly rent from the next lease for the same home , in each case , net of any amortized non-service concessions , to calculate net effective rental rate growth . leases are either renewal leases , where our current resident stays for a subsequent lease term , or new leases , where our previous resident moves out and a new resident signs a

cash flows year ended december 31 , 2020 compared to year ended december 31 , 2019 the following table summarizes our cash flows for the years ended december 31 , 2020 and 2019 : replace_table_token_11_th 76 operating activities our cash flows provided by operating activities depend on numerous factors , including the occupancy level of our homes , the rental rates achieved on our leases , the collection of rent from our residents , and the amount of our operating and other expenses . net cash provided by operating activities was $ 696.7 million and $ 662.1 million for the years ended december 31 , 2020 , and 2019 , respectively , an increase of 5.2 % . the increase in cash provided by operating activities was driven by improved operational profitability , which was partially offset by changes in operating assets and liabilities . investing activities net cash provided by ( used in ) investing activities consists primarily of the acquisition costs of homes , capital improvements , and proceeds from property sales . net cash provided by ( used in ) investing activities was $ ( 425.2 ) million and $ 102.2 million for the years ended december 31 , 2020 , and 2019 , respectively , a decrease of $ 527.4 million .

greenpro provides a range of services as a package solution ( the “ package solution ” ) to our clients and we believe that our clients can reduce their business costs and improve their revenues . in addition to our business solution services , we also operate a venture capital business through greenpro venture capital limited , an anguilla corporation . one of our venture capital business segments focuses on ( 1 ) establishing a business incubator for start-up and high growth companies to support such companies during critical growth periods , which will include education and support services , and ( 2 ) searching the investment opportunities in selected start-up and high growth companies , which may generate significant returns to the company . our venture capital business focuses on companies located in south-east asia and east asia , including hong kong , malaysia , china , thailand and singapore . another venture capital business segment focuses on rental activities of commercial properties and the sale of investment properties . results of operations for information regarding our controls and procedures , see part ii , item 9a - controls and procedures , of this annual report . during the years ended december 31 , 2020 and 2019 , we operated in three regions : hong kong , malaysia and china . we derived revenues from rental activities of our commercial properties , sale of properties , and the provision of services . a table further describing our revenue and cost of revenues is set forth below : replace_table_token_2_th 32 comparison of the years ended december 31 , 2020 and 2019 total revenues total revenue was $ 2,254,811 and $ 4,484,822 for the years ended december 31 , 2020 and 2019 , respectively . the decrease of $ 2,230,011 was primarily due to a decrease in the revenue of business services . we expect revenue from our business services segment to decrease in the next few months due to the impact of the covid-19 pandemic . service business revenue revenue from the provision of business services was $ 1,876,954 and $ 4,201,601 for the years ended december 31 , 2020 and 2019 , respectively . it was derived principally from the provision of business consulting and advisory services as well as company secretarial , accounting and financial analysis services . we experienced a decrease in service income as a result of fewer service orders placed from clients during the period due to the impact of the covid-19 pandemic . real estate business rental revenue revenue from rentals was $ 124,128 and $ 93,699 for the years ended december 31 , 2020 and 2019 , respectively . it was derived principally from leasing properties in malaysia and hong kong . we believe our rental income will be stable in the near future . sale of properties for the year ended december 31 , 2020 , revenue from the sale of properties was $ 253,729 , which was derived from the sale of one property located in hong kong . for the year ended december 31 , 2019 , there was revenue of $ 189,522 generated from the sale of one property located in hong kong . as opportunities permit , management expects to continue to purchase and sell commercial real estate in the near future . accordingly , we expect revenue and costs attributable to the sale of properties to fluctuate on a going forward basis . 33 total operating costs and expenses total operating costs and expenses were $ 5,160,386 and $ 6,075,907 for the years ended december 31 , 2020 and 2019 , respectively . they consist of cost of service revenue , cost of real estate properties sold , cost of rental revenue , general and administrative , and impairment of other receivables . loss from operations for the company for the years ended december 31 , 2020 and 2019 was $ 2,905,575 and $ 1,591,085 , respectively . the increase in a loss from operations was mainly due to a decrease in service revenue of $ 2,324,647. cost of service revenue cost of revenue for provision of services was $ 338,683 and $ 1,191,301 for the years ended december 31 , 2020 and 2019 , respectively . it primarily consists of employee compensation and related payroll benefits , company formation cost and other professional fees directly attributable to cost related to the services rendered . 34 cost of real estate properties sold cost of revenue on properties sold was $ 210,616 and $ 137,205 for the years ended december 31 , 2020 and 2019 , respectively . it primarily consists of the purchase price of property , legal fees , improvement costs to the building structure , and other acquisition costs . selling and advertising costs are expensed as incurred . cost of rental revenue cost of rental revenue was $ 50,114 and $ 48,281 for the years ended december 31 , 2020 and 2019 , respectively . it includes the costs associated with taxes , repairs and maintenance , property insurance , depreciation and other related administrative costs . property management fee and utility expenses are paid directly by tenants . general and administrative general and administrative ( “ g & a ” ) expenses were $ 4,560,973 and $ 4,675,050 for the years ended december 31 , 2020 and 2019 , respectively . the general and administrative expenses consist primarily of salaries and wages of $ 1,586,754 , rent and rates of $ 319,481 , advertising and promotion of $ 567,567 , directors ' remuneration of $ 373,125 , consultancy fee of $ 378,161 , and audit , legal , and other professional fees of $ 455,362. we expect our g & a expenses will continue toincrease as we integrate our business acquisitions , expand our businesses and offices into new jurisdictions , and strengthen our existing businesses . story_separator_special_tag our related parties are mainly those companies in which greenpro venture capital limited or greenpro resources limited owns a certain percentage of the shares of such companies , or those companies that the company can exercise significant influence over those companies in making financial and operating policy decisions . some of the related parties are either controlled by or under common control of mr. loke che chan gilbert or mr. lee chong kuang , directors of the company . one of the related parties is controlled by ms. chen yanhong , a director of some of our subsidiaries . critical accounting policies and estimates use of estimates the preparation of financial statements in conformity with u.s. generally accepted accounting principles requires management to make estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements , and the reported amounts of revenues and expenses during the reporting period . significant accounting estimates include certain assumptions related to , among others , the allowance for doubtful accounts receivable , impairment analysis of real estate assets and other long-term assets including goodwill , valuation allowance on deferred income taxes , and the accrual of potential liabilities . actual results may differ from these estimates . revenue recognition the company follows the guidance of accounting standards codification ( asc ) 606 , revenue from contracts . asc 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contracts , which includes ( 1 ) identifying the contracts or agreements with a customer , ( 2 ) identifying our performance obligations in the contract or agreement , ( 3 ) determining the transaction price , ( 4 ) allocating the transaction price to the separate performance obligations , and ( 5 ) recognizing revenue as each performance obligation is satisfied . the company only applies the five-step model to contracts when it is probable that the company will collect the consideration it is entitled to in exchange for the services it transfers to its clients . the company 's revenue consists of revenue from providing business consulting and corporate advisory services ( “ service revenue ” ) , revenue from the sale of real estate properties , and revenue from the rental of real estate properties . impairment of long-lived assets long-lived assets primarily include real estate held for investment , real estate held for use , and equipment and intangible assets . in accordance with the provision of asc 360 , the company generally conducts its annual impairment evaluation to its long-lived assets , usually in the fourth quarter of each year , or more frequently if indicators of impairment exist , such as a significant sustained change in the business climate . the recoverability of long-lived assets is measured at the reporting unit level . if the total of the expected undiscounted future net cash flows is less than the carrying amount of the asset , a loss is recognized for the difference between the fair value and carrying amount of the asset . 37 recent accounting pronouncements refer to note 1 in the accompanying financial statements . story_separator_special_tag style= `` font-family : times new roman , times , serif ; font-size : 10pt `` > financing activities net cash provided by financing activities was $ 1,502,735 and $ 381,798 for the year ended december 31 , 2020 and 2019 , respectively . the cash provided by financing activities was mainly by net cash proceeds from convertible promissory notes of $ 1,470,000 in 2020. net cash provided by financing activities was mainly resulted from a short-term loan proceeds of $ 385,158 in 2019. below is the tabular summary of the financing activities of the company during 2020 and 2019 : replace_table_token_4_th 1. the company issued 8,602 shares of restricted common stock at a price of $ 4.80 per share for aggregate gross proceeds of $ 41,290 , plus cash of $ 129,032 for the acquisition of 100 % of the shareholdings of sparkle insurance brokers limited ( renamed to greenpro sparkle insurance brokers limited on april 4 , 2019 ) . 2. the company issued 4,444,444 shares of restricted common stock at a price of $ 0.90 per share , or a total of $ 4,000,000 , to acquire a 4 % interest in a 12.3-kilogram carved natural blue sapphire ( the “ millennium sapphire ” ) . 3. the company issued 35,000 shares of restricted common stock at a price of $ 1.00 per share , or a total of $ 35,000 , to settle a marketing expense to a marketing service provider , corporateads , llc ( “ corporateads ” ) . 4. the company issued 457,312 shares of restricted common stock at a price of $ 1.64 per share , or a total of $ 749,992 , to acquire 15 % equity interests in ata plus sdn . bhd ( “ apsb ” ) . 5. the company issued and sold 50,000 shares of restricted common stock in a private placement to mr. seah kok wah at a price of $ 1.10 per share for cash proceeds of $ 55,000 . 6. the company issued and sold 145,455 shares of restricted common stock in a private placement to ag opportunities fund spc-ag pre-ipo fund sp1 at a price of $ 1.10 per share for cash proceeds of $ 160,000 . 7. the company issued 257,591 shares of restricted common stock at a price of $ 1.596 per share , or a total of $ 411,120 , to acquire 18 % equity interests in new business media sdn . bhd ( “ nbmsb ” ) . 8. the company issued 200,000 shares of restricted common stock at a price of $ 1.567 per share , or a total of $ 313,400 , to settle a marketing expense to an investor relations agent , mr. dennis burns . 9. the company issued

cash flows year ended december 31 , 2020 compared to year ended december 31 , 2019 the following table summarizes our cash flows for the years ended december 31 , 2020 and 2019 : replace_table_token_11_th 76 operating activities our cash flows provided by operating activities depend on numerous factors , including the occupancy level of our homes , the rental rates achieved on our leases , the collection of rent from our residents , and the amount of our operating and other expenses . net cash provided by operating activities was $ 696.7 million and $ 662.1 million for the years ended december 31 , 2020 , and 2019 , respectively , an increase of 5.2 % . the increase in cash provided by operating activities was driven by improved operational profitability , which was partially offset by changes in operating assets and liabilities . investing activities net cash provided by ( used in ) investing activities consists primarily of the acquisition costs of homes , capital improvements , and proceeds from property sales . net cash provided by ( used in ) investing activities was $ ( 425.2 ) million and $ 102.2 million for the years ended december 31 , 2020 , and 2019 , respectively , a decrease of $ 527.4 million .

greenpro provides a range of services as a package solution ( the “ package solution ” ) to our clients and we believe that our clients can reduce their business costs and improve their revenues . in addition to our business solution services , we also operate a venture capital business through greenpro venture capital limited , an anguilla corporation . one of our venture capital business segments focuses on ( 1 ) establishing a business incubator for start-up and high growth companies to support such companies during critical growth periods , which will include education and support services , and ( 2 ) searching the investment opportunities in selected start-up and high growth companies , which may generate significant returns to the company . our venture capital business focuses on companies located in south-east asia and east asia , including hong kong , malaysia , china , thailand and singapore . another venture capital business segment focuses on rental activities of commercial properties and the sale of investment properties . results of operations for information regarding our controls and procedures , see part ii , item 9a - controls and procedures , of this annual report . during the years ended december 31 , 2020 and 2019 , we operated in three regions : hong kong , malaysia and china . we derived revenues from rental activities of our commercial properties , sale of properties , and the provision of services . a table further describing our revenue and cost of revenues is set forth below : replace_table_token_2_th 32 comparison of the years ended december 31 , 2020 and 2019 total revenues total revenue was $ 2,254,811 and $ 4,484,822 for the years ended december 31 , 2020 and 2019 , respectively . the decrease of $ 2,230,011 was primarily due to a decrease in the revenue of business services . we expect revenue from our business services segment to decrease in the next few months due to the impact of the covid-19 pandemic . service business revenue revenue from the provision of business services was $ 1,876,954 and $ 4,201,601 for the years ended december 31 , 2020 and 2019 , respectively . it was derived principally from the provision of business consulting and advisory services as well as company secretarial , accounting and financial analysis services . we experienced a decrease in service income as a result of fewer service orders placed from clients during the period due to the impact of the covid-19 pandemic . real estate business rental revenue revenue from rentals was $ 124,128 and $ 93,699 for the years ended december 31 , 2020 and 2019 , respectively . it was derived principally from leasing properties in malaysia and hong kong . we believe our rental income will be stable in the near future . sale of properties for the year ended december 31 , 2020 , revenue from the sale of properties was $ 253,729 , which was derived from the sale of one property located in hong kong . for the year ended december 31 , 2019 , there was revenue of $ 189,522 generated from the sale of one property located in hong kong . as opportunities permit , management expects to continue to purchase and sell commercial real estate in the near future . accordingly , we expect revenue and costs attributable to the sale of properties to fluctuate on a going forward basis . 33 total operating costs and expenses total operating costs and expenses were $ 5,160,386 and $ 6,075,907 for the years ended december 31 , 2020 and 2019 , respectively . they consist of cost of service revenue , cost of real estate properties sold , cost of rental revenue , general and administrative , and impairment of other receivables . loss from operations for the company for the years ended december 31 , 2020 and 2019 was $ 2,905,575 and $ 1,591,085 , respectively . the increase in a loss from operations was mainly due to a decrease in service revenue of $ 2,324,647. cost of service revenue cost of revenue for provision of services was $ 338,683 and $ 1,191,301 for the years ended december 31 , 2020 and 2019 , respectively . it primarily consists of employee compensation and related payroll benefits , company formation cost and other professional fees directly attributable to cost related to the services rendered . 34 cost of real estate properties sold cost of revenue on properties sold was $ 210,616 and $ 137,205 for the years ended december 31 , 2020 and 2019 , respectively . it primarily consists of the purchase price of property , legal fees , improvement costs to the building structure , and other acquisition costs . selling and advertising costs are expensed as incurred . cost of rental revenue cost of rental revenue was $ 50,114 and $ 48,281 for the years ended december 31 , 2020 and 2019 , respectively . it includes the costs associated with taxes , repairs and maintenance , property insurance , depreciation and other related administrative costs . property management fee and utility expenses are paid directly by tenants . general and administrative general and administrative ( “ g & a ” ) expenses were $ 4,560,973 and $ 4,675,050 for the years ended december 31 , 2020 and 2019 , respectively . the general and administrative expenses consist primarily of salaries and wages of $ 1,586,754 , rent and rates of $ 319,481 , advertising and promotion of $ 567,567 , directors ' remuneration of $ 373,125 , consultancy fee of $ 378,161 , and audit , legal , and other professional fees of $ 455,362. we expect our g & a expenses will continue toincrease as we integrate our business acquisitions , expand our businesses and offices into new jurisdictions , and strengthen our existing businesses . story_separator_special_tag our related parties are mainly those companies in which greenpro venture capital limited or greenpro resources limited owns a certain percentage of the shares of such companies , or those companies that the company can exercise significant influence over those companies in making financial and operating policy decisions . some of the related parties are either controlled by or under common control of mr. loke che chan gilbert or mr. lee chong kuang , directors of the company . one of the related parties is controlled by ms. chen yanhong , a director of some of our subsidiaries . critical accounting policies and estimates use of estimates the preparation of financial statements in conformity with u.s. generally accepted accounting principles requires management to make estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements , and the reported amounts of revenues and expenses during the reporting period . significant accounting estimates include certain assumptions related to , among others , the allowance for doubtful accounts receivable , impairment analysis of real estate assets and other long-term assets including goodwill , valuation allowance on deferred income taxes , and the accrual of potential liabilities . actual results may differ from these estimates . revenue recognition the company follows the guidance of accounting standards codification ( asc ) 606 , revenue from contracts . asc 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contracts , which includes ( 1 ) identifying the contracts or agreements with a customer , ( 2 ) identifying our performance obligations in the contract or agreement , ( 3 ) determining the transaction price , ( 4 ) allocating the transaction price to the separate performance obligations , and ( 5 ) recognizing revenue as each performance obligation is satisfied . the company only applies the five-step model to contracts when it is probable that the company will collect the consideration it is entitled to in exchange for the services it transfers to its clients . the company 's revenue consists of revenue from providing business consulting and corporate advisory services ( “ service revenue ” ) , revenue from the sale of real estate properties , and revenue from the rental of real estate properties . impairment of long-lived assets long-lived assets primarily include real estate held for investment , real estate held for use , and equipment and intangible assets . in accordance with the provision of asc 360 , the company generally conducts its annual impairment evaluation to its long-lived assets , usually in the fourth quarter of each year , or more frequently if indicators of impairment exist , such as a significant sustained change in the business climate . the recoverability of long-lived assets is measured at the reporting unit level . if the total of the expected undiscounted future net cash flows is less than the carrying amount of the asset , a loss is recognized for the difference between the fair value and carrying amount of the asset . 37 recent accounting pronouncements refer to note 1 in the accompanying financial statements . story_separator_special_tag style= `` font-family : times new roman , times , serif ; font-size : 10pt `` > financing activities net cash provided by financing activities was $ 1,502,735 and $ 381,798 for the year ended december 31 , 2020 and 2019 , respectively . the cash provided by financing activities was mainly by net cash proceeds from convertible promissory notes of $ 1,470,000 in 2020. net cash provided by financing activities was mainly resulted from a short-term loan proceeds of $ 385,158 in 2019. below is the tabular summary of the financing activities of the company during 2020 and 2019 : replace_table_token_4_th 1. the company issued 8,602 shares of restricted common stock at a price of $ 4.80 per share for aggregate gross proceeds of $ 41,290 , plus cash of $ 129,032 for the acquisition of 100 % of the shareholdings of sparkle insurance brokers limited ( renamed to greenpro sparkle insurance brokers limited on april 4 , 2019 ) . 2. the company issued 4,444,444 shares of restricted common stock at a price of $ 0.90 per share , or a total of $ 4,000,000 , to acquire a 4 % interest in a 12.3-kilogram carved natural blue sapphire ( the “ millennium sapphire ” ) . 3. the company issued 35,000 shares of restricted common stock at a price of $ 1.00 per share , or a total of $ 35,000 , to settle a marketing expense to a marketing service provider , corporateads , llc ( “ corporateads ” ) . 4. the company issued 457,312 shares of restricted common stock at a price of $ 1.64 per share , or a total of $ 749,992 , to acquire 15 % equity interests in ata plus sdn . bhd ( “ apsb ” ) . 5. the company issued and sold 50,000 shares of restricted common stock in a private placement to mr. seah kok wah at a price of $ 1.10 per share for cash proceeds of $ 55,000 . 6. the company issued and sold 145,455 shares of restricted common stock in a private placement to ag opportunities fund spc-ag pre-ipo fund sp1 at a price of $ 1.10 per share for cash proceeds of $ 160,000 . 7. the company issued 257,591 shares of restricted common stock at a price of $ 1.596 per share , or a total of $ 411,120 , to acquire 18 % equity interests in new business media sdn . bhd ( “ nbmsb ” ) . 8. the company issued 200,000 shares of restricted common stock at a price of $ 1.567 per share , or a total of $ 313,400 , to settle a marketing expense to an investor relations agent , mr. dennis burns . 9. the company issued

liquidity and capital resources as of december 31 , 2020 , we had working capital deficiency of $ 3,411,175 as compared to working capital deficiency of $ 2,078,026 as of december 31 , 2019. as of december 31 , 2020 , we had total current assets of $ 1,612,113 consisting of cash and cash equivalents of $ 1,086,753 , accounts receivable of $ 191,490 , prepaids and other current assets of $ 190,304 , amounts due from related parties of $ 62,320 and deferred costs of revenue of $ 81,246 , compared to total current assets of $ 1,798,245 as of december 31 , 2019. we had current liabilities of $ 5,023,288 mainly consisting of amounts due to related parties of $ 1,108,641 , accounts payable and accrued liabilities of $ 702,726 , deferred revenue of $ 1,634,075 and derivative liabilities of $ 1,189,786 as of december 31 , 2020 , compared to total current liabilities of $ 3,876,271 as of december 31 , 2019. the company 's net losses were $ 3,752,953 and $ 1,349,478 for the year ended december 31 , 2020 and 2019 , respectively . the increase in net loss was mainly due to a decrease in service revenue of $ 2,324,647. for the year ended december 31 , 2020 , the company incurred a net loss of $ 3,752,953 and used cash in operating activities of $ 1,567,758 , and at december 31 , 2020 , the company had a working capital deficiency of $ 3,411,175. these factors raise substantial doubt about the company 's ability tocontinue as a going concern within one year of the date that the financial statements are issued .

patients access our tests through their physician . our afirma , percepta and envisia tests are used as part of the diagnostic process and genomic testing services are performed in our clia laboratory located in san francisco , california . cytopathology services for afirma testing are performed in our reference laboratory in austin , texas . the prosigna test is indicated in female breast cancer patients who have undergone surgery in conjunction with locoregional treatment consistent with standard of care . this in vitro diagnostic test is performed on the ncounter flex analysis system in laboratories worldwide , as well as in the united states . fourth quarter and full-year 2019 financial results 56 for the three months ended december 31 , 2019 , compared to the prior year : total revenue was $ 29.7 million , an increase of 15 % ; gross margin was 66 % , unchanged ; operating expenses , excluding cost of revenue , were $ 27.8 million , an increase of 38 % ; net loss and comprehensive loss was ( $ 7.5 ) million , an increase of 140 % ; basic and diluted net loss per common share was ( $ 0.15 ) , an increase of 88 % ; net cash provided by operating activities was $ 1.8 million , compared to $ 1.2 million used ; and cash and cash equivalents was $ 159.3 million at december 31 , 2019. for the year ended december 31 , 2019 , compared to the prior year : total revenue was $ 120.4 million , an increase of 31 % ; gross margin was 70 % , an increase of six percentage points ; operating expenses , excluding cost of revenue , were $ 99.0 million , an increase of 22 % ; net loss and comprehensive loss was ( $ 12.6 ) million , an improvement of 45 % ; basic and diluted net loss per common share was ( $ 0.27 ) , an improvement of 56 % ; and net cash used in operating activities was $ 3.2 million , an improvement of 76 % . 2019 full-year and recent business highlights commercial growth : achieved strong total revenue growth across our testing and product portfolio delivering $ 29.5 million in the fourth quarter and $ 108.3 million for 2019 , an increase of 16 % and 19 % , respectively , compared to the prior year . accelerated pulmonology testing revenue to $ 2.0 million and $ 5.5 million for the fourth quarter and full year , respectively , a 123 % and 174 % increase compared to prior year . grew total genomic volume ( afirma , percepta and envisia ) by 18 % to 10,846 tests in the fourth quarter of 2019 and by 25 % to 39,612 tests in 2019 , compared to prior year . increased genomic volume for our pulmonology products by 136 % in 2019 compared to prior year , achieving growth targets for both the percepta and envisia classifiers . received final medicare coverage in march 2019 for the envisia classifier and published strong clinical validation and clinical utility data in the lancet respiratory medicine , propelling nationwide commercial expansion of the test in the second half of 2019. expanded payer contracts by 14.4 million lives , making veracyte an in-network genomic testing provider to health plans representing over 225 million members . continued to build an extensive library of clinical data across our portfolio in 2019 , including 8 publications and 11 presentations at leading medical meetings , demonstrating our afirma and pulmonology tests ' performance and clinical utility . eleven abstracts were presented at the san antonio breast cancer symposium in december 2019 , including data showing a benefit of prosigna ® over other genomic testing to identify patients ' long-term risk of developing distant metastases . in addition , data were presented showing the test 's ability to identify patients with intrinsic breast cancer subtypes that may potentially benefit from cdk4/6 inhibitors in place of standard chemotherapy . biopharmaceutical collaborations/pipeline advancement : in january 2019 , announced a long-term strategic collaboration with johnson & johnson innovation llc to advance the development and commercialization of novel diagnostic tests to detect lung cancer at its earliest stages , when the disease is most treatable . presented preliminary data at the american college of chest physicians ( chest ) annual meeting for our first-of-its-kind noninvasive nasal swab classifier for improved lung cancer diagnosis . the test , being developed through our johnson & johnson collaboration , is expected to launch in early 2021. launched the second-generation percepta gsc , completing the transition of our core classifiers to our rna whole-transcriptome sequencing platform . 57 announced a multi-year collaboration with acerta pharma , the hematology research and development arm of astrazeneca plc , to provide genomic information that will support the biopharmaceutical company 's development of oncology therapeutics in lymphoma . global expansion : acquired the exclusive global diagnostic rights to the nanostring ncounter flex analysis system , as well as the prosigna breast cancer assay and the in-development lymphmark lymphoma subtyping test . we believe this transaction positions us to access a $ 40 billion global market for our current and pipeline products , by offering a broad menu of advanced genomic tests in oncology and other indications using a distributed-kit model . factors affecting our performance reported genomic test volume our performance depends on the number of genomic tests that we perform and report as completed in our clia laboratories . story_separator_special_tag timing of our research and development expenses we deploy state-of-the-art and costly genomic technologies in our biomarker discovery experiments , and our spending on these technologies may vary substantially from quarter to quarter . we also spend a significant amount to secure clinical samples that can be used in discovery and product development as well as clinical validation studies . the timing of these research and development activities is difficult to predict , as is the timing of sample acquisitions . if a substantial number of clinical samples are acquired in a given quarter or if a high-cost experiment is conducted in one quarter versus the next , the timing of these expenses can affect our financial results . we conduct clinical studies to validate our new products as well as on-going clinical studies to further the published evidence to support our commercialized tests . as these studies are initiated , start-up costs for each site can be significant and concentrated in a specific quarter . spending on research and development , for both experiments and studies , may vary significantly by quarter depending on the timing of these various expenses . 61 financial overview testing revenue through december 31 , 2019 , we derived a substantial majority of our revenue from the sale of afirma delivered primarily to physicians in the united states . we generally invoice third-party payers upon delivery of a patient report to the prescribing physician . as such , we take the assignment of benefits and the risk of cash collection from the third-party payer and individual patients . third-party payers and other customers in excess of 10 % of total revenue and their related revenue as a percentage of total revenue were as follows : replace_table_token_4_th for tests performed , we recognize the related revenue upon delivery of a patient report to the prescribing physician based on the amount that we expect to ultimately receive . in determining the amount to accrue for a delivered test , we consider factors such as payment history , payer coverage , whether there is a reimbursement contract between the payer and us , payment as a percentage of agreed upon reimbursement rate ( if applicable ) , amount paid per test and any current development or changes that could impact reimbursement . upon ultimate collection , the amount received is compared to previous estimates and the amount accrued is adjusted accordingly . our ability to increase our revenue will depend on our ability to penetrate the market , obtain positive coverage policies from additional third-party payers , obtain reimbursement and or enter into contracts with additional third-party payers for our current and new tests , and increase reimbursement rates for tests performed . finally , should the judgments underlying our estimated reimbursement change , our accrued revenue and financial results could be negatively impacted in future periods . cost of testing revenue the components of our cost of revenue are laboratory expenses , kit costs , sample collection expenses , compensation expense , license fees and royalties , depreciation and amortization , other expenses such as equipment and laboratory supplies , and allocations of facility and information technology expenses . costs associated with performing tests are recorded as the test is processed regardless of whether and when revenue is recognized with respect to that test . as a result , our cost of revenue as a percentage of revenue may vary significantly from period to period because we may not recognize all revenue in the period in which the associated costs are incurred . we expect cost of revenue in absolute dollars to increase as the number of tests we perform increases . however , we expect that the cost per test will decrease over time due to leveraging fixed costs , efficiencies we may gain as test volume increases and from automation , process efficiencies and other cost reductions . as we introduce new tests , initially our cost of revenue will be high as we expect to run suboptimal batch sizes , run quality control batches , test batches , registry samples and generally incur costs that may suppress or reduce gross margins . this will disproportionately increase our aggregate cost of revenue until we achieve efficiencies in processing these new tests . cost of product revenue cost of product revenue consists primarily of costs of purchasing instruments and consumables from third-party contract manufacturers , installation , warranty , service and packaging and delivery costs . in addition , cost of product includes royalty costs for licensed technologies included in our products , provisions for slow-moving and obsolete inventory and stock-based compensation expense . cost of product revenue for instruments and consumables is recognized in the period the related revenue is recognized . shipping and handling costs incurred for product shipments are included in cost of product in the consolidated statements of operations . research and development research and development expenses include expenses incurred to develop our technology , collect clinical samples and conduct clinical studies to develop and support our products and pipeline . these expenses consist of compensation expenses , direct research and development expenses such as prototype materials , laboratory supplies and costs associated with setting up and 62 conducting clinical studies at domestic and international sites , professional fees , depreciation and amortization , other miscellaneous expenses and allocation of facility and information technology expenses . we expense all research and development costs in the periods in which they are incurred . we expect to incur significant research and development expenses as we continue to invest in research and development activities related to developing additional products and evaluating various platforms . we incurred research and development expenses on ongoing evidence development for our afirma , percepta and envisia classifiers in 2019 . we believe a majority of our research and development expenses in and after 2020 will be predominantly in support of our pipeline products . selling and marketing selling and

liquidity and capital resources as of december 31 , 2020 , we had working capital deficiency of $ 3,411,175 as compared to working capital deficiency of $ 2,078,026 as of december 31 , 2019. as of december 31 , 2020 , we had total current assets of $ 1,612,113 consisting of cash and cash equivalents of $ 1,086,753 , accounts receivable of $ 191,490 , prepaids and other current assets of $ 190,304 , amounts due from related parties of $ 62,320 and deferred costs of revenue of $ 81,246 , compared to total current assets of $ 1,798,245 as of december 31 , 2019. we had current liabilities of $ 5,023,288 mainly consisting of amounts due to related parties of $ 1,108,641 , accounts payable and accrued liabilities of $ 702,726 , deferred revenue of $ 1,634,075 and derivative liabilities of $ 1,189,786 as of december 31 , 2020 , compared to total current liabilities of $ 3,876,271 as of december 31 , 2019. the company 's net losses were $ 3,752,953 and $ 1,349,478 for the year ended december 31 , 2020 and 2019 , respectively . the increase in net loss was mainly due to a decrease in service revenue of $ 2,324,647. for the year ended december 31 , 2020 , the company incurred a net loss of $ 3,752,953 and used cash in operating activities of $ 1,567,758 , and at december 31 , 2020 , the company had a working capital deficiency of $ 3,411,175. these factors raise substantial doubt about the company 's ability tocontinue as a going concern within one year of the date that the financial statements are issued .

patients access our tests through their physician . our afirma , percepta and envisia tests are used as part of the diagnostic process and genomic testing services are performed in our clia laboratory located in san francisco , california . cytopathology services for afirma testing are performed in our reference laboratory in austin , texas . the prosigna test is indicated in female breast cancer patients who have undergone surgery in conjunction with locoregional treatment consistent with standard of care . this in vitro diagnostic test is performed on the ncounter flex analysis system in laboratories worldwide , as well as in the united states . fourth quarter and full-year 2019 financial results 56 for the three months ended december 31 , 2019 , compared to the prior year : total revenue was $ 29.7 million , an increase of 15 % ; gross margin was 66 % , unchanged ; operating expenses , excluding cost of revenue , were $ 27.8 million , an increase of 38 % ; net loss and comprehensive loss was ( $ 7.5 ) million , an increase of 140 % ; basic and diluted net loss per common share was ( $ 0.15 ) , an increase of 88 % ; net cash provided by operating activities was $ 1.8 million , compared to $ 1.2 million used ; and cash and cash equivalents was $ 159.3 million at december 31 , 2019. for the year ended december 31 , 2019 , compared to the prior year : total revenue was $ 120.4 million , an increase of 31 % ; gross margin was 70 % , an increase of six percentage points ; operating expenses , excluding cost of revenue , were $ 99.0 million , an increase of 22 % ; net loss and comprehensive loss was ( $ 12.6 ) million , an improvement of 45 % ; basic and diluted net loss per common share was ( $ 0.27 ) , an improvement of 56 % ; and net cash used in operating activities was $ 3.2 million , an improvement of 76 % . 2019 full-year and recent business highlights commercial growth : achieved strong total revenue growth across our testing and product portfolio delivering $ 29.5 million in the fourth quarter and $ 108.3 million for 2019 , an increase of 16 % and 19 % , respectively , compared to the prior year . accelerated pulmonology testing revenue to $ 2.0 million and $ 5.5 million for the fourth quarter and full year , respectively , a 123 % and 174 % increase compared to prior year . grew total genomic volume ( afirma , percepta and envisia ) by 18 % to 10,846 tests in the fourth quarter of 2019 and by 25 % to 39,612 tests in 2019 , compared to prior year . increased genomic volume for our pulmonology products by 136 % in 2019 compared to prior year , achieving growth targets for both the percepta and envisia classifiers . received final medicare coverage in march 2019 for the envisia classifier and published strong clinical validation and clinical utility data in the lancet respiratory medicine , propelling nationwide commercial expansion of the test in the second half of 2019. expanded payer contracts by 14.4 million lives , making veracyte an in-network genomic testing provider to health plans representing over 225 million members . continued to build an extensive library of clinical data across our portfolio in 2019 , including 8 publications and 11 presentations at leading medical meetings , demonstrating our afirma and pulmonology tests ' performance and clinical utility . eleven abstracts were presented at the san antonio breast cancer symposium in december 2019 , including data showing a benefit of prosigna ® over other genomic testing to identify patients ' long-term risk of developing distant metastases . in addition , data were presented showing the test 's ability to identify patients with intrinsic breast cancer subtypes that may potentially benefit from cdk4/6 inhibitors in place of standard chemotherapy . biopharmaceutical collaborations/pipeline advancement : in january 2019 , announced a long-term strategic collaboration with johnson & johnson innovation llc to advance the development and commercialization of novel diagnostic tests to detect lung cancer at its earliest stages , when the disease is most treatable . presented preliminary data at the american college of chest physicians ( chest ) annual meeting for our first-of-its-kind noninvasive nasal swab classifier for improved lung cancer diagnosis . the test , being developed through our johnson & johnson collaboration , is expected to launch in early 2021. launched the second-generation percepta gsc , completing the transition of our core classifiers to our rna whole-transcriptome sequencing platform . 57 announced a multi-year collaboration with acerta pharma , the hematology research and development arm of astrazeneca plc , to provide genomic information that will support the biopharmaceutical company 's development of oncology therapeutics in lymphoma . global expansion : acquired the exclusive global diagnostic rights to the nanostring ncounter flex analysis system , as well as the prosigna breast cancer assay and the in-development lymphmark lymphoma subtyping test . we believe this transaction positions us to access a $ 40 billion global market for our current and pipeline products , by offering a broad menu of advanced genomic tests in oncology and other indications using a distributed-kit model . factors affecting our performance reported genomic test volume our performance depends on the number of genomic tests that we perform and report as completed in our clia laboratories . story_separator_special_tag timing of our research and development expenses we deploy state-of-the-art and costly genomic technologies in our biomarker discovery experiments , and our spending on these technologies may vary substantially from quarter to quarter . we also spend a significant amount to secure clinical samples that can be used in discovery and product development as well as clinical validation studies . the timing of these research and development activities is difficult to predict , as is the timing of sample acquisitions . if a substantial number of clinical samples are acquired in a given quarter or if a high-cost experiment is conducted in one quarter versus the next , the timing of these expenses can affect our financial results . we conduct clinical studies to validate our new products as well as on-going clinical studies to further the published evidence to support our commercialized tests . as these studies are initiated , start-up costs for each site can be significant and concentrated in a specific quarter . spending on research and development , for both experiments and studies , may vary significantly by quarter depending on the timing of these various expenses . 61 financial overview testing revenue through december 31 , 2019 , we derived a substantial majority of our revenue from the sale of afirma delivered primarily to physicians in the united states . we generally invoice third-party payers upon delivery of a patient report to the prescribing physician . as such , we take the assignment of benefits and the risk of cash collection from the third-party payer and individual patients . third-party payers and other customers in excess of 10 % of total revenue and their related revenue as a percentage of total revenue were as follows : replace_table_token_4_th for tests performed , we recognize the related revenue upon delivery of a patient report to the prescribing physician based on the amount that we expect to ultimately receive . in determining the amount to accrue for a delivered test , we consider factors such as payment history , payer coverage , whether there is a reimbursement contract between the payer and us , payment as a percentage of agreed upon reimbursement rate ( if applicable ) , amount paid per test and any current development or changes that could impact reimbursement . upon ultimate collection , the amount received is compared to previous estimates and the amount accrued is adjusted accordingly . our ability to increase our revenue will depend on our ability to penetrate the market , obtain positive coverage policies from additional third-party payers , obtain reimbursement and or enter into contracts with additional third-party payers for our current and new tests , and increase reimbursement rates for tests performed . finally , should the judgments underlying our estimated reimbursement change , our accrued revenue and financial results could be negatively impacted in future periods . cost of testing revenue the components of our cost of revenue are laboratory expenses , kit costs , sample collection expenses , compensation expense , license fees and royalties , depreciation and amortization , other expenses such as equipment and laboratory supplies , and allocations of facility and information technology expenses . costs associated with performing tests are recorded as the test is processed regardless of whether and when revenue is recognized with respect to that test . as a result , our cost of revenue as a percentage of revenue may vary significantly from period to period because we may not recognize all revenue in the period in which the associated costs are incurred . we expect cost of revenue in absolute dollars to increase as the number of tests we perform increases . however , we expect that the cost per test will decrease over time due to leveraging fixed costs , efficiencies we may gain as test volume increases and from automation , process efficiencies and other cost reductions . as we introduce new tests , initially our cost of revenue will be high as we expect to run suboptimal batch sizes , run quality control batches , test batches , registry samples and generally incur costs that may suppress or reduce gross margins . this will disproportionately increase our aggregate cost of revenue until we achieve efficiencies in processing these new tests . cost of product revenue cost of product revenue consists primarily of costs of purchasing instruments and consumables from third-party contract manufacturers , installation , warranty , service and packaging and delivery costs . in addition , cost of product includes royalty costs for licensed technologies included in our products , provisions for slow-moving and obsolete inventory and stock-based compensation expense . cost of product revenue for instruments and consumables is recognized in the period the related revenue is recognized . shipping and handling costs incurred for product shipments are included in cost of product in the consolidated statements of operations . research and development research and development expenses include expenses incurred to develop our technology , collect clinical samples and conduct clinical studies to develop and support our products and pipeline . these expenses consist of compensation expenses , direct research and development expenses such as prototype materials , laboratory supplies and costs associated with setting up and 62 conducting clinical studies at domestic and international sites , professional fees , depreciation and amortization , other miscellaneous expenses and allocation of facility and information technology expenses . we expense all research and development costs in the periods in which they are incurred . we expect to incur significant research and development expenses as we continue to invest in research and development activities related to developing additional products and evaluating various platforms . we incurred research and development expenses on ongoing evidence development for our afirma , percepta and envisia classifiers in 2019 . we believe a majority of our research and development expenses in and after 2020 will be predominantly in support of our pipeline products . selling and marketing selling and

cash flows the following table summarizes our cash flows for the years ended december 31 , 2019 , 2018 and 2017 ( in thousands of dollars ) : replace_table_token_10_th cash flows from operating activities cash used in operating activities for the year ended december 31 , 2019 was $ 3.2 million . the net loss of $ 12.6 million includes non-cash charges of $ 9.8 million of stock-based compensation expense and $ 4.1 million of depreciation and amortization , which includes $ 1.4 million of intangible asset amortization , and $ 0.2 million of end-of-term debt obligation accruals . cash used as a result of changes in operating assets and liabilities was $ 4.8 million , primarily comprised of an increase in accounts receivable of $ 6.2 million , increase in supplies of $ 3.4 million and increase in other assets of $ 0.4 million , partially offset by an increase in accrued liabilities and deferred rent of $ 5.2 million . cash used in operating activities for the year ended december 31 , 2018 was $ 13.5 million . the net loss of $ 23.0 million includes non-cash charges of $ 6.0 million of stock-based compensation expense and $ 3.9 million of depreciation and amortization , which includes $ 1.1 million of intangible asset amortization . it also includes $ 0.3 million of end-of-term debt obligation accruals . cash used as a result of changes in operating assets and liabilities of $ 0.7 million was primarily due to a decrease in accounts payable of $ 1.6 million , an increase in other assets of $ 0.8 million and increases in prepaid expenses and other current assets and accounts receivable of $ 0.9 million , partially offset by a decrease in supplies of $ 1.9

- 32 - attracting and penetrating network partners we created our business model to take advantage of the changing dynamics of the u.s. private health insurance market . our model is based on a b2b2c distribution strategy , meaning that we rely on our employer partners and health plan partners to reach potential members to increase the number of our hsa members . our success depends in large part on our ability to further penetrate our existing network partners by adding new hsa members from these partners and adding new network partners . our innovative technology platform we believe that innovations incorporated in our technology that enable consumers to make healthcare saving and spending decisions differentiate us from our competitors and drive our growth in revenue , hsa members , network partners and aum . similarly , these innovations underpin our ability to provide a differentiated consumer experience in a cost-effective manner . for example , we are currently undertaking a significant update of our proprietary platform 's architecture , which will allow us to improve our transaction processing capabilities and related platform infrastructure to support continued account and transaction growth . we intend to continue to invest in our technology development to enhance our platform 's capabilities and infrastructure . our “ purple ” culture the new healthcare consumer needs education and advice delivered by people as well as technology . we believe that our team-oriented , customer-focused culture , which we call “ purple , ” is a significant factor in our ability to attract and retain customers and to nimbly address opportunities in the rapidly changing healthcare sector . we make significant efforts to promote and foster purple within our workforce . we invest in and intend to continue to invest in human capital through technology-enabled training , career development and advancement opportunities . we regularly measure the success of these efforts , particularly in the context of rapid growth . interest rates as a non-bank custodian , we contract with fdic-insured custodial depository bank partners and an insurance company partner to hold cash aum , and we generate a significant portion of our total revenue from interest we charge based on interest rates offered to us by these partners . these contracts are generally long-term , substantially reducing our exposure to short-term fluctuations in interest rates . a sustained decline in prevailing interest rates may negatively affect our business by reducing the size of the interest rate margins available to us and thus the size of the custodial revenue we can realize . conversely , a sustained increase in prevailing interest rates would present us with an opportunity to increase our interest rate margins . changes in prevailing interest rates are driven by macroeconomic trends and government policies over which we have no control . our competition and industry our direct competitors are hsa custodians . these are primarily state or federally chartered banks and other financial institutions for which we believe technology-based healthcare services are not a core business . certain of our direct competitors have chosen to exit the market despite increased demand for these services . this has created , and we believe will continue to create , opportunities for us to leverage our technology platform and capabilities to increase our market share . however , some of our direct competitors are in a position , should they choose , to devote more resources to the development , sale and support of their products and services than we have at our disposal . in addition , numerous indirect competitors , including benefits administration technology and service providers , partner with banks and other hsa custodians to compete with us . our health plan partners may also choose to offer technology-based healthcare services directly , as some health plans have done . our success depends on our ability to predict and react quickly to these and other industry and competitive dynamics . regulatory change federal law and regulations , including the affordable care act , irs regulations , labor law and public health regulations that govern the provision of health insurance and are the foundation for tax-advantaged healthcare saving and spending through hsas and ras , play a pivotal role in determining our market opportunity . privacy and data security-related laws such as hipaa and the gramm-leach-bliley act , laws governing the provision of investment advice to consumers , such as the advisers act and the federal deposit insurance act , all play a similar role in determining our competitive landscape . in addition , state-level regulations also have significant implications for our business in some cases . our ability to predict and react quickly to relevant legal and regulatory trends and to correctly interpret their market and competitive implications is important to our success . - 33 - key financial and operating metrics our management regularly reviews a number of key operating and financial metrics to evaluate our business , determine the allocation of our resources , make decisions regarding corporate strategies and evaluate forward-looking projections and trends affecting our business . we discuss certain of these key financial metrics , including revenue , below in the section entitled “ key components of our results of operations . ” in addition , we utilize other key metrics as described below . hsa members the following table sets forth our hsa members for the periods indicated : replace_table_token_4_th the number of our hsa members is critical because our service revenue is driven by the amount we charge per hsa . story_separator_special_tag add hsa members by charging a lower rate as additional hsa members are added . accordingly , as network partners add more hsa members , the service revenue per hsa member will continue to decrease . additionally , as ras grow less rapidly than hsas , service revenue per hsa member will decrease . the decrease in service revenue per hsa member was partially offset by an increase in custodial revenue per hsa member . - 39 - custodial revenue the $ 13.4 million increase in custodial revenue from the year ended january 31 , 2015 to the year ended january 31 , 2016 was primarily due to an increase in average daily cash aum of $ 772.7 million , or 50 % , and an increase in the yield on average cash aum from 1.52 % in the year ended january 31 , 2015 to 1.57 % in the year ended january 31 , 2016. custodial revenue increased in the year ended january 31 , 2016 as a percentage of our total revenue compared to the year ended january 31 , 2015 , primarily due to our aum growing faster than our hsa members and higher yield on average cash aum . the $ 5.4 million increase in custodial revenue from the year ended january 31 , 2014 to the year ended january 31 , 2015 was primarily due to an increase in average daily cash aum of $ 416.0 million , or 37 % , partially offset by a decrease in the yield on average cash aum from 1.64 % in the year ended january 31 , 2014 to 1.52 % in the year ended january 31 , 2015. custodial revenue decreased in the year ended january 31 , 2015 as a percentage of our total revenue compared to the year ended january 31 , 2014 , primarily due to lower-rate custodial depository agreements added in the year ended january 31 , 2015 to accommodate our growth in cash aum . this had an adverse impact on our interest yield during the year ended january 31 , 2015 compared to the year ended january 31 , 2014. cash aum per hsa member of $ 1,532 as of january 31 , 2016 increased compared to the cash aum per hsa member of $ 1,455 as of january 31 , 2015. this was primarily due to the bancorp hsa portfolio acquired during the year having higher average cash aum balances . custodial revenue per hsa member increased by approximately 5 % from the year ended january 31 , 2015 to the year ended january 31 , 2016 , primarily due to the higher yield and higher average cash aum balances . interchange revenue the $ 9.7 million increase in interchange revenue from the year ended january 31 , 2015 to the year ended january 31 , 2016 was due to an overall increase in the number of our hsa members and payment activity . in addition , we continued to see a trend toward more hsa spending through payment card transaction swipes and less by checks and ach or electronic reimbursements , which increased our interchange revenue . the $ 5.8 million increase in interchange revenue from the year ended january 31 , 2014 to the year ended january 31 , 2015 was due to an overall increase in the number of our hsa members and payment activity . our efforts to increase card spend on our platform has resulted in an increase in interchange revenue per hsa member for the year ended january 31 , 2016 by approximately 5 % . cost of revenue the following table sets forth our cost of revenue for the periods indicated : replace_table_token_11_th service costs the $ 9.6 million increase in service costs from the year ended january 31 , 2015 to the year ended january 31 , 2016 was due to the higher volume of total accounts being serviced . the $ 9.6 million increase includes $ 5.5 million related to the hiring of additional personnel to implement and support our new network partners and hsa members , increased activation and processing costs of $ 2.1 million related to account and card activation as well as monthly processing of statements and other communications , stock compensation of $ 686,000 , depreciation and amortization of $ 465,000 , information technology expenses of $ 339,000 and $ 560,000 in other expenses . the $ 8.3 million increase in account costs from the year ended january 31 , 2014 to the year ended january 31 , 2015 was due to the higher volume of total accounts being serviced . the $ 8.3 million increase includes $ 4.6 million related to the hiring of additional personnel to implement and support our new network partners and hsa members , activation and processing costs of $ 2.0 million related to account and card activation as well as monthly processing of statements and other communications , information technology expenses of $ 315,000 , depreciation and amortization of $ 320,000 , stock compensation of $ 393,000 and $ 614,000 in other expenses . - 40 - custodial costs the $ 2.4 million increase in custodial costs from the year ended january 31 , 2015 to the year ended january 31 , 2016 was due to an increase in custodial costs on average cash aum from 0.27 % for the year ended january 31 , 2015 to 0.28 % for the year ended january 31 , 2016 , and an increase in average daily cash aum from $ 1.55 billion for the year ended january 31 , 2015 to $ 2.33 billion during the year ended january 31 , 2016. the $ 654,000 increase in custodial costs from the year ended january 31 , 2014 to the year ended january 31 , 2015 was due to an increase in average daily cash aum from $ 1.14 billion for the year ended january 31 , 2014 to $ 1.55 billion for the

cash flows the following table summarizes our cash flows for the years ended december 31 , 2019 , 2018 and 2017 ( in thousands of dollars ) : replace_table_token_10_th cash flows from operating activities cash used in operating activities for the year ended december 31 , 2019 was $ 3.2 million . the net loss of $ 12.6 million includes non-cash charges of $ 9.8 million of stock-based compensation expense and $ 4.1 million of depreciation and amortization , which includes $ 1.4 million of intangible asset amortization , and $ 0.2 million of end-of-term debt obligation accruals . cash used as a result of changes in operating assets and liabilities was $ 4.8 million , primarily comprised of an increase in accounts receivable of $ 6.2 million , increase in supplies of $ 3.4 million and increase in other assets of $ 0.4 million , partially offset by an increase in accrued liabilities and deferred rent of $ 5.2 million . cash used in operating activities for the year ended december 31 , 2018 was $ 13.5 million . the net loss of $ 23.0 million includes non-cash charges of $ 6.0 million of stock-based compensation expense and $ 3.9 million of depreciation and amortization , which includes $ 1.1 million of intangible asset amortization . it also includes $ 0.3 million of end-of-term debt obligation accruals . cash used as a result of changes in operating assets and liabilities of $ 0.7 million was primarily due to a decrease in accounts payable of $ 1.6 million , an increase in other assets of $ 0.8 million and increases in prepaid expenses and other current assets and accounts receivable of $ 0.9 million , partially offset by a decrease in supplies of $ 1.9

- 32 - attracting and penetrating network partners we created our business model to take advantage of the changing dynamics of the u.s. private health insurance market . our model is based on a b2b2c distribution strategy , meaning that we rely on our employer partners and health plan partners to reach potential members to increase the number of our hsa members . our success depends in large part on our ability to further penetrate our existing network partners by adding new hsa members from these partners and adding new network partners . our innovative technology platform we believe that innovations incorporated in our technology that enable consumers to make healthcare saving and spending decisions differentiate us from our competitors and drive our growth in revenue , hsa members , network partners and aum . similarly , these innovations underpin our ability to provide a differentiated consumer experience in a cost-effective manner . for example , we are currently undertaking a significant update of our proprietary platform 's architecture , which will allow us to improve our transaction processing capabilities and related platform infrastructure to support continued account and transaction growth . we intend to continue to invest in our technology development to enhance our platform 's capabilities and infrastructure . our “ purple ” culture the new healthcare consumer needs education and advice delivered by people as well as technology . we believe that our team-oriented , customer-focused culture , which we call “ purple , ” is a significant factor in our ability to attract and retain customers and to nimbly address opportunities in the rapidly changing healthcare sector . we make significant efforts to promote and foster purple within our workforce . we invest in and intend to continue to invest in human capital through technology-enabled training , career development and advancement opportunities . we regularly measure the success of these efforts , particularly in the context of rapid growth . interest rates as a non-bank custodian , we contract with fdic-insured custodial depository bank partners and an insurance company partner to hold cash aum , and we generate a significant portion of our total revenue from interest we charge based on interest rates offered to us by these partners . these contracts are generally long-term , substantially reducing our exposure to short-term fluctuations in interest rates . a sustained decline in prevailing interest rates may negatively affect our business by reducing the size of the interest rate margins available to us and thus the size of the custodial revenue we can realize . conversely , a sustained increase in prevailing interest rates would present us with an opportunity to increase our interest rate margins . changes in prevailing interest rates are driven by macroeconomic trends and government policies over which we have no control . our competition and industry our direct competitors are hsa custodians . these are primarily state or federally chartered banks and other financial institutions for which we believe technology-based healthcare services are not a core business . certain of our direct competitors have chosen to exit the market despite increased demand for these services . this has created , and we believe will continue to create , opportunities for us to leverage our technology platform and capabilities to increase our market share . however , some of our direct competitors are in a position , should they choose , to devote more resources to the development , sale and support of their products and services than we have at our disposal . in addition , numerous indirect competitors , including benefits administration technology and service providers , partner with banks and other hsa custodians to compete with us . our health plan partners may also choose to offer technology-based healthcare services directly , as some health plans have done . our success depends on our ability to predict and react quickly to these and other industry and competitive dynamics . regulatory change federal law and regulations , including the affordable care act , irs regulations , labor law and public health regulations that govern the provision of health insurance and are the foundation for tax-advantaged healthcare saving and spending through hsas and ras , play a pivotal role in determining our market opportunity . privacy and data security-related laws such as hipaa and the gramm-leach-bliley act , laws governing the provision of investment advice to consumers , such as the advisers act and the federal deposit insurance act , all play a similar role in determining our competitive landscape . in addition , state-level regulations also have significant implications for our business in some cases . our ability to predict and react quickly to relevant legal and regulatory trends and to correctly interpret their market and competitive implications is important to our success . - 33 - key financial and operating metrics our management regularly reviews a number of key operating and financial metrics to evaluate our business , determine the allocation of our resources , make decisions regarding corporate strategies and evaluate forward-looking projections and trends affecting our business . we discuss certain of these key financial metrics , including revenue , below in the section entitled “ key components of our results of operations . ” in addition , we utilize other key metrics as described below . hsa members the following table sets forth our hsa members for the periods indicated : replace_table_token_4_th the number of our hsa members is critical because our service revenue is driven by the amount we charge per hsa . story_separator_special_tag add hsa members by charging a lower rate as additional hsa members are added . accordingly , as network partners add more hsa members , the service revenue per hsa member will continue to decrease . additionally , as ras grow less rapidly than hsas , service revenue per hsa member will decrease . the decrease in service revenue per hsa member was partially offset by an increase in custodial revenue per hsa member . - 39 - custodial revenue the $ 13.4 million increase in custodial revenue from the year ended january 31 , 2015 to the year ended january 31 , 2016 was primarily due to an increase in average daily cash aum of $ 772.7 million , or 50 % , and an increase in the yield on average cash aum from 1.52 % in the year ended january 31 , 2015 to 1.57 % in the year ended january 31 , 2016. custodial revenue increased in the year ended january 31 , 2016 as a percentage of our total revenue compared to the year ended january 31 , 2015 , primarily due to our aum growing faster than our hsa members and higher yield on average cash aum . the $ 5.4 million increase in custodial revenue from the year ended january 31 , 2014 to the year ended january 31 , 2015 was primarily due to an increase in average daily cash aum of $ 416.0 million , or 37 % , partially offset by a decrease in the yield on average cash aum from 1.64 % in the year ended january 31 , 2014 to 1.52 % in the year ended january 31 , 2015. custodial revenue decreased in the year ended january 31 , 2015 as a percentage of our total revenue compared to the year ended january 31 , 2014 , primarily due to lower-rate custodial depository agreements added in the year ended january 31 , 2015 to accommodate our growth in cash aum . this had an adverse impact on our interest yield during the year ended january 31 , 2015 compared to the year ended january 31 , 2014. cash aum per hsa member of $ 1,532 as of january 31 , 2016 increased compared to the cash aum per hsa member of $ 1,455 as of january 31 , 2015. this was primarily due to the bancorp hsa portfolio acquired during the year having higher average cash aum balances . custodial revenue per hsa member increased by approximately 5 % from the year ended january 31 , 2015 to the year ended january 31 , 2016 , primarily due to the higher yield and higher average cash aum balances . interchange revenue the $ 9.7 million increase in interchange revenue from the year ended january 31 , 2015 to the year ended january 31 , 2016 was due to an overall increase in the number of our hsa members and payment activity . in addition , we continued to see a trend toward more hsa spending through payment card transaction swipes and less by checks and ach or electronic reimbursements , which increased our interchange revenue . the $ 5.8 million increase in interchange revenue from the year ended january 31 , 2014 to the year ended january 31 , 2015 was due to an overall increase in the number of our hsa members and payment activity . our efforts to increase card spend on our platform has resulted in an increase in interchange revenue per hsa member for the year ended january 31 , 2016 by approximately 5 % . cost of revenue the following table sets forth our cost of revenue for the periods indicated : replace_table_token_11_th service costs the $ 9.6 million increase in service costs from the year ended january 31 , 2015 to the year ended january 31 , 2016 was due to the higher volume of total accounts being serviced . the $ 9.6 million increase includes $ 5.5 million related to the hiring of additional personnel to implement and support our new network partners and hsa members , increased activation and processing costs of $ 2.1 million related to account and card activation as well as monthly processing of statements and other communications , stock compensation of $ 686,000 , depreciation and amortization of $ 465,000 , information technology expenses of $ 339,000 and $ 560,000 in other expenses . the $ 8.3 million increase in account costs from the year ended january 31 , 2014 to the year ended january 31 , 2015 was due to the higher volume of total accounts being serviced . the $ 8.3 million increase includes $ 4.6 million related to the hiring of additional personnel to implement and support our new network partners and hsa members , activation and processing costs of $ 2.0 million related to account and card activation as well as monthly processing of statements and other communications , information technology expenses of $ 315,000 , depreciation and amortization of $ 320,000 , stock compensation of $ 393,000 and $ 614,000 in other expenses . - 40 - custodial costs the $ 2.4 million increase in custodial costs from the year ended january 31 , 2015 to the year ended january 31 , 2016 was due to an increase in custodial costs on average cash aum from 0.27 % for the year ended january 31 , 2015 to 0.28 % for the year ended january 31 , 2016 , and an increase in average daily cash aum from $ 1.55 billion for the year ended january 31 , 2015 to $ 2.33 billion during the year ended january 31 , 2016. the $ 654,000 increase in custodial costs from the year ended january 31 , 2014 to the year ended january 31 , 2015 was due to an increase in average daily cash aum from $ 1.14 billion for the year ended january 31 , 2014 to $ 1.55 billion for the

cash flows provided by operating activities . net cash provided by operating activities during the year ended january 31 , 2016 resulted primarily from our net income of $ 16.6 million being adjusted for the following non-cash items : depreciation and amortization of $ 8.6 million and stock-based compensation of $ 5.9 million , changes in accrued compensation of $ 2.5 million , and accounts payable of $ 1.0 million . these were offset by changes in accounts receivable of $ 5.2 million , deferred income taxes of $ 2.2 million , and accrued liabilities , deferred rent and other assets of $ 742,000. net cash provided by operating activities during the year ended january 31 , 2015 resulted primarily from our net income of $ 10.2 million being adjusted for the following non-cash items : depreciation and amortization of $ 5.9 million and stock-based compensation of $ 2.5 million , deferred income taxes of $ 1.6 million , changes in accrued compensation of $ 1.2 million and a revaluation of our derivative liability associated with our series d-3 redeemable convertible preferred stock of $ 735,000 and changes in deferred rent of $ 95,000. these items were offset by changes in accounts receivable of $ 3.4 million , other assets of $ 1.6 million , accounts payable of $ 1.2 million , accrued liabilities and inventories of $ 1.0 million .

we believe that we are well-positioned to manage the challenges presented in a volatile commodity pricing environment by : continuing to exercise discipline in our capital program with the expectation of funding our capital expenditures with cash on hand , operating cash flows , and if required , borrowings under our revolving credit facility . continuing to optimize our drilling , completion and operational efficiencies , resulting in lower operating costs per unit of production . continuing to manage our balance sheet , which we believe provides sufficient availability under our revolving credit facility and existing cash balances to meet our capital requirements and maintain compliance with our debt covenants . continuing to manage price risk by strategically hedging our production . while we are unable to predict future commodity prices , in the e vent that commodity prices significantly decline , management would test the recoverability of the carrying value of its oil and gas properties and , if necessary , record an impairment charge . financial condition capital resources and liquidity our primary sources of cash in 2019 were from the sale of natural gas production and proceeds from the sale of our equity investment in meade . these cash flows were primarily used to fund our capital expenditures , interest payments on debt , repurchases of shares of our common stock , payment of dividends and contributions to our equity method investments . see below for additional discussion and analysis of cash flow . on april 22 , 2019 , we entered into a second amended and restated credit agreement ( revolving credit facility ) . the borrowing base under the terms of our revolving credit facility is redetermined annually in april . in addition , either we or the banks may request an interim redetermination twice a year or in connection with certain acquisitions or divestitures of oil and gas properties . the borrowing base and available commitments were reaffirmed at $ 3.2 billion and $ 1.5 billion , respectively . as of december 31 , 2019 , there were no borrowings outstanding under our revolving credit facility and our unused commitments remained at $ 1.5 billion . a decline in commodity prices could result in the future reduction of our borrowing base and related commitments under our revolving credit facility . unless commodity prices decline significantly from current levels , we do not believe that any such reductions would have a significant impact on our ability to service our debt and fund our drilling program and related operations . we strive to manage our debt at a level below the available credit line in order to maintain borrowing capacity . our revolving credit facility includes a covenant limiting our total debt . we believe that , with internally generated operating cash flow , cash on hand and availability under our revolving credit facility , we have the capacity to finance our spending plans . at december 31 , 2019 , we were in compliance with all restrictive financial covenants for both our revolving credit facility and senior notes . refer to note 5 of the notes to the consolidated financial statements for further details regarding restrictive covenants . cash flows our cash flows from operating activities , investing activities and financing activities are as follows : replace_table_token_14_th operating activities . operating cash flow fluctuations are substantially driven by commodity prices , changes in our production volumes and operating expenses . commodity prices have historically been volatile , primarily as a result of supply 38 and demand for natural gas and crude oil , pipeline infrastructure constraints , basis differentials , inventory storage levels and seasonal influences . in addition , fluctuations in cash flow may result in an increase or decrease in our capital expenditures . our working capital is substantially influenced by the variables discussed above and fluctuates based on the timing and amount of borrowings and repayments under our revolving credit facility , repayments of debt , the timing of cash collections and payments on our trade accounts receivable and payable , respectively , payment of dividends , repurchases of our securities and changes in the fair value of our commodity derivative activity . from time to time , our working capital will reflect a deficit , while at other times it will reflect a surplus . this fluctuation is not unusual . at december 31 , 2019 and 2018 , we had a working capital surplus of $ 240.2 million and $ 257.3 million , respectively . we believe we have adequate liquidity and availability under our revolving credit facility to meet our working capital requirements over the next twelve months . net cash provided by operating activities in 2019 increase d by $ 340.9 million compared to 2018 . this increase was primarily due to an increase in cash received in settlement of derivatives , higher natural gas revenue , lower operating expenses and favorable changes in working capital and other assets and liabilities . these increases were partially offset by a decrease in brokered natural gas revenue . the increase in natural gas revenue was due to higher equivalent production , partially offset by a decrease in realized natural gas prices . average realized natural gas prices decrease d by 4 percent in 2019 compared to 2018 . equivalent production increase d by 18 percent for 2019 compared to 2018 as a result of higher natural gas production in the marcellus shale . refer to `` results of operations `` for additional information relative to commodity price , production and operating expense fluctuations . we are unable to predict future commodity prices and , as a result , can not provide any assurance about future levels of net cash provided by operating activities . investing activities . story_separator_special_tag have no off-balance sheet debt or other similar unrecorded obligations . story_separator_special_tag replace_table_token_18_th replace_table_token_19_th natural gas revenues the increase in natural gas revenues of $ 104.1 million was due to higher production partially offset by lower natural gas prices . the increase in production was a result of an increase in our drilling and completion activities in the marcellus shale . crude oil and condensate revenues the decrease in crude oil and condensate revenues of $ 48.7 million was primarily due to the sale of our eagle ford shale assets in february 2018. impact of derivative instruments on operating revenues replace_table_token_20_th brokered natural gas brokered natural gas revenues decreased $ 209.5 million . there was no brokered natural gas activity in the current period . 45 operating and other expenses replace_table_token_21_th total costs and expenses from operations decrease d by $ 211.6 million from 2018 to 2019 . the primary reasons for this fluctuation are as follows : direct operations increase d $ 7.3 million primarily driven by $ 18.7 million of higher operating costs due to higher production , which included a $ 10.1 million increase in workover expense . this increase was partially offset by an $ 11.4 million decrease in operating costs as a result of the sale of our eagle ford shale assets in february 2018. transportation and gathering increase d $ 77.9 million due to higher throughput as a result of higher marcellus shale production , partially offset by a decrease in demand charges related to a change in commitments . brokered natural gas decrease d $ 184.2 million . there was no brokered natural gas activity in the current period . taxes other than income decrease d $ 5.6 million due to $ 3.6 million lower production taxes resulting from the sale of the eagle ford shale assets in february of 2018 and $ 2.7 million lower drilling impact fees driven by a decrease in rates associated with lower natural gas prices . exploration decrease d $ 93.6 million as a result of a decrease in exploratory dry hole costs of $ 95.5 million compared to 2018. the exploratory dry hole costs in 2018 related to our exploration activities in west texas and ohio . this decrease was partially offset by an increase of $ 4.3 million in geological and geophysical costs . depreciation , depletion and amortization decrease d $ 11.7 million primarily due to lower amortization of unproved properties of $ 49.7 million , partially offset by higher dd & a of $ 37.1 million . amortization of unproved properties decreased due to lower amortization rates as a result of a decrease in exploration activities . the increase in dd & a was primarily due to an increase of $ 58.0 million due to higher equivalent production volumes in the marcellus shale , partially offset by a decrease of $ 21.0 million related to a lower dd & a rate of $ 0.42 per mcfe for 2019 compared to $ 0.45 per mcfe for 2018. the lower dd & a rate was primarily due to positive reserve revisions to our 2018 year-end reserve estimates and lower cost reserve additions . general and administrative decrease d $ 1.8 million primarily due to a $ 6.1 million decrease in professional services and a $ 2.4 million decrease in stock-based compensation expense associated with certain of our market-based performance awards . these decreases were partially offset by $ 2.1 million in severance cost incurred in the second quarter 2019 and $ 3.0 million in higher employee costs . the remaining changes in other general and administrative expenses were not individually significant . 46 earnings on equity method investments earnings on equity method investments increase d $ 79.4 million primarily due to the sale of our investment in meade for a gain of $ 75.8 million and the recognition of our proportionate share of net income from our equity method investments in 2019 compared to 2018 primarily from our investment in meade , which commenced operations in late 2018. loss on sale of assets during 2019 , we recognized a net aggregate loss of $ 1.5 million primarily due to the conveyance of certain remaining properties related to the sale of our eagle ford shale assets . during 2018 , we recognized a net aggregate loss of $ 16.3 million primarily due to the sale of our eagle ford shale assets , partially offset by a gain on the sale of oil and gas properties in the haynesville shale . interest expense , net interest expense decreased $ 18.2 million primarily due to $ 14.1 million lower interest expense resulting from the repayment of $ 237.0 million of our 6.51 % weighted-average senior notes , which matured in july 2018 and $ 67.0 million of our 9.78 % senior notes that matured in december 2018 and a $ 6.2 million decrease related to income tax reserves . these decreases were partially offset by $ 3.6 million of lower interest income . income tax expense income tax expense increase d $ 78.1 million due to higher pretax income and a higher effective tax rate . the effective tax rates for 2019 and 2018 were 24.3 percent and 20.2 percent , respectively . the increase in the effective tax rate is primarily due to the impact of non-recurring discrete items recorded during 2019 compared to 2018. excluding the impact of any discrete items , we expect our 2020 effective income tax rate to be approximately 23.0 percent . however , this rate may fluctuate based on a number of factors , including but not limited to changes in enacted federal and or state rates that occur during the year , changes in our executive compensation and the amount of excess tax benefits on stock-based compensation , as well as changes in the composition and location of our asset base , our employees and our customers . 2018 and 2017 compared we reported net income for 2018 of $ 557.0 million , or $ 1.25 per share , compared to net

cash flows provided by operating activities . net cash provided by operating activities during the year ended january 31 , 2016 resulted primarily from our net income of $ 16.6 million being adjusted for the following non-cash items : depreciation and amortization of $ 8.6 million and stock-based compensation of $ 5.9 million , changes in accrued compensation of $ 2.5 million , and accounts payable of $ 1.0 million . these were offset by changes in accounts receivable of $ 5.2 million , deferred income taxes of $ 2.2 million , and accrued liabilities , deferred rent and other assets of $ 742,000. net cash provided by operating activities during the year ended january 31 , 2015 resulted primarily from our net income of $ 10.2 million being adjusted for the following non-cash items : depreciation and amortization of $ 5.9 million and stock-based compensation of $ 2.5 million , deferred income taxes of $ 1.6 million , changes in accrued compensation of $ 1.2 million and a revaluation of our derivative liability associated with our series d-3 redeemable convertible preferred stock of $ 735,000 and changes in deferred rent of $ 95,000. these items were offset by changes in accounts receivable of $ 3.4 million , other assets of $ 1.6 million , accounts payable of $ 1.2 million , accrued liabilities and inventories of $ 1.0 million .

we believe that we are well-positioned to manage the challenges presented in a volatile commodity pricing environment by : continuing to exercise discipline in our capital program with the expectation of funding our capital expenditures with cash on hand , operating cash flows , and if required , borrowings under our revolving credit facility . continuing to optimize our drilling , completion and operational efficiencies , resulting in lower operating costs per unit of production . continuing to manage our balance sheet , which we believe provides sufficient availability under our revolving credit facility and existing cash balances to meet our capital requirements and maintain compliance with our debt covenants . continuing to manage price risk by strategically hedging our production . while we are unable to predict future commodity prices , in the e vent that commodity prices significantly decline , management would test the recoverability of the carrying value of its oil and gas properties and , if necessary , record an impairment charge . financial condition capital resources and liquidity our primary sources of cash in 2019 were from the sale of natural gas production and proceeds from the sale of our equity investment in meade . these cash flows were primarily used to fund our capital expenditures , interest payments on debt , repurchases of shares of our common stock , payment of dividends and contributions to our equity method investments . see below for additional discussion and analysis of cash flow . on april 22 , 2019 , we entered into a second amended and restated credit agreement ( revolving credit facility ) . the borrowing base under the terms of our revolving credit facility is redetermined annually in april . in addition , either we or the banks may request an interim redetermination twice a year or in connection with certain acquisitions or divestitures of oil and gas properties . the borrowing base and available commitments were reaffirmed at $ 3.2 billion and $ 1.5 billion , respectively . as of december 31 , 2019 , there were no borrowings outstanding under our revolving credit facility and our unused commitments remained at $ 1.5 billion . a decline in commodity prices could result in the future reduction of our borrowing base and related commitments under our revolving credit facility . unless commodity prices decline significantly from current levels , we do not believe that any such reductions would have a significant impact on our ability to service our debt and fund our drilling program and related operations . we strive to manage our debt at a level below the available credit line in order to maintain borrowing capacity . our revolving credit facility includes a covenant limiting our total debt . we believe that , with internally generated operating cash flow , cash on hand and availability under our revolving credit facility , we have the capacity to finance our spending plans . at december 31 , 2019 , we were in compliance with all restrictive financial covenants for both our revolving credit facility and senior notes . refer to note 5 of the notes to the consolidated financial statements for further details regarding restrictive covenants . cash flows our cash flows from operating activities , investing activities and financing activities are as follows : replace_table_token_14_th operating activities . operating cash flow fluctuations are substantially driven by commodity prices , changes in our production volumes and operating expenses . commodity prices have historically been volatile , primarily as a result of supply 38 and demand for natural gas and crude oil , pipeline infrastructure constraints , basis differentials , inventory storage levels and seasonal influences . in addition , fluctuations in cash flow may result in an increase or decrease in our capital expenditures . our working capital is substantially influenced by the variables discussed above and fluctuates based on the timing and amount of borrowings and repayments under our revolving credit facility , repayments of debt , the timing of cash collections and payments on our trade accounts receivable and payable , respectively , payment of dividends , repurchases of our securities and changes in the fair value of our commodity derivative activity . from time to time , our working capital will reflect a deficit , while at other times it will reflect a surplus . this fluctuation is not unusual . at december 31 , 2019 and 2018 , we had a working capital surplus of $ 240.2 million and $ 257.3 million , respectively . we believe we have adequate liquidity and availability under our revolving credit facility to meet our working capital requirements over the next twelve months . net cash provided by operating activities in 2019 increase d by $ 340.9 million compared to 2018 . this increase was primarily due to an increase in cash received in settlement of derivatives , higher natural gas revenue , lower operating expenses and favorable changes in working capital and other assets and liabilities . these increases were partially offset by a decrease in brokered natural gas revenue . the increase in natural gas revenue was due to higher equivalent production , partially offset by a decrease in realized natural gas prices . average realized natural gas prices decrease d by 4 percent in 2019 compared to 2018 . equivalent production increase d by 18 percent for 2019 compared to 2018 as a result of higher natural gas production in the marcellus shale . refer to `` results of operations `` for additional information relative to commodity price , production and operating expense fluctuations . we are unable to predict future commodity prices and , as a result , can not provide any assurance about future levels of net cash provided by operating activities . investing activities . story_separator_special_tag have no off-balance sheet debt or other similar unrecorded obligations . story_separator_special_tag replace_table_token_18_th replace_table_token_19_th natural gas revenues the increase in natural gas revenues of $ 104.1 million was due to higher production partially offset by lower natural gas prices . the increase in production was a result of an increase in our drilling and completion activities in the marcellus shale . crude oil and condensate revenues the decrease in crude oil and condensate revenues of $ 48.7 million was primarily due to the sale of our eagle ford shale assets in february 2018. impact of derivative instruments on operating revenues replace_table_token_20_th brokered natural gas brokered natural gas revenues decreased $ 209.5 million . there was no brokered natural gas activity in the current period . 45 operating and other expenses replace_table_token_21_th total costs and expenses from operations decrease d by $ 211.6 million from 2018 to 2019 . the primary reasons for this fluctuation are as follows : direct operations increase d $ 7.3 million primarily driven by $ 18.7 million of higher operating costs due to higher production , which included a $ 10.1 million increase in workover expense . this increase was partially offset by an $ 11.4 million decrease in operating costs as a result of the sale of our eagle ford shale assets in february 2018. transportation and gathering increase d $ 77.9 million due to higher throughput as a result of higher marcellus shale production , partially offset by a decrease in demand charges related to a change in commitments . brokered natural gas decrease d $ 184.2 million . there was no brokered natural gas activity in the current period . taxes other than income decrease d $ 5.6 million due to $ 3.6 million lower production taxes resulting from the sale of the eagle ford shale assets in february of 2018 and $ 2.7 million lower drilling impact fees driven by a decrease in rates associated with lower natural gas prices . exploration decrease d $ 93.6 million as a result of a decrease in exploratory dry hole costs of $ 95.5 million compared to 2018. the exploratory dry hole costs in 2018 related to our exploration activities in west texas and ohio . this decrease was partially offset by an increase of $ 4.3 million in geological and geophysical costs . depreciation , depletion and amortization decrease d $ 11.7 million primarily due to lower amortization of unproved properties of $ 49.7 million , partially offset by higher dd & a of $ 37.1 million . amortization of unproved properties decreased due to lower amortization rates as a result of a decrease in exploration activities . the increase in dd & a was primarily due to an increase of $ 58.0 million due to higher equivalent production volumes in the marcellus shale , partially offset by a decrease of $ 21.0 million related to a lower dd & a rate of $ 0.42 per mcfe for 2019 compared to $ 0.45 per mcfe for 2018. the lower dd & a rate was primarily due to positive reserve revisions to our 2018 year-end reserve estimates and lower cost reserve additions . general and administrative decrease d $ 1.8 million primarily due to a $ 6.1 million decrease in professional services and a $ 2.4 million decrease in stock-based compensation expense associated with certain of our market-based performance awards . these decreases were partially offset by $ 2.1 million in severance cost incurred in the second quarter 2019 and $ 3.0 million in higher employee costs . the remaining changes in other general and administrative expenses were not individually significant . 46 earnings on equity method investments earnings on equity method investments increase d $ 79.4 million primarily due to the sale of our investment in meade for a gain of $ 75.8 million and the recognition of our proportionate share of net income from our equity method investments in 2019 compared to 2018 primarily from our investment in meade , which commenced operations in late 2018. loss on sale of assets during 2019 , we recognized a net aggregate loss of $ 1.5 million primarily due to the conveyance of certain remaining properties related to the sale of our eagle ford shale assets . during 2018 , we recognized a net aggregate loss of $ 16.3 million primarily due to the sale of our eagle ford shale assets , partially offset by a gain on the sale of oil and gas properties in the haynesville shale . interest expense , net interest expense decreased $ 18.2 million primarily due to $ 14.1 million lower interest expense resulting from the repayment of $ 237.0 million of our 6.51 % weighted-average senior notes , which matured in july 2018 and $ 67.0 million of our 9.78 % senior notes that matured in december 2018 and a $ 6.2 million decrease related to income tax reserves . these decreases were partially offset by $ 3.6 million of lower interest income . income tax expense income tax expense increase d $ 78.1 million due to higher pretax income and a higher effective tax rate . the effective tax rates for 2019 and 2018 were 24.3 percent and 20.2 percent , respectively . the increase in the effective tax rate is primarily due to the impact of non-recurring discrete items recorded during 2019 compared to 2018. excluding the impact of any discrete items , we expect our 2020 effective income tax rate to be approximately 23.0 percent . however , this rate may fluctuate based on a number of factors , including but not limited to changes in enacted federal and or state rates that occur during the year , changes in our executive compensation and the amount of excess tax benefits on stock-based compensation , as well as changes in the composition and location of our asset base , our employees and our customers . 2018 and 2017 compared we reported net income for 2018 of $ 557.0 million , or $ 1.25 per share , compared to net

cash flows used in investing activities increase d by $ 250.5 million from 2018 compared to 2019 . the increase was due to $ 675.8 million lower proceeds from the sale of assets primarily due to the divestiture of our eagle ford shale assets in february 2018 and our haynesville shale assets in july 2018. this change was partially offset by $ 249.5 million of proceeds from the sale of our equity investment in meade in november 2019 , $ 106.1 million of lower capital expenditures and $ 67.9 million of lower capital contributions associated with our equity method investments . financing activities . cash flows used in financing activities decrease d by $ 598.9 million from 2018 compared to 2019 . the decrease was due to $ 352.9 million of lower repurchases of our common stock in 2019 and $ 290.0 million of lower net repayments of debt primarily related to maturities of certain of our senior notes in 2018. this decrease was partially offset by $ 34.1 million of higher dividend payments related to an increase in our dividend rate in 2019 , $ 7.4 million higher debt issuance costs related to amending our revolving credit facility in early 2019 and $ 2.4 million higher tax withholdings on vesting of stock awards . share repurchases in 2019 include $ 31.4 million of share repurchases that were accrued in 2018 and paid in 2019 . 2018 and 2017 compared .

the increase from fiscal year 2017 to fiscal year 2018 was primarily the result of an increase of $ 5.7 million in banking and service fees due to increased fees from h & r block-branded products , an increase of $ 1.2 million in gain on sale-other primarily from increased sales of structured settlements , and a decrease of $ 1.1 million in unrealized loss on securities partially offset by a decrease in realized gain from sale of securities of $ 3.9 million , decreased levels of prepayment penalty fee income of $ 0.7 million , and a mortgage banking income decrease of $ 0.5 million . the increase from 2016 to 2017 was primarily due to increased banking and service fees due to increased fees from h & r block-branded products increased mortgage banking income , gain on sale of securities , partially offset by a decrease in gain on sale-other primarily from sales of structured settlements . non-interest expense for the fiscal year ended june 30 , 2018 was $ 173.9 million compared to $ 137.6 million and $ 112.8 million for the years ended june 30 , 2017 and 2016 , respectively . the increase was primarily due to an increase of $ 19.2 million in the bank 's staffing for lending , information technology infrastructure development , trustee and fiduciary services and regulatory compliance , an increase in advertising and promotions of $ 6.1 million , an increase in data processing and internet of $ 4.1 million , and an increase in other general and administrative costs of $ 3.4 million . our staffing rose to 801 full-time equivalents compared to 681 and 647 at june 30 , 2018 , 2017 and 2016 , respectively . total assets were $ 9,539.5 million at june 30 , 2018 compared to $ 8,501.7 million at june 30 , 2017 . assets grew $ 1,037.8 million or 12.2 % during the last fiscal year , primarily due to an increase in the origination of single family mortgage loans and c & i loans . these loans were funded primarily with growth in deposits . our future performance will depend on many factors : changes in interest rates , competition for deposits and quality loans , the credit performance of our assets , regulatory actions , strategic transactions , and our ability to improve operating efficiencies . see “ item 1a . risk factors . ” 34 mergers and acquisitions from time to time we undertake acquisitions or similar transactions consistent with our operating and growth strategies . during the fiscal years ended june 30 , 2016 , 2017 and 2018 there were three acquisitions , which are discussed below . h & r block bank deposit acquisition on august 31 , 2015 , our bank completed the acquisition of approximately $ 419 million in deposits consisting of checking , individual retirement savings , and cd accounts from h & r block bank and its parent company , h & r block , inc. ( “ h & r block ” ) . in connection with the closing of this transaction : ( i ) our bank and emerald financial services , llc , a delaware limited liability company and wholly-owned subsidiary of h & r block ( “ efs ” ) , entered into the program management agreement ( “ pma ” ) , dated august 31 , 2015 ; ( ii ) our bank and h & r block , efs , hrb participant i , llc , a delaware limited liability company and wholly-owned subsidiary of h & r block , entered into the emerald receivables participation agreement , dated august 31 , 2015 ; and ( iii ) our bank and h & r block entered into the guaranty agreement ( together , the “ pma and related agreements ” ) , dated august 31 , 2015. through the pma and related agreements our bank will provide h & r block-branded financial services products and services . the three products and services that represent the primary focus and the majority of transactional volume that our bank will process are described in detail below . the first product is emerald prepaid mastercard ® services . the bank entered into agreements to offer this product in august 2015. under the agreements , the bank is responsible for the primary oversight and control of the prepaid card programs of a wholly-owned subsidiary of h & r block . the bank holds the prepaid card customer deposits for those cards issued under the prepaid programs in non-interest bearing accounts and earns a fixed fee paid by h & r block 's subsidiary for each automated clearing house ( “ ach ” ) transaction processed through the prepaid card customer accounts . a portion of h & r block 's customers use the emerald card as an option to receive federal and state income tax refunds . the prepaid customer deposits are included in non-interest bearing deposit liabilities on the balance sheet of the company and the ach fee income is included in the income statement under the line banking and service fees . the second product is refund transfer . the bank entered into agreements to offer this product in august 2015. the bank is responsible for the primary oversight and control of the refund transfer program of a wholly-owned subsidiary of h & r block . the bank opens a temporary bank account for each h & r block customer who is receiving an income tax refund and elects to defer payment of his or her tax preparation fees . after the internal revenue service and any state income tax authorities transfer the refund into the customer 's account , the net funds are transferred to the customer and the temporary deposit account is closed . story_separator_special_tag our net interest income has increased as a result of the growth in our interest earning assets and is subject to competitive factors in the online banking market . our net interest income is reduced by our estimate of loss provisions for our loan and lease portfolio . we also earn non-interest income primarily from mortgage banking activities , banking products and service activity , prepaid card fee income , prepayment fee income from multifamily borrowers who repay their loans before maturity and from gains on sales of other loans and investment securities . losses on investment securities reduce non-interest income . the largest component of non-interest expense is salary and benefits , which is a function of the number of personnel , which increased from 681 full time employees at june 30 , 2017 to 801 full-time equivalent employees at june 30 , 2018 . we are subject to federal and state income taxes , and our effective tax rates were 36.42 % , 42.10 % and 41.78 % for the fiscal years ended june 30 , 2018 , 2017 , and 2016 , respectively . other factors that affect our results of operations include expenses relating to data processing , advertising , depreciation , occupancy , professional services , and other miscellaneous expenses . comparison of the fiscal year ended june 30 , 20 18 and june 30 , 2017 net interest income . net interest income totaled $ 368.5 million for the fiscal year ended june 30 , 2018 compared to $ 313.2 million for the fiscal year ended june 30 , 2017 . the following table sets forth the effects of changing rates and volumes on our net interest income . information is provided with respect to ( i ) effects on interest income and interest expense attributable to changes in volume ( changes in volume multiplied by prior rate ) ; and ( ii ) effects on interest income and interest expense attributable to changes in rate ( changes in rate multiplied by prior volume ) . the change in interest due to both volume and rate has been allocated proportionally to both , based on their relative absolute values . replace_table_token_18_th the change in interest due to both volume and rate has been allocated proportionally to both , based on their relative absolute values . interest income . interest income for the fiscal year ended june 30 , 2018 totaled $ 475.1 million , an increase of $ 87.8 million , or 22.7 % , compared to $ 387.3 million in interest income for the fiscal year ended june 30 , 2017 primarily due to growth in volume of interest-earning assets from loan originations , primarily from commercial & industrial lending as well as accretion from origination fees from refund advance loans . fundings of refund advance loans increased from $ 0.3 billion to $ 1.1 billion for the fiscal years ended june 30 , 2017 and june 30 , 2018 , respectively . average interest-earning assets for the fiscal year ended june 30 , 2018 increased by $ 1,044.5 million compared to the fiscal year ended june 30 , 2017 primarily due to loan and lease originations for investment which increased $ 1,740.1 million during the year ended june 30 , 2018 . yields on loans and leases increased by 40 basis points to 5.66 % for the fiscal year ended june 30 , 2018 , primarily due to increased yields in the single family , commercial & industrial and h & r block-branded loan products . for the fiscal year ended june 30 , 2018 , the growth in average balances contributed additional interest income of $ 52.2 million , which was supplemented by a $ 35.6 million increase in interest income due to the increase in average rate . the average yield earned on our interest-earning assets increased to 5.30 % for the fiscal year ended june 30 , 2018 , up from 4.89 % for the same period in 2017 primarily due to the increase in rate from loans and leases . as a result of the federal reserve decisions to increase the fed funds rate over the last year we have marked up our 40 adjustable loans and have increased the market rates on new loans . a contributing factor to the increase of loans and leases income is the amortization of origination fees for h & r block-branded products . interest expense . interest expense totaled $ 106.6 million for the fiscal year ended june 30 , 2018 , an increase of $ 32.5 million , or 43.9 % compared to $ 74.1 million in interest expense during the fiscal year ended june 30 , 2017 , due primarily to increased rates on deposits and advances , as a result of the federal reserve decisions to increase the fed funds rate over the last year . the average rate paid on all of our interest-bearing liabilities increased to 1.51 % for the fiscal year ended june 30 , 2018 from 1.15 % for the fiscal year ended june 30 , 2017 , due primarily to increased rates on deposits and advances from fhlb . average interest-bearing liabilities for the fiscal year ended june 30 , 2018 increased $ 603.5 million compared to fiscal 2017 . the average rate on interest-bearing deposits increased to 1.15 % from 0.75 % due to increases in prevailing deposit rates across the industry . the rates on advances from the fhlb also increased to 1.76 % from 1.55 % due primarily to the fed rate increases . the average rate on time deposits increased to 2.61 % for the fiscal year ended june 30 , 2018 from 2.33 % for the fiscal year ended june 30 , 2017 , due to fed rate increases . average fhlb advances for the fiscal year ended june 30 , 2018 increased $ 497.1 million , or 62.2 % compared to fiscal 2017. the average non-interest-bearing demand

cash flows used in investing activities increase d by $ 250.5 million from 2018 compared to 2019 . the increase was due to $ 675.8 million lower proceeds from the sale of assets primarily due to the divestiture of our eagle ford shale assets in february 2018 and our haynesville shale assets in july 2018. this change was partially offset by $ 249.5 million of proceeds from the sale of our equity investment in meade in november 2019 , $ 106.1 million of lower capital expenditures and $ 67.9 million of lower capital contributions associated with our equity method investments . financing activities . cash flows used in financing activities decrease d by $ 598.9 million from 2018 compared to 2019 . the decrease was due to $ 352.9 million of lower repurchases of our common stock in 2019 and $ 290.0 million of lower net repayments of debt primarily related to maturities of certain of our senior notes in 2018. this decrease was partially offset by $ 34.1 million of higher dividend payments related to an increase in our dividend rate in 2019 , $ 7.4 million higher debt issuance costs related to amending our revolving credit facility in early 2019 and $ 2.4 million higher tax withholdings on vesting of stock awards . share repurchases in 2019 include $ 31.4 million of share repurchases that were accrued in 2018 and paid in 2019 . 2018 and 2017 compared .

the increase from fiscal year 2017 to fiscal year 2018 was primarily the result of an increase of $ 5.7 million in banking and service fees due to increased fees from h & r block-branded products , an increase of $ 1.2 million in gain on sale-other primarily from increased sales of structured settlements , and a decrease of $ 1.1 million in unrealized loss on securities partially offset by a decrease in realized gain from sale of securities of $ 3.9 million , decreased levels of prepayment penalty fee income of $ 0.7 million , and a mortgage banking income decrease of $ 0.5 million . the increase from 2016 to 2017 was primarily due to increased banking and service fees due to increased fees from h & r block-branded products increased mortgage banking income , gain on sale of securities , partially offset by a decrease in gain on sale-other primarily from sales of structured settlements . non-interest expense for the fiscal year ended june 30 , 2018 was $ 173.9 million compared to $ 137.6 million and $ 112.8 million for the years ended june 30 , 2017 and 2016 , respectively . the increase was primarily due to an increase of $ 19.2 million in the bank 's staffing for lending , information technology infrastructure development , trustee and fiduciary services and regulatory compliance , an increase in advertising and promotions of $ 6.1 million , an increase in data processing and internet of $ 4.1 million , and an increase in other general and administrative costs of $ 3.4 million . our staffing rose to 801 full-time equivalents compared to 681 and 647 at june 30 , 2018 , 2017 and 2016 , respectively . total assets were $ 9,539.5 million at june 30 , 2018 compared to $ 8,501.7 million at june 30 , 2017 . assets grew $ 1,037.8 million or 12.2 % during the last fiscal year , primarily due to an increase in the origination of single family mortgage loans and c & i loans . these loans were funded primarily with growth in deposits . our future performance will depend on many factors : changes in interest rates , competition for deposits and quality loans , the credit performance of our assets , regulatory actions , strategic transactions , and our ability to improve operating efficiencies . see “ item 1a . risk factors . ” 34 mergers and acquisitions from time to time we undertake acquisitions or similar transactions consistent with our operating and growth strategies . during the fiscal years ended june 30 , 2016 , 2017 and 2018 there were three acquisitions , which are discussed below . h & r block bank deposit acquisition on august 31 , 2015 , our bank completed the acquisition of approximately $ 419 million in deposits consisting of checking , individual retirement savings , and cd accounts from h & r block bank and its parent company , h & r block , inc. ( “ h & r block ” ) . in connection with the closing of this transaction : ( i ) our bank and emerald financial services , llc , a delaware limited liability company and wholly-owned subsidiary of h & r block ( “ efs ” ) , entered into the program management agreement ( “ pma ” ) , dated august 31 , 2015 ; ( ii ) our bank and h & r block , efs , hrb participant i , llc , a delaware limited liability company and wholly-owned subsidiary of h & r block , entered into the emerald receivables participation agreement , dated august 31 , 2015 ; and ( iii ) our bank and h & r block entered into the guaranty agreement ( together , the “ pma and related agreements ” ) , dated august 31 , 2015. through the pma and related agreements our bank will provide h & r block-branded financial services products and services . the three products and services that represent the primary focus and the majority of transactional volume that our bank will process are described in detail below . the first product is emerald prepaid mastercard ® services . the bank entered into agreements to offer this product in august 2015. under the agreements , the bank is responsible for the primary oversight and control of the prepaid card programs of a wholly-owned subsidiary of h & r block . the bank holds the prepaid card customer deposits for those cards issued under the prepaid programs in non-interest bearing accounts and earns a fixed fee paid by h & r block 's subsidiary for each automated clearing house ( “ ach ” ) transaction processed through the prepaid card customer accounts . a portion of h & r block 's customers use the emerald card as an option to receive federal and state income tax refunds . the prepaid customer deposits are included in non-interest bearing deposit liabilities on the balance sheet of the company and the ach fee income is included in the income statement under the line banking and service fees . the second product is refund transfer . the bank entered into agreements to offer this product in august 2015. the bank is responsible for the primary oversight and control of the refund transfer program of a wholly-owned subsidiary of h & r block . the bank opens a temporary bank account for each h & r block customer who is receiving an income tax refund and elects to defer payment of his or her tax preparation fees . after the internal revenue service and any state income tax authorities transfer the refund into the customer 's account , the net funds are transferred to the customer and the temporary deposit account is closed . story_separator_special_tag our net interest income has increased as a result of the growth in our interest earning assets and is subject to competitive factors in the online banking market . our net interest income is reduced by our estimate of loss provisions for our loan and lease portfolio . we also earn non-interest income primarily from mortgage banking activities , banking products and service activity , prepaid card fee income , prepayment fee income from multifamily borrowers who repay their loans before maturity and from gains on sales of other loans and investment securities . losses on investment securities reduce non-interest income . the largest component of non-interest expense is salary and benefits , which is a function of the number of personnel , which increased from 681 full time employees at june 30 , 2017 to 801 full-time equivalent employees at june 30 , 2018 . we are subject to federal and state income taxes , and our effective tax rates were 36.42 % , 42.10 % and 41.78 % for the fiscal years ended june 30 , 2018 , 2017 , and 2016 , respectively . other factors that affect our results of operations include expenses relating to data processing , advertising , depreciation , occupancy , professional services , and other miscellaneous expenses . comparison of the fiscal year ended june 30 , 20 18 and june 30 , 2017 net interest income . net interest income totaled $ 368.5 million for the fiscal year ended june 30 , 2018 compared to $ 313.2 million for the fiscal year ended june 30 , 2017 . the following table sets forth the effects of changing rates and volumes on our net interest income . information is provided with respect to ( i ) effects on interest income and interest expense attributable to changes in volume ( changes in volume multiplied by prior rate ) ; and ( ii ) effects on interest income and interest expense attributable to changes in rate ( changes in rate multiplied by prior volume ) . the change in interest due to both volume and rate has been allocated proportionally to both , based on their relative absolute values . replace_table_token_18_th the change in interest due to both volume and rate has been allocated proportionally to both , based on their relative absolute values . interest income . interest income for the fiscal year ended june 30 , 2018 totaled $ 475.1 million , an increase of $ 87.8 million , or 22.7 % , compared to $ 387.3 million in interest income for the fiscal year ended june 30 , 2017 primarily due to growth in volume of interest-earning assets from loan originations , primarily from commercial & industrial lending as well as accretion from origination fees from refund advance loans . fundings of refund advance loans increased from $ 0.3 billion to $ 1.1 billion for the fiscal years ended june 30 , 2017 and june 30 , 2018 , respectively . average interest-earning assets for the fiscal year ended june 30 , 2018 increased by $ 1,044.5 million compared to the fiscal year ended june 30 , 2017 primarily due to loan and lease originations for investment which increased $ 1,740.1 million during the year ended june 30 , 2018 . yields on loans and leases increased by 40 basis points to 5.66 % for the fiscal year ended june 30 , 2018 , primarily due to increased yields in the single family , commercial & industrial and h & r block-branded loan products . for the fiscal year ended june 30 , 2018 , the growth in average balances contributed additional interest income of $ 52.2 million , which was supplemented by a $ 35.6 million increase in interest income due to the increase in average rate . the average yield earned on our interest-earning assets increased to 5.30 % for the fiscal year ended june 30 , 2018 , up from 4.89 % for the same period in 2017 primarily due to the increase in rate from loans and leases . as a result of the federal reserve decisions to increase the fed funds rate over the last year we have marked up our 40 adjustable loans and have increased the market rates on new loans . a contributing factor to the increase of loans and leases income is the amortization of origination fees for h & r block-branded products . interest expense . interest expense totaled $ 106.6 million for the fiscal year ended june 30 , 2018 , an increase of $ 32.5 million , or 43.9 % compared to $ 74.1 million in interest expense during the fiscal year ended june 30 , 2017 , due primarily to increased rates on deposits and advances , as a result of the federal reserve decisions to increase the fed funds rate over the last year . the average rate paid on all of our interest-bearing liabilities increased to 1.51 % for the fiscal year ended june 30 , 2018 from 1.15 % for the fiscal year ended june 30 , 2017 , due primarily to increased rates on deposits and advances from fhlb . average interest-bearing liabilities for the fiscal year ended june 30 , 2018 increased $ 603.5 million compared to fiscal 2017 . the average rate on interest-bearing deposits increased to 1.15 % from 0.75 % due to increases in prevailing deposit rates across the industry . the rates on advances from the fhlb also increased to 1.76 % from 1.55 % due primarily to the fed rate increases . the average rate on time deposits increased to 2.61 % for the fiscal year ended june 30 , 2018 from 2.33 % for the fiscal year ended june 30 , 2017 , due to fed rate increases . average fhlb advances for the fiscal year ended june 30 , 2018 increased $ 497.1 million , or 62.2 % compared to fiscal 2017. the average non-interest-bearing demand

liquidity and capital resources liquidity . our sources of liquidity include deposits , borrowings , payments and maturities of outstanding loans , sales of loans , maturities or gains on sales of investment securities and other short-term investments . while scheduled loan payments and maturing investment securities and short-term investments are relatively predictable sources of funds , deposit flows and loan prepayments are greatly influenced by general interest rates , economic conditions and competition . we generally invest excess funds in overnight deposits and other short-term interest-earning assets . we use cash generated through retail deposits , our largest funding source , to offset the cash utilized in lending and investing activities . our short-term interest-earning investment securities are also used to provide liquidity for lending and other operational requirements . as an additional source of funds , we have two credit agreements . bofi federal bank can borrow up to 40 % of its total assets from the fhlb . borrowings are collateralized by pledging certain mortgage loans and investment securities to the fhlb . based on loans and securities pledged at june 30 , 2018 , we had a total borrowing availability of approximately $ 1.6 billion available immediately , which represents a fully collateralized position , for advances from the fhlb for terms up to ten years . the bank can also borrow from the discount window at the frb . frb borrowings are collateralized by commercial loans , consumer loans and mortgage-backed securities pledged to the frb . based on loans and securities pledged at june 30 , 2018 , we had a total borrowing capacity of approximately $ 917.0 million , all of which was available for use . at june 30 , 2018 , we also had $ 35.0 million in unsecured fed funds purchase lines with two major banks under which there were no borrowings outstanding . 51 in the past , we have used long-term borrowings to fund our loans and to minimize our interest rate risk . our future borrowings will depend on the growth of our lending operations and our exposure to interest rate risk .

year 2013 , 2012 and 2011 net interest margin excluding accretion of fair value discount on acquired loans and amortization of fair value premium on assumed time deposits related to the acquisition ; 52 management believes that showing these amounts and measures excluding these items is useful for investors because it better reflects our core operating results and provides useful information by which to evaluate the company 's operating performance on an ongoing basis from period to period . the following table presents a reconciliation of the calculation of fiscal 2011 diluted earnings per share available to common shareholders excluding bargain purchase gain and transaction expenses related to the acquisition : for the twelve months ended june 30 , 2011 diluted earnings per share available to common stockholders $ 5.12 less : impact of excluding bargain purchase gain , net of transaction expenses , related to the acquisition , net of tax 1.92 diluted earnings per share available to common stockholders - excluding bargain purchase gain , net of tax and transaction expenses , related to the acquisition $ 3.20 the following table presents a reconciliation of the calculation of net income available to common stockholders , excluding accretion of fair value discount on acquired loans , amortization of premium on acquired time deposits , and bargain purchase gain , net of transaction expenses , related to the acquisition , net of tax : for the twelve months ended ( dollars in thousands ) june 30 , 2013 june 30 , 2012 june 30 , 2011 net income available to common stockholders $ 9,722 $ 9,580 $ 10,958 less : impact of excluding accretion of fair value discount on acquired loans and amortization of fair value premium on acquired time deposits , and bargain purchase gain , net of transaction expenses , related to the acquisition , net of tax 873 2,446 5,435 net income available to common shareholders - excluding accretion of fair value discount on acquired loans and amortization of fair value premium on acquired time deposits , and bargain purchase gain , net of transaction expenses , related to the acquisition , net of tax $ 8,849 $ 7,134 $ 5,523 the following table presents a reconciliation of the calculation of return on average assets , excluding accretion of fair value discount on acquired loans , amortization of premium on acquired time deposits , and bargain purchase gain , net of transaction expenses , related to the acquisition , net of tax : for the twelve months ended june 30 , 2013 june 30 , 2012 june 30 , 2011 return on average assets 1.32 % 1.37 % 1.81 % less : impact of excluding accretion of fair value discount on acquired loans and amortization of fair value premium on acquired time deposits , and bargain purchase gain , net of transaction expenses , related to the acquisition , net of tax 0.12 % 0.33 % 0.86 % return on average assets - excluding accretion of fair value discount on acquired loans and amortization of fair value premium on acquired time deposits , and bargain purchase gain , net of transaction expenses , related to the acquisition , net of tax 1.20 % 1.04 % 0.95 % 53 the following table presents a reconciliation of the calculation of return on average common equity , excluding accretion of fair value discount on acquired loans , amortization of premium on acquired time deposits , and bargain purchase gain , net of transaction expenses , related to the acquisition , net of tax : for the twelve months ended june 30 , 2013 june 30 , 2012 june 30 , 2011 return on average common equity 12.34 % 15.15 % 27.08 % less : impact of excluding accretion of fair value discount on acquired loans and amortization of fair value premium on acquired time deposits , and bargain purchase gain , net of transaction expenses , related to the acquisition , net of tax 1.11 % 3.87 % 13.43 % return on average common equity - excluding accretion of fair value discount on acquired loans and amortization of fair value premium on acquired time deposits , and bargain purchase gain , net of transaction expenses , related to the acquisition , net of tax 11.23 % 11.28 % 13.65 % the following table presents a reconciliation of the calculation of net interest margin , excluding accretion of fair value discount on acquired loans and amortization of premium on acquired time deposits related to the acquisition : replace_table_token_25_th the non-gaap disclosures contained herein should not be viewed as substitutes for the results determined to be in accordance with gaap , nor are they necessarily comparable to non-gaap performance measures that may be presented by other companies . 54 critical accounting policies the company has established various accounting policies , which govern the application of accounting principles generally accepted in the united states of america in the preparation of our financial statements . our significant accounting policies are described in item 8 under the notes to the consolidated financial statements . certain accounting policies involve significant judgments and assumptions by management that have a material impact on the carrying value of certain assets and liabilities ; management considers such accounting policies to be critical accounting policies . the judgments and assumptions used by management are based on historical experience and other factors , which are believed to be reasonable under the circumstances . because of the nature of the judgments and assumptions made by management , actual results could differ from these judgments and estimates that could have a material impact on the carrying values of assets and liabilities and the results of operations of the company . the allowance for losses on loans represents management 's best estimate of probable losses in the existing loan portfolio . story_separator_special_tag accretion of fair value discount on loans and amortization of fair value premium on time deposits , resulting from the acquisition , increased from $ 2.1 million in fiscal 2011 to $ 3.9 million in fiscal 2012. the change in this component increased net interest 59 income by $ 1.8 million and net interest margin by 25 basis points for fiscal 2012 , as compared to fiscal 2011. the company expects the impact of the fair value discount accretion will decline , over time , as the assets acquired at a discount continue to mature or prepay . for fiscal 2012 , the net interest margin was 4.12 % , compared to 3.92 % for fiscal year 2011. at june 30 , 2012 , the net interest margin was 4.23 % . interest income . interest income for fiscal 2012 was $ 39.0 million , an increase of $ 3.9 million , or 11.2 % , when compared to the prior fiscal year . the increase was due to the $ 98.3 million increase in the average balance of interest-earning assets , partially offset by a 25 basis point decline in the average yield earned on interest-earning assets , from 5.78 % in fiscal 2011 to 5.53 % in fiscal 2012. interest income on loans receivable for fiscal 2012 was $ 36.3 million , an increase of $ 4.1 million , or 12.7 % , when compared to the prior fiscal year . the increase was due to a $ 55.9 million increase in the average balance of loans receivable , combined with a nine basis point increase in the average yield earned on loans receivable . the increase in average balances was attributed to both organic growth and the acquisition . the increase in the average yield was attributable to the acquisition and the resulting fair value discount on the loan portfolio accreted to income . interest income on the investment portfolio and other interest-earning assets was $ 2.6 million for fiscal 2012 , a decrease of $ 166,000 , or 6.0 % , when compared to the prior fiscal year . the decrease was due to a 90 basis point decrease in the average yield earned on these assets , partially offset by a $ 42.5 million increase in the average balance of these assets . the decreased yield was attributed to a higher percentage of these assets held in lower-yielding cash equivalents , as well as lower available yields on investment securities , reflecting the low interest rate environment . interest expense . interest expense was $ 9.9 million for fiscal 2012 , a decrease of $ 1.3 million , or 11.9 % , when compared to the prior fiscal year . the decrease was due to a 45 basis point decrease in the average rate paid on interest-bearing liabilities , from 2.07 % in fiscal 2011 to 1.63 % in fiscal 2012 , partially offset by the $ 66.9 million increase in the average balance of interest-bearing liabilities . interest expense on deposits was $ 8.2 million for fiscal 2012 , a decrease of $ 1.0 million , or 10.5 % , when compared to the prior fiscal year . the decrease was due to a 45 basis point decrease in the average rate paid on deposits outstanding , reflecting the decrease in market rates , partially offset by a $ 75.7 million increase in the average balance of interest-bearing deposits . interest expense on fhlb advances was $ 1.2 million for fiscal 2012 , a decrease of $ 321,000 , or 20.7 % , when compared to the prior fiscal year . the decrease was due to a $ 6.5 million decrease in the average balance of fhlb advances , combined with a 16 basis point decrease in the average rate paid on advances , reflecting the repayment of advances which carried higher rates than the average of the advances that remain outstanding . provision for loan losses . a provision for loan losses is charged to earnings to bring the total allowance for loan losses to a level considered adequate by management to provide for probable loan losses based on prior loss experience , type and amount of loans in the portfolio , adverse situations that may affect the borrower 's ability to repay , the estimated value of any underlying collateral , and current economic conditions . management also considers other factors relating to the collectability of the loan portfolio . the provision for loan losses was $ 1.8 million for fiscal 2012 , compared to $ 2.4 million for the prior fiscal year . the decrease in provision was attributed to management 's analysis of the loan portfolio , which noted slower loan growth and relatively stable credit quality throughout the fiscal year . in fiscal 2012 , net charge offs were $ 731,000 , compared to $ 455,000 for the prior fiscal year . at june 30 , 2012 , classified loans totaled $ 9.2 million , or 1.55 % of gross loans , as compared to $ 8.5 million , or 1.52 % of gross loans at june 30 , 2011. classified loans were comprised primarily of commercial real estate loans and commercial loans . all loans so designated were classified due to concerns as to the borrowers ' ability to continue to generate sufficient cash flows to service the debt . the above provision was made based on management 's analysis of the various factors which affect the loan portfolio and management 's desire to maintain the allowance at a level considered adequate . management performed a detailed analysis of the loan portfolio , including types of loans , the charge-off history , and an analysis of the allowance for loan losses . management also considered the continued origination of loans secured by commercial businesses and commercial and agricultural real estate , which bear an inherently higher level of credit risk . while management believes the allowance for loan

liquidity and capital resources liquidity . our sources of liquidity include deposits , borrowings , payments and maturities of outstanding loans , sales of loans , maturities or gains on sales of investment securities and other short-term investments . while scheduled loan payments and maturing investment securities and short-term investments are relatively predictable sources of funds , deposit flows and loan prepayments are greatly influenced by general interest rates , economic conditions and competition . we generally invest excess funds in overnight deposits and other short-term interest-earning assets . we use cash generated through retail deposits , our largest funding source , to offset the cash utilized in lending and investing activities . our short-term interest-earning investment securities are also used to provide liquidity for lending and other operational requirements . as an additional source of funds , we have two credit agreements . bofi federal bank can borrow up to 40 % of its total assets from the fhlb . borrowings are collateralized by pledging certain mortgage loans and investment securities to the fhlb . based on loans and securities pledged at june 30 , 2018 , we had a total borrowing availability of approximately $ 1.6 billion available immediately , which represents a fully collateralized position , for advances from the fhlb for terms up to ten years . the bank can also borrow from the discount window at the frb . frb borrowings are collateralized by commercial loans , consumer loans and mortgage-backed securities pledged to the frb . based on loans and securities pledged at june 30 , 2018 , we had a total borrowing capacity of approximately $ 917.0 million , all of which was available for use . at june 30 , 2018 , we also had $ 35.0 million in unsecured fed funds purchase lines with two major banks under which there were no borrowings outstanding . 51 in the past , we have used long-term borrowings to fund our loans and to minimize our interest rate risk . our future borrowings will depend on the growth of our lending operations and our exposure to interest rate risk .

year 2013 , 2012 and 2011 net interest margin excluding accretion of fair value discount on acquired loans and amortization of fair value premium on assumed time deposits related to the acquisition ; 52 management believes that showing these amounts and measures excluding these items is useful for investors because it better reflects our core operating results and provides useful information by which to evaluate the company 's operating performance on an ongoing basis from period to period . the following table presents a reconciliation of the calculation of fiscal 2011 diluted earnings per share available to common shareholders excluding bargain purchase gain and transaction expenses related to the acquisition : for the twelve months ended june 30 , 2011 diluted earnings per share available to common stockholders $ 5.12 less : impact of excluding bargain purchase gain , net of transaction expenses , related to the acquisition , net of tax 1.92 diluted earnings per share available to common stockholders - excluding bargain purchase gain , net of tax and transaction expenses , related to the acquisition $ 3.20 the following table presents a reconciliation of the calculation of net income available to common stockholders , excluding accretion of fair value discount on acquired loans , amortization of premium on acquired time deposits , and bargain purchase gain , net of transaction expenses , related to the acquisition , net of tax : for the twelve months ended ( dollars in thousands ) june 30 , 2013 june 30 , 2012 june 30 , 2011 net income available to common stockholders $ 9,722 $ 9,580 $ 10,958 less : impact of excluding accretion of fair value discount on acquired loans and amortization of fair value premium on acquired time deposits , and bargain purchase gain , net of transaction expenses , related to the acquisition , net of tax 873 2,446 5,435 net income available to common shareholders - excluding accretion of fair value discount on acquired loans and amortization of fair value premium on acquired time deposits , and bargain purchase gain , net of transaction expenses , related to the acquisition , net of tax $ 8,849 $ 7,134 $ 5,523 the following table presents a reconciliation of the calculation of return on average assets , excluding accretion of fair value discount on acquired loans , amortization of premium on acquired time deposits , and bargain purchase gain , net of transaction expenses , related to the acquisition , net of tax : for the twelve months ended june 30 , 2013 june 30 , 2012 june 30 , 2011 return on average assets 1.32 % 1.37 % 1.81 % less : impact of excluding accretion of fair value discount on acquired loans and amortization of fair value premium on acquired time deposits , and bargain purchase gain , net of transaction expenses , related to the acquisition , net of tax 0.12 % 0.33 % 0.86 % return on average assets - excluding accretion of fair value discount on acquired loans and amortization of fair value premium on acquired time deposits , and bargain purchase gain , net of transaction expenses , related to the acquisition , net of tax 1.20 % 1.04 % 0.95 % 53 the following table presents a reconciliation of the calculation of return on average common equity , excluding accretion of fair value discount on acquired loans , amortization of premium on acquired time deposits , and bargain purchase gain , net of transaction expenses , related to the acquisition , net of tax : for the twelve months ended june 30 , 2013 june 30 , 2012 june 30 , 2011 return on average common equity 12.34 % 15.15 % 27.08 % less : impact of excluding accretion of fair value discount on acquired loans and amortization of fair value premium on acquired time deposits , and bargain purchase gain , net of transaction expenses , related to the acquisition , net of tax 1.11 % 3.87 % 13.43 % return on average common equity - excluding accretion of fair value discount on acquired loans and amortization of fair value premium on acquired time deposits , and bargain purchase gain , net of transaction expenses , related to the acquisition , net of tax 11.23 % 11.28 % 13.65 % the following table presents a reconciliation of the calculation of net interest margin , excluding accretion of fair value discount on acquired loans and amortization of premium on acquired time deposits related to the acquisition : replace_table_token_25_th the non-gaap disclosures contained herein should not be viewed as substitutes for the results determined to be in accordance with gaap , nor are they necessarily comparable to non-gaap performance measures that may be presented by other companies . 54 critical accounting policies the company has established various accounting policies , which govern the application of accounting principles generally accepted in the united states of america in the preparation of our financial statements . our significant accounting policies are described in item 8 under the notes to the consolidated financial statements . certain accounting policies involve significant judgments and assumptions by management that have a material impact on the carrying value of certain assets and liabilities ; management considers such accounting policies to be critical accounting policies . the judgments and assumptions used by management are based on historical experience and other factors , which are believed to be reasonable under the circumstances . because of the nature of the judgments and assumptions made by management , actual results could differ from these judgments and estimates that could have a material impact on the carrying values of assets and liabilities and the results of operations of the company . the allowance for losses on loans represents management 's best estimate of probable losses in the existing loan portfolio . story_separator_special_tag accretion of fair value discount on loans and amortization of fair value premium on time deposits , resulting from the acquisition , increased from $ 2.1 million in fiscal 2011 to $ 3.9 million in fiscal 2012. the change in this component increased net interest 59 income by $ 1.8 million and net interest margin by 25 basis points for fiscal 2012 , as compared to fiscal 2011. the company expects the impact of the fair value discount accretion will decline , over time , as the assets acquired at a discount continue to mature or prepay . for fiscal 2012 , the net interest margin was 4.12 % , compared to 3.92 % for fiscal year 2011. at june 30 , 2012 , the net interest margin was 4.23 % . interest income . interest income for fiscal 2012 was $ 39.0 million , an increase of $ 3.9 million , or 11.2 % , when compared to the prior fiscal year . the increase was due to the $ 98.3 million increase in the average balance of interest-earning assets , partially offset by a 25 basis point decline in the average yield earned on interest-earning assets , from 5.78 % in fiscal 2011 to 5.53 % in fiscal 2012. interest income on loans receivable for fiscal 2012 was $ 36.3 million , an increase of $ 4.1 million , or 12.7 % , when compared to the prior fiscal year . the increase was due to a $ 55.9 million increase in the average balance of loans receivable , combined with a nine basis point increase in the average yield earned on loans receivable . the increase in average balances was attributed to both organic growth and the acquisition . the increase in the average yield was attributable to the acquisition and the resulting fair value discount on the loan portfolio accreted to income . interest income on the investment portfolio and other interest-earning assets was $ 2.6 million for fiscal 2012 , a decrease of $ 166,000 , or 6.0 % , when compared to the prior fiscal year . the decrease was due to a 90 basis point decrease in the average yield earned on these assets , partially offset by a $ 42.5 million increase in the average balance of these assets . the decreased yield was attributed to a higher percentage of these assets held in lower-yielding cash equivalents , as well as lower available yields on investment securities , reflecting the low interest rate environment . interest expense . interest expense was $ 9.9 million for fiscal 2012 , a decrease of $ 1.3 million , or 11.9 % , when compared to the prior fiscal year . the decrease was due to a 45 basis point decrease in the average rate paid on interest-bearing liabilities , from 2.07 % in fiscal 2011 to 1.63 % in fiscal 2012 , partially offset by the $ 66.9 million increase in the average balance of interest-bearing liabilities . interest expense on deposits was $ 8.2 million for fiscal 2012 , a decrease of $ 1.0 million , or 10.5 % , when compared to the prior fiscal year . the decrease was due to a 45 basis point decrease in the average rate paid on deposits outstanding , reflecting the decrease in market rates , partially offset by a $ 75.7 million increase in the average balance of interest-bearing deposits . interest expense on fhlb advances was $ 1.2 million for fiscal 2012 , a decrease of $ 321,000 , or 20.7 % , when compared to the prior fiscal year . the decrease was due to a $ 6.5 million decrease in the average balance of fhlb advances , combined with a 16 basis point decrease in the average rate paid on advances , reflecting the repayment of advances which carried higher rates than the average of the advances that remain outstanding . provision for loan losses . a provision for loan losses is charged to earnings to bring the total allowance for loan losses to a level considered adequate by management to provide for probable loan losses based on prior loss experience , type and amount of loans in the portfolio , adverse situations that may affect the borrower 's ability to repay , the estimated value of any underlying collateral , and current economic conditions . management also considers other factors relating to the collectability of the loan portfolio . the provision for loan losses was $ 1.8 million for fiscal 2012 , compared to $ 2.4 million for the prior fiscal year . the decrease in provision was attributed to management 's analysis of the loan portfolio , which noted slower loan growth and relatively stable credit quality throughout the fiscal year . in fiscal 2012 , net charge offs were $ 731,000 , compared to $ 455,000 for the prior fiscal year . at june 30 , 2012 , classified loans totaled $ 9.2 million , or 1.55 % of gross loans , as compared to $ 8.5 million , or 1.52 % of gross loans at june 30 , 2011. classified loans were comprised primarily of commercial real estate loans and commercial loans . all loans so designated were classified due to concerns as to the borrowers ' ability to continue to generate sufficient cash flows to service the debt . the above provision was made based on management 's analysis of the various factors which affect the loan portfolio and management 's desire to maintain the allowance at a level considered adequate . management performed a detailed analysis of the loan portfolio , including types of loans , the charge-off history , and an analysis of the allowance for loan losses . management also considered the continued origination of loans secured by commercial businesses and commercial and agricultural real estate , which bear an inherently higher level of credit risk . while management believes the allowance for loan

cash and equivalents . cash equivalents and time deposits were down $ 20.9 million , or 60.3 % , as compared to june 30 , 2012 , as growth in loans and investments outpaced increases in deposit balances . loans . loans , net of the allowance for loan losses , increased $ 63.7 million , or 10.9 % , to $ 647.2 million at june 30 , 2013 , as compared to $ 583.5 million at june 30 , 2012. increases in commercial , agricultural , and residential real estate lending were partially offset by decreases in commercial business and agricultural operating and equipment loan balances . residential real estate loan growth was primarily attributable to loans secured by multi-family housing . allowance for loan losses . the allowance for loan losses increased $ 900,000 , or 11.9 % , to $ 8.4 million at june 30 , 2013 , from $ 7.5 million at june 30 , 2012. the allowance represented 1.28 % of gross loans receivable at june 30 , 2013 , as compared to 1.27 % of gross loans receivable at june 30 , 2012. at june 30 , 2013 , nonperforming loans , which included loans past due greater than 90 days and nonaccruing loans , were $ 1.4 million , compared to $ 2.4 million at june 30 , 2012. see also , provision for loan losses , under comparison of operating results for the years ended june 30 , 2013 and 2012. in its quarterly evaluation of the adequacy of its allowance for loan losses , the company employs historical data , including past due percentages , charge offs , and recoveries for the previous one to five years for each loan category . average net charge offs are calculated as net charge offs for the period by portfolio type as a percentage of the average balance of the respective portfolio type over the same period . as the company and industry have seen increases in loan defaults in the past several years , the company believes that it is prudent to emphasize more recent historical factors in the allowance evaluation .

we believe that we must continue to invest in our tommy bahama and lilly pulitzer lifestyle brands in order to take advantage of their long-term growth opportunities . investments include capital expenditures primarily related to the direct to consumer operations such as retail store build-out and distribution center and technology enhancements as well as increased employment , advertising and other costs in key functions to provide future net sales growth and support the ongoing business operations . we expect that the investments will continue to put downward pressure on our operating margins in the near future until we have sufficient sales to leverage the operating costs . we believe that there are opportunities for modest sales growth for lanier clothes through new product programs , including pants ; however , we also believe that the tailored clothing environment will continue to be very challenging , which may negatively impact net sales , operating income and operating margin . the ben sherman lifestyle brand has faced challenges in recent years with sales and operating results on a downward trajectory . during fiscal 2013 , we appointed a new ceo and strengthened the management team of the brand , refocused the business on its core consumer , reduced operating expenses and improved the operation of the ben sherman retail stores . much work remains to generate satisfactory financial results in the long-term ; however , we believe , as a result of these actions , that ben sherman has ample opportunities to increase sales and thereby generate significantly improved operating results in the future . we continue to believe that it is important to maintain a strong balance sheet and liquidity . we believe that our positive cash flow from operations coupled with the strength of our balance sheet and liquidity will provide us with ample resources to fund future investments in our lifestyle brands . in the future , we may add additional lifestyle brands to our portfolio , if we 37 identify appropriate targets which meet our investment criteria ; however , we believe that we have significant opportunities to appropriately deploy our capital and resources in our existing lifestyle brands . the following table sets forth our consolidated operating results ( in thousands , except per share amounts ) for the 52-week fiscal 2013 compared to the 53-week fiscal 2012 : replace_table_token_19_th the primary reasons for the higher earnings in fiscal 2013 were : net sales increases in excess of 10 % in both the tommy bahama and lilly pulitzer operating groups ; fiscal 2012 including a charge of $ 9.1 million related to a loss on the repurchase of senior notes , which resulted from our july 2012 redemption of the remaining $ 105 million in aggregate principal amount of our 11.375 % senior secured notes ( `` senior secured notes `` ) primarily using borrowings under our u.s. revolving credit agreement , with no loss on repurchase of senior notes in fiscal 2013 ; a $ 6.0 million reduction in the charge for the change in the fair value of contingent consideration in fiscal 2013 ; a $ 4.8 million reduction in interest expense in fiscal 2013 to $ 4.2 million primarily due to our borrowing at lower interest rates for the first half of fiscal 2013 compared to the first half of fiscal 2012 as a result of our july 2012 senior secured notes redemption ; a $ 4.1 million reduction in the lifo accounting charge in fiscal 2013 as there was no significant lifo accounting impact in fiscal 2013 ; sg & a reductions in ben sherman , primarily due to certain cost savings initiatives , and corporate and other , primarily due to lower incentive compensation amounts earned ; and fiscal 2013 including a $ 1.6 million gain on the sale of property and equipment . these items were partially offset by : an increase in sg & a for tommy bahama and lilly pulitzer which was primarily due to $ 30.8 million of incremental sg & a associated with the operation of retail stores opened in fiscal 2013 and fiscal 2012 and other sg & a increases to support the growing tommy bahama and lilly pulitzer businesses ; a $ 14.7 million decrease in net sales in ben sherman ; our effective tax rate increasing to 43.7 % in fiscal 2013 compared to 38.5 % in fiscal 2012 ; although both years reflect the unfavorable impact of foreign losses for which we were not able to recognize an income tax benefit and the favorable impact of a decrease in the enacted tax rate in the united kingdom , fiscal 2012 also benefited from certain other favorable discrete items which reduced the effective tax rate ; and $ 2.1 million of charges in the aggregate incurred in fiscal 2013 related to an inventory step-up charge and amortization of intangible assets as a result of our acquisition of the tommy bahama operations in canada in the second quarter of fiscal 2013. operating groups our business is primarily operated through our four operating groups : tommy bahama , lilly pulitzer , lanier clothes and ben sherman . we identify our operating groups based on the way our management organizes the components of our business for purposes of allocating resources and assessing performance . our operating group structure reflects a brand-focused 38 management approach , emphasizing operational coordination and resource allocation across each brand 's direct to consumer , wholesale and licensing operations . tommy bahama designs , sources , markets and distributes men 's and women 's sportswear and related products . the target consumers of tommy bahama are primarily affluent men and women age 35 and older who embrace a relaxed and casual approach to daily living . tommy bahama products can be found in our tommy bahama stores and on our tommy bahama e-commerce website , tommybahama.com , as well as in better department stores and independent specialty stores throughout the united states . story_separator_special_tag corporate and other : the gross profit in corporate and other in each period primarily reflects the impact on gross profit of our oxford golf and lyons , georgia distribution center operations and the impact of lifo accounting adjustments . the increase in the gross profit for corporate and other was primarily due to ( 1 ) fiscal 2012 being impacted by a $ 4.0 million lifo accounting charge with no significant lifo accounting charge in fiscal 2013 and ( 2 ) higher sales and gross margin in the oxford golf business in fiscal 2013 . sg & a replace_table_token_28_th the increase in sg & a was primarily due to ( 1 ) $ 30.8 million of incremental sg & a in fiscal 2013 associated with operating additional tommy bahama retail stores and restaurants and lilly pulitzer retail stores and ( 2 ) higher costs to support the growing tommy bahama and lilly pulitzer businesses . the increases in sg & a for tommy bahama and lilly pulitzer were partially offset by sg & a reductions in ben sherman and corporate and other . sg & a for fiscal 2012 was unfavorably impacted by the inclusion of a 53rd week , which we estimate resulted in an additional $ 7 million of sg & a . further , sg & a was impacted by $ 7.2 million reduction in incentive compensation in fiscal 2013 as compared to fiscal 2012 , primarily reflecting lower incentive compensation for both tommy bahama and corporate and other . sg & a included $ 2.2 million of amortization of intangible assets in fiscal 2013 compared to $ 1.0 million in fiscal 2012 with the increase primarily being $ 1.4 million of amortization associated with the intangible assets acquired as part of the tommy bahama canada acquisition . we anticipate that amortization of intangible assets for fiscal 2014 will be approximately $ 2.5 million with approximately $ 2.0 million of the amortization reflecting amortization of the intangible assets acquired as part of the tommy bahama canada acquisition . change in fair value of contingent consideration fiscal 2013 fiscal 2012 $ change % change change in fair value of contingent consideration included in lilly pulitzer $ 275 $ 6,285 $ ( 6,010 ) ( 95.6 ) % in connection with our acquisition of the lilly pulitzer brand and operations in fiscal 2010 , we entered into a contingent consideration agreement with the sellers , under which we are obligated to pay certain contingent consideration amounts based on the achievement of certain performance criteria by our lilly pulitzer operating group , which payments may be as much as $ 20 million in the aggregate over the four years subsequent to the acquisition . in accordance with gaap , we have recognized a liability in our consolidated balance sheets for the fair value of this liability at each balance sheet date . generally , this liability increases in fair value as we approach the date of anticipated payment , resulting in a charge to our consolidated statements of earnings during that period . further , if we determine that the probability of the amounts being earned changes , it would impact our assessment of the fair value in our consolidated balance sheet , resulting in a charge or 44 income in our consolidated statement of earnings at that time . thus , change in fair value of contingent consideration reflects the current period impact of the change in the fair value of any contingent consideration obligations . the $ 6.0 million decrease in the charge for the change in fair value of contingent consideration during fiscal 2013 was primarily a result of fiscal 2012 including a a significant increase in the fair value of the contingent consideration , while fiscal 2013 generally only reflected the passage of time as we approach the anticipated payments . during fiscal 2012 , we increased the fair value of the contingent consideration by $ 6.3 million to reflect not only the passage of time , but also our determination that the certainty of the payment of the contingent consideration related to the lilly pulitzer acquisition was more probable than we had determined in prior years based on our consideration of , among other things , ( 1 ) the fiscal 2011 and fiscal 2012 operating results of the lilly pulitzer operating group , ( 2 ) projected operating results for lilly pulitzer for fiscal 2013 and fiscal 2014 , ( 3 ) the operating results criteria for the fiscal 2013 and fiscal 2014 amounts to be earned and ( 4 ) the shorter remaining term of the contingent consideration agreement . we anticipate that the change in contingent consideration for fiscal 2014 will be approximately $ 0.3 million . royalties and other operating income fiscal 2013 fiscal 2012 $ change % change royalties and other operating income $ 19,016 $ 16,436 $ 2,580 15.7 % gain on sale of real estate included in corporate and other $ 1,611 $ — royalties and other operating income in fiscal 2013 increased by $ 2.6 million primarily due to ( 1 ) fiscal 2013 including a gain on sale of real estate of $ 1.6 million , ( 2 ) higher royalty income for both tommy bahama and lilly pulitzer and ( 3 ) higher other income in corporate and other . these increases were partially offset by lower royalty income for ben sherman in fiscal 2013 . royalty and other operating income primarily consists of royalty income received from third parties from the licensing of our tommy bahama , ben sherman and lilly pulitzer brands . operating income ( loss ) replace_table_token_29_th operating income , on a consolidated basis , was $ 84.7 million in fiscal 2013 compared to $ 69.0 million in fiscal 2012 . the 22.8 % increase in operating income was primarily due to the improved operating income in corporate and other , lilly pulitzer and tommy bahama , partially offset by

cash and equivalents . cash equivalents and time deposits were down $ 20.9 million , or 60.3 % , as compared to june 30 , 2012 , as growth in loans and investments outpaced increases in deposit balances . loans . loans , net of the allowance for loan losses , increased $ 63.7 million , or 10.9 % , to $ 647.2 million at june 30 , 2013 , as compared to $ 583.5 million at june 30 , 2012. increases in commercial , agricultural , and residential real estate lending were partially offset by decreases in commercial business and agricultural operating and equipment loan balances . residential real estate loan growth was primarily attributable to loans secured by multi-family housing . allowance for loan losses . the allowance for loan losses increased $ 900,000 , or 11.9 % , to $ 8.4 million at june 30 , 2013 , from $ 7.5 million at june 30 , 2012. the allowance represented 1.28 % of gross loans receivable at june 30 , 2013 , as compared to 1.27 % of gross loans receivable at june 30 , 2012. at june 30 , 2013 , nonperforming loans , which included loans past due greater than 90 days and nonaccruing loans , were $ 1.4 million , compared to $ 2.4 million at june 30 , 2012. see also , provision for loan losses , under comparison of operating results for the years ended june 30 , 2013 and 2012. in its quarterly evaluation of the adequacy of its allowance for loan losses , the company employs historical data , including past due percentages , charge offs , and recoveries for the previous one to five years for each loan category . average net charge offs are calculated as net charge offs for the period by portfolio type as a percentage of the average balance of the respective portfolio type over the same period . as the company and industry have seen increases in loan defaults in the past several years , the company believes that it is prudent to emphasize more recent historical factors in the allowance evaluation .

we believe that we must continue to invest in our tommy bahama and lilly pulitzer lifestyle brands in order to take advantage of their long-term growth opportunities . investments include capital expenditures primarily related to the direct to consumer operations such as retail store build-out and distribution center and technology enhancements as well as increased employment , advertising and other costs in key functions to provide future net sales growth and support the ongoing business operations . we expect that the investments will continue to put downward pressure on our operating margins in the near future until we have sufficient sales to leverage the operating costs . we believe that there are opportunities for modest sales growth for lanier clothes through new product programs , including pants ; however , we also believe that the tailored clothing environment will continue to be very challenging , which may negatively impact net sales , operating income and operating margin . the ben sherman lifestyle brand has faced challenges in recent years with sales and operating results on a downward trajectory . during fiscal 2013 , we appointed a new ceo and strengthened the management team of the brand , refocused the business on its core consumer , reduced operating expenses and improved the operation of the ben sherman retail stores . much work remains to generate satisfactory financial results in the long-term ; however , we believe , as a result of these actions , that ben sherman has ample opportunities to increase sales and thereby generate significantly improved operating results in the future . we continue to believe that it is important to maintain a strong balance sheet and liquidity . we believe that our positive cash flow from operations coupled with the strength of our balance sheet and liquidity will provide us with ample resources to fund future investments in our lifestyle brands . in the future , we may add additional lifestyle brands to our portfolio , if we 37 identify appropriate targets which meet our investment criteria ; however , we believe that we have significant opportunities to appropriately deploy our capital and resources in our existing lifestyle brands . the following table sets forth our consolidated operating results ( in thousands , except per share amounts ) for the 52-week fiscal 2013 compared to the 53-week fiscal 2012 : replace_table_token_19_th the primary reasons for the higher earnings in fiscal 2013 were : net sales increases in excess of 10 % in both the tommy bahama and lilly pulitzer operating groups ; fiscal 2012 including a charge of $ 9.1 million related to a loss on the repurchase of senior notes , which resulted from our july 2012 redemption of the remaining $ 105 million in aggregate principal amount of our 11.375 % senior secured notes ( `` senior secured notes `` ) primarily using borrowings under our u.s. revolving credit agreement , with no loss on repurchase of senior notes in fiscal 2013 ; a $ 6.0 million reduction in the charge for the change in the fair value of contingent consideration in fiscal 2013 ; a $ 4.8 million reduction in interest expense in fiscal 2013 to $ 4.2 million primarily due to our borrowing at lower interest rates for the first half of fiscal 2013 compared to the first half of fiscal 2012 as a result of our july 2012 senior secured notes redemption ; a $ 4.1 million reduction in the lifo accounting charge in fiscal 2013 as there was no significant lifo accounting impact in fiscal 2013 ; sg & a reductions in ben sherman , primarily due to certain cost savings initiatives , and corporate and other , primarily due to lower incentive compensation amounts earned ; and fiscal 2013 including a $ 1.6 million gain on the sale of property and equipment . these items were partially offset by : an increase in sg & a for tommy bahama and lilly pulitzer which was primarily due to $ 30.8 million of incremental sg & a associated with the operation of retail stores opened in fiscal 2013 and fiscal 2012 and other sg & a increases to support the growing tommy bahama and lilly pulitzer businesses ; a $ 14.7 million decrease in net sales in ben sherman ; our effective tax rate increasing to 43.7 % in fiscal 2013 compared to 38.5 % in fiscal 2012 ; although both years reflect the unfavorable impact of foreign losses for which we were not able to recognize an income tax benefit and the favorable impact of a decrease in the enacted tax rate in the united kingdom , fiscal 2012 also benefited from certain other favorable discrete items which reduced the effective tax rate ; and $ 2.1 million of charges in the aggregate incurred in fiscal 2013 related to an inventory step-up charge and amortization of intangible assets as a result of our acquisition of the tommy bahama operations in canada in the second quarter of fiscal 2013. operating groups our business is primarily operated through our four operating groups : tommy bahama , lilly pulitzer , lanier clothes and ben sherman . we identify our operating groups based on the way our management organizes the components of our business for purposes of allocating resources and assessing performance . our operating group structure reflects a brand-focused 38 management approach , emphasizing operational coordination and resource allocation across each brand 's direct to consumer , wholesale and licensing operations . tommy bahama designs , sources , markets and distributes men 's and women 's sportswear and related products . the target consumers of tommy bahama are primarily affluent men and women age 35 and older who embrace a relaxed and casual approach to daily living . tommy bahama products can be found in our tommy bahama stores and on our tommy bahama e-commerce website , tommybahama.com , as well as in better department stores and independent specialty stores throughout the united states . story_separator_special_tag corporate and other : the gross profit in corporate and other in each period primarily reflects the impact on gross profit of our oxford golf and lyons , georgia distribution center operations and the impact of lifo accounting adjustments . the increase in the gross profit for corporate and other was primarily due to ( 1 ) fiscal 2012 being impacted by a $ 4.0 million lifo accounting charge with no significant lifo accounting charge in fiscal 2013 and ( 2 ) higher sales and gross margin in the oxford golf business in fiscal 2013 . sg & a replace_table_token_28_th the increase in sg & a was primarily due to ( 1 ) $ 30.8 million of incremental sg & a in fiscal 2013 associated with operating additional tommy bahama retail stores and restaurants and lilly pulitzer retail stores and ( 2 ) higher costs to support the growing tommy bahama and lilly pulitzer businesses . the increases in sg & a for tommy bahama and lilly pulitzer were partially offset by sg & a reductions in ben sherman and corporate and other . sg & a for fiscal 2012 was unfavorably impacted by the inclusion of a 53rd week , which we estimate resulted in an additional $ 7 million of sg & a . further , sg & a was impacted by $ 7.2 million reduction in incentive compensation in fiscal 2013 as compared to fiscal 2012 , primarily reflecting lower incentive compensation for both tommy bahama and corporate and other . sg & a included $ 2.2 million of amortization of intangible assets in fiscal 2013 compared to $ 1.0 million in fiscal 2012 with the increase primarily being $ 1.4 million of amortization associated with the intangible assets acquired as part of the tommy bahama canada acquisition . we anticipate that amortization of intangible assets for fiscal 2014 will be approximately $ 2.5 million with approximately $ 2.0 million of the amortization reflecting amortization of the intangible assets acquired as part of the tommy bahama canada acquisition . change in fair value of contingent consideration fiscal 2013 fiscal 2012 $ change % change change in fair value of contingent consideration included in lilly pulitzer $ 275 $ 6,285 $ ( 6,010 ) ( 95.6 ) % in connection with our acquisition of the lilly pulitzer brand and operations in fiscal 2010 , we entered into a contingent consideration agreement with the sellers , under which we are obligated to pay certain contingent consideration amounts based on the achievement of certain performance criteria by our lilly pulitzer operating group , which payments may be as much as $ 20 million in the aggregate over the four years subsequent to the acquisition . in accordance with gaap , we have recognized a liability in our consolidated balance sheets for the fair value of this liability at each balance sheet date . generally , this liability increases in fair value as we approach the date of anticipated payment , resulting in a charge to our consolidated statements of earnings during that period . further , if we determine that the probability of the amounts being earned changes , it would impact our assessment of the fair value in our consolidated balance sheet , resulting in a charge or 44 income in our consolidated statement of earnings at that time . thus , change in fair value of contingent consideration reflects the current period impact of the change in the fair value of any contingent consideration obligations . the $ 6.0 million decrease in the charge for the change in fair value of contingent consideration during fiscal 2013 was primarily a result of fiscal 2012 including a a significant increase in the fair value of the contingent consideration , while fiscal 2013 generally only reflected the passage of time as we approach the anticipated payments . during fiscal 2012 , we increased the fair value of the contingent consideration by $ 6.3 million to reflect not only the passage of time , but also our determination that the certainty of the payment of the contingent consideration related to the lilly pulitzer acquisition was more probable than we had determined in prior years based on our consideration of , among other things , ( 1 ) the fiscal 2011 and fiscal 2012 operating results of the lilly pulitzer operating group , ( 2 ) projected operating results for lilly pulitzer for fiscal 2013 and fiscal 2014 , ( 3 ) the operating results criteria for the fiscal 2013 and fiscal 2014 amounts to be earned and ( 4 ) the shorter remaining term of the contingent consideration agreement . we anticipate that the change in contingent consideration for fiscal 2014 will be approximately $ 0.3 million . royalties and other operating income fiscal 2013 fiscal 2012 $ change % change royalties and other operating income $ 19,016 $ 16,436 $ 2,580 15.7 % gain on sale of real estate included in corporate and other $ 1,611 $ — royalties and other operating income in fiscal 2013 increased by $ 2.6 million primarily due to ( 1 ) fiscal 2013 including a gain on sale of real estate of $ 1.6 million , ( 2 ) higher royalty income for both tommy bahama and lilly pulitzer and ( 3 ) higher other income in corporate and other . these increases were partially offset by lower royalty income for ben sherman in fiscal 2013 . royalty and other operating income primarily consists of royalty income received from third parties from the licensing of our tommy bahama , ben sherman and lilly pulitzer brands . operating income ( loss ) replace_table_token_29_th operating income , on a consolidated basis , was $ 84.7 million in fiscal 2013 compared to $ 69.0 million in fiscal 2012 . the 22.8 % increase in operating income was primarily due to the improved operating income in corporate and other , lilly pulitzer and tommy bahama , partially offset by

liquidity and capital resources the table below sets forth the amounts outstanding under our financing arrangements ( in thousands ) as of february 1 , 2014 : $ 235 million u.s. secured revolving credit facility ( `` u.s. revolving credit agreement '' ) $ 137,592 £7 million senior secured revolving credit facility ( `` u.k. revolving credit agreement '' ) 3,993 total debt 141,585 short-term debt ( 3,993 ) long-term debt $ 137,592 the u.s. revolving credit agreement , entered into in june 2012 and amended in november 2013 , amended and restated our prior $ 175 million u.s. revolving credit facility . the u.s. revolving credit agreement generally ( i ) is limited to a borrowing base consisting of specified percentages of eligible categories of assets ; ( ii ) accrues variable-rate interest ( 2.1 % as of february 1 , 2014 ) , unused line fees and letter of credit fees based upon a pricing grid which is tied to average unused availability and or utilization ; ( iii ) requires periodic interest payments with principal due at maturity ( november 2018 ) ; and ( iv ) is generally secured by a first priority security interest in the accounts receivable , inventory , general intangibles and eligible 58 trademarks , investment property ( including the equity interests of certain subsidiaries ) , deposit accounts , intercompany obligations , equipment , goods , documents , contracts , books and records and other personal property of oxford industries , inc. and substantially all of its domestic subsidiaries . the u.s. revolving credit agreement was amended in november 2013 primarily to ( 1 ) extend the maturity date of the facility from june 2017 to november 2018 , ( 2 ) reduce the applicable margin ( by 25 to 50 basis points , depending on excess availability under the facility at the time of determination ) used to determine the applicable interest rate ( s ) ; and ( 3 ) modify certain other provisions and restrictions under the u.s. revolving credit agreement in a manner that is more favorable to and or less restrictive on us .

ccc is included in our aerospace segment . on january 14 , 2015 , the company purchased 100 % of the equity of armstrong for approximately $ 52.3 million in cash . armstrong , located in itasca , illinois , is a leading provider of engineering , design and certification solutions for commercial aircraft , specializing in connectivity , in-flight entertainment , and electrical power systems . armstrong is included in our aerospace segment . 16 markets commercial transport market sales to the commercial transport market include sales of electrical power generation , distribution and motion products , lighting & safety products , avionics products , systems certification and structures products . sales to this market totaled approximately $ 414.5 million or 66.4 % of our consolidated sales in 2017 . maintaining and growing sales to the commercial transport market will depend on airlines ' capital spending budgets for cabin upgrades as well as the purchase of new aircraft by global airlines . this spending by the airlines is impacted by their profits , cash flow and available financing as well as competitive pressures between the airlines to improve the travel experience for their passengers . we expect that new aircraft will be equipped with more passenger and aircraft connectivity and in-seat power than previous generation aircraft . this market has experienced strong growth from airlines installing in-seat passenger power systems on their existing and newly delivered aircraft . our ability to maintain and grow sales to this market depends on our ability to maintain our technological advantages over our competitors and maintain our relationships with major in-flight entertainment suppliers and global airlines . military aerospace market sales to the military aerospace market include sales of lighting & safety products , avionics products , electrical power & motion products and other products . sales to this market totaled approximately 9.8 % of our consolidated revenue and amounted to $ 61.3 million in 2017 . the military market is dependent on governmental funding which can change from year to year . risks are that overall spending may be reduced in the future , specific programs may be eliminated or that we fail to win new business through the competitive bid process . astronics does not have significant reliance on any one program such that cancellation of a particular program will cause material financial loss . we believe that we will continue to have opportunities similar to past years regarding this market . business jet market sales to the business jet aerospace market include sales of lighting & safety products , avionics products , and electrical power & motion products . sales to this market totaled approximately 6.6 % of our consolidated revenue in 2017 and amounted to $ 41.3 million . sales to the business jet market are driven by our ship set content on new aircraft and build rates of new aircraft . business jet oem build rates continue to be significantly impacted by slow global wealth creation and corporate profitability which have been negatively affected during the past several years by global economic uncertainty among prospective buyers . our sales to the business jet market will continue to be challenged in the upcoming year as business jet aircraft production rates are not expected to increase significantly during 2018 . despite the current market conditions , we continue to see opportunities on new aircraft currently in the design phase to employ our lighting & safety , electrical power and avionics technologies in the business jet market . there is risk involved in the development of any new aircraft including the risk that the aircraft will not ultimately be produced or that it will be produced in lower quantities than originally expected and thus impacting our return on our engineering and development efforts . other aerospace sales of our other aerospace products include sales of airfield lighting products and other peco products . sales to this market totaled approximately 2.8 % of our total revenue or $ 17.5 million in 2017 . tests systems products our test systems segment accounted for approximately 14.4 % of our consolidated sales in 2017 and amounted to $ 89.9 million . sales to the semiconductor market were approximately $ 32.0 million . sales to the aerospace & defense market were approximately $ 57.9 million in 2017 . critical accounting policies our financial statements and accompanying notes are prepared in accordance with u.s. generally accepted accounting principles . the preparation of the company 's financial statements requires management to make estimates , assumptions and judgments that affect the amounts reported . these estimates , assumptions and judgments are affected by management 's 17 application of accounting policies , which are discussed in the notes to consolidated financial statements , note 1 of item 8 , financial statements and supplementary data of this report . the critical accounting policies have been reviewed with the audit committee of our board of directors . revenue recognition the vast majority of our sales agreements are for standard products and services , with revenue recognized on the accrual basis at the time of shipment of goods , transfer of title and customer acceptance , where required . there are no significant contracts allowing for right of return . to a limited extent , certain contracts involve multiple elements ( such as equipment and service ) . the company recognizes revenue for delivered elements when they have stand-alone value to the customer , they have been accepted by the customer , and for which there are only customary refund or return rights . arrangement consideration is allocated to the deliverables by use of the relative selling price method . the selling price used for each deliverable is based on vendor-specific objective evidence ( “ vsoe ” ) if available , third party-evidence ( “ tpe ” ) if vsoe is not available , or estimated selling price if neither vsoe nor tpe is available . story_separator_special_tag sg & a expenses in 2015 benefited from a $ 1.8 million write-down of a contingent consideration liability related to an acquisition earn-out obligation . interest expense decreased in 2016 compared to 2015 due to decreased debt levels . income taxes our effective tax rates for 2017 , 2016 and 2015 were 21.3 % , 29.6 % and 28.8 % , respectively . our tax rate is affected by recurring items , such as tax rates in foreign jurisdictions and the relative amount of income we earn in those jurisdictions , which we expect to be fairly consistent in the near term . it is also affected by discrete items that may occur in any given year , 21 but are not consistent from year to year . in addition to state income taxes , the following items had the most significant impact on the difference between our statutory u.s. federal income tax rate of 35 % and our effective tax rate : 2017 : 1. recognition of approximately $ 2.9 million of 2017 u.s. r & d tax credits . 2. permanent differences , primarily the impact of the domestic production activities deduction . 3. federal tax expense on deemed repatriation of foreign earnings ( $ 1.3 million ) , partially offset by revaluation of the deferred tax balances ( $ 0.9 million ) as a result of a reduction in the federal tax rate from tax law changes enacted in 2017 . 2016 : 1. recognition of approximately $ 2.6 million of 2016 u.s. r & d tax credits . 2. permanent differences , primarily the impact of the domestic production activities deduction . 2015 : 1. recognition of approximately $ 2.6 million of 2015 u.s. r & d tax credits . 2. permanent differences , primarily the impact of the domestic production activities deduction . 2018 outlook we expect consolidated sales in 2018 to be between $ 745.0 million and $ 815.0 million . our consolidated backlog at december 31 , 2017 was $ 393.7 million of which approximately $ 346.7 million is expected to ship in 2018 . we expect our capital equipment spending in 2018 to be in the range of $ 24.0 million to $ 28.0 million . e & d spending in 2018 is expected to be in the range of $ 110.0 million to $ 115.0 million including the acquired businesses , which represents approximately 14.4 % of sales at the mid-point of the expected sales range . segment results of operations and outlook operating profit , as presented below , is sales less cost of products sold and other operating expenses excluding interest expense , corporate expenses and other non-operating revenue and expenses . cost of products sold and operating expenses are directly attributable to the respective segment . operating profit is reconciled to earnings before income taxes in note 17 of item 8 , financial statements and supplementary data , of this report . aerospace segment replace_table_token_7_th 2017 2016 total assets $ 621,047 $ 500,892 backlog $ 298,604 $ 219,146 22 replace_table_token_8_th replace_table_token_9_th 2017 compared with 2016 aerospace segment sales increased by $ 0.6 million , or 0.1 % , to $ 534.6 million , when compared with the prior year , primarily due to the addition of the acquired businesses which added $ 15.5 million . electrical power & motion sales decreased $ 24.2 million , or 8.4 % , due to lower sales of cabin power products due to a combination of lower volume and pricing . systems certifications sales decreased $ 2.2 million and other products decreased $ 1.0 million from lower project activity . these declines were offset by increased avionics sales , up $ 21.2 million of which $ 15.0 million was from the acquired businesses and $ 5.3 million was from increased sales of databus and in-flight entertainment systems . structures sales increased by $ 5.0 million . aerospace operating profit for 2017 was $ 38.9 million , or 7.3 % of sales , compared with $ 78.0 million , or 14.6 % of sales , in the same period last year . aerospace operating profit was negatively impacted by lower sales volume and market pricing pressures primarily related to cabin power products , coupled with the $ 16.2 million goodwill impairment at armstrong and an operating loss of $ 8.4 million from ccc . e & d costs for aerospace were $ 85.3 million ( inclusive of $ 5.6 million related to the acquired businesses ) and $ 78.5 million in 2017 and 2016 , respectively . 2016 compared with 2015 aerospace segment sales decreased by $ 15.7 million , or 2.9 % , when compared with the prior year to $ 534.0 million . electrical power & motion sales increased $ 8.7 million , or 3.1 % , largely driven by higher sales of in-seat power products and seat motion products , which were up $ 7.0 million and $ 4.3 million , respectively . sales of structures products were up $ 4.5 million . these increases were offset by a $ 23.4 million decline in avionics products , which was largely due to lower sales of satellite antenna systems and lower vvip in-flight entertainment/cabin management systems , and a $ 4.8 million decrease in system certification sales . aerospace operating profit for 2016 was $ 78.0 million , or 14.6 % of sales , compared with $ 85.1 million , or 15.5 % of sales , in the same period last year . the decrease in operating profit was the result of lower sales volume , coupled with slightly higher e & d costs and a general increase in operating costs . e & d costs for aerospace were $ 78.5 million and $ 77.9 million in 2016 and 2015 , respectively . aerospace sg & a expense decreased slightly to $ 60.0 million in 2016 , compared with $ 60.1 million in 2015 . 2018 outlook for aerospace – we

liquidity and capital resources the table below sets forth the amounts outstanding under our financing arrangements ( in thousands ) as of february 1 , 2014 : $ 235 million u.s. secured revolving credit facility ( `` u.s. revolving credit agreement '' ) $ 137,592 £7 million senior secured revolving credit facility ( `` u.k. revolving credit agreement '' ) 3,993 total debt 141,585 short-term debt ( 3,993 ) long-term debt $ 137,592 the u.s. revolving credit agreement , entered into in june 2012 and amended in november 2013 , amended and restated our prior $ 175 million u.s. revolving credit facility . the u.s. revolving credit agreement generally ( i ) is limited to a borrowing base consisting of specified percentages of eligible categories of assets ; ( ii ) accrues variable-rate interest ( 2.1 % as of february 1 , 2014 ) , unused line fees and letter of credit fees based upon a pricing grid which is tied to average unused availability and or utilization ; ( iii ) requires periodic interest payments with principal due at maturity ( november 2018 ) ; and ( iv ) is generally secured by a first priority security interest in the accounts receivable , inventory , general intangibles and eligible 58 trademarks , investment property ( including the equity interests of certain subsidiaries ) , deposit accounts , intercompany obligations , equipment , goods , documents , contracts , books and records and other personal property of oxford industries , inc. and substantially all of its domestic subsidiaries . the u.s. revolving credit agreement was amended in november 2013 primarily to ( 1 ) extend the maturity date of the facility from june 2017 to november 2018 , ( 2 ) reduce the applicable margin ( by 25 to 50 basis points , depending on excess availability under the facility at the time of determination ) used to determine the applicable interest rate ( s ) ; and ( 3 ) modify certain other provisions and restrictions under the u.s. revolving credit agreement in a manner that is more favorable to and or less restrictive on us .

ccc is included in our aerospace segment . on january 14 , 2015 , the company purchased 100 % of the equity of armstrong for approximately $ 52.3 million in cash . armstrong , located in itasca , illinois , is a leading provider of engineering , design and certification solutions for commercial aircraft , specializing in connectivity , in-flight entertainment , and electrical power systems . armstrong is included in our aerospace segment . 16 markets commercial transport market sales to the commercial transport market include sales of electrical power generation , distribution and motion products , lighting & safety products , avionics products , systems certification and structures products . sales to this market totaled approximately $ 414.5 million or 66.4 % of our consolidated sales in 2017 . maintaining and growing sales to the commercial transport market will depend on airlines ' capital spending budgets for cabin upgrades as well as the purchase of new aircraft by global airlines . this spending by the airlines is impacted by their profits , cash flow and available financing as well as competitive pressures between the airlines to improve the travel experience for their passengers . we expect that new aircraft will be equipped with more passenger and aircraft connectivity and in-seat power than previous generation aircraft . this market has experienced strong growth from airlines installing in-seat passenger power systems on their existing and newly delivered aircraft . our ability to maintain and grow sales to this market depends on our ability to maintain our technological advantages over our competitors and maintain our relationships with major in-flight entertainment suppliers and global airlines . military aerospace market sales to the military aerospace market include sales of lighting & safety products , avionics products , electrical power & motion products and other products . sales to this market totaled approximately 9.8 % of our consolidated revenue and amounted to $ 61.3 million in 2017 . the military market is dependent on governmental funding which can change from year to year . risks are that overall spending may be reduced in the future , specific programs may be eliminated or that we fail to win new business through the competitive bid process . astronics does not have significant reliance on any one program such that cancellation of a particular program will cause material financial loss . we believe that we will continue to have opportunities similar to past years regarding this market . business jet market sales to the business jet aerospace market include sales of lighting & safety products , avionics products , and electrical power & motion products . sales to this market totaled approximately 6.6 % of our consolidated revenue in 2017 and amounted to $ 41.3 million . sales to the business jet market are driven by our ship set content on new aircraft and build rates of new aircraft . business jet oem build rates continue to be significantly impacted by slow global wealth creation and corporate profitability which have been negatively affected during the past several years by global economic uncertainty among prospective buyers . our sales to the business jet market will continue to be challenged in the upcoming year as business jet aircraft production rates are not expected to increase significantly during 2018 . despite the current market conditions , we continue to see opportunities on new aircraft currently in the design phase to employ our lighting & safety , electrical power and avionics technologies in the business jet market . there is risk involved in the development of any new aircraft including the risk that the aircraft will not ultimately be produced or that it will be produced in lower quantities than originally expected and thus impacting our return on our engineering and development efforts . other aerospace sales of our other aerospace products include sales of airfield lighting products and other peco products . sales to this market totaled approximately 2.8 % of our total revenue or $ 17.5 million in 2017 . tests systems products our test systems segment accounted for approximately 14.4 % of our consolidated sales in 2017 and amounted to $ 89.9 million . sales to the semiconductor market were approximately $ 32.0 million . sales to the aerospace & defense market were approximately $ 57.9 million in 2017 . critical accounting policies our financial statements and accompanying notes are prepared in accordance with u.s. generally accepted accounting principles . the preparation of the company 's financial statements requires management to make estimates , assumptions and judgments that affect the amounts reported . these estimates , assumptions and judgments are affected by management 's 17 application of accounting policies , which are discussed in the notes to consolidated financial statements , note 1 of item 8 , financial statements and supplementary data of this report . the critical accounting policies have been reviewed with the audit committee of our board of directors . revenue recognition the vast majority of our sales agreements are for standard products and services , with revenue recognized on the accrual basis at the time of shipment of goods , transfer of title and customer acceptance , where required . there are no significant contracts allowing for right of return . to a limited extent , certain contracts involve multiple elements ( such as equipment and service ) . the company recognizes revenue for delivered elements when they have stand-alone value to the customer , they have been accepted by the customer , and for which there are only customary refund or return rights . arrangement consideration is allocated to the deliverables by use of the relative selling price method . the selling price used for each deliverable is based on vendor-specific objective evidence ( “ vsoe ” ) if available , third party-evidence ( “ tpe ” ) if vsoe is not available , or estimated selling price if neither vsoe nor tpe is available . story_separator_special_tag sg & a expenses in 2015 benefited from a $ 1.8 million write-down of a contingent consideration liability related to an acquisition earn-out obligation . interest expense decreased in 2016 compared to 2015 due to decreased debt levels . income taxes our effective tax rates for 2017 , 2016 and 2015 were 21.3 % , 29.6 % and 28.8 % , respectively . our tax rate is affected by recurring items , such as tax rates in foreign jurisdictions and the relative amount of income we earn in those jurisdictions , which we expect to be fairly consistent in the near term . it is also affected by discrete items that may occur in any given year , 21 but are not consistent from year to year . in addition to state income taxes , the following items had the most significant impact on the difference between our statutory u.s. federal income tax rate of 35 % and our effective tax rate : 2017 : 1. recognition of approximately $ 2.9 million of 2017 u.s. r & d tax credits . 2. permanent differences , primarily the impact of the domestic production activities deduction . 3. federal tax expense on deemed repatriation of foreign earnings ( $ 1.3 million ) , partially offset by revaluation of the deferred tax balances ( $ 0.9 million ) as a result of a reduction in the federal tax rate from tax law changes enacted in 2017 . 2016 : 1. recognition of approximately $ 2.6 million of 2016 u.s. r & d tax credits . 2. permanent differences , primarily the impact of the domestic production activities deduction . 2015 : 1. recognition of approximately $ 2.6 million of 2015 u.s. r & d tax credits . 2. permanent differences , primarily the impact of the domestic production activities deduction . 2018 outlook we expect consolidated sales in 2018 to be between $ 745.0 million and $ 815.0 million . our consolidated backlog at december 31 , 2017 was $ 393.7 million of which approximately $ 346.7 million is expected to ship in 2018 . we expect our capital equipment spending in 2018 to be in the range of $ 24.0 million to $ 28.0 million . e & d spending in 2018 is expected to be in the range of $ 110.0 million to $ 115.0 million including the acquired businesses , which represents approximately 14.4 % of sales at the mid-point of the expected sales range . segment results of operations and outlook operating profit , as presented below , is sales less cost of products sold and other operating expenses excluding interest expense , corporate expenses and other non-operating revenue and expenses . cost of products sold and operating expenses are directly attributable to the respective segment . operating profit is reconciled to earnings before income taxes in note 17 of item 8 , financial statements and supplementary data , of this report . aerospace segment replace_table_token_7_th 2017 2016 total assets $ 621,047 $ 500,892 backlog $ 298,604 $ 219,146 22 replace_table_token_8_th replace_table_token_9_th 2017 compared with 2016 aerospace segment sales increased by $ 0.6 million , or 0.1 % , to $ 534.6 million , when compared with the prior year , primarily due to the addition of the acquired businesses which added $ 15.5 million . electrical power & motion sales decreased $ 24.2 million , or 8.4 % , due to lower sales of cabin power products due to a combination of lower volume and pricing . systems certifications sales decreased $ 2.2 million and other products decreased $ 1.0 million from lower project activity . these declines were offset by increased avionics sales , up $ 21.2 million of which $ 15.0 million was from the acquired businesses and $ 5.3 million was from increased sales of databus and in-flight entertainment systems . structures sales increased by $ 5.0 million . aerospace operating profit for 2017 was $ 38.9 million , or 7.3 % of sales , compared with $ 78.0 million , or 14.6 % of sales , in the same period last year . aerospace operating profit was negatively impacted by lower sales volume and market pricing pressures primarily related to cabin power products , coupled with the $ 16.2 million goodwill impairment at armstrong and an operating loss of $ 8.4 million from ccc . e & d costs for aerospace were $ 85.3 million ( inclusive of $ 5.6 million related to the acquired businesses ) and $ 78.5 million in 2017 and 2016 , respectively . 2016 compared with 2015 aerospace segment sales decreased by $ 15.7 million , or 2.9 % , when compared with the prior year to $ 534.0 million . electrical power & motion sales increased $ 8.7 million , or 3.1 % , largely driven by higher sales of in-seat power products and seat motion products , which were up $ 7.0 million and $ 4.3 million , respectively . sales of structures products were up $ 4.5 million . these increases were offset by a $ 23.4 million decline in avionics products , which was largely due to lower sales of satellite antenna systems and lower vvip in-flight entertainment/cabin management systems , and a $ 4.8 million decrease in system certification sales . aerospace operating profit for 2016 was $ 78.0 million , or 14.6 % of sales , compared with $ 85.1 million , or 15.5 % of sales , in the same period last year . the decrease in operating profit was the result of lower sales volume , coupled with slightly higher e & d costs and a general increase in operating costs . e & d costs for aerospace were $ 78.5 million and $ 77.9 million in 2016 and 2015 , respectively . aerospace sg & a expense decreased slightly to $ 60.0 million in 2016 , compared with $ 60.1 million in 2015 . 2018 outlook for aerospace – we

cash provided by operating activities was $ 48.9 million in 2016 compared with $ 78.5 million in 2015 . the decrease of $ 29.6 million in 2016 was primarily a result of decreased net income and net operating assets in 2016 when compared with 2015 , partially offset by an increase deferred income tax benefit in 2016. cash provided by operating activities was $ 78.5 million in 2015 compared with $ 99.9 million in 2014. the decrease of $ 21.4 million in 2015 was primarily a result of the impact of increases in net operating assets in 2015 when compared with 2014 net of the effects from acquisitions of businesses . our cash flows from operations are primarily dependent on our net income adjusted for non-cash expenses and the timing of collections of receivables , level of inventory and payments to suppliers and employees . sales and operating results of our aerospace segment are influenced by the build rates of new aircraft , which are subject to general economic conditions , airline passenger travel and spending for government and military programs . our test systems segment depends on capital 25 expenditures of the semiconductor industry which , in turn , depend on current and future demand for those products . a reduction in demand for our customers ' products would adversely affect our operating results and cash flows . investing activities cash used for investing activities in 2017 was $ 129.6 million , primarily related to the acquisitions of ccc and csc of $ 114.0 million and purchases of property , plant , and equipment ( “ pp & e ” ) of $ 13.5 million . cash used for investing activities in 2016 was $ 14.6 million , primarily related to purchases of pp & e of $ 13.0 million . cash used for investing activities in 2015 was $ 73.6 million . the acquisition of armstrong used approximately $ 52.3 million of cash in 2015 and purchases of pp & e used $ 18.6 million . our expectation for 2018 is that we will invest between $ 24.0 million and $ 28.0 million for pp & e .

the corporation 's consolidated financial condition and results of operations are comprised primarily of the bank 's financial condition and results of operations . current performance does not guarantee , and may not be indicative of , similar performance in the future . for more information on the factors that could affect performance , see “ special cautionary notice regarding forward looking statements ” immediately following the index at the beginning of this document . the geographic information required by item 101 ( d ) of regulation s-k promulgated under the securities exchange act of 1934 , as amended , is impracticable for the corporation to calculate ; however , the corporation does not believe that a material amount of revenue in any of the last three years was attributable to customers outside of the united states , nor does it believe that a material amount of its long-lived assets , in any of the past three years , was located outside of the united states . 30 critical accounting policies , judgments and estimates the accounting and reporting policies of the corporation and its subsidiaries conform to u.s. generally accepted accounting principles ( “ gaap ” ) . all inter-company transactions are eliminated in consolidation and certain reclassifications are made when necessary in order to conform the previous years ' consolidated financial statements to the current year 's presentation . in preparing the consolidated financial statements , management is required to make estimates and assumptions that affect the reported amount of assets and liabilities as of the dates of the balance sheets and revenues and expenditures for the periods presented . therefore , actual results could differ from these estimates . the allowance for loan and lease losses ( the “ allowance ” ) the allowance involves a higher degree of judgment and complexity than other significant accounting policies . the allowance is estimated with the objective of maintaining a reserve level believed by management to be sufficient to absorb estimated credit losses present in the loan portfolio as of the reporting date . management 's determination of the adequacy of the allowance is based on frequent evaluations of the loan and lease portfolio and other relevant factors . consideration is given to a variety of factors in establishing the estimate . quantitative factors in the form of historical charge-off rates by portfolio segment are considered . in connection with these quantitative factors , management establishes what it deems to be an adequate look-back period ( “ lbp ” ) for the charge-off history . as of december 31 , 2018 , management utilized a five-year lbp , which it believes adequately captures the trends in charge-offs . in addition , management develops an estimate of a loss emergence period ( “ lep ” ) for each segment of the loan portfolio . the lep estimates the time between the occurrence of a loss event for a borrower and an actual charge-off of a loan . as of december 31 , 2018 , management utilized a two-year lep for its commercial loan segments and a one-year lep for its consumer loan segments based on analyses of actual charge-offs tracked back in time to the triggering event for the eventual loss . in addition , various qualitative factors are considered , including specific terms and conditions of loans and leases , underwriting standards , delinquency statistics , industry concentration , overall exposure to a single customer , adequacy of collateral , the dependence on collateral , and results of internal loan review , including a borrower 's perceived financial and management strengths , the amounts and timing of the present value of future cash flows , and the access to additional funds . it should be noted that this evaluation is inherently subjective as it requires material estimates , including , among others , expected default probabilities , the amounts and timing of expected cash flows on impaired loans and leases , the value of collateral , estimated losses on consumer loans and residential mortgages and the relevance of historical loss experience . the process also considers economic conditions and inherent risks in the loan and lease portfolio . all of these factors may be susceptible to significant change . to the extent actual outcomes differ from management 's estimates , additional provision for loan and lease losses ( the “ provision ” ) may be required that would adversely impact earnings in future periods . see the section of this document titled asset quality and analysis of credit risk beginning at page 43 for additional information . fair value measurement of investment securities available-for-sale and assessment for impairment of certain investment securities management may designate its investment securities as held-to-maturity , available-for-sale or trading . each of these designations affords different treatment for changes in the fair market values of investment securities in the corporation 's consolidated financial statements that are otherwise identical . should evidence emerge which indicates that management 's intent or ability to maintain the securities as originally designated is not supported , reclassifications among the three designations may be necessary and , as a result , may require adjustments to the corporation 's consolidated financial statements . as of december 31 , 2018 , the corporation 's investment portfolio was primarily comprised of investment securities classified as available for sale . valuation of goodwill and intangible assets goodwill and intangible assets have been recorded on the books of the corporation in connection with its acquisitions . management completes a goodwill impairment analysis at least on an annual basis , or more often if events and circumstances indicate that there may be impairment . management also reviews other intangible assets with finite lives for impairment if events and circumstances indicate that the carrying value may not be recoverable . there was no goodwill or intangible asset impairment recorded during the years ended december 31 , 2018 , 2017 or 2016 . story_separator_special_tag average loans and leases for the year ended december 31 , 2018 increased $ 691.3 million from the same period in 2017 and experienced a 48 basis point increase in tax-equivalent yield . the increase in average loans and leases was primarily related to the loans and leases acquired in the rbpi merger which initially increased loans and leases by $ 566.2 million , as well as organic loan growth between the periods . tax-equivalent interest income on available for sale investment securities of $ 12.0 million for the year ended december 31 , 2018 increased $ 3.3 million as compared to $ 8.7 million for the year ended december 31 , 2017 . average available for sale investment securities for the year ended december 31 , 2018 increased $ 93.2 million from the same period in 2017 and experienced a 26 basis point increase in tax-equivalent yield . partially offsetting the effect on net interest income associated with the increase in average balances and yields in loans and leases and available for sale investment securities were increases in interest expense on deposits and borrowings . interest expense on interest-bearing deposits of $ 20.6 million for the year ended december 31 , 2018 increased $ 11.9 million as compared to $ 8.7 million for the year ended december 31 , 2017 . average interest-bearing deposits for the year ended december 31 , 2018 increased $ 604.0 million from the same period in 2017 and experienced a 36 basis point increase in rates paid . the increase in average interest-bearing deposits was primarily related to the interest-bearing deposits assumed in the rbpi merger , which initially totaled $ 494.8 million . interest expense on borrowings of $ 11.0 million for the year ended december 31 , 2018 increased $ 5.3 million as compared to $ 5.7 million for the year ended december 31 , 2017 . the increase related to increases in interest expense on subordinated notes , short-term borrowings , and junior subordinated debt of $ 2.9 million , $ 2.0 million , and $ 1.2 million , respectively , partially offset by a decrease in interest expense on long-term fhlb advances of $ 843 thousand . average subordinated notes for the year ended december 31 , 2018 increased $ 65.3 million from the same period in 2017 and experienced a 26 basis point decrease in rates paid . the volume increase in subordinated notes was the result of the december 13 , 2017 issuance of $ 70 million ten-year , 4.25 % fixed-to-floating subordinated notes . average short-term borrowings and junior subordinated notes for the year ended december 31 , 2018 increased $ 50.6 million and $ 20.5 million , respectively , from the same period in 2017 and experienced an 81 and 138 basis point increase , respectively , in rates paid . the volume increase in junior subordinated debt was related to the $ 21.4 million of floating rate junior subordinated debentures assumed in the rbpi merger . tax-equivalent net interest income and margin – 2017 compared to 2016 tax-equivalent net interest income of $ 115.9 million for the year ended december 31 , 2017 increased $ 9.0 million as compared to $ 106.9 million for the year ended december 31 , 2016 . tax-equivalent net interest margin of 3.69 % for the year ended december 31 , 2017 decreased seven basis points as compared to 3.76 % for the year ended december 31 , 2016 . tax-equivalent interest and fees on loans and leases of $ 121.4 million for the year ended december 31 , 2017 increased $ 10.5 million as compared to $ 110.9 million for the year ended december 31 , 2016 . average loans and leases for the year ended december 31 , 2017 increased $ 235.5 million from the same period in 2016 with yields remaining relatively flat . tax-equivalent interest income on available for sale investment securities of $ 8.7 million for the year ended december 31 , 2017 increased $ 2.2 million as compared to $ 6.5 million for the year ended december 31 , 2016 . average available for sale investment securities for the year ended december 31 , 2017 increased $ 69.5 million from the same period in 2017 and experienced a 22 basis point increase in tax-equivalent yield . partially offsetting the effect on net interest income associated with the increase in average balances and yields in loans and leases and available for sale investment securities were increases in interest expense on deposits and borrowings . 37 interest expense on interest-bearing deposits of $ 8.7 million for the year ended december 31 , 2017 increased $ 2.9 million as compared to $ 5.8 million for the year ended december 31 , 2016 . average interest-bearing deposits for the year ended december 31 , 2017 increased $ 179.8 million from the same period in 2016 and experienced a 12 basis point increase in rates paid . interest expense on borrowings of $ 5.7 million for the year ended december 31 , 2017 increased $ 762 thousand as compared to $ 4.9 million for the year ended december 31 , 2016 . the increase primarily related to increases in interest expense on short-term borrowings and subordinated notes of $ 1.3 million and $ 152 thousand , respectively , partially offset by a decrease in interest expense on long-term fhlb advances of $ 733 thousand . average borrowings for the year ended december 31 , 2017 increased $ 30.8 million from the same period in 2016 and experienced an 8 basis point increase in rates paid . tax-equivalent net interest margin – quarterly comparison the tax-equivalent net interest margin and related components for the past five quarters are shown in the table below : replace_table_token_7_th interest rate sensitivity management actively manages the corporation 's interest rate sensitivity position . the objectives of interest rate risk management are to control exposure of net interest income changes associated with interest rate movements

cash provided by operating activities was $ 48.9 million in 2016 compared with $ 78.5 million in 2015 . the decrease of $ 29.6 million in 2016 was primarily a result of decreased net income and net operating assets in 2016 when compared with 2015 , partially offset by an increase deferred income tax benefit in 2016. cash provided by operating activities was $ 78.5 million in 2015 compared with $ 99.9 million in 2014. the decrease of $ 21.4 million in 2015 was primarily a result of the impact of increases in net operating assets in 2015 when compared with 2014 net of the effects from acquisitions of businesses . our cash flows from operations are primarily dependent on our net income adjusted for non-cash expenses and the timing of collections of receivables , level of inventory and payments to suppliers and employees . sales and operating results of our aerospace segment are influenced by the build rates of new aircraft , which are subject to general economic conditions , airline passenger travel and spending for government and military programs . our test systems segment depends on capital 25 expenditures of the semiconductor industry which , in turn , depend on current and future demand for those products . a reduction in demand for our customers ' products would adversely affect our operating results and cash flows . investing activities cash used for investing activities in 2017 was $ 129.6 million , primarily related to the acquisitions of ccc and csc of $ 114.0 million and purchases of property , plant , and equipment ( “ pp & e ” ) of $ 13.5 million . cash used for investing activities in 2016 was $ 14.6 million , primarily related to purchases of pp & e of $ 13.0 million . cash used for investing activities in 2015 was $ 73.6 million . the acquisition of armstrong used approximately $ 52.3 million of cash in 2015 and purchases of pp & e used $ 18.6 million . our expectation for 2018 is that we will invest between $ 24.0 million and $ 28.0 million for pp & e .

the corporation 's consolidated financial condition and results of operations are comprised primarily of the bank 's financial condition and results of operations . current performance does not guarantee , and may not be indicative of , similar performance in the future . for more information on the factors that could affect performance , see “ special cautionary notice regarding forward looking statements ” immediately following the index at the beginning of this document . the geographic information required by item 101 ( d ) of regulation s-k promulgated under the securities exchange act of 1934 , as amended , is impracticable for the corporation to calculate ; however , the corporation does not believe that a material amount of revenue in any of the last three years was attributable to customers outside of the united states , nor does it believe that a material amount of its long-lived assets , in any of the past three years , was located outside of the united states . 30 critical accounting policies , judgments and estimates the accounting and reporting policies of the corporation and its subsidiaries conform to u.s. generally accepted accounting principles ( “ gaap ” ) . all inter-company transactions are eliminated in consolidation and certain reclassifications are made when necessary in order to conform the previous years ' consolidated financial statements to the current year 's presentation . in preparing the consolidated financial statements , management is required to make estimates and assumptions that affect the reported amount of assets and liabilities as of the dates of the balance sheets and revenues and expenditures for the periods presented . therefore , actual results could differ from these estimates . the allowance for loan and lease losses ( the “ allowance ” ) the allowance involves a higher degree of judgment and complexity than other significant accounting policies . the allowance is estimated with the objective of maintaining a reserve level believed by management to be sufficient to absorb estimated credit losses present in the loan portfolio as of the reporting date . management 's determination of the adequacy of the allowance is based on frequent evaluations of the loan and lease portfolio and other relevant factors . consideration is given to a variety of factors in establishing the estimate . quantitative factors in the form of historical charge-off rates by portfolio segment are considered . in connection with these quantitative factors , management establishes what it deems to be an adequate look-back period ( “ lbp ” ) for the charge-off history . as of december 31 , 2018 , management utilized a five-year lbp , which it believes adequately captures the trends in charge-offs . in addition , management develops an estimate of a loss emergence period ( “ lep ” ) for each segment of the loan portfolio . the lep estimates the time between the occurrence of a loss event for a borrower and an actual charge-off of a loan . as of december 31 , 2018 , management utilized a two-year lep for its commercial loan segments and a one-year lep for its consumer loan segments based on analyses of actual charge-offs tracked back in time to the triggering event for the eventual loss . in addition , various qualitative factors are considered , including specific terms and conditions of loans and leases , underwriting standards , delinquency statistics , industry concentration , overall exposure to a single customer , adequacy of collateral , the dependence on collateral , and results of internal loan review , including a borrower 's perceived financial and management strengths , the amounts and timing of the present value of future cash flows , and the access to additional funds . it should be noted that this evaluation is inherently subjective as it requires material estimates , including , among others , expected default probabilities , the amounts and timing of expected cash flows on impaired loans and leases , the value of collateral , estimated losses on consumer loans and residential mortgages and the relevance of historical loss experience . the process also considers economic conditions and inherent risks in the loan and lease portfolio . all of these factors may be susceptible to significant change . to the extent actual outcomes differ from management 's estimates , additional provision for loan and lease losses ( the “ provision ” ) may be required that would adversely impact earnings in future periods . see the section of this document titled asset quality and analysis of credit risk beginning at page 43 for additional information . fair value measurement of investment securities available-for-sale and assessment for impairment of certain investment securities management may designate its investment securities as held-to-maturity , available-for-sale or trading . each of these designations affords different treatment for changes in the fair market values of investment securities in the corporation 's consolidated financial statements that are otherwise identical . should evidence emerge which indicates that management 's intent or ability to maintain the securities as originally designated is not supported , reclassifications among the three designations may be necessary and , as a result , may require adjustments to the corporation 's consolidated financial statements . as of december 31 , 2018 , the corporation 's investment portfolio was primarily comprised of investment securities classified as available for sale . valuation of goodwill and intangible assets goodwill and intangible assets have been recorded on the books of the corporation in connection with its acquisitions . management completes a goodwill impairment analysis at least on an annual basis , or more often if events and circumstances indicate that there may be impairment . management also reviews other intangible assets with finite lives for impairment if events and circumstances indicate that the carrying value may not be recoverable . there was no goodwill or intangible asset impairment recorded during the years ended december 31 , 2018 , 2017 or 2016 . story_separator_special_tag average loans and leases for the year ended december 31 , 2018 increased $ 691.3 million from the same period in 2017 and experienced a 48 basis point increase in tax-equivalent yield . the increase in average loans and leases was primarily related to the loans and leases acquired in the rbpi merger which initially increased loans and leases by $ 566.2 million , as well as organic loan growth between the periods . tax-equivalent interest income on available for sale investment securities of $ 12.0 million for the year ended december 31 , 2018 increased $ 3.3 million as compared to $ 8.7 million for the year ended december 31 , 2017 . average available for sale investment securities for the year ended december 31 , 2018 increased $ 93.2 million from the same period in 2017 and experienced a 26 basis point increase in tax-equivalent yield . partially offsetting the effect on net interest income associated with the increase in average balances and yields in loans and leases and available for sale investment securities were increases in interest expense on deposits and borrowings . interest expense on interest-bearing deposits of $ 20.6 million for the year ended december 31 , 2018 increased $ 11.9 million as compared to $ 8.7 million for the year ended december 31 , 2017 . average interest-bearing deposits for the year ended december 31 , 2018 increased $ 604.0 million from the same period in 2017 and experienced a 36 basis point increase in rates paid . the increase in average interest-bearing deposits was primarily related to the interest-bearing deposits assumed in the rbpi merger , which initially totaled $ 494.8 million . interest expense on borrowings of $ 11.0 million for the year ended december 31 , 2018 increased $ 5.3 million as compared to $ 5.7 million for the year ended december 31 , 2017 . the increase related to increases in interest expense on subordinated notes , short-term borrowings , and junior subordinated debt of $ 2.9 million , $ 2.0 million , and $ 1.2 million , respectively , partially offset by a decrease in interest expense on long-term fhlb advances of $ 843 thousand . average subordinated notes for the year ended december 31 , 2018 increased $ 65.3 million from the same period in 2017 and experienced a 26 basis point decrease in rates paid . the volume increase in subordinated notes was the result of the december 13 , 2017 issuance of $ 70 million ten-year , 4.25 % fixed-to-floating subordinated notes . average short-term borrowings and junior subordinated notes for the year ended december 31 , 2018 increased $ 50.6 million and $ 20.5 million , respectively , from the same period in 2017 and experienced an 81 and 138 basis point increase , respectively , in rates paid . the volume increase in junior subordinated debt was related to the $ 21.4 million of floating rate junior subordinated debentures assumed in the rbpi merger . tax-equivalent net interest income and margin – 2017 compared to 2016 tax-equivalent net interest income of $ 115.9 million for the year ended december 31 , 2017 increased $ 9.0 million as compared to $ 106.9 million for the year ended december 31 , 2016 . tax-equivalent net interest margin of 3.69 % for the year ended december 31 , 2017 decreased seven basis points as compared to 3.76 % for the year ended december 31 , 2016 . tax-equivalent interest and fees on loans and leases of $ 121.4 million for the year ended december 31 , 2017 increased $ 10.5 million as compared to $ 110.9 million for the year ended december 31 , 2016 . average loans and leases for the year ended december 31 , 2017 increased $ 235.5 million from the same period in 2016 with yields remaining relatively flat . tax-equivalent interest income on available for sale investment securities of $ 8.7 million for the year ended december 31 , 2017 increased $ 2.2 million as compared to $ 6.5 million for the year ended december 31 , 2016 . average available for sale investment securities for the year ended december 31 , 2017 increased $ 69.5 million from the same period in 2017 and experienced a 22 basis point increase in tax-equivalent yield . partially offsetting the effect on net interest income associated with the increase in average balances and yields in loans and leases and available for sale investment securities were increases in interest expense on deposits and borrowings . 37 interest expense on interest-bearing deposits of $ 8.7 million for the year ended december 31 , 2017 increased $ 2.9 million as compared to $ 5.8 million for the year ended december 31 , 2016 . average interest-bearing deposits for the year ended december 31 , 2017 increased $ 179.8 million from the same period in 2016 and experienced a 12 basis point increase in rates paid . interest expense on borrowings of $ 5.7 million for the year ended december 31 , 2017 increased $ 762 thousand as compared to $ 4.9 million for the year ended december 31 , 2016 . the increase primarily related to increases in interest expense on short-term borrowings and subordinated notes of $ 1.3 million and $ 152 thousand , respectively , partially offset by a decrease in interest expense on long-term fhlb advances of $ 733 thousand . average borrowings for the year ended december 31 , 2017 increased $ 30.8 million from the same period in 2016 and experienced an 8 basis point increase in rates paid . tax-equivalent net interest margin – quarterly comparison the tax-equivalent net interest margin and related components for the past five quarters are shown in the table below : replace_table_token_7_th interest rate sensitivity management actively manages the corporation 's interest rate sensitivity position . the objectives of interest rate risk management are to control exposure of net interest income changes associated with interest rate movements

liquidity the corporation has significant sources of liquidity as of december 31 , 2018 . the liquidity position is managed on a daily basis as part of the daily settlement function , and on a monthly basis as part of the asset liability management process . the corporation 's primary liquidity is maintained by managing its deposits , along with the utilization of borrowings from the fhlb , purchased federal funds , and utilization of other wholesale funding sources . secondary sources of liquidity include the sale of certain investment securities and certain loans in the secondary market . other wholesale funding sources include certificates of deposit from brokers , generally available in blocks of $ 1.0 million or more . funds obtained through these programs totaled $ 325.3 million as of december 31 , 2018 . as of december 31 , 2018 , the maximum borrowing capacity with the fhlb was $ 1.53 billion , with an unused borrowing availability of $ 1.25 billion . borrowing availability at the federal reserve discount window was $ 140.4 million , and overnight fed funds lines , consisting of lines from seven banks , totaled $ 79.0 million . on a monthly basis , the alco reviews the corporation 's liquidity needs .

pursuant to such revised compensation arrangements , we granted 100,000 stock options to non-employee directors on june 15 , 2010 and granted 25,000 stock options to a newly appointed non-employee director in july 2010. in august 2010 , we granted 150,000 stock options to the newly appointed member of our management team . as a result of these 2010 option grants and the amortization of the cost associated with options granted in prior years that remain subject to vesting , we recognized non-cash compensation expense for 2010 totaling $ 2,357,230. dividends during 2010 , we declared and paid cash dividends to our shareholders of $ 0.22 per share , or an aggregate of $ 6,837,845. development and operating outlook while we continually seek to identify and evaluate opportunities , both domestically and in south america , to acquire interests in early stage high potential resource plays , our focus since the beginning of 2010 has been , and continues to be , the development of our colombian assets . in particular , we have been , and are , focused on development of our cpo 4 and serrania prospects in colombia where we have increased our interest in cpo 4 during 2010 , conducted extensive seismic acquisition and analysis , invested in infrastructure and conducted preliminary work in preparation for drilling wells on both of our cpo 4 and serrania prospects . consistent with our past operating plans , we selectively divest holdings on an opportunistic basis where we believe that favorable prices can be realized from assets and proceeds redeployed to grow our asset base and produce superior returns . to that end , during 2010 , we divested our interest in undeveloped domestic acreage and four blocks in colombia which were in various stages of development , which divestitures produced approximately $ 29.4 million of net proceeds ( including $ 7.1 million held in escrow ) to our company . during 2011 , we plan to invest approximately $ 21.4 million in the development of our colombian prospects , including cpo 4 , serrania and four prospects operated by hupecol . as of january 1 , 2011 , substantially all seismic , infrastructure and pre-drilling work had been completed on both our cpo 4 and serrania prospects and our plans are to drill 3 test wells on the cpo 4 block and 2 test wells on the serrania block during 2011. subject to the results of those test wells , we expect to begin developmental drilling of those prospects . while our 2010 asset sales provided funding that we believe will satisfy our financial commitments relating to the cpo 4 and serrania prospects , as well as our remaining hupecol holdings , the interests sold during 2010 accounted for approximately 97 % of our net oil production and oil revenues during 2010 , as well as 99 % of our lease operating expenses . accordingly , until we bring production on line from drilling and development of our cpo 4 , serrania and remaining hupecol prospects , our future production , revenues and lease operating expenses will be substantially lower than 2010 levels . there can be no assurance as to the ultimate success of our drilling and development operations on our cpo 4 , serrania and remaining hupecol prospects or the timing of such drilling and development operations . critical accounting policies the following describes the critical accounting policies used in reporting our financial condition and results of operations . in some cases , accounting standards allow more than one alternative accounting method for reporting . such is the case with accounting for oil and gas activities described below . in those cases , our reported results of operations would be different should we employ an alternative accounting method . 32 full cost method of accounting for oil and gas activities . we follow the full cost method of accounting for oil and gas property acquisition , exploration and development activities . under this method , all productive and nonproductive costs incurred in connection with the exploration for and development of oil and gas reserves are capitalized . capitalized costs include lease acquisition , geological and geophysical work , delay rentals , costs of drilling , completing and equipping successful and unsuccessful oil and gas wells and related internal costs that can be directly identified with acquisition , exploration and development activities , but does not include any cost related to production , general corporate overhead or similar activities . gain or loss on the sale or other disposition of oil and gas properties is not recognized unless significant amounts of oil and gas reserves are involved . no corporate overhead has been capitalized as of december 31 , 2010. the capitalized costs of oil and gas properties , plus estimated future development costs relating to proved reserves , are amortized on a units-of-production method over the estimated productive life of the reserves . unevaluated oil and gas properties are excluded from this calculation . the capitalized oil and gas property costs , less accumulated amortization , are limited to an amount ( the ceiling limitation ) equal to the sum of : ( a ) the present value of estimated future net revenues from the projected production of proved oil and gas reserves , calculated using the average oil and natural gas sales price received by the company as of the first trading day of each month over the preceding twelve months ( such prices are held constant throughout the life of the properties ) and a discount factor of 10 % ; ( b ) the cost of unproved and unevaluated properties excluded from the costs being amortized ; ( c ) the lower of cost or estimated fair value of unproved properties included in the costs being amortized ; and (d ) related income tax effects . story_separator_special_tag we reported an income tax expense of approximately $ 9.4 million in 2010 as compared to a benefit of $ 737,406 in 2009. the income tax expense during 2010 was entirely attributable to operations in colombia and reflects increased sales and profitability in colombia , as well as the taxes applicable to the proceeds received on sale of oil and gas properties discussed above . the income tax benefit during 2009 was primarily attributable to net operating losses generated in colombia and the united states and the refund during 2009 of approximately $ 548,000 of colombian taxes . the income tax benefit during 2009 was attributable $ 402,663 to the u.s. and $ 334,743 to colombia . at december 31 , 2010 , we had no foreign tax credit carryovers . year ended december 31 , 2009 compared to year ended december 31 , 2008 oil and gas revenues . total oil and gas revenues decreased 23.6 % , to $ 8,116,275 in 2009 from $ 10,622,050 in 2008. the decrease in oil and gas revenue was due to a decline in oil and gas prices received during 2009 ( approximately $ 84,000 based on lower average gas prices realized during 2009 and approximately $ 2.8 million based on lower average oil prices ) . the following table sets forth the gross and net producing wells , net oil and gas production volumes and average hydrocarbon sales prices for 2009 and 2008 : replace_table_token_17_th 35 production volumes were less then what they otherwise would have been in 2009 due to the sale of our caracara interest during 2008 ( accounting for 29,954 barrels of production and $ 3,005,140 of revenues during 2008 ) and the cessation of production and sales from the majority of our colombian properties for 52 days in early 2009 as a result of unfavorable commodity prices , partially offset by increased production in fields in which we hold higher working interests ( 12.5 % vs. 1.6 % in caracara ) . giving pro forma effect to exclude sales revenues from the caracara interest , which was sold in june 2008 , oil and gas revenues for 2008 would have been $ 7,616,910. the decline in average sales prices realized reflects the sharp worldwide economic decline , and accompanying decline in commodity prices , during the second half of 2008 continuing through 2009. oil and gas sales revenues for 2009 and 2008 by region were as follows : replace_table_token_18_th lease operating expenses . lease operating expenses , excluding joint venture expenses relating to our colombian operations discussed below , increased 41 % to $ 4,746,295 in 2009 from $ 3,366,740 in 2008. the increase in lease operating expenses as a percentage of revenues , from 32 % of revenues in 2008 to 58 % of revenues in 2009 , was primarily attributable to the temporary cessation of production from a majority of our colombian properties during the 2009 period as discussed above , the steep decline in oil and gas prices and an increase in our average working interest following the caracara sale , as well as increased cost in colombia relating to personnel expenses , facilities and equipment expenses , catering expenses , road maintenance , as well environmental services expenses . following is a summary comparison of lease operating expenses for the periods . replace_table_token_19_th hupecol , our operator in colombia , implemented cost cutting measures in order to improve field economics from our colombian operations . joint venture expenses . joint venture expenses totaled $ 172,890 in 2009 compared to $ 183,510 in 2008. the joint venture expenses represent our allocable share of the indirect field operating and region administrative expenses billed by the operator of the colombian concessions . the decrease in joint venture expenses was attributable to the decrease in the number of producing wells during 2009. depreciation and depletion expense . depreciation and depletion expense decreased by 67 % to $ 1,900,631 in 2009 from $ 5,816,691 in 2008. the decrease in depreciation and depletion was due to an increase in reserves due to exploration and development . this resulting increase in our reserves from exploration and development activities lowered our depreciation rate per barrel . impairment expense . during 2008 , we recorded a provision for impairment of oil and gas properties of $ 5,621,106 , most of which was attributable to our south american properties . impairments related to reduced commodity prices at year end and lower reserve estimates for our colombian wells , reduced reserve estimates for our u.s. properties as a result of lower commodity prices and lower than expected production volumes , as well as the lack of commercial production on our caddo lake prospect . 36 gain on sale of oil & gas properties . the sale of our caracara assets resulted in a gain of $ 7,615,236 during 2008. general and administrative expenses . general and administrative expense decreased by 12 % to $ 2,768,195 in 2009 from $ 3,152,930 in 2008. the decrease in general and administrative expense was primarily attributable to decreases in employee compensation and professional fees , including a decrease of $ 750,000 related to cash bonuses paid in 2008 not repeated in 2009 and $ 400,320 related to restricted stocks grants in 2008. other income . other income consists of interest earned on cash balances and marketable securities . other income totaled $ 64,882 in 2009 as compared to $ 295,375 in 2008. the decrease in other income resulted from the sale of the balance of our marketable securities during early 2008 and a reduction in interest rates on short-term cash investments , partially offset by interest earned on dip financing provided to the creditors under the letter agreement related to assets the company was considering acquiring out of a bankruptcy proceeding . income tax expense/benefit . we reported an income tax benefit of $ 737,406 in 2009 as compared to an income tax benefit of $ 73,261 in

liquidity the corporation has significant sources of liquidity as of december 31 , 2018 . the liquidity position is managed on a daily basis as part of the daily settlement function , and on a monthly basis as part of the asset liability management process . the corporation 's primary liquidity is maintained by managing its deposits , along with the utilization of borrowings from the fhlb , purchased federal funds , and utilization of other wholesale funding sources . secondary sources of liquidity include the sale of certain investment securities and certain loans in the secondary market . other wholesale funding sources include certificates of deposit from brokers , generally available in blocks of $ 1.0 million or more . funds obtained through these programs totaled $ 325.3 million as of december 31 , 2018 . as of december 31 , 2018 , the maximum borrowing capacity with the fhlb was $ 1.53 billion , with an unused borrowing availability of $ 1.25 billion . borrowing availability at the federal reserve discount window was $ 140.4 million , and overnight fed funds lines , consisting of lines from seven banks , totaled $ 79.0 million . on a monthly basis , the alco reviews the corporation 's liquidity needs .

pursuant to such revised compensation arrangements , we granted 100,000 stock options to non-employee directors on june 15 , 2010 and granted 25,000 stock options to a newly appointed non-employee director in july 2010. in august 2010 , we granted 150,000 stock options to the newly appointed member of our management team . as a result of these 2010 option grants and the amortization of the cost associated with options granted in prior years that remain subject to vesting , we recognized non-cash compensation expense for 2010 totaling $ 2,357,230. dividends during 2010 , we declared and paid cash dividends to our shareholders of $ 0.22 per share , or an aggregate of $ 6,837,845. development and operating outlook while we continually seek to identify and evaluate opportunities , both domestically and in south america , to acquire interests in early stage high potential resource plays , our focus since the beginning of 2010 has been , and continues to be , the development of our colombian assets . in particular , we have been , and are , focused on development of our cpo 4 and serrania prospects in colombia where we have increased our interest in cpo 4 during 2010 , conducted extensive seismic acquisition and analysis , invested in infrastructure and conducted preliminary work in preparation for drilling wells on both of our cpo 4 and serrania prospects . consistent with our past operating plans , we selectively divest holdings on an opportunistic basis where we believe that favorable prices can be realized from assets and proceeds redeployed to grow our asset base and produce superior returns . to that end , during 2010 , we divested our interest in undeveloped domestic acreage and four blocks in colombia which were in various stages of development , which divestitures produced approximately $ 29.4 million of net proceeds ( including $ 7.1 million held in escrow ) to our company . during 2011 , we plan to invest approximately $ 21.4 million in the development of our colombian prospects , including cpo 4 , serrania and four prospects operated by hupecol . as of january 1 , 2011 , substantially all seismic , infrastructure and pre-drilling work had been completed on both our cpo 4 and serrania prospects and our plans are to drill 3 test wells on the cpo 4 block and 2 test wells on the serrania block during 2011. subject to the results of those test wells , we expect to begin developmental drilling of those prospects . while our 2010 asset sales provided funding that we believe will satisfy our financial commitments relating to the cpo 4 and serrania prospects , as well as our remaining hupecol holdings , the interests sold during 2010 accounted for approximately 97 % of our net oil production and oil revenues during 2010 , as well as 99 % of our lease operating expenses . accordingly , until we bring production on line from drilling and development of our cpo 4 , serrania and remaining hupecol prospects , our future production , revenues and lease operating expenses will be substantially lower than 2010 levels . there can be no assurance as to the ultimate success of our drilling and development operations on our cpo 4 , serrania and remaining hupecol prospects or the timing of such drilling and development operations . critical accounting policies the following describes the critical accounting policies used in reporting our financial condition and results of operations . in some cases , accounting standards allow more than one alternative accounting method for reporting . such is the case with accounting for oil and gas activities described below . in those cases , our reported results of operations would be different should we employ an alternative accounting method . 32 full cost method of accounting for oil and gas activities . we follow the full cost method of accounting for oil and gas property acquisition , exploration and development activities . under this method , all productive and nonproductive costs incurred in connection with the exploration for and development of oil and gas reserves are capitalized . capitalized costs include lease acquisition , geological and geophysical work , delay rentals , costs of drilling , completing and equipping successful and unsuccessful oil and gas wells and related internal costs that can be directly identified with acquisition , exploration and development activities , but does not include any cost related to production , general corporate overhead or similar activities . gain or loss on the sale or other disposition of oil and gas properties is not recognized unless significant amounts of oil and gas reserves are involved . no corporate overhead has been capitalized as of december 31 , 2010. the capitalized costs of oil and gas properties , plus estimated future development costs relating to proved reserves , are amortized on a units-of-production method over the estimated productive life of the reserves . unevaluated oil and gas properties are excluded from this calculation . the capitalized oil and gas property costs , less accumulated amortization , are limited to an amount ( the ceiling limitation ) equal to the sum of : ( a ) the present value of estimated future net revenues from the projected production of proved oil and gas reserves , calculated using the average oil and natural gas sales price received by the company as of the first trading day of each month over the preceding twelve months ( such prices are held constant throughout the life of the properties ) and a discount factor of 10 % ; ( b ) the cost of unproved and unevaluated properties excluded from the costs being amortized ; ( c ) the lower of cost or estimated fair value of unproved properties included in the costs being amortized ; and (d ) related income tax effects . story_separator_special_tag we reported an income tax expense of approximately $ 9.4 million in 2010 as compared to a benefit of $ 737,406 in 2009. the income tax expense during 2010 was entirely attributable to operations in colombia and reflects increased sales and profitability in colombia , as well as the taxes applicable to the proceeds received on sale of oil and gas properties discussed above . the income tax benefit during 2009 was primarily attributable to net operating losses generated in colombia and the united states and the refund during 2009 of approximately $ 548,000 of colombian taxes . the income tax benefit during 2009 was attributable $ 402,663 to the u.s. and $ 334,743 to colombia . at december 31 , 2010 , we had no foreign tax credit carryovers . year ended december 31 , 2009 compared to year ended december 31 , 2008 oil and gas revenues . total oil and gas revenues decreased 23.6 % , to $ 8,116,275 in 2009 from $ 10,622,050 in 2008. the decrease in oil and gas revenue was due to a decline in oil and gas prices received during 2009 ( approximately $ 84,000 based on lower average gas prices realized during 2009 and approximately $ 2.8 million based on lower average oil prices ) . the following table sets forth the gross and net producing wells , net oil and gas production volumes and average hydrocarbon sales prices for 2009 and 2008 : replace_table_token_17_th 35 production volumes were less then what they otherwise would have been in 2009 due to the sale of our caracara interest during 2008 ( accounting for 29,954 barrels of production and $ 3,005,140 of revenues during 2008 ) and the cessation of production and sales from the majority of our colombian properties for 52 days in early 2009 as a result of unfavorable commodity prices , partially offset by increased production in fields in which we hold higher working interests ( 12.5 % vs. 1.6 % in caracara ) . giving pro forma effect to exclude sales revenues from the caracara interest , which was sold in june 2008 , oil and gas revenues for 2008 would have been $ 7,616,910. the decline in average sales prices realized reflects the sharp worldwide economic decline , and accompanying decline in commodity prices , during the second half of 2008 continuing through 2009. oil and gas sales revenues for 2009 and 2008 by region were as follows : replace_table_token_18_th lease operating expenses . lease operating expenses , excluding joint venture expenses relating to our colombian operations discussed below , increased 41 % to $ 4,746,295 in 2009 from $ 3,366,740 in 2008. the increase in lease operating expenses as a percentage of revenues , from 32 % of revenues in 2008 to 58 % of revenues in 2009 , was primarily attributable to the temporary cessation of production from a majority of our colombian properties during the 2009 period as discussed above , the steep decline in oil and gas prices and an increase in our average working interest following the caracara sale , as well as increased cost in colombia relating to personnel expenses , facilities and equipment expenses , catering expenses , road maintenance , as well environmental services expenses . following is a summary comparison of lease operating expenses for the periods . replace_table_token_19_th hupecol , our operator in colombia , implemented cost cutting measures in order to improve field economics from our colombian operations . joint venture expenses . joint venture expenses totaled $ 172,890 in 2009 compared to $ 183,510 in 2008. the joint venture expenses represent our allocable share of the indirect field operating and region administrative expenses billed by the operator of the colombian concessions . the decrease in joint venture expenses was attributable to the decrease in the number of producing wells during 2009. depreciation and depletion expense . depreciation and depletion expense decreased by 67 % to $ 1,900,631 in 2009 from $ 5,816,691 in 2008. the decrease in depreciation and depletion was due to an increase in reserves due to exploration and development . this resulting increase in our reserves from exploration and development activities lowered our depreciation rate per barrel . impairment expense . during 2008 , we recorded a provision for impairment of oil and gas properties of $ 5,621,106 , most of which was attributable to our south american properties . impairments related to reduced commodity prices at year end and lower reserve estimates for our colombian wells , reduced reserve estimates for our u.s. properties as a result of lower commodity prices and lower than expected production volumes , as well as the lack of commercial production on our caddo lake prospect . 36 gain on sale of oil & gas properties . the sale of our caracara assets resulted in a gain of $ 7,615,236 during 2008. general and administrative expenses . general and administrative expense decreased by 12 % to $ 2,768,195 in 2009 from $ 3,152,930 in 2008. the decrease in general and administrative expense was primarily attributable to decreases in employee compensation and professional fees , including a decrease of $ 750,000 related to cash bonuses paid in 2008 not repeated in 2009 and $ 400,320 related to restricted stocks grants in 2008. other income . other income consists of interest earned on cash balances and marketable securities . other income totaled $ 64,882 in 2009 as compared to $ 295,375 in 2008. the decrease in other income resulted from the sale of the balance of our marketable securities during early 2008 and a reduction in interest rates on short-term cash investments , partially offset by interest earned on dip financing provided to the creditors under the letter agreement related to assets the company was considering acquiring out of a bankruptcy proceeding . income tax expense/benefit . we reported an income tax benefit of $ 737,406 in 2009 as compared to an income tax benefit of $ 73,261 in

liquidity and capital resources . at december 31 , 2010 , we had a cash balance of $ 26,656,450 and working capital of $ 34,255,206 compared to a cash balance of $ 11,973,137 and working capital of $ 16,365,490 at december 31 , 2009. the increase in cash and working capital during the period was primarily attributable to the receipt of $ 25,942,822 ( net proceeds ) excluding escrowed monies from the sale of our karnes county , texas property and our indirect interest in four concessions in colombia and operating cash flow , partially offset by payment of drilling costs , acquisition costs , seismic costs and other costs related to the planned drilling of prospects in colombia and the payment of dividends . cash flows . operating activities provided cash during 2010 totaling $ 8,290,671 as compared to $ 484,677 of cash used in operating activities during 2009. the increase in cash flows from operations was primarily a result of improved profitability during 2010. investing activities provided cash during 2010 totaling $ 12,660,487 as compared to $ 9,239,263 used in investing activities during 2009. funds provided by investing activities during 2010 reflect the receipt of proceeds from the sale of our karnes county , texas property and our indirect interest in four colombian concessions which provided , in the aggregate , approximately $ 25,942,822 of net proceeds excluding escrowed amounts . the funds provided by investing activities during 2010 were partially offset by investments in oil and gas properties and assets and property plant and equipment of $ 8,662,516 and payments of $ 3,951,370 of costs associated with the cpo 4 prospect that are reimbursable by gulf united and recorded as accounts receivable - other .

● cash flow generated by operating activities was $ 253.3 million in 2018 as compared to $ 140.8 million in 2017 and $ 195.7 million in 2016. our total year constant currency sales growth , which we define as the combined variances from sales volume , product pricing , sales mix and business acquisitions , increased 32.0 percent for 2018 compared to 2017. in 2018 , our diluted earnings per share was $ 3.29 compared to $ 1.15 in 2017 and $ 2.37 in 2016. the higher earnings per share in 2018 compared to 2017 was due to higher net revenue , lower transaction costs related to acquisitions , and one time discrete items related to u.s. tax reform , which were partially offset by higher operating expenses mainly due to the impact of acquired businesses and higher interest expense due to higher u.s. debt balances at higher interest rates from the issuance of new debt in 2017. the lower earnings per share in 2017 compared to 2016 was due to an increase in transaction costs related to acquisitions , including make-whole costs associated with the early repayment of certain outstanding debt obligations , and the implementation of the 2017 restructuring plan . change in accounting principle in the fourth quarter of 2018 , we elected to change our method of accounting for certain inventories in the united states within the company 's americas adhesives and construction adhesives segments from the last-in , first-out method ( “ lifo ” ) to weighted-average cost . we have retrospectively adjusted the consolidated financial statements for all periods presented to reflect this change . project one in december 2012 , our board of directors approved a multi-year project to replace and enhance our existing core information technology platforms . the scope for this project includes most of the basic transaction processing for the company including customer orders , procurement , manufacturing , and financial reporting . the project envisions harmonized business processes for all of our operating segments supported with one standard software configuration . the execution of this project , which we refer to as project one , is being supported by internal resources and consulting services . the north america adhesives business went live in 2014. in 2017 , we began the project one implementation in our latin america adhesives business , and implementation for all countries , with the exception of brazil , has been completed as of the end of 2018. during 2019 and beyond , we will continue implementation in north america , eimea ( europe , india , middle east and africa ) and asia pacific . total expenditures for project one are estimated to be $ 195 to $ 210 million , of which 50-55 % is expected to be capital expenditures . our total project-to-date expenditures are approximately $ 73 million , of which approximately $ 38 million are capital expenditures . given the complexity of the implementation , the total investment to complete the project may exceed our estimate . 18 restructuring plan s royal adhesives restructuring plan during the first quarter of 2018 , we approved a restructuring plan consisting of consolidation plans , organizational changes and other actions related to the integration of the operations of royal adhesives with the operations of the company ( the “ royal adhesives restructuring plan ” ) . in implementing the royal adhesives restructuring plan , we expect to incur costs of approximately $ 20.0 million , which includes ( i ) cash expenditures of approximately $ 12.0 million for severance and related employee costs globally and ( ii ) other costs of approximately $ 8.0 million related to the optimization of production facilities , streamlining of processes and accelerated depreciation of long-lived assets . approximately $ 14.0 million of the costs are expected to be cash costs . for the year ending december 1 , 2018 , we incurred costs of $ 6.7 million under this plan . the royal adhesives restructuring plan was implemented in the first quarter of 2018 and is currently expected to be completed by the end of fiscal year 2020 . 2017 restructuring plan during the first quarter of 2017 , we approved a restructuring plan ( the “ 2017 restructuring plan ” ) related to organizational changes and other actions to optimize operations . in implementing the 2017 restructuring plan , we incurred costs of $ 20.2 million as of december 1 , 2018 which included cash expenditures of approximately $ 11.3 million for severance and related employee costs globally and $ 8.9 million related to the optimization of production facilities , streamlining of processes and accelerated depreciation of long-lived assets . approximately $ 15.8 million of the costs were cash costs . the 2017 restructuring plan is substantially complete . federal income tax reform on december 22 , 2017 , the president of the united states signed into law h.r . 1 , originally known as the “ tax cuts and jobs act ” , hereafter referred to as “ u.s . tax reform ” . since the passing of u.s. tax reform , additional guidance in the form of notices and proposed regulations which interpret various aspects of u.s. tax reform have been issued . as of the filing of this document , additional guidance is expected . changes could be made to the proposed regulations as they become finalized , future legislation could be enacted , more regulations and notices could be issued , all of which may impact our financial results . we will continue to monitor all of these changes and will reflect the impact as appropriate in future financial statements . many state and local tax jurisdictions are still determining how they will interpret elements of u.s. tax reform . final state and local governments ' conformity and legislation or guidance relating to u.s. tax reform may impact our financial results . story_separator_special_tag 22 acquisition accounting as we enter into business combinations , we perform acquisition accounting requirements including the following : ● identifying the acquirer , ● determining the acquisition date , ● recognizing and measuring the identifiable assets acquired and the liabilities assumed , and ● recognizing and measuring goodwill or a gain from a bargain purchase we complete valuation procedures and record the resulting fair value of the acquired assets and assumed liabilities based upon the valuation of the business enterprise and the tangible and intangible assets acquired . enterprise value allocation methodology requires management to make assumptions and apply judgment to estimate the fair value of assets acquired and liabilities assumed . if estimates or assumptions used to complete the enterprise valuation and estimates of the fair value of the acquired assets and assumed liabilities significantly differed from assumptions made , the resulting difference could materially affect the fair value of net assets . the calculation of the fair value of the tangible assets , including property , plant and equipment , utilizes the cost approach , which computes the cost to replace the asset , less accrued depreciation resulting from physical deterioration , functional obsolescence and external obsolescence . the calculation of the fair value of the identified intangible assets are determined using cash flow models following the income approach or a discounted market-based methodology approach . significant inputs include estimated revenue growth rates , gross margins , operating expenses , and estimated attrition , royalty and discount rates . goodwill is recorded as the difference in the fair value of the acquired assets and assumed liabilities and the purchase price . replace_table_token_5_th net revenue in 2018 increased 31.9 percent from 2017. the 2017 net revenue was 10.1 percent higher than the net revenue in 2016. every five or six years we have a 53 rd week in our fiscal year . 2016 was a 53-week year which contributed approximately 2.0 percent to net revenue in 2016 , primarily related to volume . in analyzing our results of operations from period to period , we review variances in net revenue in terms of changes related to sales volume , product pricing , sales mix , business acquisitions and changes in foreign currency exchange rates . the impact of sales volume , product pricing , sales mix and acquisitions including royal adhesives , adecol and wisdom , cyberbond , l.l.c . and advanced adhesives are viewed as constant currency growth . the following table shows the net revenue variance analysis for the past two years : replace_table_token_6_th constant currency growth was 32.0 percent in 2018 compared to 2017. the 32.0 percent constant currency growth in 2018 was driven by 71.4 percent growth in construction adhesives , 57.1 percent growth in engineering adhesives , 29.9 percent growth in eimea , 21.2 percent growth in americas adhesives and 5.1 percent growth in asia pacific . constant currency growth in 2018 includes 28.3 percent growth attributable to the acquisition of royal adhesives and adecol . the negative 0.1 percent currency impact was primarily driven by a weaker brazilian real , argentinian peso , australian dollar , canadian dollar and turkish lira offset by a stronger mexican peso , chinese renminbi and euro compared to the u.s. dollar . constant currency growth was 12.3 percent in 2017 compared to 2016. the inclusion of a 53 rd week in 2016 negatively impacted 2017 constant currency sales growth by approximately 2.0 percent . the 12.3 percent constant currency growth in 2017 was driven by 24.2 percent growth in engineering adhesives , 12.6 percent growth in americas adhesives , 9.5 percent growth in asia pacific , 4.3 percent growth in eimea and 1.5 percent growth in construction adhesives . constant currency growth in 2017 includes 3.7 percent growth attributable to the acquisition of royal adhesives . the negative 2.2 percent currency impact was primarily driven by a weaker egyptian pound , turkish lira , chinese renminbi , argentinian peso , mexican peso and malaysian ringgit partially offset by a stronger euro , indian rupee and australian dollar compared to the u.s. dollar . 23 replace_table_token_7_th raw material costs as a percentage of net revenue decreased 130 basis points in 2018 compared to 2017 due to an increase in product pricing and the impact of the royal adhesives acquisition . other manufacturing costs as a percentage of net revenue was flat compared to 2017. as a result , cost of sales as a percentage of net revenue decreased 130 basis points compared to 2017. raw material costs as a percentage of net revenue increased 240 basis points in 2017 compared to 2016 due to higher raw material costs and the impact of acquired businesses including the inventory step up related to our recent acquisitions . other manufacturing costs as a percentage of revenue increased 40 basis points compared to 2016 driven primarily by the impact of acquired businesses and the implementation of the 2017 restructuring plan . as a result , cost of sales as a percentage of net revenue increased 270 basis points compared to 2016. replace_table_token_8_th gross profit in 2018 increased $ 231.8 million compared to 2017 and gross profit margin increased 130 basis points . the increase in gross profit margin was primarily due to favorable product pricing and the impact of the royal adhesives acquisition and lower restructuring plan costs . gross profit in 2017 decreased $ 0.7 million compared to 2016 and gross profit margin decreased 270 basis points . the decrease in gross profit margin was primarily due to higher raw material costs , the impact of acquired businesses and the implementation of the 2017 restructuring plan . replace_table_token_9_th selling , general and administration ( “ sg & a ” ) expenses for 2018 increased $ 105.1 million or 22.0 percent compared to 2017. the increase is mainly due to the impact of acquired businesses and the impact of unfavorable foreign currency exchange rates on spending outside the u.s. sg &

liquidity and capital resources . at december 31 , 2010 , we had a cash balance of $ 26,656,450 and working capital of $ 34,255,206 compared to a cash balance of $ 11,973,137 and working capital of $ 16,365,490 at december 31 , 2009. the increase in cash and working capital during the period was primarily attributable to the receipt of $ 25,942,822 ( net proceeds ) excluding escrowed monies from the sale of our karnes county , texas property and our indirect interest in four concessions in colombia and operating cash flow , partially offset by payment of drilling costs , acquisition costs , seismic costs and other costs related to the planned drilling of prospects in colombia and the payment of dividends . cash flows . operating activities provided cash during 2010 totaling $ 8,290,671 as compared to $ 484,677 of cash used in operating activities during 2009. the increase in cash flows from operations was primarily a result of improved profitability during 2010. investing activities provided cash during 2010 totaling $ 12,660,487 as compared to $ 9,239,263 used in investing activities during 2009. funds provided by investing activities during 2010 reflect the receipt of proceeds from the sale of our karnes county , texas property and our indirect interest in four colombian concessions which provided , in the aggregate , approximately $ 25,942,822 of net proceeds excluding escrowed amounts . the funds provided by investing activities during 2010 were partially offset by investments in oil and gas properties and assets and property plant and equipment of $ 8,662,516 and payments of $ 3,951,370 of costs associated with the cpo 4 prospect that are reimbursable by gulf united and recorded as accounts receivable - other .

● cash flow generated by operating activities was $ 253.3 million in 2018 as compared to $ 140.8 million in 2017 and $ 195.7 million in 2016. our total year constant currency sales growth , which we define as the combined variances from sales volume , product pricing , sales mix and business acquisitions , increased 32.0 percent for 2018 compared to 2017. in 2018 , our diluted earnings per share was $ 3.29 compared to $ 1.15 in 2017 and $ 2.37 in 2016. the higher earnings per share in 2018 compared to 2017 was due to higher net revenue , lower transaction costs related to acquisitions , and one time discrete items related to u.s. tax reform , which were partially offset by higher operating expenses mainly due to the impact of acquired businesses and higher interest expense due to higher u.s. debt balances at higher interest rates from the issuance of new debt in 2017. the lower earnings per share in 2017 compared to 2016 was due to an increase in transaction costs related to acquisitions , including make-whole costs associated with the early repayment of certain outstanding debt obligations , and the implementation of the 2017 restructuring plan . change in accounting principle in the fourth quarter of 2018 , we elected to change our method of accounting for certain inventories in the united states within the company 's americas adhesives and construction adhesives segments from the last-in , first-out method ( “ lifo ” ) to weighted-average cost . we have retrospectively adjusted the consolidated financial statements for all periods presented to reflect this change . project one in december 2012 , our board of directors approved a multi-year project to replace and enhance our existing core information technology platforms . the scope for this project includes most of the basic transaction processing for the company including customer orders , procurement , manufacturing , and financial reporting . the project envisions harmonized business processes for all of our operating segments supported with one standard software configuration . the execution of this project , which we refer to as project one , is being supported by internal resources and consulting services . the north america adhesives business went live in 2014. in 2017 , we began the project one implementation in our latin america adhesives business , and implementation for all countries , with the exception of brazil , has been completed as of the end of 2018. during 2019 and beyond , we will continue implementation in north america , eimea ( europe , india , middle east and africa ) and asia pacific . total expenditures for project one are estimated to be $ 195 to $ 210 million , of which 50-55 % is expected to be capital expenditures . our total project-to-date expenditures are approximately $ 73 million , of which approximately $ 38 million are capital expenditures . given the complexity of the implementation , the total investment to complete the project may exceed our estimate . 18 restructuring plan s royal adhesives restructuring plan during the first quarter of 2018 , we approved a restructuring plan consisting of consolidation plans , organizational changes and other actions related to the integration of the operations of royal adhesives with the operations of the company ( the “ royal adhesives restructuring plan ” ) . in implementing the royal adhesives restructuring plan , we expect to incur costs of approximately $ 20.0 million , which includes ( i ) cash expenditures of approximately $ 12.0 million for severance and related employee costs globally and ( ii ) other costs of approximately $ 8.0 million related to the optimization of production facilities , streamlining of processes and accelerated depreciation of long-lived assets . approximately $ 14.0 million of the costs are expected to be cash costs . for the year ending december 1 , 2018 , we incurred costs of $ 6.7 million under this plan . the royal adhesives restructuring plan was implemented in the first quarter of 2018 and is currently expected to be completed by the end of fiscal year 2020 . 2017 restructuring plan during the first quarter of 2017 , we approved a restructuring plan ( the “ 2017 restructuring plan ” ) related to organizational changes and other actions to optimize operations . in implementing the 2017 restructuring plan , we incurred costs of $ 20.2 million as of december 1 , 2018 which included cash expenditures of approximately $ 11.3 million for severance and related employee costs globally and $ 8.9 million related to the optimization of production facilities , streamlining of processes and accelerated depreciation of long-lived assets . approximately $ 15.8 million of the costs were cash costs . the 2017 restructuring plan is substantially complete . federal income tax reform on december 22 , 2017 , the president of the united states signed into law h.r . 1 , originally known as the “ tax cuts and jobs act ” , hereafter referred to as “ u.s . tax reform ” . since the passing of u.s. tax reform , additional guidance in the form of notices and proposed regulations which interpret various aspects of u.s. tax reform have been issued . as of the filing of this document , additional guidance is expected . changes could be made to the proposed regulations as they become finalized , future legislation could be enacted , more regulations and notices could be issued , all of which may impact our financial results . we will continue to monitor all of these changes and will reflect the impact as appropriate in future financial statements . many state and local tax jurisdictions are still determining how they will interpret elements of u.s. tax reform . final state and local governments ' conformity and legislation or guidance relating to u.s. tax reform may impact our financial results . story_separator_special_tag 22 acquisition accounting as we enter into business combinations , we perform acquisition accounting requirements including the following : ● identifying the acquirer , ● determining the acquisition date , ● recognizing and measuring the identifiable assets acquired and the liabilities assumed , and ● recognizing and measuring goodwill or a gain from a bargain purchase we complete valuation procedures and record the resulting fair value of the acquired assets and assumed liabilities based upon the valuation of the business enterprise and the tangible and intangible assets acquired . enterprise value allocation methodology requires management to make assumptions and apply judgment to estimate the fair value of assets acquired and liabilities assumed . if estimates or assumptions used to complete the enterprise valuation and estimates of the fair value of the acquired assets and assumed liabilities significantly differed from assumptions made , the resulting difference could materially affect the fair value of net assets . the calculation of the fair value of the tangible assets , including property , plant and equipment , utilizes the cost approach , which computes the cost to replace the asset , less accrued depreciation resulting from physical deterioration , functional obsolescence and external obsolescence . the calculation of the fair value of the identified intangible assets are determined using cash flow models following the income approach or a discounted market-based methodology approach . significant inputs include estimated revenue growth rates , gross margins , operating expenses , and estimated attrition , royalty and discount rates . goodwill is recorded as the difference in the fair value of the acquired assets and assumed liabilities and the purchase price . replace_table_token_5_th net revenue in 2018 increased 31.9 percent from 2017. the 2017 net revenue was 10.1 percent higher than the net revenue in 2016. every five or six years we have a 53 rd week in our fiscal year . 2016 was a 53-week year which contributed approximately 2.0 percent to net revenue in 2016 , primarily related to volume . in analyzing our results of operations from period to period , we review variances in net revenue in terms of changes related to sales volume , product pricing , sales mix , business acquisitions and changes in foreign currency exchange rates . the impact of sales volume , product pricing , sales mix and acquisitions including royal adhesives , adecol and wisdom , cyberbond , l.l.c . and advanced adhesives are viewed as constant currency growth . the following table shows the net revenue variance analysis for the past two years : replace_table_token_6_th constant currency growth was 32.0 percent in 2018 compared to 2017. the 32.0 percent constant currency growth in 2018 was driven by 71.4 percent growth in construction adhesives , 57.1 percent growth in engineering adhesives , 29.9 percent growth in eimea , 21.2 percent growth in americas adhesives and 5.1 percent growth in asia pacific . constant currency growth in 2018 includes 28.3 percent growth attributable to the acquisition of royal adhesives and adecol . the negative 0.1 percent currency impact was primarily driven by a weaker brazilian real , argentinian peso , australian dollar , canadian dollar and turkish lira offset by a stronger mexican peso , chinese renminbi and euro compared to the u.s. dollar . constant currency growth was 12.3 percent in 2017 compared to 2016. the inclusion of a 53 rd week in 2016 negatively impacted 2017 constant currency sales growth by approximately 2.0 percent . the 12.3 percent constant currency growth in 2017 was driven by 24.2 percent growth in engineering adhesives , 12.6 percent growth in americas adhesives , 9.5 percent growth in asia pacific , 4.3 percent growth in eimea and 1.5 percent growth in construction adhesives . constant currency growth in 2017 includes 3.7 percent growth attributable to the acquisition of royal adhesives . the negative 2.2 percent currency impact was primarily driven by a weaker egyptian pound , turkish lira , chinese renminbi , argentinian peso , mexican peso and malaysian ringgit partially offset by a stronger euro , indian rupee and australian dollar compared to the u.s. dollar . 23 replace_table_token_7_th raw material costs as a percentage of net revenue decreased 130 basis points in 2018 compared to 2017 due to an increase in product pricing and the impact of the royal adhesives acquisition . other manufacturing costs as a percentage of net revenue was flat compared to 2017. as a result , cost of sales as a percentage of net revenue decreased 130 basis points compared to 2017. raw material costs as a percentage of net revenue increased 240 basis points in 2017 compared to 2016 due to higher raw material costs and the impact of acquired businesses including the inventory step up related to our recent acquisitions . other manufacturing costs as a percentage of revenue increased 40 basis points compared to 2016 driven primarily by the impact of acquired businesses and the implementation of the 2017 restructuring plan . as a result , cost of sales as a percentage of net revenue increased 270 basis points compared to 2016. replace_table_token_8_th gross profit in 2018 increased $ 231.8 million compared to 2017 and gross profit margin increased 130 basis points . the increase in gross profit margin was primarily due to favorable product pricing and the impact of the royal adhesives acquisition and lower restructuring plan costs . gross profit in 2017 decreased $ 0.7 million compared to 2016 and gross profit margin decreased 270 basis points . the decrease in gross profit margin was primarily due to higher raw material costs , the impact of acquired businesses and the implementation of the 2017 restructuring plan . replace_table_token_9_th selling , general and administration ( “ sg & a ” ) expenses for 2018 increased $ 105.1 million or 22.0 percent compared to 2017. the increase is mainly due to the impact of acquired businesses and the impact of unfavorable foreign currency exchange rates on spending outside the u.s. sg &

debt outstanding and debt capacity notes payable notes payable were $ 14.8 million at december 1 , 2018 and $ 31.5 million at december 2 , 2017. these amounts mainly represented various foreign subsidiaries ' short-term borrowings that were not part of committed lines . the weighted-average interest rates on these short-term borrowings were 9.6 percent in 2018 and 11.0 percent in 2017. long-term debt long-term debt consisted of a secured term loan ( “ term loan b ” ) and an unsecured public note ( “ public notes ” ) . the term loan b bears a floating interest rate at libor plus 2.00 percent ( 4.30 percent at december 1 , 2018 ) and matures in fiscal year 2024. the public notes bear interest at 4.00 percent fixed interest and mature in fiscal year 2027. we are subject to a par call of 1.00 percent except within three months of maturity date . we currently have no intention to prepay the public notes . additional details on the public notes and the term loan b credit agreement can be found in the 8-k dated february 9 , 2017 and the 8-k dated october 20 , 2017 , respectively . 32 we executed interest rate swap agreements for the purpose of obtaining a fixed interest rate on $ 1,450.0 million of the $ 2,150.0 million term loan b. we have designated forecasted interest payments resulting from the variability of 1-month libor in relation to $ 1,450.0 million of the term loan b as the hedged item in cash flow hedges . the combined fair value of the interest rate swaps in total was an asset of $ 28.9 million at december 1 , 2018 and was included in other assets in the consolidated balance sheets .

hemoglobin measurement is one of the most frequent invasive laboratory measurements in the world , often measured as part of a complete blood count . a low hemoglobin status is called anemia , which is generally caused by bleeding or the inability of the body to produce red blood cells . rra allows for the continuous and noninvasive monitoring of respiration rate , via rainbow acoustic monitoring . respiration rate is the number of breaths per minute . a low respiration rate is indicative of respiratory depression and high respiration rate is indicative of patient distress . traditional methods used to measure respiration rate are often considered inaccurate or are not tolerated well by patients . our halo index sensor allows continuous global trending and assessment of multiple physiological measurements of a patient with a single number displayed on the patient safetynet screen . halo index is ce marked , but not currently available for sale in the u.s. in july 2010 , we began selling the sedline ® monitor , which measures the brain 's electrical activity and provides information about a patient 's response to anesthesia . in january 2012 , we received fda clearance for the pronto-7 ® , a product designed specifically for spot-checking hemoglobin , along with oxygen saturation and pulse rate . in december 2012 , we released ispo 2 , a pulse oximeter cable and sensor with measure-through motion and low perfusion masimo set ® technology for use with an iphone , ipad or ipod touch . we also offer a remote monitoring and clinician notification solution called patient safetynet , which includes our masimo set ® or rainbow ® set monitors at the patient 's bedside along with a central assignment station and wired or wireless server . patient safetynet wirelessly notifies clinicians who are taking care of multiple patients in different rooms when one of their patients has an alarm , allowing them to intervene sooner and provide potentially life-saving support . we offer masimo set ® and rainbow ® set through our oems and our own end-user products , including the radical-7 ® , rad-87 , rad-57 ® , pronto ® , pronto-7 ® , rad-8 ® , rad-5 ® , and rad-5v . our solutions and related products are based upon our proprietary masimo set ® and rainbow ® algorithms . this software-based technology is incorporated into a variety of product platforms depending on our customers ' specifications . our technology is supported by a substantial intellectual property 61 portfolio that we have built through internal development and , to a lesser extent , acquisitions and license agreements . as of december 28 , 2013 , we had 674 issued and pending patents worldwide . we have exclusively licensed from our development partner , cercacor , the right to oem rainbow ® technology and incorporate rainbow ® technology into our products intended to be used by professional caregivers , including , but not limited to , hospital caregivers and alternate care facility caregivers . dividend payments our board of directors ( board ) continuously evaluates a variety of options to return value to stockholders , including acquisition opportunities , stock buy-back programs and dividends . in 2012 and 2010 , after considering all available options at those times , the board concluded that the best and most direct way to reward stockholders for their continued investment and confidence in masimo was through the declaration of cash dividends . in february 2010 , the board declared a special dividend of $ 2.00 per share , or $ 117.5 million , which was paid in march 2010. in november 2010 , the board declared a second special dividend of $ 0.75 per share , or $ 44.5 million , which was paid in december 2010. in october 2012 , the board declared another special dividend of $ 1.00 per share , or $ 57.3 million , which was paid out on december 11 , 2012 to stockholders of record as of the close of business on november 27 , 2012. both the 2012 and 2010 special dividends represented only a portion of our cash reserves , which the board believed was sufficient to cover our current operational needs , and to fund continued research and development investments and current strategic initiatives . the board did not declare any dividends during fiscal year 2013 and there is no assurance with respect to the payment of any dividends in the future . stock repurchase program in august 2011 , our board authorized the repurchase of up to 3.0 million shares of common stock under a repurchase program , which terminated pursuant to its terms in april 2012. the stock repurchase program was carried out at the discretion of a committee comprised of our chief executive officer and chief financial officer through open market purchases under a rule 10b5-1 trading plan . we paid for these repurchases with available cash and cash equivalents . during the year ended december 31 , 2011 , 1.8 million shares were repurchased , at an average price of $ 19.61 per share , totaling $ 36.2 million . during the year ended december 29 , 2012 , 1.2 million shares were repurchased , at an average price of $ 22.74 per share , totaling $ 26.3 million , which completed the stock repurchase program . in february 2013 , our board authorized the repurchase of up to 6.0 million shares of common stock under a new repurchase program which is expected to continue for a period of up to 36 months from the effective date of the program unless it is terminated earlier by the board . story_separator_special_tag cost of goods sold increased $ 22.1 million to $ 167.0 million in the year ended december 29 , 2012 from $ 144.9 million in the year ended december 31 , 2011. our total gross margin decreased to 66.1 % for the year ended december 29 , 2012 from 67.0 % for the year ended december 31 , 2011. excluding royalties , product gross margin declined to 64.1 % for the year ended december 29 , 2012 from 64.4 % for the year ended december 31 , 2011. this decline in product margin was primarily due to the incremental costs associated with the roll out of a new sensor technology , called x-cal tm , and the impact of lower product margins associated with the recently acquired masimo semiconductor and phasein businesses . these declines were partially offset by decreased amortization costs associated with equipment placed at hospitals , selected inventory charge-offs related to product redesign and transition activities in 2011 that did not reoccur in 2012 , and manufacturing efficiency improvements in 2012. excluding masimo semiconductor and phasein , our product gross margin would have been 65.2 % for the year ended december 29 , 2012. we incurred $ 5.0 million in cercacor royalty expenses for both the year ended december 29 , 2012 and december 31 , 2011 , which have been eliminated in our consolidated financial results for the periods presented . had these royalty expenses not been eliminated , our reported product gross profit margin would have been 63.0 % and 63.1 % for the year ended december 29 , 2012 and december 31 , 2011 , respectively . selling , general and administrative . selling , general and administrative expenses increased $ 24.7 million , or 14.6 % , to $ 193.9 million for the year ended december 29 , 2012 from $ 169.2 million for the year ended december 31 , 2011. excluding masimo semiconductor and phasein , selling , general and administrative expenses would have increased $ 21.6 million to $ 190.8 million for the year ended december 29 , 2012. this increase was primarily due to a $ 9.8 million increase in payroll and related costs associated with increased staffing levels . in addition , total trade show , advertising and training expenses increased by $ 7.4 million , primarily due to additional trade shows attended , including a worldwide trade show in q1 2012 , which is only held once every four years . also , legal fees increased $ 2.0 million due to increased litigation activity . included in total selling , general and administrative expenses are $ 2.5 million and $ 1.9 million of direct expenses incurred by cercacor for the year ended december 29 , 2012 and december 31 , 2011 , respectively . research and development . research and development expenses increased $ 8.7 million , or 22.6 % , to $ 47.1 million for the year ended december 29 , 2012 from $ 38.4 million for the year ended december 31 , 2011. excluding masimo semiconductor and phasein , research and development expenses would have increased $ 8.0 million , or 20.7 % , to $ 46.4 million for the year ended december 29 , 2012. this increase was primarily due to increased payroll and payroll related costs of $ 4.1 million associated with increased research and development staffing levels due to investment in research and development efforts . in addition , new project costs and engineering supplies increased $ 2.2 million related to new product development projects and additional clinical trial costs . included in total research and development expenses are $ 3.7 million and $ 3.4 million of engineering expenses incurred by cercacor for the year ended december 29 , 2012 and december 31 , 2011 , respectively . non-operating income ( expense ) . non-operating expense was $ 1.4 million for the year ended december 29 , 2012 , as compared to non-operating income of $ 14,000 for the year ended december 31 , 2011. this net change of $ 1.4 million was primarily due to the recognition of net realized and unrealized losses on foreign currency denominated transactions during the year ended december 29 , 2012 of $ 1.6 million , as compared to the recognition of net realized and unrealized losses on foreign currency denominated transactions of $ 0.1 million during the year ended december 31 , 2011. the net realized and unrealized losses recognized during the year ended december 29 , 2012 resulted primarily from the strengthening of the u.s. dollar against the japanese yen , partially offset by the weakening of the u.s. dollar against the euro . the realized and unrealized net losses on foreign currency denominated transactions recognized during the year ended december 31 , 2011 resulted primarily from losses due to the strengthening of the u.s. dollar against the euro , the british pound , the canadian dollar and the australian dollar , offset by gains due to the weakening of the u.s. dollar against the japanese yen . provision for income taxes . our provision for income taxes was $ 21.9 million for the year ended december 29 , 2012 compared to $ 22.5 million for the year ended december 31 , 2011. our effective tax rate increased to 26.1 % for the year ended december 29 , 2012 , compared to 26.0 % for the year ended december 31 , 2011. this increase in the effective tax rate was due primarily to the suspension of the federal research tax credit and increase in non-deductible items , which was offset by an effective tax rate decrease due to the income tax benefit resulting from the conclusion of a prior year tax audit , and the derecognition of uncertain tax positions due to the expiration of the statute of limitations . the american taxpayer relief act of 2012 , or the tax act , extended the research tax credit retroactively to 2012 and prospectively through the

debt outstanding and debt capacity notes payable notes payable were $ 14.8 million at december 1 , 2018 and $ 31.5 million at december 2 , 2017. these amounts mainly represented various foreign subsidiaries ' short-term borrowings that were not part of committed lines . the weighted-average interest rates on these short-term borrowings were 9.6 percent in 2018 and 11.0 percent in 2017. long-term debt long-term debt consisted of a secured term loan ( “ term loan b ” ) and an unsecured public note ( “ public notes ” ) . the term loan b bears a floating interest rate at libor plus 2.00 percent ( 4.30 percent at december 1 , 2018 ) and matures in fiscal year 2024. the public notes bear interest at 4.00 percent fixed interest and mature in fiscal year 2027. we are subject to a par call of 1.00 percent except within three months of maturity date . we currently have no intention to prepay the public notes . additional details on the public notes and the term loan b credit agreement can be found in the 8-k dated february 9 , 2017 and the 8-k dated october 20 , 2017 , respectively . 32 we executed interest rate swap agreements for the purpose of obtaining a fixed interest rate on $ 1,450.0 million of the $ 2,150.0 million term loan b. we have designated forecasted interest payments resulting from the variability of 1-month libor in relation to $ 1,450.0 million of the term loan b as the hedged item in cash flow hedges . the combined fair value of the interest rate swaps in total was an asset of $ 28.9 million at december 1 , 2018 and was included in other assets in the consolidated balance sheets .

hemoglobin measurement is one of the most frequent invasive laboratory measurements in the world , often measured as part of a complete blood count . a low hemoglobin status is called anemia , which is generally caused by bleeding or the inability of the body to produce red blood cells . rra allows for the continuous and noninvasive monitoring of respiration rate , via rainbow acoustic monitoring . respiration rate is the number of breaths per minute . a low respiration rate is indicative of respiratory depression and high respiration rate is indicative of patient distress . traditional methods used to measure respiration rate are often considered inaccurate or are not tolerated well by patients . our halo index sensor allows continuous global trending and assessment of multiple physiological measurements of a patient with a single number displayed on the patient safetynet screen . halo index is ce marked , but not currently available for sale in the u.s. in july 2010 , we began selling the sedline ® monitor , which measures the brain 's electrical activity and provides information about a patient 's response to anesthesia . in january 2012 , we received fda clearance for the pronto-7 ® , a product designed specifically for spot-checking hemoglobin , along with oxygen saturation and pulse rate . in december 2012 , we released ispo 2 , a pulse oximeter cable and sensor with measure-through motion and low perfusion masimo set ® technology for use with an iphone , ipad or ipod touch . we also offer a remote monitoring and clinician notification solution called patient safetynet , which includes our masimo set ® or rainbow ® set monitors at the patient 's bedside along with a central assignment station and wired or wireless server . patient safetynet wirelessly notifies clinicians who are taking care of multiple patients in different rooms when one of their patients has an alarm , allowing them to intervene sooner and provide potentially life-saving support . we offer masimo set ® and rainbow ® set through our oems and our own end-user products , including the radical-7 ® , rad-87 , rad-57 ® , pronto ® , pronto-7 ® , rad-8 ® , rad-5 ® , and rad-5v . our solutions and related products are based upon our proprietary masimo set ® and rainbow ® algorithms . this software-based technology is incorporated into a variety of product platforms depending on our customers ' specifications . our technology is supported by a substantial intellectual property 61 portfolio that we have built through internal development and , to a lesser extent , acquisitions and license agreements . as of december 28 , 2013 , we had 674 issued and pending patents worldwide . we have exclusively licensed from our development partner , cercacor , the right to oem rainbow ® technology and incorporate rainbow ® technology into our products intended to be used by professional caregivers , including , but not limited to , hospital caregivers and alternate care facility caregivers . dividend payments our board of directors ( board ) continuously evaluates a variety of options to return value to stockholders , including acquisition opportunities , stock buy-back programs and dividends . in 2012 and 2010 , after considering all available options at those times , the board concluded that the best and most direct way to reward stockholders for their continued investment and confidence in masimo was through the declaration of cash dividends . in february 2010 , the board declared a special dividend of $ 2.00 per share , or $ 117.5 million , which was paid in march 2010. in november 2010 , the board declared a second special dividend of $ 0.75 per share , or $ 44.5 million , which was paid in december 2010. in october 2012 , the board declared another special dividend of $ 1.00 per share , or $ 57.3 million , which was paid out on december 11 , 2012 to stockholders of record as of the close of business on november 27 , 2012. both the 2012 and 2010 special dividends represented only a portion of our cash reserves , which the board believed was sufficient to cover our current operational needs , and to fund continued research and development investments and current strategic initiatives . the board did not declare any dividends during fiscal year 2013 and there is no assurance with respect to the payment of any dividends in the future . stock repurchase program in august 2011 , our board authorized the repurchase of up to 3.0 million shares of common stock under a repurchase program , which terminated pursuant to its terms in april 2012. the stock repurchase program was carried out at the discretion of a committee comprised of our chief executive officer and chief financial officer through open market purchases under a rule 10b5-1 trading plan . we paid for these repurchases with available cash and cash equivalents . during the year ended december 31 , 2011 , 1.8 million shares were repurchased , at an average price of $ 19.61 per share , totaling $ 36.2 million . during the year ended december 29 , 2012 , 1.2 million shares were repurchased , at an average price of $ 22.74 per share , totaling $ 26.3 million , which completed the stock repurchase program . in february 2013 , our board authorized the repurchase of up to 6.0 million shares of common stock under a new repurchase program which is expected to continue for a period of up to 36 months from the effective date of the program unless it is terminated earlier by the board . story_separator_special_tag cost of goods sold increased $ 22.1 million to $ 167.0 million in the year ended december 29 , 2012 from $ 144.9 million in the year ended december 31 , 2011. our total gross margin decreased to 66.1 % for the year ended december 29 , 2012 from 67.0 % for the year ended december 31 , 2011. excluding royalties , product gross margin declined to 64.1 % for the year ended december 29 , 2012 from 64.4 % for the year ended december 31 , 2011. this decline in product margin was primarily due to the incremental costs associated with the roll out of a new sensor technology , called x-cal tm , and the impact of lower product margins associated with the recently acquired masimo semiconductor and phasein businesses . these declines were partially offset by decreased amortization costs associated with equipment placed at hospitals , selected inventory charge-offs related to product redesign and transition activities in 2011 that did not reoccur in 2012 , and manufacturing efficiency improvements in 2012. excluding masimo semiconductor and phasein , our product gross margin would have been 65.2 % for the year ended december 29 , 2012. we incurred $ 5.0 million in cercacor royalty expenses for both the year ended december 29 , 2012 and december 31 , 2011 , which have been eliminated in our consolidated financial results for the periods presented . had these royalty expenses not been eliminated , our reported product gross profit margin would have been 63.0 % and 63.1 % for the year ended december 29 , 2012 and december 31 , 2011 , respectively . selling , general and administrative . selling , general and administrative expenses increased $ 24.7 million , or 14.6 % , to $ 193.9 million for the year ended december 29 , 2012 from $ 169.2 million for the year ended december 31 , 2011. excluding masimo semiconductor and phasein , selling , general and administrative expenses would have increased $ 21.6 million to $ 190.8 million for the year ended december 29 , 2012. this increase was primarily due to a $ 9.8 million increase in payroll and related costs associated with increased staffing levels . in addition , total trade show , advertising and training expenses increased by $ 7.4 million , primarily due to additional trade shows attended , including a worldwide trade show in q1 2012 , which is only held once every four years . also , legal fees increased $ 2.0 million due to increased litigation activity . included in total selling , general and administrative expenses are $ 2.5 million and $ 1.9 million of direct expenses incurred by cercacor for the year ended december 29 , 2012 and december 31 , 2011 , respectively . research and development . research and development expenses increased $ 8.7 million , or 22.6 % , to $ 47.1 million for the year ended december 29 , 2012 from $ 38.4 million for the year ended december 31 , 2011. excluding masimo semiconductor and phasein , research and development expenses would have increased $ 8.0 million , or 20.7 % , to $ 46.4 million for the year ended december 29 , 2012. this increase was primarily due to increased payroll and payroll related costs of $ 4.1 million associated with increased research and development staffing levels due to investment in research and development efforts . in addition , new project costs and engineering supplies increased $ 2.2 million related to new product development projects and additional clinical trial costs . included in total research and development expenses are $ 3.7 million and $ 3.4 million of engineering expenses incurred by cercacor for the year ended december 29 , 2012 and december 31 , 2011 , respectively . non-operating income ( expense ) . non-operating expense was $ 1.4 million for the year ended december 29 , 2012 , as compared to non-operating income of $ 14,000 for the year ended december 31 , 2011. this net change of $ 1.4 million was primarily due to the recognition of net realized and unrealized losses on foreign currency denominated transactions during the year ended december 29 , 2012 of $ 1.6 million , as compared to the recognition of net realized and unrealized losses on foreign currency denominated transactions of $ 0.1 million during the year ended december 31 , 2011. the net realized and unrealized losses recognized during the year ended december 29 , 2012 resulted primarily from the strengthening of the u.s. dollar against the japanese yen , partially offset by the weakening of the u.s. dollar against the euro . the realized and unrealized net losses on foreign currency denominated transactions recognized during the year ended december 31 , 2011 resulted primarily from losses due to the strengthening of the u.s. dollar against the euro , the british pound , the canadian dollar and the australian dollar , offset by gains due to the weakening of the u.s. dollar against the japanese yen . provision for income taxes . our provision for income taxes was $ 21.9 million for the year ended december 29 , 2012 compared to $ 22.5 million for the year ended december 31 , 2011. our effective tax rate increased to 26.1 % for the year ended december 29 , 2012 , compared to 26.0 % for the year ended december 31 , 2011. this increase in the effective tax rate was due primarily to the suspension of the federal research tax credit and increase in non-deductible items , which was offset by an effective tax rate decrease due to the income tax benefit resulting from the conclusion of a prior year tax audit , and the derecognition of uncertain tax positions due to the expiration of the statute of limitations . the american taxpayer relief act of 2012 , or the tax act , extended the research tax credit retroactively to 2012 and prospectively through the

liquidity and capital resources as of december 28 , 2013 , we had cash and cash equivalents of $ 95.5 million , of which $ 26.0 million was invested in u.s. treasury bills , $ 1.8 million was in money market accounts with major financial institutions and $ 67.7 million was in checking accounts . the u.s. treasury bills are classified as cash equivalents since they are highly liquid investments , with a maturity of three months or less at the date of purchase . we carry cash equivalents at cost which approximates fair value . as of december 28 , 2013 , cash totaling $ 51.3 million was held outside of the u.s. a substantial portion of this cash held offshore is accessible without a significant tax cost . in managing our day-to-day liquidity and our capital structure , we do not rely on foreign earnings as a source of funds . we currently have sufficient funds for domestic operations and do not anticipate the need to repatriate funds associated with our permanently reinvested foreign earnings . in the event funds that are treated as permanently reinvested are repatriated , we may be required to accrue and pay additional u.s. taxes to repatriate these funds . during fiscal years 2013 , 2012 , and 2011 , we received $ 29.8 million , $ 28.3 million , and $ 32.5 million , respectively , in cash receipts from covidien for royalties pursuant to our settlement agreement . through march 14 , 2011 , we received a royalty payment based on a rate of 13 % of covidien 's u.s. pulse oximetry sales . on january 28 , 2011 , we entered into a second amendment to the settlement agreement with covidien . as part of this amendment , which became effective as of march 14 , 2011 , covidien agreed to pay us a royalty of 7.75 % on its u.s. pulse oximetry revenue , as specifically defined in that second amendment , at least through march 15 , 2014. in august 2011 , our board authorized the repurchase of up to 3.0 million shares of common stock under a repurchase program .

pursuant to the provisions of the fifth amended and restated advisory agreement with ashford llc , as amended on january 15 , 2019 , the revenues and expenses used to calculate net earnings ( as defined ) for the twelve months ended december 31 , 2020 , are as follows ( in thousands ) : revenues $ 24,337 expenses 10,981 net earnings $ 13,556 covid-19 , management 's plans and liquidity in december 2019 , covid-19 was identified in wuhan , china , subsequently spread to other regions of the world , and has resulted in significant travel restrictions and extended shutdown of numerous businesses in every state in the united states . in march 2020 , the world health organization declared covid-19 to be a global pandemic . beginning in late february 2020 , we have experienced a significant decline in occupancy and revpar associated with covid-19 as we experienced significant reservation cancellations as well as a significant reduction in new reservations . the prolonged presence of the virus has resulted 91 in health and other government authorities imposing widespread restrictions on travel and other businesses . the hotel industry and our portfolio have experienced the postponement or cancellation of a significant number of business conferences and similar events . following the government mandates and health official orders in march 2020 , the company temporarily suspended operations at 11 of its 13 hotels and dramatically reduced staffing and expenses at its hotels that remained operational . covid-19 has had a significant negative impact on the company 's operations and financial results to date . the full financial impact of the reduction in hotel demand caused by the pandemic and suspension of operations at the company 's hotels can not be reasonably estimated at this time due to uncertainty as to its severity and duration . in addition , one or more possible recurrences of covid-19 cases could result in further reductions in business and personal travel and could cause state and local governments to reinstate travel restrictions . the company expects that the covid-19 pandemic will continue to have a negative impact on the company 's results of operations , financial position and cash flow in 2021 and potentially much longer . as a result , in march 2020 , the company fully drew down its $ 75 million secured revolving credit facility , which was later converted into a term loan , suspended the quarterly cash dividend on its common stock , reduced planned capital expenditures , and , working closely with its hotel managers , significantly reduced its hotels ' operating expenses . see note 7 to our consolidated financial statements . all of the company 's property-level debt is non-recourse . beginning on april 1 , 2020 , we did not make at least one interest payment under nearly all of our loan agreements , which constituted an “ event of default ” as such term is defined under the applicable loan documents . further , the company triggered an “ event of default , ” as defined under the secured revolving credit facility agreement as a result of the company being in default on mortgage and mezzanine loans with an aggregate principal amount in excess of $ 200 million . pursuant to the terms of the applicable loan documents , such an event of default caused an automatic increase in the interest rate on our outstanding loan balance for the period such event of default remains outstanding . following an event of default , our lenders can generally elect to accelerate all principal and accrued interest payments that remain outstanding under the applicable loan agreement and foreclose on the applicable hotel properties that are security for such loans . such event of default under the senior revolving credit facility agreement was eliminated by the first amendment to second amended and restated credit agreement , dated june 8 , 2020 , which provides that defaults under mortgage and mezzanine loans wi th an aggregate principal amount in excess of $ 200 million do not trigger a default under the senior revolving credit agreement unless such mortgage or mezzanine loans are also accelerated , and excluding from the $ 200 million threshold , any default and acceleration under those certain mortgage and mezzanine loans having an aggregate principal amount of $ 435 million and secured by the marriott seattle waterfront , sofitel chicago magnificent mile , the notary hotel and the clancy . during the second and third quarter of 2020 , we reached forbearance and other agreements with our lenders relating to loans secured by the pier house resort & spa , the ritz-carlton sarasota , the ritz-carlton lake tahoe , hotel yountville , bardessono hotel and spa , sofitel chicago magnificent mile , the notary hotel , the clancy , marriott seattle waterfront , capital hilton and hilton la jolla torrey pines . on june 8 , 2020 , the company amended its secured revolving credit facility converting it into a $ 65 million secured term loan and changed the terms of certain financial covenants , including a waiver of the consolidated fixed charge coverage ratio ( as defined in the amendment ) through march 31 , 2021 , that the company was subject to under the secured revolving credit facility . on february 22 , 2021 , the company further amended the term loan providing an extension of the waiver on the majority of the covenants through the fourth quarter of 2021 and a reduced fixed charge coverage ratio covenant through the end of 2022. the first period in which covenants will be tested is for the fiscal quarter ending march 31 , 2022. as of december 31 , 2020 , no loans are in default . story_separator_special_tag we use this information to measure the operating performance of our individual hotels , groups of hotels and or business as a whole . we also use these metrics to evaluate the hotels in our portfolio and potential acquisitions to determine each hotel 's contribution to cash flow and its potential to provide attractive long-term total returns . these key indicators include : occupancy . occupancy means the total number of hotel rooms sold in a given period divided by the total number of rooms available . occupancy measures the utilization of our hotels ' available capacity . we use occupancy to measure demand at a specific hotel or group of hotels in a given period . adr . adr means average daily rate and is calculated by dividing total hotel rooms revenues by total number of rooms sold in a given period . adr measures average room price attained by a hotel and adr trends provide useful information concerning the pricing environment and the nature of the customer base of a hotel or group of hotels . we use adr to assess the pricing levels that we are able to generate . revpar . revpar means revenue per available room and is calculated by multiplying adr by the average daily occupancy . revpar is one of the commonly used measures within the hotel industry to evaluate hotel operations . revpar does not include revenues from food and beverage sales or parking , telephone or other non-rooms revenues generated by the property . although revpar does not include these ancillary revenues , it is generally considered the leading indicator of core revenues for many hotels . we also use revpar to compare the results of our hotels between periods and to analyze results of our comparable hotels ( comparable hotels represent hotels we have owned for the entire period ) . revpar improvements attributable to increases in occupancy are generally accompanied by increases in most categories of variable operating costs . revpar improvements attributable to increases in adr are generally accompanied by increases in limited categories of operating costs , such as management fees and franchise fees . revpar changes that are primarily driven by changes in occupancy have different implications for overall revenues and profitability than changes that are driven primarily by changes in adr . for example , an increase in occupancy at a hotel would lead to additional variable operating costs ( including housekeeping services , utilities and room supplies ) and could also result in increased other operating department revenue and expense . changes in adr typically have a greater impact on operating margins and profitability as they do not have a substantial effect on variable operating costs . occupancy , adr and revpar are commonly used measures within the lodging industry to evaluate operating performance . revpar is an important statistic for monitoring operating performance at the individual hotel level and across our entire business . we evaluate individual hotel revpar performance on an absolute basis with comparisons to budget and prior periods , as well as on a regional and company-wide basis . adr and revpar include only rooms revenue . rooms revenue is dictated by demand ( as measured by occupancy ) , pricing ( as measured by adr ) and our available supply of hotel rooms . 95 we also use funds from operations ( “ ffo ” ) , adjusted ffo , earnings before interest , taxes , depreciation and amortization for real estate ( “ ebitdare ” ) and adjusted ebitdare as measures of the operating performance of our business . see “ non-gaap financial measures . ” principal factors affecting our results of operations the principal factors affecting our operating results include overall demand for hotel rooms compared to the supply of available hotel rooms , and the ability of our third-party management companies to increase or maintain revenues while controlling expenses . demand . the demand for lodging , including business travel , is directly correlated to the overall economy ; as gdp increases , lodging demand typically increases . historically , periods of declining demand are followed by extended periods of relatively strong demand , which typically occurs during the growth phase of the lodging cycle . beginning in 2020 , the covid-19 pandemic had a direct impact on demand . supply . the development of new hotels is driven largely by construction costs , the availability of financing and expected performance of existing hotels . short-term supply is also expected to be below long-term averages . while the industry is expected to have supply growth below historical averages , we may experience supply growth , in certain markets , in excess of national averages that may negatively impact performance . beginning in 2020 , the covid-19 pandemic had a direct impact on supply . we expect that our adr , occupancy and revpar performance will be impacted by macroeconomic factors such as national and local employment growth , personal income and corporate earnings , gdp , consumer confidence , office vacancy rates and business relocation decisions , airport and other business and leisure travel , new hotel construction , the pricing strategies of competitors and currency fluctuations . in addition , our adr , occupancy and revpar performance are dependent on the continued success of the marriott , hilton , hyatt and sofitel brands . revenue . substantially all of our revenue is derived from the operation of hotels . specifically , our revenue is comprised of : rooms revenue—occupancy and adr are the major drivers of rooms revenue . rooms revenue accounts for the substantial majority of our total revenue . food and beverage revenue—occupancy and the type of customer staying at the hotel are the major drivers of food and beverage revenue ( i.e . , group business typically generates more food and beverage business through catering functions when compared to transient business , which may or may not utilize the hotel 's food

liquidity and capital resources as of december 28 , 2013 , we had cash and cash equivalents of $ 95.5 million , of which $ 26.0 million was invested in u.s. treasury bills , $ 1.8 million was in money market accounts with major financial institutions and $ 67.7 million was in checking accounts . the u.s. treasury bills are classified as cash equivalents since they are highly liquid investments , with a maturity of three months or less at the date of purchase . we carry cash equivalents at cost which approximates fair value . as of december 28 , 2013 , cash totaling $ 51.3 million was held outside of the u.s. a substantial portion of this cash held offshore is accessible without a significant tax cost . in managing our day-to-day liquidity and our capital structure , we do not rely on foreign earnings as a source of funds . we currently have sufficient funds for domestic operations and do not anticipate the need to repatriate funds associated with our permanently reinvested foreign earnings . in the event funds that are treated as permanently reinvested are repatriated , we may be required to accrue and pay additional u.s. taxes to repatriate these funds . during fiscal years 2013 , 2012 , and 2011 , we received $ 29.8 million , $ 28.3 million , and $ 32.5 million , respectively , in cash receipts from covidien for royalties pursuant to our settlement agreement . through march 14 , 2011 , we received a royalty payment based on a rate of 13 % of covidien 's u.s. pulse oximetry sales . on january 28 , 2011 , we entered into a second amendment to the settlement agreement with covidien . as part of this amendment , which became effective as of march 14 , 2011 , covidien agreed to pay us a royalty of 7.75 % on its u.s. pulse oximetry revenue , as specifically defined in that second amendment , at least through march 15 , 2014. in august 2011 , our board authorized the repurchase of up to 3.0 million shares of common stock under a repurchase program .

pursuant to the provisions of the fifth amended and restated advisory agreement with ashford llc , as amended on january 15 , 2019 , the revenues and expenses used to calculate net earnings ( as defined ) for the twelve months ended december 31 , 2020 , are as follows ( in thousands ) : revenues $ 24,337 expenses 10,981 net earnings $ 13,556 covid-19 , management 's plans and liquidity in december 2019 , covid-19 was identified in wuhan , china , subsequently spread to other regions of the world , and has resulted in significant travel restrictions and extended shutdown of numerous businesses in every state in the united states . in march 2020 , the world health organization declared covid-19 to be a global pandemic . beginning in late february 2020 , we have experienced a significant decline in occupancy and revpar associated with covid-19 as we experienced significant reservation cancellations as well as a significant reduction in new reservations . the prolonged presence of the virus has resulted 91 in health and other government authorities imposing widespread restrictions on travel and other businesses . the hotel industry and our portfolio have experienced the postponement or cancellation of a significant number of business conferences and similar events . following the government mandates and health official orders in march 2020 , the company temporarily suspended operations at 11 of its 13 hotels and dramatically reduced staffing and expenses at its hotels that remained operational . covid-19 has had a significant negative impact on the company 's operations and financial results to date . the full financial impact of the reduction in hotel demand caused by the pandemic and suspension of operations at the company 's hotels can not be reasonably estimated at this time due to uncertainty as to its severity and duration . in addition , one or more possible recurrences of covid-19 cases could result in further reductions in business and personal travel and could cause state and local governments to reinstate travel restrictions . the company expects that the covid-19 pandemic will continue to have a negative impact on the company 's results of operations , financial position and cash flow in 2021 and potentially much longer . as a result , in march 2020 , the company fully drew down its $ 75 million secured revolving credit facility , which was later converted into a term loan , suspended the quarterly cash dividend on its common stock , reduced planned capital expenditures , and , working closely with its hotel managers , significantly reduced its hotels ' operating expenses . see note 7 to our consolidated financial statements . all of the company 's property-level debt is non-recourse . beginning on april 1 , 2020 , we did not make at least one interest payment under nearly all of our loan agreements , which constituted an “ event of default ” as such term is defined under the applicable loan documents . further , the company triggered an “ event of default , ” as defined under the secured revolving credit facility agreement as a result of the company being in default on mortgage and mezzanine loans with an aggregate principal amount in excess of $ 200 million . pursuant to the terms of the applicable loan documents , such an event of default caused an automatic increase in the interest rate on our outstanding loan balance for the period such event of default remains outstanding . following an event of default , our lenders can generally elect to accelerate all principal and accrued interest payments that remain outstanding under the applicable loan agreement and foreclose on the applicable hotel properties that are security for such loans . such event of default under the senior revolving credit facility agreement was eliminated by the first amendment to second amended and restated credit agreement , dated june 8 , 2020 , which provides that defaults under mortgage and mezzanine loans wi th an aggregate principal amount in excess of $ 200 million do not trigger a default under the senior revolving credit agreement unless such mortgage or mezzanine loans are also accelerated , and excluding from the $ 200 million threshold , any default and acceleration under those certain mortgage and mezzanine loans having an aggregate principal amount of $ 435 million and secured by the marriott seattle waterfront , sofitel chicago magnificent mile , the notary hotel and the clancy . during the second and third quarter of 2020 , we reached forbearance and other agreements with our lenders relating to loans secured by the pier house resort & spa , the ritz-carlton sarasota , the ritz-carlton lake tahoe , hotel yountville , bardessono hotel and spa , sofitel chicago magnificent mile , the notary hotel , the clancy , marriott seattle waterfront , capital hilton and hilton la jolla torrey pines . on june 8 , 2020 , the company amended its secured revolving credit facility converting it into a $ 65 million secured term loan and changed the terms of certain financial covenants , including a waiver of the consolidated fixed charge coverage ratio ( as defined in the amendment ) through march 31 , 2021 , that the company was subject to under the secured revolving credit facility . on february 22 , 2021 , the company further amended the term loan providing an extension of the waiver on the majority of the covenants through the fourth quarter of 2021 and a reduced fixed charge coverage ratio covenant through the end of 2022. the first period in which covenants will be tested is for the fiscal quarter ending march 31 , 2022. as of december 31 , 2020 , no loans are in default . story_separator_special_tag we use this information to measure the operating performance of our individual hotels , groups of hotels and or business as a whole . we also use these metrics to evaluate the hotels in our portfolio and potential acquisitions to determine each hotel 's contribution to cash flow and its potential to provide attractive long-term total returns . these key indicators include : occupancy . occupancy means the total number of hotel rooms sold in a given period divided by the total number of rooms available . occupancy measures the utilization of our hotels ' available capacity . we use occupancy to measure demand at a specific hotel or group of hotels in a given period . adr . adr means average daily rate and is calculated by dividing total hotel rooms revenues by total number of rooms sold in a given period . adr measures average room price attained by a hotel and adr trends provide useful information concerning the pricing environment and the nature of the customer base of a hotel or group of hotels . we use adr to assess the pricing levels that we are able to generate . revpar . revpar means revenue per available room and is calculated by multiplying adr by the average daily occupancy . revpar is one of the commonly used measures within the hotel industry to evaluate hotel operations . revpar does not include revenues from food and beverage sales or parking , telephone or other non-rooms revenues generated by the property . although revpar does not include these ancillary revenues , it is generally considered the leading indicator of core revenues for many hotels . we also use revpar to compare the results of our hotels between periods and to analyze results of our comparable hotels ( comparable hotels represent hotels we have owned for the entire period ) . revpar improvements attributable to increases in occupancy are generally accompanied by increases in most categories of variable operating costs . revpar improvements attributable to increases in adr are generally accompanied by increases in limited categories of operating costs , such as management fees and franchise fees . revpar changes that are primarily driven by changes in occupancy have different implications for overall revenues and profitability than changes that are driven primarily by changes in adr . for example , an increase in occupancy at a hotel would lead to additional variable operating costs ( including housekeeping services , utilities and room supplies ) and could also result in increased other operating department revenue and expense . changes in adr typically have a greater impact on operating margins and profitability as they do not have a substantial effect on variable operating costs . occupancy , adr and revpar are commonly used measures within the lodging industry to evaluate operating performance . revpar is an important statistic for monitoring operating performance at the individual hotel level and across our entire business . we evaluate individual hotel revpar performance on an absolute basis with comparisons to budget and prior periods , as well as on a regional and company-wide basis . adr and revpar include only rooms revenue . rooms revenue is dictated by demand ( as measured by occupancy ) , pricing ( as measured by adr ) and our available supply of hotel rooms . 95 we also use funds from operations ( “ ffo ” ) , adjusted ffo , earnings before interest , taxes , depreciation and amortization for real estate ( “ ebitdare ” ) and adjusted ebitdare as measures of the operating performance of our business . see “ non-gaap financial measures . ” principal factors affecting our results of operations the principal factors affecting our operating results include overall demand for hotel rooms compared to the supply of available hotel rooms , and the ability of our third-party management companies to increase or maintain revenues while controlling expenses . demand . the demand for lodging , including business travel , is directly correlated to the overall economy ; as gdp increases , lodging demand typically increases . historically , periods of declining demand are followed by extended periods of relatively strong demand , which typically occurs during the growth phase of the lodging cycle . beginning in 2020 , the covid-19 pandemic had a direct impact on demand . supply . the development of new hotels is driven largely by construction costs , the availability of financing and expected performance of existing hotels . short-term supply is also expected to be below long-term averages . while the industry is expected to have supply growth below historical averages , we may experience supply growth , in certain markets , in excess of national averages that may negatively impact performance . beginning in 2020 , the covid-19 pandemic had a direct impact on supply . we expect that our adr , occupancy and revpar performance will be impacted by macroeconomic factors such as national and local employment growth , personal income and corporate earnings , gdp , consumer confidence , office vacancy rates and business relocation decisions , airport and other business and leisure travel , new hotel construction , the pricing strategies of competitors and currency fluctuations . in addition , our adr , occupancy and revpar performance are dependent on the continued success of the marriott , hilton , hyatt and sofitel brands . revenue . substantially all of our revenue is derived from the operation of hotels . specifically , our revenue is comprised of : rooms revenue—occupancy and adr are the major drivers of rooms revenue . rooms revenue accounts for the substantial majority of our total revenue . food and beverage revenue—occupancy and the type of customer staying at the hotel are the major drivers of food and beverage revenue ( i.e . , group business typically generates more food and beverage business through catering functions when compared to transient business , which may or may not utilize the hotel 's food

sources and uses of cash we had approximately $ 78.6 million and $ 72.0 million of cash and cash equivalents at december 31 , 2020 and december 31 , 2019 , respectively . we anticipate that our principal sources of funds to meet our cash requirements will include cash on hand , positive cash flow from operations and capital market activities . we anticipate using funds to pay for ( i ) capital expenditures for our thirteen 108 hotel properties , estimated to be approximately $ 20 million to $ 24 million in fiscal year 2021 and ( ii ) debt interest payments are estimated to be approximately $ 28 million in 2021 based on future payments using the one month libor rate as of december 31 , 2020. this estimate will fluctuate based on changes in the one month libor rate . net cash flows provided by ( used in ) operating activities . net cash flows provided by ( used in ) operating activities were $ ( 50.3 ) million and $ 66.3 million for the year ended december 31 , 2020 and 2019 , respectively . cash flows from operations were impacted by the covid-19 pandemic , changes in hotel operations of our twelve comparable hotel properties as well as the acquisition of the ritz-carlton lake tahoe on january 15 , 2019. cash flows from operations are also impacted by the timing of working capital cash flows such as collecting receivables from hotel guests , paying vendors , settling with derivative counterparties , settling with related parties , settling with hotel managers and timing differences between the receipt of proceeds from business interruption insurance claims and the recognition of the related revenue . net cash flows provided by ( used in ) investing activities .

we believe that msrs are being sold at a discount to historical pricing levels , although increased competition for these assets has driven prices higher recently . there can be no assurance that any future investment in excess msrs will generate returns similar to the returns on our current investments in excess msrs . as of the fourth quarter of 2013 , approximately $ 7 trillion of the $ 10 trillion of residential mortgages outstanding has been securitized , according to inside mortgage finance . approximately $ 6 trillion are agency rmbs according to inside mortgage finance , which are securities issued or guaranteed by a u.s. government agency , such as ginnie mae , or by a gse , such as fannie mae or freddie mac . the balance has been securitized by either public trusts or pls , and are referred to as non-agency rmbs . since the financial crisis , there has been significant volatility in the prices for non-agency rmbs , which resulted from a widespread contraction in capital available for this asset class , deteriorating housing fundamentals , and an increase in forced selling by institutional investors ( often in response to rating agency downgrades ) . while the prices of these assets have started to recover from their lows , we believe a meaningful gap still exists between current prices and the recovery value of many non-agency rmbs . accordingly , we believe there are opportunities to acquire non-agency rmbs at attractive risk-adjusted yields , with the potential for meaningful upside if the u.s. economy and housing market continue to strengthen . we believe the value of existing non-agency rmbs may also rise if the number of buyers returns to pre-2007 levels . the primary causes of mark-to-market changes in our rmbs portfolio are changes in interest rates and credit spreads . interest rates have risen significantly in recent months and may continue to increase , although the timing of any further increases is uncertain . in periods of rising interest rates , the rates of prepayments and delinquencies with respect to mortgage loans generally decline . generally , the value of our excess msrs is expected to increase when interest rates rise or delinquencies decline , and the value is expected to decrease when interest rates decline or delinquencies increase , due to the effect of changes in interest rates on prepayment speeds and delinquencies . however , prepayment speeds and delinquencies could increase even in the current interest rate environment , as a result of , among other things , a general economic recovery , government programs intended to foster refinancing activity or other reasons , which could reduce the value of our investments . moreover , the value of our excess msrs is subject to a variety of factors , as described under “risk factors.” in the fourth quarter of 2013 , the fair value of our investments in excess msrs ( directly and through equity method investees ) increased by approximately $ 8.2 million and the weighted average discount rate of the portfolio remained relatively unchanged at 12.5 % . we do not expect changes in interest rates to have a meaningful impact on the net interest spread of our agency arm and non-agency portfolios . our rmbs are primarily floating rate or hybrid ( i.e . , fixed to floating rate ) securities , which we generally finance with floating rate debt . therefore , while rising interest rates will generally result in a higher cost of financing , they will also result in a higher coupon payable on the securities . the net interest spread on our agency arm rmbs portfolio as of december 31 , 2013 was 0.94 % , which was the same as the net interest spread as of september 30 , 2013. the net interest spread on our non-agency rmbs portfolio as of december 31 , 2013 was 2.83 % , compared to 2.85 % as of september 30 , 2013 . 63 credit performance also affects the value of our portfolio . higher rates of delinquency and or defaults can reduce the value of our excess msrs , non-agency rmbs , agency rmbs and consumer loan portfolios . for our excess msrs on agency portfolios and our agency rmbs , delinquency and default rates have an effect similar to prepayment rates . our excess msrs on non-agency rmbs are not affected by delinquency rates because the servicer continues to advance the excess msr until a default occurs on the applicable loan ; defaults have an effect similar to prepayments . for the non-agency rmbs and consumer loans , higher default rates can lead to greater loss of principal . credit spreads continued to decrease , or “tighten , ” in the fourth quarter of 2013 relative to the first three quarters of 2013 , which has had a favorable impact on the value of our securities and loan portfolio . credit spreads measure the yield relative to a specified benchmark that the market demands on securities and loans based on such assets ' credit risk . for a discussion of the way in which interest rates , credit spreads and other market factors affect us , see “quantitative and qualitative disclosures about market risk.” the value of our consumer loan portfolio is influenced by , among other factors , the u.s. macroeconomic environment , and unemployment rates in particular . we believe that losses are highly correlated to unemployment ; therefore , we expect that an improvement in unemployment rates would support the value of our investment , while deterioration in unemployment rates would result in a decline in its value . our portfolio our portfolio is currently composed of servicing related assets , residential securities and loans and other investments , as described in more detail below . story_separator_special_tag net cost of funds excludes facility fees . ( c ) the following types of advances comprise the investment in servicer advances : 72 december 31 , 2013 principal and interest advances $ 1,516,715 escrow advances ( taxes and insurance advances ) 934,525 foreclosure advances 209,890 total $ 2,661,130 replace_table_token_19_th ( a ) story_separator_special_tag valign= `` bottom `` > $ 1,392,612 $ 3,434 $ ( 3,885 ) $ 1,392,161 $ 1,332,954 ( a ) amortized cost basis and carrying value exclude $ 10.6 million of principal receivables as of december 31 , 2013 . ( b ) fair value , which is equal to carrying value for all securities . the following table summarizes the reset dates of our agency arm rmbs portfolio as of december 31 , 2013 ( dollars in thousands ) : replace_table_token_20_th ( a ) of these investments , 90.6 % reset based on 12 month libor index , 1.8 % reset based on 6 month libor index , 0.4 % reset based on 1 month libor , and 7.3 % reset based on the 1 year treasury constant maturity rate . after the initial fixed period , 97.8 % of these securities will reset annually and 2.2 % will reset semi-annually . ( b ) amortized cost basis and carrying value exclude $ 10.6 million of principal receivables as of december 31 , 2013 . ( c ) represents the maximum change in the coupon at the end of the fixed rate period . ( d ) represents the maximum change in the coupon at each reset date subsequent to the first coupon adjustment . ( e ) represents the maximum coupon on the underlying security over its life . ( f ) represents recurrent weighted average months to the next interest rate reset . ( g ) not applicable as 57 of the securities ( 72 % of the current face of this category ) are past the first coupon adjustment period . the remaining 16 securities ( 28 % of the current face of this category ) have a maximum change in the coupon of 5.0 % at the end of the fixed rate period . the following table summarizes the characteristics of our agency arm rmbs portfolio and of the collateral underlying our agency arm rmbs as of december 31 , 2013 ( dollars in thousands ) : 75 replace_table_token_21_th ( a ) the year in which the securities were issued . ( b ) amortized cost basis and carrying value exclude $ 10.6 million of principal receivables as of december 31 , 2013 . ( c ) three month average constant prepayment rate . the following table summarizes the net interest spread of our agency arm rmbs portfolio as of december 31 , 2013 : net interest spread ( a ) weighted average asset yield 1.33 % weighted average funding cost 0.39 % net interest spread 0.94 % ( a ) the entire agency arm rmbs portfolio consists of floating rate securities . see table above for details on rate resets . non-agency rmbs the following table summarizes our non-agency rmbs portfolio as of december 31 , 2013 ( dollars in thousands ) : gross unrealized asset type outstanding face amount amortized cost basis gains losses carrying value ( a ) outstanding repurchase agreements non-agency rmbs $ 872,866 $ 566,760 $ 7,618 $ ( 3,953 ) $ 570,425 $ 287,757 ( a ) fair value , which is equal to carrying value for all securities . the following tables summarize the characteristics of our non-agency rmbs portfolio and of the collateral underlying our non-agency rmbs as of december 31 , 2013 ( dollars in thousands ) : replace_table_token_22_th 76 replace_table_token_23_th ( a ) the year in which the securities were issued . ( b ) ratings provided above were determined by third party rating agencies , represent the most recent credit ratings available as of the reporting date and may not be current . this excludes the ratings of the collateral underlying two bonds with a face amount of $ 6.3 million for which we were unable to obtain rating information . we had no assets that were on negative watch for possible downgrade by at least one rating agency as of december 31 , 2013 . ( c ) the percentage of the outstanding face amount of securities and residual interests that is subordinate to our investments . ( d ) the current amount of interest received on the underlying loans in excess of the interest paid on the securities , as a percentage of the outstanding collateral balance for the quarter ended december 31 , 2013 . ( e ) the weighted average loan size of the underlying collateral is $ 223.7 thousand . this excludes the collateral underlying one bond , due to unavailable information , with a face amount of $ 42.9 million . ( f ) the ratio of original upb of loans still outstanding . ( g ) three month average constant prepayment rate and default rates . ( h ) the percentage of underlying loans that are 90+ days delinquent , or in foreclosure or considered reo . the following table sets forth the geographic diversification of the loans underlying our non-agency rmbs as of december 31 , 2013 ( dollars in thousands ) : replace_table_token_24_th ( a ) represents collateral for which we were unable to obtain geographical information . the following table summarizes the net interest spread of our non-agency rmbs portfolio as of december 31 , 2013 : net interest spread ( a ) weighted average asset yield 4.68 % weighted average funding cost 1.85 % net interest spread 2.83 % ( a ) the non-agency rmbs portfolio consists of 99.2 % floating rate securities and 0.8 % fixed rate securities . real estate loans residential mortgage loans as of december 31 , 2013 , we had approximately $ 57.6 million outstanding face amount of residential mortgage loans . in february

sources and uses of cash we had approximately $ 78.6 million and $ 72.0 million of cash and cash equivalents at december 31 , 2020 and december 31 , 2019 , respectively . we anticipate that our principal sources of funds to meet our cash requirements will include cash on hand , positive cash flow from operations and capital market activities . we anticipate using funds to pay for ( i ) capital expenditures for our thirteen 108 hotel properties , estimated to be approximately $ 20 million to $ 24 million in fiscal year 2021 and ( ii ) debt interest payments are estimated to be approximately $ 28 million in 2021 based on future payments using the one month libor rate as of december 31 , 2020. this estimate will fluctuate based on changes in the one month libor rate . net cash flows provided by ( used in ) operating activities . net cash flows provided by ( used in ) operating activities were $ ( 50.3 ) million and $ 66.3 million for the year ended december 31 , 2020 and 2019 , respectively . cash flows from operations were impacted by the covid-19 pandemic , changes in hotel operations of our twelve comparable hotel properties as well as the acquisition of the ritz-carlton lake tahoe on january 15 , 2019. cash flows from operations are also impacted by the timing of working capital cash flows such as collecting receivables from hotel guests , paying vendors , settling with derivative counterparties , settling with related parties , settling with hotel managers and timing differences between the receipt of proceeds from business interruption insurance claims and the recognition of the related revenue . net cash flows provided by ( used in ) investing activities .

we believe that msrs are being sold at a discount to historical pricing levels , although increased competition for these assets has driven prices higher recently . there can be no assurance that any future investment in excess msrs will generate returns similar to the returns on our current investments in excess msrs . as of the fourth quarter of 2013 , approximately $ 7 trillion of the $ 10 trillion of residential mortgages outstanding has been securitized , according to inside mortgage finance . approximately $ 6 trillion are agency rmbs according to inside mortgage finance , which are securities issued or guaranteed by a u.s. government agency , such as ginnie mae , or by a gse , such as fannie mae or freddie mac . the balance has been securitized by either public trusts or pls , and are referred to as non-agency rmbs . since the financial crisis , there has been significant volatility in the prices for non-agency rmbs , which resulted from a widespread contraction in capital available for this asset class , deteriorating housing fundamentals , and an increase in forced selling by institutional investors ( often in response to rating agency downgrades ) . while the prices of these assets have started to recover from their lows , we believe a meaningful gap still exists between current prices and the recovery value of many non-agency rmbs . accordingly , we believe there are opportunities to acquire non-agency rmbs at attractive risk-adjusted yields , with the potential for meaningful upside if the u.s. economy and housing market continue to strengthen . we believe the value of existing non-agency rmbs may also rise if the number of buyers returns to pre-2007 levels . the primary causes of mark-to-market changes in our rmbs portfolio are changes in interest rates and credit spreads . interest rates have risen significantly in recent months and may continue to increase , although the timing of any further increases is uncertain . in periods of rising interest rates , the rates of prepayments and delinquencies with respect to mortgage loans generally decline . generally , the value of our excess msrs is expected to increase when interest rates rise or delinquencies decline , and the value is expected to decrease when interest rates decline or delinquencies increase , due to the effect of changes in interest rates on prepayment speeds and delinquencies . however , prepayment speeds and delinquencies could increase even in the current interest rate environment , as a result of , among other things , a general economic recovery , government programs intended to foster refinancing activity or other reasons , which could reduce the value of our investments . moreover , the value of our excess msrs is subject to a variety of factors , as described under “risk factors.” in the fourth quarter of 2013 , the fair value of our investments in excess msrs ( directly and through equity method investees ) increased by approximately $ 8.2 million and the weighted average discount rate of the portfolio remained relatively unchanged at 12.5 % . we do not expect changes in interest rates to have a meaningful impact on the net interest spread of our agency arm and non-agency portfolios . our rmbs are primarily floating rate or hybrid ( i.e . , fixed to floating rate ) securities , which we generally finance with floating rate debt . therefore , while rising interest rates will generally result in a higher cost of financing , they will also result in a higher coupon payable on the securities . the net interest spread on our agency arm rmbs portfolio as of december 31 , 2013 was 0.94 % , which was the same as the net interest spread as of september 30 , 2013. the net interest spread on our non-agency rmbs portfolio as of december 31 , 2013 was 2.83 % , compared to 2.85 % as of september 30 , 2013 . 63 credit performance also affects the value of our portfolio . higher rates of delinquency and or defaults can reduce the value of our excess msrs , non-agency rmbs , agency rmbs and consumer loan portfolios . for our excess msrs on agency portfolios and our agency rmbs , delinquency and default rates have an effect similar to prepayment rates . our excess msrs on non-agency rmbs are not affected by delinquency rates because the servicer continues to advance the excess msr until a default occurs on the applicable loan ; defaults have an effect similar to prepayments . for the non-agency rmbs and consumer loans , higher default rates can lead to greater loss of principal . credit spreads continued to decrease , or “tighten , ” in the fourth quarter of 2013 relative to the first three quarters of 2013 , which has had a favorable impact on the value of our securities and loan portfolio . credit spreads measure the yield relative to a specified benchmark that the market demands on securities and loans based on such assets ' credit risk . for a discussion of the way in which interest rates , credit spreads and other market factors affect us , see “quantitative and qualitative disclosures about market risk.” the value of our consumer loan portfolio is influenced by , among other factors , the u.s. macroeconomic environment , and unemployment rates in particular . we believe that losses are highly correlated to unemployment ; therefore , we expect that an improvement in unemployment rates would support the value of our investment , while deterioration in unemployment rates would result in a decline in its value . our portfolio our portfolio is currently composed of servicing related assets , residential securities and loans and other investments , as described in more detail below . story_separator_special_tag net cost of funds excludes facility fees . ( c ) the following types of advances comprise the investment in servicer advances : 72 december 31 , 2013 principal and interest advances $ 1,516,715 escrow advances ( taxes and insurance advances ) 934,525 foreclosure advances 209,890 total $ 2,661,130 replace_table_token_19_th ( a ) story_separator_special_tag valign= `` bottom `` > $ 1,392,612 $ 3,434 $ ( 3,885 ) $ 1,392,161 $ 1,332,954 ( a ) amortized cost basis and carrying value exclude $ 10.6 million of principal receivables as of december 31 , 2013 . ( b ) fair value , which is equal to carrying value for all securities . the following table summarizes the reset dates of our agency arm rmbs portfolio as of december 31 , 2013 ( dollars in thousands ) : replace_table_token_20_th ( a ) of these investments , 90.6 % reset based on 12 month libor index , 1.8 % reset based on 6 month libor index , 0.4 % reset based on 1 month libor , and 7.3 % reset based on the 1 year treasury constant maturity rate . after the initial fixed period , 97.8 % of these securities will reset annually and 2.2 % will reset semi-annually . ( b ) amortized cost basis and carrying value exclude $ 10.6 million of principal receivables as of december 31 , 2013 . ( c ) represents the maximum change in the coupon at the end of the fixed rate period . ( d ) represents the maximum change in the coupon at each reset date subsequent to the first coupon adjustment . ( e ) represents the maximum coupon on the underlying security over its life . ( f ) represents recurrent weighted average months to the next interest rate reset . ( g ) not applicable as 57 of the securities ( 72 % of the current face of this category ) are past the first coupon adjustment period . the remaining 16 securities ( 28 % of the current face of this category ) have a maximum change in the coupon of 5.0 % at the end of the fixed rate period . the following table summarizes the characteristics of our agency arm rmbs portfolio and of the collateral underlying our agency arm rmbs as of december 31 , 2013 ( dollars in thousands ) : 75 replace_table_token_21_th ( a ) the year in which the securities were issued . ( b ) amortized cost basis and carrying value exclude $ 10.6 million of principal receivables as of december 31 , 2013 . ( c ) three month average constant prepayment rate . the following table summarizes the net interest spread of our agency arm rmbs portfolio as of december 31 , 2013 : net interest spread ( a ) weighted average asset yield 1.33 % weighted average funding cost 0.39 % net interest spread 0.94 % ( a ) the entire agency arm rmbs portfolio consists of floating rate securities . see table above for details on rate resets . non-agency rmbs the following table summarizes our non-agency rmbs portfolio as of december 31 , 2013 ( dollars in thousands ) : gross unrealized asset type outstanding face amount amortized cost basis gains losses carrying value ( a ) outstanding repurchase agreements non-agency rmbs $ 872,866 $ 566,760 $ 7,618 $ ( 3,953 ) $ 570,425 $ 287,757 ( a ) fair value , which is equal to carrying value for all securities . the following tables summarize the characteristics of our non-agency rmbs portfolio and of the collateral underlying our non-agency rmbs as of december 31 , 2013 ( dollars in thousands ) : replace_table_token_22_th 76 replace_table_token_23_th ( a ) the year in which the securities were issued . ( b ) ratings provided above were determined by third party rating agencies , represent the most recent credit ratings available as of the reporting date and may not be current . this excludes the ratings of the collateral underlying two bonds with a face amount of $ 6.3 million for which we were unable to obtain rating information . we had no assets that were on negative watch for possible downgrade by at least one rating agency as of december 31 , 2013 . ( c ) the percentage of the outstanding face amount of securities and residual interests that is subordinate to our investments . ( d ) the current amount of interest received on the underlying loans in excess of the interest paid on the securities , as a percentage of the outstanding collateral balance for the quarter ended december 31 , 2013 . ( e ) the weighted average loan size of the underlying collateral is $ 223.7 thousand . this excludes the collateral underlying one bond , due to unavailable information , with a face amount of $ 42.9 million . ( f ) the ratio of original upb of loans still outstanding . ( g ) three month average constant prepayment rate and default rates . ( h ) the percentage of underlying loans that are 90+ days delinquent , or in foreclosure or considered reo . the following table sets forth the geographic diversification of the loans underlying our non-agency rmbs as of december 31 , 2013 ( dollars in thousands ) : replace_table_token_24_th ( a ) represents collateral for which we were unable to obtain geographical information . the following table summarizes the net interest spread of our non-agency rmbs portfolio as of december 31 , 2013 : net interest spread ( a ) weighted average asset yield 4.68 % weighted average funding cost 1.85 % net interest spread 2.83 % ( a ) the non-agency rmbs portfolio consists of 99.2 % floating rate securities and 0.8 % fixed rate securities . real estate loans residential mortgage loans as of december 31 , 2013 , we had approximately $ 57.6 million outstanding face amount of residential mortgage loans . in february

outstanding debt net of restricted cash ( b ) includes working capital ( c ) based on cash basis equity call right in transaction 1 , the buyer also acquired the right , but not the obligation ( the “call right” ) , to purchase additional servicer advances , including the basic fee component of the related msrs , on terms substantially similar to the terms of transaction 1. as in transaction 1 , ( i ) the purchase price for the servicer advances , including the basic fee , will be the outstanding balance of the advances at the time of purchase and ( ii ) the buyer will be obligated to purchase future servicer advances on the related loans . as of december 31 , 2013 , the outstanding balance of the advances subject to the call right was approximately $ 3.1 billion and the upb of the related loans was approximately $ 71.5 billion . we previously acquired an interest in the excess msrs related to these loans , which are in pools 5 , 10 and 12. see above “—our portfolio—servicing related assets—excess msrs.” the call right expires on june 30 , 2014. the buyer exercised the call right , in part , in transaction 2. the outstanding balance of the servicer advances subject to the portion of the call right that was exercised was approximately $ 1.1 billion as of the exercise dates , february 28 , 2014 and march 5 , 2014. if the buyer exercises the call right in full , it expects to fund the total purchase price with approximately $ 2.5 billion of debt and $ 0.3 billion of equity , excluding working capital . as of the date hereof , the buyer has settled $ 1.1 billion of advances related to transaction 2 , which was financed with approximately $ 0.9 billion of debt . the remaining balance of the call right is expected to be settled in the second quarter of 2014. there can be no assurance that the remainder of the call right will be settled .

pending on the rate of resolution of the on-going covid-19 pandemic , we provisionally expect to report an interim futility analysis in the second half of 2021. currently enrollment completion and top-line data are projected to occur in the first half of 2022 . 84 to complement and diversify our portfolio of targeted mabs , we are developing a broad spectrum small molecule non-antibiotic anti-infective agent gallium citrate ( ar-501 ) . ar-501 is being developed in collaboration with the cystic fibrosis foundation ( “ cff ” ) as a chronic inhaled therapy to treat lung infections in cystic fibrosis patients . in 2018 , ar-501 was granted orphan drug , fast track and qualified infectious disease product ( “ qidp ” ) designations by the food and drug administration ( “ fda ” ) . during the third quarter of 2019 , the european medicines agency ( “ ema ” ) granted the program orphan drug designation . we initiated a phase 1/2a clinical trial in december 2018 of the inhalable formulation of gallium citrate , which is being evaluated for the treatment of chronic lung infections associated with cystic fibrosis . in june 2020 , we announced positive results from the phase 1 portion of our phase 1/2a clinical trial of ar-501 in which healthy subjects were enrolled . the safety monitoring committee ( “ smc ' ) and data safety monitoring board ( “ dsmb ” ) from the cystic fibrosis foundation supported that the study proceed at all dose levels to the phase 2a portion of the phase 1/2a trial in adult subjects with cystic fibrosis ( “ cf ” ) . the on-going covid-19 pandemic has caused an impact on the rate of clinical site activation . we provisionally expect to complete enrollment of the phase 2a portion with cystic fibrosis subjects in the second half of 2021 with top-line data available shortly afterward . in september 2020 , we announced that we reached an agreement with the fda to simplify our ar-501 phase 2 trial design for the treatment of chronic lung infections associated with cf . we proposed , and the fda agreed , to streamline ar-501 's forthcoming phase 2a clinical trial in cf patients , by removing the single ascending dose ( “ sad ” ) portion of the study and only conducting a multiple ascending dose ( “ mad ” ) regimen . furthermore , the fda also concurred with our proposal to expand the originally planned phase 2a protocol design into a phase 2a/2b study . this phase 2a/2b design will enable seamless and efficient advancement of the study from phase 2a into phase 2b using the same clinical study protocol . the data from the phase 2a will inform the dose selection and sample size expansion to achieve statistical significance in efficacy in phase 2b . to date , we have devoted substantially all of our resources to research and development efforts relating to our therapeutic candidates , including conducting clinical trials and developing manufacturing capabilities , in-licensing related intellectual property , protecting our intellectual property and providing general and administrative support for these operations . we have generated revenue from our payments under our collaboration strategic research and development contracts and federal awards and grants , as well as awards and grants from not-for-profit entities and fee for service to third-party entities . since our inception , we have funded our operations primarily through these sources and the issuance of common stock , convertible preferred stock , and debt securities . current clinical development activities are focused on ar-301 , ar712 and ar-501 . our expenses and resulting cash burn during the years ended december 31 , 2020 and 2019 , were largely due to costs associated with the phase 3 study of ar-301 for the treatment of vap caused by the s. aureus bacteria , preclinical development of ar-712 covid-19 mab , and the phase 1/2 study of ar-501 for the treatment of chronic lung infections associated with cystic fibrosis . financial overview we have incurred losses since our inception . our net losses were approximately $ 22.3 million and $ 29.7 million for the years ended december 31 , 2020 and 2019 , respectively . as of december 31 , 2020 we had approximately $ 8.2 million of cash and cash equivalents and had an accumulated deficit of approximately $ 123.1 million . substantially , all of our net losses have resulted from costs incurred in connection with our research and development programs , clinical trials , intellectual property matters , strengthening our manufacturing capabilities , and from general and administrative costs associated with our operations . we have not yet achieved commercialization of our products and have a cumulative net loss from our operations . we will continue to incur net losses for the foreseeable future . our consolidated financial statements have been prepared assuming that we will continue as a going concern . we will require additional capital to meet our long-term operating requirements . we expect to raise additional capital through the sale of equity and or debt securities . historically , our principal sources of cash have included proceeds from grant funding , fees for services performed , issuances of convertible debt and the sale of our preferred stock . our principal uses of cash have included cash used in operations . we expect that the principal uses of cash in the future will be for continuing operations , funding of research and development including our clinical trials and general working capital requirements . story_separator_special_tag we have determined that there is substantial doubt about our ability to continue as a going concern for at least the one-year period following our consolidated financial statements issuance date , which have been prepared assuming that we will continue as a going concern . we have not made any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of us to continue as a going concern . results of operations comparison of the years ended december 31 , 2020 and 2019 the following table summarizes our results of operations for the years ended december 31 , 2020 and 2019 ( in thousands ) : replace_table_token_3_th grant revenue . grant revenue remained fairly constant at approximately $ 1.0 million for both years ended december 31 , 2020 and 2019 related to the recognition of revenue for milestones achieved under the award from the cff during 2020 and 2019. research and development expenses . research and development expenses decreased by approximately $ 7.1 million from $ 24.1 million for year ended december 31 , 2019 to $ 17.0 million for the year ended december 31 , 2020 due primarily to : a decrease of approximately $ 5.4 million in spending on clinical trial activities and drug manufacturing expenses for the phase 2 study of our ar-105 program that was terminated during 2019 ; ​ a decrease of approximately $ 1.2 million in drug manufacturing expenses for the phase 3 study of our ar-301 program ; ​ a decrease of approximately $ 400,000 in spending on other research and development activities ; ​ 90 a decrease of approximately $ 200,000 in personnel , consulting and other related costs ; and ​ a decrease of approximately $ 200,000 in spending on clinical trial activities for the phase 1/2a study of our ar-501 program because the phase 1 portion of the study ended in the second quarter of 2020 . ​ these decreases were partially offset by : an increase of approximately $ 300,000 in spending on research and development activities for our covid-19 programs . ​ general and administrative expenses . general and administrative expenses increased by approximately $ 419,000 from $ 6.0 million for the year ended december 31 , 2019 to $ 6.4 million for the year ended december 31 , 2020 due primarily to increases in directors ' and officers ' related liabilities insurance expense , professional service fees , and rent expense due to the company entering into a new facility lease during the fourth quarter of 2020. these increases were partially offset by a decrease in patent related fees and delaware franchise taxes . interest income , net . interest income , net decreased by approximately $ 280,000 from $ 357,000 for the year ended december 31 , 2019 to $ 77,000 for the year ended december 31 , 2020. the decrease is primarily due to lower interest rates and a lower average cash balance during 2020 as compared to 2019. share of loss in equity method investment . loss from equity method investment decreased by approximately $ 942,000 from $ 951,000 for the year ended december 31 , 2019 to $ 9,000 for the year ended december 31 , 2020 as our share of loss from our minority interest calculated under the equity method was limited to the reduction of the net book value of the investment to zero as of march 31,2020. liquidity , capital resources and going concern as of december 31 , 2020 we had approximately $ 8.2 million of cash and cash equivalents and had an accumulated deficit of approximately $ 123.1 million . in july 2019 , we issued and sold 801,820 shares of restricted common stock in a private placement to sibv , and received total gross proceeds of $ 10 million , and after deducting commissions and offering costs of approximately $ 816,000 , the net proceeds were approximately $ 9.2 million . in addition , we received an upfront cash payment of $ 5 million upon the execution of an option agreement with sibv and received an upfront payment of $ 10 million in october 2019 in connection with a license agreement we executed in september 2019 with samr , and after deducting commissions of approximately $ 1.2 million , the net proceeds were approximately $ 13.8 million . in september 2019 , we entered into a common stock sales agreement ( the “ atm agreement ” ) with cantor fitzgerald & co. ( “ cantor ” ) under which we may offer and sell , from time to time , at our sole discretion , shares of common stock having an aggregate offering price of up to $ 25.0 million through cantor as our sales agent . we will pay cantor a commission of up to three percent ( 3.0 % ) of the gross sales proceeds of any common stock sold through cantor under the atm agreement , and also provided cantor with customary indemnification rights . our registration statement on form s-3 contemplated under the atm agreement was declared effective by the sec on september 5 , 2019. as a result of the limitations of general instruction i.b.6 of form s-3 , and in accordance with the terms of the atm agreement , we filed a prospectus supplement on may 14 , 2020 that registered the offer and sale of shares of our common stock having an aggregate offering price of up to $ 22.0 million from time to time through cantor . as of december 31 , 2020 , we have sold 7,883 shares of common stock under the atm agreement for gross proceeds of approximately $ 64,000 , and after deducting commissions , net proceeds were approximately $ 62,000. in may 2020 , we received a loan in the form of a note , from silicon valley bank ( “ svb ” ) in the

outstanding debt net of restricted cash ( b ) includes working capital ( c ) based on cash basis equity call right in transaction 1 , the buyer also acquired the right , but not the obligation ( the “call right” ) , to purchase additional servicer advances , including the basic fee component of the related msrs , on terms substantially similar to the terms of transaction 1. as in transaction 1 , ( i ) the purchase price for the servicer advances , including the basic fee , will be the outstanding balance of the advances at the time of purchase and ( ii ) the buyer will be obligated to purchase future servicer advances on the related loans . as of december 31 , 2013 , the outstanding balance of the advances subject to the call right was approximately $ 3.1 billion and the upb of the related loans was approximately $ 71.5 billion . we previously acquired an interest in the excess msrs related to these loans , which are in pools 5 , 10 and 12. see above “—our portfolio—servicing related assets—excess msrs.” the call right expires on june 30 , 2014. the buyer exercised the call right , in part , in transaction 2. the outstanding balance of the servicer advances subject to the portion of the call right that was exercised was approximately $ 1.1 billion as of the exercise dates , february 28 , 2014 and march 5 , 2014. if the buyer exercises the call right in full , it expects to fund the total purchase price with approximately $ 2.5 billion of debt and $ 0.3 billion of equity , excluding working capital . as of the date hereof , the buyer has settled $ 1.1 billion of advances related to transaction 2 , which was financed with approximately $ 0.9 billion of debt . the remaining balance of the call right is expected to be settled in the second quarter of 2014. there can be no assurance that the remainder of the call right will be settled .

pending on the rate of resolution of the on-going covid-19 pandemic , we provisionally expect to report an interim futility analysis in the second half of 2021. currently enrollment completion and top-line data are projected to occur in the first half of 2022 . 84 to complement and diversify our portfolio of targeted mabs , we are developing a broad spectrum small molecule non-antibiotic anti-infective agent gallium citrate ( ar-501 ) . ar-501 is being developed in collaboration with the cystic fibrosis foundation ( “ cff ” ) as a chronic inhaled therapy to treat lung infections in cystic fibrosis patients . in 2018 , ar-501 was granted orphan drug , fast track and qualified infectious disease product ( “ qidp ” ) designations by the food and drug administration ( “ fda ” ) . during the third quarter of 2019 , the european medicines agency ( “ ema ” ) granted the program orphan drug designation . we initiated a phase 1/2a clinical trial in december 2018 of the inhalable formulation of gallium citrate , which is being evaluated for the treatment of chronic lung infections associated with cystic fibrosis . in june 2020 , we announced positive results from the phase 1 portion of our phase 1/2a clinical trial of ar-501 in which healthy subjects were enrolled . the safety monitoring committee ( “ smc ' ) and data safety monitoring board ( “ dsmb ” ) from the cystic fibrosis foundation supported that the study proceed at all dose levels to the phase 2a portion of the phase 1/2a trial in adult subjects with cystic fibrosis ( “ cf ” ) . the on-going covid-19 pandemic has caused an impact on the rate of clinical site activation . we provisionally expect to complete enrollment of the phase 2a portion with cystic fibrosis subjects in the second half of 2021 with top-line data available shortly afterward . in september 2020 , we announced that we reached an agreement with the fda to simplify our ar-501 phase 2 trial design for the treatment of chronic lung infections associated with cf . we proposed , and the fda agreed , to streamline ar-501 's forthcoming phase 2a clinical trial in cf patients , by removing the single ascending dose ( “ sad ” ) portion of the study and only conducting a multiple ascending dose ( “ mad ” ) regimen . furthermore , the fda also concurred with our proposal to expand the originally planned phase 2a protocol design into a phase 2a/2b study . this phase 2a/2b design will enable seamless and efficient advancement of the study from phase 2a into phase 2b using the same clinical study protocol . the data from the phase 2a will inform the dose selection and sample size expansion to achieve statistical significance in efficacy in phase 2b . to date , we have devoted substantially all of our resources to research and development efforts relating to our therapeutic candidates , including conducting clinical trials and developing manufacturing capabilities , in-licensing related intellectual property , protecting our intellectual property and providing general and administrative support for these operations . we have generated revenue from our payments under our collaboration strategic research and development contracts and federal awards and grants , as well as awards and grants from not-for-profit entities and fee for service to third-party entities . since our inception , we have funded our operations primarily through these sources and the issuance of common stock , convertible preferred stock , and debt securities . current clinical development activities are focused on ar-301 , ar712 and ar-501 . our expenses and resulting cash burn during the years ended december 31 , 2020 and 2019 , were largely due to costs associated with the phase 3 study of ar-301 for the treatment of vap caused by the s. aureus bacteria , preclinical development of ar-712 covid-19 mab , and the phase 1/2 study of ar-501 for the treatment of chronic lung infections associated with cystic fibrosis . financial overview we have incurred losses since our inception . our net losses were approximately $ 22.3 million and $ 29.7 million for the years ended december 31 , 2020 and 2019 , respectively . as of december 31 , 2020 we had approximately $ 8.2 million of cash and cash equivalents and had an accumulated deficit of approximately $ 123.1 million . substantially , all of our net losses have resulted from costs incurred in connection with our research and development programs , clinical trials , intellectual property matters , strengthening our manufacturing capabilities , and from general and administrative costs associated with our operations . we have not yet achieved commercialization of our products and have a cumulative net loss from our operations . we will continue to incur net losses for the foreseeable future . our consolidated financial statements have been prepared assuming that we will continue as a going concern . we will require additional capital to meet our long-term operating requirements . we expect to raise additional capital through the sale of equity and or debt securities . historically , our principal sources of cash have included proceeds from grant funding , fees for services performed , issuances of convertible debt and the sale of our preferred stock . our principal uses of cash have included cash used in operations . we expect that the principal uses of cash in the future will be for continuing operations , funding of research and development including our clinical trials and general working capital requirements . story_separator_special_tag we have determined that there is substantial doubt about our ability to continue as a going concern for at least the one-year period following our consolidated financial statements issuance date , which have been prepared assuming that we will continue as a going concern . we have not made any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of us to continue as a going concern . results of operations comparison of the years ended december 31 , 2020 and 2019 the following table summarizes our results of operations for the years ended december 31 , 2020 and 2019 ( in thousands ) : replace_table_token_3_th grant revenue . grant revenue remained fairly constant at approximately $ 1.0 million for both years ended december 31 , 2020 and 2019 related to the recognition of revenue for milestones achieved under the award from the cff during 2020 and 2019. research and development expenses . research and development expenses decreased by approximately $ 7.1 million from $ 24.1 million for year ended december 31 , 2019 to $ 17.0 million for the year ended december 31 , 2020 due primarily to : a decrease of approximately $ 5.4 million in spending on clinical trial activities and drug manufacturing expenses for the phase 2 study of our ar-105 program that was terminated during 2019 ; ​ a decrease of approximately $ 1.2 million in drug manufacturing expenses for the phase 3 study of our ar-301 program ; ​ a decrease of approximately $ 400,000 in spending on other research and development activities ; ​ 90 a decrease of approximately $ 200,000 in personnel , consulting and other related costs ; and ​ a decrease of approximately $ 200,000 in spending on clinical trial activities for the phase 1/2a study of our ar-501 program because the phase 1 portion of the study ended in the second quarter of 2020 . ​ these decreases were partially offset by : an increase of approximately $ 300,000 in spending on research and development activities for our covid-19 programs . ​ general and administrative expenses . general and administrative expenses increased by approximately $ 419,000 from $ 6.0 million for the year ended december 31 , 2019 to $ 6.4 million for the year ended december 31 , 2020 due primarily to increases in directors ' and officers ' related liabilities insurance expense , professional service fees , and rent expense due to the company entering into a new facility lease during the fourth quarter of 2020. these increases were partially offset by a decrease in patent related fees and delaware franchise taxes . interest income , net . interest income , net decreased by approximately $ 280,000 from $ 357,000 for the year ended december 31 , 2019 to $ 77,000 for the year ended december 31 , 2020. the decrease is primarily due to lower interest rates and a lower average cash balance during 2020 as compared to 2019. share of loss in equity method investment . loss from equity method investment decreased by approximately $ 942,000 from $ 951,000 for the year ended december 31 , 2019 to $ 9,000 for the year ended december 31 , 2020 as our share of loss from our minority interest calculated under the equity method was limited to the reduction of the net book value of the investment to zero as of march 31,2020. liquidity , capital resources and going concern as of december 31 , 2020 we had approximately $ 8.2 million of cash and cash equivalents and had an accumulated deficit of approximately $ 123.1 million . in july 2019 , we issued and sold 801,820 shares of restricted common stock in a private placement to sibv , and received total gross proceeds of $ 10 million , and after deducting commissions and offering costs of approximately $ 816,000 , the net proceeds were approximately $ 9.2 million . in addition , we received an upfront cash payment of $ 5 million upon the execution of an option agreement with sibv and received an upfront payment of $ 10 million in october 2019 in connection with a license agreement we executed in september 2019 with samr , and after deducting commissions of approximately $ 1.2 million , the net proceeds were approximately $ 13.8 million . in september 2019 , we entered into a common stock sales agreement ( the “ atm agreement ” ) with cantor fitzgerald & co. ( “ cantor ” ) under which we may offer and sell , from time to time , at our sole discretion , shares of common stock having an aggregate offering price of up to $ 25.0 million through cantor as our sales agent . we will pay cantor a commission of up to three percent ( 3.0 % ) of the gross sales proceeds of any common stock sold through cantor under the atm agreement , and also provided cantor with customary indemnification rights . our registration statement on form s-3 contemplated under the atm agreement was declared effective by the sec on september 5 , 2019. as a result of the limitations of general instruction i.b.6 of form s-3 , and in accordance with the terms of the atm agreement , we filed a prospectus supplement on may 14 , 2020 that registered the offer and sale of shares of our common stock having an aggregate offering price of up to $ 22.0 million from time to time through cantor . as of december 31 , 2020 , we have sold 7,883 shares of common stock under the atm agreement for gross proceeds of approximately $ 64,000 , and after deducting commissions , net proceeds were approximately $ 62,000. in may 2020 , we received a loan in the form of a note , from silicon valley bank ( “ svb ” ) in the

cash flows our net cash flow from operating , investing and financing activities for the periods below were as follows ( in thousands ) : replace_table_token_4_th cash flows from operating activities . net cash used in operating activities was approximately $ 20.5 million for the year ended december 31 , 2020 , which was primarily due to our net loss of approximately $ 22.3 million , an increase of approximately $ 488,000 related to capitalized contract costs , resulting from the samr license agreement entered into in 2019 , a decrease of approximately $ 756,000 in accrued liabilities and other , a decrease of approximately $ 83,000 in accounts payables , and an increase of approximately $ 144,000 in other receivables . the cash used in operating activities was partially offset by a decrease of approximately $ 808,000 in prepaid expenses and a decrease of approximately $ 46,000 in other assets , and the non-cash charges of approximately $ 2.1 million related to stock-based compensation and approximately $ 337,000 in depreciation and amortization . net cash used in operating activities was approximately $ 8.2 million for the year ended december 31 , 2019 , which was primarily due to our net loss of approximately $ 29.7 million , an increase of approximately $ 1.6 million in capitalized contract costs , resulting from the samr license agreement , an increase of approximately $ 1.4 million in prepaid expenses , and a decrease of approximately $ 469,000 in accounts payable .

we expect that our expenses and capital requirements will increase substantially in connection with our ongoing activities , particularly if and as we :  conduct clinical trials for our product candidates ;  further develop our red platform ;  continue to discover and develop additional product candidates ;  maintain , expand and protect our intellectual property portfolio ; 131  hire additional clinical , scientific manufacturing and commercial personnel ;  expand in-house manufacturing capabilities , including through the renovation , customization and operation of our recently purchased manufacturing facility ;  establish a commercial manufacturing source and secure supply chain capacity sufficient to provide commercial quantities of any product candidates for which we may obtain regulatory approval ;  acquire or in-license other product candidates and technologies ;  seek regulatory approvals for any product candidates that successfully complete clinical trials ;  establish a sales , marketing and distribution infrastructure to commercialize any products for which we may obtain regulatory approval ; and  add operational , financial and management information systems and personnel , including personnel to support our product development and planned future commercialization efforts , as well as to support our transition to a public company . we will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for our product candidates . if we obtain regulatory approval for any of our product candidates , we expect to incur significant expenses related to developing our commercialization capability to support product sales , marketing and distribution . further , we expect to incur additional costs associated with operating as a public company . as a result , we will need substantial additional funding to support our continuing operations and pursue our growth strategy . until such time as we can generate significant revenue from product sales , if ever , we expect to finance our operations through a combination of equity offerings , debt financings , collaborations , strategic alliances and marketing , distribution or licensing arrangements . we may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms , or at all . if we fail to raise capital or enter into such agreements as , and when , needed , we may have to significantly delay , scale back or discontinue the development and commercialization of one or more of our product candidates . because of the numerous risks and uncertainties associated with pharmaceutical product development , we are unable to accurately predict the timing or amount of increased expenses or when , or if , we will be able to achieve or maintain profitability . even if we are able to generate product sales , we may not become profitable . if we fail to become profitable or are unable to sustain profitability on a continuing basis , then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations . as of december 31 , 2018 , we had cash , cash equivalents and investments of $ 404.1 million . we believe that our existing cash , cash equivalents and investments will enable us to fund our operating expenses , capital expenditure requirements , including the renovation and customization of our recently purchased manufacturing facility , and debt service payments into 2021. see “ —liquidity and capital resources . ” components of our results of operations revenue to date , we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products in the near future . if our development efforts for our product candidates are successful and result in regulatory approval or license or collaboration agreements with third parties , we may generate revenue in the future from product sales , payments from collaboration or license agreements that we may enter into with third parties , or any combination thereof . 132 operating expenses research and development expenses research and development expenses consist primarily of costs incurred for our research activities , including our drug discovery efforts , and the development of our product candidates , which include : employee‑related expenses , including salaries , related benefits and stock‑based compensation expense for employees engaged in research and development functions ; expenses incurred in connection with the preclinical and clinical development of our product candidates and research programs , including under agreements with third parties , such as consultants , contractors and contract research organizations , or cros ; the cost of developing and scaling our manufacturing process and manufacturing drug products for use in our preclinical studies and clinical trials , including under agreements with third parties , such as consultants , contractors and contract manufacturing organizations , or cmos ; laboratory supplies and research materials ; facilities , depreciation and other expenses , which include direct and allocated expenses for rent and maintenance of facilities and insurance ; and payments made under third‑party licensing agreements . we expense research and development costs as incurred . advance payments that we make for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses . the prepaid amounts are expensed as the related goods are delivered or the services are performed . our direct external research and development expenses are tracked on a program‑by‑program basis for clinical candidates and consist of costs that include fees , reimbursed materials and other costs paid to consultants , contractors , cmos and cros in connection with our preclinical and clinical development and manufacturing activities . story_separator_special_tag we did not invest our cash balances during the year ended december 31 , 2016. other expense was not significant for the years ended december 31 , 2017 and 2016. liquidity and capital resources since our inception , we have incurred significant operating losses . we have not yet commercialized any of our product candidates and we do not expect to generate revenue from sales of any product candidates for several years , if at all . to date , we have funded our operations with proceeds from the sale of preferred stock and issuance of debt and , most 139 recently , with proceeds from our initial public offering , or ipo . as of december 31 , 2018 , we had cash , cash equivalents and investments of $ 404.1 million . in july 2018 , we completed our ipo , pursuant to which we issued and sold 12,055,450 shares of common stock , inclusive of 1,572,450 shares pursuant to the full exercise of the underwriters ' option to purchase additional shares . we received proceeds of $ 254.3 million , after deducting underwriting discounts and commissions and other offering costs . in december 2018 , the company repaid all borrowings under its 2015 loan and security agreement and entered into a new loan and security agreement for an aggregate principal amount of $ 75.0 million , of which $ 25.0 million was drawn as of december 31 , 2018. story_separator_special_tag will be funded in three tranches of term loans of $ 25.0 million each . on the closing date , we made an initial draw of $ 25.0 million . the second tranche will be available to us through june 30 , 2019 , subject to certain conditions including the satisfaction of certain financial covenants . the third tranche will be available to us through june 30 , 2020 , subject to certain conditions including the food and drug administration 's acceptance of at least one of our investigational new drug applications and the satisfaction of certain financial covenants . interest on the outstanding loan balance will accrue at a rate of the one-month u.s. libor rate plus 5.50 % . monthly principal payments will commence 36 months after the closing date and will be amortized over the following 24 months . the term loans are subject to a prepayment fee of 1.00 % in the first year , 0.50 % in the second year and 0.25 % in the third year . in conjunction with 2018 credit facility , the company incurred issuance costs of $ 0.8 million . the loan agreement contains financial covenants that require us to maintain either a certain minimum cash balance or a minimum market capitalization threshold . we were in compliance with all such covenants as of december 31 , 2018. the loan agreement contains customary representations , warranties and covenants and also includes customary events of default , including payment defaults , breaches of covenants , change of control and a material adverse change default . upon the occurrence of an event of default , a default interest rate of an additional 4.00 % per annum may be applied to the outstanding loan balances , and the lenders may declare all outstanding obligations immediately due and payable . borrowings under the loan agreement are collateralized by substantially all of the company 's assets , other than its intellectual property . 141 funding requirements we expect our expenses to increase substantially in connection with our ongoing activities , particularly as we advance the preclinical activities and clinical trials for our product candidates in development . in addition , upon the closing of this offering , we expect to incur additional costs associated with operating as a public company . the timing and amount of our operating and capital expenditures will depend largely on : the timing and progress of preclinical and clinical development activities ; the commencement , enrollment or results of the planned clinical trials of our product candidates or any future clinical trials we may conduct , or changes in the development status of our product candidates ; the timing and outcome of regulatory review of our product candidates ; our decision to initiate a clinical trial , not to initiate a clinical trial or to terminate an existing clinical trial ; changes in laws or regulations applicable to our product candidates , including but not limited to clinical trial requirements for approvals ; developments concerning our cmos ; our ability to obtain materials to produce adequate product supply for any approved product or inability to do so at acceptable prices ; the costs and timing associated with the renovation , customization and operation of our planned multi‑suite manufacturing facility that we purchased in july 2018 ; our ability to establish collaborations if needed ; the costs and timing of future commercialization activities , including product manufacturing , marketing , sales and distribution , for any of our product candidates for which we obtain marketing approval ; the legal patent costs involved in prosecuting patent applications and enforcing patent claims and other intellectual property claims ; additions or departures of key scientific or management personnel ; unanticipated serious safety concerns related to the use of our product candidates ; and the terms and timing of any collaboration , license or other arrangement , including the terms and timing of any milestone payments thereunder . we believe that our existing cash , cash equivalents and investments , will enable us to fund our operating expenses , capital expenditure requirements , including the renovation and customization of the manufacturing facility we purchased in july 2018 , and debt service payments into 2021. we have based this estimate on assumptions that may prove to be wrong , and we could utilize our available capital resources sooner than we expect . until such time , if ever , as we can generate substantial product revenue , we expect to finance our operations

cash flows our net cash flow from operating , investing and financing activities for the periods below were as follows ( in thousands ) : replace_table_token_4_th cash flows from operating activities . net cash used in operating activities was approximately $ 20.5 million for the year ended december 31 , 2020 , which was primarily due to our net loss of approximately $ 22.3 million , an increase of approximately $ 488,000 related to capitalized contract costs , resulting from the samr license agreement entered into in 2019 , a decrease of approximately $ 756,000 in accrued liabilities and other , a decrease of approximately $ 83,000 in accounts payables , and an increase of approximately $ 144,000 in other receivables . the cash used in operating activities was partially offset by a decrease of approximately $ 808,000 in prepaid expenses and a decrease of approximately $ 46,000 in other assets , and the non-cash charges of approximately $ 2.1 million related to stock-based compensation and approximately $ 337,000 in depreciation and amortization . net cash used in operating activities was approximately $ 8.2 million for the year ended december 31 , 2019 , which was primarily due to our net loss of approximately $ 29.7 million , an increase of approximately $ 1.6 million in capitalized contract costs , resulting from the samr license agreement , an increase of approximately $ 1.4 million in prepaid expenses , and a decrease of approximately $ 469,000 in accounts payable .

we expect that our expenses and capital requirements will increase substantially in connection with our ongoing activities , particularly if and as we :  conduct clinical trials for our product candidates ;  further develop our red platform ;  continue to discover and develop additional product candidates ;  maintain , expand and protect our intellectual property portfolio ; 131  hire additional clinical , scientific manufacturing and commercial personnel ;  expand in-house manufacturing capabilities , including through the renovation , customization and operation of our recently purchased manufacturing facility ;  establish a commercial manufacturing source and secure supply chain capacity sufficient to provide commercial quantities of any product candidates for which we may obtain regulatory approval ;  acquire or in-license other product candidates and technologies ;  seek regulatory approvals for any product candidates that successfully complete clinical trials ;  establish a sales , marketing and distribution infrastructure to commercialize any products for which we may obtain regulatory approval ; and  add operational , financial and management information systems and personnel , including personnel to support our product development and planned future commercialization efforts , as well as to support our transition to a public company . we will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for our product candidates . if we obtain regulatory approval for any of our product candidates , we expect to incur significant expenses related to developing our commercialization capability to support product sales , marketing and distribution . further , we expect to incur additional costs associated with operating as a public company . as a result , we will need substantial additional funding to support our continuing operations and pursue our growth strategy . until such time as we can generate significant revenue from product sales , if ever , we expect to finance our operations through a combination of equity offerings , debt financings , collaborations , strategic alliances and marketing , distribution or licensing arrangements . we may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms , or at all . if we fail to raise capital or enter into such agreements as , and when , needed , we may have to significantly delay , scale back or discontinue the development and commercialization of one or more of our product candidates . because of the numerous risks and uncertainties associated with pharmaceutical product development , we are unable to accurately predict the timing or amount of increased expenses or when , or if , we will be able to achieve or maintain profitability . even if we are able to generate product sales , we may not become profitable . if we fail to become profitable or are unable to sustain profitability on a continuing basis , then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations . as of december 31 , 2018 , we had cash , cash equivalents and investments of $ 404.1 million . we believe that our existing cash , cash equivalents and investments will enable us to fund our operating expenses , capital expenditure requirements , including the renovation and customization of our recently purchased manufacturing facility , and debt service payments into 2021. see “ —liquidity and capital resources . ” components of our results of operations revenue to date , we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products in the near future . if our development efforts for our product candidates are successful and result in regulatory approval or license or collaboration agreements with third parties , we may generate revenue in the future from product sales , payments from collaboration or license agreements that we may enter into with third parties , or any combination thereof . 132 operating expenses research and development expenses research and development expenses consist primarily of costs incurred for our research activities , including our drug discovery efforts , and the development of our product candidates , which include : employee‑related expenses , including salaries , related benefits and stock‑based compensation expense for employees engaged in research and development functions ; expenses incurred in connection with the preclinical and clinical development of our product candidates and research programs , including under agreements with third parties , such as consultants , contractors and contract research organizations , or cros ; the cost of developing and scaling our manufacturing process and manufacturing drug products for use in our preclinical studies and clinical trials , including under agreements with third parties , such as consultants , contractors and contract manufacturing organizations , or cmos ; laboratory supplies and research materials ; facilities , depreciation and other expenses , which include direct and allocated expenses for rent and maintenance of facilities and insurance ; and payments made under third‑party licensing agreements . we expense research and development costs as incurred . advance payments that we make for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses . the prepaid amounts are expensed as the related goods are delivered or the services are performed . our direct external research and development expenses are tracked on a program‑by‑program basis for clinical candidates and consist of costs that include fees , reimbursed materials and other costs paid to consultants , contractors , cmos and cros in connection with our preclinical and clinical development and manufacturing activities . story_separator_special_tag we did not invest our cash balances during the year ended december 31 , 2016. other expense was not significant for the years ended december 31 , 2017 and 2016. liquidity and capital resources since our inception , we have incurred significant operating losses . we have not yet commercialized any of our product candidates and we do not expect to generate revenue from sales of any product candidates for several years , if at all . to date , we have funded our operations with proceeds from the sale of preferred stock and issuance of debt and , most 139 recently , with proceeds from our initial public offering , or ipo . as of december 31 , 2018 , we had cash , cash equivalents and investments of $ 404.1 million . in july 2018 , we completed our ipo , pursuant to which we issued and sold 12,055,450 shares of common stock , inclusive of 1,572,450 shares pursuant to the full exercise of the underwriters ' option to purchase additional shares . we received proceeds of $ 254.3 million , after deducting underwriting discounts and commissions and other offering costs . in december 2018 , the company repaid all borrowings under its 2015 loan and security agreement and entered into a new loan and security agreement for an aggregate principal amount of $ 75.0 million , of which $ 25.0 million was drawn as of december 31 , 2018. story_separator_special_tag will be funded in three tranches of term loans of $ 25.0 million each . on the closing date , we made an initial draw of $ 25.0 million . the second tranche will be available to us through june 30 , 2019 , subject to certain conditions including the satisfaction of certain financial covenants . the third tranche will be available to us through june 30 , 2020 , subject to certain conditions including the food and drug administration 's acceptance of at least one of our investigational new drug applications and the satisfaction of certain financial covenants . interest on the outstanding loan balance will accrue at a rate of the one-month u.s. libor rate plus 5.50 % . monthly principal payments will commence 36 months after the closing date and will be amortized over the following 24 months . the term loans are subject to a prepayment fee of 1.00 % in the first year , 0.50 % in the second year and 0.25 % in the third year . in conjunction with 2018 credit facility , the company incurred issuance costs of $ 0.8 million . the loan agreement contains financial covenants that require us to maintain either a certain minimum cash balance or a minimum market capitalization threshold . we were in compliance with all such covenants as of december 31 , 2018. the loan agreement contains customary representations , warranties and covenants and also includes customary events of default , including payment defaults , breaches of covenants , change of control and a material adverse change default . upon the occurrence of an event of default , a default interest rate of an additional 4.00 % per annum may be applied to the outstanding loan balances , and the lenders may declare all outstanding obligations immediately due and payable . borrowings under the loan agreement are collateralized by substantially all of the company 's assets , other than its intellectual property . 141 funding requirements we expect our expenses to increase substantially in connection with our ongoing activities , particularly as we advance the preclinical activities and clinical trials for our product candidates in development . in addition , upon the closing of this offering , we expect to incur additional costs associated with operating as a public company . the timing and amount of our operating and capital expenditures will depend largely on : the timing and progress of preclinical and clinical development activities ; the commencement , enrollment or results of the planned clinical trials of our product candidates or any future clinical trials we may conduct , or changes in the development status of our product candidates ; the timing and outcome of regulatory review of our product candidates ; our decision to initiate a clinical trial , not to initiate a clinical trial or to terminate an existing clinical trial ; changes in laws or regulations applicable to our product candidates , including but not limited to clinical trial requirements for approvals ; developments concerning our cmos ; our ability to obtain materials to produce adequate product supply for any approved product or inability to do so at acceptable prices ; the costs and timing associated with the renovation , customization and operation of our planned multi‑suite manufacturing facility that we purchased in july 2018 ; our ability to establish collaborations if needed ; the costs and timing of future commercialization activities , including product manufacturing , marketing , sales and distribution , for any of our product candidates for which we obtain marketing approval ; the legal patent costs involved in prosecuting patent applications and enforcing patent claims and other intellectual property claims ; additions or departures of key scientific or management personnel ; unanticipated serious safety concerns related to the use of our product candidates ; and the terms and timing of any collaboration , license or other arrangement , including the terms and timing of any milestone payments thereunder . we believe that our existing cash , cash equivalents and investments , will enable us to fund our operating expenses , capital expenditure requirements , including the renovation and customization of the manufacturing facility we purchased in july 2018 , and debt service payments into 2021. we have based this estimate on assumptions that may prove to be wrong , and we could utilize our available capital resources sooner than we expect . until such time , if ever , as we can generate substantial product revenue , we expect to finance our operations

cash flows the following table summarizes our sources and uses of cash for each of the periods presented : replace_table_token_8_th operating activities during the year ended december 31 , 2018 , operating activities used $ 58.3 million of cash , primarily resulting from our net loss of $ 89.2 million , partially offset by net non‑cash charges of $ 30.7 million , primarily consisting of stock‑based compensation expense . changes in our operating assets and liabilities for the year ended december 31 , 2018 provided net cash of $ 0.1 million , which consisted primarily of a $ 9.2 million increase in accounts payable and accrued expenses and other current liabilities , offset by a $ 9.1 million increase in prepaid expenses and other current assets and others assets . during the year ended december 31 , 2017 , operating activities used $ 21.9 million of cash , primarily resulting from our net loss of $ 43.8 million , partially offset by net non‑cash charges of $ 19.2 million , primarily consisting of stock‑based compensation expense , and net cash provided by changes in our operating assets and liabilities of $ 2.7 million . net cash provided by changes in our operating assets and liabilities for the year ended december 31 , 2017 consisted primarily of a $ 3.4 million increase in accounts payable and accrued expenses and other current liabilities , partially offset by a $ 0.6 million increase in prepaid expenses and other current assets . during the year ended december 31 , 2016 , operating activities used $ 9.5 million of cash , primarily resulting from our net loss of $ 11.0 million , partially offset by net non-cash charges of $ 0.4 million and net cash provided by changes in our operating assets and liabilities of $ 1.1 million .

as a result of a greater percentage of financial aid available , a greater number of students were able to finance their educations entirely from financial aid sources . while this provided greater opportunities for our students , it also severely impacted our ability to comply with the 90/10 rule . because of the increases in title iv student loan limits and grants in recent years , it has become difficult for us to comply with the 90/10 rule . we considered two alternatives to aid us with our compliance with the 90/10 rule : increasing tuition prices above the applicable maximums for title iv student loans and grants or restructuring certain of our programs . we decided to restructure program offerings . this resulted in increasing the financing gaps between tuition and the amount of financial aid available to cover the financing gap . this resulted in students having to attend classes longer each week as well as students having to make regular monthly cash payments . these actions have led to a decrease in the number of students who have enrolled at our institutions . our operating expenses , while a function of our revenue growth , contain a high fixed cost component . our educational services and facilities expenses as a percentage of revenues increased to 50.1 % in 2013 from 47.2 % in 2012 and 43.1 % in 2011 , and selling , general and administrative expenses increased as a percentage of revenue to 51.7 % in 2013 from 49.9 % in 2012 and 47.5 % in 2011. as our enrollment declined , we experienced significant negative leverage due to lower utilization at our schools . 41 index our revenues are directly dependent on the average number of students enrolled in our schools and the courses in which they are enrolled . our average enrollment is impacted by the number of new students starting , re-entering , graduating and withdrawing from our schools . in addition , our diploma/certificate programs range from 22 to 106 weeks , our associate 's degree programs range from 48 to 156 weeks , and our bachelor 's degree programs range from 142 to 208 weeks , and students attend classes for different amounts of time per week depending on the school and program in which they are enrolled . because we start new students every month , our total student population changes monthly . the number of students enrolling or re-entering our programs each month is driven by the demand for our programs , the effectiveness of our marketing and advertising , the availability of financial aid and other sources of funding , the number of recent high school graduates , the job market and seasonality . our retention and graduation rates are influenced by the quality and commitment of our teachers and student services personnel , the effectiveness of our programs , the placement rate and success of our graduates and the availability of financial aid . although similar courses have comparable tuition rates , the tuition rates vary among our numerous programs . as more of our schools receive approval to offer associate 's degree and bachelor 's degree programs , which are longer than our diploma degree programs , we would expect our average enrollment and the average length of stay of our students to increase . the majority of students enrolled at our schools rely on funds received under various government-sponsored student financial aid programs to pay a substantial portion of their tuition and other education-related expenses . the largest of these programs are title iv programs which represented approximately 80 % of our cash receipts relating to revenues in 2013. we extend credit for tuition and fees to many of our students that attend our campuses . our credit risk is mitigated through the student 's participation in federally funded financial aid programs unless students withdraw prior to the receipt by us of title iv funds for those students . under title iv programs , the government funds a certain portion of a students ' tuition , with the remainder , referred to as “ the gap , ” financed by students themselves under private party loans , including credit extended by us . the gap amount has continued to increase over the last several years as we have raised tuition on average for the last several years by 3 % per year and restructured certain programs to reduce the amount of financial aid available to students , while funds received from title iv programs increased at lower rates . the additional financing that we are providing to students may expose us to greater credit risk and can impact our liquidity . however , we believe that these risks are somewhat mitigated due to the following : · annual federal title iv loan limits , including grants have increased . title iv funds represented 80 % of our 2013 revenue on a cash basis ; · our internal financing is provided to students only after all other funding resources have been exhausted ; thus , by the time this funding is available , students have completed approximately two-thirds of their curriculum and are more likely to graduate ; · funding for students who interrupt their education is typically covered by title iv funds as long as they have been properly packaged for financial aid ; and · we have a good collection history with our graduates . historically , 90 % of all of our graduates have repaid their balances in full . for the year ended december 31 , 2013 , approximately 80 % of our revenue on a cash basis was derived from title iv funds and approximately 20 % was derived from state grants and cash payments made by students . the hea requires institutions to use the cash basis of accounting when determining its compliance with the 90/10 rule . story_separator_special_tag the fair values of these reporting units were estimated using the expected present value of future cash flows . no other reporting unit 's carrying goodwill amount exceeded or approximated its implied value . at december 31 , 2011 , we tested goodwill for impairment and determined we did not have an impairment . we concluded that the decrease in our market capitalization as of september 30 , 2011 was an indicator of potential impairment and , accordingly , we tested goodwill for impairment . the tests indicated that five of the company 's reporting units were impaired , which resulted in an expense of $ 9.3 million in the third quarter of 2011 ( $ 1.0 million included in discontinued operations ) . stock-based compensation . we currently account for stock-based employee compensation arrangements by using the black-scholes valuation model and utilize straight-line amortization of compensation expense over the requisite service period of the grant . we make an estimate of expected forfeitures at the time options are granted . 45 index the fair value of the stock options used to compute stock-based compensation is the estimated present value at the date of grant using the black-scholes option pricing model . during 2013 and 2011 , there were no new stock option grants . the weighted average fair values of options granted during 2012 was $ 2.52 using the following weighted average assumptions for grants : at december 31 , 2012 expected volatility 51.25 % expected dividend yield 4 % expected life ( term ) 4.65 years risk-free interest rate 0.87 % weighted-average exercise price during the year $ 7.79 the expected volatility considers the volatility of our common stock that has been traded for a period commensurate with the expected life . the expected term of options granted represents the period of time that options granted are expected to be outstanding based on historical experience . the risk-free rate used is based on the published u.s. treasury yield curve in effect at the time of grant for instruments with a similar life . the 2012 expected dividend yield presumes a set dividend rate based on the current dividend yield . income taxes . we account for income taxes in accordance with fasb asc topic 740 , “ income taxes ” ( “ asc 740 ” ) . this statement requires an asset and a liability approach for measuring deferred taxes based on temporary differences between the financial statement and tax bases of assets and liabilities existing at each balance sheet date using enacted tax rates for years in which taxes are expected to be paid or recovered . in accordance with asc 740 , we assess our deferred tax asset to determine whether all or any portion of the asset is more likely than not unrealizable . a valuation allowance is required to be established or maintained when , based on currently available information , it is more likely than not that all or a portion of a deferred tax asset will not be realized . in accordance with asc 740 , our assessment considers whether there has been sufficient income in recent years and whether sufficient income is expected in future years in order to utilize the deferred tax asset . in evaluating the realizability of deferred income tax assets we considered , among other things , historical levels of income , expected future income , the expected timing of the reversals of existing temporary reporting differences , and the expected impact of tax planning strategies that may be implemented to prevent the potential loss of future income tax benefits . significant judgment is required in determining the future tax consequences of events that have been recognized in our consolidated financial statements and or tax returns . differences between anticipated and actual outcomes of these future tax consequences could have a material impact on our consolidated financial position or results of operations . changes in , among other things , income tax legislation , statutory income tax rates , or future income levels could materially impact our valuation of income tax assets and liabilities and could cause our income tax provision to vary significantly among financial reporting periods . we recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense . during the years ended december 31 , 2013 and 2012 , the interest and penalties expense associated with uncertain tax positions are not significant to our results of operations or financial position . results of continuing operations for the three years ended december 31 , 2013 the following table sets forth selected consolidated statements of continuing operations data as a percentage of revenues for each of the periods indicated : replace_table_token_8_th 46 index year ended december 31 , 2013 compared to year ended december 31 , 2012 revenue . revenue decreased by $ 37.7 million , or 9.9 % , to $ 345.0 million for the year ended december 31 , 2013 from $ 382.8 million for the year ended december 31 , 2012. the decrease was primarily attributable to a 12.3 % decrease in average student population , which decreased to 15,009 for the year ended december 31 , 2013 from 17,121 for the year ended december 31 , 2012 , partially offset by a 2.8 % increase in average revenue per student . we began 2013 with approximately 2,200 , or 12.3 % , fewer students than we had on january 1 , 2012. the average student population was negatively impacted by regulatory changes under the appropriations act , which eliminated our ability to enroll atb students as well as our decision in early 2012 to stop enrolling fully online students . in addition , w e believe current economic conditions have increased the number of potential students who are hesitant to incur debt and therefore , have not enrolled in our schools . these factors have led to a significant decline in student starts and average student population .

cash flows the following table summarizes our sources and uses of cash for each of the periods presented : replace_table_token_8_th operating activities during the year ended december 31 , 2018 , operating activities used $ 58.3 million of cash , primarily resulting from our net loss of $ 89.2 million , partially offset by net non‑cash charges of $ 30.7 million , primarily consisting of stock‑based compensation expense . changes in our operating assets and liabilities for the year ended december 31 , 2018 provided net cash of $ 0.1 million , which consisted primarily of a $ 9.2 million increase in accounts payable and accrued expenses and other current liabilities , offset by a $ 9.1 million increase in prepaid expenses and other current assets and others assets . during the year ended december 31 , 2017 , operating activities used $ 21.9 million of cash , primarily resulting from our net loss of $ 43.8 million , partially offset by net non‑cash charges of $ 19.2 million , primarily consisting of stock‑based compensation expense , and net cash provided by changes in our operating assets and liabilities of $ 2.7 million . net cash provided by changes in our operating assets and liabilities for the year ended december 31 , 2017 consisted primarily of a $ 3.4 million increase in accounts payable and accrued expenses and other current liabilities , partially offset by a $ 0.6 million increase in prepaid expenses and other current assets . during the year ended december 31 , 2016 , operating activities used $ 9.5 million of cash , primarily resulting from our net loss of $ 11.0 million , partially offset by net non-cash charges of $ 0.4 million and net cash provided by changes in our operating assets and liabilities of $ 1.1 million .

as a result of a greater percentage of financial aid available , a greater number of students were able to finance their educations entirely from financial aid sources . while this provided greater opportunities for our students , it also severely impacted our ability to comply with the 90/10 rule . because of the increases in title iv student loan limits and grants in recent years , it has become difficult for us to comply with the 90/10 rule . we considered two alternatives to aid us with our compliance with the 90/10 rule : increasing tuition prices above the applicable maximums for title iv student loans and grants or restructuring certain of our programs . we decided to restructure program offerings . this resulted in increasing the financing gaps between tuition and the amount of financial aid available to cover the financing gap . this resulted in students having to attend classes longer each week as well as students having to make regular monthly cash payments . these actions have led to a decrease in the number of students who have enrolled at our institutions . our operating expenses , while a function of our revenue growth , contain a high fixed cost component . our educational services and facilities expenses as a percentage of revenues increased to 50.1 % in 2013 from 47.2 % in 2012 and 43.1 % in 2011 , and selling , general and administrative expenses increased as a percentage of revenue to 51.7 % in 2013 from 49.9 % in 2012 and 47.5 % in 2011. as our enrollment declined , we experienced significant negative leverage due to lower utilization at our schools . 41 index our revenues are directly dependent on the average number of students enrolled in our schools and the courses in which they are enrolled . our average enrollment is impacted by the number of new students starting , re-entering , graduating and withdrawing from our schools . in addition , our diploma/certificate programs range from 22 to 106 weeks , our associate 's degree programs range from 48 to 156 weeks , and our bachelor 's degree programs range from 142 to 208 weeks , and students attend classes for different amounts of time per week depending on the school and program in which they are enrolled . because we start new students every month , our total student population changes monthly . the number of students enrolling or re-entering our programs each month is driven by the demand for our programs , the effectiveness of our marketing and advertising , the availability of financial aid and other sources of funding , the number of recent high school graduates , the job market and seasonality . our retention and graduation rates are influenced by the quality and commitment of our teachers and student services personnel , the effectiveness of our programs , the placement rate and success of our graduates and the availability of financial aid . although similar courses have comparable tuition rates , the tuition rates vary among our numerous programs . as more of our schools receive approval to offer associate 's degree and bachelor 's degree programs , which are longer than our diploma degree programs , we would expect our average enrollment and the average length of stay of our students to increase . the majority of students enrolled at our schools rely on funds received under various government-sponsored student financial aid programs to pay a substantial portion of their tuition and other education-related expenses . the largest of these programs are title iv programs which represented approximately 80 % of our cash receipts relating to revenues in 2013. we extend credit for tuition and fees to many of our students that attend our campuses . our credit risk is mitigated through the student 's participation in federally funded financial aid programs unless students withdraw prior to the receipt by us of title iv funds for those students . under title iv programs , the government funds a certain portion of a students ' tuition , with the remainder , referred to as “ the gap , ” financed by students themselves under private party loans , including credit extended by us . the gap amount has continued to increase over the last several years as we have raised tuition on average for the last several years by 3 % per year and restructured certain programs to reduce the amount of financial aid available to students , while funds received from title iv programs increased at lower rates . the additional financing that we are providing to students may expose us to greater credit risk and can impact our liquidity . however , we believe that these risks are somewhat mitigated due to the following : · annual federal title iv loan limits , including grants have increased . title iv funds represented 80 % of our 2013 revenue on a cash basis ; · our internal financing is provided to students only after all other funding resources have been exhausted ; thus , by the time this funding is available , students have completed approximately two-thirds of their curriculum and are more likely to graduate ; · funding for students who interrupt their education is typically covered by title iv funds as long as they have been properly packaged for financial aid ; and · we have a good collection history with our graduates . historically , 90 % of all of our graduates have repaid their balances in full . for the year ended december 31 , 2013 , approximately 80 % of our revenue on a cash basis was derived from title iv funds and approximately 20 % was derived from state grants and cash payments made by students . the hea requires institutions to use the cash basis of accounting when determining its compliance with the 90/10 rule . story_separator_special_tag the fair values of these reporting units were estimated using the expected present value of future cash flows . no other reporting unit 's carrying goodwill amount exceeded or approximated its implied value . at december 31 , 2011 , we tested goodwill for impairment and determined we did not have an impairment . we concluded that the decrease in our market capitalization as of september 30 , 2011 was an indicator of potential impairment and , accordingly , we tested goodwill for impairment . the tests indicated that five of the company 's reporting units were impaired , which resulted in an expense of $ 9.3 million in the third quarter of 2011 ( $ 1.0 million included in discontinued operations ) . stock-based compensation . we currently account for stock-based employee compensation arrangements by using the black-scholes valuation model and utilize straight-line amortization of compensation expense over the requisite service period of the grant . we make an estimate of expected forfeitures at the time options are granted . 45 index the fair value of the stock options used to compute stock-based compensation is the estimated present value at the date of grant using the black-scholes option pricing model . during 2013 and 2011 , there were no new stock option grants . the weighted average fair values of options granted during 2012 was $ 2.52 using the following weighted average assumptions for grants : at december 31 , 2012 expected volatility 51.25 % expected dividend yield 4 % expected life ( term ) 4.65 years risk-free interest rate 0.87 % weighted-average exercise price during the year $ 7.79 the expected volatility considers the volatility of our common stock that has been traded for a period commensurate with the expected life . the expected term of options granted represents the period of time that options granted are expected to be outstanding based on historical experience . the risk-free rate used is based on the published u.s. treasury yield curve in effect at the time of grant for instruments with a similar life . the 2012 expected dividend yield presumes a set dividend rate based on the current dividend yield . income taxes . we account for income taxes in accordance with fasb asc topic 740 , “ income taxes ” ( “ asc 740 ” ) . this statement requires an asset and a liability approach for measuring deferred taxes based on temporary differences between the financial statement and tax bases of assets and liabilities existing at each balance sheet date using enacted tax rates for years in which taxes are expected to be paid or recovered . in accordance with asc 740 , we assess our deferred tax asset to determine whether all or any portion of the asset is more likely than not unrealizable . a valuation allowance is required to be established or maintained when , based on currently available information , it is more likely than not that all or a portion of a deferred tax asset will not be realized . in accordance with asc 740 , our assessment considers whether there has been sufficient income in recent years and whether sufficient income is expected in future years in order to utilize the deferred tax asset . in evaluating the realizability of deferred income tax assets we considered , among other things , historical levels of income , expected future income , the expected timing of the reversals of existing temporary reporting differences , and the expected impact of tax planning strategies that may be implemented to prevent the potential loss of future income tax benefits . significant judgment is required in determining the future tax consequences of events that have been recognized in our consolidated financial statements and or tax returns . differences between anticipated and actual outcomes of these future tax consequences could have a material impact on our consolidated financial position or results of operations . changes in , among other things , income tax legislation , statutory income tax rates , or future income levels could materially impact our valuation of income tax assets and liabilities and could cause our income tax provision to vary significantly among financial reporting periods . we recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense . during the years ended december 31 , 2013 and 2012 , the interest and penalties expense associated with uncertain tax positions are not significant to our results of operations or financial position . results of continuing operations for the three years ended december 31 , 2013 the following table sets forth selected consolidated statements of continuing operations data as a percentage of revenues for each of the periods indicated : replace_table_token_8_th 46 index year ended december 31 , 2013 compared to year ended december 31 , 2012 revenue . revenue decreased by $ 37.7 million , or 9.9 % , to $ 345.0 million for the year ended december 31 , 2013 from $ 382.8 million for the year ended december 31 , 2012. the decrease was primarily attributable to a 12.3 % decrease in average student population , which decreased to 15,009 for the year ended december 31 , 2013 from 17,121 for the year ended december 31 , 2012 , partially offset by a 2.8 % increase in average revenue per student . we began 2013 with approximately 2,200 , or 12.3 % , fewer students than we had on january 1 , 2012. the average student population was negatively impacted by regulatory changes under the appropriations act , which eliminated our ability to enroll atb students as well as our decision in early 2012 to stop enrolling fully online students . in addition , w e believe current economic conditions have increased the number of potential students who are hesitant to incur debt and therefore , have not enrolled in our schools . these factors have led to a significant decline in student starts and average student population .

liquidity and capital resources our primary capital requirements are for facilities expansion and maintenance , acquisitions and the development of new programs . our principal sources of liquidity have been cash provided by operating activities and borrowings under our credit agreement . the following chart summarizes the principal elements of our cash flow for each of the three years in the period ended december 31 , 2013 : replace_table_token_9_th as of december 31 , 2013 , we had cash , cash equivalents and restricted cash of $ 67.4 million , including $ 54.5 million of restricted cash , representing an increase of approximately $ 5.7 million as compared to $ 61.7 million of cash and cash equivalents as of december 31 , 2012. this increase is primarily due to $ 54.5 million of borrowings under our credit facility ( as defined below ) during the fourth quarter of 2013 compared to $ 37.5 million of borrowings during the fourth quarter of 2012 partially offset by a net loss during the year ended december 31 , 2013 of $ 51.3 million compared to a net loss during the year ended december 31 , 2012 of $ 37.2 million . historically , we have financed our operating activities and organic growth primarily through cash generated from operations . we have financed acquisitions primarily through borrowings under our credit facility and cash generated from operations . we currently anticipate that we will be able to meet our short-term cash needs , as well as our need to fund operations and meet our obligations beyond the next twelve months with cash generated by operations , existing cash balances and borrowings under our credit facility . in addition , we may also consider accessing the financial markets in the future as a source of liquidity for capital requirements , acquisitions and general corporate purposes to the extent such requirements are not satisfied by cash on hand , borrowings under our credit facility or operating cash flows . however , we can not assure you that we will be able to raise additional capital on favorable terms , if at all .

we will make further investments in people and infrastructure in fiscal 2012 , building on the progress we have made through fiscal 2011 , primarily focused on the development of our omni-channel sales strategies , continued progress on our product assortment planning and supply chain solutions , the move of our ecommerce fulfillment center to edwardsville , kansas , and a capital investment related to building a new home office planned to open in the second quarter of fiscal 2012. we anticipate inventory levels per square foot to grow slightly . we expect our cash , short-term investments and working capital to increase , and do not anticipate any borrowings on our credit facility . general net sales constitute gross sales net of actual and estimated returns and deductions for promotions . net sales include our in-store sales and our ecommerce sales , which includes ecommerce shipping revenue . ecommerce sales were 7.3 % , 4.7 % and 2.5 % of total net sales for fiscal 2011 , 2010 and 2009. sales of gift cards are deferred and recognized when gift cards are redeemed . the amount of the gift card liability is determined taking into account our estimate of the portion of gift cards that will not be redeemed or recovered ( “gift card breakage” ) . gift card breakage is recognized as revenue after 24 months , at which time the likelihood of redemption is considered remote based on our historical redemption data . we report “comparable store sales” based on net sales beginning on the first anniversary of the first day of operation of a new store . our comparable store sales also include our ecommerce sales , due to the substantial integration of our stores and ecommerce business . changes in our comparable store sales between two periods are based on net sales of stores which were in operation during both of the two periods being compared and , if a store is included in the calculation of comparable store sales for only a portion of one of the two periods being compared , then that store is included in the calculation for only the comparable portion of the other period . any change in square footage of an existing comparable store , including remodels and relocations , does not eliminate that store from inclusion in the calculation of comparable store sales . there may be variations in the way in which some of our competitors and other apparel retailers calculate comparable or same store sales . as a result , data herein regarding our comparable store sales may not be comparable to similar data made available by our competitors or other retailers . cost of goods sold consists of branded merchandise costs and our private label merchandise costs including design , sourcing , importing and inbound freight costs . our cost of goods sold also includes shrinkage and buying , occupancy , distribution and warehousing costs . this may not be comparable to the way in which our competitors or other retailers compute their cost of goods sold . we receive cash consideration from vendors , which have been reported as a reduction cost of goods sold if the inventory has sold , as a reduction of the carrying value of the 29 inventory if the inventory is still on hand , or a reduction of selling , general and administrative expense if the amounts are reimbursements of specific , incremental and identifiable costs of selling the vendors ' products . with respect to the freight component of our ecommerce sales , we arrange and pay the freight for our customers and bill them for this service , unless our customers have their product shipped to one of our stores or we have free shipping promotions to our customers , in which case we do not bill our customers . such amounts billed are included in net sales and the related freight cost is charged to cost of goods sold . selling , general and administrative expenses consist primarily of store personnel wages and benefits , administrative staff and infrastructure expenses , outbound freight , store supplies , depreciation on fixed assets at our home office and stores , facility expenses and training , advertising and marketing costs . credit card fees , insurance , public company expenses , legal expenses and other miscellaneous operating costs are also included in selling , general and administrative expenses . this may not be comparable to the way in which our competitors or other retailers compute their selling , general and administrative expenses . key performance indicators our management evaluates the following items , which we consider key performance indicators , in assessing our performance : comparable store sales . as previously described in detail under the caption “general , ” comparable store sales provide a measure of sales growth for stores open at least one year over the comparable prior year period . we consider comparable store sales to be an important indicator of our current performance . comparable store sales results are important to achieve leveraging of our costs , including store payroll and store occupancy . comparable store sales also have a direct impact on our total net sales , cash and working capital . gross profit . gross profit measures whether we are optimizing the price and inventory levels of our merchandise . gross profit is the difference between net sales and cost of goods sold . any inability to obtain acceptable levels of initial markups or any significant increase in our use of markdowns could have an adverse effect on our gross profit and results of operations . operating profit . we view operating profit as a key indicator of our success . the key drivers of operating profit are comparable store sales , gross profit , our ability to control selling , general and administrative expenses and our level of capital expenditures affecting depreciation expense . store productivity . story_separator_special_tag sg & a expenses as a percent of sales decreased by 240 basis points for fiscal 2010 to 27.2 % compared to 29.6 % for fiscal 2009. the primary contributors to this decrease were 110 basis points due to store operating expense efficiencies gained by growing expenses at a slower rate than sales growth , the effect of the change in accounting estimate for the depreciable lives of our leasehold improvements of 90 basis points ( as further explained in note 2 in our notes to consolidated financial statements ) , 60 basis points due to impairment charges of $ 2.5 million on 21 stores in fiscal 2009 and a 30 basis points impact of a litigation settlement charge of $ 1.3 million incurred fiscal 2009 , partially offset by a 40 basis points impact of a litigation settlement charge of $ 2.1 million incurred in fiscal 2010. exit or disposal activities on march 2 , 2010 , we acquired a 168,450 square foot building in corona , california for $ 11.8 million and we have relocated our distribution facility from everett , washington to this facility . we believe that we will be more effective distributing our products through a distribution center located in corona , california due to the majority of our vendors being located in southern california . cumulatively , during fiscal 2010 , we recorded $ 0.9 million of employee benefit costs ( severance and performance bonuses ) , $ 0.6 million of lease termination costs , $ 0.3 million of loss on disposal of long-lived assets and $ 0.8 million of other costs to exit the facility , partially offset by a $ 0.2 million benefit for the related deferred rent liability . these amounts are included in cost of goods sold in our consolidated statements of operations . net income net income for fiscal 2010 was $ 24.2 million , or $ 0.79 per diluted share , compared with net income of $ 9.1 million , or $ 0.30 per diluted share , for fiscal 2009. our effective income tax rate for fiscal 2010 was 37.7 % compared to 34.8 % for fiscal 2009. seasonality and quarterly results as is the case with many retailers of apparel and related merchandise , our business is subject to seasonal influences . as a result , we have historically experienced , and expect to continue to experience , seasonal and quarterly fluctuations in our net sales and operating results . our net sales and operating results are typically lower in the first and second fiscal quarters of our fiscal year , while the back-to-school and winter holiday periods in our third and fourth fiscal quarters historically have accounted for the largest percentage of our annual net sales . quarterly results of operations may also fluctuate significantly as a result of a variety of factors , including the timing of store openings and the relative proportion of our new stores to mature stores , fashion trends and changes in consumer preferences , calendar shifts of holiday or seasonal periods , changes in merchandise mix , timing of promotional events , general economic conditions , competition and weather conditions . the following table sets forth selected unaudited quarterly consolidated statements of operations data for the last two recent fiscal years . the unaudited quarterly information has been prepared on a basis consistent with the audited consolidated financial statements included elsewhere herein and includes all adjustments that we 35 consider necessary for a fair presentation of the information shown . this information should be read in conjunction with our audited consolidated financial statements and the notes thereto . the operating results for any fiscal quarter are not indicative of the operating results for a full fiscal year or for any future period and there can be no assurance that any trend reflected in such results will continue in the future . replace_table_token_11_th ( 1 ) all quarters in fiscal year ended january 28 , 2012 are 13 week periods ended april 30 , 2011 , july 30 , 2011 , october 29 , 2011 and january 28 , 2012 . ( 2 ) all quarters in fiscal year ended january 29 , 2011 are 13 week periods ended may 1 , 2010 , july 31 , 2010 , october 30 , 2011 and january 29 , 2011 . ( 3 ) gross profit for the first , second and third quarters of the fiscal year ended january 28 , 2012 and all quarters for the fiscal year ended january 29 , 2011 have been revised to account for the reclassification of certain expenses from selling , general and administrative expenses to cost of goods sold . liquidity and capital resources our primary uses of cash are for operational expenditures , capital investments , inventory purchases , store remodeling , store fixtures and ongoing infrastructure improvements such as technology enhancements and distribution capabilities . historically , our main sources of liquidity have been cash flows from operations . the significant components of our working capital are inventory and liquid assets such as cash , cash equivalents , current marketable securities and receivables , reduced by accounts payable and accrued expenses . our working capital position benefits from the fact that we generally collect cash from sales to customers the same day or within several days of the related sale , while we typically have longer payment terms with our vendors . at january 28 , 2012 and january 29 , 2011 , cash , cash equivalents and current marketable securities were $ 172.8 million and $ 128.8 million . working capital , the excess of current assets over current liabilities , was $ 197.9 million at the end of fiscal 2011 , up 27.4 % from $ 155.4 million at the end of fiscal 2010. the increase in 36 cash , cash equivalents and current marketable securities and working capital in fiscal 2011 were due primarily to the increased cash flow

liquidity and capital resources our primary capital requirements are for facilities expansion and maintenance , acquisitions and the development of new programs . our principal sources of liquidity have been cash provided by operating activities and borrowings under our credit agreement . the following chart summarizes the principal elements of our cash flow for each of the three years in the period ended december 31 , 2013 : replace_table_token_9_th as of december 31 , 2013 , we had cash , cash equivalents and restricted cash of $ 67.4 million , including $ 54.5 million of restricted cash , representing an increase of approximately $ 5.7 million as compared to $ 61.7 million of cash and cash equivalents as of december 31 , 2012. this increase is primarily due to $ 54.5 million of borrowings under our credit facility ( as defined below ) during the fourth quarter of 2013 compared to $ 37.5 million of borrowings during the fourth quarter of 2012 partially offset by a net loss during the year ended december 31 , 2013 of $ 51.3 million compared to a net loss during the year ended december 31 , 2012 of $ 37.2 million . historically , we have financed our operating activities and organic growth primarily through cash generated from operations . we have financed acquisitions primarily through borrowings under our credit facility and cash generated from operations . we currently anticipate that we will be able to meet our short-term cash needs , as well as our need to fund operations and meet our obligations beyond the next twelve months with cash generated by operations , existing cash balances and borrowings under our credit facility . in addition , we may also consider accessing the financial markets in the future as a source of liquidity for capital requirements , acquisitions and general corporate purposes to the extent such requirements are not satisfied by cash on hand , borrowings under our credit facility or operating cash flows . however , we can not assure you that we will be able to raise additional capital on favorable terms , if at all .

we will make further investments in people and infrastructure in fiscal 2012 , building on the progress we have made through fiscal 2011 , primarily focused on the development of our omni-channel sales strategies , continued progress on our product assortment planning and supply chain solutions , the move of our ecommerce fulfillment center to edwardsville , kansas , and a capital investment related to building a new home office planned to open in the second quarter of fiscal 2012. we anticipate inventory levels per square foot to grow slightly . we expect our cash , short-term investments and working capital to increase , and do not anticipate any borrowings on our credit facility . general net sales constitute gross sales net of actual and estimated returns and deductions for promotions . net sales include our in-store sales and our ecommerce sales , which includes ecommerce shipping revenue . ecommerce sales were 7.3 % , 4.7 % and 2.5 % of total net sales for fiscal 2011 , 2010 and 2009. sales of gift cards are deferred and recognized when gift cards are redeemed . the amount of the gift card liability is determined taking into account our estimate of the portion of gift cards that will not be redeemed or recovered ( “gift card breakage” ) . gift card breakage is recognized as revenue after 24 months , at which time the likelihood of redemption is considered remote based on our historical redemption data . we report “comparable store sales” based on net sales beginning on the first anniversary of the first day of operation of a new store . our comparable store sales also include our ecommerce sales , due to the substantial integration of our stores and ecommerce business . changes in our comparable store sales between two periods are based on net sales of stores which were in operation during both of the two periods being compared and , if a store is included in the calculation of comparable store sales for only a portion of one of the two periods being compared , then that store is included in the calculation for only the comparable portion of the other period . any change in square footage of an existing comparable store , including remodels and relocations , does not eliminate that store from inclusion in the calculation of comparable store sales . there may be variations in the way in which some of our competitors and other apparel retailers calculate comparable or same store sales . as a result , data herein regarding our comparable store sales may not be comparable to similar data made available by our competitors or other retailers . cost of goods sold consists of branded merchandise costs and our private label merchandise costs including design , sourcing , importing and inbound freight costs . our cost of goods sold also includes shrinkage and buying , occupancy , distribution and warehousing costs . this may not be comparable to the way in which our competitors or other retailers compute their cost of goods sold . we receive cash consideration from vendors , which have been reported as a reduction cost of goods sold if the inventory has sold , as a reduction of the carrying value of the 29 inventory if the inventory is still on hand , or a reduction of selling , general and administrative expense if the amounts are reimbursements of specific , incremental and identifiable costs of selling the vendors ' products . with respect to the freight component of our ecommerce sales , we arrange and pay the freight for our customers and bill them for this service , unless our customers have their product shipped to one of our stores or we have free shipping promotions to our customers , in which case we do not bill our customers . such amounts billed are included in net sales and the related freight cost is charged to cost of goods sold . selling , general and administrative expenses consist primarily of store personnel wages and benefits , administrative staff and infrastructure expenses , outbound freight , store supplies , depreciation on fixed assets at our home office and stores , facility expenses and training , advertising and marketing costs . credit card fees , insurance , public company expenses , legal expenses and other miscellaneous operating costs are also included in selling , general and administrative expenses . this may not be comparable to the way in which our competitors or other retailers compute their selling , general and administrative expenses . key performance indicators our management evaluates the following items , which we consider key performance indicators , in assessing our performance : comparable store sales . as previously described in detail under the caption “general , ” comparable store sales provide a measure of sales growth for stores open at least one year over the comparable prior year period . we consider comparable store sales to be an important indicator of our current performance . comparable store sales results are important to achieve leveraging of our costs , including store payroll and store occupancy . comparable store sales also have a direct impact on our total net sales , cash and working capital . gross profit . gross profit measures whether we are optimizing the price and inventory levels of our merchandise . gross profit is the difference between net sales and cost of goods sold . any inability to obtain acceptable levels of initial markups or any significant increase in our use of markdowns could have an adverse effect on our gross profit and results of operations . operating profit . we view operating profit as a key indicator of our success . the key drivers of operating profit are comparable store sales , gross profit , our ability to control selling , general and administrative expenses and our level of capital expenditures affecting depreciation expense . store productivity . story_separator_special_tag sg & a expenses as a percent of sales decreased by 240 basis points for fiscal 2010 to 27.2 % compared to 29.6 % for fiscal 2009. the primary contributors to this decrease were 110 basis points due to store operating expense efficiencies gained by growing expenses at a slower rate than sales growth , the effect of the change in accounting estimate for the depreciable lives of our leasehold improvements of 90 basis points ( as further explained in note 2 in our notes to consolidated financial statements ) , 60 basis points due to impairment charges of $ 2.5 million on 21 stores in fiscal 2009 and a 30 basis points impact of a litigation settlement charge of $ 1.3 million incurred fiscal 2009 , partially offset by a 40 basis points impact of a litigation settlement charge of $ 2.1 million incurred in fiscal 2010. exit or disposal activities on march 2 , 2010 , we acquired a 168,450 square foot building in corona , california for $ 11.8 million and we have relocated our distribution facility from everett , washington to this facility . we believe that we will be more effective distributing our products through a distribution center located in corona , california due to the majority of our vendors being located in southern california . cumulatively , during fiscal 2010 , we recorded $ 0.9 million of employee benefit costs ( severance and performance bonuses ) , $ 0.6 million of lease termination costs , $ 0.3 million of loss on disposal of long-lived assets and $ 0.8 million of other costs to exit the facility , partially offset by a $ 0.2 million benefit for the related deferred rent liability . these amounts are included in cost of goods sold in our consolidated statements of operations . net income net income for fiscal 2010 was $ 24.2 million , or $ 0.79 per diluted share , compared with net income of $ 9.1 million , or $ 0.30 per diluted share , for fiscal 2009. our effective income tax rate for fiscal 2010 was 37.7 % compared to 34.8 % for fiscal 2009. seasonality and quarterly results as is the case with many retailers of apparel and related merchandise , our business is subject to seasonal influences . as a result , we have historically experienced , and expect to continue to experience , seasonal and quarterly fluctuations in our net sales and operating results . our net sales and operating results are typically lower in the first and second fiscal quarters of our fiscal year , while the back-to-school and winter holiday periods in our third and fourth fiscal quarters historically have accounted for the largest percentage of our annual net sales . quarterly results of operations may also fluctuate significantly as a result of a variety of factors , including the timing of store openings and the relative proportion of our new stores to mature stores , fashion trends and changes in consumer preferences , calendar shifts of holiday or seasonal periods , changes in merchandise mix , timing of promotional events , general economic conditions , competition and weather conditions . the following table sets forth selected unaudited quarterly consolidated statements of operations data for the last two recent fiscal years . the unaudited quarterly information has been prepared on a basis consistent with the audited consolidated financial statements included elsewhere herein and includes all adjustments that we 35 consider necessary for a fair presentation of the information shown . this information should be read in conjunction with our audited consolidated financial statements and the notes thereto . the operating results for any fiscal quarter are not indicative of the operating results for a full fiscal year or for any future period and there can be no assurance that any trend reflected in such results will continue in the future . replace_table_token_11_th ( 1 ) all quarters in fiscal year ended january 28 , 2012 are 13 week periods ended april 30 , 2011 , july 30 , 2011 , october 29 , 2011 and january 28 , 2012 . ( 2 ) all quarters in fiscal year ended january 29 , 2011 are 13 week periods ended may 1 , 2010 , july 31 , 2010 , october 30 , 2011 and january 29 , 2011 . ( 3 ) gross profit for the first , second and third quarters of the fiscal year ended january 28 , 2012 and all quarters for the fiscal year ended january 29 , 2011 have been revised to account for the reclassification of certain expenses from selling , general and administrative expenses to cost of goods sold . liquidity and capital resources our primary uses of cash are for operational expenditures , capital investments , inventory purchases , store remodeling , store fixtures and ongoing infrastructure improvements such as technology enhancements and distribution capabilities . historically , our main sources of liquidity have been cash flows from operations . the significant components of our working capital are inventory and liquid assets such as cash , cash equivalents , current marketable securities and receivables , reduced by accounts payable and accrued expenses . our working capital position benefits from the fact that we generally collect cash from sales to customers the same day or within several days of the related sale , while we typically have longer payment terms with our vendors . at january 28 , 2012 and january 29 , 2011 , cash , cash equivalents and current marketable securities were $ 172.8 million and $ 128.8 million . working capital , the excess of current assets over current liabilities , was $ 197.9 million at the end of fiscal 2011 , up 27.4 % from $ 155.4 million at the end of fiscal 2010. the increase in 36 cash , cash equivalents and current marketable securities and working capital in fiscal 2011 were due primarily to the increased cash flow

sources of liquidity our most significant sources of liquidity continue to be funds generated by operating activities , available cash , cash equivalents and current marketable securities . we expect these sources of liquidity and available borrowings under our revolving credit facility will be sufficient to meet our foreseeable cash requirements for 37 operations and planned capital expenditures for at least the next twelve months . beyond this time frame , if cash flows from operations and borrowings under our revolving credit facility are not sufficient to meet our capital requirements , then we will be required to obtain additional equity or debt financing in the future . however , there can be no assurance that equity or debt financing will be available to us when we need it or , if available , that the terms will be satisfactory to us and not dilutive to our then-current shareholders . on august 29 , 2011 , we renewed and amended our secured credit agreement with wells fargo bank , n.a. , and the prior facility agreement was terminated . the credit agreement provides us with a secured revolving credit facility until september 1 , 2013 of up to $ 25.0 million , which , pursuant to an accordion feature , may be increased to $ 35.0 million at our discretion . the secured revolving credit facility provides for the issuance of standby letter of credits in an amount not to exceed $ 5.0 million outstanding at any time and with a term not to exceed 365 days . the commercial line of credit provides for the issuance of commercial letter of credits in an amount not to exceed $ 10.0 million and with terms not to exceed 120 days . the amount of borrowings available at any time under our secured revolving credit facility is reduced by the amount of standby and commercial letters of credit outstanding at that time .

1 ) ( iv ) of regulation s-k and the related instructions , or a reportable event within the meaning set forth in item 304 ( a ) ( 1 ) ( v ) of regulation s-k. audit fees the fees involved with the audit by bfb of the financial statements for the year ended december 31 , 2019 are $ 5,000 . other than that , the company paid $ 4,500 to bfb for the review of all interim financial statements during 2019 , $ 4,500 for the previous audit for the year ended december 31 , 2018 and $ 4,500 for the review of all interim financial statements during 2018. audit-related fees during the years ended december 31 , 2019 and december 31 , 2018 , our principal accountant did not render audit-related services to us . tax fees during the year ended december 31 , 2019 and december 31 , 2018 , our principal accountant did not render services to us for tax compliance , tax advice or tax planning . all other fees during the year ended december 31 , 2019 and december 31 , 2018 there were no fees billed for products and services provided by the principal accountant other than those set forth above . currently , we have no independent audit committee . our full board of directors functions as our audit committee and is comprised of one director who is not considered to be `` independent `` in accordance with the requirements of rule 10a-3 under the exchange act . our audit committee 's pre-approval policies and procedures described in paragraph ( c ) ( 7 ) ( i ) of rule 2-01 of regulation s-x were that the audit committee pre-approve all accounting related activities prior to the performance of any services by any accountant or auditor . 18 part iv item 15 exhibits , financial statement schedules ( a ) the following documents are filed as a part of this report : 1. financial statements . the following financial statements of new leap , inc. are included in item 8 : replace_table_token_8_th 2. financial statement schedule ( s ) : all schedules are omitted for the reason that the information is included in the financial statements or the notes thereto or that they are not required or are not applicable . 3. exhibits : replace_table_token_9_th _ * filed herewith . ( 1 ) incorporated herein by reference from the company 's form s-1 filed with the securities and exchange commission on august 8 , 2017 . 19 signatures in accordance with section 13 or 15 ( d ) of the securities exchange act , the registrant caused this report to be signed on its behalf by the undersigned , thereunto duly authorized . march 27 , 2020 itzhak ostashinsky itzhak ostashinsky chief executive officer 20 story_separator_special_tag this discussion summarizes the significant factors affecting the operating results , financial condition , liquidity and cash flows of the company for the fiscal year ended december 31 , 2019. the discussion and analysis that follows should be read together with the section entitled “ forward looking statements ” and our consolidated financial statements and the notes to the consolidated financial statements included elsewhere in this annual report on form 10-k. except for historical information , the matters discussed in this section are forward-looking statements that involve risks and uncertainties and are based upon judgments concerning various factors that are beyond the company 's control . consequently , and because forward-looking statements are inherently subject to risks and uncertainties , the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements . you are urged to carefully review and consider the various disclosures made by us in this report . company overview new leap plans to match up potential investors from all over the world , except for u.s. residents with private u.s. companies and companies which are publicly traded in the u.s. ( both u.s. and foreign incorporated ) . the goal is to use the crowdfunding trend in order to make private investments in such companies more accessible to non-u.s. investors on one hand and allow easier access to capital for these companies on the other . we will not allow u.s. persons access to the materials presented by the companies offering their securities on our website . anyone trying to gain access to the offering materials posted on our website will first need to fill out a questionnaire which will include a question about the country of residence . anyone answering “ u.s.a ” or any of its states will be prohibited from gaining access to the page showing the offering materials of the presenting companies . we intend to start developing a website following completion of this offering . for this purpose our intention is to use a third party vendor which can provide both design and programming services . all securities will bear a legend indicating that the securities are `` restricted securities `` and may not be sold in the u.s. absent an effective registration statement under the securities act covering the resale of such securities or an available exemption from such registration requirement . new leap will keep a complete audit trail of investments in the companies presenting on its website . funds committed for an investment will be kept in an escrow account until the company 's funding goal is reached . upon reaching such goal , funds will be transferred from the escrow account to the company 's bank account while simultaneously stock certificates will be delivered to the investors . should the funding goal not be reached until the deadline of the offering , funds would immediately be returned to the investors . results of operations january 1 , 2018 to december 31 , 2018 compared to january 1 , 2019 to december 31 , 2019 selling , general and administrative expenses selling , general and administrative story_separator_special_tag 1 ) ( iv ) of regulation s-k and the related instructions , or a reportable event within the meaning set forth in item 304 ( a ) ( 1 ) ( v ) of regulation s-k. audit fees the fees involved with the audit by bfb of the financial statements for the year ended december 31 , 2019 are $ 5,000 . other than that , the company paid $ 4,500 to bfb for the review of all interim financial statements during 2019 , $ 4,500 for the previous audit for the year ended december 31 , 2018 and $ 4,500 for the review of all interim financial statements during 2018. audit-related fees during the years ended december 31 , 2019 and december 31 , 2018 , our principal accountant did not render audit-related services to us . tax fees during the year ended december 31 , 2019 and december 31 , 2018 , our principal accountant did not render services to us for tax compliance , tax advice or tax planning . all other fees during the year ended december 31 , 2019 and december 31 , 2018 there were no fees billed for products and services provided by the principal accountant other than those set forth above . currently , we have no independent audit committee . our full board of directors functions as our audit committee and is comprised of one director who is not considered to be `` independent `` in accordance with the requirements of rule 10a-3 under the exchange act . our audit committee 's pre-approval policies and procedures described in paragraph ( c ) ( 7 ) ( i ) of rule 2-01 of regulation s-x were that the audit committee pre-approve all accounting related activities prior to the performance of any services by any accountant or auditor . 18 part iv item 15 exhibits , financial statement schedules ( a ) the following documents are filed as a part of this report : 1. financial statements . the following financial statements of new leap , inc. are included in item 8 : replace_table_token_8_th 2. financial statement schedule ( s ) : all schedules are omitted for the reason that the information is included in the financial statements or the notes thereto or that they are not required or are not applicable . 3. exhibits : replace_table_token_9_th _ * filed herewith . ( 1 ) incorporated herein by reference from the company 's form s-1 filed with the securities and exchange commission on august 8 , 2017 . 19 signatures in accordance with section 13 or 15 ( d ) of the securities exchange act , the registrant caused this report to be signed on its behalf by the undersigned , thereunto duly authorized . march 27 , 2020 itzhak ostashinsky itzhak ostashinsky chief executive officer 20 story_separator_special_tag this discussion summarizes the significant factors affecting the operating results , financial condition , liquidity and cash flows of the company for the fiscal year ended december 31 , 2019. the discussion and analysis that follows should be read together with the section entitled “ forward looking statements ” and our consolidated financial statements and the notes to the consolidated financial statements included elsewhere in this annual report on form 10-k. except for historical information , the matters discussed in this section are forward-looking statements that involve risks and uncertainties and are based upon judgments concerning various factors that are beyond the company 's control . consequently , and because forward-looking statements are inherently subject to risks and uncertainties , the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements . you are urged to carefully review and consider the various disclosures made by us in this report . company overview new leap plans to match up potential investors from all over the world , except for u.s. residents with private u.s. companies and companies which are publicly traded in the u.s. ( both u.s. and foreign incorporated ) . the goal is to use the crowdfunding trend in order to make private investments in such companies more accessible to non-u.s. investors on one hand and allow easier access to capital for these companies on the other . we will not allow u.s. persons access to the materials presented by the companies offering their securities on our website . anyone trying to gain access to the offering materials posted on our website will first need to fill out a questionnaire which will include a question about the country of residence . anyone answering “ u.s.a ” or any of its states will be prohibited from gaining access to the page showing the offering materials of the presenting companies . we intend to start developing a website following completion of this offering . for this purpose our intention is to use a third party vendor which can provide both design and programming services . all securities will bear a legend indicating that the securities are `` restricted securities `` and may not be sold in the u.s. absent an effective registration statement under the securities act covering the resale of such securities or an available exemption from such registration requirement . new leap will keep a complete audit trail of investments in the companies presenting on its website . funds committed for an investment will be kept in an escrow account until the company 's funding goal is reached . upon reaching such goal , funds will be transferred from the escrow account to the company 's bank account while simultaneously stock certificates will be delivered to the investors . should the funding goal not be reached until the deadline of the offering , funds would immediately be returned to the investors . results of operations january 1 , 2018 to december 31 , 2018 compared to january 1 , 2019 to december 31 , 2019 selling , general and administrative expenses selling , general and administrative

sources of liquidity our most significant sources of liquidity continue to be funds generated by operating activities , available cash , cash equivalents and current marketable securities . we expect these sources of liquidity and available borrowings under our revolving credit facility will be sufficient to meet our foreseeable cash requirements for 37 operations and planned capital expenditures for at least the next twelve months . beyond this time frame , if cash flows from operations and borrowings under our revolving credit facility are not sufficient to meet our capital requirements , then we will be required to obtain additional equity or debt financing in the future . however , there can be no assurance that equity or debt financing will be available to us when we need it or , if available , that the terms will be satisfactory to us and not dilutive to our then-current shareholders . on august 29 , 2011 , we renewed and amended our secured credit agreement with wells fargo bank , n.a. , and the prior facility agreement was terminated . the credit agreement provides us with a secured revolving credit facility until september 1 , 2013 of up to $ 25.0 million , which , pursuant to an accordion feature , may be increased to $ 35.0 million at our discretion . the secured revolving credit facility provides for the issuance of standby letter of credits in an amount not to exceed $ 5.0 million outstanding at any time and with a term not to exceed 365 days . the commercial line of credit provides for the issuance of commercial letter of credits in an amount not to exceed $ 10.0 million and with terms not to exceed 120 days . the amount of borrowings available at any time under our secured revolving credit facility is reduced by the amount of standby and commercial letters of credit outstanding at that time .

1 ) ( iv ) of regulation s-k and the related instructions , or a reportable event within the meaning set forth in item 304 ( a ) ( 1 ) ( v ) of regulation s-k. audit fees the fees involved with the audit by bfb of the financial statements for the year ended december 31 , 2019 are $ 5,000 . other than that , the company paid $ 4,500 to bfb for the review of all interim financial statements during 2019 , $ 4,500 for the previous audit for the year ended december 31 , 2018 and $ 4,500 for the review of all interim financial statements during 2018. audit-related fees during the years ended december 31 , 2019 and december 31 , 2018 , our principal accountant did not render audit-related services to us . tax fees during the year ended december 31 , 2019 and december 31 , 2018 , our principal accountant did not render services to us for tax compliance , tax advice or tax planning . all other fees during the year ended december 31 , 2019 and december 31 , 2018 there were no fees billed for products and services provided by the principal accountant other than those set forth above . currently , we have no independent audit committee . our full board of directors functions as our audit committee and is comprised of one director who is not considered to be `` independent `` in accordance with the requirements of rule 10a-3 under the exchange act . our audit committee 's pre-approval policies and procedures described in paragraph ( c ) ( 7 ) ( i ) of rule 2-01 of regulation s-x were that the audit committee pre-approve all accounting related activities prior to the performance of any services by any accountant or auditor . 18 part iv item 15 exhibits , financial statement schedules ( a ) the following documents are filed as a part of this report : 1. financial statements . the following financial statements of new leap , inc. are included in item 8 : replace_table_token_8_th 2. financial statement schedule ( s ) : all schedules are omitted for the reason that the information is included in the financial statements or the notes thereto or that they are not required or are not applicable . 3. exhibits : replace_table_token_9_th _ * filed herewith . ( 1 ) incorporated herein by reference from the company 's form s-1 filed with the securities and exchange commission on august 8 , 2017 . 19 signatures in accordance with section 13 or 15 ( d ) of the securities exchange act , the registrant caused this report to be signed on its behalf by the undersigned , thereunto duly authorized . march 27 , 2020 itzhak ostashinsky itzhak ostashinsky chief executive officer 20 story_separator_special_tag this discussion summarizes the significant factors affecting the operating results , financial condition , liquidity and cash flows of the company for the fiscal year ended december 31 , 2019. the discussion and analysis that follows should be read together with the section entitled “ forward looking statements ” and our consolidated financial statements and the notes to the consolidated financial statements included elsewhere in this annual report on form 10-k. except for historical information , the matters discussed in this section are forward-looking statements that involve risks and uncertainties and are based upon judgments concerning various factors that are beyond the company 's control . consequently , and because forward-looking statements are inherently subject to risks and uncertainties , the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements . you are urged to carefully review and consider the various disclosures made by us in this report . company overview new leap plans to match up potential investors from all over the world , except for u.s. residents with private u.s. companies and companies which are publicly traded in the u.s. ( both u.s. and foreign incorporated ) . the goal is to use the crowdfunding trend in order to make private investments in such companies more accessible to non-u.s. investors on one hand and allow easier access to capital for these companies on the other . we will not allow u.s. persons access to the materials presented by the companies offering their securities on our website . anyone trying to gain access to the offering materials posted on our website will first need to fill out a questionnaire which will include a question about the country of residence . anyone answering “ u.s.a ” or any of its states will be prohibited from gaining access to the page showing the offering materials of the presenting companies . we intend to start developing a website following completion of this offering . for this purpose our intention is to use a third party vendor which can provide both design and programming services . all securities will bear a legend indicating that the securities are `` restricted securities `` and may not be sold in the u.s. absent an effective registration statement under the securities act covering the resale of such securities or an available exemption from such registration requirement . new leap will keep a complete audit trail of investments in the companies presenting on its website . funds committed for an investment will be kept in an escrow account until the company 's funding goal is reached . upon reaching such goal , funds will be transferred from the escrow account to the company 's bank account while simultaneously stock certificates will be delivered to the investors . should the funding goal not be reached until the deadline of the offering , funds would immediately be returned to the investors . results of operations january 1 , 2018 to december 31 , 2018 compared to january 1 , 2019 to december 31 , 2019 selling , general and administrative expenses selling , general and administrative story_separator_special_tag 1 ) ( iv ) of regulation s-k and the related instructions , or a reportable event within the meaning set forth in item 304 ( a ) ( 1 ) ( v ) of regulation s-k. audit fees the fees involved with the audit by bfb of the financial statements for the year ended december 31 , 2019 are $ 5,000 . other than that , the company paid $ 4,500 to bfb for the review of all interim financial statements during 2019 , $ 4,500 for the previous audit for the year ended december 31 , 2018 and $ 4,500 for the review of all interim financial statements during 2018. audit-related fees during the years ended december 31 , 2019 and december 31 , 2018 , our principal accountant did not render audit-related services to us . tax fees during the year ended december 31 , 2019 and december 31 , 2018 , our principal accountant did not render services to us for tax compliance , tax advice or tax planning . all other fees during the year ended december 31 , 2019 and december 31 , 2018 there were no fees billed for products and services provided by the principal accountant other than those set forth above . currently , we have no independent audit committee . our full board of directors functions as our audit committee and is comprised of one director who is not considered to be `` independent `` in accordance with the requirements of rule 10a-3 under the exchange act . our audit committee 's pre-approval policies and procedures described in paragraph ( c ) ( 7 ) ( i ) of rule 2-01 of regulation s-x were that the audit committee pre-approve all accounting related activities prior to the performance of any services by any accountant or auditor . 18 part iv item 15 exhibits , financial statement schedules ( a ) the following documents are filed as a part of this report : 1. financial statements . the following financial statements of new leap , inc. are included in item 8 : replace_table_token_8_th 2. financial statement schedule ( s ) : all schedules are omitted for the reason that the information is included in the financial statements or the notes thereto or that they are not required or are not applicable . 3. exhibits : replace_table_token_9_th _ * filed herewith . ( 1 ) incorporated herein by reference from the company 's form s-1 filed with the securities and exchange commission on august 8 , 2017 . 19 signatures in accordance with section 13 or 15 ( d ) of the securities exchange act , the registrant caused this report to be signed on its behalf by the undersigned , thereunto duly authorized . march 27 , 2020 itzhak ostashinsky itzhak ostashinsky chief executive officer 20 story_separator_special_tag this discussion summarizes the significant factors affecting the operating results , financial condition , liquidity and cash flows of the company for the fiscal year ended december 31 , 2019. the discussion and analysis that follows should be read together with the section entitled “ forward looking statements ” and our consolidated financial statements and the notes to the consolidated financial statements included elsewhere in this annual report on form 10-k. except for historical information , the matters discussed in this section are forward-looking statements that involve risks and uncertainties and are based upon judgments concerning various factors that are beyond the company 's control . consequently , and because forward-looking statements are inherently subject to risks and uncertainties , the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements . you are urged to carefully review and consider the various disclosures made by us in this report . company overview new leap plans to match up potential investors from all over the world , except for u.s. residents with private u.s. companies and companies which are publicly traded in the u.s. ( both u.s. and foreign incorporated ) . the goal is to use the crowdfunding trend in order to make private investments in such companies more accessible to non-u.s. investors on one hand and allow easier access to capital for these companies on the other . we will not allow u.s. persons access to the materials presented by the companies offering their securities on our website . anyone trying to gain access to the offering materials posted on our website will first need to fill out a questionnaire which will include a question about the country of residence . anyone answering “ u.s.a ” or any of its states will be prohibited from gaining access to the page showing the offering materials of the presenting companies . we intend to start developing a website following completion of this offering . for this purpose our intention is to use a third party vendor which can provide both design and programming services . all securities will bear a legend indicating that the securities are `` restricted securities `` and may not be sold in the u.s. absent an effective registration statement under the securities act covering the resale of such securities or an available exemption from such registration requirement . new leap will keep a complete audit trail of investments in the companies presenting on its website . funds committed for an investment will be kept in an escrow account until the company 's funding goal is reached . upon reaching such goal , funds will be transferred from the escrow account to the company 's bank account while simultaneously stock certificates will be delivered to the investors . should the funding goal not be reached until the deadline of the offering , funds would immediately be returned to the investors . results of operations january 1 , 2018 to december 31 , 2018 compared to january 1 , 2019 to december 31 , 2019 selling , general and administrative expenses selling , general and administrative

liquidity and capital resources the following is a summary of the company 's cash flows provided by ( used in ) operating , investing , and financing activities for the year ended december 31 , 2018 and the year ended december 31 , 2019 : replace_table_token_1_th to date , most of our resources and work have been devoted to planning our business , completing our registration statement and building our website . private capital , if sought , we believe will be sought from former business associates of our president and chief executive officer or through private investors referred to us by those same business associates . if a market for our shares ever develops , of which there can be no assurances , we may use restricted shares of our common stock to compensate employees/consultants and independent contractors wherever possible . we can not predict the likelihood or source of raising capital or funds that may be needed to complete the development of our business plan . we are a public company and as such we have incurred and will continue to incur significant expenses for legal , accounting and related services . as a public entity , subject to the reporting requirements of the exchange act of 1934 , we incur ongoing expenses associated with professional fees for accounting , legal and a host of other expenses including annual reports and proxy statements , if required . we estimate that these costs will range up to $ 50,000 per year over the next few years and may be significantly higher if our business volume and transactional activity increases but should be lower during our first year of being public because our overall business volume ( and financial transactions ) will be lower , and we will not yet be subject to the requirements of section 404 of the sarbanes-oxley act of 2002 until we exceed $ 250 million in market capitalization ( if ever ) . these obligations will certainly reduce our ability and resources to expand our business plan and activities .

we intend to review our proposed confirmatory program with the fda , and to finalize its design in the first half of 2019. we hope to leverage the confirmatory program to expand tazemetostat into the second-line treatment setting for patients with fl , both with and without ezh2 activating mutations . in addition , we plan to evaluate tazemetostat treatment in combination with other therapies . in mid-2019 , we anticipate initiating a combination study that would compare tazemetostat plus rituximab and revlimid , a chemotherapeutic-free treatment regimen referred to as r 2 , versus r 2 with placebo in patients with relapsed or refractory fl , both with and without ezh2 activating mutations . in addition , we are finalizing plans for a trial of tazemetostat in combination with rituxan for the treatment of patients with relapsed and refractory fl . based on clinical activity observed with tazemetostat in combination with r-chop as a front-line treatment for 80 patients with diffuse large b-cell lymphoma , or dlbcl , we are evaluating the opportunity to investigate this combination as a front-line treatment for patients with fl . in collaboration with the lymphoma study association , or lysa , we are continuing to evaluate tazemetostat with r-chop as a front-line treatment for high-risk patients with dlbcl . in addition , genentech inc. , or genentech , is evaluating the combination of tazemetostat with its checkpoint inhibitor , tecentriq ( atezolizumab ) , for the treatment of patients with relapsed or refractory dlbcl , with preliminary data expected from that study in 2019. in our solid tumor program , we are evaluating tazemetostat 's treatment potential in adults and children with molecularly defined solid tumors , including ini1- and smarca4-negative tumors , which we collectively refer to as ini1-negative tumors . we are conducting a multi-cohort global phase 2 trial of tazemetostat in adults with ini1-negative tumors , including epithelioid sarcoma or chordoma . based on positive data that we have observed in patients with epithelioid sarcoma in the ongoing phase 2 study , we are targeting submission of our first nda for accelerated approval of tazemetostat for the treatment of epithelioid sarcoma in the second quarter of 2019. in connection with this submission , we will need to conduct a confirmatory program to verify clinical benefit and support the full approval of tazemetostat . we plan to explore with the fda utilizing the natural history study in epithelioid sarcoma that we are conducting to serve as confirmatory evidence required in connection with any accelerated approval . the cohort of patients in the phase 2 study of chordoma patients is ongoing , and we are evaluating tazemetostat in the dose-expansion portion of a phase 1 study in pediatric patients with ini1-negative tumors , with plans to report updated data in 2019. we own the global development and commercialization rights to tazemetostat outside of japan . eisai co. ltd , or eisai , holds the rights to develop and commercialize tazemetostat in japan . we intend to build a focused field presence and marketing capabilities to commercialize tazemetostat for the epithelioid sarcoma and follicular lymphoma indications in the united states . we have begun building the infrastructure necessary to support the launch and marketing of tazemetostat for epithelioid sarcoma , and believe we can adequately address this patient population through a modest field force of less than 25 professionals . for geographies outside the united states , we are evaluating the most efficient path to reach patients , including through potential collaborations . tazemetostat is covered by claims of u.s. and european composition of matter patents , which are expected to expire in 2032 , exclusive of any patent term or other extensions . tazemetostat has been granted fast track designation by the fda in patients with relapsed or refractory fl , with or without activating ezh2 mutations , relapsed or refractory dlbcl with ezh2 activating mutations and metastatic or locally advanced epithelioid sarcoma who have progressed on or following an anthracycline-based treatment regimen . the fda has also granted orphan drug designation to tazemetostat for the treatment of patients with fl , malignant rhabdoid tumors , or mrt , soft tissue sarcoma , or sts , and mesothelioma . the orphan drug designation for the treatment of mrt applies to ini1-negative mrt as well as smarca4-negative malignant rhabdoid tumor of ovary , or mrto . beyond tazemetostat , we are building an early pipeline to further support our leadership in epigenetics . we are developing our wholly-owned g9a candidate , ezm8266 , for the treatment of people with sickle cell disease . we have completed ind-enabling studies for this program and plan to begin clinical evaluation with a safety and dose-finding study in the second half of 2019. in november 2018 , we entered a strategic collaboration with boehringer ingelheim international gmbh , or boehringer ingelheim , focused on the research , development and commercialization of novel small molecule inhibitors , discovered by us , directed toward two previously unaddressed epigenetic targets as potential therapies for people with cancer . specifically , these targets are enzymes within the helicase and histone acetyltransferase , or hat , families that when dysregulated have been linked to the development of cancers that currently lack therapeutic options . we also have collaborations with glaxo group limited ( an affiliate of glaxosmithkline ) , or gsk , focused on the development of prmt inhibitors discovered by us , and with celgene corporation and celgene rivot ltd. , an affiliate of celgene corporation , which we collectively refer to as celgene , focused on the development of pinometostat and small molecule inhibitors directed to three hmt targets . through december 31 , 2018 , we have raised an aggregate of $ 988.2 million to fund our operations , of which $ 232.8 million was non-equity funding through our collaboration agreements , $ 679.4 million was from the sale of common stock in our public offerings and $ 76.0 story_separator_special_tag 87 liquidity and capital resources through december 31 , 2018 , we have raised an aggregate of $ 988.2 million to fund our operations , of which $ 232.8 million was non-equity funding through our collaboration agreements , $ 679.4 million was from the sale of common stock in our public offerings and $ 76.0 million was from the sale of redeemable convertible preferred stock . as of december 31 , 2018 , we had $ 240.3 million in cash , cash equivalents and marketable securities . in october 2018 , we raised approximately $ 81.6 million in net proceeds ( after deducting underwriting discounts and commissions and estimated offering expenses , but excluding any expenses and other costs reimbursed by the underwriters ) from the sale of 9,583,334 shares of our common stock in a public offering at a price of $ 9.00 per share . in september 2017 , we raised $ 151.3 million , net of underwriting discounts and commissions , but before direct and incremental costs from the sale of 10,557,000 shares of our common stock in a public offering at a price to the public of $ 15.25 per share . on april 15 , 2016 , we entered into a sales agreement with cowen and company , llc , or cowen , to sell , from time to time , shares of our common stock having an aggregate sales price of up to $ 50.0 million through an “ at the market offering ” as defined in rule 415 under the securities act of 1933 , as amended , under which cowen would act as sales agent , which we refer to as the atm offering . through march 10 , 2017 , we sold 155,834 shares of common stock under the sales agreement , resulting in net proceeds of $ 1.9 million related to the atm offering . we terminated the sales agreement with cowen , effective march 10 , 2017. in addition to our existing cash , cash equivalents and marketable securities , we may receive research and development co-funding and are eligible to earn a significant amount of option exercise and milestone payments under our collaboration agreements . our ability to earn these payments and the timing of earning these payments is dependent upon the outcome of our research and development activities and is uncertain at this time . funding requirements our primary uses of capital are , clinical trial costs , third-party research and development services , expenses related to preparation for commercialization , compensation and related expenses , laboratory and related supplies , our potential future milestone payment obligations to eisai and roche molecular under the amended eisai collaboration agreement and roche molecular companion diagnostic agreement , legal and other regulatory expenses and general overhead costs . because our product candidates are in various stages of clinical and preclinical development and the outcome of these efforts is uncertain , we can not estimate the actual amounts necessary to successfully complete the development and commercialization of our product candidates or whether , or when , we may achieve profitability . until such time , if ever , as we can generate substantial product revenues , we expect to finance our cash needs through a combination of equity or debt financings and collaboration arrangements . except for any obligations of our collaborators to make license , milestone or royalty payments under our agreements with them , we do not have any committed external sources of liquidity . to the extent that we raise additional capital through the future sale of equity or debt , the ownership interest of our stockholders may be diluted , and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing common stockholders . debt financing and preferred equity financing , if available , may involve agreements that include covenants limiting or restricting our ability to take specific actions , such as incurring additional debt , making capital expenditures or declaring dividends . if we raise additional funds through collaboration arrangements in the future , we may have to relinquish valuable rights to our technologies , future revenue streams or product candidates or grant licenses on terms that may not be favorable to us . if we are unable to raise any additional funds that may be needed through equity or debt financings when needed , we may be required to delay , limit , reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves . 88 outlook based on our research and development plans and our timing expectations related to the progress of our programs , we expect that our existing cash , cash equivalents and marketable securities as of december 31 , 2018 , will be sufficient to fund our planned operating expenses and capital expenditure requirements into the second quarter of 2020 , without giving effect to any potential option exercise fees or milestone payments we may receive under our collaboration agreements . we have based this estimate on assumptions that may prove to be wrong , particularly as the process of testing product candidates in clinical trials is costly and the timing of progress in these trials is uncertain . as a result , we could use our capital resources sooner than we expect . story_separator_special_tag 2018 , we have committed to fund $ 8.4 million of remaining development costs payable to roche molecular , expected to be paid through 2020 upon certain development and regulatory milestones , under an amended companion diagnostic agreement . the agreement was amended in march 2018. under the amended agreement , we are responsible for remaining development costs of $ 10.4 million due under the agreement as of march 2018 and eisai has agreed to reimburse us for $ 0.9 million of this amount related to a regulatory milestone

liquidity and capital resources the following is a summary of the company 's cash flows provided by ( used in ) operating , investing , and financing activities for the year ended december 31 , 2018 and the year ended december 31 , 2019 : replace_table_token_1_th to date , most of our resources and work have been devoted to planning our business , completing our registration statement and building our website . private capital , if sought , we believe will be sought from former business associates of our president and chief executive officer or through private investors referred to us by those same business associates . if a market for our shares ever develops , of which there can be no assurances , we may use restricted shares of our common stock to compensate employees/consultants and independent contractors wherever possible . we can not predict the likelihood or source of raising capital or funds that may be needed to complete the development of our business plan . we are a public company and as such we have incurred and will continue to incur significant expenses for legal , accounting and related services . as a public entity , subject to the reporting requirements of the exchange act of 1934 , we incur ongoing expenses associated with professional fees for accounting , legal and a host of other expenses including annual reports and proxy statements , if required . we estimate that these costs will range up to $ 50,000 per year over the next few years and may be significantly higher if our business volume and transactional activity increases but should be lower during our first year of being public because our overall business volume ( and financial transactions ) will be lower , and we will not yet be subject to the requirements of section 404 of the sarbanes-oxley act of 2002 until we exceed $ 250 million in market capitalization ( if ever ) . these obligations will certainly reduce our ability and resources to expand our business plan and activities .

we intend to review our proposed confirmatory program with the fda , and to finalize its design in the first half of 2019. we hope to leverage the confirmatory program to expand tazemetostat into the second-line treatment setting for patients with fl , both with and without ezh2 activating mutations . in addition , we plan to evaluate tazemetostat treatment in combination with other therapies . in mid-2019 , we anticipate initiating a combination study that would compare tazemetostat plus rituximab and revlimid , a chemotherapeutic-free treatment regimen referred to as r 2 , versus r 2 with placebo in patients with relapsed or refractory fl , both with and without ezh2 activating mutations . in addition , we are finalizing plans for a trial of tazemetostat in combination with rituxan for the treatment of patients with relapsed and refractory fl . based on clinical activity observed with tazemetostat in combination with r-chop as a front-line treatment for 80 patients with diffuse large b-cell lymphoma , or dlbcl , we are evaluating the opportunity to investigate this combination as a front-line treatment for patients with fl . in collaboration with the lymphoma study association , or lysa , we are continuing to evaluate tazemetostat with r-chop as a front-line treatment for high-risk patients with dlbcl . in addition , genentech inc. , or genentech , is evaluating the combination of tazemetostat with its checkpoint inhibitor , tecentriq ( atezolizumab ) , for the treatment of patients with relapsed or refractory dlbcl , with preliminary data expected from that study in 2019. in our solid tumor program , we are evaluating tazemetostat 's treatment potential in adults and children with molecularly defined solid tumors , including ini1- and smarca4-negative tumors , which we collectively refer to as ini1-negative tumors . we are conducting a multi-cohort global phase 2 trial of tazemetostat in adults with ini1-negative tumors , including epithelioid sarcoma or chordoma . based on positive data that we have observed in patients with epithelioid sarcoma in the ongoing phase 2 study , we are targeting submission of our first nda for accelerated approval of tazemetostat for the treatment of epithelioid sarcoma in the second quarter of 2019. in connection with this submission , we will need to conduct a confirmatory program to verify clinical benefit and support the full approval of tazemetostat . we plan to explore with the fda utilizing the natural history study in epithelioid sarcoma that we are conducting to serve as confirmatory evidence required in connection with any accelerated approval . the cohort of patients in the phase 2 study of chordoma patients is ongoing , and we are evaluating tazemetostat in the dose-expansion portion of a phase 1 study in pediatric patients with ini1-negative tumors , with plans to report updated data in 2019. we own the global development and commercialization rights to tazemetostat outside of japan . eisai co. ltd , or eisai , holds the rights to develop and commercialize tazemetostat in japan . we intend to build a focused field presence and marketing capabilities to commercialize tazemetostat for the epithelioid sarcoma and follicular lymphoma indications in the united states . we have begun building the infrastructure necessary to support the launch and marketing of tazemetostat for epithelioid sarcoma , and believe we can adequately address this patient population through a modest field force of less than 25 professionals . for geographies outside the united states , we are evaluating the most efficient path to reach patients , including through potential collaborations . tazemetostat is covered by claims of u.s. and european composition of matter patents , which are expected to expire in 2032 , exclusive of any patent term or other extensions . tazemetostat has been granted fast track designation by the fda in patients with relapsed or refractory fl , with or without activating ezh2 mutations , relapsed or refractory dlbcl with ezh2 activating mutations and metastatic or locally advanced epithelioid sarcoma who have progressed on or following an anthracycline-based treatment regimen . the fda has also granted orphan drug designation to tazemetostat for the treatment of patients with fl , malignant rhabdoid tumors , or mrt , soft tissue sarcoma , or sts , and mesothelioma . the orphan drug designation for the treatment of mrt applies to ini1-negative mrt as well as smarca4-negative malignant rhabdoid tumor of ovary , or mrto . beyond tazemetostat , we are building an early pipeline to further support our leadership in epigenetics . we are developing our wholly-owned g9a candidate , ezm8266 , for the treatment of people with sickle cell disease . we have completed ind-enabling studies for this program and plan to begin clinical evaluation with a safety and dose-finding study in the second half of 2019. in november 2018 , we entered a strategic collaboration with boehringer ingelheim international gmbh , or boehringer ingelheim , focused on the research , development and commercialization of novel small molecule inhibitors , discovered by us , directed toward two previously unaddressed epigenetic targets as potential therapies for people with cancer . specifically , these targets are enzymes within the helicase and histone acetyltransferase , or hat , families that when dysregulated have been linked to the development of cancers that currently lack therapeutic options . we also have collaborations with glaxo group limited ( an affiliate of glaxosmithkline ) , or gsk , focused on the development of prmt inhibitors discovered by us , and with celgene corporation and celgene rivot ltd. , an affiliate of celgene corporation , which we collectively refer to as celgene , focused on the development of pinometostat and small molecule inhibitors directed to three hmt targets . through december 31 , 2018 , we have raised an aggregate of $ 988.2 million to fund our operations , of which $ 232.8 million was non-equity funding through our collaboration agreements , $ 679.4 million was from the sale of common stock in our public offerings and $ 76.0 story_separator_special_tag 87 liquidity and capital resources through december 31 , 2018 , we have raised an aggregate of $ 988.2 million to fund our operations , of which $ 232.8 million was non-equity funding through our collaboration agreements , $ 679.4 million was from the sale of common stock in our public offerings and $ 76.0 million was from the sale of redeemable convertible preferred stock . as of december 31 , 2018 , we had $ 240.3 million in cash , cash equivalents and marketable securities . in october 2018 , we raised approximately $ 81.6 million in net proceeds ( after deducting underwriting discounts and commissions and estimated offering expenses , but excluding any expenses and other costs reimbursed by the underwriters ) from the sale of 9,583,334 shares of our common stock in a public offering at a price of $ 9.00 per share . in september 2017 , we raised $ 151.3 million , net of underwriting discounts and commissions , but before direct and incremental costs from the sale of 10,557,000 shares of our common stock in a public offering at a price to the public of $ 15.25 per share . on april 15 , 2016 , we entered into a sales agreement with cowen and company , llc , or cowen , to sell , from time to time , shares of our common stock having an aggregate sales price of up to $ 50.0 million through an “ at the market offering ” as defined in rule 415 under the securities act of 1933 , as amended , under which cowen would act as sales agent , which we refer to as the atm offering . through march 10 , 2017 , we sold 155,834 shares of common stock under the sales agreement , resulting in net proceeds of $ 1.9 million related to the atm offering . we terminated the sales agreement with cowen , effective march 10 , 2017. in addition to our existing cash , cash equivalents and marketable securities , we may receive research and development co-funding and are eligible to earn a significant amount of option exercise and milestone payments under our collaboration agreements . our ability to earn these payments and the timing of earning these payments is dependent upon the outcome of our research and development activities and is uncertain at this time . funding requirements our primary uses of capital are , clinical trial costs , third-party research and development services , expenses related to preparation for commercialization , compensation and related expenses , laboratory and related supplies , our potential future milestone payment obligations to eisai and roche molecular under the amended eisai collaboration agreement and roche molecular companion diagnostic agreement , legal and other regulatory expenses and general overhead costs . because our product candidates are in various stages of clinical and preclinical development and the outcome of these efforts is uncertain , we can not estimate the actual amounts necessary to successfully complete the development and commercialization of our product candidates or whether , or when , we may achieve profitability . until such time , if ever , as we can generate substantial product revenues , we expect to finance our cash needs through a combination of equity or debt financings and collaboration arrangements . except for any obligations of our collaborators to make license , milestone or royalty payments under our agreements with them , we do not have any committed external sources of liquidity . to the extent that we raise additional capital through the future sale of equity or debt , the ownership interest of our stockholders may be diluted , and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing common stockholders . debt financing and preferred equity financing , if available , may involve agreements that include covenants limiting or restricting our ability to take specific actions , such as incurring additional debt , making capital expenditures or declaring dividends . if we raise additional funds through collaboration arrangements in the future , we may have to relinquish valuable rights to our technologies , future revenue streams or product candidates or grant licenses on terms that may not be favorable to us . if we are unable to raise any additional funds that may be needed through equity or debt financings when needed , we may be required to delay , limit , reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves . 88 outlook based on our research and development plans and our timing expectations related to the progress of our programs , we expect that our existing cash , cash equivalents and marketable securities as of december 31 , 2018 , will be sufficient to fund our planned operating expenses and capital expenditure requirements into the second quarter of 2020 , without giving effect to any potential option exercise fees or milestone payments we may receive under our collaboration agreements . we have based this estimate on assumptions that may prove to be wrong , particularly as the process of testing product candidates in clinical trials is costly and the timing of progress in these trials is uncertain . as a result , we could use our capital resources sooner than we expect . story_separator_special_tag 2018 , we have committed to fund $ 8.4 million of remaining development costs payable to roche molecular , expected to be paid through 2020 upon certain development and regulatory milestones , under an amended companion diagnostic agreement . the agreement was amended in march 2018. under the amended agreement , we are responsible for remaining development costs of $ 10.4 million due under the agreement as of march 2018 and eisai has agreed to reimburse us for $ 0.9 million of this amount related to a regulatory milestone

cash flows the following is a summary of cash flows for the years ended december 31 , 2018 , 2017 and 2016 : replace_table_token_16_th replace_table_token_17_th net cash used in operating activities net cash used in operating activities was $ 121.6 million during the year ended december 31 , 2018 compared to $ 120.4 million during the year ended december 31 , 2017. the increase in net cash used in operating activities primarily relates to the decrease in net loss in the period compared to 2017 , a net increase in non-cash stock-based compensation , partially offset by a decrease in net depreciation and amortization and changes in working capital . the most significant items affecting working capital in the year ended december 31 , 2018 includes accounts receivable related to the milestone revenue recognized under the gsk agreement and current deferred revenue associated with the bi agreement . net cash used in operating activities was $ 120.4 million during the year ended december 31 , 2017 compared to $ 96.4 million during the year ended december 31 , 2016. the increase in net cash used in operating activities primarily relates to the increase in net loss in the period compared to 2016 , partially offset by changes in working capital .

this non-gaap presentation reflects the entire natg segment , misco germany operation and rebate processing business as a discontinued operation for all periods presented as well as including adjustments for non-recurring items , intangible amortization and equity compensation in recurring operations . 21 highlights from 2018 the following discussion of our results of operations and financial condition will provide information that will assist in understanding our financial statements and information about how certain accounting principles and estimates affect the consolidated financial statements . this discussion should be read in conjunction with the consolidated financial statements included herein . consolidated sales increased 13.3 % to $ 896.9 million compared to $ 791.8 million in the prior year . on a constant currency basis , average daily sales increased 13.3 % compared to prior year . consolidated operating income grew 35.0 % to $ 61.7 million compared to $ 45.7 million last year . net income per diluted share from continuing operations declined 24.7 % to $ 1.31. the full year 2017 comparative period includes a tax benefit of $ 20.0 million primarily related to the reversal of valuation allowances against the company 's deferred tax assets and the impacts of u.s. tax reform enacted in q4 2017. net income per diluted share from discontinued operations was $ 4.62 , primarily related to the $ 160.5 million book gain recognized on the sale of the company 's france business and the inclusion of eight months of france operating results in discontinued operations in 2018 . 22 gaap results of operations key performance indicators * ( in millions ) : replace_table_token_4_th * excludes discontinued operations ( see note 4 of notes to consolidated financial statements ) . * * includes special charges , net ( see note 4 of notes to consolidated financial statements ) . replace_table_token_5_th 23 replace_table_token_6_th * percentages are calculated using sales data in hundreds of thousands . for the year ended december 31 , 2018 and 2017 , ipg had 253 selling days and for the year ended december 31 , 2016 , ipg had 254 selling days . * * see reconciliation of segment and consolidated gaap operating income ( loss ) from continuing operations to segment and consolidated non-gaap operating income ( loss ) from continuing operations – unaudited 1 on august 31 , 2018 , the company closed on the sale of the france operations . prior and current year results of these divested operations , along with the associated gain , have been classified as discontinued operations . on march 24 , 2017 , the company closed on the sale of its european technology group businesses , other than its operations in france . prior and current year results of these divested businesses , along with the associated loss on the sale recorded in 2017 , have been classified as discontinued operations . on december 31 , 2016 the company closed on the sale of its afligo rebate processing business and on september 2 , 2016 the company closed on the sale of certain assets of its misco germany operation which had been reported as part of its european technology products group . prior and current year results of the germany operations and the rebate processing business , along with the associated gain on the sale of the rebate business , have been eliminated in the non-gaap presentation . the company believes that the non-gaap presentation conveys additional meaningful information to investors as it depicts the operations that are currently generating sales and that will continue to do so in future periods . see accompanying gaap reconciliation tables . 2 systemax manages its business and reports using a 52-53 week fiscal year that ends at midnight on the saturday closest to december 31. for clarity of presentation , fiscal years and quarters are described as if they ended on the last day of the respective calendar month . the actual fiscal quarter ended on december 29 , 2018 , december 30 , 2017 and december 31 , 2016 , respectively . the years ended 2018 , 2017 and 2016 included 52 weeks . 24 systemax inc. reconciliation of segment and consolidated gaap net sales from continuing operations to segment and consolidated non-gaap net sales from continuing operations - unaudited ( in millions ) replace_table_token_7_th systemax inc. reconciliation of segment and consolidated gaap gross profit from continuing operations to segment and consolidated non-gaap gross profit from continuing operations - unaudited ( in millions ) replace_table_token_8_th 25 systemax inc. reconciliation of segment gaap operating income ( loss ) from continuing operations to non-gaap operating income ( loss ) from continuing operations - unaudited ( in millions ) replace_table_token_9_th 26 management 's discussion and analysis that follows will include ipg , corporate and other , natg continuing operations and discontinued operations . the discussion is based upon the gaap results of operations table . net sales segments : the ipg segment net sales benefited in 2018 from continued strong demand across most product categories with growth rates led by many of the newer product lines we have invested in over the past several years . ipg grew sales across all of our sales channels , with growth rates highest within our managed sales channels , where we are benefiting from improvements in sales force productivity , evidenced by increased penetration of existing customer accounts , as well as growth from new customer acquisition and a continuation of a strong macro-economic environment . ipg net sales benefited from growth in its canada business which delivered its eighth consecutive quarter of double digit growth in the fourth quarter . canada sales increased approximately 30.8 % , 30.7 % on a constant currency basis , compared to prior year . u.s. revenue increased 12.5 % compared to prior year . on a constant currency basis , ipg average daily sales increased 13.3 % compared to prior year . story_separator_special_tag details of the purchase is as follows : fiscal month total number of shares purchased average price paid per share total number of shares purchased as part of publicly announced plans or programs maximum number of shares that may yet be purchased under the plans or programs july 232,550 $ 38.96 232,550 1,767,450 the company maintains a $ 75.0 million secured revolving credit agreement with one financial institution which has a five-year term , maturing on october 28 , 2021 and provides for borrowings in the united states . the credit agreement contains certain operating , financial and other covenants , including limits on annual levels of capital expenditures , availability tests related to payments of dividends and stock repurchases and fixed charge coverage tests related to acquisitions . the revolving credit agreement requires that a minimum level of availability be maintained . if such availability is not maintained , the company will be required to maintain a fixed charge coverage ratio ( as defined ) . the borrowings under the agreement are subject to borrowing base limitations of up to 85 % of eligible accounts receivable and the inventory advance rate computed as the lesser of 60 % or 85 % of the net orderly liquidation value ( “ nolv ” ) . borrowings are secured by substantially all of the borrower 's assets , as defined , including all accounts , accounts receivable , inventory and certain other assets , subject to limited exceptions , including the exclusion of certain foreign assets from the collateral . the interest rate under the amended and restated facility is computed at applicable market rates based on the london interbank offered rate ( “ libo ” ) , the federal reserve bank of new york ( “ nyfrb ” ) or the prime rate , plus an applicable margin . the applicable margin varies based on borrowing base availability . as of december 31 , 2018 , eligible collateral under the credit agreement was $ 75.0 million , total availability was $ 73.4 million , total outstanding letters of credit were $ 2.3 million , excess availability was $ 71.1 million and there were no outstanding borrowings . the company was in compliance with all of the covenants of the credit agreement in place as of december 31 , 2018. levels of earnings and cash flows are dependent on factors such as consolidated gross margin and selling , distribution and administrative costs , product mix and relative levels of domestic and foreign sales . unusual gains or expense items , such as special ( gains ) charges and settlements , may impact earnings and are separately disclosed . we expect that past performance may not be 32 indicative of future performance due to the competitive nature of our business segments where the need to adjust prices to gain or hold market share is prevalent . macroeconomic conditions , such as business and consumer sentiment , may affect our revenues , cash flows or financial condition . however , we do not believe that there is a direct correlation between any specific macroeconomic indicator and our revenues , cash flows or financial condition . we are not currently interest rate sensitive , as we have minimal debt . the expenses , capital expenditures and exit activities described above will require significant levels of liquidity , which we believe can be adequately funded from our currently available cash resources . in 2019 we anticipate capital expenditures in the range of $ 8.0 to $ 12.0 million , though at this time we are not contractually committed to incur these expenditures . within this spend , we currently anticipate an expansion of our distribution footprint in the second half of 2019 , including opening a new distribution center . we anticipate that capital spend would return to more normalized historical levels upon the opening of a new facility . over the past several years we have engaged in opportunistic acquisitions , choosing to pay the purchase price in cash , and may do so in the future as favorable situations arise . however , a deep and prolonged period of reduced business spending could adversely impact our cash resources and force us to either forego future acquisition opportunities or to pay the purchase price in shares of our common stock , which could have a dilutive effect on our earnings per share . we believe that our cash balances , future cash flows from operations and our availability under credit facilities will be sufficient to fund our working capital and other cash requirements for at least the next twelve months . we maintain our cash and cash equivalents in money market funds or their equivalent that have maturities of less than three months and in non-interest bearing accounts that partially offset banking fees . as of december 31 , 2018 , we had no investments with maturities of greater than three months . accordingly , we do not believe that our cash balances have significant exposure to interest rate risk . at december 31 , 2018 cash balances held in foreign subsidiaries totaled approximately $ 4.0 million . these balances are held in local country banks and are held primarily to support local working capital needs . the company had in excess of $ 362 million of liquidity ( cash and an undrawn line of credit ) in the u.s. as of december 31 , 2018 , which is sufficient to fund its u.s. operations and capital needs , including any dividend payments , for the foreseeable future . our cash position at december 31 , 2018 does not reflect payment of our special dividend of $ 6.50 per share , which was payable on january 3 , 2019. this dividend resulted in a total cash outlay of $ 243.5 million and was essentially funded by the sale of our france operations . we are obligated under non-cancelable operating leases for the rental of most

cash flows the following is a summary of cash flows for the years ended december 31 , 2018 , 2017 and 2016 : replace_table_token_16_th replace_table_token_17_th net cash used in operating activities net cash used in operating activities was $ 121.6 million during the year ended december 31 , 2018 compared to $ 120.4 million during the year ended december 31 , 2017. the increase in net cash used in operating activities primarily relates to the decrease in net loss in the period compared to 2017 , a net increase in non-cash stock-based compensation , partially offset by a decrease in net depreciation and amortization and changes in working capital . the most significant items affecting working capital in the year ended december 31 , 2018 includes accounts receivable related to the milestone revenue recognized under the gsk agreement and current deferred revenue associated with the bi agreement . net cash used in operating activities was $ 120.4 million during the year ended december 31 , 2017 compared to $ 96.4 million during the year ended december 31 , 2016. the increase in net cash used in operating activities primarily relates to the increase in net loss in the period compared to 2016 , partially offset by changes in working capital .

this non-gaap presentation reflects the entire natg segment , misco germany operation and rebate processing business as a discontinued operation for all periods presented as well as including adjustments for non-recurring items , intangible amortization and equity compensation in recurring operations . 21 highlights from 2018 the following discussion of our results of operations and financial condition will provide information that will assist in understanding our financial statements and information about how certain accounting principles and estimates affect the consolidated financial statements . this discussion should be read in conjunction with the consolidated financial statements included herein . consolidated sales increased 13.3 % to $ 896.9 million compared to $ 791.8 million in the prior year . on a constant currency basis , average daily sales increased 13.3 % compared to prior year . consolidated operating income grew 35.0 % to $ 61.7 million compared to $ 45.7 million last year . net income per diluted share from continuing operations declined 24.7 % to $ 1.31. the full year 2017 comparative period includes a tax benefit of $ 20.0 million primarily related to the reversal of valuation allowances against the company 's deferred tax assets and the impacts of u.s. tax reform enacted in q4 2017. net income per diluted share from discontinued operations was $ 4.62 , primarily related to the $ 160.5 million book gain recognized on the sale of the company 's france business and the inclusion of eight months of france operating results in discontinued operations in 2018 . 22 gaap results of operations key performance indicators * ( in millions ) : replace_table_token_4_th * excludes discontinued operations ( see note 4 of notes to consolidated financial statements ) . * * includes special charges , net ( see note 4 of notes to consolidated financial statements ) . replace_table_token_5_th 23 replace_table_token_6_th * percentages are calculated using sales data in hundreds of thousands . for the year ended december 31 , 2018 and 2017 , ipg had 253 selling days and for the year ended december 31 , 2016 , ipg had 254 selling days . * * see reconciliation of segment and consolidated gaap operating income ( loss ) from continuing operations to segment and consolidated non-gaap operating income ( loss ) from continuing operations – unaudited 1 on august 31 , 2018 , the company closed on the sale of the france operations . prior and current year results of these divested operations , along with the associated gain , have been classified as discontinued operations . on march 24 , 2017 , the company closed on the sale of its european technology group businesses , other than its operations in france . prior and current year results of these divested businesses , along with the associated loss on the sale recorded in 2017 , have been classified as discontinued operations . on december 31 , 2016 the company closed on the sale of its afligo rebate processing business and on september 2 , 2016 the company closed on the sale of certain assets of its misco germany operation which had been reported as part of its european technology products group . prior and current year results of the germany operations and the rebate processing business , along with the associated gain on the sale of the rebate business , have been eliminated in the non-gaap presentation . the company believes that the non-gaap presentation conveys additional meaningful information to investors as it depicts the operations that are currently generating sales and that will continue to do so in future periods . see accompanying gaap reconciliation tables . 2 systemax manages its business and reports using a 52-53 week fiscal year that ends at midnight on the saturday closest to december 31. for clarity of presentation , fiscal years and quarters are described as if they ended on the last day of the respective calendar month . the actual fiscal quarter ended on december 29 , 2018 , december 30 , 2017 and december 31 , 2016 , respectively . the years ended 2018 , 2017 and 2016 included 52 weeks . 24 systemax inc. reconciliation of segment and consolidated gaap net sales from continuing operations to segment and consolidated non-gaap net sales from continuing operations - unaudited ( in millions ) replace_table_token_7_th systemax inc. reconciliation of segment and consolidated gaap gross profit from continuing operations to segment and consolidated non-gaap gross profit from continuing operations - unaudited ( in millions ) replace_table_token_8_th 25 systemax inc. reconciliation of segment gaap operating income ( loss ) from continuing operations to non-gaap operating income ( loss ) from continuing operations - unaudited ( in millions ) replace_table_token_9_th 26 management 's discussion and analysis that follows will include ipg , corporate and other , natg continuing operations and discontinued operations . the discussion is based upon the gaap results of operations table . net sales segments : the ipg segment net sales benefited in 2018 from continued strong demand across most product categories with growth rates led by many of the newer product lines we have invested in over the past several years . ipg grew sales across all of our sales channels , with growth rates highest within our managed sales channels , where we are benefiting from improvements in sales force productivity , evidenced by increased penetration of existing customer accounts , as well as growth from new customer acquisition and a continuation of a strong macro-economic environment . ipg net sales benefited from growth in its canada business which delivered its eighth consecutive quarter of double digit growth in the fourth quarter . canada sales increased approximately 30.8 % , 30.7 % on a constant currency basis , compared to prior year . u.s. revenue increased 12.5 % compared to prior year . on a constant currency basis , ipg average daily sales increased 13.3 % compared to prior year . story_separator_special_tag details of the purchase is as follows : fiscal month total number of shares purchased average price paid per share total number of shares purchased as part of publicly announced plans or programs maximum number of shares that may yet be purchased under the plans or programs july 232,550 $ 38.96 232,550 1,767,450 the company maintains a $ 75.0 million secured revolving credit agreement with one financial institution which has a five-year term , maturing on october 28 , 2021 and provides for borrowings in the united states . the credit agreement contains certain operating , financial and other covenants , including limits on annual levels of capital expenditures , availability tests related to payments of dividends and stock repurchases and fixed charge coverage tests related to acquisitions . the revolving credit agreement requires that a minimum level of availability be maintained . if such availability is not maintained , the company will be required to maintain a fixed charge coverage ratio ( as defined ) . the borrowings under the agreement are subject to borrowing base limitations of up to 85 % of eligible accounts receivable and the inventory advance rate computed as the lesser of 60 % or 85 % of the net orderly liquidation value ( “ nolv ” ) . borrowings are secured by substantially all of the borrower 's assets , as defined , including all accounts , accounts receivable , inventory and certain other assets , subject to limited exceptions , including the exclusion of certain foreign assets from the collateral . the interest rate under the amended and restated facility is computed at applicable market rates based on the london interbank offered rate ( “ libo ” ) , the federal reserve bank of new york ( “ nyfrb ” ) or the prime rate , plus an applicable margin . the applicable margin varies based on borrowing base availability . as of december 31 , 2018 , eligible collateral under the credit agreement was $ 75.0 million , total availability was $ 73.4 million , total outstanding letters of credit were $ 2.3 million , excess availability was $ 71.1 million and there were no outstanding borrowings . the company was in compliance with all of the covenants of the credit agreement in place as of december 31 , 2018. levels of earnings and cash flows are dependent on factors such as consolidated gross margin and selling , distribution and administrative costs , product mix and relative levels of domestic and foreign sales . unusual gains or expense items , such as special ( gains ) charges and settlements , may impact earnings and are separately disclosed . we expect that past performance may not be 32 indicative of future performance due to the competitive nature of our business segments where the need to adjust prices to gain or hold market share is prevalent . macroeconomic conditions , such as business and consumer sentiment , may affect our revenues , cash flows or financial condition . however , we do not believe that there is a direct correlation between any specific macroeconomic indicator and our revenues , cash flows or financial condition . we are not currently interest rate sensitive , as we have minimal debt . the expenses , capital expenditures and exit activities described above will require significant levels of liquidity , which we believe can be adequately funded from our currently available cash resources . in 2019 we anticipate capital expenditures in the range of $ 8.0 to $ 12.0 million , though at this time we are not contractually committed to incur these expenditures . within this spend , we currently anticipate an expansion of our distribution footprint in the second half of 2019 , including opening a new distribution center . we anticipate that capital spend would return to more normalized historical levels upon the opening of a new facility . over the past several years we have engaged in opportunistic acquisitions , choosing to pay the purchase price in cash , and may do so in the future as favorable situations arise . however , a deep and prolonged period of reduced business spending could adversely impact our cash resources and force us to either forego future acquisition opportunities or to pay the purchase price in shares of our common stock , which could have a dilutive effect on our earnings per share . we believe that our cash balances , future cash flows from operations and our availability under credit facilities will be sufficient to fund our working capital and other cash requirements for at least the next twelve months . we maintain our cash and cash equivalents in money market funds or their equivalent that have maturities of less than three months and in non-interest bearing accounts that partially offset banking fees . as of december 31 , 2018 , we had no investments with maturities of greater than three months . accordingly , we do not believe that our cash balances have significant exposure to interest rate risk . at december 31 , 2018 cash balances held in foreign subsidiaries totaled approximately $ 4.0 million . these balances are held in local country banks and are held primarily to support local working capital needs . the company had in excess of $ 362 million of liquidity ( cash and an undrawn line of credit ) in the u.s. as of december 31 , 2018 , which is sufficient to fund its u.s. operations and capital needs , including any dividend payments , for the foreseeable future . our cash position at december 31 , 2018 does not reflect payment of our special dividend of $ 6.50 per share , which was payable on january 3 , 2019. this dividend resulted in a total cash outlay of $ 243.5 million and was essentially funded by the sale of our france operations . we are obligated under non-cancelable operating leases for the rental of most

required the use of cash . 28 natg discontinued operations incurred special charges of approximately $ 6.9 million throughout the year ended december 31 , 2017 , of which $ 6.2 million primarily related to updating our future lease cash flows and $ 0.7 million related to ongoing restitution proceedings against certain former natg executives . amounts that are unpaid at december 31 , 2018 are recorded in accrued expenses and other current liabilities and other liabilities in the accompanying consolidated balance sheets . the company 's natg segment incurred special charges in 2016 of approximately $ 11.7 million , of which $ 2.2 million is included in continuing operations and $ 9.5 million is included in discontinued operations . charges incurred included approximately $ 10.9 million for lease terminations and other exit costs ( includes $ 3.3 million benefit of previous rent accruals ) for the closing of the two remaining retail stores , a distribution center and the natg corporate headquarters in 2016 , approximately $ 2.0 million of additional lease termination costs ( includes $ 0.1 million benefit of previous rent accruals ) of our previously exited retail stores ( present value of contractual gross lease payments net of sublease rental income , or settlement amount ) , $ 0.6 million for consulting expenses related to the lease terminations and $ 0.2 million for severance and related expenses . natg also incurred in 2016 approximately $ 1.3 million of professional costs , related to the ongoing restitution proceedings against certain former natg executives and professional costs related to the investigation conducted at the request of the us attorney for the southern district of florida .

in 2018 , our loyalty customers grew 16 % to 11 million and contributed 56 % of our sales . in october 2018 , we launched our enhanced program , the nordy club . cardmembers now earn three points for every dollar spent , up from two points . in addition , we added experiential elements , such as exclusive access to services and experiences . going forward , we plan to pursue additional opportunities to further personalize the customer experience and drive increased spend . we remain focused on driving higher shareholder returns through three key deliverables : growing market share , improving profitability and shareholder returns and continuing our disciplined capital allocation approach . we are well-positioned to execute against our long-term plans and deliver a differentiated customer experience . 20 results of operations in our ongoing effort to enhance the customer experience , we are focused on providing customers with a seamless experience across our channels . we invested early in our omni-channel capabilities , integrating our operations , merchandising and technology across our stores and online , in both our full-price and off-price businesses . while our customers may engage with us through multiple channels , we know they value the overall nordstrom brand experience and view us simply as nordstrom , which is ultimately how we view our business . we have one reportable segment in 2018 , retail , and analyze our results on a total company basis . similar to other retailers , nordstrom follows the retail 4-5-4 reporting calendar , which included an extra week in the fourth quarter of 2017 ( the “ 53rd week ” ) . references to 2018 and all years except 2017 within this document are based on a 52-week fiscal year , while 2017 is based on a 53-week fiscal year . however , the 53rd week is not included in the comparable sales calculations . we may not calculate certain metrics used to evaluate our business in a consistent manner among industry peers . provided below are definitions of metrics we present within our analysis : comparable sales – sales from stores that have been open at least one full year at the beginning of the year . in 2019 , we expect net sales growth to approximate comparable sales . as a result , we will only report net sales growth comparable sales include digital sales and actual returns . our estimate for sales return allowance is not included in the comparable sales calculations . due to the 53rd week in 2017 , our 2018 comparable sales are reported on a like-for-like basis with no impact from calendar shifts or the new revenue standard ( see note 1 : nature of operations and summary of significant accounting policies in item 8 ) . digital sales – online sales and digitally assisted store sales which include buy online , pick up in store ( “ bopus ” ) , ship to store , reserve online , try in store ( store reserve ) and style board , a digital selling tool gross profit – net sales less cost of sales and related buying and occupancy costs inventory turnover rate – trailing 4-quarter cost of sales and related buying and occupancy costs divided by the trailing 4-quarter average inventory net sales during the first quarter of 2018 , we adopted the new revenue standard using the modified retrospective adoption method ( see note 1 : nature of operations and summary of significant accounting policies in item 8 ) . results beginning in the first quarter of 2018 are presented under the new revenue standard , while prior period amounts are not adjusted . also beginning in 2018 , we aligned our sales presentation with how we view the results of our operations internally and how our customers shop with us , by our full-price and off-price businesses . in 2018 , we allocated our sales return allowance and loyalty related adjustments to full-price and off-price . for 2017 and 2016 , other primarily included unallocated sales return , in-transit and loyalty related adjustments necessary to reconcile sales by business to total net sales . full-price – nordstrom u.s. full-line stores , nordstrom.com , canada , trunk club , jeffrey and nordstrom local off-price – nordstrom u.s. rack stores , nordstromrack.com/hautelook and last chance clearance stores the following table summarizes net sales and comparable sales by business : replace_table_token_6_th nordstrom , inc. and subsidiaries 21 net sales ( 2018 vs. 2017 ) in 2018 , total company net sales increased 2.3 % , compared with 2017 . this included a decrease of approximately 150 basis points due to the 53rd week , which contributed approximately $ 220 in additional net sales in 2017 . digital sales increased 16 % compared with 2017 . during the year , we opened our nordstrom men 's store nyc , six nordstrom rack stores in canada and six in the u.s. , one jeffrey boutique and two nordstrom locals . we closed two full-line stores and one trunk club clubhouse . full-price net sales decreased 1.5 % , compared with 2017 . this included a decrease of approximately 300 basis points primarily due to loyalty related adjustments and the 53rd week . full-price sales reflected an increase in the average selling price per item sold , partially offset by a decrease in the number of items sold . kids ' was the top-performing merchandise category . off-price net sales increased 4.5 % , compared with 2017 . this included a decrease of approximately 250 basis points primarily due to the 53rd week and loyalty related adjustments . off-price sales reflected an increase in the number of items sold , partially offset by a decrease in the average selling price per item sold . the top-performing merchandise category was shoes . story_separator_special_tag adjusted ebitda is not a measure of financial performance under gaap and should be considered in addition to , and not as a substitute for net earnings , overall change in cash or liquidity of the business as a whole . our method of determining non-gaap financial measures may differ from other companies ' methods and therefore may not be comparable to those used by other companies . the following is a reconciliation of net earnings to adjusted ebitda : replace_table_token_18_th nordstrom , inc. and subsidiaries 29 credit capacity and commitments as of february 2 , 2019 , we had total short-term borrowing capacity of $ 800 . in september 2018 , we renewed our existing $ 800 senior unsecured revolving credit facility ( “ revolver ” ) , extending the expiration from april 2020 to september 2023 . our revolver contains customary representations , warranties , covenants and terms , which are substantially similar to our 2015 revolver . under the terms of our revolver , we pay a variable rate of interest and a commitment fee based on our debt rating . the revolver is available for working capital , capital expenditures and general corporate purposes . provided that we obtain written consent from our lenders , we have the option to increase the revolving commitment by up to $ 200 , to a total of $ 1,000 , and two options to extend the revolving commitment by one year . our $ 800 commercial paper program allows us to use the proceeds to fund operating cash requirements . under the terms of the commercial paper agreement , we pay a rate of interest based on , among other factors , the maturity of the issuance and market conditions . the issuance of commercial paper has the effect , while it is outstanding , of reducing available liquidity under the revolver by an amount equal to the principal amount of commercial paper . as of february 2 , 2019 , we had no issuances outstanding under our commercial paper program and no borrowings outstanding under our revolver . our wholly owned subsidiary in puerto rico maintained a $ 52 unsecured borrowing facility to support our expansion into that market . borrowings on this facility incurred interest at an annual rate based upon libor plus 1.275 % and also incurred a fee based on any unused commitment . in 2018 , we fully repaid $ 47 outstanding on this facility , which was included in the current portion of long-term debt . this facility expired in the fourth quarter of 2018. we maintain trade and standby letters of credit to facilitate our international payments . as of february 2 , 2019 , we have $ 8 available and none outstanding under the trade letter of credit and $ 15 available and $ 2 outstanding under the standby letter of credit . plans for our nordstrom nyc store , which we currently expect to open in october 2019 , ultimately include owning a condominium interest in a mixed-use tower and leasing certain nearby properties . as of february 2 , 2019 , we had approximately $ 302 of fee interest in land , which is expected to convert to the condominium interest once the store is constructed . we have committed to make future installment payments based on the developer meeting pre-established construction and development milestones . in the event that this project is not completed , the opening may be delayed and we may be subject to future losses or capital commitments in order to complete construction or to monetize our investment . impact of credit ratings under the terms of our revolver , any borrowings we may enter into will accrue interest for euro-dollar rate loans at a floating base rate tied to libor , for canadian dealer offer rate loans at a floating rate tied to cdor , and for base rate loans at the highest of : ( i ) the euro-dollar rate plus 100 basis points , ( ii ) the federal funds rate plus 50 basis points and ( iii ) the prime rate . the rate depends upon the type of borrowing incurred , plus in each case an applicable margin . this applicable margin varies depending upon the credit ratings assigned to our long-term unsecured debt . at the time of this report , our long-term unsecured debt ratings , outlook and resulting applicable margin were as follows : credit ratings outlook moody 's baa1 stable standard & poor 's bbb+ stable base interest rate applicable margin euro-dollar rate loan libor 1.03 % canadian dealer offer rate loan cdor 1.03 % base rate loan various 0.03 % should the ratings assigned to our long-term unsecured debt improve , the applicable margin associated with any such borrowings may decrease , resulting in a lower borrowing cost under this facility . should the ratings assigned to our long-term unsecured debt worsen , the applicable margin associated with our borrowings may increase , resulting in a higher borrowing cost under this facility . debt covenants the revolver requires that we maintain an adjusted debt to earnings before interest , income taxes , depreciation , amortization and rent ( “ ebitdar ” ) leverage ratio of no more than four times . as of february 2 , 2019 , we were in compliance with this covenant . 30 adjusted debt to ebitdar ( non-gaap financial measure ) adjusted debt to ebitdar is one of our key financial metrics , and we believe that our debt levels are best analyzed using this measure . our goal is to manage debt levels to maintain an investment-grade credit rating and operate with an efficient capital structure . in evaluating our debt levels , this measure provides a reflection of our credit worthiness that could impact our credit rating and borrowing costs . we also have a debt covenant that requires an adjusted debt to ebitdar leverage ratio of no

required the use of cash . 28 natg discontinued operations incurred special charges of approximately $ 6.9 million throughout the year ended december 31 , 2017 , of which $ 6.2 million primarily related to updating our future lease cash flows and $ 0.7 million related to ongoing restitution proceedings against certain former natg executives . amounts that are unpaid at december 31 , 2018 are recorded in accrued expenses and other current liabilities and other liabilities in the accompanying consolidated balance sheets . the company 's natg segment incurred special charges in 2016 of approximately $ 11.7 million , of which $ 2.2 million is included in continuing operations and $ 9.5 million is included in discontinued operations . charges incurred included approximately $ 10.9 million for lease terminations and other exit costs ( includes $ 3.3 million benefit of previous rent accruals ) for the closing of the two remaining retail stores , a distribution center and the natg corporate headquarters in 2016 , approximately $ 2.0 million of additional lease termination costs ( includes $ 0.1 million benefit of previous rent accruals ) of our previously exited retail stores ( present value of contractual gross lease payments net of sublease rental income , or settlement amount ) , $ 0.6 million for consulting expenses related to the lease terminations and $ 0.2 million for severance and related expenses . natg also incurred in 2016 approximately $ 1.3 million of professional costs , related to the ongoing restitution proceedings against certain former natg executives and professional costs related to the investigation conducted at the request of the us attorney for the southern district of florida .

in 2018 , our loyalty customers grew 16 % to 11 million and contributed 56 % of our sales . in october 2018 , we launched our enhanced program , the nordy club . cardmembers now earn three points for every dollar spent , up from two points . in addition , we added experiential elements , such as exclusive access to services and experiences . going forward , we plan to pursue additional opportunities to further personalize the customer experience and drive increased spend . we remain focused on driving higher shareholder returns through three key deliverables : growing market share , improving profitability and shareholder returns and continuing our disciplined capital allocation approach . we are well-positioned to execute against our long-term plans and deliver a differentiated customer experience . 20 results of operations in our ongoing effort to enhance the customer experience , we are focused on providing customers with a seamless experience across our channels . we invested early in our omni-channel capabilities , integrating our operations , merchandising and technology across our stores and online , in both our full-price and off-price businesses . while our customers may engage with us through multiple channels , we know they value the overall nordstrom brand experience and view us simply as nordstrom , which is ultimately how we view our business . we have one reportable segment in 2018 , retail , and analyze our results on a total company basis . similar to other retailers , nordstrom follows the retail 4-5-4 reporting calendar , which included an extra week in the fourth quarter of 2017 ( the “ 53rd week ” ) . references to 2018 and all years except 2017 within this document are based on a 52-week fiscal year , while 2017 is based on a 53-week fiscal year . however , the 53rd week is not included in the comparable sales calculations . we may not calculate certain metrics used to evaluate our business in a consistent manner among industry peers . provided below are definitions of metrics we present within our analysis : comparable sales – sales from stores that have been open at least one full year at the beginning of the year . in 2019 , we expect net sales growth to approximate comparable sales . as a result , we will only report net sales growth comparable sales include digital sales and actual returns . our estimate for sales return allowance is not included in the comparable sales calculations . due to the 53rd week in 2017 , our 2018 comparable sales are reported on a like-for-like basis with no impact from calendar shifts or the new revenue standard ( see note 1 : nature of operations and summary of significant accounting policies in item 8 ) . digital sales – online sales and digitally assisted store sales which include buy online , pick up in store ( “ bopus ” ) , ship to store , reserve online , try in store ( store reserve ) and style board , a digital selling tool gross profit – net sales less cost of sales and related buying and occupancy costs inventory turnover rate – trailing 4-quarter cost of sales and related buying and occupancy costs divided by the trailing 4-quarter average inventory net sales during the first quarter of 2018 , we adopted the new revenue standard using the modified retrospective adoption method ( see note 1 : nature of operations and summary of significant accounting policies in item 8 ) . results beginning in the first quarter of 2018 are presented under the new revenue standard , while prior period amounts are not adjusted . also beginning in 2018 , we aligned our sales presentation with how we view the results of our operations internally and how our customers shop with us , by our full-price and off-price businesses . in 2018 , we allocated our sales return allowance and loyalty related adjustments to full-price and off-price . for 2017 and 2016 , other primarily included unallocated sales return , in-transit and loyalty related adjustments necessary to reconcile sales by business to total net sales . full-price – nordstrom u.s. full-line stores , nordstrom.com , canada , trunk club , jeffrey and nordstrom local off-price – nordstrom u.s. rack stores , nordstromrack.com/hautelook and last chance clearance stores the following table summarizes net sales and comparable sales by business : replace_table_token_6_th nordstrom , inc. and subsidiaries 21 net sales ( 2018 vs. 2017 ) in 2018 , total company net sales increased 2.3 % , compared with 2017 . this included a decrease of approximately 150 basis points due to the 53rd week , which contributed approximately $ 220 in additional net sales in 2017 . digital sales increased 16 % compared with 2017 . during the year , we opened our nordstrom men 's store nyc , six nordstrom rack stores in canada and six in the u.s. , one jeffrey boutique and two nordstrom locals . we closed two full-line stores and one trunk club clubhouse . full-price net sales decreased 1.5 % , compared with 2017 . this included a decrease of approximately 300 basis points primarily due to loyalty related adjustments and the 53rd week . full-price sales reflected an increase in the average selling price per item sold , partially offset by a decrease in the number of items sold . kids ' was the top-performing merchandise category . off-price net sales increased 4.5 % , compared with 2017 . this included a decrease of approximately 250 basis points primarily due to the 53rd week and loyalty related adjustments . off-price sales reflected an increase in the number of items sold , partially offset by a decrease in the average selling price per item sold . the top-performing merchandise category was shoes . story_separator_special_tag adjusted ebitda is not a measure of financial performance under gaap and should be considered in addition to , and not as a substitute for net earnings , overall change in cash or liquidity of the business as a whole . our method of determining non-gaap financial measures may differ from other companies ' methods and therefore may not be comparable to those used by other companies . the following is a reconciliation of net earnings to adjusted ebitda : replace_table_token_18_th nordstrom , inc. and subsidiaries 29 credit capacity and commitments as of february 2 , 2019 , we had total short-term borrowing capacity of $ 800 . in september 2018 , we renewed our existing $ 800 senior unsecured revolving credit facility ( “ revolver ” ) , extending the expiration from april 2020 to september 2023 . our revolver contains customary representations , warranties , covenants and terms , which are substantially similar to our 2015 revolver . under the terms of our revolver , we pay a variable rate of interest and a commitment fee based on our debt rating . the revolver is available for working capital , capital expenditures and general corporate purposes . provided that we obtain written consent from our lenders , we have the option to increase the revolving commitment by up to $ 200 , to a total of $ 1,000 , and two options to extend the revolving commitment by one year . our $ 800 commercial paper program allows us to use the proceeds to fund operating cash requirements . under the terms of the commercial paper agreement , we pay a rate of interest based on , among other factors , the maturity of the issuance and market conditions . the issuance of commercial paper has the effect , while it is outstanding , of reducing available liquidity under the revolver by an amount equal to the principal amount of commercial paper . as of february 2 , 2019 , we had no issuances outstanding under our commercial paper program and no borrowings outstanding under our revolver . our wholly owned subsidiary in puerto rico maintained a $ 52 unsecured borrowing facility to support our expansion into that market . borrowings on this facility incurred interest at an annual rate based upon libor plus 1.275 % and also incurred a fee based on any unused commitment . in 2018 , we fully repaid $ 47 outstanding on this facility , which was included in the current portion of long-term debt . this facility expired in the fourth quarter of 2018. we maintain trade and standby letters of credit to facilitate our international payments . as of february 2 , 2019 , we have $ 8 available and none outstanding under the trade letter of credit and $ 15 available and $ 2 outstanding under the standby letter of credit . plans for our nordstrom nyc store , which we currently expect to open in october 2019 , ultimately include owning a condominium interest in a mixed-use tower and leasing certain nearby properties . as of february 2 , 2019 , we had approximately $ 302 of fee interest in land , which is expected to convert to the condominium interest once the store is constructed . we have committed to make future installment payments based on the developer meeting pre-established construction and development milestones . in the event that this project is not completed , the opening may be delayed and we may be subject to future losses or capital commitments in order to complete construction or to monetize our investment . impact of credit ratings under the terms of our revolver , any borrowings we may enter into will accrue interest for euro-dollar rate loans at a floating base rate tied to libor , for canadian dealer offer rate loans at a floating rate tied to cdor , and for base rate loans at the highest of : ( i ) the euro-dollar rate plus 100 basis points , ( ii ) the federal funds rate plus 50 basis points and ( iii ) the prime rate . the rate depends upon the type of borrowing incurred , plus in each case an applicable margin . this applicable margin varies depending upon the credit ratings assigned to our long-term unsecured debt . at the time of this report , our long-term unsecured debt ratings , outlook and resulting applicable margin were as follows : credit ratings outlook moody 's baa1 stable standard & poor 's bbb+ stable base interest rate applicable margin euro-dollar rate loan libor 1.03 % canadian dealer offer rate loan cdor 1.03 % base rate loan various 0.03 % should the ratings assigned to our long-term unsecured debt improve , the applicable margin associated with any such borrowings may decrease , resulting in a lower borrowing cost under this facility . should the ratings assigned to our long-term unsecured debt worsen , the applicable margin associated with our borrowings may increase , resulting in a higher borrowing cost under this facility . debt covenants the revolver requires that we maintain an adjusted debt to earnings before interest , income taxes , depreciation , amortization and rent ( “ ebitdar ” ) leverage ratio of no more than four times . as of february 2 , 2019 , we were in compliance with this covenant . 30 adjusted debt to ebitdar ( non-gaap financial measure ) adjusted debt to ebitdar is one of our key financial metrics , and we believe that our debt levels are best analyzed using this measure . our goal is to manage debt levels to maintain an investment-grade credit rating and operate with an efficient capital structure . in evaluating our debt levels , this measure provides a reflection of our credit worthiness that could impact our credit rating and borrowing costs . we also have a debt covenant that requires an adjusted debt to ebitdar leverage ratio of no

net cash provided by operating activities decreased by $ 104 between 2018 and 2017 primarily due to the timing of payroll and increased incentive compensation payouts , which included $ 16 for our one-time investment in employees in response to the tax act , paid in 2018. net cash provided by operating activities decreased by $ 258 between 2017 and 2016 primarily due to the timing of tax refunds and payments . investing activities our investing cash inflows are generally from proceeds from sales of property and equipment . our investing cash outflows include payments for capital expenditures , including stores , supply chain improvements and technology costs . in addition , other investing includes payments for investments in other companies , as well as proceeds from distributions or sales of these investments . net cash used in investing activities decreased by $ 31 between 2018 and 2017 and $ 107 between 2017 and 2016 primarily due to decreases in capital expenditures , partially offset by the acquisitions of two retail technology companies in 2018 , which were classified in other investing activities , net ( see note 1 : nature of operations and summary of significant accounting policies in item 8 ) . capital expenditures our capital expenditures , net are summarized as follows : replace_table_token_16_th 1 deferred property incentives are included in our cash provided by operations in our consolidated statements of cash flows in item 8 . we operationally view the property incentives we receive from our developers as an offset to our capital expenditures . 2 generational investments include nordstromrack.com/hautelook , canada , trunk club and nordstrom nyc . nordstrom , inc. and subsidiaries 27 capital expenditures , net decreased $ 66 in 2018 compared with 2017 primarily due to fewer new nordstrom rack store openings and u.s. full-line relocations , partially offset by increased supply chain investments .

all debt securities with an unrealized loss are reviewed . we recognize an impairment loss when a debt investment 's value declines below cost , adjusted for accretion , amortization and previous other-than-temporary impairments , and it is determined that the decline is other-than-temporary . debt investments : we assess whether we intend to sell , or it is more likely than not that we will be required to sell , a fixed maturity investment before recovery of its amortized cost basis less any current period credit losses . for fixed maturity investments that are considered other-than-temporarily impaired and that we do not intend to sell and will not be required to sell , we separate the amount of the impairment into the amount that is credit related ( credit loss component ) and the amount due to all other factors . the credit loss component is recognized in earnings and is the difference between the investment 's amortized cost basis and the present value of its expected future cash flows . the remaining difference between the investment 's fair value and the present value of future expected cash flows is recognized in other comprehensive income . the fair value at the time of impairment is the new cost basis for the impaired security . equity investments : asu 2016-01 , “ recognition and measurement of financial assets and financial liabilities ” requires equity investments that are not consolidated or accounted for under the equity method of accounting to be measured at fair value with changes in fair value recognized in net income each reporting period . as a result of this standard , equity securities with readily determinable fair values are not required to be evaluated for other-than-temporary-impairment . fair values of financial instruments . accounting standards codification ( “ asc ” ) 820 defines fair value , establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements . asc 820 , among other things , requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value . in addition , asc 820 precludes the use of block discounts when measuring the fair value of instruments traded in an active market , which were previously applied to large holdings of publicly traded equity securities . we determine the fair value of our financial instruments based on the fair value hierarchy established in asc 820. in accordance with asc 820 , we utilize the following fair value hierarchy : ● level 1 : quoted prices in active markets for identical assets ; ● level 2 : inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets , inputs of identical assets for less active markets , and inputs that are observable for the asset or liability , either directly or indirectly , for substantially the full term of the instrument ; and ● level 3 : inputs to the valuation methodology that are unobservable for the asset or liability . this hierarchy requires the use of observable market data when available . under asc 820 , we determine fair value based on the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date . it is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements , in accordance with the fair value hierarchy described above . fair value measurements for assets and liabilities where there exists limited or no observable market data are calculated based upon our pricing policy , the economic and competitive environment , the characteristics of the asset or liability and other factors as appropriate . these estimated fair values may not be realized upon actual sale or immediate settlement of the asset or liability . 37 ​ where quoted prices are available on active exchanges for identical instruments , investment securities are classified within level 1 of the valuation hierarchy . level 1 investment securities include common stock , preferred stock and the equity warrant classified as other investments . level 2 investment securities include corporate bonds , corporate bank loans , municipal bonds , u.s. treasury securities , other obligations of the u.s. government and mortgage-backed securities for which quoted prices are not available on active exchanges for identical instruments . we use a third party pricing service to determine fair values for each level 2 investment security in all asset classes . since quoted prices in active markets for identical assets are not available , these prices are determined using observable market information such as quotes from less active markets and or quoted prices of securities with similar characteristics , among other things . we have reviewed the processes used by the pricing service and have determined that they result in fair values consistent with the requirements of asc 820 for level 2 investment securities . we have not adjusted any prices received from third-party pricing sources . in cases where there is limited activity or less transparency around inputs to the valuation , investment securities are classified within level 3 of the valuation hierarchy . level 3 investments are valued based on the best available data in order to approximate fair value . this data may be internally developed and consider risk premiums that a market participant would require . investment securities classified within level 3 include other less liquid investment securities . deferred policy acquisition costs . policy acquisition costs ( mainly commission , premium taxes , underwriting and marketing expenses and ceding commissions ) that vary with and are primarily related to the successful acquisition of new and renewal insurance contracts are deferred and charged to operations over periods in which the related premiums are earned . story_separator_special_tag as well as unfavorable net prior year loss reserve development of $ 0.1 million during the year ended december 31 , 2020 as compared to favorable net prior year loss reserve development of $ 0.7 million during the same period the prior year , and ( e ) a $ 1.8 million increase in losses and lae in our aerospace & programs business unit due primarily to higher net premiums earned , higher current 41 ​ accident year net loss trends , partially offset by $ 0.4 million of favorable prior year net loss reserve development during the year ended december 31 , 2020 compared to $ 0.1 million of unfavorable prior year net loss reserve development during the same period of 2019. the exited contract binding line of the primary automobile business contributed $ 32.8 million to the commercial auto business unit 's unfavorable prior year loss reserve development during the fiscal year ended december 31 , 2020 as compared to $ 39.8 million for the same period the prior year . operating expenses increased $ 2.3 million primarily as the result of higher production related expenses of $ 1.8 million , increased professional services of $ 2.3 million and increased other operating expenses of $ 0.5 million , partially offset by lower salary and related expenses of $ 1.3 million , due primarily to incentive compensation accrual adjustments reported during the first quarter of 2020 , lower occupancy and related expenses of $ 0.2 million and lower travel and related expenses of $ 0.8 million . the specialty commercial segment reported a net loss ratio of 86.6 % for the year ended december 31 , 2020 as compared to 85.0 % for the same period in 2019. the gross loss ratio before reinsurance was 85.3 % for the year ended december 31 , 2020 as compared to 75.9 % for the same period in 2019. the increase in the net loss ratio was due in large part to the $ 21.7 million charge for the loss portfolio transfer reinsurance contract that closed during the third quarter of 2020 that was reported as ceded incurred losses . the increase in the gross and net loss ratios was also impacted by catastrophe losses of $ 15.7 million for the year ended december 31 , 2020 as compared to catastrophe losses of $ 2.3 million during the same period of 2019 , partially offset by lower unfavorable prior year net loss reserve development and lower current accident year loss trends for the year ended december 31 , 2020 as compared to the same period of 2019. the specialty commercial segment reported $ 45.8 million of unfavorable prior year net loss reserve development for the year ended december 31 , 2020 as compared to unfavorable prior year net loss reserve development of $ 60.1 million for the same period of 2019. the specialty commercial segment reported a net expense ratio of 19.4 % for the year ended december 31 , 2020 as compared to 21.8 % for the same period of 2019. the decrease in the net expense ratio was due largely to the increase in net premiums earned partially offset by the increase in operating expenses . standard commercial segment . gross premiums written for the standard commercial segment were $ 98.0 million for the year ended december 31 , 2020 , which was $ 5.4 million , or 6 % , more than the $ 92.6 million reported for the same period in 2019. net premiums written were $ 68.4 million for the year ended december 31 , 2020 as compared to $ 62.9 million for the same period in 2019. the increase in gross and net premiums written was due to higher premium production in our commercial accounts business unit . total revenue for the standard commercial segment of $ 69.8 million for the year ended december 31 , 2020 , was $ 1.6 million , or 2 % , more than the $ 68.2 million reported for the same period in 2019. this increase in total revenue was due to higher net premiums earned of $ 2.6 million , due primarily to the increased premiums written discussed above , partially offset by lower net investment income of $ 0.8 million and lower finance charges of $ 0.2 million during the year ended december 31 , 2020 as compared to the same period during 2019. our standard commercial segment reported a pre-tax loss of $ 3.0 million for the year ended december 31 , 2020 as compared to a pre-tax loss of $ 0.8 million for the same period of 2019. the pre-tax loss was the result of higher losses and lae of $ 2.4 million and higher operating expenses of $ 1.4 million , partially offset by the higher revenue discussed above . the higher operating expenses were largely the result of higher production related expenses of $ 0.5 million , higher salary and related expenses of $ 0.9 million , higher professional service fees of $ 0.2 million and higher other general expenses of $ 0.2 million , partially offset by lower occupancy and related expenses of $ 0.2 million and lower travel and related expenses of $ 0.2 million . the standard commercial segment reported a net loss ratio of 78.9 % for the year ended december 31 , 2020 as compared to 78.2 % for the same period of 2019. the gross loss ratio before reinsurance for the year ended december 31 , 2020 was 70.3 % as compared to the 74.0 % reported for the same period of 2019. the decrease in the gross loss ratio was due primarily to lower current accident year loss trends . the increase in the net loss ratio was due to unfavorable prior year reserve development and higher net catastrophe losses . during the year ended december 31 , 2020 , the standard commercial segment reported unfavorable net loss reserve development of $ 3.4 million as compared to

net cash provided by operating activities decreased by $ 104 between 2018 and 2017 primarily due to the timing of payroll and increased incentive compensation payouts , which included $ 16 for our one-time investment in employees in response to the tax act , paid in 2018. net cash provided by operating activities decreased by $ 258 between 2017 and 2016 primarily due to the timing of tax refunds and payments . investing activities our investing cash inflows are generally from proceeds from sales of property and equipment . our investing cash outflows include payments for capital expenditures , including stores , supply chain improvements and technology costs . in addition , other investing includes payments for investments in other companies , as well as proceeds from distributions or sales of these investments . net cash used in investing activities decreased by $ 31 between 2018 and 2017 and $ 107 between 2017 and 2016 primarily due to decreases in capital expenditures , partially offset by the acquisitions of two retail technology companies in 2018 , which were classified in other investing activities , net ( see note 1 : nature of operations and summary of significant accounting policies in item 8 ) . capital expenditures our capital expenditures , net are summarized as follows : replace_table_token_16_th 1 deferred property incentives are included in our cash provided by operations in our consolidated statements of cash flows in item 8 . we operationally view the property incentives we receive from our developers as an offset to our capital expenditures . 2 generational investments include nordstromrack.com/hautelook , canada , trunk club and nordstrom nyc . nordstrom , inc. and subsidiaries 27 capital expenditures , net decreased $ 66 in 2018 compared with 2017 primarily due to fewer new nordstrom rack store openings and u.s. full-line relocations , partially offset by increased supply chain investments .

all debt securities with an unrealized loss are reviewed . we recognize an impairment loss when a debt investment 's value declines below cost , adjusted for accretion , amortization and previous other-than-temporary impairments , and it is determined that the decline is other-than-temporary . debt investments : we assess whether we intend to sell , or it is more likely than not that we will be required to sell , a fixed maturity investment before recovery of its amortized cost basis less any current period credit losses . for fixed maturity investments that are considered other-than-temporarily impaired and that we do not intend to sell and will not be required to sell , we separate the amount of the impairment into the amount that is credit related ( credit loss component ) and the amount due to all other factors . the credit loss component is recognized in earnings and is the difference between the investment 's amortized cost basis and the present value of its expected future cash flows . the remaining difference between the investment 's fair value and the present value of future expected cash flows is recognized in other comprehensive income . the fair value at the time of impairment is the new cost basis for the impaired security . equity investments : asu 2016-01 , “ recognition and measurement of financial assets and financial liabilities ” requires equity investments that are not consolidated or accounted for under the equity method of accounting to be measured at fair value with changes in fair value recognized in net income each reporting period . as a result of this standard , equity securities with readily determinable fair values are not required to be evaluated for other-than-temporary-impairment . fair values of financial instruments . accounting standards codification ( “ asc ” ) 820 defines fair value , establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements . asc 820 , among other things , requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value . in addition , asc 820 precludes the use of block discounts when measuring the fair value of instruments traded in an active market , which were previously applied to large holdings of publicly traded equity securities . we determine the fair value of our financial instruments based on the fair value hierarchy established in asc 820. in accordance with asc 820 , we utilize the following fair value hierarchy : ● level 1 : quoted prices in active markets for identical assets ; ● level 2 : inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets , inputs of identical assets for less active markets , and inputs that are observable for the asset or liability , either directly or indirectly , for substantially the full term of the instrument ; and ● level 3 : inputs to the valuation methodology that are unobservable for the asset or liability . this hierarchy requires the use of observable market data when available . under asc 820 , we determine fair value based on the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date . it is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements , in accordance with the fair value hierarchy described above . fair value measurements for assets and liabilities where there exists limited or no observable market data are calculated based upon our pricing policy , the economic and competitive environment , the characteristics of the asset or liability and other factors as appropriate . these estimated fair values may not be realized upon actual sale or immediate settlement of the asset or liability . 37 ​ where quoted prices are available on active exchanges for identical instruments , investment securities are classified within level 1 of the valuation hierarchy . level 1 investment securities include common stock , preferred stock and the equity warrant classified as other investments . level 2 investment securities include corporate bonds , corporate bank loans , municipal bonds , u.s. treasury securities , other obligations of the u.s. government and mortgage-backed securities for which quoted prices are not available on active exchanges for identical instruments . we use a third party pricing service to determine fair values for each level 2 investment security in all asset classes . since quoted prices in active markets for identical assets are not available , these prices are determined using observable market information such as quotes from less active markets and or quoted prices of securities with similar characteristics , among other things . we have reviewed the processes used by the pricing service and have determined that they result in fair values consistent with the requirements of asc 820 for level 2 investment securities . we have not adjusted any prices received from third-party pricing sources . in cases where there is limited activity or less transparency around inputs to the valuation , investment securities are classified within level 3 of the valuation hierarchy . level 3 investments are valued based on the best available data in order to approximate fair value . this data may be internally developed and consider risk premiums that a market participant would require . investment securities classified within level 3 include other less liquid investment securities . deferred policy acquisition costs . policy acquisition costs ( mainly commission , premium taxes , underwriting and marketing expenses and ceding commissions ) that vary with and are primarily related to the successful acquisition of new and renewal insurance contracts are deferred and charged to operations over periods in which the related premiums are earned . story_separator_special_tag as well as unfavorable net prior year loss reserve development of $ 0.1 million during the year ended december 31 , 2020 as compared to favorable net prior year loss reserve development of $ 0.7 million during the same period the prior year , and ( e ) a $ 1.8 million increase in losses and lae in our aerospace & programs business unit due primarily to higher net premiums earned , higher current 41 ​ accident year net loss trends , partially offset by $ 0.4 million of favorable prior year net loss reserve development during the year ended december 31 , 2020 compared to $ 0.1 million of unfavorable prior year net loss reserve development during the same period of 2019. the exited contract binding line of the primary automobile business contributed $ 32.8 million to the commercial auto business unit 's unfavorable prior year loss reserve development during the fiscal year ended december 31 , 2020 as compared to $ 39.8 million for the same period the prior year . operating expenses increased $ 2.3 million primarily as the result of higher production related expenses of $ 1.8 million , increased professional services of $ 2.3 million and increased other operating expenses of $ 0.5 million , partially offset by lower salary and related expenses of $ 1.3 million , due primarily to incentive compensation accrual adjustments reported during the first quarter of 2020 , lower occupancy and related expenses of $ 0.2 million and lower travel and related expenses of $ 0.8 million . the specialty commercial segment reported a net loss ratio of 86.6 % for the year ended december 31 , 2020 as compared to 85.0 % for the same period in 2019. the gross loss ratio before reinsurance was 85.3 % for the year ended december 31 , 2020 as compared to 75.9 % for the same period in 2019. the increase in the net loss ratio was due in large part to the $ 21.7 million charge for the loss portfolio transfer reinsurance contract that closed during the third quarter of 2020 that was reported as ceded incurred losses . the increase in the gross and net loss ratios was also impacted by catastrophe losses of $ 15.7 million for the year ended december 31 , 2020 as compared to catastrophe losses of $ 2.3 million during the same period of 2019 , partially offset by lower unfavorable prior year net loss reserve development and lower current accident year loss trends for the year ended december 31 , 2020 as compared to the same period of 2019. the specialty commercial segment reported $ 45.8 million of unfavorable prior year net loss reserve development for the year ended december 31 , 2020 as compared to unfavorable prior year net loss reserve development of $ 60.1 million for the same period of 2019. the specialty commercial segment reported a net expense ratio of 19.4 % for the year ended december 31 , 2020 as compared to 21.8 % for the same period of 2019. the decrease in the net expense ratio was due largely to the increase in net premiums earned partially offset by the increase in operating expenses . standard commercial segment . gross premiums written for the standard commercial segment were $ 98.0 million for the year ended december 31 , 2020 , which was $ 5.4 million , or 6 % , more than the $ 92.6 million reported for the same period in 2019. net premiums written were $ 68.4 million for the year ended december 31 , 2020 as compared to $ 62.9 million for the same period in 2019. the increase in gross and net premiums written was due to higher premium production in our commercial accounts business unit . total revenue for the standard commercial segment of $ 69.8 million for the year ended december 31 , 2020 , was $ 1.6 million , or 2 % , more than the $ 68.2 million reported for the same period in 2019. this increase in total revenue was due to higher net premiums earned of $ 2.6 million , due primarily to the increased premiums written discussed above , partially offset by lower net investment income of $ 0.8 million and lower finance charges of $ 0.2 million during the year ended december 31 , 2020 as compared to the same period during 2019. our standard commercial segment reported a pre-tax loss of $ 3.0 million for the year ended december 31 , 2020 as compared to a pre-tax loss of $ 0.8 million for the same period of 2019. the pre-tax loss was the result of higher losses and lae of $ 2.4 million and higher operating expenses of $ 1.4 million , partially offset by the higher revenue discussed above . the higher operating expenses were largely the result of higher production related expenses of $ 0.5 million , higher salary and related expenses of $ 0.9 million , higher professional service fees of $ 0.2 million and higher other general expenses of $ 0.2 million , partially offset by lower occupancy and related expenses of $ 0.2 million and lower travel and related expenses of $ 0.2 million . the standard commercial segment reported a net loss ratio of 78.9 % for the year ended december 31 , 2020 as compared to 78.2 % for the same period of 2019. the gross loss ratio before reinsurance for the year ended december 31 , 2020 was 70.3 % as compared to the 74.0 % reported for the same period of 2019. the decrease in the gross loss ratio was due primarily to lower current accident year loss trends . the increase in the net loss ratio was due to unfavorable prior year reserve development and higher net catastrophe losses . during the year ended december 31 , 2020 , the standard commercial segment reported unfavorable net loss reserve development of $ 3.4 million as compared to

liquidity and capital resources sources and uses of funds our sources of funds are from insurance-related operations , financing activities and investing activities . major sources of funds from operations include premiums collected ( net of policy cancellations and premiums ceded ) , commissions and processing and service fees . as a holding company , hallmark is dependent on dividend payments and management fees from its subsidiaries to meet operating expenses and debt obligations . as of december 31 , 2020 , we had $ 9.6 million in unrestricted cash and cash equivalents , including $ 6.7 million held in premium and claim trust accounts , at the holding company and our non-insurance subsidiaries . as of that date , our insurance subsidiaries held $ 93.0 million of unrestricted cash and cash equivalents as well as $ 507.3 million in debt securities with an average modified duration of 0.8 years . accordingly , we do not anticipate selling long-term debt instruments to meet any liquidity needs . ahic and tbic , domiciled in texas , are limited in the payment of dividends to their stockholders in any 12-month period , without the prior written consent of the texas department of insurance , to the greater of statutory net income for the prior calendar year or 10 % of statutory policyholders ' surplus as of the prior year end . hic and hnic , both domiciled in arizona , are limited in the payment of dividends to the lesser of 10 % of prior year policyholders ' surplus or prior year 's net income , without prior written approval from the arizona department of insurance . hsic , domiciled in oklahoma , is limited in the payment of dividends to the greater of 10 % of prior year policyholders ' surplus or prior year 's statutory net income , not including realized capital gains , without prior written approval from the oklahoma insurance department . for all our insurance companies , dividends may only be paid from unassigned surplus funds . during 2021 , the aggregate ordinary dividend capacity of these subsidiaries is $ 22.5 million , of which $ 15.0 million is available to hallmark .

after evaluating alternative options , the company concluded that teaching out and closing the campus was in the best interest of the company and its students . subsequent to formalizing the lcne closure decision in august 2018 , the company partnered with goodwin college , another neasc- accredited institution in the region , to assist lcne students to complete their programs of study . the majority of the lcne students will continue their education at goodwin college thereby limiting some of the company 's closing costs . the revenue , net loss and ending population of lcne , as of december 31 , 2017 , were $ 8.4 million , $ 1.6 million and 397 students , respectively . the company recorded net costs associated with the closure of the lcne campus in 2018 of approximately $ 4.3 million , including ( i ) $ 1.6 million in connection with the termination of the lcne campus lease , which is the net present value of the remaining obligation , to be paid in equal monthly installments through january 2020 , ( ii ) approximately $ 700,000 of severance payments and ( iii ) $ 2.0 million of additional operating losses related to no longer enrolling additional students during 2018. lcne results , previously reported in the hops segment , are now included in the transitional segment as of december 31 , 2018. as of december 31 , 2018 , we had 10,525 students enrolled at 22 campuses . our campuses , a majority of which serve major metropolitan markets , are located throughout the united states . five of our campuses are destination schools , which attract students from across the united states and , in some cases , from abroad . our other campuses primarily attract students from their local communities and surrounding areas . all of our schools are either nationally or regionally accredited and are eligible to participate in federal financial aid programs . 32 index our revenues consist primarily of student tuition and fees derived from the programs we offer . our revenues are reduced by scholarships granted to our students . we recognize revenues from tuition and one-time fees , such as application fees , ratably over the length of a program , including internships or externships that take place prior to graduation . we also earn revenues from our bookstores , dormitories , cafeterias and contract training services . these non-tuition revenues are recognized upon delivery of goods or as services are performed and represent less than 10 % of our revenues . our revenues are directly dependent on the average number of students enrolled in our schools and the courses in which they are enrolled . our average enrollment is impacted by the number of new students starting , re-entering , graduating and withdrawing from our schools . in addition , our diploma/certificate programs range from 19 to 136 weeks , our associate 's degree programs range from 64 to 98 weeks , and students attend classes for different amounts of time per week depending on the school and program in which they are enrolled . because we start new students every month , our total student population changes monthly . the number of students enrolling or re-entering our programs each month is driven by the demand for our programs , the effectiveness of our marketing and advertising , the availability of financial aid and other sources of funding , the number of recent high school graduates , the job market and seasonality . our retention and graduation rates are influenced by the quality and commitment of our teachers and student services personnel , the effectiveness of our programs , the placement rate and success of our graduates and the availability of financial aid . although similar courses have comparable tuition rates , the tuition rates vary among our numerous programs . the majority of students enrolled at our schools rely on funds received under various government-sponsored student financial aid programs to pay a substantial portion of their tuition and other education-related expenses . the largest of these programs are title iv programs which represented approximately 78 % of our revenue on a cash basis while the remainder is primarily derived from state grants and cash payments made by students during both 2018 and 2017. the higher education act of 1965 , as amended ( the “ hea ” ) requires institutions to use the cash basis of accounting when determining its compliance with the 90/10 rule . we extend credit for tuition and fees to many of our students that attend our campuses . our credit risk is mitigated through the students ' participation in federally funded financial aid programs unless students withdraw prior to the receipt by us of title iv program funds for those students . under title iv programs , the government funds a certain portion of a student 's tuition , with the remainder , referred to as “ the gap , ” financed by the students themselves under private party loans , including credit extended by us . the gap amount has continued to increase over the last several years as we have raised tuition on average for the last several years by 2-3 % per year and restructured certain programs to reduce the amount of financial aid available to students , while funds received from title iv programs increased at lower rates . the additional financing that we are providing to students may expose us to greater credit risk and can impact our liquidity . story_separator_special_tag differences between anticipated and actual outcomes of these future tax consequences could have a material impact on our consolidated financial position or results of operations . changes in , among other things , income tax legislation , statutory income tax rates , or future income levels could materially impact our valuation of income tax assets and liabilities and could cause our income tax provision to vary significantly among financial reporting periods . we recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense . during the years ended december 31 , 2018 and 2017 , we did not record any interest and penalties expense associated with uncertain tax positions . on december 22 , 2017 , the u.s. government enacted comprehensive tax legislation known as the tax cuts and jobs act ( the “ tax act ” ) . the tax act establishes new tax laws that took effect in 2018 , including , but not limited to ( 1 ) reduction of the u.s. federal corporate tax rate from a maximum of 35 % to 21 % ; ( 2 ) elimination of the corporate alternative minimum tax ( amt ) ; ( 3 ) a new limitation on deductible interest expense ; ( 4 ) the repeal of the domestic production activity deduction ; ( 5 ) limitations on the deductibility of certain executive compensation ; and ( 6 ) limitation on net operating losses ( nols ) generated after december 31 , 2017 , to 80 % of taxable income . in addition , certain changes were made to the bonus depreciation rules that impacted fiscal year 2017. in accordance with sab 118 , we completed our analysis of the tax act resulting in no material adjustments from the provisional amounts recorded during the prior year . the tax act did not have a material impact on our financial statements because we are under a full valuation allowance . 36 index results of continuing operations for the three years ended december 31 , 2018 the following table sets forth selected consolidated statements of continuing operations data as a percentage of revenues for each of the periods indicated : replace_table_token_3_th year ended december 31 , 2018 compared to year ended december 31 , 2017 consolidated results of operations revenue . revenue increased $ 1.3 million to $ 263.2 million for the year ended december 31 , 2018 from $ 261.9 million in the prior year comparable period . the revenue increase was a result of five consecutive quarters of start growth which drove a 9.5 % and 1.2 % increase in average population in both our healthcare and other professions segment and transportation and skilled trades segment . excluding our transitional segment ( which represents campuses that have closed ) which had revenue of $ 5.8 million and $ 16.9 million during the years ended december 31 , 2018 and 2017 , respectively , revenue would have increased by $ 12.4 million , or 5.1 % , year over year . the increase in revenue was despite student population at the beginning of the year being down 77 students compared to the prior year . total student starts increased 5.6 % for the year ended december 31 , 2018 as compared to the prior year comparable period . excluding the transitional segment , student starts would have increased 7.7 % year over year . we continue to attribute this growth to our investments in marketing , enhanced high school programs and improved admissions process driving more consistency from lead to start . for a general discussion of trends in our student enrollment , see “ seasonality and outlook ” below . educational services and facilities expense . our educational services and facilities expense decreased $ 4.0 million , or 3.1 % , to $ 125.4 million for the year ended december 31 , 2018 from $ 129.4 million in the prior year comparable period . the expense reductions were primarily due to the transitional segment , which accounted for $ 7.6 million in cost savings , partially offset by $ 2.1 million in additional books and tools expense and $ 1.2 million in additional instructional expenses . the increase in books and tools expense and instructional expense was a direct correlation between providing laptops for a growing number of program offerings and an increased student population year over year . educational services and facilities expenses , as a percentage of revenue , decreased to 47.6 % for the year ended december 31 , 2018 from 49.4 % in the prior year comparable period . selling , general and administrative expense . our selling general and administrative expense increased $ 2.5 million , or 1.8 % , to $ 141.2 million for the year ended december 31 , 2018 from $ 138.8 million in the prior year comparable period . increased costs were driven by $ 3.8 million of additional bad debt expense and $ 2.9 million of marketing investments . partially offsetting the increased expenses were cost savings of $ 4.4 million derived from the transitional segment . story_separator_special_tag program offerings in the hops segment . educational services and facilities expenses , as a percentage of revenue , decreased to 49.4 % for the year ended december 31 , 2017 from 50.6 % in the prior year comparable period . 38 index selling , general and administrative expense . our selling , general and administrative expense decreased by $ 9.7 million , or 6.5 % , to $ 138.8 million for the year ended december 31 , 2017 from $ 148.5 million in the prior year comparable period . the decrease was primarily due to the transitional segment , which accounted for approximately $ 13.4 million in cost reductions . partially offsetting the cost reductions are $ 2.8 million in additional sales and marketing expense and $ 1 million in increased administrative expense . the $ 2.8 million increase in sales and marketing expense

liquidity and capital resources sources and uses of funds our sources of funds are from insurance-related operations , financing activities and investing activities . major sources of funds from operations include premiums collected ( net of policy cancellations and premiums ceded ) , commissions and processing and service fees . as a holding company , hallmark is dependent on dividend payments and management fees from its subsidiaries to meet operating expenses and debt obligations . as of december 31 , 2020 , we had $ 9.6 million in unrestricted cash and cash equivalents , including $ 6.7 million held in premium and claim trust accounts , at the holding company and our non-insurance subsidiaries . as of that date , our insurance subsidiaries held $ 93.0 million of unrestricted cash and cash equivalents as well as $ 507.3 million in debt securities with an average modified duration of 0.8 years . accordingly , we do not anticipate selling long-term debt instruments to meet any liquidity needs . ahic and tbic , domiciled in texas , are limited in the payment of dividends to their stockholders in any 12-month period , without the prior written consent of the texas department of insurance , to the greater of statutory net income for the prior calendar year or 10 % of statutory policyholders ' surplus as of the prior year end . hic and hnic , both domiciled in arizona , are limited in the payment of dividends to the lesser of 10 % of prior year policyholders ' surplus or prior year 's net income , without prior written approval from the arizona department of insurance . hsic , domiciled in oklahoma , is limited in the payment of dividends to the greater of 10 % of prior year policyholders ' surplus or prior year 's statutory net income , not including realized capital gains , without prior written approval from the oklahoma insurance department . for all our insurance companies , dividends may only be paid from unassigned surplus funds . during 2021 , the aggregate ordinary dividend capacity of these subsidiaries is $ 22.5 million , of which $ 15.0 million is available to hallmark .

after evaluating alternative options , the company concluded that teaching out and closing the campus was in the best interest of the company and its students . subsequent to formalizing the lcne closure decision in august 2018 , the company partnered with goodwin college , another neasc- accredited institution in the region , to assist lcne students to complete their programs of study . the majority of the lcne students will continue their education at goodwin college thereby limiting some of the company 's closing costs . the revenue , net loss and ending population of lcne , as of december 31 , 2017 , were $ 8.4 million , $ 1.6 million and 397 students , respectively . the company recorded net costs associated with the closure of the lcne campus in 2018 of approximately $ 4.3 million , including ( i ) $ 1.6 million in connection with the termination of the lcne campus lease , which is the net present value of the remaining obligation , to be paid in equal monthly installments through january 2020 , ( ii ) approximately $ 700,000 of severance payments and ( iii ) $ 2.0 million of additional operating losses related to no longer enrolling additional students during 2018. lcne results , previously reported in the hops segment , are now included in the transitional segment as of december 31 , 2018. as of december 31 , 2018 , we had 10,525 students enrolled at 22 campuses . our campuses , a majority of which serve major metropolitan markets , are located throughout the united states . five of our campuses are destination schools , which attract students from across the united states and , in some cases , from abroad . our other campuses primarily attract students from their local communities and surrounding areas . all of our schools are either nationally or regionally accredited and are eligible to participate in federal financial aid programs . 32 index our revenues consist primarily of student tuition and fees derived from the programs we offer . our revenues are reduced by scholarships granted to our students . we recognize revenues from tuition and one-time fees , such as application fees , ratably over the length of a program , including internships or externships that take place prior to graduation . we also earn revenues from our bookstores , dormitories , cafeterias and contract training services . these non-tuition revenues are recognized upon delivery of goods or as services are performed and represent less than 10 % of our revenues . our revenues are directly dependent on the average number of students enrolled in our schools and the courses in which they are enrolled . our average enrollment is impacted by the number of new students starting , re-entering , graduating and withdrawing from our schools . in addition , our diploma/certificate programs range from 19 to 136 weeks , our associate 's degree programs range from 64 to 98 weeks , and students attend classes for different amounts of time per week depending on the school and program in which they are enrolled . because we start new students every month , our total student population changes monthly . the number of students enrolling or re-entering our programs each month is driven by the demand for our programs , the effectiveness of our marketing and advertising , the availability of financial aid and other sources of funding , the number of recent high school graduates , the job market and seasonality . our retention and graduation rates are influenced by the quality and commitment of our teachers and student services personnel , the effectiveness of our programs , the placement rate and success of our graduates and the availability of financial aid . although similar courses have comparable tuition rates , the tuition rates vary among our numerous programs . the majority of students enrolled at our schools rely on funds received under various government-sponsored student financial aid programs to pay a substantial portion of their tuition and other education-related expenses . the largest of these programs are title iv programs which represented approximately 78 % of our revenue on a cash basis while the remainder is primarily derived from state grants and cash payments made by students during both 2018 and 2017. the higher education act of 1965 , as amended ( the “ hea ” ) requires institutions to use the cash basis of accounting when determining its compliance with the 90/10 rule . we extend credit for tuition and fees to many of our students that attend our campuses . our credit risk is mitigated through the students ' participation in federally funded financial aid programs unless students withdraw prior to the receipt by us of title iv program funds for those students . under title iv programs , the government funds a certain portion of a student 's tuition , with the remainder , referred to as “ the gap , ” financed by the students themselves under private party loans , including credit extended by us . the gap amount has continued to increase over the last several years as we have raised tuition on average for the last several years by 2-3 % per year and restructured certain programs to reduce the amount of financial aid available to students , while funds received from title iv programs increased at lower rates . the additional financing that we are providing to students may expose us to greater credit risk and can impact our liquidity . story_separator_special_tag differences between anticipated and actual outcomes of these future tax consequences could have a material impact on our consolidated financial position or results of operations . changes in , among other things , income tax legislation , statutory income tax rates , or future income levels could materially impact our valuation of income tax assets and liabilities and could cause our income tax provision to vary significantly among financial reporting periods . we recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense . during the years ended december 31 , 2018 and 2017 , we did not record any interest and penalties expense associated with uncertain tax positions . on december 22 , 2017 , the u.s. government enacted comprehensive tax legislation known as the tax cuts and jobs act ( the “ tax act ” ) . the tax act establishes new tax laws that took effect in 2018 , including , but not limited to ( 1 ) reduction of the u.s. federal corporate tax rate from a maximum of 35 % to 21 % ; ( 2 ) elimination of the corporate alternative minimum tax ( amt ) ; ( 3 ) a new limitation on deductible interest expense ; ( 4 ) the repeal of the domestic production activity deduction ; ( 5 ) limitations on the deductibility of certain executive compensation ; and ( 6 ) limitation on net operating losses ( nols ) generated after december 31 , 2017 , to 80 % of taxable income . in addition , certain changes were made to the bonus depreciation rules that impacted fiscal year 2017. in accordance with sab 118 , we completed our analysis of the tax act resulting in no material adjustments from the provisional amounts recorded during the prior year . the tax act did not have a material impact on our financial statements because we are under a full valuation allowance . 36 index results of continuing operations for the three years ended december 31 , 2018 the following table sets forth selected consolidated statements of continuing operations data as a percentage of revenues for each of the periods indicated : replace_table_token_3_th year ended december 31 , 2018 compared to year ended december 31 , 2017 consolidated results of operations revenue . revenue increased $ 1.3 million to $ 263.2 million for the year ended december 31 , 2018 from $ 261.9 million in the prior year comparable period . the revenue increase was a result of five consecutive quarters of start growth which drove a 9.5 % and 1.2 % increase in average population in both our healthcare and other professions segment and transportation and skilled trades segment . excluding our transitional segment ( which represents campuses that have closed ) which had revenue of $ 5.8 million and $ 16.9 million during the years ended december 31 , 2018 and 2017 , respectively , revenue would have increased by $ 12.4 million , or 5.1 % , year over year . the increase in revenue was despite student population at the beginning of the year being down 77 students compared to the prior year . total student starts increased 5.6 % for the year ended december 31 , 2018 as compared to the prior year comparable period . excluding the transitional segment , student starts would have increased 7.7 % year over year . we continue to attribute this growth to our investments in marketing , enhanced high school programs and improved admissions process driving more consistency from lead to start . for a general discussion of trends in our student enrollment , see “ seasonality and outlook ” below . educational services and facilities expense . our educational services and facilities expense decreased $ 4.0 million , or 3.1 % , to $ 125.4 million for the year ended december 31 , 2018 from $ 129.4 million in the prior year comparable period . the expense reductions were primarily due to the transitional segment , which accounted for $ 7.6 million in cost savings , partially offset by $ 2.1 million in additional books and tools expense and $ 1.2 million in additional instructional expenses . the increase in books and tools expense and instructional expense was a direct correlation between providing laptops for a growing number of program offerings and an increased student population year over year . educational services and facilities expenses , as a percentage of revenue , decreased to 47.6 % for the year ended december 31 , 2018 from 49.4 % in the prior year comparable period . selling , general and administrative expense . our selling general and administrative expense increased $ 2.5 million , or 1.8 % , to $ 141.2 million for the year ended december 31 , 2018 from $ 138.8 million in the prior year comparable period . increased costs were driven by $ 3.8 million of additional bad debt expense and $ 2.9 million of marketing investments . partially offsetting the increased expenses were cost savings of $ 4.4 million derived from the transitional segment . story_separator_special_tag program offerings in the hops segment . educational services and facilities expenses , as a percentage of revenue , decreased to 49.4 % for the year ended december 31 , 2017 from 50.6 % in the prior year comparable period . 38 index selling , general and administrative expense . our selling , general and administrative expense decreased by $ 9.7 million , or 6.5 % , to $ 138.8 million for the year ended december 31 , 2017 from $ 148.5 million in the prior year comparable period . the decrease was primarily due to the transitional segment , which accounted for approximately $ 13.4 million in cost reductions . partially offsetting the cost reductions are $ 2.8 million in additional sales and marketing expense and $ 1 million in increased administrative expense . the $ 2.8 million increase in sales and marketing expense

bad debt expense has increased mainly due to larger accounts receivable balances driven by higher population and thus higher revenue of $ 12.4 million , or 5.1 % , excluding the transitional segment . also , we are seeing more students graduating with accounts receivable balances as a result of our institutional loan program which began offering the option to defer all payments post-graduation . this change was effective approximately two years ago . furthermore , there has been a shift in our program mix during the year from longer duration programs to shorter more condensed programs . the shifts in program mix have impacted disbursement of title iv funds and , as a result , has contributed to a higher accounts receivable balance year over year . 37 index marketing investments during the year ended december 31 , 2018 were approximately $ 2.9 million higher than the prior year comparable period . while marketing investments have increased during 2018 as expected , the cost to obtain prospective students has remained essentially flat when compared to the prior year . marketing dollars are providing a return on investment and are expected to yield start growth over the next several quarters . selling general and administrative expenses , as a percentage of revenue , increased to 53.7 % for the year ended december 31 , 2018 from 53 % in the prior year comparable period . bad debt expense as a percentage of revenue was 6.7 % for the year ended december 31 , 2018 , compared to 5.2 % for the same period in 2017. as of december 31 , 2018 , we had total outstanding loan commitments to our students of $ 63.1 million , as compared to $ 51.9 million at december 31 , 2017. the increase was due to higher student population and thus an increased number of students electing to take our institutional loans to finance their education costs that are not covered by a third party or financial aid .

in addition to launching new projects for our future growth , we continue to analyze our asset portfolio to ensure capital discipline in all aspects of our business . as a result , we have decided to discontinue the operation of our ammonia pipeline system later this year due to its low profitability and challenging economic outlook . we are also no longer pursuing our delaware basin crude oil pipeline construction project on a stand-alone basis and are actively evaluating a lower cost solution to meet the needs of our customers . these decisions demonstrate our commitment to manage all aspects of our business in a disciplined manner . growth projects additional energy infrastructure to support our nation 's growing export needs remains an important theme for our industry . we have made significant progress to advance our strategy to grow our marine capabilities along the gulf coast for both crude oil and refined products . our seabrook joint venture initiated its first crude oil export in august 2018 , and we announced plans to further expand this terminal with additional storage and dock capabilities . we believe the export options provided through seabrook increases the attractiveness of our service offering to seamlessly deliver crude oil from the permian basin to the gulf coast waterway to meet our customers ' growing interest in crude exports . the first phase of our newly constructed mvp joint venture marine terminal in pasadena , texas became operational in january 2019 to meet our customers ' increasing desire for refined products storage and export solutions . we continue to make significant progress on the next phase of the terminal at pasadena , with an additional 4 million barrels of storage and additional dock capabilities expected to come online by the end of 2019. discussions with a number of industry participants continue for additional infrastructure needs at this new facility . we remain optimistic about future expansions at pasadena that could double the capacity of this new marine terminal . industry demand for additional pipeline infrastructure continues as well , and construction is underway for a new refined products pipeline segment in central texas that will expand capacity between houston and the dallas-ft. worth metropolitan area . this new pipeline segment is expected to be in-service during mid-2019 . we are also expanding the western leg of our texas refined products pipeline by mid-2020 . our texas refined products pipeline system has been oversubscribed for quite some time , and we are pleased to meet the industry 's need for more capacity through these strategic enhancements to our essential refined products pipeline system . in 2018 , we also announced plans to form a new crude oil pipeline joint venture with energy transfer , mplx and delek to deliver crude oil from the permian basin to our terminal in the houston area and energy transfer 's terminal in nederland , texas . this permian gulf coast ( “ pgc ” ) pipeline is intended to serve the gulf coast refining complex from texas to louisiana as well as multiple crude oil export facilities . while advancing the pgc stand-alone project , we also remain in discussions with other industry players to assess the potential to combine similar projects to capture capital and operating efficiencies that may be available for all parties . recent developments cash distribution . in january 2019 , the board of directors of our general partner declared a quarterly cash distribution of $ 0.9975 per unit for the period of october 1 , 2018 through december 31 , 2018. this quarterly cash distribution was paid on february 14 , 2019 to unitholders of record on february 7 , 2019. the total distribution paid on 228.4 million limited partner units outstanding was $ 227.8 million . 48 debt issuance . in january 2019 , we issued $ 500.0 million of 4.85 % senior notes due 2049 in an underwritten public offering . the notes were issued at 99.371 % of par . net proceeds from this offering were approximately $ 492.5 million after underwriting discounts . the net proceeds from this offering along with cash on hand were used to redeem our 6.55 % senior notes due 2019 , which were paid on february 11 , 2019. ammonia pipeline . in december 2018 , we made the decision to discontinue commercial operations of our ammonia pipeline beginning in late 2019 due to the system 's low profitability and challenging economic outlook . as a result , we have recognized a $ 49.1 million impairment charge . results of operations we believe that investors benefit from having access to the same financial measures utilized by management . operating margin , which is presented in the following tables , is an important measure used by management to evaluate the economic performance of our core operations . operating margin is not a generally accepted accounting principles ( “ gaap ” ) measure , but the components of operating margin are computed using amounts that are determined in accordance with gaap . a reconciliation of operating margin to operating profit , which is its nearest comparable gaap financial measure , is included in the following tables . operating profit includes expense items , such as depreciation , amortization and impairment expense and general and administrative ( “ g & a ” ) expenses , which management does not focus on when evaluating the core profitability of our separate operating segments . additionally , product margin , which management primarily uses to evaluate the profitability of our commodity-related activities , is provided in these tables . product margin is a non-gaap measure ; however , its components of product sales revenue and cost of product sales are determined in accordance with gaap . our butane blending , fractionation and other commodity-related activities generate significant revenue . story_separator_special_tag for purposes of this table , we have reflected no assumed borrowings under our revolving credit facility or commercial paper program for any periods presented . we have included interest obligations based on the stated amounts of our fixed-rate obligations . ( 2 ) we have entered into product storage contracts with third parties . the cost of storage services is recognized in cost of product sales on our consolidated statements of income . ( 3 ) represents the projected benefit obligation of our pension and postretirement medical plans less the fair value of plan assets . ( 4 ) includes product purchase commitments for which the price provisions are indexed based on the date of delivery . we have estimated the value of these commitments using the related index price curve as of december 31 , 2018. also , we have excluded certain product purchase agreements for which there is no specified or minimum quantity . ( 5 ) as of december 31 , 2018 , we had entered into exchange-traded futures contracts representing 4.1 million barrels of petroleum products that we expect to sell in the future and 0.9 million barrels of butane we expect to purchase in the future . at december 31 , 2018 , we had recorded a net asset of $ 55.0 million and held margin deposits of $ 37.3 million . we have excluded from this table the future net cash outflows , if any , under these futures contracts and the amounts of future margin deposit requirements because those amounts are uncertain . ( 6 ) settlements of our ltip awards will differ from these reported amounts primarily due to differences between actual and current estimates of payout percentages and completion of the remaining portion of the requisite service periods . environmental our operations are subject to federal , state and local environmental laws and regulations . we have accrued liabilities for estimated costs at our facilities and properties . we record liabilities when environmental costs are probable and can be reasonably estimated . the determination of amounts recorded for environmental liabilities involves significant judgments and assumptions by management . due to the inherent uncertainties involved in determining environmental liabilities , it is reasonably possible that the actual amounts required to extinguish these liabilities could be materially different from those we have recognized . other items pipeline tariff increase . the federal energy regulatory commission ( “ ferc ” ) regulates the rates charged on interstate common carrier pipeline operations primarily through an indexing methodology , which establishes the maximum amount by which index-based tariffs can be adjusted each year . approximately 40 % of our refined products tariffs are subject to this indexing methodology . the remaining 60 % of our refined products tariffs are either subject to regulations by the states in which we operate or are approved for market-based rates by the ferc , 59 and in both cases these rates can be adjusted at our discretion based on market factors . the current ferc-approved indexing method is the annual change in the producer price index for finished goods ( “ ppi-fg ” ) plus 1.23 % . based on the preliminary estimates for this indexing methodology in 2018 , we expect to increase virtually all of our refined products pipeline rates by approximately 4.3 % on july 1 , 2019. most of the tariffs on our crude oil pipelines are established at negotiated rates that generally provide for annual adjustments in line with changes in the ferc index , subject to certain modifications . we also expect to increase the rates of our crude oil pipelines by approximately 4 % on average in july 2019. sale of interest in bridgetex . in september 2018 , we sold a 20 % interest in bridgetex to an affiliate of omers infrastructure management inc. , which reduced our ongoing ownership in bridgetex to a 30 % interest . we received $ 575.6 million in cash from the sale and recorded a gain of $ 353.8 million on our consolidated statements of income . we continue to serve as the operator of bridgetex . crude oil pipeline contract renewals . due to increased competition , recent contract renewals have resulted in lower average crude oil tariff rates for term commitments . for example , the initial term of our contracts for the longhorn pipeline expired in september 2018 , and some shippers elected to extend their contracts under current terms for an additional two years , while others executed new contracts with lower incentive tariff rates and terms up to 10 years , resulting in an average contract term of five years and a lower average tariff rate . although we continue to believe that demand for capacity on longhorn and our other crude oil pipelines remains strong , the pricing environment for term commitments on crude oil pipelines is very competitive , and we continue to assume the average tariff rates agreed to for term commitments on our crude oil pipelines , including the crude oil pipelines of our joint ventures , will be lower upon future renewals . commodity derivative agreements . certain of the business activities in which we engage result in our owning various commodities , which exposes us to commodity price risk . we use forward physical commodity contracts and exchange-based futures contracts to help manage this commodity price risk . we use forward physical contracts to purchase butane and sell refined products . we account for these forward physical contracts as normal purchase and sale contracts , using traditional accrual accounting . we use futures contracts to hedge against changes in prices of petroleum products that we expect to sell or purchase in future periods . we use and account for those futures contracts that qualify for hedge accounting treatment as either cash flow or fair value hedges , and we use and account for those futures contracts that do not qualify for hedge accounting treatment

bad debt expense has increased mainly due to larger accounts receivable balances driven by higher population and thus higher revenue of $ 12.4 million , or 5.1 % , excluding the transitional segment . also , we are seeing more students graduating with accounts receivable balances as a result of our institutional loan program which began offering the option to defer all payments post-graduation . this change was effective approximately two years ago . furthermore , there has been a shift in our program mix during the year from longer duration programs to shorter more condensed programs . the shifts in program mix have impacted disbursement of title iv funds and , as a result , has contributed to a higher accounts receivable balance year over year . 37 index marketing investments during the year ended december 31 , 2018 were approximately $ 2.9 million higher than the prior year comparable period . while marketing investments have increased during 2018 as expected , the cost to obtain prospective students has remained essentially flat when compared to the prior year . marketing dollars are providing a return on investment and are expected to yield start growth over the next several quarters . selling general and administrative expenses , as a percentage of revenue , increased to 53.7 % for the year ended december 31 , 2018 from 53 % in the prior year comparable period . bad debt expense as a percentage of revenue was 6.7 % for the year ended december 31 , 2018 , compared to 5.2 % for the same period in 2017. as of december 31 , 2018 , we had total outstanding loan commitments to our students of $ 63.1 million , as compared to $ 51.9 million at december 31 , 2017. the increase was due to higher student population and thus an increased number of students electing to take our institutional loans to finance their education costs that are not covered by a third party or financial aid .

in addition to launching new projects for our future growth , we continue to analyze our asset portfolio to ensure capital discipline in all aspects of our business . as a result , we have decided to discontinue the operation of our ammonia pipeline system later this year due to its low profitability and challenging economic outlook . we are also no longer pursuing our delaware basin crude oil pipeline construction project on a stand-alone basis and are actively evaluating a lower cost solution to meet the needs of our customers . these decisions demonstrate our commitment to manage all aspects of our business in a disciplined manner . growth projects additional energy infrastructure to support our nation 's growing export needs remains an important theme for our industry . we have made significant progress to advance our strategy to grow our marine capabilities along the gulf coast for both crude oil and refined products . our seabrook joint venture initiated its first crude oil export in august 2018 , and we announced plans to further expand this terminal with additional storage and dock capabilities . we believe the export options provided through seabrook increases the attractiveness of our service offering to seamlessly deliver crude oil from the permian basin to the gulf coast waterway to meet our customers ' growing interest in crude exports . the first phase of our newly constructed mvp joint venture marine terminal in pasadena , texas became operational in january 2019 to meet our customers ' increasing desire for refined products storage and export solutions . we continue to make significant progress on the next phase of the terminal at pasadena , with an additional 4 million barrels of storage and additional dock capabilities expected to come online by the end of 2019. discussions with a number of industry participants continue for additional infrastructure needs at this new facility . we remain optimistic about future expansions at pasadena that could double the capacity of this new marine terminal . industry demand for additional pipeline infrastructure continues as well , and construction is underway for a new refined products pipeline segment in central texas that will expand capacity between houston and the dallas-ft. worth metropolitan area . this new pipeline segment is expected to be in-service during mid-2019 . we are also expanding the western leg of our texas refined products pipeline by mid-2020 . our texas refined products pipeline system has been oversubscribed for quite some time , and we are pleased to meet the industry 's need for more capacity through these strategic enhancements to our essential refined products pipeline system . in 2018 , we also announced plans to form a new crude oil pipeline joint venture with energy transfer , mplx and delek to deliver crude oil from the permian basin to our terminal in the houston area and energy transfer 's terminal in nederland , texas . this permian gulf coast ( “ pgc ” ) pipeline is intended to serve the gulf coast refining complex from texas to louisiana as well as multiple crude oil export facilities . while advancing the pgc stand-alone project , we also remain in discussions with other industry players to assess the potential to combine similar projects to capture capital and operating efficiencies that may be available for all parties . recent developments cash distribution . in january 2019 , the board of directors of our general partner declared a quarterly cash distribution of $ 0.9975 per unit for the period of october 1 , 2018 through december 31 , 2018. this quarterly cash distribution was paid on february 14 , 2019 to unitholders of record on february 7 , 2019. the total distribution paid on 228.4 million limited partner units outstanding was $ 227.8 million . 48 debt issuance . in january 2019 , we issued $ 500.0 million of 4.85 % senior notes due 2049 in an underwritten public offering . the notes were issued at 99.371 % of par . net proceeds from this offering were approximately $ 492.5 million after underwriting discounts . the net proceeds from this offering along with cash on hand were used to redeem our 6.55 % senior notes due 2019 , which were paid on february 11 , 2019. ammonia pipeline . in december 2018 , we made the decision to discontinue commercial operations of our ammonia pipeline beginning in late 2019 due to the system 's low profitability and challenging economic outlook . as a result , we have recognized a $ 49.1 million impairment charge . results of operations we believe that investors benefit from having access to the same financial measures utilized by management . operating margin , which is presented in the following tables , is an important measure used by management to evaluate the economic performance of our core operations . operating margin is not a generally accepted accounting principles ( “ gaap ” ) measure , but the components of operating margin are computed using amounts that are determined in accordance with gaap . a reconciliation of operating margin to operating profit , which is its nearest comparable gaap financial measure , is included in the following tables . operating profit includes expense items , such as depreciation , amortization and impairment expense and general and administrative ( “ g & a ” ) expenses , which management does not focus on when evaluating the core profitability of our separate operating segments . additionally , product margin , which management primarily uses to evaluate the profitability of our commodity-related activities , is provided in these tables . product margin is a non-gaap measure ; however , its components of product sales revenue and cost of product sales are determined in accordance with gaap . our butane blending , fractionation and other commodity-related activities generate significant revenue . story_separator_special_tag for purposes of this table , we have reflected no assumed borrowings under our revolving credit facility or commercial paper program for any periods presented . we have included interest obligations based on the stated amounts of our fixed-rate obligations . ( 2 ) we have entered into product storage contracts with third parties . the cost of storage services is recognized in cost of product sales on our consolidated statements of income . ( 3 ) represents the projected benefit obligation of our pension and postretirement medical plans less the fair value of plan assets . ( 4 ) includes product purchase commitments for which the price provisions are indexed based on the date of delivery . we have estimated the value of these commitments using the related index price curve as of december 31 , 2018. also , we have excluded certain product purchase agreements for which there is no specified or minimum quantity . ( 5 ) as of december 31 , 2018 , we had entered into exchange-traded futures contracts representing 4.1 million barrels of petroleum products that we expect to sell in the future and 0.9 million barrels of butane we expect to purchase in the future . at december 31 , 2018 , we had recorded a net asset of $ 55.0 million and held margin deposits of $ 37.3 million . we have excluded from this table the future net cash outflows , if any , under these futures contracts and the amounts of future margin deposit requirements because those amounts are uncertain . ( 6 ) settlements of our ltip awards will differ from these reported amounts primarily due to differences between actual and current estimates of payout percentages and completion of the remaining portion of the requisite service periods . environmental our operations are subject to federal , state and local environmental laws and regulations . we have accrued liabilities for estimated costs at our facilities and properties . we record liabilities when environmental costs are probable and can be reasonably estimated . the determination of amounts recorded for environmental liabilities involves significant judgments and assumptions by management . due to the inherent uncertainties involved in determining environmental liabilities , it is reasonably possible that the actual amounts required to extinguish these liabilities could be materially different from those we have recognized . other items pipeline tariff increase . the federal energy regulatory commission ( “ ferc ” ) regulates the rates charged on interstate common carrier pipeline operations primarily through an indexing methodology , which establishes the maximum amount by which index-based tariffs can be adjusted each year . approximately 40 % of our refined products tariffs are subject to this indexing methodology . the remaining 60 % of our refined products tariffs are either subject to regulations by the states in which we operate or are approved for market-based rates by the ferc , 59 and in both cases these rates can be adjusted at our discretion based on market factors . the current ferc-approved indexing method is the annual change in the producer price index for finished goods ( “ ppi-fg ” ) plus 1.23 % . based on the preliminary estimates for this indexing methodology in 2018 , we expect to increase virtually all of our refined products pipeline rates by approximately 4.3 % on july 1 , 2019. most of the tariffs on our crude oil pipelines are established at negotiated rates that generally provide for annual adjustments in line with changes in the ferc index , subject to certain modifications . we also expect to increase the rates of our crude oil pipelines by approximately 4 % on average in july 2019. sale of interest in bridgetex . in september 2018 , we sold a 20 % interest in bridgetex to an affiliate of omers infrastructure management inc. , which reduced our ongoing ownership in bridgetex to a 30 % interest . we received $ 575.6 million in cash from the sale and recorded a gain of $ 353.8 million on our consolidated statements of income . we continue to serve as the operator of bridgetex . crude oil pipeline contract renewals . due to increased competition , recent contract renewals have resulted in lower average crude oil tariff rates for term commitments . for example , the initial term of our contracts for the longhorn pipeline expired in september 2018 , and some shippers elected to extend their contracts under current terms for an additional two years , while others executed new contracts with lower incentive tariff rates and terms up to 10 years , resulting in an average contract term of five years and a lower average tariff rate . although we continue to believe that demand for capacity on longhorn and our other crude oil pipelines remains strong , the pricing environment for term commitments on crude oil pipelines is very competitive , and we continue to assume the average tariff rates agreed to for term commitments on our crude oil pipelines , including the crude oil pipelines of our joint ventures , will be lower upon future renewals . commodity derivative agreements . certain of the business activities in which we engage result in our owning various commodities , which exposes us to commodity price risk . we use forward physical commodity contracts and exchange-based futures contracts to help manage this commodity price risk . we use forward physical contracts to purchase butane and sell refined products . we account for these forward physical contracts as normal purchase and sale contracts , using traditional accrual accounting . we use futures contracts to hedge against changes in prices of petroleum products that we expect to sell or purchase in future periods . we use and account for those futures contracts that qualify for hedge accounting treatment as either cash flow or fair value hedges , and we use and account for those futures contracts that do not qualify for hedge accounting treatment

liquidity and capital resources cash flows and capital expenditures operating activities . net cash provided by operating activities was $ 973.3 million , $ 1,131.2 million and $ 1,353.0 million for the years ended december 31 , 2016 , 2017 and 2018 , respectively . the $ 221.8 million increase from 2017 to 2018 was due to higher net income as previously described and changes in our working capital , partially offset by adjustments for non-cash items . the $ 157.9 million increase from 2016 to 2017 was due to higher net income as previously described , adjustments to non-cash items and changes in our working capital . investing activities . net cash used by investing activities for the years ended december 31 , 2016 , 2017 and 2018 was $ 866.6 million , $ 593.2 million and $ 119.3 million , respectively . during 2018 , we sold a portion of our interest in bridgetex for cash proceeds of $ 575.6 million . also during 2018 , we spent $ 562.3 million on capital expenditures , which included $ 88.7 million for maintenance capital , $ 425.0 million for our expansion capital projects and $ 48.6 million for undivided joint interest projects for which cash was received from a third party . additionally , we contributed capital of $ 216.4 million in conjunction with our joint venture capital projects , which we account for as investments in non-controlled entities .

as previously disclosed , we are undertaking a strategic evaluation of our business focusing on four key areas of our expense base : our organizational model , our real estate footprint , management of third party spend , and technology and operations efficiency . we plan to invest in key areas of growth aligned with our strategic plan , including etfs , fixed income , china , solutions , alternatives and global equities , while creating permanent annual net operating expense improvements of $ 200 million . a significant element of the savings will be generated from realigning our workforce to support key areas of growth as well as repositioning some of our workforce to lower cost locations . we expect $ 150 million of the savings to be achieved by 29 the end of 2021 with the remainder by the end of 2022. remaining restructuring costs related to the strategic evaluation are estimated to be in a range of $ 150 to $ 175 million over the next two years , with $ 119.0 million incurred in 2020. in 2019 , invesco completed the acquisition of oppenheimerfunds ( ofi ) , and the integration of our two firms . building on the combination with ofi , in 2020 we further deepened our relationships with clients in the us , expanded the capabilities we offered globally and further scaled our business for the benefit of clients and shareholders . the firm is also highly focused on delivering the additional capabilities achieved through the combination to institutional and non-us markets . managing our business and meeting client needs through covid-19 invesco is committed to helping our employees , our clients and our communities navigate the challenges presented by the impacts of covid-19 . the primary focus of our efforts is to ensure the health and safety of our employees while preserving our ability to serve clients and manage assets in a highly dynamic market environment . as always , we are committed to helping our clients achieve their investment objectives through disciplined long-term investing . to this end , we continue to proactively engage with our clients virtually to help them better navigate market volatility by providing thought leadership and other value-added services . we believe our client centric approach will enable our clients to emerge from this crisis stronger . to ensure we continue to meet client needs in a primarily remote-working environment , small select teams are working at alternate sites or operating in split shifts to mitigate the risks associated with the virus . some of our offices in locations across the globe have begun staged re-openings . we will continue to be responsive to the evolving threat of the virus and may re-close if necessary . decisions regarding openings and closings of our offices are supported by information from local government and health officials , as well as our own internal research regarding the needs of our employees and clients . our portfolio managers , research analysts and traders are successfully working remotely or in secure locations with access to all systems necessary to do their jobs and an ability to connect with their teams in managing client assets . additionally , our operational , control and support teams are primarily working in a remote environment . in light of the remote working environment , we continue to assess and enhance our business continuity plans as well as our internal controls with appropriate adjustments made to address the environment . this thoughtful , coordinated approach helps ensure our ability to continue to meet client needs and to run our business . other external factors impacting invesco invesco has a larger global presence in key markets than most of our peers . as one of the leading investment managers in the uk and europe , we were more impacted by continuing uncertainties surrounding brexit . additionally , our strong position in asia-pacific meant that invesco was more affected than others by market uncertainties over the trade issues between china and the u.s. on december 24 , 2020 , the uk and the eu ( european union ) announced a trade deal after months of negotiations . the deal came into force effective december 31 , 2020. while the deal announced largely covers goods , details related to the financial services industry are not specifically outlined within the agreement . the uk and the eu aim to agree by march 2021 to a memorandum of understanding establishing a framework for regulatory cooperation on financial services . the brexit outcome at the end of 2020 was largely anticipated by the market . invesco is a global business and has been committed for many years to meeting clients ' needs across europe in both eu and non-eu countries . invesco has local teams of experts focused on servicing local clients and fund ranges in different countries to meet a variety of local , country and regional client needs . we currently have a presence in 12 countries across europe . our staff will be able to continue to reside and work across the relevant regions . the change in the uk 's status from an eu to a non-eu country will not change invesco 's focus or commitment to serve its clients across europe . we are fully prepared to continue to operate and deliver for our clients with minimal disruption . investment exposure to the london interbank offered rate ( libor ) based interest rates could impact our client portfolios . story_separator_special_tag however , aum mix in 2020 was impacted by flows into lower fee products , from the market impact of the covid-19 pandemic and from the growth in our qqq fund , all of which increased the proportion of lower-fee aum , which has lowered net revenue yield in 2020. as passive products generally have lower fees than active products , the aum shift towards passive has contributed to the declining net revenue yield . passive aum includes our qqq etf , for which we do not receive a management fee but which delivers significant marketing and brand value and increases invesco 's footprint , leadership and relevance in the etf market . at december 31 , 2020 , passive aum were $ 370.6 billion , representing 27.5 % of total aum at that date ; whereas at december 31 , 2019 , passive aum were $ 297.0 billion , representing 24.2 % of our total aum at that date . 35 also contributing to the overall decline , the net revenue yield specific to passive aum has declined , particularly from the impact of the growth of the qqq fund . at december 31 , 2020 , the qqq fund represented $ 152.5 billion , or 41.1 % of passive aum . at december 31 , 2019 , the qqq fund represented $ 86.9 billion , or 29.3 % of passive aum . in the year ended december 31 , 2020 , the net revenue yield on passive aum was 12.0 basis points compared to 14.6 basis points in the year ended december 31 , 2019 , a decrease of 2.6 basis points . market volatility in 2020 also contributed to investors moving into lower risk assets , such as money market and stable value funds , which are active funds with lower fees . we saw outflows from equity products and alternatives and inflows into fixed income and other relatively lower fee products . these changes have decreased the net revenue yield on active aum . at december 31 , 2020 , active aum were $ 979.3 billion , representing 72.5 % of total aum at that date ; whereas at december 31 , 2019 , active aum were $ 929.2 billion , representing 75.8 % of our total aum at that date . in the year ended december 31 , 2020 , the net revenue yield on active aum was 46.4 basis points compared to 48.6 basis points in the year ended december 31 , 2019 , a decrease of 2.2 basis points . the changes described above have adversely impacted our revenue and resulting revenue yields , and we expect they will continue to pressure revenues and yields in the near term . 36 changes in our aum by channel , asset class , and client domicile , and average aum by asset class , are presented below : total aum by channel ( 1 ) replace_table_token_8_th see accompanying notes immediately following these aum tables . 37 passive aum by channel ( 1 ) replace_table_token_9_th see accompanying notes immediately following these aum tables . 38 total aum by asset class ( 2 ) replace_table_token_10_th see accompanying notes immediately following these aum tables . 39 passive aum by asset class ( 2 ) replace_table_token_11_th see accompanying notes immediately following these aum tables . 40 total aum by client domicile ( 3 ) replace_table_token_12_th see accompanying notes immediately following these aum tables . 41 passive aum by client domicile ( 3 ) replace_table_token_13_th ( 1 ) channel refers to the internal distribution channel from which the aum originated . retail aum represents aum distributed by the company 's retail sales team . institutional aum represents aum distributed by our institutional sales team . this aggregation is viewed as a proxy for presenting aum in the retail and institutional markets in which the company operates . ( 2 ) asset classes are descriptive groupings of aum by common type of underlying investments . ( 3 ) client domicile disclosure groups aum by the domicile of the underlying clients . ( 4 ) the acquisition of oppenheimerfunds business on may 24 , 2019 added $ 224.4 billion in aum at that date . the acquisition of guggenheim investments ' etf business on april 6 , 2018 added $ 38.1 billion in aum during the second quarter of 2018. as of july 1 , 2018 , we began including 100 % of invesco great wall , which added $ 9.5 billion in aum during the third quarter of 2018. results of operations for the year ended december 31 , 2020 compared to december 31 , 2019 the discussion below includes the use of non-gaap financial measures . see “ schedule of non-gaap information ” for additional details and reconciliations of the most directly comparable u.s. gaap measures to the non-gaap measures . the results of the oppenheimerfunds acquisition are included from may 24 , 2019 ( date of acquisition ) , the results of guggenheim investments ' etf business are included from april 6 , 2018 ( date of acquisition ) and the results of intelliflo are included from june 4 , 2018 ( date of acquisition ) . 42 operating revenues and net revenues the main categories of revenues , and the dollar and percentage change between the periods , are as follows : replace_table_token_14_th _ ( 1 ) total revenue adjustments includes passed through investment management , service and distribution , and other revenues and equal the same amount as the third party distribution , service and advisory expenses . ( 2 ) net revenues are operating revenues less revenue adjustments , plus net revenues from invesco great wall , plus management and performance fees earned from cip . see “ schedule of non-gaap information ” for additional important disclosures regarding the use of net revenues . the impact of foreign exchange rate movements increased operating revenues by $ 13.2 million , equivalent to 0.2 % of total operating

liquidity and capital resources cash flows and capital expenditures operating activities . net cash provided by operating activities was $ 973.3 million , $ 1,131.2 million and $ 1,353.0 million for the years ended december 31 , 2016 , 2017 and 2018 , respectively . the $ 221.8 million increase from 2017 to 2018 was due to higher net income as previously described and changes in our working capital , partially offset by adjustments for non-cash items . the $ 157.9 million increase from 2016 to 2017 was due to higher net income as previously described , adjustments to non-cash items and changes in our working capital . investing activities . net cash used by investing activities for the years ended december 31 , 2016 , 2017 and 2018 was $ 866.6 million , $ 593.2 million and $ 119.3 million , respectively . during 2018 , we sold a portion of our interest in bridgetex for cash proceeds of $ 575.6 million . also during 2018 , we spent $ 562.3 million on capital expenditures , which included $ 88.7 million for maintenance capital , $ 425.0 million for our expansion capital projects and $ 48.6 million for undivided joint interest projects for which cash was received from a third party . additionally , we contributed capital of $ 216.4 million in conjunction with our joint venture capital projects , which we account for as investments in non-controlled entities .

as previously disclosed , we are undertaking a strategic evaluation of our business focusing on four key areas of our expense base : our organizational model , our real estate footprint , management of third party spend , and technology and operations efficiency . we plan to invest in key areas of growth aligned with our strategic plan , including etfs , fixed income , china , solutions , alternatives and global equities , while creating permanent annual net operating expense improvements of $ 200 million . a significant element of the savings will be generated from realigning our workforce to support key areas of growth as well as repositioning some of our workforce to lower cost locations . we expect $ 150 million of the savings to be achieved by 29 the end of 2021 with the remainder by the end of 2022. remaining restructuring costs related to the strategic evaluation are estimated to be in a range of $ 150 to $ 175 million over the next two years , with $ 119.0 million incurred in 2020. in 2019 , invesco completed the acquisition of oppenheimerfunds ( ofi ) , and the integration of our two firms . building on the combination with ofi , in 2020 we further deepened our relationships with clients in the us , expanded the capabilities we offered globally and further scaled our business for the benefit of clients and shareholders . the firm is also highly focused on delivering the additional capabilities achieved through the combination to institutional and non-us markets . managing our business and meeting client needs through covid-19 invesco is committed to helping our employees , our clients and our communities navigate the challenges presented by the impacts of covid-19 . the primary focus of our efforts is to ensure the health and safety of our employees while preserving our ability to serve clients and manage assets in a highly dynamic market environment . as always , we are committed to helping our clients achieve their investment objectives through disciplined long-term investing . to this end , we continue to proactively engage with our clients virtually to help them better navigate market volatility by providing thought leadership and other value-added services . we believe our client centric approach will enable our clients to emerge from this crisis stronger . to ensure we continue to meet client needs in a primarily remote-working environment , small select teams are working at alternate sites or operating in split shifts to mitigate the risks associated with the virus . some of our offices in locations across the globe have begun staged re-openings . we will continue to be responsive to the evolving threat of the virus and may re-close if necessary . decisions regarding openings and closings of our offices are supported by information from local government and health officials , as well as our own internal research regarding the needs of our employees and clients . our portfolio managers , research analysts and traders are successfully working remotely or in secure locations with access to all systems necessary to do their jobs and an ability to connect with their teams in managing client assets . additionally , our operational , control and support teams are primarily working in a remote environment . in light of the remote working environment , we continue to assess and enhance our business continuity plans as well as our internal controls with appropriate adjustments made to address the environment . this thoughtful , coordinated approach helps ensure our ability to continue to meet client needs and to run our business . other external factors impacting invesco invesco has a larger global presence in key markets than most of our peers . as one of the leading investment managers in the uk and europe , we were more impacted by continuing uncertainties surrounding brexit . additionally , our strong position in asia-pacific meant that invesco was more affected than others by market uncertainties over the trade issues between china and the u.s. on december 24 , 2020 , the uk and the eu ( european union ) announced a trade deal after months of negotiations . the deal came into force effective december 31 , 2020. while the deal announced largely covers goods , details related to the financial services industry are not specifically outlined within the agreement . the uk and the eu aim to agree by march 2021 to a memorandum of understanding establishing a framework for regulatory cooperation on financial services . the brexit outcome at the end of 2020 was largely anticipated by the market . invesco is a global business and has been committed for many years to meeting clients ' needs across europe in both eu and non-eu countries . invesco has local teams of experts focused on servicing local clients and fund ranges in different countries to meet a variety of local , country and regional client needs . we currently have a presence in 12 countries across europe . our staff will be able to continue to reside and work across the relevant regions . the change in the uk 's status from an eu to a non-eu country will not change invesco 's focus or commitment to serve its clients across europe . we are fully prepared to continue to operate and deliver for our clients with minimal disruption . investment exposure to the london interbank offered rate ( libor ) based interest rates could impact our client portfolios . story_separator_special_tag however , aum mix in 2020 was impacted by flows into lower fee products , from the market impact of the covid-19 pandemic and from the growth in our qqq fund , all of which increased the proportion of lower-fee aum , which has lowered net revenue yield in 2020. as passive products generally have lower fees than active products , the aum shift towards passive has contributed to the declining net revenue yield . passive aum includes our qqq etf , for which we do not receive a management fee but which delivers significant marketing and brand value and increases invesco 's footprint , leadership and relevance in the etf market . at december 31 , 2020 , passive aum were $ 370.6 billion , representing 27.5 % of total aum at that date ; whereas at december 31 , 2019 , passive aum were $ 297.0 billion , representing 24.2 % of our total aum at that date . 35 also contributing to the overall decline , the net revenue yield specific to passive aum has declined , particularly from the impact of the growth of the qqq fund . at december 31 , 2020 , the qqq fund represented $ 152.5 billion , or 41.1 % of passive aum . at december 31 , 2019 , the qqq fund represented $ 86.9 billion , or 29.3 % of passive aum . in the year ended december 31 , 2020 , the net revenue yield on passive aum was 12.0 basis points compared to 14.6 basis points in the year ended december 31 , 2019 , a decrease of 2.6 basis points . market volatility in 2020 also contributed to investors moving into lower risk assets , such as money market and stable value funds , which are active funds with lower fees . we saw outflows from equity products and alternatives and inflows into fixed income and other relatively lower fee products . these changes have decreased the net revenue yield on active aum . at december 31 , 2020 , active aum were $ 979.3 billion , representing 72.5 % of total aum at that date ; whereas at december 31 , 2019 , active aum were $ 929.2 billion , representing 75.8 % of our total aum at that date . in the year ended december 31 , 2020 , the net revenue yield on active aum was 46.4 basis points compared to 48.6 basis points in the year ended december 31 , 2019 , a decrease of 2.2 basis points . the changes described above have adversely impacted our revenue and resulting revenue yields , and we expect they will continue to pressure revenues and yields in the near term . 36 changes in our aum by channel , asset class , and client domicile , and average aum by asset class , are presented below : total aum by channel ( 1 ) replace_table_token_8_th see accompanying notes immediately following these aum tables . 37 passive aum by channel ( 1 ) replace_table_token_9_th see accompanying notes immediately following these aum tables . 38 total aum by asset class ( 2 ) replace_table_token_10_th see accompanying notes immediately following these aum tables . 39 passive aum by asset class ( 2 ) replace_table_token_11_th see accompanying notes immediately following these aum tables . 40 total aum by client domicile ( 3 ) replace_table_token_12_th see accompanying notes immediately following these aum tables . 41 passive aum by client domicile ( 3 ) replace_table_token_13_th ( 1 ) channel refers to the internal distribution channel from which the aum originated . retail aum represents aum distributed by the company 's retail sales team . institutional aum represents aum distributed by our institutional sales team . this aggregation is viewed as a proxy for presenting aum in the retail and institutional markets in which the company operates . ( 2 ) asset classes are descriptive groupings of aum by common type of underlying investments . ( 3 ) client domicile disclosure groups aum by the domicile of the underlying clients . ( 4 ) the acquisition of oppenheimerfunds business on may 24 , 2019 added $ 224.4 billion in aum at that date . the acquisition of guggenheim investments ' etf business on april 6 , 2018 added $ 38.1 billion in aum during the second quarter of 2018. as of july 1 , 2018 , we began including 100 % of invesco great wall , which added $ 9.5 billion in aum during the third quarter of 2018. results of operations for the year ended december 31 , 2020 compared to december 31 , 2019 the discussion below includes the use of non-gaap financial measures . see “ schedule of non-gaap information ” for additional details and reconciliations of the most directly comparable u.s. gaap measures to the non-gaap measures . the results of the oppenheimerfunds acquisition are included from may 24 , 2019 ( date of acquisition ) , the results of guggenheim investments ' etf business are included from april 6 , 2018 ( date of acquisition ) and the results of intelliflo are included from june 4 , 2018 ( date of acquisition ) . 42 operating revenues and net revenues the main categories of revenues , and the dollar and percentage change between the periods , are as follows : replace_table_token_14_th _ ( 1 ) total revenue adjustments includes passed through investment management , service and distribution , and other revenues and equal the same amount as the third party distribution , service and advisory expenses . ( 2 ) net revenues are operating revenues less revenue adjustments , plus net revenues from invesco great wall , plus management and performance fees earned from cip . see “ schedule of non-gaap information ” for additional important disclosures regarding the use of net revenues . the impact of foreign exchange rate movements increased operating revenues by $ 13.2 million , equivalent to 0.2 % of total operating

cash and cash equivalents 1,408.4 — 1,408.4 1,049.0 — 1,049.0 1,147.7 — 1,147.7 restricted cash 129.2 — 129.2 — — — — — — cash and cash equivalents of cip 301.7 301.7 — 652.2 652.2 — 657.7 657.7 — total cash , cash equivalents and restricted cash per consolidated statement of cash flows 1,839.3 301.7 1,537.6 1,701.2 652.2 1,049.0 1,805.4 657.7 1,147.7 ( 1 ) these tables include non-gaap presentations . cash held by cip is not available for use by invesco . additionally , there is no recourse to invesco for cip debt . the cash flows of cip do not form part of the company 's cash flow management processes , nor do they form part of the company 's significant liquidity evaluations and decisions . policyholder assets and liabilities are equal and offsetting and have no impact on invesco 's shareholder 's equity . the impact of cash inflows/outflows from policyholder assets and liabilities are reflected within cash flows from operating activities as changes in receivables and or payables , as applicable . as discussed in note 2 , “ business combinations , ” the oppenheimerfunds acquisition purchase price was allocated to the assets acquired and liabilities assumed at fair value as of the date of the transaction . the issuance of common stock and preferred stock consideration represents a non-cash financing activity related to the statement of cash flows . 59 operating activities operating cash flows include the receipt of investment management and other fees generated from aum , offset by operating expenses and changes in operating assets and liabilities . although some receipts and payments are seasonal , particularly bonus payments which are paid out during the first quarter , in general , after allowing for the change in cash held by cip , and investment activities , our operating cash flows move in the same direction as our operating income . during 2020 , cash provided by operating activities was $ 1,230.3 million compared to $ 1,116.6 million provided during 2019 ( an increase of $ 113.7 million ) .

in the early stages of the pandemic , our tenants were impacted by the governmental mandates to defer elective surgeries , the takeover of certain facilities by the governments in certain countries , and the overall downturn in the economy in general . by the 2020 third quarter , our tenants were back accepting patients and performing medically necessary elective procedures , resulting in improved volumes compared to the 2020 second quarter . despite all of this , we received all but 2 % of our annual rent and interest payments in 2020. for the 2 % not collected as scheduled , we have agreements in place to collect such deferred amounts plus interest . we expect to continue to receive substantially all future rent and interest payments ; however , no assurances can be made that if the pandemic continues for an extended period of time that our rent and interest payments will not be delayed into the future until our tenants can recover . in addition to the collection of almost all of our rent and interest during the pandemic , we , along with our operators , executed on several accretive growth initiatives during 2020 despite the environment created by the covid-19 pandemic . in 2020 , we invested approximately $ 3.6 billion in hospital real estate . additionally , we have maintained liquidity during the covid-19 pandemic by raising more than $ 400.0 million in proceeds through sales of our common stock in our at-the-market program , receiving more than $ 500.0 million from payoffs on our loan portfolio and divestitures , and completing a $ 1.3 billion 3.50 % senior unsecured notes offering , of which approximately $ 833 million was used to refinance debt with a weighted-average interest rate of 6 % . we also increased our dividend to $ 0.27 per share per quarter in 2020 , which is the 6 th year in a row for such an increase . finally , shortly after year-end , we were able to extend and improve pricing of our revolving credit and term loan facility ( “ credit facility ” ) . a summary of our 2020 highlights is as follows : acquired the following real estate assets : acquired 30 acute care hospitals in the united kingdom for a purchase price of approximately £1.5 billion . these facilities are leased to circle ; formed a new joint venture for the purpose of investing in the operations of international hospitals and originated a $ 205 million acquisition loan as part of this formation . we have a 49 % interest in this joint venture , which simultaneously purchased from steward the rights and existing assets related to all present and future international opportunities previously owned by steward for strategic , regulatory , and risk management purposes ; completed construction and began recording rental income on two general acute care facilities and one irf ; commenced the development of two irfs in california for a total budget of $ 95.6 million . these facilities will be leased to ernest health , inc. ( “ ernest ” ) upon completion in the fourth quarter of 2021 and first quarter of 2022 ; acquired the fee simple real estate of two general acute care hospitals in utah for a total investment of $ 950 million in exchange for the reduction of the mortgage loans made to steward for such properties and additional cash consideration of $ 200 million based on their relative fair value ; acquired an inpatient rehabilitation facility in germany for approximately 12.5 million leased to median ; acquired two private acute care facilities in the united kingdom for a total of approximately £115 million leased to circle ; acquired a general acute care hospital in lynwood , california for a total investment of approximately $ 300 million . this facility is leased to affiliates of prime healthcare services , inc. ( collectively , “ prime ” ) ; acquired a general acute care facility in the united kingdom for £50.0 million leased to a new tenant , the royal marsden nhs foundation trust ; financed three general acute care hospitals in colombia for approximately $ 135 million operated by the new international joint venture ; acquired two inpatient rehabilitation facilities , one in texas and one in indiana , for a total of approximately $ 58 million leased to curahealth hospitals , a new tenant to us ; acquired an additional equity ownership in infracore sa ( “ infracore ” ) for chf 206.5 million ; and acquired an inpatient rehabilitation facility in south carolina for $ 17.0 million leased to ernest . subsequent to december 31 , 2020 , we entered into definitive agreements to acquire 35 to 40 behavioral health facilities currently owned and operated by priory for an aggregate purchase price of approximately £800 million along with a £250 million short-term acquisition loan . to help fund these investments subsequent to year-end , we completed an underwritten public offering of 36.8 million shares of our common stock , resulting in net proceeds of approximately $ 711.0 million , after deducting 41 underwriting discounts and commissions and offering expenses , along with utilizing approximately £500 million of a $ 900 million interim credit facility at terms similar to our credit facility . 2019 highlights in 2019 , we invested in approximately $ 4.5 billion in healthcare real estate assets . these significant investments enhanced the size and scale of our healthcare portfolio , while expanding our geographic footprint in the u.s. and europe , and entering into new territories such as australia . to fund these new investments , we raised $ 2.5 billion in proceeds from equity sales during 2019 , received proceeds of $ 837 million from an australian term loan facility in june 2019 , and completed $ 900 million and £1 billion senior unsecured notes offerings in july and december 2019 , respectively . story_separator_special_tag characteristics to be considered by management in allocating these values include the nature and extent of our existing business relationships with the tenant , growth prospects for developing new business with the tenant , the tenant 's credit quality , and expectations of lease renewals , including those existing under the terms of the lease agreement , among other factors . at december 31 , 2020 , we have not assigned any value to customer relationship intangibles . we amortize the value of lease intangibles to expense over the term of the respective leases , which have a weighted-average useful life of 26.1 years at december 31 , 2020. if a lease is terminated early , the unamortized portion of the lease intangible is charged to expense . principles of consolidation : property holding entities and other subsidiaries of which we own 100 % of the equity or have a controlling financial interest evidenced by ownership of a majority voting interest are consolidated . all inter-company balances and transactions are eliminated . for entities in which we own less than 100 % of the equity interest , we consolidate the property if we have the direct or indirect ability to control the entities ' activities based upon the terms of the respective entities ' ownership agreements . for these entities , we record a non-controlling interest representing equity held by non-controlling interests . we continually evaluate all of our transactions and investments to determine if they represent variable interests in a variable interest entity . if we determine that we have a variable interest in a variable interest entity , we then evaluate if we are the primary beneficiary of the variable interest entity . the evaluation is a qualitative assessment as to whether we have the ability to direct the activities of a variable interest entity that most significantly impact the entity 's economic performance . we consolidate each variable interest entity in which we , by virtue of or transactions with our investments in the entity , are considered to be the primary beneficiary . at december 31 , 2020 and 2019 , we determined that we were not the primary beneficiary of any variable interest entity in which we hold a variable interest because we do not control the activities ( such as the day-to-day operations ) that most significantly impact the economic performance of these entities . story_separator_special_tag normal ; `` > in regards to other investing and financing activities in 2018 , we did the following : a ) in 2018 , we generated more than $ 2 billion of cash proceeds from the joint venture transaction with primotop ( which included the disposal of 71 inpatient rehabilitation hospitals in germany and issuance of secured debt ) and the sale of five other acute care and long-term acute care properties . approximately $ 580 million was reinvested in the joint venture with primotop in the form of an equity interest and shareholder loan ; b ) on august 31 , 2018 , we funded the acquisition of one property in pasco , washington for $ 17.5 million ; c ) on august 28 , 2018 , we funded the acquisition of three properties in germany for 17.3 million ; d ) originated $ 212 million in mortgage and other loans ; e ) funded less than $ 200 million for development and capital improvement projects ; f ) acquired five facilities operated by steward by converting the $ 764.4 million in mortgage loans on the same properties plus cash consideration ; g ) we used the net cash received from property disposals to reduce our revolver by approximately $ 810 million ; h ) on october 4 , 2018 , we finalized our recapitalization agreement with ernest generating $ 176.3 million ( which included the sale of our equity investment in ernest and repayment in full of non-mortgage loans outstanding plus accrued interest ) ; and i ) in the fourth quarter of 2018 , we sold 5.6 million shares of common stock under our at-the-market equity program generating approximately $ 95 million . debt restrictions and reit requirements our debt facilities impose certain restrictions on us , including , but not limited to , restrictions on our ability to : incur debt ; create or incur liens ; provide guarantees in respect of obligations of any other entity ; make redemptions and repurchases of our capital stock ; prepay , redeem , or repurchase debt ; engage in mergers or consolidations ; enter into affiliated transactions ; dispose of real estate or other assets ; and change our business . in addition , the credit agreement governing our credit facility limits the amount of dividends we can pay to 95 % of naffo , as defined in the agreements , on a rolling four quarter basis . the indentures governing our senior unsecured notes also limit the amount of dividends we can pay based on the sum of 95 % of funds from operations , proceeds of equity issuances , and certain other net cash proceeds . finally , our senior unsecured notes require us to maintain total unencumbered assets ( as defined in the related indenture ) of not less than 150 % of our unsecured indebtedness . in addition to these restrictions , the credit facility contains customary financial and operating covenants , including covenants relating to our total leverage ratio , fixed charge coverage ratio , secured leverage ratio , unsecured leverage ratio , consolidated adjusted net worth , and unsecured interest coverage ratio . this facility also contains customary events of default , including among others , nonpayment of principal or interest , material inaccuracy of representations , and failure to comply with our covenants . if an event of default occurs and is continuing under the facility , the entire outstanding balance may become immediately due and payable . at december 31 , 2020 , we were in compliance

cash and cash equivalents 1,408.4 — 1,408.4 1,049.0 — 1,049.0 1,147.7 — 1,147.7 restricted cash 129.2 — 129.2 — — — — — — cash and cash equivalents of cip 301.7 301.7 — 652.2 652.2 — 657.7 657.7 — total cash , cash equivalents and restricted cash per consolidated statement of cash flows 1,839.3 301.7 1,537.6 1,701.2 652.2 1,049.0 1,805.4 657.7 1,147.7 ( 1 ) these tables include non-gaap presentations . cash held by cip is not available for use by invesco . additionally , there is no recourse to invesco for cip debt . the cash flows of cip do not form part of the company 's cash flow management processes , nor do they form part of the company 's significant liquidity evaluations and decisions . policyholder assets and liabilities are equal and offsetting and have no impact on invesco 's shareholder 's equity . the impact of cash inflows/outflows from policyholder assets and liabilities are reflected within cash flows from operating activities as changes in receivables and or payables , as applicable . as discussed in note 2 , “ business combinations , ” the oppenheimerfunds acquisition purchase price was allocated to the assets acquired and liabilities assumed at fair value as of the date of the transaction . the issuance of common stock and preferred stock consideration represents a non-cash financing activity related to the statement of cash flows . 59 operating activities operating cash flows include the receipt of investment management and other fees generated from aum , offset by operating expenses and changes in operating assets and liabilities . although some receipts and payments are seasonal , particularly bonus payments which are paid out during the first quarter , in general , after allowing for the change in cash held by cip , and investment activities , our operating cash flows move in the same direction as our operating income . during 2020 , cash provided by operating activities was $ 1,230.3 million compared to $ 1,116.6 million provided during 2019 ( an increase of $ 113.7 million ) .

in the early stages of the pandemic , our tenants were impacted by the governmental mandates to defer elective surgeries , the takeover of certain facilities by the governments in certain countries , and the overall downturn in the economy in general . by the 2020 third quarter , our tenants were back accepting patients and performing medically necessary elective procedures , resulting in improved volumes compared to the 2020 second quarter . despite all of this , we received all but 2 % of our annual rent and interest payments in 2020. for the 2 % not collected as scheduled , we have agreements in place to collect such deferred amounts plus interest . we expect to continue to receive substantially all future rent and interest payments ; however , no assurances can be made that if the pandemic continues for an extended period of time that our rent and interest payments will not be delayed into the future until our tenants can recover . in addition to the collection of almost all of our rent and interest during the pandemic , we , along with our operators , executed on several accretive growth initiatives during 2020 despite the environment created by the covid-19 pandemic . in 2020 , we invested approximately $ 3.6 billion in hospital real estate . additionally , we have maintained liquidity during the covid-19 pandemic by raising more than $ 400.0 million in proceeds through sales of our common stock in our at-the-market program , receiving more than $ 500.0 million from payoffs on our loan portfolio and divestitures , and completing a $ 1.3 billion 3.50 % senior unsecured notes offering , of which approximately $ 833 million was used to refinance debt with a weighted-average interest rate of 6 % . we also increased our dividend to $ 0.27 per share per quarter in 2020 , which is the 6 th year in a row for such an increase . finally , shortly after year-end , we were able to extend and improve pricing of our revolving credit and term loan facility ( “ credit facility ” ) . a summary of our 2020 highlights is as follows : acquired the following real estate assets : acquired 30 acute care hospitals in the united kingdom for a purchase price of approximately £1.5 billion . these facilities are leased to circle ; formed a new joint venture for the purpose of investing in the operations of international hospitals and originated a $ 205 million acquisition loan as part of this formation . we have a 49 % interest in this joint venture , which simultaneously purchased from steward the rights and existing assets related to all present and future international opportunities previously owned by steward for strategic , regulatory , and risk management purposes ; completed construction and began recording rental income on two general acute care facilities and one irf ; commenced the development of two irfs in california for a total budget of $ 95.6 million . these facilities will be leased to ernest health , inc. ( “ ernest ” ) upon completion in the fourth quarter of 2021 and first quarter of 2022 ; acquired the fee simple real estate of two general acute care hospitals in utah for a total investment of $ 950 million in exchange for the reduction of the mortgage loans made to steward for such properties and additional cash consideration of $ 200 million based on their relative fair value ; acquired an inpatient rehabilitation facility in germany for approximately 12.5 million leased to median ; acquired two private acute care facilities in the united kingdom for a total of approximately £115 million leased to circle ; acquired a general acute care hospital in lynwood , california for a total investment of approximately $ 300 million . this facility is leased to affiliates of prime healthcare services , inc. ( collectively , “ prime ” ) ; acquired a general acute care facility in the united kingdom for £50.0 million leased to a new tenant , the royal marsden nhs foundation trust ; financed three general acute care hospitals in colombia for approximately $ 135 million operated by the new international joint venture ; acquired two inpatient rehabilitation facilities , one in texas and one in indiana , for a total of approximately $ 58 million leased to curahealth hospitals , a new tenant to us ; acquired an additional equity ownership in infracore sa ( “ infracore ” ) for chf 206.5 million ; and acquired an inpatient rehabilitation facility in south carolina for $ 17.0 million leased to ernest . subsequent to december 31 , 2020 , we entered into definitive agreements to acquire 35 to 40 behavioral health facilities currently owned and operated by priory for an aggregate purchase price of approximately £800 million along with a £250 million short-term acquisition loan . to help fund these investments subsequent to year-end , we completed an underwritten public offering of 36.8 million shares of our common stock , resulting in net proceeds of approximately $ 711.0 million , after deducting 41 underwriting discounts and commissions and offering expenses , along with utilizing approximately £500 million of a $ 900 million interim credit facility at terms similar to our credit facility . 2019 highlights in 2019 , we invested in approximately $ 4.5 billion in healthcare real estate assets . these significant investments enhanced the size and scale of our healthcare portfolio , while expanding our geographic footprint in the u.s. and europe , and entering into new territories such as australia . to fund these new investments , we raised $ 2.5 billion in proceeds from equity sales during 2019 , received proceeds of $ 837 million from an australian term loan facility in june 2019 , and completed $ 900 million and £1 billion senior unsecured notes offerings in july and december 2019 , respectively . story_separator_special_tag characteristics to be considered by management in allocating these values include the nature and extent of our existing business relationships with the tenant , growth prospects for developing new business with the tenant , the tenant 's credit quality , and expectations of lease renewals , including those existing under the terms of the lease agreement , among other factors . at december 31 , 2020 , we have not assigned any value to customer relationship intangibles . we amortize the value of lease intangibles to expense over the term of the respective leases , which have a weighted-average useful life of 26.1 years at december 31 , 2020. if a lease is terminated early , the unamortized portion of the lease intangible is charged to expense . principles of consolidation : property holding entities and other subsidiaries of which we own 100 % of the equity or have a controlling financial interest evidenced by ownership of a majority voting interest are consolidated . all inter-company balances and transactions are eliminated . for entities in which we own less than 100 % of the equity interest , we consolidate the property if we have the direct or indirect ability to control the entities ' activities based upon the terms of the respective entities ' ownership agreements . for these entities , we record a non-controlling interest representing equity held by non-controlling interests . we continually evaluate all of our transactions and investments to determine if they represent variable interests in a variable interest entity . if we determine that we have a variable interest in a variable interest entity , we then evaluate if we are the primary beneficiary of the variable interest entity . the evaluation is a qualitative assessment as to whether we have the ability to direct the activities of a variable interest entity that most significantly impact the entity 's economic performance . we consolidate each variable interest entity in which we , by virtue of or transactions with our investments in the entity , are considered to be the primary beneficiary . at december 31 , 2020 and 2019 , we determined that we were not the primary beneficiary of any variable interest entity in which we hold a variable interest because we do not control the activities ( such as the day-to-day operations ) that most significantly impact the economic performance of these entities . story_separator_special_tag normal ; `` > in regards to other investing and financing activities in 2018 , we did the following : a ) in 2018 , we generated more than $ 2 billion of cash proceeds from the joint venture transaction with primotop ( which included the disposal of 71 inpatient rehabilitation hospitals in germany and issuance of secured debt ) and the sale of five other acute care and long-term acute care properties . approximately $ 580 million was reinvested in the joint venture with primotop in the form of an equity interest and shareholder loan ; b ) on august 31 , 2018 , we funded the acquisition of one property in pasco , washington for $ 17.5 million ; c ) on august 28 , 2018 , we funded the acquisition of three properties in germany for 17.3 million ; d ) originated $ 212 million in mortgage and other loans ; e ) funded less than $ 200 million for development and capital improvement projects ; f ) acquired five facilities operated by steward by converting the $ 764.4 million in mortgage loans on the same properties plus cash consideration ; g ) we used the net cash received from property disposals to reduce our revolver by approximately $ 810 million ; h ) on october 4 , 2018 , we finalized our recapitalization agreement with ernest generating $ 176.3 million ( which included the sale of our equity investment in ernest and repayment in full of non-mortgage loans outstanding plus accrued interest ) ; and i ) in the fourth quarter of 2018 , we sold 5.6 million shares of common stock under our at-the-market equity program generating approximately $ 95 million . debt restrictions and reit requirements our debt facilities impose certain restrictions on us , including , but not limited to , restrictions on our ability to : incur debt ; create or incur liens ; provide guarantees in respect of obligations of any other entity ; make redemptions and repurchases of our capital stock ; prepay , redeem , or repurchase debt ; engage in mergers or consolidations ; enter into affiliated transactions ; dispose of real estate or other assets ; and change our business . in addition , the credit agreement governing our credit facility limits the amount of dividends we can pay to 95 % of naffo , as defined in the agreements , on a rolling four quarter basis . the indentures governing our senior unsecured notes also limit the amount of dividends we can pay based on the sum of 95 % of funds from operations , proceeds of equity issuances , and certain other net cash proceeds . finally , our senior unsecured notes require us to maintain total unencumbered assets ( as defined in the related indenture ) of not less than 150 % of our unsecured indebtedness . in addition to these restrictions , the credit facility contains customary financial and operating covenants , including covenants relating to our total leverage ratio , fixed charge coverage ratio , secured leverage ratio , unsecured leverage ratio , consolidated adjusted net worth , and unsecured interest coverage ratio . this facility also contains customary events of default , including among others , nonpayment of principal or interest , material inaccuracy of representations , and failure to comply with our covenants . if an event of default occurs and is continuing under the facility , the entire outstanding balance may become immediately due and payable . at december 31 , 2020 , we were in compliance

liquidity and capital resources our typical sources of cash include our monthly rent and interest receipts , distributions from our five real estate joint venture agreements , borrowings under our revolving credit facility , public issuances of debt and equity securities , and proceeds from bank debt , asset dispositions ( either one-off or group asset sales through joint venture transactions ) , and principal payments on loans . our primary uses of cash include dividend distributions , debt service ( including principal and interest ) , new investments ( including acquisitions , developments , or capital improvement projects ) , loan advances , property expenses , and general and administrative expenses . absent our requirements to make distributions to maintain our reit qualification ( as more fully described in note 5 within item 8 of this annual report on form 10-k ) and our current contractual commitments discussed later , we do not have any material off-balance sheet arrangements that we expect would materially affect our liquidity and capital resources . see below for highlights of our sources and uses of cash for the past three years : 45 2020 cash flow activity we generated cash of $ 617.6 million from operating activities during 2020 , primarily consisting of rent and interest from mortgage and other loans . we used these operating cash flows to fund our dividends of $ 568 million and certain investing activities .

the fourth and second quarter , respectively ; and a $ 109 million ( $ 68 million after-tax ) charge related to the renewal of our partnership with delta air lines ( delta ) in the fourth quarter . 2013 results included : a $ 66 million ( $ 41 million after-tax ) charge related to a proposed merchant litigation settlement in the fourth quarter . in addition , effective december 1 , 2015 , we transferred the card member loans and receivables related to our cobrand partnerships with costco wholesale corporation ( costco ) in the united states and jetblue airways corporation ( jetblue ) ( the hfs portfolios ) to card member loans and receivables held for sale ( hfs ) on the consolidated balance sheets . refer to note 2 to the “consolidated financial statements” for additional information . non-gaap measures we prepare our consolidated financial statements in accordance with accounting principles generally accepted in the united states of america ( gaap ) . however , certain information included within this report constitutes non-gaap financial measures . our calculations of non-gaap financial measures may differ from the calculations of similarly titled measures by other companies . business environment our performance in 2015 reflected both the strength of our business and the headwinds we have been managing throughout the year . results for the year benefited from healthy loan growth , strong card acquisitions , excellent credit performance , disciplined operating expense control and the benefits of our strong capital position . our results were also challenged by several factors . first , the cumulative impact from the initial increased costs associated with early renewals of certain of our cobrand relationships and the end of our relationship with costco in canada negatively impacted our results . second , the u.s. dollar continued to strengthen as the year progressed . third , our decision to increase spending on growth initiatives for the year , consistent with the elevated levels of 2014 , further pressured our 2015 earnings . fourth , the economic , regulatory , and competitive environments all became even more challenging as the year progressed . the combination of these factors resulted in billings and revenue growth rates that were fairly steady throughout the year . billings did grow in 2015 , although growth rates decelerated modestly during the second half of the year . international billed business continued to be strong versus the prior year after excluding canada ( due to the termination of our relationship with costco canada last year ) and adjusting for foreign currency exchange rates . in the united states , we saw softening in billings on the costco cobrand card , where volumes dropped versus the prior year . lower gas prices also continued to be a drag on billings . gcs billed business growth continued to slow due , in part , to lower airline volumes and a generally cautious corporate spending environment . our billings growth rates during the second half of 2016 will be impacted by the end of our relationship with costco in the united states , which is expected to occur around mid-year . for the full year , discount revenue was down slightly versus the prior year driven in part by a decline in our discount rate due primarily to the continued rollout of optblue , and we anticipate that the discount rate will further decline by a greater amount during 2016 , due to the continued expansion of optblue , a greater impact from international regulatory changes , and continued competitive pressures . 52 growth in net interest income remained strong during the year , driven by loan growth . card member loans held for investment were down in 2015 on a reported basis due to the transfer of the costco and jetblue loan portfolios to card member loans and receivables hfs , effective december 1 , 2015. excluding the hfs portfolios from the prior year , worldwide loans increased . we expect to see strong growth in loans held for investment in 2016 , and continue to believe there are opportunities to increase our share of lending without significantly changing our overall risk profile . our credit provision was down versus the prior year , as lending write-off rates remained at lower levels . we expect continued growth in loans will contribute to an increase in provisions ; we also expect to see some upward pressure on our write-off rates , due primarily to the seasoning of loans related to new card members . our capital position allowed us to return over $ 5 billion to our shareholders in the form of dividends and share repurchases , representing approximately 105 percent of total capital generated during the year , reflecting our ongoing commitment to using our capital strength to create value for our shareholders . as mentioned above , we are now reporting the costco portfolio as hfs . we expect the sale to close around mid-year 2016 and that our merchant acceptance agreement will extend through the transaction close . the ultimate gain on sale will be determined based on the assets actually sold , but we currently estimate a gain of approximately $ 1 billion . we have not yet signed a definitive agreement and given that we are still several months away from the close , and the card member borrowing and paydown trends are difficult to predict in this type of transition , the final gain could differ from our estimate . we expect the portfolio sale gain will be partially used to fund spending on growth initiatives throughout 2016 , resulting in some unevenness in our quarterly performance . as of december 31 , 2015 , costco cobrand accounts were responsible for approximately 19 percent of our worldwide card member loans held for investment and hfs ( combined ) and approximately 10 percent of our total cards-in-force . story_separator_special_tag accordingly , the average discount rate for prior periods was also revised , resulting in a reduction of between zero and one basis point in any period from what was originally reported . ( b ) average basic card member spending and average fee per card are computed from proprietary card activities only . average fee per card is computed based on net card fees , including the amortization of deferred direct acquisition costs divided by average worldwide proprietary cards-in-force . the average fee per card , adjusted , which is a non-gaap measure , is computed in the same manner , but excludes amortization of deferred direct acquisition costs . the amount of amortization excluded was $ 283 million , $ 306 million and $ 262 million for the years ended december 31 , 2015 , 2014 and 2013 , respectively . we present the average fee per card , adjusted , because we believe this metric presents a useful indicator of card fee pricing across a range of our proprietary card products . 58 table 6 : selected statistical information replace_table_token_10_th ( a ) the foreign currency adjusted information assumes a constant exchange rate between the periods being compared for purposes of currency translation into u.s. dollars ( i.e . , assumes the foreign exchange rates used to determine results for the current year apply to the corresponding prior year period against which such results are being compared ) . ( b ) captions in the table above not designated as “proprietary” or “gns” include both proprietary and gns data . ( c ) included in the gnms segment . ( d ) included in the uscs segment . ( e ) included in the gcs segment . ( f ) included in the ics segment . 59 table 7 : selected statistical information replace_table_token_11_th ( a ) effective december 1 , 2015 , does not reflect the hfs portfolios . ( b ) provisions on principal and fee reserve components on card member receivables and provisions for principal , interest and or fees on card member loans . ( c ) write-offs , less recoveries . ( d ) 2015 includes the impact of the transfer of the hfs receivables portfolio , which was not significant . ( e ) historically , net loss ratio as a % of charge volume and 90 days past billing as a % of receivables were presented for ics . beginning in the first quarter 2014 , as a result of system enhancements , 30 days past due as a % of total , net write-off rate ( principal only ) and net write-off rate ( principal and fees ) have been presented . ( f ) we present a net write-off rate based on principal losses only ( i.e . , excluding interest and or fees ) to be consistent with industry convention . in addition , because we consider uncollectible interest and or fees in our reserves for credit losses , a net write-off rate including principal , interest and or fees is also presented . the twelve months ended december 31 , 2015 reflect the impact of a change in the timing of charge-offs for card member receivables and loans in certain modification programs from 180 days past due to 120 days past due . 60 table 8 : net interest yield on card member loans replace_table_token_12_th ( a ) adjusted net interest income , adjusted average loans , and net interest yield on card member loans are non-gaap measures . refer to “glossary of selected terminology” for definitions of these terms . we believe adjusted net interest income and adjusted average loans are useful to investors because they are components of net interest yield on card member loans , which provides a measure of profitability of our card member loan portfolio . ( b ) for purposes of the calculation of net interest yield on card member loans , average loans continues to include the hfs loan portfolios . 61 business segment results we consider a combination of factors when evaluating the composition of our reportable operating segments , including the results reviewed by the chief operating decision maker , economic characteristics , products and services offered , classes of customers , product distribution channels , geographic considerations ( primarily united states versus outside the united states ) and regulatory considerations . refer to note 25 of the “consolidated financial statements” for additional discussion of the products and services by segment . in light of the organizational changes discussed under “business , ” our financial disclosures will reflect segment changes starting in the first quarter of 2016. this overview discusses the operating segments used for financial reporting in 2015. results of the business segments generally treat each segment as a stand-alone business . the management reporting process that derives these results allocates revenue and expense using various methodologies as described below . total revenues net of interest expense we allocate discount revenue and certain other revenues among segments using a transfer pricing methodology . within the uscs , ics and gcs segments , discount revenue generally reflects the issuer component of the overall discount revenue generated by each segment 's card members ; within the gnms segment , discount revenue generally reflects the network and acquirer component of the overall discount revenue . net card fees and travel commissions and fees are directly attributable to the segment in which they are reported . interest and fees on loans and certain investment income is directly attributable to the segment in which it is reported . interest expense represents an allocated funding cost based on a combination of segment funding requirements and internal funding rates . provisions for losses the provisions for losses are directly attributable to the segment in which they are reported . expenses marketing and promotion expenses are included in each segment based on actual expenses incurred , with the exception of brand advertising , which

liquidity and capital resources our typical sources of cash include our monthly rent and interest receipts , distributions from our five real estate joint venture agreements , borrowings under our revolving credit facility , public issuances of debt and equity securities , and proceeds from bank debt , asset dispositions ( either one-off or group asset sales through joint venture transactions ) , and principal payments on loans . our primary uses of cash include dividend distributions , debt service ( including principal and interest ) , new investments ( including acquisitions , developments , or capital improvement projects ) , loan advances , property expenses , and general and administrative expenses . absent our requirements to make distributions to maintain our reit qualification ( as more fully described in note 5 within item 8 of this annual report on form 10-k ) and our current contractual commitments discussed later , we do not have any material off-balance sheet arrangements that we expect would materially affect our liquidity and capital resources . see below for highlights of our sources and uses of cash for the past three years : 45 2020 cash flow activity we generated cash of $ 617.6 million from operating activities during 2020 , primarily consisting of rent and interest from mortgage and other loans . we used these operating cash flows to fund our dividends of $ 568 million and certain investing activities .

the fourth and second quarter , respectively ; and a $ 109 million ( $ 68 million after-tax ) charge related to the renewal of our partnership with delta air lines ( delta ) in the fourth quarter . 2013 results included : a $ 66 million ( $ 41 million after-tax ) charge related to a proposed merchant litigation settlement in the fourth quarter . in addition , effective december 1 , 2015 , we transferred the card member loans and receivables related to our cobrand partnerships with costco wholesale corporation ( costco ) in the united states and jetblue airways corporation ( jetblue ) ( the hfs portfolios ) to card member loans and receivables held for sale ( hfs ) on the consolidated balance sheets . refer to note 2 to the “consolidated financial statements” for additional information . non-gaap measures we prepare our consolidated financial statements in accordance with accounting principles generally accepted in the united states of america ( gaap ) . however , certain information included within this report constitutes non-gaap financial measures . our calculations of non-gaap financial measures may differ from the calculations of similarly titled measures by other companies . business environment our performance in 2015 reflected both the strength of our business and the headwinds we have been managing throughout the year . results for the year benefited from healthy loan growth , strong card acquisitions , excellent credit performance , disciplined operating expense control and the benefits of our strong capital position . our results were also challenged by several factors . first , the cumulative impact from the initial increased costs associated with early renewals of certain of our cobrand relationships and the end of our relationship with costco in canada negatively impacted our results . second , the u.s. dollar continued to strengthen as the year progressed . third , our decision to increase spending on growth initiatives for the year , consistent with the elevated levels of 2014 , further pressured our 2015 earnings . fourth , the economic , regulatory , and competitive environments all became even more challenging as the year progressed . the combination of these factors resulted in billings and revenue growth rates that were fairly steady throughout the year . billings did grow in 2015 , although growth rates decelerated modestly during the second half of the year . international billed business continued to be strong versus the prior year after excluding canada ( due to the termination of our relationship with costco canada last year ) and adjusting for foreign currency exchange rates . in the united states , we saw softening in billings on the costco cobrand card , where volumes dropped versus the prior year . lower gas prices also continued to be a drag on billings . gcs billed business growth continued to slow due , in part , to lower airline volumes and a generally cautious corporate spending environment . our billings growth rates during the second half of 2016 will be impacted by the end of our relationship with costco in the united states , which is expected to occur around mid-year . for the full year , discount revenue was down slightly versus the prior year driven in part by a decline in our discount rate due primarily to the continued rollout of optblue , and we anticipate that the discount rate will further decline by a greater amount during 2016 , due to the continued expansion of optblue , a greater impact from international regulatory changes , and continued competitive pressures . 52 growth in net interest income remained strong during the year , driven by loan growth . card member loans held for investment were down in 2015 on a reported basis due to the transfer of the costco and jetblue loan portfolios to card member loans and receivables hfs , effective december 1 , 2015. excluding the hfs portfolios from the prior year , worldwide loans increased . we expect to see strong growth in loans held for investment in 2016 , and continue to believe there are opportunities to increase our share of lending without significantly changing our overall risk profile . our credit provision was down versus the prior year , as lending write-off rates remained at lower levels . we expect continued growth in loans will contribute to an increase in provisions ; we also expect to see some upward pressure on our write-off rates , due primarily to the seasoning of loans related to new card members . our capital position allowed us to return over $ 5 billion to our shareholders in the form of dividends and share repurchases , representing approximately 105 percent of total capital generated during the year , reflecting our ongoing commitment to using our capital strength to create value for our shareholders . as mentioned above , we are now reporting the costco portfolio as hfs . we expect the sale to close around mid-year 2016 and that our merchant acceptance agreement will extend through the transaction close . the ultimate gain on sale will be determined based on the assets actually sold , but we currently estimate a gain of approximately $ 1 billion . we have not yet signed a definitive agreement and given that we are still several months away from the close , and the card member borrowing and paydown trends are difficult to predict in this type of transition , the final gain could differ from our estimate . we expect the portfolio sale gain will be partially used to fund spending on growth initiatives throughout 2016 , resulting in some unevenness in our quarterly performance . as of december 31 , 2015 , costco cobrand accounts were responsible for approximately 19 percent of our worldwide card member loans held for investment and hfs ( combined ) and approximately 10 percent of our total cards-in-force . story_separator_special_tag accordingly , the average discount rate for prior periods was also revised , resulting in a reduction of between zero and one basis point in any period from what was originally reported . ( b ) average basic card member spending and average fee per card are computed from proprietary card activities only . average fee per card is computed based on net card fees , including the amortization of deferred direct acquisition costs divided by average worldwide proprietary cards-in-force . the average fee per card , adjusted , which is a non-gaap measure , is computed in the same manner , but excludes amortization of deferred direct acquisition costs . the amount of amortization excluded was $ 283 million , $ 306 million and $ 262 million for the years ended december 31 , 2015 , 2014 and 2013 , respectively . we present the average fee per card , adjusted , because we believe this metric presents a useful indicator of card fee pricing across a range of our proprietary card products . 58 table 6 : selected statistical information replace_table_token_10_th ( a ) the foreign currency adjusted information assumes a constant exchange rate between the periods being compared for purposes of currency translation into u.s. dollars ( i.e . , assumes the foreign exchange rates used to determine results for the current year apply to the corresponding prior year period against which such results are being compared ) . ( b ) captions in the table above not designated as “proprietary” or “gns” include both proprietary and gns data . ( c ) included in the gnms segment . ( d ) included in the uscs segment . ( e ) included in the gcs segment . ( f ) included in the ics segment . 59 table 7 : selected statistical information replace_table_token_11_th ( a ) effective december 1 , 2015 , does not reflect the hfs portfolios . ( b ) provisions on principal and fee reserve components on card member receivables and provisions for principal , interest and or fees on card member loans . ( c ) write-offs , less recoveries . ( d ) 2015 includes the impact of the transfer of the hfs receivables portfolio , which was not significant . ( e ) historically , net loss ratio as a % of charge volume and 90 days past billing as a % of receivables were presented for ics . beginning in the first quarter 2014 , as a result of system enhancements , 30 days past due as a % of total , net write-off rate ( principal only ) and net write-off rate ( principal and fees ) have been presented . ( f ) we present a net write-off rate based on principal losses only ( i.e . , excluding interest and or fees ) to be consistent with industry convention . in addition , because we consider uncollectible interest and or fees in our reserves for credit losses , a net write-off rate including principal , interest and or fees is also presented . the twelve months ended december 31 , 2015 reflect the impact of a change in the timing of charge-offs for card member receivables and loans in certain modification programs from 180 days past due to 120 days past due . 60 table 8 : net interest yield on card member loans replace_table_token_12_th ( a ) adjusted net interest income , adjusted average loans , and net interest yield on card member loans are non-gaap measures . refer to “glossary of selected terminology” for definitions of these terms . we believe adjusted net interest income and adjusted average loans are useful to investors because they are components of net interest yield on card member loans , which provides a measure of profitability of our card member loan portfolio . ( b ) for purposes of the calculation of net interest yield on card member loans , average loans continues to include the hfs loan portfolios . 61 business segment results we consider a combination of factors when evaluating the composition of our reportable operating segments , including the results reviewed by the chief operating decision maker , economic characteristics , products and services offered , classes of customers , product distribution channels , geographic considerations ( primarily united states versus outside the united states ) and regulatory considerations . refer to note 25 of the “consolidated financial statements” for additional discussion of the products and services by segment . in light of the organizational changes discussed under “business , ” our financial disclosures will reflect segment changes starting in the first quarter of 2016. this overview discusses the operating segments used for financial reporting in 2015. results of the business segments generally treat each segment as a stand-alone business . the management reporting process that derives these results allocates revenue and expense using various methodologies as described below . total revenues net of interest expense we allocate discount revenue and certain other revenues among segments using a transfer pricing methodology . within the uscs , ics and gcs segments , discount revenue generally reflects the issuer component of the overall discount revenue generated by each segment 's card members ; within the gnms segment , discount revenue generally reflects the network and acquirer component of the overall discount revenue . net card fees and travel commissions and fees are directly attributable to the segment in which they are reported . interest and fees on loans and certain investment income is directly attributable to the segment in which it is reported . interest expense represents an allocated funding cost based on a combination of segment funding requirements and internal funding rates . provisions for losses the provisions for losses are directly attributable to the segment in which they are reported . expenses marketing and promotion expenses are included in each segment based on actual expenses incurred , with the exception of brand advertising , which

consolidated capital resources and liquidity our balance sheet management objectives are to maintain : a solid and flexible equity capital profile ; a broad , deep and diverse set of funding sources to finance our assets and meet operating requirements ; and liquidity programs that enable us to continuously meet expected future financing obligations and business requirements for at least a 12-month period , even in the event we are unable to continue to raise new funds under our traditional funding programs during a substantial weakening in economic conditions . capital strategy our objective is to retain sufficient levels of capital generated through earnings and other sources to maintain a solid equity capital base and to provide flexibility to support future business growth . we believe capital allocated to growing businesses with a return on risk-adjusted equity in excess of our costs will generate shareholder value . the level and composition of our consolidated capital position are determined through our internal capital adequacy assessment process , which takes into account our business activities , as well as marketplace conditions and requirements or expectations of credit rating agencies , regulators and shareholders , among others . our consolidated capital position is also influenced by subsidiary capital requirements . as a bank holding company , we are also subject to regulatory requirements administered by the u.s. federal banking agencies . the federal reserve has established specific capital adequacy guidelines that involve quantitative measures of assets , liabilities and certain off-balance sheet items .

for 2013 , we reported record revenue of $ 48.1 million driven by continued growth in our email encryption business . the company 's operating income for 2013 was $ 9.3 million , an increase of $ 0.4 million over prior year , resulting from 11 % growth in revenue that was partially offset by increases in selling and marketing expenses and additional investments in r & d . our net income in 2013 included a tax benefit of $ 1.4 million resulting from a decrease in our deferred tax valuation allowance . the overall decrease to our valuation allowance was $ 4.1 million , of which $ 2.7 million was due to operations and offset current tax expense . the remaining $ 1.4 million was due to a partial reversal of the remaining valuation allowance and recorded as tax benefit . this compares to a decrease in our deferred tax asset valuation allowance and resulting tax benefit of $ 2.3 million in 2012. net income for 2013 and 2012 excluding the impact of this tax benefit was $ 9.1 million and $ 8.7 million , respectively . our services are sold on a subscription basis with contract terms generally ranging from one to five years . we provide a financial incentive to our customers and sales force to contract for three to five years . historically , most of our customers contract for three year terms , except for our large partner orders ( i.e . “oem” orders ) which are one year terms . at the end of the contract term we attempt to renew the subscription , again attempting to secure a three to five year term . our customers pay us annually at the start of the subscription term and each succeeding year on the anniversary of the commencement of the service . we recognize revenue ratably on a monthly basis over the term of the subscription . we attempt to grow the business by signing new customers to subscription services and or selling new or higher volume services to existing customers ( i.e . “upsell” ) while retaining existing customers through renewal of their services . our total orders consist of both orders from new customers and upsell to existing customers plus renewal orders . total orders may vary from quarter to quarter due to the timing of renewal orders which will fluctuate in amount due to timing and length of expiring subscription terms . similarly , total new orders and upsell orders will fluctuate in amount due to term length . to better understand new orders , management tracks the first year value of new orders as well as the total order value for the subscription term because total order value will exceed the first year value on multi-year orders . by segregating the first year value of new orders , we eliminate the fluctuation in total order amount caused by the dollar impact of multi-year contracts . we refer to this metric as , new first year orders ( “nfyo” ) . our backlog consists of the order value of contracted business that has not yet been recognized into revenue . backlog is calculated by adding to existing deferred revenue the total value of all orders booked in the period ( i.e . quarterly ) less the value of revenue recognized for the period . although orders are non-cancellable , occasionally we adjust backlog for customer bankruptcy or change of term , but these instances are rare and do not materially impact the backlog amount . the backlog amount will grow if the value of total orders exceeds the value of revenue recognized in the period . conversely , the backlog amount will decline if revenue recognized exceeds the total order value for the period . although rare , a decline in backlog may result from fluctuations in total orders caused by timing of renewal orders described above . we retain approximately 90 % of our recurring revenue on an annual basis . we calculate this percentage by comparing the annual recurring revenue to the annual recurring revenue plus annual revenue lost from cancelled subscriptions . deferred revenue is the value of contracted business that has been paid but has not been recognized as revenue . see description of the components of the backlog following in item 7 of this form 10-k under the heading , “backlog and orders.” 18 our revenue growth is dependent on our ability to sell subscription services to new customers , upsell new services or increase volume with existing customers and retain existing customers by renewing their subscription services . generally , if nfyo exceed the annual value of cancelled subscriptions , revenue should grow . however , revenue growth may fluctuate due to timing of deployment of new services and subscription cancellations . for example , a nfyo reported in one quarter may not be deployed until the following quarter and therefore delay commencement of revenue recognition . similarly , a cancellation of a contract with an expiration in the first month of a quarter will have a higher negative impact on revenue in the quarter than a contract of the same amount with an expiration in the last month of a quarter . the impact of these quarter to quarter fluctuations tends to diminish over annual periods making year over year quarterly revenue comparisons more indicative of revenue growth than sequential quarterly revenue comparisons . our operations and future prospects are further discussed throughout this “management 's discussion and analysis of financial condition and results of operations” ( “md & a” ) . there are no assurances we will be successful in our efforts to achieve continued growth . our continued growth depends on the timely development and market acceptance of our products and services . story_separator_special_tag the 29 % increase in expenses in 2013 compared to 2012 resulted primarily from the full year cost impact in 2013 of headcount increases made primarily in the second half of 2012. similarly , the 42 % increase in expenses in 2012 compared to 2011 resulted from additional headcount added in the second half of 2012. the headcount increases described in this paragraph related primarily to new product development . 23 selling and marketing expenses the following table sets forth a year-over-year comparison of our selling and marketing expenses from continuing operations : replace_table_token_7_th selling and marketing expenses consist primarily of salary , commissions , travel , stock-based compensation and employee benefits for selling and marketing personnel as well as costs associated with promotional activities and advertising . the 22 % increase in 2013 compared to 2012 resulted primarily from increases in average headcount including salaries and benefits and travel ( $ 2.0 million ) . the remaining year over year variance ( $ 0.4 million ) resulted primarily from increases in advertising expenses . the 19 % increase in 2012 compared to 2011 resulted primarily from higher sales commissions and bonuses resulting primarily from higher nfyos and increase in average headcount ( $ 1.0 million ) . we also acquired new sales and marketing tools and invested in marketing and advertising programs ( $ 0.5 million ) . stock-based compensation expense also increased by $ 0.2 million year-over-year . the remaining variance consisted of relatively minor increases across various selling and marketing activities none of which were significant . general and administrative expenses the following table sets forth a year-over-year comparison of our general and administrative expenses from continuing operations : replace_table_token_8_th general and administrative expenses consist primarily of salary and bonuses , travel , stock-based compensation and benefits for administrative and executive personnel as well as fees for professional services and other general corporate activities and corporate governance . for the year 2013 compared to the same period in 2012 , general and administrative costs decreased by 2 % . this decrease resulted from lower outside legal counsel fees associated with litigation ( $ 0.4 million ) , lower sales tax expense ( $ 0.3 million ) , and lower utility expense resulting from lower electrical usage ( $ 0.1 million ) . these cost reductions were partially offset by higher stock based compensation expense ( $ 0.3 million ) , salary expense resulting from increased average headcount ( $ 0.2 million ) and other miscellaneous increases netting to $ 0.1 million . the increase in 2012 compared to 2011 resulted primarily from year-over-year increases in outside legal counsel fees associated with litigation ( $ 1.7 million ) , stock-based compensation expense ( $ 0.2 million ) , and salary and benefits expense resulting from increases in average headcount ( $ 0.4 million ) . the remaining variance resulted primarily from normal increases in other administrative expenses none of which were significant . income taxes our company or one of our subsidiaries files income tax returns in the u.s. federal jurisdiction and various states and in the canadian federal and provincial jurisdictions . we recognize and measure uncertain tax positions using a two-step approach . the first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit , including resolution of related appeals or litigation processes , if any . the second step is to measure the tax benefit as the largest amount that is more than 50 % likely of being realized upon settlement . 24 the company 's income tax benefit for 2013 , 2012 , and 2011 of $ 1.0 million , $ 1.9 million , and $ 11.9 million , respectively , represents refundable u.s. alternative minimum tax , u.s. research and development credits , non-u.s. taxes payable related to the operations of the company 's canadian subsidiary established in late 2002 , state income taxes , and reversals of a portion of the company 's historical valuation allowance . significant judgment is required in determining any valuation allowance recorded against deferred tax assets . in assessing the need for a valuation allowance , we consider available evidence , including past earnings , estimates of future taxable income , and the feasibility of tax planning strategies . at december 31 , 2013 , the company partially reserved its u.s. net deferred tax assets due to the uncertainty of future taxable income sufficient to utilize net loss carryforwards prior to their expiration . the portion of the company 's deferred tax asset not reserved was $ 54.1 million . the majority of this unreserved portion related to $ 45.3 million u.s. net operating losses ( “nols” ) because we believe the company will generate sufficient taxable income in future years to utilize these nols prior to their expiration . the remaining balance consists of $ 5.7 million relating to temporary timing differences between gaap and tax-related expense , $ 2.0 million relating to u.s. state tax income credits , and $ 1.1 million related to alternative minimum tax credits . we have determined that utilization of existing net operating losses against future taxable income is not limited by section 382 of the internal revenue code . future ownership changes , however , may limit the company 's ability to fully utilize its existing net operating loss carryforwards against any future taxable income . if we begin to generate additional u.s. taxable income in a future period or if the facts and circumstances on which our current estimates and assumptions are based were to change , thereby impacting the likelihood of realizing a greater or lesser amount of our deferred tax assets , judgment would have to be applied in determining the amount of valuation allowance required . adjusting our valuation allowance could have a significant impact on operating results in the period

consolidated capital resources and liquidity our balance sheet management objectives are to maintain : a solid and flexible equity capital profile ; a broad , deep and diverse set of funding sources to finance our assets and meet operating requirements ; and liquidity programs that enable us to continuously meet expected future financing obligations and business requirements for at least a 12-month period , even in the event we are unable to continue to raise new funds under our traditional funding programs during a substantial weakening in economic conditions . capital strategy our objective is to retain sufficient levels of capital generated through earnings and other sources to maintain a solid equity capital base and to provide flexibility to support future business growth . we believe capital allocated to growing businesses with a return on risk-adjusted equity in excess of our costs will generate shareholder value . the level and composition of our consolidated capital position are determined through our internal capital adequacy assessment process , which takes into account our business activities , as well as marketplace conditions and requirements or expectations of credit rating agencies , regulators and shareholders , among others . our consolidated capital position is also influenced by subsidiary capital requirements . as a bank holding company , we are also subject to regulatory requirements administered by the u.s. federal banking agencies . the federal reserve has established specific capital adequacy guidelines that involve quantitative measures of assets , liabilities and certain off-balance sheet items .

for 2013 , we reported record revenue of $ 48.1 million driven by continued growth in our email encryption business . the company 's operating income for 2013 was $ 9.3 million , an increase of $ 0.4 million over prior year , resulting from 11 % growth in revenue that was partially offset by increases in selling and marketing expenses and additional investments in r & d . our net income in 2013 included a tax benefit of $ 1.4 million resulting from a decrease in our deferred tax valuation allowance . the overall decrease to our valuation allowance was $ 4.1 million , of which $ 2.7 million was due to operations and offset current tax expense . the remaining $ 1.4 million was due to a partial reversal of the remaining valuation allowance and recorded as tax benefit . this compares to a decrease in our deferred tax asset valuation allowance and resulting tax benefit of $ 2.3 million in 2012. net income for 2013 and 2012 excluding the impact of this tax benefit was $ 9.1 million and $ 8.7 million , respectively . our services are sold on a subscription basis with contract terms generally ranging from one to five years . we provide a financial incentive to our customers and sales force to contract for three to five years . historically , most of our customers contract for three year terms , except for our large partner orders ( i.e . “oem” orders ) which are one year terms . at the end of the contract term we attempt to renew the subscription , again attempting to secure a three to five year term . our customers pay us annually at the start of the subscription term and each succeeding year on the anniversary of the commencement of the service . we recognize revenue ratably on a monthly basis over the term of the subscription . we attempt to grow the business by signing new customers to subscription services and or selling new or higher volume services to existing customers ( i.e . “upsell” ) while retaining existing customers through renewal of their services . our total orders consist of both orders from new customers and upsell to existing customers plus renewal orders . total orders may vary from quarter to quarter due to the timing of renewal orders which will fluctuate in amount due to timing and length of expiring subscription terms . similarly , total new orders and upsell orders will fluctuate in amount due to term length . to better understand new orders , management tracks the first year value of new orders as well as the total order value for the subscription term because total order value will exceed the first year value on multi-year orders . by segregating the first year value of new orders , we eliminate the fluctuation in total order amount caused by the dollar impact of multi-year contracts . we refer to this metric as , new first year orders ( “nfyo” ) . our backlog consists of the order value of contracted business that has not yet been recognized into revenue . backlog is calculated by adding to existing deferred revenue the total value of all orders booked in the period ( i.e . quarterly ) less the value of revenue recognized for the period . although orders are non-cancellable , occasionally we adjust backlog for customer bankruptcy or change of term , but these instances are rare and do not materially impact the backlog amount . the backlog amount will grow if the value of total orders exceeds the value of revenue recognized in the period . conversely , the backlog amount will decline if revenue recognized exceeds the total order value for the period . although rare , a decline in backlog may result from fluctuations in total orders caused by timing of renewal orders described above . we retain approximately 90 % of our recurring revenue on an annual basis . we calculate this percentage by comparing the annual recurring revenue to the annual recurring revenue plus annual revenue lost from cancelled subscriptions . deferred revenue is the value of contracted business that has been paid but has not been recognized as revenue . see description of the components of the backlog following in item 7 of this form 10-k under the heading , “backlog and orders.” 18 our revenue growth is dependent on our ability to sell subscription services to new customers , upsell new services or increase volume with existing customers and retain existing customers by renewing their subscription services . generally , if nfyo exceed the annual value of cancelled subscriptions , revenue should grow . however , revenue growth may fluctuate due to timing of deployment of new services and subscription cancellations . for example , a nfyo reported in one quarter may not be deployed until the following quarter and therefore delay commencement of revenue recognition . similarly , a cancellation of a contract with an expiration in the first month of a quarter will have a higher negative impact on revenue in the quarter than a contract of the same amount with an expiration in the last month of a quarter . the impact of these quarter to quarter fluctuations tends to diminish over annual periods making year over year quarterly revenue comparisons more indicative of revenue growth than sequential quarterly revenue comparisons . our operations and future prospects are further discussed throughout this “management 's discussion and analysis of financial condition and results of operations” ( “md & a” ) . there are no assurances we will be successful in our efforts to achieve continued growth . our continued growth depends on the timely development and market acceptance of our products and services . story_separator_special_tag the 29 % increase in expenses in 2013 compared to 2012 resulted primarily from the full year cost impact in 2013 of headcount increases made primarily in the second half of 2012. similarly , the 42 % increase in expenses in 2012 compared to 2011 resulted from additional headcount added in the second half of 2012. the headcount increases described in this paragraph related primarily to new product development . 23 selling and marketing expenses the following table sets forth a year-over-year comparison of our selling and marketing expenses from continuing operations : replace_table_token_7_th selling and marketing expenses consist primarily of salary , commissions , travel , stock-based compensation and employee benefits for selling and marketing personnel as well as costs associated with promotional activities and advertising . the 22 % increase in 2013 compared to 2012 resulted primarily from increases in average headcount including salaries and benefits and travel ( $ 2.0 million ) . the remaining year over year variance ( $ 0.4 million ) resulted primarily from increases in advertising expenses . the 19 % increase in 2012 compared to 2011 resulted primarily from higher sales commissions and bonuses resulting primarily from higher nfyos and increase in average headcount ( $ 1.0 million ) . we also acquired new sales and marketing tools and invested in marketing and advertising programs ( $ 0.5 million ) . stock-based compensation expense also increased by $ 0.2 million year-over-year . the remaining variance consisted of relatively minor increases across various selling and marketing activities none of which were significant . general and administrative expenses the following table sets forth a year-over-year comparison of our general and administrative expenses from continuing operations : replace_table_token_8_th general and administrative expenses consist primarily of salary and bonuses , travel , stock-based compensation and benefits for administrative and executive personnel as well as fees for professional services and other general corporate activities and corporate governance . for the year 2013 compared to the same period in 2012 , general and administrative costs decreased by 2 % . this decrease resulted from lower outside legal counsel fees associated with litigation ( $ 0.4 million ) , lower sales tax expense ( $ 0.3 million ) , and lower utility expense resulting from lower electrical usage ( $ 0.1 million ) . these cost reductions were partially offset by higher stock based compensation expense ( $ 0.3 million ) , salary expense resulting from increased average headcount ( $ 0.2 million ) and other miscellaneous increases netting to $ 0.1 million . the increase in 2012 compared to 2011 resulted primarily from year-over-year increases in outside legal counsel fees associated with litigation ( $ 1.7 million ) , stock-based compensation expense ( $ 0.2 million ) , and salary and benefits expense resulting from increases in average headcount ( $ 0.4 million ) . the remaining variance resulted primarily from normal increases in other administrative expenses none of which were significant . income taxes our company or one of our subsidiaries files income tax returns in the u.s. federal jurisdiction and various states and in the canadian federal and provincial jurisdictions . we recognize and measure uncertain tax positions using a two-step approach . the first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit , including resolution of related appeals or litigation processes , if any . the second step is to measure the tax benefit as the largest amount that is more than 50 % likely of being realized upon settlement . 24 the company 's income tax benefit for 2013 , 2012 , and 2011 of $ 1.0 million , $ 1.9 million , and $ 11.9 million , respectively , represents refundable u.s. alternative minimum tax , u.s. research and development credits , non-u.s. taxes payable related to the operations of the company 's canadian subsidiary established in late 2002 , state income taxes , and reversals of a portion of the company 's historical valuation allowance . significant judgment is required in determining any valuation allowance recorded against deferred tax assets . in assessing the need for a valuation allowance , we consider available evidence , including past earnings , estimates of future taxable income , and the feasibility of tax planning strategies . at december 31 , 2013 , the company partially reserved its u.s. net deferred tax assets due to the uncertainty of future taxable income sufficient to utilize net loss carryforwards prior to their expiration . the portion of the company 's deferred tax asset not reserved was $ 54.1 million . the majority of this unreserved portion related to $ 45.3 million u.s. net operating losses ( “nols” ) because we believe the company will generate sufficient taxable income in future years to utilize these nols prior to their expiration . the remaining balance consists of $ 5.7 million relating to temporary timing differences between gaap and tax-related expense , $ 2.0 million relating to u.s. state tax income credits , and $ 1.1 million related to alternative minimum tax credits . we have determined that utilization of existing net operating losses against future taxable income is not limited by section 382 of the internal revenue code . future ownership changes , however , may limit the company 's ability to fully utilize its existing net operating loss carryforwards against any future taxable income . if we begin to generate additional u.s. taxable income in a future period or if the facts and circumstances on which our current estimates and assumptions are based were to change , thereby impacting the likelihood of realizing a greater or lesser amount of our deferred tax assets , judgment would have to be applied in determining the amount of valuation allowance required . adjusting our valuation allowance could have a significant impact on operating results in the period

liquidity and capital resources overview based on our 2013 financial results and current expectations , we believe our cash and cash equivalents , and cash generated from operations , will satisfy our working capital needs , capital expenditures , investment requirements , contractual obligations , commitments , future customer financings , and other liquidity requirements associated with our operations through at least the next twelve months . we plan for and measure our liquidity and capital resources through an annual budgeting process . at december 31 , 2013 , our cash and cash equivalents totaled $ 27.5 million and we held no debt . for the year ended december 31 , 2013 , we achieved an 11 % growth in revenue , 84 % gross margin and strong cash collections . we expect this trend to continue in the foreseeable future , and believe a significant portion of our spending is discretionary and flexible and that we have the ability to adjust overall cash spending to react , as needed , to any shortfalls in projected cash . sources and uses of cash replace_table_token_10_th our primary source of liquidity from operations was the collection of revenue in advance from our customers , accounts receivable from our customers , and the management of the timing of payments to our vendors and service providers . cash used in our investing activities in 2013 related to purchases of various computing equipment primarily to satisfy customer contracts .

these systems incorporate lithium-ion batteries ( or other advanced battery chemistries ) with our proprietary bms into our standard dc power systems . · dc solar hybrid power systems . these systems incorporate photovoltaic and other sources of renewable energy into our dc hybrid power system . our dc power systems are available in diesel , natural gas , liquid propane gas , gasoline and biofuel formats , with diesel , natural gas and liquid propane gas being the predominant formats , and are capable of being remotely monitored by our global network management tool using our proprietary software technology , allowing us and our customers to collect performance data and update our products remotely . we install , sell and service our products within our identified markets through our direct sales force and a network of independent service providers and dealers . in addition , we have established strategic relationships with local service partners in international markets to jointly promote , distribute and service our products . 46 during the years ended december 31 , 2016 and 2015 , 97 % and 81 % , respectively , of our total net sales were within the telecommunications market , with 91 % and 79 % , respectively , of our total net sales during those periods being derived from our largest customer , verizon wireless . during those periods , sales of our dc base power systems represented 97 % and 79 % , respectively , of all dc power systems sold while sales of our dc solar hybrid power systems represented 3 % and 2 % , respectively , of all dc power systems sold . we did not sell any of our dc hybrid power systems during these periods . to date , all sales to verizon wireless have been comprised of our dc base power systems . critical accounting policies our 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 us to make estimates and judgments that may have a significant impact on the portrayal of our financial condition and results of operations . we base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances , the results of which form the basis of making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources . actual results could differ materially from these estimates . we believe that the following critical accounting policies , among others , affect our more significant judgment and estimates used in the preparation of our financial statements : revenue recognition . we recognize revenue from the sale of completed production units and parts when there is persuasive evidence that an arrangement exists , delivery of the product has occurred and title has passed , the selling price is both fixed and determinable , and collectability is reasonably assured , all of which occurs upon shipment of our product or delivery of the product to the destination specified by the customer . once a product is delivered , we do not have a post-delivery obligation to provide additional services to the customer . we determine whether delivery has occurred based on when title transfers and the risks and rewards of ownership have transferred to the buyer , which usually occurs when we place the product with the buyer 's carrier or deliver the product to a customer 's location . we regularly review our customers ' financial positions to ensure that collectability is reasonably assured . except for warranties , we have no post-sales obligations . warranty costs . we provide limited warranties for parts and labor at no cost to our customers within a specified time period after the sale . the warranty terms are typically from one to five years . provisions for estimated expenses related to product warranties are made at the time products are sold . these estimates are established using historical information about the nature , frequency and average cost of warranty claim settlements as well as product manufacturing and recovery from suppliers . management actively studies trends of warranty claims and takes action to improve product quality and minimize warranty costs . we estimate the actual historical warranty claims coupled with an analysis of unfulfilled claims to record a liability for specific warranty purposes . our product warranty obligations are included in other accrued liabilities in the balance sheets . as of december 31 , 2016 and 2015 , we had accrued a liability for warranty reserve of $ 175,000 and $ 25,000 , respectively . management believes that the warranty accrual is appropriate ; however actual claims incurred could differ from original estimates , requiring adjustments to the accrual . the product warranty accrual is allocated to current and liabilities in the balance sheets . 47 inventory . we write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value-based upon assumptions about future demand , future pricing and market conditions . if actual future demand , future pricing or market conditions are less favorable than those projected by management , additional inventory write-downs may be required and the differences could be material . once established , write-downs are considered permanent adjustments to the cost basis of the obsolete or unmarketable inventories . income taxes . story_separator_special_tag results of operations the tables presented below , which compare our results of operations from one period to another , present the results for each period , the change in those results from one period to another in both dollars and percentage change , and the results for each period as a percentage of net revenues . the columns present the following : · the first two data columns in each table show the absolute results for each period presented . · the columns entitled “ dollar variance ” and “ percentage variance ” shows the change in results , both in dollars and percentages . these two columns show favorable changes as a positive and unfavorable changes as negative . for example , when our net revenues increase from one period to the next , that change is shown as a positive number in both columns . conversely , when expenses increase from one period to the next , that change is shown as a negative in both columns . · the last two columns in each table show the results for each period as a percentage of net revenues . 49 comparison of the years ended december 31 , 2016 and 2015 replace_table_token_0_th net sales . net sales increased by $ 15,954,735 , or 233 % , to $ 22,801,494 for 2016 , as compared to $ 6,846,759 for 2015. the increase in net sales was primarily due to an increase in the number of dc base power systems sold to verizon wireless . sales to verizon wireless accounted for 91 % of our total net sales during 2016 , as compared to 81 % of total net sales in 2015. in addition , in early 2016 , we expanded our production facilities to increase our production capacity which , in turn , allowed us to meet the increased demand for our products resulting in higher revenues . cost of sales . cost of sales increased by $ 8,061,112 to $ 12,619,837 during 2016 , compared to $ 4,558,725 during 2015 ; however cost of sales as a percentage of net sales decreased from 66.6 % in 2015 to 55.3 % in 2016. the favorable improvement in cost of sales as a percentage of net sales was attributed to improved overhead absorption resulting from increased revenues and lower material costs resulting from increased purchases of raw materials . gross profit . our gross profit during 2016 increased by $ 7,893,623 , to $ 10,181,657 , as compared to $ 2,288,034 during 2015. gross profit as a percentage of net sales increased to 45 % in 2016 , as compared to 33 % in 2015 , a change of 12 % . the improvement in gross profit margin during 2016 was primarily due to the following factors : ( i ) we were able to negotiate lower cost of goods due to our increased buying power , ( ii ) we were able to capitalize certain factory overhead in 2016 into our ending finished goods inventory instead of as a reflection of cost of sales ( there were no such finished good as of 2015 ) , and ( iii ) increased absorption of factory overhead due to significantly increased sales volumes . going forward , we expect our gross margins as a percentage of net sales to normalize within the range of 43 % to 48 % , depending on the product mix . 50 research and development expenses . during 2016 , research and development expenses increased by $ 97,634 to $ 213,931 as compared to $ 116,297 during 2015. the increase in the research and development expenses was a result of the addition of new engineers to support current and new product development strategies . we plan to continue expanding our research and development efforts during 2017 and anticipate research and development expenses as a percentage of sales to increase to 2 % in 2017 from 0.9 % in 2016. sales and marketing expenses . sales and marketing expenses increased to $ 424,579 during 2016 , as compared to $ 392,306 during 2015. the $ 32,273 increase in expenses was mainly related to a addition of sales support personnel . we anticipate a our sales costs will continue to increase in the short term while we hire new sales personnel to expand our sales infrastructure in u.s. and international markets . general and administrative expenses . our general and administrative expenses increased by $ 657,773 , to $ 2,112,336 during 2016 , as compared to $ 1,454,563 during 2015. the increase in general and administrative expenses was primarily due to a $ 397,779 increase in employee fringe benefits resulting from discretionary bonus awarded to all employees and a $ 298,682 increase in management salaries resulting from addition of employees . during 2016 , we also experienced an increase in legal and professional fees of $ 251,297 resulting from expenses related to audits and legal review of internal controls and procedures , together with indirect legal and accounting fees related to our public offering . we anticipate our general and administrative costs to remain flat or slightly lower as percentage of sales during 2017. depreciation and amortization expenses . during 2016 , depreciation and amortization expenses increased by $ 8,546 , to $ 26,888 , as compared to $ 18,342 during 2015. the increase is attributed to purchase of erp software to upgrade financial and manufacturing information systems . in presenting our statement of operations for 2015 , we reclassified $ 125,231 of depreciation expense that was previously reflected as operating expenses to cost of sales . interest expense . during 2016 , our interest expense was $ 112,550 , as compared to $ 50,971 during 2015 , an increase of $ 61,579. our interest expense is mainly attributable to interest paid for financing of production equipment and borrowing costs associated with our line of credit with gibraltar business capital , which we utilized to fund our

liquidity and capital resources overview based on our 2013 financial results and current expectations , we believe our cash and cash equivalents , and cash generated from operations , will satisfy our working capital needs , capital expenditures , investment requirements , contractual obligations , commitments , future customer financings , and other liquidity requirements associated with our operations through at least the next twelve months . we plan for and measure our liquidity and capital resources through an annual budgeting process . at december 31 , 2013 , our cash and cash equivalents totaled $ 27.5 million and we held no debt . for the year ended december 31 , 2013 , we achieved an 11 % growth in revenue , 84 % gross margin and strong cash collections . we expect this trend to continue in the foreseeable future , and believe a significant portion of our spending is discretionary and flexible and that we have the ability to adjust overall cash spending to react , as needed , to any shortfalls in projected cash . sources and uses of cash replace_table_token_10_th our primary source of liquidity from operations was the collection of revenue in advance from our customers , accounts receivable from our customers , and the management of the timing of payments to our vendors and service providers . cash used in our investing activities in 2013 related to purchases of various computing equipment primarily to satisfy customer contracts .

these systems incorporate lithium-ion batteries ( or other advanced battery chemistries ) with our proprietary bms into our standard dc power systems . · dc solar hybrid power systems . these systems incorporate photovoltaic and other sources of renewable energy into our dc hybrid power system . our dc power systems are available in diesel , natural gas , liquid propane gas , gasoline and biofuel formats , with diesel , natural gas and liquid propane gas being the predominant formats , and are capable of being remotely monitored by our global network management tool using our proprietary software technology , allowing us and our customers to collect performance data and update our products remotely . we install , sell and service our products within our identified markets through our direct sales force and a network of independent service providers and dealers . in addition , we have established strategic relationships with local service partners in international markets to jointly promote , distribute and service our products . 46 during the years ended december 31 , 2016 and 2015 , 97 % and 81 % , respectively , of our total net sales were within the telecommunications market , with 91 % and 79 % , respectively , of our total net sales during those periods being derived from our largest customer , verizon wireless . during those periods , sales of our dc base power systems represented 97 % and 79 % , respectively , of all dc power systems sold while sales of our dc solar hybrid power systems represented 3 % and 2 % , respectively , of all dc power systems sold . we did not sell any of our dc hybrid power systems during these periods . to date , all sales to verizon wireless have been comprised of our dc base power systems . critical accounting policies our 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 us to make estimates and judgments that may have a significant impact on the portrayal of our financial condition and results of operations . we base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances , the results of which form the basis of making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources . actual results could differ materially from these estimates . we believe that the following critical accounting policies , among others , affect our more significant judgment and estimates used in the preparation of our financial statements : revenue recognition . we recognize revenue from the sale of completed production units and parts when there is persuasive evidence that an arrangement exists , delivery of the product has occurred and title has passed , the selling price is both fixed and determinable , and collectability is reasonably assured , all of which occurs upon shipment of our product or delivery of the product to the destination specified by the customer . once a product is delivered , we do not have a post-delivery obligation to provide additional services to the customer . we determine whether delivery has occurred based on when title transfers and the risks and rewards of ownership have transferred to the buyer , which usually occurs when we place the product with the buyer 's carrier or deliver the product to a customer 's location . we regularly review our customers ' financial positions to ensure that collectability is reasonably assured . except for warranties , we have no post-sales obligations . warranty costs . we provide limited warranties for parts and labor at no cost to our customers within a specified time period after the sale . the warranty terms are typically from one to five years . provisions for estimated expenses related to product warranties are made at the time products are sold . these estimates are established using historical information about the nature , frequency and average cost of warranty claim settlements as well as product manufacturing and recovery from suppliers . management actively studies trends of warranty claims and takes action to improve product quality and minimize warranty costs . we estimate the actual historical warranty claims coupled with an analysis of unfulfilled claims to record a liability for specific warranty purposes . our product warranty obligations are included in other accrued liabilities in the balance sheets . as of december 31 , 2016 and 2015 , we had accrued a liability for warranty reserve of $ 175,000 and $ 25,000 , respectively . management believes that the warranty accrual is appropriate ; however actual claims incurred could differ from original estimates , requiring adjustments to the accrual . the product warranty accrual is allocated to current and liabilities in the balance sheets . 47 inventory . we write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value-based upon assumptions about future demand , future pricing and market conditions . if actual future demand , future pricing or market conditions are less favorable than those projected by management , additional inventory write-downs may be required and the differences could be material . once established , write-downs are considered permanent adjustments to the cost basis of the obsolete or unmarketable inventories . income taxes . story_separator_special_tag results of operations the tables presented below , which compare our results of operations from one period to another , present the results for each period , the change in those results from one period to another in both dollars and percentage change , and the results for each period as a percentage of net revenues . the columns present the following : · the first two data columns in each table show the absolute results for each period presented . · the columns entitled “ dollar variance ” and “ percentage variance ” shows the change in results , both in dollars and percentages . these two columns show favorable changes as a positive and unfavorable changes as negative . for example , when our net revenues increase from one period to the next , that change is shown as a positive number in both columns . conversely , when expenses increase from one period to the next , that change is shown as a negative in both columns . · the last two columns in each table show the results for each period as a percentage of net revenues . 49 comparison of the years ended december 31 , 2016 and 2015 replace_table_token_0_th net sales . net sales increased by $ 15,954,735 , or 233 % , to $ 22,801,494 for 2016 , as compared to $ 6,846,759 for 2015. the increase in net sales was primarily due to an increase in the number of dc base power systems sold to verizon wireless . sales to verizon wireless accounted for 91 % of our total net sales during 2016 , as compared to 81 % of total net sales in 2015. in addition , in early 2016 , we expanded our production facilities to increase our production capacity which , in turn , allowed us to meet the increased demand for our products resulting in higher revenues . cost of sales . cost of sales increased by $ 8,061,112 to $ 12,619,837 during 2016 , compared to $ 4,558,725 during 2015 ; however cost of sales as a percentage of net sales decreased from 66.6 % in 2015 to 55.3 % in 2016. the favorable improvement in cost of sales as a percentage of net sales was attributed to improved overhead absorption resulting from increased revenues and lower material costs resulting from increased purchases of raw materials . gross profit . our gross profit during 2016 increased by $ 7,893,623 , to $ 10,181,657 , as compared to $ 2,288,034 during 2015. gross profit as a percentage of net sales increased to 45 % in 2016 , as compared to 33 % in 2015 , a change of 12 % . the improvement in gross profit margin during 2016 was primarily due to the following factors : ( i ) we were able to negotiate lower cost of goods due to our increased buying power , ( ii ) we were able to capitalize certain factory overhead in 2016 into our ending finished goods inventory instead of as a reflection of cost of sales ( there were no such finished good as of 2015 ) , and ( iii ) increased absorption of factory overhead due to significantly increased sales volumes . going forward , we expect our gross margins as a percentage of net sales to normalize within the range of 43 % to 48 % , depending on the product mix . 50 research and development expenses . during 2016 , research and development expenses increased by $ 97,634 to $ 213,931 as compared to $ 116,297 during 2015. the increase in the research and development expenses was a result of the addition of new engineers to support current and new product development strategies . we plan to continue expanding our research and development efforts during 2017 and anticipate research and development expenses as a percentage of sales to increase to 2 % in 2017 from 0.9 % in 2016. sales and marketing expenses . sales and marketing expenses increased to $ 424,579 during 2016 , as compared to $ 392,306 during 2015. the $ 32,273 increase in expenses was mainly related to a addition of sales support personnel . we anticipate a our sales costs will continue to increase in the short term while we hire new sales personnel to expand our sales infrastructure in u.s. and international markets . general and administrative expenses . our general and administrative expenses increased by $ 657,773 , to $ 2,112,336 during 2016 , as compared to $ 1,454,563 during 2015. the increase in general and administrative expenses was primarily due to a $ 397,779 increase in employee fringe benefits resulting from discretionary bonus awarded to all employees and a $ 298,682 increase in management salaries resulting from addition of employees . during 2016 , we also experienced an increase in legal and professional fees of $ 251,297 resulting from expenses related to audits and legal review of internal controls and procedures , together with indirect legal and accounting fees related to our public offering . we anticipate our general and administrative costs to remain flat or slightly lower as percentage of sales during 2017. depreciation and amortization expenses . during 2016 , depreciation and amortization expenses increased by $ 8,546 , to $ 26,888 , as compared to $ 18,342 during 2015. the increase is attributed to purchase of erp software to upgrade financial and manufacturing information systems . in presenting our statement of operations for 2015 , we reclassified $ 125,231 of depreciation expense that was previously reflected as operating expenses to cost of sales . interest expense . during 2016 , our interest expense was $ 112,550 , as compared to $ 50,971 during 2015 , an increase of $ 61,579. our interest expense is mainly attributable to interest paid for financing of production equipment and borrowing costs associated with our line of credit with gibraltar business capital , which we utilized to fund our

liquidity and capital resources sources of liquidity during the year ended december 31 , 2016 , we funded our operations primarily from cash on hand , cash generated by our operations , a working capital credit line of $ 2,000,000 and net proceeds of $ 1,665,000 from an equity financing during 2015 and 2014. on december 7 , 2016 , we raised $ 19,320,000 in equity capital in our initial public offering resulting in net proceeds of $ 16,957,334. these funds were also used to make capital expenditures and to increase inventory to support higher production . as of december 31 , 2016 , we had working capital of $ 22,924,390 , as compared to $ 1,545,338 at december 31 , 2015. this $ 21,379,052 increase in working capital is primarily attributable to a $ 15,978,740 increase in cash and cash equivalents resulting from our initial public offering in december 2016. on december 31 , 2016 , and december 31 , 2015 , our trade receivables totaled $ 4,403,946 ( 94 % ) and $ 1,496,654 ( 81 % ) respectively , of which $ 4,160,975 and $ 1,235,931respectively , represented customer account balances of our largest telecommunications customer with 60-day payment terms . our available capital resources on december 31 , 2016 consisted primarily of $ 16,242,158 in cash and cash equivalents .

today , legacy processes and systems are being disrupted and replaced by cloud-based enterprise work management software that improves visibility , collaboration and productivity . in response to these changes , we are providing organizations and their knowledge workers with software applications that better align resources with business objectives and increase visibility , governance , collaboration , quality of customer experience and responsiveness to changes in the business environment . this results in increased work capacity , higher productivity , better execution and greater levels of customer engagement . our applications are easy-to-use , scalable and offer real-time collaboration for knowledge workers distributed on a local or global scale . our applications address enterprise work challenges in the following categories : project & information technology ( it ) management . enables users to manage their organization 's projects , professional workforce and it costs . workflow automation . enables users to automate document-intensive workflow business processes across their enterprise and supply chain . digital engagement . enables users to effectively engage with their customers , prospects and community via the web and mobile technologies . we sell our software applications primarily through a direct sales organization comprised of inside sales and field sales personnel . in addition to our direct sales organization , we have an indirect sales organization , which sells to distributors and value-added resellers . we employ a land-and-expand go-to-market strategy . after we demonstrate the value of an initial application to a customer , our sales and account management teams work to expand the adoption of that initial application across the customer , as well as cross-sell additional applications to address other enterprise work management needs of the customer . our customer success organization supports our direct sales efforts by managing the post-sale customer lifecycle . our subscription agreements are typically sold either on a per-seat basis or on a minimum contracted volume basis with overage fees billed in arrears , depending on the application being sold . we service customers ranging from large global corporations and government agencies to small- and medium-sized businesses . we have more than 2,500 customers with over 250,000 users across a broad range of industries , including financial services , retail , technology , manufacturing , education , consumer goods , media , telecommunications , government , food and beverage , healthcare and life sciences . 41 through a series of acquisitions and integrations , we have established a diverse family of software applications under the upland brand , each of which addresses a specific enterprise work management need . our revenue has grown from $ 22.8 million in fiscal 2012 to $ 74.8 million in fiscal 2016 , representing a 228 % period-over-period growth rate . see note 15 of the notes to consolidated financial statements for more information regarding our revenue as it relates to domestic and foreign operations . our operating results in a given period can fluctuate based on the mix of subscription and support , perpetual license and professional services revenue . for the years ended december 31 , 2016 , 2015 and 2014 , our subscription and support revenue accounted for 88 % , 82 % , and 75 % , respectively of our total revenue in both periods . historically , we have sold certain of our applications under perpetual licenses , which also are paid in advance . for the years ended december 31 , 2016 , 2015 and 2014 , our perpetual license revenue accounted for 2 % , 4 % , and 4 % of our total revenue , respectively . the support agreements related to our perpetual licenses are one-year in duration and entitle the customer to support and unspecified upgrades . the revenue related to such support agreements is included as part of our subscription and support revenue . professional services revenue consists of fees related to implementation , data extraction , integration and configuration and training on our applications . for the years ended december 31 , 2016 , 2015 and 2014 , our professional services revenue accounted for 10 % , 14 % , and 21 % , respectively . to support continued growth , we intend to pursue acquisitions of complementary technologies , products and businesses . this will expand our product families , customer base , and market access resulting in increased benefits of scale . we will prioritize acquisitions within the product categories we currently participate in , including project & it management , workflow automation , and digital engagement . consistent with our growth strategy , we have made twelve acquisitions in the five years ending december 31 , 2016 , excluding an additional acquisition in january 2017. see note 17 of the notes to consolidated financial statements for more information regarding events occurring after december 31 , 2016 . 2012 acquisitions powersteering . in february 2012 , we acquired the business of powersteering software , inc. , or powersteering , a provider of cloud-based program and portfolio management software , for $ 13.0 million . the acquisition of powersteering enabled our customers to gain high-level visibility across their organizations and improve top-down governance in management of programs , initiatives , investments and projects . tenrox . in february 2012 , we acquired the business of tenrox inc. , or tenrox , a provider of cloud-based professional services automation software , for $ 15.3 million . the acquisition of tenrox provided us with additional access to the professional services market and provided our customers with the ability to more effectively manage their knowledge workers to better track work , expenses and client billing while improving scheduling , utilization and alignment of human capital . in addition , following the tenrox acquisition , we began selling timesheet.com , a tenrox product for professional services automation , as a separate application . epm live . story_separator_special_tag we expense sales commissions when the initial customer contract is signed and upon any renewal as our obligation to pay a sales commission arises at these times . sales and marketing expenses may fluctuate as a percentage of total revenues for a variety of reasons including due to the timing of such expenses , in any particular quarterly or annual period . research and development . research and development expenses primarily consist of personnel and related costs of our research and development staff , including salaries , benefits , bonuses , payroll taxes , stock-based compensation , allocated overhead and costs of certain third-party contractors . research and development costs related to the development of our software applications are generally recognized as incurred . for example , we are parties to a technology services agreement pursuant to which we generally recognize expenses for services as they are received . see note 16 of the notes to consolidated financial statements for more information regarding how expenses under such agreement are recognized . we have devoted our product development efforts primarily to enhancing the functionality , and expanding the capabilities , of our applications . refundable canadian tax credits . investment tax credits are accounted for as a reduction of research and development costs . credits are accrued in the year in which the research and development costs of the capital expenditures are incurred , provided that we are reasonably certain that the credits will be received . the investment tax credit must be examined and approved by the tax authorities , and it is possible that the amounts granted will differ from the amounts recorded . general and administrative . general and administrative expenses primarily consist of personnel and related costs for our executive , administrative , finance , information technology , legal , accounting and human resource staff , including salaries , benefits , bonuses , payroll taxes , stock-based compensation , allocated overhead , professional fees and other corporate expenses . we have recently incurred , and expect to continue to incur , additional expenses as we grow our operations , including potentially higher legal , corporate insurance , accounting and auditing expenses , and the additional costs of enhancing and maintaining our internal control environment . general and administrative expenses may fluctuate as a percentage of revenue , and overtime we expect that general and administrative expenses will decrease as a percent of revenue due to operational efficiencies . depreciation and amortization . depreciation and amortization expenses primarily consist of depreciation and amortization of acquired intangible assets as a result of business combination purchase accounting adjustments . the valuation of identifiable intangible assets reflects management 's estimates based on , among other factors , use of established valuation methods . customer relationships are valued using an income approach , which estimates fair value based on the earnings and cash flow capacity of the subject asset and are amortized over a seven to ten-year period . the value of the trade name intangibles are determined using a relief from royalty method , which estimates fair value based on the value the owner of the asset receives from not having to pay a royalty to use the asset and are amortized over mostly a three-year period . developed technology is valued using a cost-to-recreate approach and is amortized over a four- to seven-year period . acquisition-related expenses . acquisition-related expenses consist of one-time costs in connection with each of our acquisitions , including legal fees , accounting fees , financing fees , restructuring costs , integration costs and other transactional fees and bonuses . we intend to continue executing our focused strategy of acquisitions to 48 enhance the features and functionality of our applications , expand our customer base and provide access to new markets and increased benefits of scale . total other expense total other expense consists primarily of changes in the estimated fair value of our preferred stock warrant liabilities , amortization of deferred financing costs over the term of the related loan facility , revaluation of contingent consideration , and interest expense on outstanding debt , including amortization of debt discount and effect of beneficial conversion features in our convertible promissory notes payable . income taxes because we have not generated domestic net income in any period to date , we have recorded a full valuation allowance against our domestic net deferred tax assets , exclusive of tax deductible goodwill . we have historically not recorded any material provision for federal or state income taxes , other than deferred taxes related to tax deductible goodwill and current taxes in certain separate company filing states . the balance of the tax provision for fiscal years ended december 31 , 2016 , 2015 , and 2014 , outside of tax deductible goodwill and current taxes in separate filing states , is related to foreign income taxes , primarily operations of our canadian subsidiaries . realization of any of our domestic deferred tax assets depends upon future earnings , the timing and amount of which are uncertain . based on analysis of acquired net operating losses , utilization of our net operating losses will be subject to annual limitations due to the ownership change rules under the internal revenue code of 1986 , as amended , or the code , and similar state provisions . in the event we have subsequent changes in ownership , the availability of net operating losses and research and development credit carryovers could be further limited . 49 results of operations consolidated statements of operations data the following tables set forth our results of operations for the specified periods , as well as our results of operations for the specified periods as a percentage of revenue . the period-to-period comparisons of results of operations are not necessarily indicative of results for future periods . replace_table_token_11_th ( 1 ) includes stock-based compensation . ( 2 ) includes depreciation and amortization of $ 3,916,000 , $ 3,147,000

liquidity and capital resources sources of liquidity during the year ended december 31 , 2016 , we funded our operations primarily from cash on hand , cash generated by our operations , a working capital credit line of $ 2,000,000 and net proceeds of $ 1,665,000 from an equity financing during 2015 and 2014. on december 7 , 2016 , we raised $ 19,320,000 in equity capital in our initial public offering resulting in net proceeds of $ 16,957,334. these funds were also used to make capital expenditures and to increase inventory to support higher production . as of december 31 , 2016 , we had working capital of $ 22,924,390 , as compared to $ 1,545,338 at december 31 , 2015. this $ 21,379,052 increase in working capital is primarily attributable to a $ 15,978,740 increase in cash and cash equivalents resulting from our initial public offering in december 2016. on december 31 , 2016 , and december 31 , 2015 , our trade receivables totaled $ 4,403,946 ( 94 % ) and $ 1,496,654 ( 81 % ) respectively , of which $ 4,160,975 and $ 1,235,931respectively , represented customer account balances of our largest telecommunications customer with 60-day payment terms . our available capital resources on december 31 , 2016 consisted primarily of $ 16,242,158 in cash and cash equivalents .

today , legacy processes and systems are being disrupted and replaced by cloud-based enterprise work management software that improves visibility , collaboration and productivity . in response to these changes , we are providing organizations and their knowledge workers with software applications that better align resources with business objectives and increase visibility , governance , collaboration , quality of customer experience and responsiveness to changes in the business environment . this results in increased work capacity , higher productivity , better execution and greater levels of customer engagement . our applications are easy-to-use , scalable and offer real-time collaboration for knowledge workers distributed on a local or global scale . our applications address enterprise work challenges in the following categories : project & information technology ( it ) management . enables users to manage their organization 's projects , professional workforce and it costs . workflow automation . enables users to automate document-intensive workflow business processes across their enterprise and supply chain . digital engagement . enables users to effectively engage with their customers , prospects and community via the web and mobile technologies . we sell our software applications primarily through a direct sales organization comprised of inside sales and field sales personnel . in addition to our direct sales organization , we have an indirect sales organization , which sells to distributors and value-added resellers . we employ a land-and-expand go-to-market strategy . after we demonstrate the value of an initial application to a customer , our sales and account management teams work to expand the adoption of that initial application across the customer , as well as cross-sell additional applications to address other enterprise work management needs of the customer . our customer success organization supports our direct sales efforts by managing the post-sale customer lifecycle . our subscription agreements are typically sold either on a per-seat basis or on a minimum contracted volume basis with overage fees billed in arrears , depending on the application being sold . we service customers ranging from large global corporations and government agencies to small- and medium-sized businesses . we have more than 2,500 customers with over 250,000 users across a broad range of industries , including financial services , retail , technology , manufacturing , education , consumer goods , media , telecommunications , government , food and beverage , healthcare and life sciences . 41 through a series of acquisitions and integrations , we have established a diverse family of software applications under the upland brand , each of which addresses a specific enterprise work management need . our revenue has grown from $ 22.8 million in fiscal 2012 to $ 74.8 million in fiscal 2016 , representing a 228 % period-over-period growth rate . see note 15 of the notes to consolidated financial statements for more information regarding our revenue as it relates to domestic and foreign operations . our operating results in a given period can fluctuate based on the mix of subscription and support , perpetual license and professional services revenue . for the years ended december 31 , 2016 , 2015 and 2014 , our subscription and support revenue accounted for 88 % , 82 % , and 75 % , respectively of our total revenue in both periods . historically , we have sold certain of our applications under perpetual licenses , which also are paid in advance . for the years ended december 31 , 2016 , 2015 and 2014 , our perpetual license revenue accounted for 2 % , 4 % , and 4 % of our total revenue , respectively . the support agreements related to our perpetual licenses are one-year in duration and entitle the customer to support and unspecified upgrades . the revenue related to such support agreements is included as part of our subscription and support revenue . professional services revenue consists of fees related to implementation , data extraction , integration and configuration and training on our applications . for the years ended december 31 , 2016 , 2015 and 2014 , our professional services revenue accounted for 10 % , 14 % , and 21 % , respectively . to support continued growth , we intend to pursue acquisitions of complementary technologies , products and businesses . this will expand our product families , customer base , and market access resulting in increased benefits of scale . we will prioritize acquisitions within the product categories we currently participate in , including project & it management , workflow automation , and digital engagement . consistent with our growth strategy , we have made twelve acquisitions in the five years ending december 31 , 2016 , excluding an additional acquisition in january 2017. see note 17 of the notes to consolidated financial statements for more information regarding events occurring after december 31 , 2016 . 2012 acquisitions powersteering . in february 2012 , we acquired the business of powersteering software , inc. , or powersteering , a provider of cloud-based program and portfolio management software , for $ 13.0 million . the acquisition of powersteering enabled our customers to gain high-level visibility across their organizations and improve top-down governance in management of programs , initiatives , investments and projects . tenrox . in february 2012 , we acquired the business of tenrox inc. , or tenrox , a provider of cloud-based professional services automation software , for $ 15.3 million . the acquisition of tenrox provided us with additional access to the professional services market and provided our customers with the ability to more effectively manage their knowledge workers to better track work , expenses and client billing while improving scheduling , utilization and alignment of human capital . in addition , following the tenrox acquisition , we began selling timesheet.com , a tenrox product for professional services automation , as a separate application . epm live . story_separator_special_tag we expense sales commissions when the initial customer contract is signed and upon any renewal as our obligation to pay a sales commission arises at these times . sales and marketing expenses may fluctuate as a percentage of total revenues for a variety of reasons including due to the timing of such expenses , in any particular quarterly or annual period . research and development . research and development expenses primarily consist of personnel and related costs of our research and development staff , including salaries , benefits , bonuses , payroll taxes , stock-based compensation , allocated overhead and costs of certain third-party contractors . research and development costs related to the development of our software applications are generally recognized as incurred . for example , we are parties to a technology services agreement pursuant to which we generally recognize expenses for services as they are received . see note 16 of the notes to consolidated financial statements for more information regarding how expenses under such agreement are recognized . we have devoted our product development efforts primarily to enhancing the functionality , and expanding the capabilities , of our applications . refundable canadian tax credits . investment tax credits are accounted for as a reduction of research and development costs . credits are accrued in the year in which the research and development costs of the capital expenditures are incurred , provided that we are reasonably certain that the credits will be received . the investment tax credit must be examined and approved by the tax authorities , and it is possible that the amounts granted will differ from the amounts recorded . general and administrative . general and administrative expenses primarily consist of personnel and related costs for our executive , administrative , finance , information technology , legal , accounting and human resource staff , including salaries , benefits , bonuses , payroll taxes , stock-based compensation , allocated overhead , professional fees and other corporate expenses . we have recently incurred , and expect to continue to incur , additional expenses as we grow our operations , including potentially higher legal , corporate insurance , accounting and auditing expenses , and the additional costs of enhancing and maintaining our internal control environment . general and administrative expenses may fluctuate as a percentage of revenue , and overtime we expect that general and administrative expenses will decrease as a percent of revenue due to operational efficiencies . depreciation and amortization . depreciation and amortization expenses primarily consist of depreciation and amortization of acquired intangible assets as a result of business combination purchase accounting adjustments . the valuation of identifiable intangible assets reflects management 's estimates based on , among other factors , use of established valuation methods . customer relationships are valued using an income approach , which estimates fair value based on the earnings and cash flow capacity of the subject asset and are amortized over a seven to ten-year period . the value of the trade name intangibles are determined using a relief from royalty method , which estimates fair value based on the value the owner of the asset receives from not having to pay a royalty to use the asset and are amortized over mostly a three-year period . developed technology is valued using a cost-to-recreate approach and is amortized over a four- to seven-year period . acquisition-related expenses . acquisition-related expenses consist of one-time costs in connection with each of our acquisitions , including legal fees , accounting fees , financing fees , restructuring costs , integration costs and other transactional fees and bonuses . we intend to continue executing our focused strategy of acquisitions to 48 enhance the features and functionality of our applications , expand our customer base and provide access to new markets and increased benefits of scale . total other expense total other expense consists primarily of changes in the estimated fair value of our preferred stock warrant liabilities , amortization of deferred financing costs over the term of the related loan facility , revaluation of contingent consideration , and interest expense on outstanding debt , including amortization of debt discount and effect of beneficial conversion features in our convertible promissory notes payable . income taxes because we have not generated domestic net income in any period to date , we have recorded a full valuation allowance against our domestic net deferred tax assets , exclusive of tax deductible goodwill . we have historically not recorded any material provision for federal or state income taxes , other than deferred taxes related to tax deductible goodwill and current taxes in certain separate company filing states . the balance of the tax provision for fiscal years ended december 31 , 2016 , 2015 , and 2014 , outside of tax deductible goodwill and current taxes in separate filing states , is related to foreign income taxes , primarily operations of our canadian subsidiaries . realization of any of our domestic deferred tax assets depends upon future earnings , the timing and amount of which are uncertain . based on analysis of acquired net operating losses , utilization of our net operating losses will be subject to annual limitations due to the ownership change rules under the internal revenue code of 1986 , as amended , or the code , and similar state provisions . in the event we have subsequent changes in ownership , the availability of net operating losses and research and development credit carryovers could be further limited . 49 results of operations consolidated statements of operations data the following tables set forth our results of operations for the specified periods , as well as our results of operations for the specified periods as a percentage of revenue . the period-to-period comparisons of results of operations are not necessarily indicative of results for future periods . replace_table_token_11_th ( 1 ) includes stock-based compensation . ( 2 ) includes depreciation and amortization of $ 3,916,000 , $ 3,147,000

cash flows from operating activities cash used in operating activities is significantly influenced by the amount of cash we invest in personnel and infrastructure to support the anticipated growth of our business . our operating assets and liabilities consist primarily of receivables from clients and unbilled professional services , accounts payable and accrued expenses and deferred revenues . the timing of our subscription and support billings , the volume of professional services rendered , the amount of perpetual licenses sold , and the related timing of collections on those bookings , as well as payments of our accounts payable and accrued payroll and related benefits affect these account balances . our cash provided by operating activities for the year ended 2016 primarily reflects our net loss of $ 13.5 million , partially offset by non-cash expenses that included $ 9.8 million of depreciation and amortization , $ 0.5 million of deferred income taxes , $ 0.3 million of non-cash interest expense , and $ 4.3 million of non-cash stock compensation expense . working capital sources of cash included a $ 0.4 million increase in accrued expenses and other liabilities and a $ 2.2 million increase in deferred revenue . these sources of cash were partially offset by a $ 0.4 million increase in accounts receivable , $ 1.5 million decrease in accounts payable and a $ 0.6 million decrease in prepaids and other . our cash provided by operating activities for the year ended 2015 primarily reflects our net loss of $ 13.7 million , offset by non-cash expenses that included $ 8.5 million of depreciation and amortization , $ 0.2 million of deferred income taxes , $ 1.0 million of foreign currency re-measurement loss , $ 0.4 million of non-cash interest expense , and $ 2.7 million of non-cash stock compensation expense . working capital sources of cash included a $ 0.7 million decrease in accounts receivable , a $ 1.9 million decrease in prepaids and other assets , and a $ 0.2 million 61 increase in accounts payable . these sources of cash were offset by a $ 2.8 million decrease in accrued expenses and other liabilities and a $ 0.6 million decrease in deferred revenue .

to the extent there are material differences between our estimates and the actual results , our future results of operations will be affected . we believe the following critical accounting policies require us to make significant judgments and estimates in the preparation of our consolidated financial statements : revenue recognition we recognize revenue when all of the following criteria are met : persuasive evidence of an arrangement exists ; delivery has occurred or services have been rendered ; our price to the buyer is fixed or determinable ; and collectability is reasonably assured . a significant portion of our sales are made to distributors under agreements which contain a limited right to return unsold product and price protection provisions . therefore , the recognition of net revenue and related cost of revenue from sales to these distributors are deferred until the distributor resells the product . when product revenue is recognized , we establish an estimated allowance for future product returns based on historical returns experience . actual product returns or pricing adjustments that differ from our estimates could result in increases or decreases to revenue . additionally , we sell extended warranty services , which extend the warranty period for an additional one to three years , depending upon the product . warranty net revenue is deferred and recognized ratably over the warranty service period . warranty reserve the standard warranty periods for our products typically range from one to five years . we establish reserves for estimated product warranty costs at the time revenue is recognized based upon our historical warranty experience , and additionally for any known product warranty issues . although we engage in extensive product quality programs and processes , our warranty obligation is affected by product failure rates , use of materials or service delivery costs that differ from our estimates . as a result , increases or decreases to warranty reserves could be required , which could impact our gross margins . allowance for doubtful accounts we maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments . our allowance for doubtful accounts is based on our assessment of the collectability of specific customer accounts , the aging of accounts receivable , our history of bad debts and the general condition of the industry . if a major customer 's credit worthiness deteriorates , or our customers ' actual defaults exceed our historical experience , our estimates could change and impact our reported financial results . inventory valuation our policy is to value inventories at the lower of cost or market on a part-by-part basis . this policy requires us to make estimates regarding the market value of our inventories , including an assessment of excess and obsolete inventories . we determine excess and obsolete inventories based on an estimate of the future sales demand for our products within a specified time horizon , generally twelve months . the estimates we use for demand are also used for near-term capacity planning and inventory purchasing . in addition , specific reserves are recorded to cover risks in the area of end of life products , inventory located at our contract manufacturers , deferred inventory in our sales channel and warranty replacement stock . if our sales forecast is less than the inventory we have on hand at the end of an accounting period , we may be required to take excess and obsolete inventory charges , which will decrease our gross margin and net operating results for that period . 20 valuation of deferred income taxes we have recorded a valuation allowance to reduce our net deferred tax assets to zero , primarily due to historical net operating losses and uncertainty of generating future taxable income . we consider estimated future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance . if we determine that it is more likely than not that we will realize a deferred tax asset that currently has a valuation allowance , we would be required to reverse the valuation allowance , which would be reflected as an income tax benefit in our consolidated statements of operations at that time . goodwill impairment testing in performing our goodwill impairment testing , we first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount . if we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount , we conduct a two-step goodwill impairment test . the first step of the impairment test involves comparing the estimated fair value of our single reporting unit with its carrying value , including goodwill . if the carrying amount of the reporting unit exceeds the reporting unit 's fair value , we perform the second step of the analysis , which involves comparing the implied fair value of the reporting unit 's goodwill with the carrying value of that goodwill , the difference of which represents the impairment loss . the determination of the reporting unit 's fair value requires significant judgment and is based on management 's best estimate . we generally use valuation techniques based on our market capitalization and multiples of revenue for similar companies . in addition , management may consider the reporting unit 's expected future earnings , and a control premium , which is the amount that a buyer is willing to pay over the current market price of a company as indicated by the traded price per share ( i.e . , market capitalization ) , in order to acquire a controlling interest . story_separator_special_tag the following table presents gross profit : replace_table_token_5_th 22 the decrease in gross profit as a percentage of net revenue ( referred to as “ gross margin ” ) was impacted by an increase in expedited freight costs . in addition , gross margin was affected by the growth in sales , as a percentage of total net revenues , of certain lower margin new products . since newer products typically have lower margins until they reach production volumes , we may experience downward pressure on gross margins if new product revenues continue to grow as a percentage of total net revenue . selling , general and administrative selling , general and administrative expenses consisted of personnel-related expenses including salaries and commissions , share-based compensation , facility expenses , information technology , trade show expenses , advertising and professional legal and accounting fees . the following table presents selling , general and administrative expenses : replace_table_token_6_th the increase in selling , general and administrative was primarily due to an increase in advertising and marketing fees related to various marketing initiatives attributable to new products releases . the increase in selling , general and administrative expense was partially offset by decreases in ( i ) professional fees and outside services due to a reduction associated with the implementation of various cost-cutting programs , as well as the fact that in the prior year , the balance included fees related to the special investigation that was completed during the quarter ended september 30 , 2011 , and ( ii ) certain facilities-related equipment and insurance expenses . research and development research and development expenses consisted of personnel-related expenses including share-based compensation , as well as expenditures to third-party vendors for research and development activities , and product certification costs . the following table presents research and development expenses : replace_table_token_7_th 23 the decrease in research and development expenses was primarily due to a decrease in variable compensation and lower travel and other miscellaneous expenses . this decrease was partially offset by an increase in the cost of outside services and certifications primarily related to development costs for new products . other expense , net the following table presents other expense , net : replace_table_token_8_th other expense , net , is comprised of foreign currency remeasurement and transaction adjustments related to our foreign subsidiaries whose functional currency is the u.s. dollar . during fiscal year 2013 , as a result of the final dissolution of our foreign subsidiary in france , we reclassified to other income $ 28,000 in accumulated foreign currency translation adjustments related to this subsidiary that were previously suspended in accumulated other comprehensive income . provision for income taxes the following table presents the income tax provision : replace_table_token_9_th the following table presents our effective tax rate based upon our income tax provision : replace_table_token_10_th we utilize the liability method of accounting for income taxes . the difference between our effective tax rate and the federal statutory rate resulted primarily from the effect of our domestic losses recorded without a tax benefit , as well as the effect of foreign earnings taxed at rates differing from the federal statutory rate . we record net deferred tax assets to the extent we believe these assets will more likely than not be realized . as a result of our cumulative losses and uncertainty of generating future taxable income , we provided a full valuation allowance against our net deferred tax assets for the fiscal years ended june 30 , 2013 and 2012. due to the “ change of ownership ” provision of the tax reform act of 1986 , utilization of our net operating loss ( “ nol ” ) carryforwards and tax credit carryforwards may be subject to an annual limitation against taxable income in future periods . as a result of the annual limitation , a portion of these carryforwards may expire before ultimately becoming available to reduce future income tax liabilities . the following table summarizes our nols : june 30 , 2013 ( in thousands ) federal $ 86,397 state $ 33,146 24 our nol carryovers for federal and state income tax purposes begin to expire in fiscal years 2021 and 2014 , respectively . at june 30 , 2013 , our fiscal year ended 2006 through fiscal year ended 2013 tax years remain open to examination by federal , state , and foreign taxing authorities . however , we have nols beginning in fiscal year ended 2001 which would cause the statute of limitations to remain open for the year in which the nol was incurred . liquidity and capital resources story_separator_special_tag text-align : justify `` > june 30 , 2013 ( in thousands ) minimum tnw $ 6,000 actual tnw $ 10,469 the following table presents the balance outstanding on the term loan , the available borrowing capacity on the revolving line of credit and outstanding letters of credit , which were used as security deposits . to date , we have not used any of the borrowing capacity under the revolving line . the available borrowing capacity under the revolving line set forth below reflects a change in the method of calculating our borrowing capacity for foreign trade receivables whereby only trade receivables derived from shipments originating within the u.s. are used to determine our borrowing capacity , which effectively reduces our borrowing capacity to the extent we ship products to foreign customers from an overseas warehouse . replace_table_token_12_th as of june 30 , 2013 , approximately $ 150,000 of our cash was held in foreign subsidiary bank accounts . this cash is unrestricted with regard to foreign liquidity needs ; however , our ability to utilize a portion of this cash to satisfy liquidity needs outside of such foreign locations may be subject to approval by the foreign location board of directors . 26 cash flows the following table presents the major components of the consolidated statements of cash flows : replace_table_token_13_th operating activities

cash flows from operating activities cash used in operating activities is significantly influenced by the amount of cash we invest in personnel and infrastructure to support the anticipated growth of our business . our operating assets and liabilities consist primarily of receivables from clients and unbilled professional services , accounts payable and accrued expenses and deferred revenues . the timing of our subscription and support billings , the volume of professional services rendered , the amount of perpetual licenses sold , and the related timing of collections on those bookings , as well as payments of our accounts payable and accrued payroll and related benefits affect these account balances . our cash provided by operating activities for the year ended 2016 primarily reflects our net loss of $ 13.5 million , partially offset by non-cash expenses that included $ 9.8 million of depreciation and amortization , $ 0.5 million of deferred income taxes , $ 0.3 million of non-cash interest expense , and $ 4.3 million of non-cash stock compensation expense . working capital sources of cash included a $ 0.4 million increase in accrued expenses and other liabilities and a $ 2.2 million increase in deferred revenue . these sources of cash were partially offset by a $ 0.4 million increase in accounts receivable , $ 1.5 million decrease in accounts payable and a $ 0.6 million decrease in prepaids and other . our cash provided by operating activities for the year ended 2015 primarily reflects our net loss of $ 13.7 million , offset by non-cash expenses that included $ 8.5 million of depreciation and amortization , $ 0.2 million of deferred income taxes , $ 1.0 million of foreign currency re-measurement loss , $ 0.4 million of non-cash interest expense , and $ 2.7 million of non-cash stock compensation expense . working capital sources of cash included a $ 0.7 million decrease in accounts receivable , a $ 1.9 million decrease in prepaids and other assets , and a $ 0.2 million 61 increase in accounts payable . these sources of cash were offset by a $ 2.8 million decrease in accrued expenses and other liabilities and a $ 0.6 million decrease in deferred revenue .

to the extent there are material differences between our estimates and the actual results , our future results of operations will be affected . we believe the following critical accounting policies require us to make significant judgments and estimates in the preparation of our consolidated financial statements : revenue recognition we recognize revenue when all of the following criteria are met : persuasive evidence of an arrangement exists ; delivery has occurred or services have been rendered ; our price to the buyer is fixed or determinable ; and collectability is reasonably assured . a significant portion of our sales are made to distributors under agreements which contain a limited right to return unsold product and price protection provisions . therefore , the recognition of net revenue and related cost of revenue from sales to these distributors are deferred until the distributor resells the product . when product revenue is recognized , we establish an estimated allowance for future product returns based on historical returns experience . actual product returns or pricing adjustments that differ from our estimates could result in increases or decreases to revenue . additionally , we sell extended warranty services , which extend the warranty period for an additional one to three years , depending upon the product . warranty net revenue is deferred and recognized ratably over the warranty service period . warranty reserve the standard warranty periods for our products typically range from one to five years . we establish reserves for estimated product warranty costs at the time revenue is recognized based upon our historical warranty experience , and additionally for any known product warranty issues . although we engage in extensive product quality programs and processes , our warranty obligation is affected by product failure rates , use of materials or service delivery costs that differ from our estimates . as a result , increases or decreases to warranty reserves could be required , which could impact our gross margins . allowance for doubtful accounts we maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments . our allowance for doubtful accounts is based on our assessment of the collectability of specific customer accounts , the aging of accounts receivable , our history of bad debts and the general condition of the industry . if a major customer 's credit worthiness deteriorates , or our customers ' actual defaults exceed our historical experience , our estimates could change and impact our reported financial results . inventory valuation our policy is to value inventories at the lower of cost or market on a part-by-part basis . this policy requires us to make estimates regarding the market value of our inventories , including an assessment of excess and obsolete inventories . we determine excess and obsolete inventories based on an estimate of the future sales demand for our products within a specified time horizon , generally twelve months . the estimates we use for demand are also used for near-term capacity planning and inventory purchasing . in addition , specific reserves are recorded to cover risks in the area of end of life products , inventory located at our contract manufacturers , deferred inventory in our sales channel and warranty replacement stock . if our sales forecast is less than the inventory we have on hand at the end of an accounting period , we may be required to take excess and obsolete inventory charges , which will decrease our gross margin and net operating results for that period . 20 valuation of deferred income taxes we have recorded a valuation allowance to reduce our net deferred tax assets to zero , primarily due to historical net operating losses and uncertainty of generating future taxable income . we consider estimated future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance . if we determine that it is more likely than not that we will realize a deferred tax asset that currently has a valuation allowance , we would be required to reverse the valuation allowance , which would be reflected as an income tax benefit in our consolidated statements of operations at that time . goodwill impairment testing in performing our goodwill impairment testing , we first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount . if we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount , we conduct a two-step goodwill impairment test . the first step of the impairment test involves comparing the estimated fair value of our single reporting unit with its carrying value , including goodwill . if the carrying amount of the reporting unit exceeds the reporting unit 's fair value , we perform the second step of the analysis , which involves comparing the implied fair value of the reporting unit 's goodwill with the carrying value of that goodwill , the difference of which represents the impairment loss . the determination of the reporting unit 's fair value requires significant judgment and is based on management 's best estimate . we generally use valuation techniques based on our market capitalization and multiples of revenue for similar companies . in addition , management may consider the reporting unit 's expected future earnings , and a control premium , which is the amount that a buyer is willing to pay over the current market price of a company as indicated by the traded price per share ( i.e . , market capitalization ) , in order to acquire a controlling interest . story_separator_special_tag the following table presents gross profit : replace_table_token_5_th 22 the decrease in gross profit as a percentage of net revenue ( referred to as “ gross margin ” ) was impacted by an increase in expedited freight costs . in addition , gross margin was affected by the growth in sales , as a percentage of total net revenues , of certain lower margin new products . since newer products typically have lower margins until they reach production volumes , we may experience downward pressure on gross margins if new product revenues continue to grow as a percentage of total net revenue . selling , general and administrative selling , general and administrative expenses consisted of personnel-related expenses including salaries and commissions , share-based compensation , facility expenses , information technology , trade show expenses , advertising and professional legal and accounting fees . the following table presents selling , general and administrative expenses : replace_table_token_6_th the increase in selling , general and administrative was primarily due to an increase in advertising and marketing fees related to various marketing initiatives attributable to new products releases . the increase in selling , general and administrative expense was partially offset by decreases in ( i ) professional fees and outside services due to a reduction associated with the implementation of various cost-cutting programs , as well as the fact that in the prior year , the balance included fees related to the special investigation that was completed during the quarter ended september 30 , 2011 , and ( ii ) certain facilities-related equipment and insurance expenses . research and development research and development expenses consisted of personnel-related expenses including share-based compensation , as well as expenditures to third-party vendors for research and development activities , and product certification costs . the following table presents research and development expenses : replace_table_token_7_th 23 the decrease in research and development expenses was primarily due to a decrease in variable compensation and lower travel and other miscellaneous expenses . this decrease was partially offset by an increase in the cost of outside services and certifications primarily related to development costs for new products . other expense , net the following table presents other expense , net : replace_table_token_8_th other expense , net , is comprised of foreign currency remeasurement and transaction adjustments related to our foreign subsidiaries whose functional currency is the u.s. dollar . during fiscal year 2013 , as a result of the final dissolution of our foreign subsidiary in france , we reclassified to other income $ 28,000 in accumulated foreign currency translation adjustments related to this subsidiary that were previously suspended in accumulated other comprehensive income . provision for income taxes the following table presents the income tax provision : replace_table_token_9_th the following table presents our effective tax rate based upon our income tax provision : replace_table_token_10_th we utilize the liability method of accounting for income taxes . the difference between our effective tax rate and the federal statutory rate resulted primarily from the effect of our domestic losses recorded without a tax benefit , as well as the effect of foreign earnings taxed at rates differing from the federal statutory rate . we record net deferred tax assets to the extent we believe these assets will more likely than not be realized . as a result of our cumulative losses and uncertainty of generating future taxable income , we provided a full valuation allowance against our net deferred tax assets for the fiscal years ended june 30 , 2013 and 2012. due to the “ change of ownership ” provision of the tax reform act of 1986 , utilization of our net operating loss ( “ nol ” ) carryforwards and tax credit carryforwards may be subject to an annual limitation against taxable income in future periods . as a result of the annual limitation , a portion of these carryforwards may expire before ultimately becoming available to reduce future income tax liabilities . the following table summarizes our nols : june 30 , 2013 ( in thousands ) federal $ 86,397 state $ 33,146 24 our nol carryovers for federal and state income tax purposes begin to expire in fiscal years 2021 and 2014 , respectively . at june 30 , 2013 , our fiscal year ended 2006 through fiscal year ended 2013 tax years remain open to examination by federal , state , and foreign taxing authorities . however , we have nols beginning in fiscal year ended 2001 which would cause the statute of limitations to remain open for the year in which the nol was incurred . liquidity and capital resources story_separator_special_tag text-align : justify `` > june 30 , 2013 ( in thousands ) minimum tnw $ 6,000 actual tnw $ 10,469 the following table presents the balance outstanding on the term loan , the available borrowing capacity on the revolving line of credit and outstanding letters of credit , which were used as security deposits . to date , we have not used any of the borrowing capacity under the revolving line . the available borrowing capacity under the revolving line set forth below reflects a change in the method of calculating our borrowing capacity for foreign trade receivables whereby only trade receivables derived from shipments originating within the u.s. are used to determine our borrowing capacity , which effectively reduces our borrowing capacity to the extent we ship products to foreign customers from an overseas warehouse . replace_table_token_12_th as of june 30 , 2013 , approximately $ 150,000 of our cash was held in foreign subsidiary bank accounts . this cash is unrestricted with regard to foreign liquidity needs ; however , our ability to utilize a portion of this cash to satisfy liquidity needs outside of such foreign locations may be subject to approval by the foreign location board of directors . 26 cash flows the following table presents the major components of the consolidated statements of cash flows : replace_table_token_13_th operating activities

liquidity the following table presents details of our working capital and cash and cash equivalents : replace_table_token_11_th our principal sources of cash and liquidity include our existing cash and cash equivalents , amounts available under our credit facilities , and cash generated from operations . we believe that these sources will be sufficient to fund our current requirements for working capital , capital expenditures and other financial commitments for at least the next 12 months . we anticipate that the primary factors affecting our cash and liquidity are net revenue , working capital requirements and capital expenditures . management defines cash and cash equivalents as highly liquid deposits with original maturities of 90 days or less when purchased . we maintain cash and cash equivalents balances at certain financial institutions in excess of amounts insured by federal agencies . management does not believe this concentration subjects us to any unusual financial risk beyond the normal risk associated with commercial banking relationships . we frequently monitor the third-party depository institutions that hold our cash and cash equivalents . our emphasis is primarily on safety of principal and secondarily on maximizing yield on those funds . our future working capital requirements will depend on many factors , including the timing and amount of our net revenue , research and development expenses , and expenses associated with any strategic partnerships or acquisitions and infrastructure investments . we incurred a net loss of $ 2.8 million and $ 3.0 million for the fiscal years ended june 30 , 2013 and 2012 , respectively . we expect our existing cash and cash equivalents , amounts available under our credit facilities and cash generated from operations will be sufficient to fund our capital expenditures , our working capital and other cash requirements . from time to time , we may seek additional capital from public or private offerings of our capital stock , borrowings under our existing or future credit lines or other sources in order to ( i ) develop or enhance our products , ( ii ) take advantage of future opportunities , ( iii ) respond to competition or ( iv ) continue to operate our business .

overview the following discussion and analysis of our financial results , as well as the accompanying unaudited consolidated financial statements and related notes to consolidated financial statements to which they refer , are the responsibility of our management . our accounting and financial reporting fairly reflect our business model which is based on the manufacturing and marketing of specialty petrochemicals products and waxes and providing custom manufacturing services . our preferred supplier position in the specialty petrochemicals market is derived from the combination of our reputation as a reliable supplier established over many years , the very high purity of our products , and a focused approach to customer service . in specialty waxes , we are able to deliver to our customers a performance and price point that is unique to our market ; while the diversity of our custom processing assets and capabilities offers solutions to our customers that we believe are uncommon along the u.s. gulf coast . enabling our success in these businesses is a commitment to operational excellence which establishes a culture that prioritizes the safety of our employees and communities in which we operate , the integrity of our assets and regulatory compliance . this commitment drives a change to an emphasis on forward-looking , leading-indicators of our results and proactive steps to continuously improve our performance . we bring the same commitment to excellence to our commercial activities where we focus on the value proposition to our customers while understanding opportunities to maximize our value capture through service and product differentiation , supply chain and operating cost efficiencies and diversified supply options . we believe over time our focus on execution , meeting the needs of our customers and the prudent control of our costs will create value for our stockholders . business environment and risk assessment we believe we are well-positioned to participate in the us chemical industry growth driven by new investments and overall economic growth . while petrochemical prices are volatile on a short-term basis and depend on the demand of our customers ' products , our investment decisions are based on our long-term business outlook using a disciplined approach in selecting and pursuing the most attractive investment opportunities . specialty petrochemicals operations shr 's specialty petrochemicals sales decreased in 2019 compared to 2018. product sales revenue decreased 9.9 % driven by volume decline of 5.4 % and lower 2019 product prices compared to 2018 primarily due to lower feedstock costs . during 2019 shr continued to emphasize our competitive advantages achieved through our high quality products and outstanding customer service and responsiveness . we also made major strides in improving plant reliability and safety . during 2019 feedstock costs were approximately 20 % lower than 2018 reflecting lower crude oil prices . approximately 68 % of our prime products are sold under formula pricing whereby feedstock costs are passed along to the customer typically with a one month lag . thus , when feedstock prices start falling , we experience higher margins as formula pricing lags feedstock costs . during most of 2019 prime products margins were assisted due to falling feedstock costs and reduced competitive pricing pressure on prime products sales that are based on non-formula pricing . our by-product margins improved significantly compared to 2018 as shr benefited from a full year of reliable operation of the advanced reformer unit which upgrades by-products to higher value products . on october 29 , 2019 , a severe weather event at the silsbee plant caused significant damage to one of the feedstock storage tanks . the damaged tank leaked hydrocarbon product into the tank containment area . spill cleanup was completed promptly and the tank has been taken out of service . the total cost of the cleanup and lost product was approximately $ 2 million and will be substantially covered by insurance . some insurance proceeds were received in december 2019 and we expect the remaining proceeds to be received in 2020 . 24 specialty waxes operations sales revenues for our specialty waxes business decreased approximately 9.1 % in 2019 from 2018 as we had lower wax product revenues and lower custom processing revenues . the decline in revenues was primarily due to operational issues at our pasadena , texas facility as well as wax feed supply constraints from our suppliers . most specialty wax markets are mature . key applications for our specialty polyethylene waxes are in hot melt adhesives ( `` hma `` ) , plastic processing , pvc lubricants and inks , paints and coatings , where they act as surface or rheology modifiers . the hma market is expected to grow at a higher rate than gdp growth due to growth in the developing markets and increases in packaging requirements due to changes in consumer purchasing ( shift to home deliveries via the internet ) in developed economies . road marking paints are also expected to grow at rates exceeding gdp growth based upon an expectation that there will be infrastructure investment in the u.s. the pvc market is expected to grow at gdp rates ; however , we expect to get more traction out of our products within this market with acceptance of our new pvc grade waxes . the global wax market is benefiting from the reduction of paraffin wax availability from large refiners as they move toward more hydrocracking and hydroisomerization to produce group iii lube oils and distillate . restructuring and severance impact during 2018 , the company incurred restructuring and severance expenses of $ 2.3 million which were included in general and administrative expenses . story_separator_special_tag in addition , the company elected the practical expedients related to ( 1 ) certain classes of underlying asset to not separate non-lease components from lease components and ( 2 ) the short-term lease recognition exemption for all leases that qualify . the adoption of asc 842 on january 1 , 2019 resulted in the recognition of right-of-use assets of approximately $ 17.0 million and lease liabilities for operating leases of approximately $ 17.0 million on its consolidated balance sheets , with no material impact to retained earnings or consolidated statements of operations . see note 9 to the consolidated financial statements for further information regarding the impact of the adoption of asc 842 on the company 's consolidated financial statements . in january 2017 , the fasb issued asu no . 2017-04 , intangibles - goodwill and other ( topic 350 ) . the amendments simplify the measurement of goodwill by eliminating step 2 from the goodwill impairment test . instead , under these amendments , an entity should perform its annual , or interim , goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount . an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit 's fair value ; however , the loss should not exceed the total amount of goodwill allocated to that reporting unit . the amendments are effective for public business entities for the first interim and annual reporting periods beginning after december 15 , 2019. early adoption was permitted for interim or annual goodwill impairment tests performed on testing dates after january 1 , 2017. the amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and , if it fails that qualitative test , to perform step 2 of the goodwill impairment test . an entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary . the company elected to early adopt this asu on january 1 , 2019. see note 10 to the consolidated financial statements for a discussion of the results of our goodwill impairment testing . in june 2018 , the fasb issued asu no . 2018-07 , improvements to nonemployee share-based payment accounting . asu 2018-07 simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share- 32 based payments to employees , with certain exceptions . the company adopted this asu on january 1 , 2019 and it did not have a material effect on the company 's consolidated financial statements . recent accounting pronouncements in august 2018 , the fasb issued asu no . 2018-13 , fair value measurement ( topic 820 ) - disclosure framework - changes to the disclosure requirements for fair value measurement , which is designed to improve the effectiveness of disclosures by removing , modifying and adding disclosures related to fair value measurements . asu no . 2018-13 is effective for fiscal years beginning after december 15 , 2019 , including interim periods within those fiscal years , and the asu allows for early adoption in any interim period after issuance of the update . the adoption of this asu is not expected to have a significant impact on the company 's consolidated financial statements . in june 2016 , the fasb issued asu no . 2016-13 , financial instruments - credit losses ( topic 326 ) , to require the measurement of expected credit losses for financial instruments held at the reporting date based on historical experience , current conditions and reasonable forecasts and applies to all financial assets , including trade receivables . the main objective of this asu is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date . asu no . 2016-13 is effective for fiscal years beginning after december 15 , 2019 , including interim periods within those fiscal years , and the asu allows for early adoption as of the beginning of an interim or annual reporting period beginning after december 15 , 2018. the company is currently assessing the impact this asu will have on its consolidated financial statements . in december 2019 , the fasb issued asu no . 2019-12 , income taxes ( topic 740 ) - simplifying the accounting for income taxes . the amendments in this update simplify the accounting for income taxes by removing certain exceptions and clarifying certain requirements regarding franchise taxes , goodwill , consolidated tax expenses , and annual effective tax rate calculations . the asu is effective for fiscal years beginning after december 15 , 2020 , and early adoption is permitted . the company is currently assessing the impact of this asu will have on its consolidated financial statements . critical accounting policies our consolidated financial statements are based on the selection and application of significant accounting policies . the preparation of consolidated financial statements in conformity with gaap requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of net sales , expenses and allocated charges during the reported period . actual results could differ from those estimates . however , we are not currently aware of any reasonably likely events or circumstances that would result in materially different results . we believe the following accounting policies and estimates are critical to understanding the financial reporting risks present currently . these matters , and the judgments and uncertainties affecting them , are essential to understanding our reported results . see note 2 to the consolidated financial statements for further information . discontinued operations assets that are sold or classified as held for sale are classified as discontinued operations provided that the disposal represents a strategic shift

liquidity the following table presents details of our working capital and cash and cash equivalents : replace_table_token_11_th our principal sources of cash and liquidity include our existing cash and cash equivalents , amounts available under our credit facilities , and cash generated from operations . we believe that these sources will be sufficient to fund our current requirements for working capital , capital expenditures and other financial commitments for at least the next 12 months . we anticipate that the primary factors affecting our cash and liquidity are net revenue , working capital requirements and capital expenditures . management defines cash and cash equivalents as highly liquid deposits with original maturities of 90 days or less when purchased . we maintain cash and cash equivalents balances at certain financial institutions in excess of amounts insured by federal agencies . management does not believe this concentration subjects us to any unusual financial risk beyond the normal risk associated with commercial banking relationships . we frequently monitor the third-party depository institutions that hold our cash and cash equivalents . our emphasis is primarily on safety of principal and secondarily on maximizing yield on those funds . our future working capital requirements will depend on many factors , including the timing and amount of our net revenue , research and development expenses , and expenses associated with any strategic partnerships or acquisitions and infrastructure investments . we incurred a net loss of $ 2.8 million and $ 3.0 million for the fiscal years ended june 30 , 2013 and 2012 , respectively . we expect our existing cash and cash equivalents , amounts available under our credit facilities and cash generated from operations will be sufficient to fund our capital expenditures , our working capital and other cash requirements . from time to time , we may seek additional capital from public or private offerings of our capital stock , borrowings under our existing or future credit lines or other sources in order to ( i ) develop or enhance our products , ( ii ) take advantage of future opportunities , ( iii ) respond to competition or ( iv ) continue to operate our business .

overview the following discussion and analysis of our financial results , as well as the accompanying unaudited consolidated financial statements and related notes to consolidated financial statements to which they refer , are the responsibility of our management . our accounting and financial reporting fairly reflect our business model which is based on the manufacturing and marketing of specialty petrochemicals products and waxes and providing custom manufacturing services . our preferred supplier position in the specialty petrochemicals market is derived from the combination of our reputation as a reliable supplier established over many years , the very high purity of our products , and a focused approach to customer service . in specialty waxes , we are able to deliver to our customers a performance and price point that is unique to our market ; while the diversity of our custom processing assets and capabilities offers solutions to our customers that we believe are uncommon along the u.s. gulf coast . enabling our success in these businesses is a commitment to operational excellence which establishes a culture that prioritizes the safety of our employees and communities in which we operate , the integrity of our assets and regulatory compliance . this commitment drives a change to an emphasis on forward-looking , leading-indicators of our results and proactive steps to continuously improve our performance . we bring the same commitment to excellence to our commercial activities where we focus on the value proposition to our customers while understanding opportunities to maximize our value capture through service and product differentiation , supply chain and operating cost efficiencies and diversified supply options . we believe over time our focus on execution , meeting the needs of our customers and the prudent control of our costs will create value for our stockholders . business environment and risk assessment we believe we are well-positioned to participate in the us chemical industry growth driven by new investments and overall economic growth . while petrochemical prices are volatile on a short-term basis and depend on the demand of our customers ' products , our investment decisions are based on our long-term business outlook using a disciplined approach in selecting and pursuing the most attractive investment opportunities . specialty petrochemicals operations shr 's specialty petrochemicals sales decreased in 2019 compared to 2018. product sales revenue decreased 9.9 % driven by volume decline of 5.4 % and lower 2019 product prices compared to 2018 primarily due to lower feedstock costs . during 2019 shr continued to emphasize our competitive advantages achieved through our high quality products and outstanding customer service and responsiveness . we also made major strides in improving plant reliability and safety . during 2019 feedstock costs were approximately 20 % lower than 2018 reflecting lower crude oil prices . approximately 68 % of our prime products are sold under formula pricing whereby feedstock costs are passed along to the customer typically with a one month lag . thus , when feedstock prices start falling , we experience higher margins as formula pricing lags feedstock costs . during most of 2019 prime products margins were assisted due to falling feedstock costs and reduced competitive pricing pressure on prime products sales that are based on non-formula pricing . our by-product margins improved significantly compared to 2018 as shr benefited from a full year of reliable operation of the advanced reformer unit which upgrades by-products to higher value products . on october 29 , 2019 , a severe weather event at the silsbee plant caused significant damage to one of the feedstock storage tanks . the damaged tank leaked hydrocarbon product into the tank containment area . spill cleanup was completed promptly and the tank has been taken out of service . the total cost of the cleanup and lost product was approximately $ 2 million and will be substantially covered by insurance . some insurance proceeds were received in december 2019 and we expect the remaining proceeds to be received in 2020 . 24 specialty waxes operations sales revenues for our specialty waxes business decreased approximately 9.1 % in 2019 from 2018 as we had lower wax product revenues and lower custom processing revenues . the decline in revenues was primarily due to operational issues at our pasadena , texas facility as well as wax feed supply constraints from our suppliers . most specialty wax markets are mature . key applications for our specialty polyethylene waxes are in hot melt adhesives ( `` hma `` ) , plastic processing , pvc lubricants and inks , paints and coatings , where they act as surface or rheology modifiers . the hma market is expected to grow at a higher rate than gdp growth due to growth in the developing markets and increases in packaging requirements due to changes in consumer purchasing ( shift to home deliveries via the internet ) in developed economies . road marking paints are also expected to grow at rates exceeding gdp growth based upon an expectation that there will be infrastructure investment in the u.s. the pvc market is expected to grow at gdp rates ; however , we expect to get more traction out of our products within this market with acceptance of our new pvc grade waxes . the global wax market is benefiting from the reduction of paraffin wax availability from large refiners as they move toward more hydrocracking and hydroisomerization to produce group iii lube oils and distillate . restructuring and severance impact during 2018 , the company incurred restructuring and severance expenses of $ 2.3 million which were included in general and administrative expenses . story_separator_special_tag in addition , the company elected the practical expedients related to ( 1 ) certain classes of underlying asset to not separate non-lease components from lease components and ( 2 ) the short-term lease recognition exemption for all leases that qualify . the adoption of asc 842 on january 1 , 2019 resulted in the recognition of right-of-use assets of approximately $ 17.0 million and lease liabilities for operating leases of approximately $ 17.0 million on its consolidated balance sheets , with no material impact to retained earnings or consolidated statements of operations . see note 9 to the consolidated financial statements for further information regarding the impact of the adoption of asc 842 on the company 's consolidated financial statements . in january 2017 , the fasb issued asu no . 2017-04 , intangibles - goodwill and other ( topic 350 ) . the amendments simplify the measurement of goodwill by eliminating step 2 from the goodwill impairment test . instead , under these amendments , an entity should perform its annual , or interim , goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount . an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit 's fair value ; however , the loss should not exceed the total amount of goodwill allocated to that reporting unit . the amendments are effective for public business entities for the first interim and annual reporting periods beginning after december 15 , 2019. early adoption was permitted for interim or annual goodwill impairment tests performed on testing dates after january 1 , 2017. the amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and , if it fails that qualitative test , to perform step 2 of the goodwill impairment test . an entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary . the company elected to early adopt this asu on january 1 , 2019. see note 10 to the consolidated financial statements for a discussion of the results of our goodwill impairment testing . in june 2018 , the fasb issued asu no . 2018-07 , improvements to nonemployee share-based payment accounting . asu 2018-07 simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share- 32 based payments to employees , with certain exceptions . the company adopted this asu on january 1 , 2019 and it did not have a material effect on the company 's consolidated financial statements . recent accounting pronouncements in august 2018 , the fasb issued asu no . 2018-13 , fair value measurement ( topic 820 ) - disclosure framework - changes to the disclosure requirements for fair value measurement , which is designed to improve the effectiveness of disclosures by removing , modifying and adding disclosures related to fair value measurements . asu no . 2018-13 is effective for fiscal years beginning after december 15 , 2019 , including interim periods within those fiscal years , and the asu allows for early adoption in any interim period after issuance of the update . the adoption of this asu is not expected to have a significant impact on the company 's consolidated financial statements . in june 2016 , the fasb issued asu no . 2016-13 , financial instruments - credit losses ( topic 326 ) , to require the measurement of expected credit losses for financial instruments held at the reporting date based on historical experience , current conditions and reasonable forecasts and applies to all financial assets , including trade receivables . the main objective of this asu is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date . asu no . 2016-13 is effective for fiscal years beginning after december 15 , 2019 , including interim periods within those fiscal years , and the asu allows for early adoption as of the beginning of an interim or annual reporting period beginning after december 15 , 2018. the company is currently assessing the impact this asu will have on its consolidated financial statements . in december 2019 , the fasb issued asu no . 2019-12 , income taxes ( topic 740 ) - simplifying the accounting for income taxes . the amendments in this update simplify the accounting for income taxes by removing certain exceptions and clarifying certain requirements regarding franchise taxes , goodwill , consolidated tax expenses , and annual effective tax rate calculations . the asu is effective for fiscal years beginning after december 15 , 2020 , and early adoption is permitted . the company is currently assessing the impact of this asu will have on its consolidated financial statements . critical accounting policies our consolidated financial statements are based on the selection and application of significant accounting policies . the preparation of consolidated financial statements in conformity with gaap requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of net sales , expenses and allocated charges during the reported period . actual results could differ from those estimates . however , we are not currently aware of any reasonably likely events or circumstances that would result in materially different results . we believe the following accounting policies and estimates are critical to understanding the financial reporting risks present currently . these matters , and the judgments and uncertainties affecting them , are essential to understanding our reported results . see note 2 to the consolidated financial statements for further information . discontinued operations assets that are sold or classified as held for sale are classified as discontinued operations provided that the disposal represents a strategic shift

cash and cash equivalents decreased $ 0.6 million during the year ended december 31 , 2019 . the change in cash and cash equivalents is summarized as follows : replace_table_token_10_th 25 operating activities operating activities generated cash of $ 25.1 million during fiscal 2019 as compared with $ 19.9 million of cash provided during fiscal 2018 . net loss increased by $ 12.4 million while cash provided by operations increased by $ 5.2 million from 2018 to 2019 due primarily to the following factors : net loss for 2019 included a non-cash impairment charge for goodwill and certain intangible assets of $ 24.2 million ; and trade receivables increased $ 0.8 million in 2019 as compared to a decrease of $ 1.5 million in 2018. these significant sources of cash were partially offset by the following decreases in cash provided by operations : accounts payable and accrued liabilities decreased $ 4.9 million in 2019 ( primarily due to payoff of catalyst purchased at the end of 2018 ) as compared to an increase of $ 2.2 million in 2018 ( also primarily due to catalyst purchases ) ; income taxes receivable were flat in 2019 , as compared to a decrease of $ 5.4 million in 2018 ( primarily due to collection of federal and state research and development credits , carryback claims , and refunds of tax payments on deposit ) ; and net loss for 2019 included non-cash deferred income tax liability of $ 3.0 million as compared to non-cash deferred income tax liability of $ 1.4 million in 2018. operating activities generated cash of $ 19.9 million during fiscal 2018 as compared with $ 30.8 million of cash provided during fiscal 2017. net income decreased by $ 20.3 million and cash provided by operations decreased by $ 10.9 million from 2017 to 2018 due primarily to the following factors : net loss for 2018 included a non-cash depreciation and amortization charge of $ 14.4 million as compared to 2017 which included a non-cash depreciation and amortization charge of $ 11.0 million ; net loss for 2018 included non-cash deferred income tax liability of $ 1.6 million as compared to non-cash deferred income

gross profit margins related to sales in our europe and asia businesses are historically higher than our americas business primarily due to the following factors : ( i ) premiums charged in comparison to retail prices on products sold in the u.s. ; ( ii ) the product sales mix in our international businesses , in comparison to our americas business , is comprised more predominantly of watches and jewelry that generally produce higher gross profit margins than leather goods ; and ( iii ) the watch sales mix in our europe and asia businesses , in comparison to our americas business , are comprised more predominantly of higher priced licensed brands . our business is subject to the risks inherent in global sourcing supply . certain key components in our products come from limited sources of supply , which exposes us to potential supply shortages that could disrupt the manufacture and sale of our products . any interruption or delay in the supply of key components could significantly harm our ability to meet scheduled product deliveries to our customers and cause us to lose sales . interruptions or delays in supply may be caused by a number of factors that are outside of our and our contractor manufacturers ' control . this discussion should be read in conjunction with our consolidated financial statements and the related notes included therewith . 36 critical accounting policies and estimates the preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the united states of america requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period . on an ongoing basis , we evaluate our estimates and judgments , including those related to product returns , bad debt , inventories , long-lived asset impairment , impairment of goodwill and trade names , income taxes , warranty costs , hedge accounting , litigation liabilities and stock-based compensation . we base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances . our estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources . actual results may differ from these estimates under different assumptions or conditions . we believe the following critical accounting policies require the most significant estimates and judgments . product returns . we accept limited returns and may request that a customer return a product if we feel the customer has an excess of any style that we have identified as being a poor performer for that customer or geographic location . we monitor returns and maintain a provision for estimated returns based upon historical experience and any specific issues identified . while returns have historically been within our expectations and the provisions established , future return rates may differ from those experienced in the past . in the event that our products are performing poorly in the retail market and or we experience product damages or defects at a rate significantly higher than our historical rate , the resulting returns could have an adverse impact on the operating results for the period or periods in which such returns occur . if our allowance for product returns were to change by 10 % , the result would have been a $ 2.7 million change to net income , net of taxes . inventories . inventories are stated at the lower of market or average cost , including any applicable duty and freight charges . we account for estimated obsolescence or unmarketable inventory equal to the difference between the average cost of inventory and the estimated market value based upon assumptions about future demand , market conditions and available liquidation channels . if actual future demand or market conditions are less favorable than those projected by management , or if liquidation channels are not readily available , additional inventory valuation reductions may be required . we assess our off-price sales on an ongoing basis and update our estimates accordingly . revenue from sales of our products that are subject to inventory consignment agreements is recognized when title and risk of loss transfers , delivery has occurred , the price to the buyer is determinable and collectability is reasonably assured . inventory held at consignment locations is included in our finished goods inventory . long-lived asset impairment . we test for asset impairment of property , plant and equipment and other long-lived assets whenever events or conditions indicate that the carrying value of an asset might not be recoverable based on expected undiscounted cash flows related to the asset . in evaluating long-lived assets for recoverability , we calculate fair value using our best estimate of future cash flows expected to result from the use of the asset and its eventual disposition . when undiscounted cash flows estimated to be generated through the operations of our company-owned retail stores are less than the carrying value of the underlying assets , the assets are impaired . if it is determined that assets are impaired , an impairment loss is recognized for the amount the asset 's book value exceeds its fair value . impairment losses are recorded in selling , general and administrative expenses . should actual results or market conditions differ from those anticipated , additional losses may be recorded . we recorded impairment losses on long-lived assets of approximately $ 11.1 million , $ 9.3 million and $ 5.8 million in fiscal years 2015 , 2014 and 2013 , respectively . an increase of 100 basis points to the discount rate used in our impairment testing would not have resulted in additional impairment expense . story_separator_special_tag within the region , growth in canada across the retail and wholesale channels and in our mexico wholesale business was more than offset by declines in both the wholesale and retail channels in the united states ( `` u.s. `` ) . our u.s. wholesale business declined largely driven by a 40 weaker performance in u.s. department stores where traffic continues to be a challenge and softer trends in the business persist . comparable retail store sales increased slightly in our owned retail stores ( normalized for the 53-week calendar ) as improved conversion rates offset a decline in traffic . europe net sales . during fiscal year 2015 , europe net sales decreased $ 126.1 million or 10.5 % ( increased 2 % in constant currency and comparable calendar ) . on a constant currency and comparable calendar basis , france and italy delivered the strongest performances offset by declines in the united kingdom , distributor and germany markets . our multi-brand watch portfolio decreased $ 104.3 million or 11.7 % ( increased 1 % in constant currency and comparable calendar ) while our jewelry category decreased $ 11.8 million or 6.7 % ( increased 8 % in constant currency and comparable calendar ) . our leathers business decreased $ 8.7 million or 9.3 % ( increased 6 % in constant currency and comparable calendar ) in fiscal year 2015 as compared to the prior fiscal year . comparable retail store sales in our owned retail stores in the european region increased modestly ( normalized for the 53-week calendar ) as our marketing investments gained traction . our e-commerce business also contributed favorably to fiscal year 2015 with double-digit growth on a constant dollar and comparable calendar basis . asia net sales . in fiscal year 2015 , asia net sales decreased $ 69.2 million or 12.2 % ( 4 % in constant currency and comparable calendar ) . sales growth in india , australia and japan was offset by decreases in most other markets including south korea , hong kong and china where general economic sluggishness and macro uncertainty has continued to impact our business although we saw some improvement in the south korea performance during the last quarter of fiscal year 2015. our watch category decreased $ 67.1 million or 13.7 % ( 6 % in constant currency and comparable calendar ) , while our leathers products decreased $ 1.0 million or 1.7 % ( increased 11 % in constant currency and comparable calendar ) . our jewelry business decreased $ 0.9 million or 11.1 % ( 1 % in constant currency and comparable calendar ) . comparable retail store sales in our owned retail stores in the asia region decreased modestly ( normalized for the 53-week calendar ) while total retail channel sales increased on a constant currency and comparable calendar basis as a result of new doors . constant currency and comparable calendar financial information . the following table presents our business segment and product net sales on a constant currency and comparable calendar basis . to calculate net sales on a constant currency basis , net sales for fiscal year 2015 for entities reporting in currencies other than the u.s. dollar are translated into u.s. dollars at the average rates during fiscal year 2014. to calculate net sales on a comparable calendar basis , we have estimated the impact on net sales of the extra week in fiscal year 2014. our presentations of net sales on a constant currency and comparable calendar basis are non-gaap financial measures . we present net sales on a constant currency and comparable calendar basis because we believe that such information is useful to certain investors as a measure of our results of operations year-over-year without the effects of foreign currency fluctuations and the extra week in fiscal year 2014. replace_table_token_11_th 41 stores . the following table sets forth the number of stores by concept for the fiscal years ended below : replace_table_token_12_th during fiscal year 2015 , we opened 38 new stores and closed 36 stores . in addition , we added 24 stores through our skwg acquisition . during fiscal year 2016 , we anticipate opening approximately 25 to 30 additional retail stores and closing approximately 30 stores globally . a store is included in comparable store sales in the thirteenth month of operation . stores that experience a gross square footage increase of 10 % or more due to an expansion and or relocation are removed from the comparable store sales base , but are included in total sales . these stores are returned to the comparable store sales base in the thirteenth month following the expansion and or relocation . gross profit . gross profit of $ 1.8 billion in fiscal year 2015 decreased 12.4 % in comparison to $ 2.0 billion in fiscal year 2014 as a result of decreased sales and changes in foreign currencies . gross profit margin decreased 270 basis points to 54.3 % in fiscal year 2015 compared to 57.0 % in the prior fiscal year . the gross margin rate decreased as compared to fiscal year 2014 primarily driven by changes in foreign currencies , which unfavorably impacted gross profit margin by approximately 290 basis points . excluding the impacts of currency , the gross margin rate expanded mainly due to the favorable impacts of our pricing initiatives , lower product costs and our regional distribution mix given the growth in international markets which more than offset the impact of higher markdowns , increased effectiveness of promotional activity in our retail channel , primarily in our outlet stores and clearance activities including increased levels of off-price sales . operating expenses . for fiscal year 2015 , operating expenses as a percentage of net sales increased to 45.3 % in fiscal year 2015 compared to 40.9 % in fiscal year 2014 and included a $ 96.0 million favorable impact from the translation of foreign-based expenses into u.s. dollars . on

cash and cash equivalents decreased $ 0.6 million during the year ended december 31 , 2019 . the change in cash and cash equivalents is summarized as follows : replace_table_token_10_th 25 operating activities operating activities generated cash of $ 25.1 million during fiscal 2019 as compared with $ 19.9 million of cash provided during fiscal 2018 . net loss increased by $ 12.4 million while cash provided by operations increased by $ 5.2 million from 2018 to 2019 due primarily to the following factors : net loss for 2019 included a non-cash impairment charge for goodwill and certain intangible assets of $ 24.2 million ; and trade receivables increased $ 0.8 million in 2019 as compared to a decrease of $ 1.5 million in 2018. these significant sources of cash were partially offset by the following decreases in cash provided by operations : accounts payable and accrued liabilities decreased $ 4.9 million in 2019 ( primarily due to payoff of catalyst purchased at the end of 2018 ) as compared to an increase of $ 2.2 million in 2018 ( also primarily due to catalyst purchases ) ; income taxes receivable were flat in 2019 , as compared to a decrease of $ 5.4 million in 2018 ( primarily due to collection of federal and state research and development credits , carryback claims , and refunds of tax payments on deposit ) ; and net loss for 2019 included non-cash deferred income tax liability of $ 3.0 million as compared to non-cash deferred income tax liability of $ 1.4 million in 2018. operating activities generated cash of $ 19.9 million during fiscal 2018 as compared with $ 30.8 million of cash provided during fiscal 2017. net income decreased by $ 20.3 million and cash provided by operations decreased by $ 10.9 million from 2017 to 2018 due primarily to the following factors : net loss for 2018 included a non-cash depreciation and amortization charge of $ 14.4 million as compared to 2017 which included a non-cash depreciation and amortization charge of $ 11.0 million ; net loss for 2018 included non-cash deferred income tax liability of $ 1.6 million as compared to non-cash deferred income

gross profit margins related to sales in our europe and asia businesses are historically higher than our americas business primarily due to the following factors : ( i ) premiums charged in comparison to retail prices on products sold in the u.s. ; ( ii ) the product sales mix in our international businesses , in comparison to our americas business , is comprised more predominantly of watches and jewelry that generally produce higher gross profit margins than leather goods ; and ( iii ) the watch sales mix in our europe and asia businesses , in comparison to our americas business , are comprised more predominantly of higher priced licensed brands . our business is subject to the risks inherent in global sourcing supply . certain key components in our products come from limited sources of supply , which exposes us to potential supply shortages that could disrupt the manufacture and sale of our products . any interruption or delay in the supply of key components could significantly harm our ability to meet scheduled product deliveries to our customers and cause us to lose sales . interruptions or delays in supply may be caused by a number of factors that are outside of our and our contractor manufacturers ' control . this discussion should be read in conjunction with our consolidated financial statements and the related notes included therewith . 36 critical accounting policies and estimates the preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the united states of america requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period . on an ongoing basis , we evaluate our estimates and judgments , including those related to product returns , bad debt , inventories , long-lived asset impairment , impairment of goodwill and trade names , income taxes , warranty costs , hedge accounting , litigation liabilities and stock-based compensation . we base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances . our estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources . actual results may differ from these estimates under different assumptions or conditions . we believe the following critical accounting policies require the most significant estimates and judgments . product returns . we accept limited returns and may request that a customer return a product if we feel the customer has an excess of any style that we have identified as being a poor performer for that customer or geographic location . we monitor returns and maintain a provision for estimated returns based upon historical experience and any specific issues identified . while returns have historically been within our expectations and the provisions established , future return rates may differ from those experienced in the past . in the event that our products are performing poorly in the retail market and or we experience product damages or defects at a rate significantly higher than our historical rate , the resulting returns could have an adverse impact on the operating results for the period or periods in which such returns occur . if our allowance for product returns were to change by 10 % , the result would have been a $ 2.7 million change to net income , net of taxes . inventories . inventories are stated at the lower of market or average cost , including any applicable duty and freight charges . we account for estimated obsolescence or unmarketable inventory equal to the difference between the average cost of inventory and the estimated market value based upon assumptions about future demand , market conditions and available liquidation channels . if actual future demand or market conditions are less favorable than those projected by management , or if liquidation channels are not readily available , additional inventory valuation reductions may be required . we assess our off-price sales on an ongoing basis and update our estimates accordingly . revenue from sales of our products that are subject to inventory consignment agreements is recognized when title and risk of loss transfers , delivery has occurred , the price to the buyer is determinable and collectability is reasonably assured . inventory held at consignment locations is included in our finished goods inventory . long-lived asset impairment . we test for asset impairment of property , plant and equipment and other long-lived assets whenever events or conditions indicate that the carrying value of an asset might not be recoverable based on expected undiscounted cash flows related to the asset . in evaluating long-lived assets for recoverability , we calculate fair value using our best estimate of future cash flows expected to result from the use of the asset and its eventual disposition . when undiscounted cash flows estimated to be generated through the operations of our company-owned retail stores are less than the carrying value of the underlying assets , the assets are impaired . if it is determined that assets are impaired , an impairment loss is recognized for the amount the asset 's book value exceeds its fair value . impairment losses are recorded in selling , general and administrative expenses . should actual results or market conditions differ from those anticipated , additional losses may be recorded . we recorded impairment losses on long-lived assets of approximately $ 11.1 million , $ 9.3 million and $ 5.8 million in fiscal years 2015 , 2014 and 2013 , respectively . an increase of 100 basis points to the discount rate used in our impairment testing would not have resulted in additional impairment expense . story_separator_special_tag within the region , growth in canada across the retail and wholesale channels and in our mexico wholesale business was more than offset by declines in both the wholesale and retail channels in the united states ( `` u.s. `` ) . our u.s. wholesale business declined largely driven by a 40 weaker performance in u.s. department stores where traffic continues to be a challenge and softer trends in the business persist . comparable retail store sales increased slightly in our owned retail stores ( normalized for the 53-week calendar ) as improved conversion rates offset a decline in traffic . europe net sales . during fiscal year 2015 , europe net sales decreased $ 126.1 million or 10.5 % ( increased 2 % in constant currency and comparable calendar ) . on a constant currency and comparable calendar basis , france and italy delivered the strongest performances offset by declines in the united kingdom , distributor and germany markets . our multi-brand watch portfolio decreased $ 104.3 million or 11.7 % ( increased 1 % in constant currency and comparable calendar ) while our jewelry category decreased $ 11.8 million or 6.7 % ( increased 8 % in constant currency and comparable calendar ) . our leathers business decreased $ 8.7 million or 9.3 % ( increased 6 % in constant currency and comparable calendar ) in fiscal year 2015 as compared to the prior fiscal year . comparable retail store sales in our owned retail stores in the european region increased modestly ( normalized for the 53-week calendar ) as our marketing investments gained traction . our e-commerce business also contributed favorably to fiscal year 2015 with double-digit growth on a constant dollar and comparable calendar basis . asia net sales . in fiscal year 2015 , asia net sales decreased $ 69.2 million or 12.2 % ( 4 % in constant currency and comparable calendar ) . sales growth in india , australia and japan was offset by decreases in most other markets including south korea , hong kong and china where general economic sluggishness and macro uncertainty has continued to impact our business although we saw some improvement in the south korea performance during the last quarter of fiscal year 2015. our watch category decreased $ 67.1 million or 13.7 % ( 6 % in constant currency and comparable calendar ) , while our leathers products decreased $ 1.0 million or 1.7 % ( increased 11 % in constant currency and comparable calendar ) . our jewelry business decreased $ 0.9 million or 11.1 % ( 1 % in constant currency and comparable calendar ) . comparable retail store sales in our owned retail stores in the asia region decreased modestly ( normalized for the 53-week calendar ) while total retail channel sales increased on a constant currency and comparable calendar basis as a result of new doors . constant currency and comparable calendar financial information . the following table presents our business segment and product net sales on a constant currency and comparable calendar basis . to calculate net sales on a constant currency basis , net sales for fiscal year 2015 for entities reporting in currencies other than the u.s. dollar are translated into u.s. dollars at the average rates during fiscal year 2014. to calculate net sales on a comparable calendar basis , we have estimated the impact on net sales of the extra week in fiscal year 2014. our presentations of net sales on a constant currency and comparable calendar basis are non-gaap financial measures . we present net sales on a constant currency and comparable calendar basis because we believe that such information is useful to certain investors as a measure of our results of operations year-over-year without the effects of foreign currency fluctuations and the extra week in fiscal year 2014. replace_table_token_11_th 41 stores . the following table sets forth the number of stores by concept for the fiscal years ended below : replace_table_token_12_th during fiscal year 2015 , we opened 38 new stores and closed 36 stores . in addition , we added 24 stores through our skwg acquisition . during fiscal year 2016 , we anticipate opening approximately 25 to 30 additional retail stores and closing approximately 30 stores globally . a store is included in comparable store sales in the thirteenth month of operation . stores that experience a gross square footage increase of 10 % or more due to an expansion and or relocation are removed from the comparable store sales base , but are included in total sales . these stores are returned to the comparable store sales base in the thirteenth month following the expansion and or relocation . gross profit . gross profit of $ 1.8 billion in fiscal year 2015 decreased 12.4 % in comparison to $ 2.0 billion in fiscal year 2014 as a result of decreased sales and changes in foreign currencies . gross profit margin decreased 270 basis points to 54.3 % in fiscal year 2015 compared to 57.0 % in the prior fiscal year . the gross margin rate decreased as compared to fiscal year 2014 primarily driven by changes in foreign currencies , which unfavorably impacted gross profit margin by approximately 290 basis points . excluding the impacts of currency , the gross margin rate expanded mainly due to the favorable impacts of our pricing initiatives , lower product costs and our regional distribution mix given the growth in international markets which more than offset the impact of higher markdowns , increased effectiveness of promotional activity in our retail channel , primarily in our outlet stores and clearance activities including increased levels of off-price sales . operating expenses . for fiscal year 2015 , operating expenses as a percentage of net sales increased to 45.3 % in fiscal year 2015 compared to 40.9 % in fiscal year 2014 and included a $ 96.0 million favorable impact from the translation of foreign-based expenses into u.s. dollars . on

net cash provided by operating activities of $ 360.8 million in fiscal year 2015 was partially offset by the aggregate amount of cash used in investing and financing activities of $ 293.8 million and $ 64.0 million , respectively , resulting in a $ 13.0 million increase in cash and cash equivalents since the end of fiscal year 2014 . during fiscal year 2015 , net cash provided by operating activities consisted primarily of net income of $ 229.9 million and non-cash activities of $ 130.8 million . during fiscal year 2015 , net cash used in investing activities was primarily driven by $ 220.2 million of business acquisitions , net of cash acquired and $ 80.0 million in capital expenditures . during fiscal year 2015 , net cash used in financing activities was principally comprised of $ 231.3 million of common stock acquisitions , partially offset by $ 180.2 million of net borrowings on our credit facilities . 45 accounts receivable decreased by 13.9 % to $ 370.8 million during fiscal year 2015 compared to $ 430.5 million at the end of the prior fiscal year , primarily as a result of increased collection efforts and lower sales volume . average days sales outstanding for our wholesale business for fiscal year 2015 was 49 days compared to 52 days in the prior fiscal year . inventory at the end of fiscal year 2015 was $ 625.3 million , representing an increase of 4.7 % from the prior fiscal year inventory balance of $ 597.3 million largely driven by new businesses and brands added during fiscal year 2015. the following tables reflect our common stock repurchase activity under our repurchase programs for the periods indicated ( in millions ) : replace_table_token_17_th ( 1 ) in the first quarter of fiscal year 2015 , the company completed this repurchase plan . we effectively retired 2.7 million shares of repurchased common stock under our repurchase programs during fiscal year 2015 . we account for the retirements by allocating the repurchase price , which is based upon the equity contribution associated with historical issuances , to common stock , additional paid-in capital and retained earnings .

if oil and gas prices decline , our revenues , profitability and cash flows from operations will also likely decrease which could cause us to alter our business plans , including reducing our drilling activities . such declines will require us to write down the carrying value of our oil and gas assets which will also cause a reduction in net income . the realized prices that we receive for our production differ from nymex futures and spot market prices , principally due to : basis differentials which are dependent on actual delivery location ; adjustments for btu content ; quality of the hydrocarbons ; and gathering , processing and transportation costs . the following table sets forth our average differentials for the years ended december 31 , 2019 and 2020 : replace_table_token_12_th _ ( 1 ) average realized prices are before the impact of hedging activities . the company 's derivative contracts as of december 31 , 2020 and december 31 , 2019 consisted of nymex-based fixed price swaps and basis differential swaps . under fixed price swaps , we receive a fixed price for our production and pay a variable market price to the contract counter-party . 38 as of december 31 , 2020 , we had nymex-based fixed price commodity swap arrangements , on approximately 88 % of the oil production from our estimated net proved developed producing reserves ( as of december 31 , 2020 ) through december 31 , 2021 , 96 % for 2022 , 72 % for 2023 and 88 % for 2024. by removing a portion of price volatility on our future oil and gas production , we believe we will mitigate , but not eliminate , the potential effects of changing commodity prices on our cash flows from operations for those periods . however , when prevailing market prices are higher than our contract prices , we will not realize increased cash flows on the portion of the production that has been hedged . we have in the past and will in the future sustain losses on both open and settled derivative contracts if market prices are higher than our contract prices . conversely , when prevailing market prices are lower than our contract prices , we will sustain realized and unrealized gains on our commodity derivative contracts . in 2020 , we recorded a gain of $ 42.9 million , consisting of a gain of $ 17.5 million on closed contracts and a gain of $ 25.4 million related to open contracts . in 2019 , we recognized a loss of $ 26.8 million , consisting of a loss of $ 6.0 million on closed contracts and a loss of $ 20.8 million related to open contracts . we have not designated any of these derivative contracts as a hedge as permitted by applicable accounting rules if certain conditions are met . substantially all of our hedging contracts were terminated subsequent to march 31 , 2021. see note 14 `` subseqemt events `` . the following table sets forth our derivative contracts at december 31 , 2020 : replace_table_token_13_th at december 31 , 2020 , the aggregate fair market value of our commodity derivative contracts was an asset of approximately $ 19.4 million . in april 2021 , we received notice that certain of our hedging agreements were being terminated as a result of events of default under the first lien credit facility , and we voluntarily terminated most of our other hedging arrangements . as a result of the settlement of the terminated hedges , we have outstanding obligations of $ 9.9 million . the settlement values of the terminated hedges were determined at various dates between april 15 and april 30 , 2021. these obligations will be added to the balance of the first lien credit facility and accrue interest at the default interest rate , currently 6.7 % , until repaid . our remaining hedging agreements may also be terminated as a result of such events of default . the settlement of terminated hedging agreements may result in losses and limit our ability to reduce exposure to adverse fluctuations in oil and gas prices . see note 14 “ subsequent events ” for current information regarding non-compliance with certain covenants . production volumes . our proved reserves will decline as oil and gas is produced , unless we find , acquire or develop additional properties containing proved reserves or conduct successful exploration and development activities . based on the reserve information set forth in our reserve report as of december 31 , 2020 , our average annual estimated decline rate for our net proved developed producing reserves is 39 % , 18 % , 14 % , 13 % and 12 % in 2021 , 2022 , 2023 , 2024 and 2025 , respectively , 9 % in the following five years , and approximately 9 % thereafter . these rates of decline are estimates and actual production declines could be materially higher . while we have had some success in finding , acquiring and developing additional reserves , we have not always been able to fully replace the production volumes lost from natural field declines and property sales . our ability to acquire or find additional reserves in the future will be dependent , in part , upon the amount of available funds for acquisition , exploration and development projects . the decline in oil prices that occurred in march 2020 , resulted in the suspension of our 2020 drilling program as well as shutting in production for some period of time . both of these events impacted our production volumes and will impact them going forward . story_separator_special_tag the table below sets forth the components of these capital expenditures : replace_table_token_15_th 42 during 2020 capital expenditures were primarily expenditures on our existing properties , designed to reduce lease operating expense , such as purchasing certain equipment as opposed to renting . we also performed extensive workovers on several wells in 2020. in 2019 , capital expenditures were for the exploration and development of our existing properties . the level of capital expenditures will vary during future periods depending on economic and industry conditions and commodity prices . should the prices of oil and gas decline and if our costs of operations increase or if our production volumes decrease , our cash flows from operations will decrease which may result in a reduction of capital expenditure . due to capital expenditure limits imposed by our credit facilities , we have not adopted a capital drilling budget for 2021 , but do intend to complete the six previously drilled wells in the bakken . if we can not incur significant capital expenditure , we will not be able to offset oil and gas production decreases caused by natural field declines . sources and uses of capital . the net funds provided by and or used in each of the operating , investing and financing activities are summarized in the following table and discussed in further detail below : replace_table_token_16_th operating activities for the year ended december 31 , 2020 provided $ 16.0 million in cash compared to $ 73.6 million in 2019. the reduction was primarily due to lower net income due to lower commodity prices and lower production volumes . investing activities used $ 12.6 million in 2020 primarily for the development of our existing properties . cash expenditures for the year ended december 31 , 2020 included a decrease in the accounts payable balance related to capital expenditures of $ 7.2 million , resulting in accrual based capital expenditures incurred during the period of $ 5.4 million . operating activities for the year ended december 31 , 2019 provided $ 73.6 million in cash . the reduction from 2018 was primarily due to lower net income due to lower commodity prices . investing activities used $ 85.0 million in 2019 primarily for the development of our existing properties and leasehold acquisitions . cash expenditures for the year ended december 31 , 2019 included a decrease in the accounts payable balance related to capital expenditures of $ 16.5 million , and an increase in our asset retirement obligation liability of $ 0.8 million , resulting in accrual based capital expenditures , net of dispositions of $ 23.4 million , incurred during the period of $ 93.0 million . financing activities provided $ 10.5 million primarily from net borrowings under our first lien credit facility and second lien credit facility . 43 story_separator_special_tag `` times new roman `` , times , serif ; font-size : 10pt ; margin : 0px ; text-align : justify ; ' > outstanding amounts under the first lien credit facility accrue interest at a rate per annum equal to ( a ) ( i ) for borrowings that we elect to accrue interest at the reference rate at the greater of ( x ) the reference rate announced from time to time by société générale , ( y ) the federal funds rate plus 0.5 % , and ( z ) daily one-month libor plus , in each case , 1.5 % -2.5 % , depending on the utilization of the borrowing base , and ( ii ) for borrowings that we elect to accrue interest at the eurodollar rate , libor plus 2.5 % -3.5 % depending on the utilization of the borrowing base , and ( b ) at any time an event of default exists , 3.0 % plus the amounts set forth above . at december 31 , 2020 , the interest rate on the first lien credit facility was approximately 3.6 % . subject to earlier termination rights and events of default , the stated maturity date of the first lien credit facility is may 16 , 2022. interest is payable quarterly on reference rate advances and not less than quarterly on libor advances . the company is permitted to terminate the first lien credit facility and is able , from time to time , to permanently reduce the lenders ' aggregate commitment under the first lien credit facility in compliance with certain notice and dollar increment requirements . each of the company 's subsidiaries has guaranteed our obligations under the first lien credit facility on a senior secured basis . obligations under the first lien credit facility are secured by a first priority perfected security interest , subject to certain permitted encumbrances , in all of the company and its subsidiary guarantors ' material property and assets . as of december 31 , 2020 , the collateral is required to include properties comprising at least 90 % of the pv-9 of the company 's proven reserves and 95 % of the pv-9 of the company 's pdp reserves . under the amended first lien credit facility , the company is subject to customary covenants , including financial covenants and reporting covenants . the amendment to the first lien credit facility dated june 25 , 2020 ( the `` 1l amendment `` ) modified certain provisions of the first lien credit facility , including ( i ) the addition of monthly mandatory prepayments from excess cash ( defined as available cash minus certain cash set-asides and a $ 3.0 million working capital reserve ) with corresponding reductions to the borrowing base ; ( ii ) the elimination of scheduled redeterminations ( which were previously made every six months ) and interim redeterminations ( which were previously made at the request of the lenders no more than once in the six month period between scheduled redeterminations ) of the borrowing base ; ( iii ) the replacement of total debt leverage

net cash provided by operating activities of $ 360.8 million in fiscal year 2015 was partially offset by the aggregate amount of cash used in investing and financing activities of $ 293.8 million and $ 64.0 million , respectively , resulting in a $ 13.0 million increase in cash and cash equivalents since the end of fiscal year 2014 . during fiscal year 2015 , net cash provided by operating activities consisted primarily of net income of $ 229.9 million and non-cash activities of $ 130.8 million . during fiscal year 2015 , net cash used in investing activities was primarily driven by $ 220.2 million of business acquisitions , net of cash acquired and $ 80.0 million in capital expenditures . during fiscal year 2015 , net cash used in financing activities was principally comprised of $ 231.3 million of common stock acquisitions , partially offset by $ 180.2 million of net borrowings on our credit facilities . 45 accounts receivable decreased by 13.9 % to $ 370.8 million during fiscal year 2015 compared to $ 430.5 million at the end of the prior fiscal year , primarily as a result of increased collection efforts and lower sales volume . average days sales outstanding for our wholesale business for fiscal year 2015 was 49 days compared to 52 days in the prior fiscal year . inventory at the end of fiscal year 2015 was $ 625.3 million , representing an increase of 4.7 % from the prior fiscal year inventory balance of $ 597.3 million largely driven by new businesses and brands added during fiscal year 2015. the following tables reflect our common stock repurchase activity under our repurchase programs for the periods indicated ( in millions ) : replace_table_token_17_th ( 1 ) in the first quarter of fiscal year 2015 , the company completed this repurchase plan . we effectively retired 2.7 million shares of repurchased common stock under our repurchase programs during fiscal year 2015 . we account for the retirements by allocating the repurchase price , which is based upon the equity contribution associated with historical issuances , to common stock , additional paid-in capital and retained earnings .

if oil and gas prices decline , our revenues , profitability and cash flows from operations will also likely decrease which could cause us to alter our business plans , including reducing our drilling activities . such declines will require us to write down the carrying value of our oil and gas assets which will also cause a reduction in net income . the realized prices that we receive for our production differ from nymex futures and spot market prices , principally due to : basis differentials which are dependent on actual delivery location ; adjustments for btu content ; quality of the hydrocarbons ; and gathering , processing and transportation costs . the following table sets forth our average differentials for the years ended december 31 , 2019 and 2020 : replace_table_token_12_th _ ( 1 ) average realized prices are before the impact of hedging activities . the company 's derivative contracts as of december 31 , 2020 and december 31 , 2019 consisted of nymex-based fixed price swaps and basis differential swaps . under fixed price swaps , we receive a fixed price for our production and pay a variable market price to the contract counter-party . 38 as of december 31 , 2020 , we had nymex-based fixed price commodity swap arrangements , on approximately 88 % of the oil production from our estimated net proved developed producing reserves ( as of december 31 , 2020 ) through december 31 , 2021 , 96 % for 2022 , 72 % for 2023 and 88 % for 2024. by removing a portion of price volatility on our future oil and gas production , we believe we will mitigate , but not eliminate , the potential effects of changing commodity prices on our cash flows from operations for those periods . however , when prevailing market prices are higher than our contract prices , we will not realize increased cash flows on the portion of the production that has been hedged . we have in the past and will in the future sustain losses on both open and settled derivative contracts if market prices are higher than our contract prices . conversely , when prevailing market prices are lower than our contract prices , we will sustain realized and unrealized gains on our commodity derivative contracts . in 2020 , we recorded a gain of $ 42.9 million , consisting of a gain of $ 17.5 million on closed contracts and a gain of $ 25.4 million related to open contracts . in 2019 , we recognized a loss of $ 26.8 million , consisting of a loss of $ 6.0 million on closed contracts and a loss of $ 20.8 million related to open contracts . we have not designated any of these derivative contracts as a hedge as permitted by applicable accounting rules if certain conditions are met . substantially all of our hedging contracts were terminated subsequent to march 31 , 2021. see note 14 `` subseqemt events `` . the following table sets forth our derivative contracts at december 31 , 2020 : replace_table_token_13_th at december 31 , 2020 , the aggregate fair market value of our commodity derivative contracts was an asset of approximately $ 19.4 million . in april 2021 , we received notice that certain of our hedging agreements were being terminated as a result of events of default under the first lien credit facility , and we voluntarily terminated most of our other hedging arrangements . as a result of the settlement of the terminated hedges , we have outstanding obligations of $ 9.9 million . the settlement values of the terminated hedges were determined at various dates between april 15 and april 30 , 2021. these obligations will be added to the balance of the first lien credit facility and accrue interest at the default interest rate , currently 6.7 % , until repaid . our remaining hedging agreements may also be terminated as a result of such events of default . the settlement of terminated hedging agreements may result in losses and limit our ability to reduce exposure to adverse fluctuations in oil and gas prices . see note 14 “ subsequent events ” for current information regarding non-compliance with certain covenants . production volumes . our proved reserves will decline as oil and gas is produced , unless we find , acquire or develop additional properties containing proved reserves or conduct successful exploration and development activities . based on the reserve information set forth in our reserve report as of december 31 , 2020 , our average annual estimated decline rate for our net proved developed producing reserves is 39 % , 18 % , 14 % , 13 % and 12 % in 2021 , 2022 , 2023 , 2024 and 2025 , respectively , 9 % in the following five years , and approximately 9 % thereafter . these rates of decline are estimates and actual production declines could be materially higher . while we have had some success in finding , acquiring and developing additional reserves , we have not always been able to fully replace the production volumes lost from natural field declines and property sales . our ability to acquire or find additional reserves in the future will be dependent , in part , upon the amount of available funds for acquisition , exploration and development projects . the decline in oil prices that occurred in march 2020 , resulted in the suspension of our 2020 drilling program as well as shutting in production for some period of time . both of these events impacted our production volumes and will impact them going forward . story_separator_special_tag the table below sets forth the components of these capital expenditures : replace_table_token_15_th 42 during 2020 capital expenditures were primarily expenditures on our existing properties , designed to reduce lease operating expense , such as purchasing certain equipment as opposed to renting . we also performed extensive workovers on several wells in 2020. in 2019 , capital expenditures were for the exploration and development of our existing properties . the level of capital expenditures will vary during future periods depending on economic and industry conditions and commodity prices . should the prices of oil and gas decline and if our costs of operations increase or if our production volumes decrease , our cash flows from operations will decrease which may result in a reduction of capital expenditure . due to capital expenditure limits imposed by our credit facilities , we have not adopted a capital drilling budget for 2021 , but do intend to complete the six previously drilled wells in the bakken . if we can not incur significant capital expenditure , we will not be able to offset oil and gas production decreases caused by natural field declines . sources and uses of capital . the net funds provided by and or used in each of the operating , investing and financing activities are summarized in the following table and discussed in further detail below : replace_table_token_16_th operating activities for the year ended december 31 , 2020 provided $ 16.0 million in cash compared to $ 73.6 million in 2019. the reduction was primarily due to lower net income due to lower commodity prices and lower production volumes . investing activities used $ 12.6 million in 2020 primarily for the development of our existing properties . cash expenditures for the year ended december 31 , 2020 included a decrease in the accounts payable balance related to capital expenditures of $ 7.2 million , resulting in accrual based capital expenditures incurred during the period of $ 5.4 million . operating activities for the year ended december 31 , 2019 provided $ 73.6 million in cash . the reduction from 2018 was primarily due to lower net income due to lower commodity prices . investing activities used $ 85.0 million in 2019 primarily for the development of our existing properties and leasehold acquisitions . cash expenditures for the year ended december 31 , 2019 included a decrease in the accounts payable balance related to capital expenditures of $ 16.5 million , and an increase in our asset retirement obligation liability of $ 0.8 million , resulting in accrual based capital expenditures , net of dispositions of $ 23.4 million , incurred during the period of $ 93.0 million . financing activities provided $ 10.5 million primarily from net borrowings under our first lien credit facility and second lien credit facility . 43 story_separator_special_tag `` times new roman `` , times , serif ; font-size : 10pt ; margin : 0px ; text-align : justify ; ' > outstanding amounts under the first lien credit facility accrue interest at a rate per annum equal to ( a ) ( i ) for borrowings that we elect to accrue interest at the reference rate at the greater of ( x ) the reference rate announced from time to time by société générale , ( y ) the federal funds rate plus 0.5 % , and ( z ) daily one-month libor plus , in each case , 1.5 % -2.5 % , depending on the utilization of the borrowing base , and ( ii ) for borrowings that we elect to accrue interest at the eurodollar rate , libor plus 2.5 % -3.5 % depending on the utilization of the borrowing base , and ( b ) at any time an event of default exists , 3.0 % plus the amounts set forth above . at december 31 , 2020 , the interest rate on the first lien credit facility was approximately 3.6 % . subject to earlier termination rights and events of default , the stated maturity date of the first lien credit facility is may 16 , 2022. interest is payable quarterly on reference rate advances and not less than quarterly on libor advances . the company is permitted to terminate the first lien credit facility and is able , from time to time , to permanently reduce the lenders ' aggregate commitment under the first lien credit facility in compliance with certain notice and dollar increment requirements . each of the company 's subsidiaries has guaranteed our obligations under the first lien credit facility on a senior secured basis . obligations under the first lien credit facility are secured by a first priority perfected security interest , subject to certain permitted encumbrances , in all of the company and its subsidiary guarantors ' material property and assets . as of december 31 , 2020 , the collateral is required to include properties comprising at least 90 % of the pv-9 of the company 's proven reserves and 95 % of the pv-9 of the company 's pdp reserves . under the amended first lien credit facility , the company is subject to customary covenants , including financial covenants and reporting covenants . the amendment to the first lien credit facility dated june 25 , 2020 ( the `` 1l amendment `` ) modified certain provisions of the first lien credit facility , including ( i ) the addition of monthly mandatory prepayments from excess cash ( defined as available cash minus certain cash set-asides and a $ 3.0 million working capital reserve ) with corresponding reductions to the borrowing base ; ( ii ) the elimination of scheduled redeterminations ( which were previously made every six months ) and interim redeterminations ( which were previously made at the request of the lenders no more than once in the six month period between scheduled redeterminations ) of the borrowing base ; ( iii ) the replacement of total debt leverage

future capital resources . our principal sources of capital going forward , are cash flows from operations , proceeds from the sale of properties , monetizing of derivative instruments and if an opportunity presents itself , the sale of debt or equity securities , although we may not be able to complete financing on terms acceptable to us , if at all . cash from operating activities is dependent upon commodity prices and production volumes . a decrease in commodity prices from current levels would likely reduce our cash flows from operations . this could cause us to alter our business plans , including reducing our exploration and development plans . unless we otherwise expand and develop reserves , our production volumes may decline as reserves are produced . in the future we may continue to sell producing properties , which could further reduce our production volumes . to offset the loss in production volumes resulting from natural field declines and sales of producing properties , we must conduct successful exploration and development activities , acquire additional producing properties or identify and develop additional behind-pipe zones or secondary recovery reserves . we believe our numerous drilling opportunities will allow us to increase our production volumes ; however , our drilling activities are subject to numerous risks , including the risk that no commercially productive oil and gas reservoirs will be found .

to meet our debt service obligations and other cash needs ; changes in capital deployment opportunities ; our ability to maintain effective controls over financial reporting ; our ability to continue to recruit and retain productive agents and distribution partners ; customer response to new products , distribution channels and marketing initiatives ; our ability to achieve additional upgrades of the financial strength ratings of cno and our insurance company subsidiaries as well as the impact of our ratings on our business , our ability to access capital , and the cost of capital ; regulatory changes or actions , including : those relating to regulation of the financial affairs of our insurance companies , such as the calculation of risk-based capital and minimum capital requirements , and payment of dividends and surplus debenture interest to us ; regulation of the sale , underwriting and pricing of products ; and health care regulation affecting health insurance products ; changes in the federal income tax laws and regulations which may affect or eliminate the relative tax advantages of some of our products or affect the value of our deferred tax assets ; availability and effectiveness of reinsurance arrangements , as well as the impact of any defaults or failure of reinsurers to perform ; the amount we may need to pay to a reinsurer and the earnings charge we may incur in connection with a long-term care reinsurance transaction ; the performance of third party service providers and potential difficulties arising from outsourcing arrangements ; the growth rate of sales , collected premiums , annuity deposits and assets ; interruption in telecommunication , information technology or other operational systems or failure to maintain the security , confidentiality or privacy of sensitive data on such systems ; events of terrorism , cyber attacks , natural disasters or other catastrophic events , including losses from a disease pandemic ; ineffectiveness of risk management policies and procedures in identifying , monitoring and managing risks ; and the risk factors or uncertainties listed from time to time in our filings with the sec . other factors and assumptions not identified above are also relevant to the forward-looking statements , and if they prove incorrect , could also cause actual results to differ materially from those projected . all written or oral forward-looking statements attributable to us are expressly qualified in their entirety by the foregoing cautionary statement . our forward-looking statements speak only as of the date made . we assume no obligation to update or to publicly announce the results of any revisions to any of the forward-looking statements to reflect actual results , future events or developments , changes in assumptions or changes in other factors affecting the forward-looking statements . 48 the reporting of rbc measures is not intended for the purpose of ranking any insurance company or for use in connection with any marketing , advertising or promotional activities . overview we are a holding company for a group of insurance companies operating throughout the united states that develop , market and administer health insurance , annuity , individual life insurance and other insurance products . we focus on serving the senior and middle-income markets , which we believe are attractive , underserved , high growth markets . we sell our products through three distribution channels : career agents , independent producers ( some of whom sell one or more of our product lines exclusively ) and direct marketing . we measure segment performance by excluding the loss on reinsurance transaction , net realized investment gains ( losses ) , fair value changes in embedded derivative liabilities ( net of related amortization ) , fair value changes and amendment related to the agent deferred compensation plan , loss on extinguishment of debt , income taxes and other non-operating items consisting primarily of equity in earnings of certain non-strategic investments and earnings attributable to vies ( `` pre-tax operating earnings `` ) because we believe that this performance measure is a better indicator of the ongoing business and trends in our business . our primary investment focus is on investment income to support our liabilities for insurance products as opposed to the generation of net realized investment gains ( losses ) , and a long-term focus is necessary to maintain profitability over the life of the business . the loss on reinsurance transaction , net realized investment gains ( losses ) , fair value changes in embedded derivative liabilities ( net of related amortization ) , fair value changes and amendment related to the agent deferred compensation plan , loss on extinguishment of debt and other non-operating items consisting primarily of equity in earnings of certain non-strategic investments and earnings attributable to vies depend on market conditions or represent unusual items that do not necessarily relate to the underlying business of our segments . net realized investment gains ( losses ) and fair value changes in embedded derivative liabilities ( net of related amortization ) may affect future earnings levels since our underlying business is long-term in nature and changes in our investment portfolio may impact our ability to earn the assumed interest rates needed to maintain the profitability of our business . in the fourth quarter of 2016 , we began reporting the long-term care block recaptured from bre as further described in `` management 's discussion and analysis of consolidated financial condition and results of operations - consolidated financial condition - termination of long-term care reinsurance agreements and recapture of related long-term care business in run-off `` as an additional business segment . the company 's insurance segments are described below : bankers life , which markets and distributes medicare supplement insurance , interest-sensitive life insurance , traditional life insurance , fixed annuities and long-term care insurance products to the middle-income senior market through a dedicated field force of career agents , financial and investment advisors , and sales managers supported by a network of community-based sales offices . story_separator_special_tag financial liabilities in this category include our insurance liabilities for interest-sensitive products , which includes embedded derivatives ( including embedded derivatives related to our fixed index annuity products and to a modified coinsurance arrangement ) since their values include significant unobservable inputs including actuarial assumptions . at each reporting date , we classify assets and liabilities into the three input levels based on the lowest level of input that is significant to the measurement of fair value for each asset and liability reported at fair value . this classification is impacted by a number of factors , including the type of financial instrument , whether the financial instrument is new to the market and not yet established , the characteristics specific to the transaction and overall market conditions . our assessment of the significance of a particular input to the fair value measurement and the ultimate classification of each asset and liability requires judgment and is subject to change from period to period based on the observability of the valuation inputs . below-investment grade corporate debt securities typically have different characteristics than investment grade corporate debt securities . based on historical performance , probability of default by the borrower is significantly greater for below-investment grade corporate debt securities and in many cases severity of loss is relatively greater as such securities are generally unsecured and often subordinated to other indebtedness of the issuer . also , issuers of below-investment grade corporate debt securities frequently have higher levels of debt relative to investment-grade issuers , hence , all other things being equal , are generally more sensitive to adverse economic conditions . the company attempts to reduce the overall risk related to its investment in below-investment grade securities , as in all investments , through careful credit analysis , strict investment policy guidelines , and diversification by issuer and or guarantor and by industry . our fixed maturity investments are generally purchased in the context of long-term strategies , including funding insurance liabilities , so we do not generally seek to generate short-term realized gains through the purchase and sale of such securities . in certain circumstances , including those in which securities are selling at prices which exceed our view of their underlying economic value , or when it is possible to reinvest the proceeds to better meet our long-term asset-liability objectives , we may sell certain securities . during 2017 , we sold $ 427.6 million of fixed maturity investments which resulted in gross investment losses ( before income taxes ) of $ 24.2 million . we actively manage the relationship between the duration and cash flows of our invested assets and the estimated duration and cash flows of benefit payments arising from contract liabilities . these efforts may cause us to sell investments before their maturity date and could result in the realization of net realized investment gains ( losses ) . when the estimated durations of assets and liabilities are similar , the effect of changes in market interest rates shall have largely offsetting effects on the value of the related assets and liabilities . in certain circumstances , a mismatch of the durations or related cash flows of invested assets and insurance liabilities could have a significant impact on our results of operations and financial position . for more information on our investment portfolio and our critical accounting policies related to investments , see the note to our consolidated financial statements entitled `` investments `` . 54 present value of future profits and deferred acquisition costs in conjunction with the implementation of fresh start accounting , we eliminated the historical balances of our predecessor 's deferred acquisition costs and the present value of future profits and replaced them with the present value of future profits as calculated on the effective date . the value assigned to the right to receive future cash flows from contracts existing at the effective date is referred to as the present value of future profits . the balance of this account is amortized , evaluated for recovery , and adjusted for the impact of unrealized gains ( losses ) in the same manner as the deferred acquisition costs described below . we expect to amortize the balance of the present value of future profits as of december 31 , 2017 as follows : 11 percent in 2018 , 10 percent in 2019 , 9 percent in 2020 , 7 percent in 2021 and 7 percent in 2022 . deferred acquisition costs represent incremental direct costs related to the successful acquisition of new or renewal insurance contracts . for interest-sensitive life or annuity products , we amortize these costs in relation to the estimated gross profits using the interest rate credited to the underlying policies . for other products , we generally amortize these costs in relation to future anticipated premium revenue using the projected investment earnings rate . insurance acquisition costs are amortized to expense over the lives of the underlying policies in relation to future anticipated premiums or gross profits . the insurance acquisition costs for policies other than interest-sensitive life and annuity products are amortized with interest ( using the projected investment earnings rate ) over the estimated premium-paying period of the policies , in a manner which recognizes amortization expense in proportion to each year 's premium income . the insurance acquisition costs for interest-sensitive life and annuity products are amortized with interest ( using the interest rate credited to the underlying policy ) in proportion to estimated gross profits . the interest , mortality , morbidity and persistency assumptions used to amortize insurance acquisition costs are consistent with those assumptions used to estimate liabilities for insurance products . for interest-sensitive life and annuity products , these assumptions are reviewed on a regular basis . when actual profits or our current best estimates of future profits are different from previous estimates , we adjust cumulative amortization of insurance acquisition costs to maintain amortization expense as a constant percentage

future capital resources . our principal sources of capital going forward , are cash flows from operations , proceeds from the sale of properties , monetizing of derivative instruments and if an opportunity presents itself , the sale of debt or equity securities , although we may not be able to complete financing on terms acceptable to us , if at all . cash from operating activities is dependent upon commodity prices and production volumes . a decrease in commodity prices from current levels would likely reduce our cash flows from operations . this could cause us to alter our business plans , including reducing our exploration and development plans . unless we otherwise expand and develop reserves , our production volumes may decline as reserves are produced . in the future we may continue to sell producing properties , which could further reduce our production volumes . to offset the loss in production volumes resulting from natural field declines and sales of producing properties , we must conduct successful exploration and development activities , acquire additional producing properties or identify and develop additional behind-pipe zones or secondary recovery reserves . we believe our numerous drilling opportunities will allow us to increase our production volumes ; however , our drilling activities are subject to numerous risks , including the risk that no commercially productive oil and gas reservoirs will be found .

to meet our debt service obligations and other cash needs ; changes in capital deployment opportunities ; our ability to maintain effective controls over financial reporting ; our ability to continue to recruit and retain productive agents and distribution partners ; customer response to new products , distribution channels and marketing initiatives ; our ability to achieve additional upgrades of the financial strength ratings of cno and our insurance company subsidiaries as well as the impact of our ratings on our business , our ability to access capital , and the cost of capital ; regulatory changes or actions , including : those relating to regulation of the financial affairs of our insurance companies , such as the calculation of risk-based capital and minimum capital requirements , and payment of dividends and surplus debenture interest to us ; regulation of the sale , underwriting and pricing of products ; and health care regulation affecting health insurance products ; changes in the federal income tax laws and regulations which may affect or eliminate the relative tax advantages of some of our products or affect the value of our deferred tax assets ; availability and effectiveness of reinsurance arrangements , as well as the impact of any defaults or failure of reinsurers to perform ; the amount we may need to pay to a reinsurer and the earnings charge we may incur in connection with a long-term care reinsurance transaction ; the performance of third party service providers and potential difficulties arising from outsourcing arrangements ; the growth rate of sales , collected premiums , annuity deposits and assets ; interruption in telecommunication , information technology or other operational systems or failure to maintain the security , confidentiality or privacy of sensitive data on such systems ; events of terrorism , cyber attacks , natural disasters or other catastrophic events , including losses from a disease pandemic ; ineffectiveness of risk management policies and procedures in identifying , monitoring and managing risks ; and the risk factors or uncertainties listed from time to time in our filings with the sec . other factors and assumptions not identified above are also relevant to the forward-looking statements , and if they prove incorrect , could also cause actual results to differ materially from those projected . all written or oral forward-looking statements attributable to us are expressly qualified in their entirety by the foregoing cautionary statement . our forward-looking statements speak only as of the date made . we assume no obligation to update or to publicly announce the results of any revisions to any of the forward-looking statements to reflect actual results , future events or developments , changes in assumptions or changes in other factors affecting the forward-looking statements . 48 the reporting of rbc measures is not intended for the purpose of ranking any insurance company or for use in connection with any marketing , advertising or promotional activities . overview we are a holding company for a group of insurance companies operating throughout the united states that develop , market and administer health insurance , annuity , individual life insurance and other insurance products . we focus on serving the senior and middle-income markets , which we believe are attractive , underserved , high growth markets . we sell our products through three distribution channels : career agents , independent producers ( some of whom sell one or more of our product lines exclusively ) and direct marketing . we measure segment performance by excluding the loss on reinsurance transaction , net realized investment gains ( losses ) , fair value changes in embedded derivative liabilities ( net of related amortization ) , fair value changes and amendment related to the agent deferred compensation plan , loss on extinguishment of debt , income taxes and other non-operating items consisting primarily of equity in earnings of certain non-strategic investments and earnings attributable to vies ( `` pre-tax operating earnings `` ) because we believe that this performance measure is a better indicator of the ongoing business and trends in our business . our primary investment focus is on investment income to support our liabilities for insurance products as opposed to the generation of net realized investment gains ( losses ) , and a long-term focus is necessary to maintain profitability over the life of the business . the loss on reinsurance transaction , net realized investment gains ( losses ) , fair value changes in embedded derivative liabilities ( net of related amortization ) , fair value changes and amendment related to the agent deferred compensation plan , loss on extinguishment of debt and other non-operating items consisting primarily of equity in earnings of certain non-strategic investments and earnings attributable to vies depend on market conditions or represent unusual items that do not necessarily relate to the underlying business of our segments . net realized investment gains ( losses ) and fair value changes in embedded derivative liabilities ( net of related amortization ) may affect future earnings levels since our underlying business is long-term in nature and changes in our investment portfolio may impact our ability to earn the assumed interest rates needed to maintain the profitability of our business . in the fourth quarter of 2016 , we began reporting the long-term care block recaptured from bre as further described in `` management 's discussion and analysis of consolidated financial condition and results of operations - consolidated financial condition - termination of long-term care reinsurance agreements and recapture of related long-term care business in run-off `` as an additional business segment . the company 's insurance segments are described below : bankers life , which markets and distributes medicare supplement insurance , interest-sensitive life insurance , traditional life insurance , fixed annuities and long-term care insurance products to the middle-income senior market through a dedicated field force of career agents , financial and investment advisors , and sales managers supported by a network of community-based sales offices . story_separator_special_tag financial liabilities in this category include our insurance liabilities for interest-sensitive products , which includes embedded derivatives ( including embedded derivatives related to our fixed index annuity products and to a modified coinsurance arrangement ) since their values include significant unobservable inputs including actuarial assumptions . at each reporting date , we classify assets and liabilities into the three input levels based on the lowest level of input that is significant to the measurement of fair value for each asset and liability reported at fair value . this classification is impacted by a number of factors , including the type of financial instrument , whether the financial instrument is new to the market and not yet established , the characteristics specific to the transaction and overall market conditions . our assessment of the significance of a particular input to the fair value measurement and the ultimate classification of each asset and liability requires judgment and is subject to change from period to period based on the observability of the valuation inputs . below-investment grade corporate debt securities typically have different characteristics than investment grade corporate debt securities . based on historical performance , probability of default by the borrower is significantly greater for below-investment grade corporate debt securities and in many cases severity of loss is relatively greater as such securities are generally unsecured and often subordinated to other indebtedness of the issuer . also , issuers of below-investment grade corporate debt securities frequently have higher levels of debt relative to investment-grade issuers , hence , all other things being equal , are generally more sensitive to adverse economic conditions . the company attempts to reduce the overall risk related to its investment in below-investment grade securities , as in all investments , through careful credit analysis , strict investment policy guidelines , and diversification by issuer and or guarantor and by industry . our fixed maturity investments are generally purchased in the context of long-term strategies , including funding insurance liabilities , so we do not generally seek to generate short-term realized gains through the purchase and sale of such securities . in certain circumstances , including those in which securities are selling at prices which exceed our view of their underlying economic value , or when it is possible to reinvest the proceeds to better meet our long-term asset-liability objectives , we may sell certain securities . during 2017 , we sold $ 427.6 million of fixed maturity investments which resulted in gross investment losses ( before income taxes ) of $ 24.2 million . we actively manage the relationship between the duration and cash flows of our invested assets and the estimated duration and cash flows of benefit payments arising from contract liabilities . these efforts may cause us to sell investments before their maturity date and could result in the realization of net realized investment gains ( losses ) . when the estimated durations of assets and liabilities are similar , the effect of changes in market interest rates shall have largely offsetting effects on the value of the related assets and liabilities . in certain circumstances , a mismatch of the durations or related cash flows of invested assets and insurance liabilities could have a significant impact on our results of operations and financial position . for more information on our investment portfolio and our critical accounting policies related to investments , see the note to our consolidated financial statements entitled `` investments `` . 54 present value of future profits and deferred acquisition costs in conjunction with the implementation of fresh start accounting , we eliminated the historical balances of our predecessor 's deferred acquisition costs and the present value of future profits and replaced them with the present value of future profits as calculated on the effective date . the value assigned to the right to receive future cash flows from contracts existing at the effective date is referred to as the present value of future profits . the balance of this account is amortized , evaluated for recovery , and adjusted for the impact of unrealized gains ( losses ) in the same manner as the deferred acquisition costs described below . we expect to amortize the balance of the present value of future profits as of december 31 , 2017 as follows : 11 percent in 2018 , 10 percent in 2019 , 9 percent in 2020 , 7 percent in 2021 and 7 percent in 2022 . deferred acquisition costs represent incremental direct costs related to the successful acquisition of new or renewal insurance contracts . for interest-sensitive life or annuity products , we amortize these costs in relation to the estimated gross profits using the interest rate credited to the underlying policies . for other products , we generally amortize these costs in relation to future anticipated premium revenue using the projected investment earnings rate . insurance acquisition costs are amortized to expense over the lives of the underlying policies in relation to future anticipated premiums or gross profits . the insurance acquisition costs for policies other than interest-sensitive life and annuity products are amortized with interest ( using the projected investment earnings rate ) over the estimated premium-paying period of the policies , in a manner which recognizes amortization expense in proportion to each year 's premium income . the insurance acquisition costs for interest-sensitive life and annuity products are amortized with interest ( using the interest rate credited to the underlying policy ) in proportion to estimated gross profits . the interest , mortality , morbidity and persistency assumptions used to amortize insurance acquisition costs are consistent with those assumptions used to estimate liabilities for insurance products . for interest-sensitive life and annuity products , these assumptions are reviewed on a regular basis . when actual profits or our current best estimates of future profits are different from previous estimates , we adjust cumulative amortization of insurance acquisition costs to maintain amortization expense as a constant percentage

interest expense on corporate debt has been primarily impacted by : ( i ) the debt refinancing transactions completed in may 2015 ; and ( ii ) the timing and amount of debt repayments in 2015 , along with the mix of interest rates on the related outstanding borrowings . such transactions are further discussed in the note to the consolidated financial statements entitled `` notes payable - direct corporate obligations '' . our average corporate debt outstanding was $ 925.0 million , $ 925.0 million and $ 888.6 million in 2017 , 2016 and 2015 , respectively . the average interest rate on our debt was 4.8 percent , 4.7 percent and 4.7 percent in 2017 , 2016 and 2015 , respectively . interest expense in periods subsequent to the debt refinancing transactions also reflects lower amortization of discount and issuance costs primarily due to the extended maturity profile of the debt incurred in our refinancing transactions . net investment income on general investment portfolio fluctuates based on the amount and type of invested assets in the corporate operations segment . net investment income on other special-purpose portfolios includes the income ( loss ) from : ( i ) investments related to deferred compensation plans held in a rabbi trust ( which is offset by amounts included in other operating costs and expenses as the investment results are allocated to participants ' account balances ) ; ( ii ) trading account activities ; ( iii ) income ( loss ) from coli equal to the difference between the return on these investments ( representing the change in value of the underlying investments ) and our overall portfolio yield ; and ( iv ) other alternative strategies . coli is utilized as an investment vehicle to fund bankers life 's agent deferred compensation plan .

we sell the majority of our services by leading with our engineered solutions , which we believe are highly valued by our select customer base and drive higher margin outcomes . services segment our services primarily include the following categories : specialty contracting , including the design and construction of hvac , plumbing and or electrical systems within commercial and institutional buildings ; general contracting , including construction on projects that primarily involve hvac , plumbing and or electrical ; maintenance of hvac , plumbing and or electrical systems ; service projects for system and equipment upgrades , including energy retrofits ; emergency service work , which we refer to as “ spot work ” ; water treatment ; automatic temperature controls ( “ atc ” ) ; and performance contracting , including significant building energy retrofits . typical maintenance and water treatment agreements range in value from $ 2,500 to over $ 200,000. service projects typically range in value from $ 1,000 to $ 500,000. spot work varies in value and is typically billed at preapproved billing rates . atc projects vary in size from $ 10,000 to over $ 250,000. specialty contracting , general contracting and performance contracting can range from $ 100,000 to $ 100 million . the durations of our contracts generally range from six months to two years . while these ranges are typical for our services , certain projects may be below or above these stated ranges . 29 jobs act we are an “ emerging growth company ” ( “ egc ” ) pursuant to the jumpstart our business act ( “ jobs ” ) . the jobs act contains provisions that , among other things , reduce certain reporting requirements for qualifying companies . under the jobs act , we will remain an egc until the earliest of : december 31 , 2019 ( the last day of the fiscal year following the fifth anniversary of our initial public offering of common equity securities ) ; the last day of the fiscal year in which we have annual gross revenue of $ 1.07 billion or more ; the date on which we have , during the previous three-year period , issued more than $ 1.0 billion in non-convertible debt ; and the date on which we are deemed to be a “ large accelerated filer , ” which will occur at such time as the company has an aggregate worldwide market value of common equity securities held by non-affiliates of $ 700.0 million or more as of the last business day of our most recently completed second fiscal quarter . pursuant to section 107 ( b ) of the jobs act , as an egc we elected to delay adoption of accounting pronouncements newly issued or revised after april 5 , 2012 applicable to public companies until such pronouncements are made applicable to private companies . as a result , our financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies . upon expiration of its egc status , the company would no longer qualify for certain exceptions and would be required to transition to more extensive disclosure obligations and expanded corporate governance requirements , including obtaining an external auditor 's opinion on the effectiveness of internal controls pursuant to item 404 ( b ) of the sarbanes-oxley act of 2002. industry forecast industry forecasting by fmi anticipates continued growth in all of our sectors in the near and midterm . as noted in fmi 's fourth quarter 2018 construction outlook report , our top four sectors healthcare , education , sports & amusement , and transportation are projected to be relatively stable , with growth in line with the rate of inflation through 2022. combining the expansion of the market opportunities , our competitive differentiation and the growth strategies we are employing , we believe we will continue to realize steady sales and improve margin opportunities . trends that could affect the company 's business are discussed in “ risk factors-risks related to our business and industry ” in item 1a . key components of consolidated statements of operations revenue we generate revenue principally from fixed-price construction contracts to deliver hvac , plumbing , and electrical construction services to our customers . the duration of our contracts generally ranges from six months to two years . revenue from fixed price contracts is recognized on the percentage-of-completion method , measured by the relationship of total cost incurred to total estimated contract costs ( cost-to-cost method ) . revenue from time and materials service contracts is recognized as services are performed . we believe that our extensive experience in hvac , plumbing , and electrical projects , and our internal cost review procedures during the bidding process , enable us to reasonably estimate costs and mitigate the risk of cost overruns on fixed price contracts . 30 we generally invoice customers on a monthly basis , based on a schedule of values that breaks down the contract amount into discrete billing items . costs and estimated earnings in excess of billings on uncompleted contracts are recorded as an asset until billable under the contract terms . billings in excess of costs and estimated earnings on uncompleted contracts are recorded as a liability until the related revenue is recognizable . cost of revenue cost of revenue primarily consists of the labor , equipment , material , subcontract , and other job costs in connection with fulfilling the terms of our contracts . labor costs consist of wages plus taxes , fringe benefits , and insurance . equipment costs consist of the ownership and operating costs of company-owned assets , in addition to outside-rented equipment . if applicable , job costs include estimated contract losses to be incurred in future periods . story_separator_special_tag while labor costs associated with these contracts are paid weekly and salary costs associated with the contracts are paid bi-weekly , certain subcontractor costs are generally not paid until we receive payment from our customers ( contractual “ pay-if-paid ” terms ) . we have not historically experienced a large volume of write-offs related to our receivables and our unbilled revenue on contracts in progress . we regularly assess our receivables and costs in excess of billings for collectability and provide allowances for doubtful accounts where appropriate . we believe that our reserves for doubtful accounts are appropriate as of december 31 , 2018 , but adverse changes in the economic environment may impact certain of our customers ' ability to access capital and compensate us for our services , as well as impact project activity for the foreseeable future . the following table represents our summarized working capital information : replace_table_token_7_th * current ratio is calculated by dividing current assets by current liabilities . 38 cash flows provided by ( used in ) operating activities cash flows provided by ( used in ) operating activities were $ 25.3 million for the year ended december 31 , 2018 as compared to $ ( 4.1 ) million for the year ended december 31 , 2017. as compared to the same period in 2017 for the year ended december 31 , 2018 , we experienced increases of $ 6.4 million in our net receivables , $ 22.3 million in billings in excess of costs and estimated earnings on uncompleted contracts ( “ overbilled position ” ) , and $ 6.9 million in accounts payable . the increase in receivables was driven by higher fourth quarter billings year over year associated with 2018 's increase in revenue volume . in addition , the increase in our overbilled position resulted from a combination of favorable billing terms in certain new projects and heightened attention to our billing procedures . stock-based compensation expense from the issuance of restricted stock units was $ 2.2 million for the year ended december 31 , 2018. the increases in other current assets of $ 31.2 million and accrued expenses and other current liabilities of $ 29.5 million are primarily attributable to the $ 30.0 million lawsuit settlement referenced in note 14 – commitments and contingencies in the accompanying notes to consolidated financial statements . the settlement of this matter is being entirely covered by the company 's insurance carriers . our accrued taxes payable at december 31 , 2018 decreased by $ 2.8 million from december 31 , 2017 due to accrued income tax payments made during the period ending december 31 , 2018. for the year ended december 31 , 2017 , we experienced an increase in net receivables of $ 15.6 million and an increase in costs and estimated earnings in excess of billings on uncompleted contracts ( “ underbilled position ” ) of $ 1.0 million along with a decrease in billings in excess of costs and estimated earnings on uncompleted contracts ( “ overbilled position ” ) of $ 10.6 million and an increase in accounts payable of $ 10.4 million . the increase in receivables and payables was due to an increase in revenue volume . our combined 2017 cash usage pertaining to over and underbilled positions was $ 11.7 million , of which $ 11.2 million results from the winding down of three major projects in two of our locations . non-cash charges for depreciation and amortization decreased by $ 3.4 million to $ 5.7 million for the year ended december 31 , 2018 from $ 9.1 million for the year ended december 31 , 2017 due primarily to the amortization of certain intangible assets acquired as part of the acquisition of lhllc becoming fully amortized during the year ended december 31 , 2018. story_separator_special_tag border-bottom : black 1pt solid `` > 40 debt and related obligations credit agreement on july 20 , 2016 , in connection with the business combination , a subsidiary of the company , limbach facility services llc ( “ lfs ” ) entered into the credit agreement ( as amended , the “ credit agreement ” ) . the credit agreement provided for a $ 25.0 million line of credit ( the “ credit agreement revolver ” ) and a $ 24.0 million term loan ( the “ credit agreement term loan ” ) with a consortium of four commercial banks . the loans had a variable interest rate based on one-month libor and were set to expire in july 2021. the loans were subject to certain financial covenants . effective december 31 , 2017 , the company was required to remit an amount equal to 50 % of its excess cash flow ( as defined in the credit agreement ) , which percentage was subject to reduction based on the senior leverage ratio ( as defined therein ) . based on the company 's related computation as of december 31 , 2017 , $ 1.6 million ​was paid to the lenders on may 1 , 2018. this amount was reclassified from long-term debt to the current portion of long-term debt at december 31 , 2017. on january 12 , 2018 , lfs and lhllc entered into the second amendment and limited waiver to the credit agreement ( the “ second amendment and limited waiver ” ) with the lenders party thereto and fifth third bank , as administrative agent . the second amendment and limited waiver provided for a new term loan under the credit agreement in the aggregate principal amount of $ 10.0 million ( the “ bridge term loan ” ) the proceeds of which were used to repurchase the company 's remaining 280,000 shares of class a preferred stock for an aggregate purchase price of $ 9.1 million plus accrued but unpaid dividends of $ 0.9 million . loans under the credit agreement bore interest , at the borrower 's option , at either

interest expense on corporate debt has been primarily impacted by : ( i ) the debt refinancing transactions completed in may 2015 ; and ( ii ) the timing and amount of debt repayments in 2015 , along with the mix of interest rates on the related outstanding borrowings . such transactions are further discussed in the note to the consolidated financial statements entitled `` notes payable - direct corporate obligations '' . our average corporate debt outstanding was $ 925.0 million , $ 925.0 million and $ 888.6 million in 2017 , 2016 and 2015 , respectively . the average interest rate on our debt was 4.8 percent , 4.7 percent and 4.7 percent in 2017 , 2016 and 2015 , respectively . interest expense in periods subsequent to the debt refinancing transactions also reflects lower amortization of discount and issuance costs primarily due to the extended maturity profile of the debt incurred in our refinancing transactions . net investment income on general investment portfolio fluctuates based on the amount and type of invested assets in the corporate operations segment . net investment income on other special-purpose portfolios includes the income ( loss ) from : ( i ) investments related to deferred compensation plans held in a rabbi trust ( which is offset by amounts included in other operating costs and expenses as the investment results are allocated to participants ' account balances ) ; ( ii ) trading account activities ; ( iii ) income ( loss ) from coli equal to the difference between the return on these investments ( representing the change in value of the underlying investments ) and our overall portfolio yield ; and ( iv ) other alternative strategies . coli is utilized as an investment vehicle to fund bankers life 's agent deferred compensation plan .

we sell the majority of our services by leading with our engineered solutions , which we believe are highly valued by our select customer base and drive higher margin outcomes . services segment our services primarily include the following categories : specialty contracting , including the design and construction of hvac , plumbing and or electrical systems within commercial and institutional buildings ; general contracting , including construction on projects that primarily involve hvac , plumbing and or electrical ; maintenance of hvac , plumbing and or electrical systems ; service projects for system and equipment upgrades , including energy retrofits ; emergency service work , which we refer to as “ spot work ” ; water treatment ; automatic temperature controls ( “ atc ” ) ; and performance contracting , including significant building energy retrofits . typical maintenance and water treatment agreements range in value from $ 2,500 to over $ 200,000. service projects typically range in value from $ 1,000 to $ 500,000. spot work varies in value and is typically billed at preapproved billing rates . atc projects vary in size from $ 10,000 to over $ 250,000. specialty contracting , general contracting and performance contracting can range from $ 100,000 to $ 100 million . the durations of our contracts generally range from six months to two years . while these ranges are typical for our services , certain projects may be below or above these stated ranges . 29 jobs act we are an “ emerging growth company ” ( “ egc ” ) pursuant to the jumpstart our business act ( “ jobs ” ) . the jobs act contains provisions that , among other things , reduce certain reporting requirements for qualifying companies . under the jobs act , we will remain an egc until the earliest of : december 31 , 2019 ( the last day of the fiscal year following the fifth anniversary of our initial public offering of common equity securities ) ; the last day of the fiscal year in which we have annual gross revenue of $ 1.07 billion or more ; the date on which we have , during the previous three-year period , issued more than $ 1.0 billion in non-convertible debt ; and the date on which we are deemed to be a “ large accelerated filer , ” which will occur at such time as the company has an aggregate worldwide market value of common equity securities held by non-affiliates of $ 700.0 million or more as of the last business day of our most recently completed second fiscal quarter . pursuant to section 107 ( b ) of the jobs act , as an egc we elected to delay adoption of accounting pronouncements newly issued or revised after april 5 , 2012 applicable to public companies until such pronouncements are made applicable to private companies . as a result , our financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies . upon expiration of its egc status , the company would no longer qualify for certain exceptions and would be required to transition to more extensive disclosure obligations and expanded corporate governance requirements , including obtaining an external auditor 's opinion on the effectiveness of internal controls pursuant to item 404 ( b ) of the sarbanes-oxley act of 2002. industry forecast industry forecasting by fmi anticipates continued growth in all of our sectors in the near and midterm . as noted in fmi 's fourth quarter 2018 construction outlook report , our top four sectors healthcare , education , sports & amusement , and transportation are projected to be relatively stable , with growth in line with the rate of inflation through 2022. combining the expansion of the market opportunities , our competitive differentiation and the growth strategies we are employing , we believe we will continue to realize steady sales and improve margin opportunities . trends that could affect the company 's business are discussed in “ risk factors-risks related to our business and industry ” in item 1a . key components of consolidated statements of operations revenue we generate revenue principally from fixed-price construction contracts to deliver hvac , plumbing , and electrical construction services to our customers . the duration of our contracts generally ranges from six months to two years . revenue from fixed price contracts is recognized on the percentage-of-completion method , measured by the relationship of total cost incurred to total estimated contract costs ( cost-to-cost method ) . revenue from time and materials service contracts is recognized as services are performed . we believe that our extensive experience in hvac , plumbing , and electrical projects , and our internal cost review procedures during the bidding process , enable us to reasonably estimate costs and mitigate the risk of cost overruns on fixed price contracts . 30 we generally invoice customers on a monthly basis , based on a schedule of values that breaks down the contract amount into discrete billing items . costs and estimated earnings in excess of billings on uncompleted contracts are recorded as an asset until billable under the contract terms . billings in excess of costs and estimated earnings on uncompleted contracts are recorded as a liability until the related revenue is recognizable . cost of revenue cost of revenue primarily consists of the labor , equipment , material , subcontract , and other job costs in connection with fulfilling the terms of our contracts . labor costs consist of wages plus taxes , fringe benefits , and insurance . equipment costs consist of the ownership and operating costs of company-owned assets , in addition to outside-rented equipment . if applicable , job costs include estimated contract losses to be incurred in future periods . story_separator_special_tag while labor costs associated with these contracts are paid weekly and salary costs associated with the contracts are paid bi-weekly , certain subcontractor costs are generally not paid until we receive payment from our customers ( contractual “ pay-if-paid ” terms ) . we have not historically experienced a large volume of write-offs related to our receivables and our unbilled revenue on contracts in progress . we regularly assess our receivables and costs in excess of billings for collectability and provide allowances for doubtful accounts where appropriate . we believe that our reserves for doubtful accounts are appropriate as of december 31 , 2018 , but adverse changes in the economic environment may impact certain of our customers ' ability to access capital and compensate us for our services , as well as impact project activity for the foreseeable future . the following table represents our summarized working capital information : replace_table_token_7_th * current ratio is calculated by dividing current assets by current liabilities . 38 cash flows provided by ( used in ) operating activities cash flows provided by ( used in ) operating activities were $ 25.3 million for the year ended december 31 , 2018 as compared to $ ( 4.1 ) million for the year ended december 31 , 2017. as compared to the same period in 2017 for the year ended december 31 , 2018 , we experienced increases of $ 6.4 million in our net receivables , $ 22.3 million in billings in excess of costs and estimated earnings on uncompleted contracts ( “ overbilled position ” ) , and $ 6.9 million in accounts payable . the increase in receivables was driven by higher fourth quarter billings year over year associated with 2018 's increase in revenue volume . in addition , the increase in our overbilled position resulted from a combination of favorable billing terms in certain new projects and heightened attention to our billing procedures . stock-based compensation expense from the issuance of restricted stock units was $ 2.2 million for the year ended december 31 , 2018. the increases in other current assets of $ 31.2 million and accrued expenses and other current liabilities of $ 29.5 million are primarily attributable to the $ 30.0 million lawsuit settlement referenced in note 14 – commitments and contingencies in the accompanying notes to consolidated financial statements . the settlement of this matter is being entirely covered by the company 's insurance carriers . our accrued taxes payable at december 31 , 2018 decreased by $ 2.8 million from december 31 , 2017 due to accrued income tax payments made during the period ending december 31 , 2018. for the year ended december 31 , 2017 , we experienced an increase in net receivables of $ 15.6 million and an increase in costs and estimated earnings in excess of billings on uncompleted contracts ( “ underbilled position ” ) of $ 1.0 million along with a decrease in billings in excess of costs and estimated earnings on uncompleted contracts ( “ overbilled position ” ) of $ 10.6 million and an increase in accounts payable of $ 10.4 million . the increase in receivables and payables was due to an increase in revenue volume . our combined 2017 cash usage pertaining to over and underbilled positions was $ 11.7 million , of which $ 11.2 million results from the winding down of three major projects in two of our locations . non-cash charges for depreciation and amortization decreased by $ 3.4 million to $ 5.7 million for the year ended december 31 , 2018 from $ 9.1 million for the year ended december 31 , 2017 due primarily to the amortization of certain intangible assets acquired as part of the acquisition of lhllc becoming fully amortized during the year ended december 31 , 2018. story_separator_special_tag border-bottom : black 1pt solid `` > 40 debt and related obligations credit agreement on july 20 , 2016 , in connection with the business combination , a subsidiary of the company , limbach facility services llc ( “ lfs ” ) entered into the credit agreement ( as amended , the “ credit agreement ” ) . the credit agreement provided for a $ 25.0 million line of credit ( the “ credit agreement revolver ” ) and a $ 24.0 million term loan ( the “ credit agreement term loan ” ) with a consortium of four commercial banks . the loans had a variable interest rate based on one-month libor and were set to expire in july 2021. the loans were subject to certain financial covenants . effective december 31 , 2017 , the company was required to remit an amount equal to 50 % of its excess cash flow ( as defined in the credit agreement ) , which percentage was subject to reduction based on the senior leverage ratio ( as defined therein ) . based on the company 's related computation as of december 31 , 2017 , $ 1.6 million ​was paid to the lenders on may 1 , 2018. this amount was reclassified from long-term debt to the current portion of long-term debt at december 31 , 2017. on january 12 , 2018 , lfs and lhllc entered into the second amendment and limited waiver to the credit agreement ( the “ second amendment and limited waiver ” ) with the lenders party thereto and fifth third bank , as administrative agent . the second amendment and limited waiver provided for a new term loan under the credit agreement in the aggregate principal amount of $ 10.0 million ( the “ bridge term loan ” ) the proceeds of which were used to repurchase the company 's remaining 280,000 shares of class a preferred stock for an aggregate purchase price of $ 9.1 million plus accrued but unpaid dividends of $ 0.9 million . loans under the credit agreement bore interest , at the borrower 's option , at either

cash flows used in investing activities cash flows used in investing activities were $ 3.7 million for the year ended december 31 , 2018 as compared to $ 3.2 million for the year ended december 31 , 2017. cash used in investing activities for the year ended december 31 , 2018 of $ 3.9 million represented cash outflows for capital additions pertaining to additional vehicles , tools and equipment , computer software and hardware purchases , office furniture and office related leasehold improvements , offset by $ 0.2 million in proceeds from the sale of property and equipment . cash used in investing activities for the year ended december 31 , 2017 of $ 3.2 million represented cash outflows for capital expenditures , offset by $ 0.1 million in proceeds from the sale of property and equipment . during both 2018 and 2017 , we obtained the use of various assets through operating and capital leases , which reduced the level of capital expenditures that would have otherwise been necessary to operate our business . 39 cash flows provided by ( used in ) financing activities cash flows provided by ( used in ) financing activities was $ ( 20.6 ) million for the year ended december 31 , 2018 as compared to $ 0.5 million for the year ended through december 31 , 2017. for the year ended december 31 , 2018 , we borrowed $ 109.7 million and repaid a total of $ 115.3 million on the credit agreement revolver , and borrowed$ 10.0 million under the bridge term loan which was used to redeem the company 's remaining 280,000 preferred shares for $ 10.0 million , including accrued but unpaid dividends of $ 0.9 million .

the acquisition of annie 's in october 2014 significantly expanded our scale and participation in the attractive u.s. natural and organic food category . combined net sales in the u.s. for our portfolio of natural and organic brands exceeded $ 570 million in fiscal 2015. we increased our share of u.s. cereal category measured dollar sales . we increased our share of u.s. yogurt category measured dollar sales , including strong gains in the greek yogurt segment , and renewed sales growth in the regular and child yogurt segments . our international yogurt operations expanded to china with first production and order shipments to the shanghai market commencing near the end of the fiscal year . we generated strong levels of supply chain productivity savings in 2015 through our ongoing holistic margin management ( hmm ) efforts . beyond this program , we began several new cost savings initiatives during the fiscal year . project century is our effort to simplify our north american supply chain . project catalyst is focused on increasing the agility and effectiveness of our u.s. retail and corporate organizations , and we are making changes to various corporate policies and practices to reduce overhead expense . together , these three initiatives generated more than $ 75 million in cost savings during fiscal 2015 , and they are expected to produce a cumulative $ 260 to $ 280 million in savings in fiscal 2016. we delivered strong cash returns to stockholders through dividends of $ 1.67 per share and share repurchases totaling $ 1.2 billion . share repurchase activity in fiscal 2015 and 2014 reduced the average number of diluted shares outstanding in fiscal 2015 by 4 percent from fiscal 2014. a detailed review of our fiscal 2015 performance appears below in the section titled “fiscal 2015 consolidated results of operations.” our sales and earnings growth targets for fiscal 2016 reflect the impact of one less week compared to fiscal 2015. the annie 's business will contribute 6 months of incremental results . we expect foreign currency exchange will continue to have a negative impact on reported results for our international operations , and we expect the operating environment in our large developing markets ( china and brazil ) to remain uncertain . we estimate our input cost inflation for fiscal 2016 at 2 percent . with these assumptions in mind : we expect fiscal 2016 net sales to essentially match 2015 levels in constant currency , reflecting the impact of one less week of business . we expect fiscal 2016 total segment operating profit to increase at a low-single-digit rate in constant currency , as hmm and our more recent cost-saving initiatives increase our efficiency and improve margins . we expect fiscal 2016 adjusted diluted eps to increase at a mid-single-digit rate in constant currency . our fiscal 2016 plans call for continued strong cash returns to stockholders . the current annualized dividend rate of $ 1.76 per share is up 5 percent from the annual dividend paid in 2015. share repurchases in fiscal 2016 are expected to result in a net reduction in average diluted shares outstanding of approximately 1 percent . certain terms used throughout this report are defined in a glossary in item 8 of this report . 18 fiscal 2015 consolidated results of operations fiscal 2015 had 53 weeks compared to 52 weeks in fiscal 2014. fiscal 2015 net sales declined 2 percent to $ 17,630 million and increased 1 percent on a constant-currency basis . in fiscal 2015 , net earnings attributable to general mills were $ 1,221 million , down 33 percent from $ 1,824 million in fiscal 2014 , and we reported diluted eps of $ 1.97 in fiscal 2015 , down 30 percent from $ 2.83 in fiscal 2014. fiscal 2015 results include restructuring-related charges , an indefinite-lived intangible asset impairment charge , tax impact of the repatriation of foreign earnings , losses from the mark-to-market valuation of certain commodity positions and grain inventories , integration costs resulting from the acquisition of annie 's , and the impact of venezuela currency devaluation . fiscal 2014 results include the impact of venezuela currency devaluation , a gain on the divestiture of certain grain elevators , losses from the mark-to-market valuation of certain commodity positions and grain inventories , and restructuring charges related to our fiscal 2012 productivity and cost savings plan . diluted eps excluding these items affecting comparability totaled $ 2.86 in fiscal 2015 , up 1 percent from $ 2.82 in fiscal 2014. diluted eps excluding certain items affecting comparability on a constant-currency basis increased 4 percent compared to fiscal 2014 ( see the “non-gaap measures” section below for a description of our use of these measures not defined by gaap ) . net sales declined 2 percent to $ 17,630 million in fiscal 2015 from $ 17,910 in fiscal 2014. the components of net sales growth are shown in the following table : fiscal 2015 vs. 2014 contributions from volume growth ( a ) ( 1 ) pt net price realization and mix 2 pts foreign currency exchange ( 3 ) pts net sales growth ( 2 ) pts ( a ) measured in tons based on the stated weight of our product shipments . the 53 rd week in fiscal 2015 contributed approximately 1 percentage point of net sales growth , reflecting 1 percentage point of growth from volume . cost of sales increased $ 141 million in fiscal 2015 to $ 11,681 million . in fiscal 2015 , we recorded a $ 90 million net increase in cost of sales related to mark-to-market valuation of certain commodity positions and grain inventories as described in note 7 to the consolidated financial statements in item 8 of this report , compared to a net decrease of $ 49 million in fiscal 2014. in fiscal 2015 , we recorded $ 60 million of restructuring charges in cost of sales . story_separator_special_tag the acquisition of annie 's added 1 percentage point of net sales growth , reflecting 1 percentage point of growth from volume in fiscal 2015. the 53 rd week in fiscal 2015 contributed approximately 1 percentage point of net sales growth , reflecting 1 percentage point of growth from volume . net sales for our u.s. retail operating units are shown in the following table : replace_table_token_7_th 25 u.s. retail net sales percentage change by operating unit are shown in the following table : replace_table_token_8_th segment operating profit of $ 2,159 million in fiscal 2015 declined $ 152 million , or 7 percent , from fiscal 2014. the decrease was primarily driven by lower volume and an increase in supply chain costs , partially offset by a 6 percent reduction in advertising and media expense . segment operating profit of $ 2,312 million in fiscal 2014 declined $ 81 million , or 3 percent , from fiscal 2013. the decrease reflected higher trade spending , partially offset by a 1 percent reduction in advertising and media expense . international segment our international segment consists of retail and foodservice businesses outside of the united states . our product categories include ready-to-eat cereals , shelf stable and frozen vegetables , meal kits , refrigerated and frozen dough products , dessert and baking mixes , frozen pizza snacks , refrigerated yogurt , grain and fruit snacks , and super-premium ice cream and frozen desserts . we also sell super-premium ice cream and frozen desserts directly to consumers through owned retail shops . our international segment also includes products manufactured in the united states for export , mainly to caribbean and latin american markets , as well as products we manufacture for sale to our international joint ventures . revenues from export activities and franchise fees are reported in the region or country where the end customer is located . net sales for our international segment were down 5 percent in fiscal 2015 compared to fiscal 2014 , to $ 5,128 million . net sales totaled $ 5,386 million in fiscal 2014 , up 4 percent from $ 5,200 million in fiscal 2013. the components of international net sales growth are shown in the following table : replace_table_token_9_th ( a ) measured in tons based on the stated weight of our product shipments . the 53 rd week in fiscal 2015 contributed approximately 1 percentage point of net sales growth , reflecting 1 percentage point of growth from volume . 26 net sales for our international segment by geographic region are shown in the following table : replace_table_token_10_th ( a ) fiscal 2013 net sales for the europe region include an additional month of results . international change in net sales by geographic region are shown in the following table : replace_table_token_11_th ( a ) see the “non-gaap measures” section below for our use of this measure . segment operating profit for fiscal 2015 declined 2 percent to $ 523 million from $ 535 million in fiscal 2014 , primarily driven by unfavorable foreign currency exchange and higher input costs , partially offset by favorable net price realization and mix . international segment operating profit increased 9 percent on a constant-currency basis in fiscal 2015 compared to fiscal 2014 ( see the “non-gaap measures” section below for our use of this measure ) . segment operating profit for fiscal 2014 grew 4 percent to $ 535 million from $ 515 million in fiscal 2013 , primarily driven by volume growth , favorable net price realization and mix , and an additional quarter of results from the yoki acquisition , partially offset by unfavorable foreign currency and higher input costs . in addition , we recorded a $ 17 million non-recurring expense related to the assumption of the canadian yoplait franchise license in fiscal 2013. international segment operating profit increased 10 percent on a constant-currency basis in fiscal 2014 compared to fiscal 2013 ( see the “non-gaap measures” section below for our use of this measure ) . convenience stores and foodservice segment in our convenience stores and foodservice segment our major product categories are ready-to-eat cereals , snacks , refrigerated yogurt , frozen breakfasts , unbaked and fully baked frozen dough products , baking mixes , and flour . many products we sell are branded to the consumer and nearly all are branded to our customers . we sell to distributors and operators in many customer channels including foodservice , convenience stores , vending , and supermarket bakeries . substantially all of this segment 's operations are located in the united states . 27 for fiscal 2015 , net sales for our convenience stores and foodservice segment increased 4 percent to $ 1,995 million . for fiscal 2014 , net sales decreased 2 percent to $ 1,919 million compared to $ 1,959 million in fiscal 2013. the components of convenience stores and foodservice net sales growth are shown in the following table : replace_table_token_12_th ( a ) measured in tons based on the stated weight of our product shipments . the 53 rd week in fiscal 2015 contributed approximately 2 percentage points of net sales growth , reflecting 2 percentage points of growth from volume . in fiscal 2015 , segment operating profit was $ 353 million , up 15 percent from $ 307 million in fiscal 2014. the increase was primarily driven by favorable net price realization and mix and higher volume . in fiscal 2014 , segment operating profit was $ 307 million , down 2 percent from $ 315 million in fiscal 2013. the decrease was primarily driven by volume declines , unfavorable net price realization , and investments to protect and grow the business . unallocated corporate items beginning in the first quarter of fiscal 2015 , we changed how we assess segment operating performance to exclude the asset and liability remeasurement impact from hyperinflationary economies . this impact is now included in unallocated corporate items . all periods presented

cash flows used in investing activities cash flows used in investing activities were $ 3.7 million for the year ended december 31 , 2018 as compared to $ 3.2 million for the year ended december 31 , 2017. cash used in investing activities for the year ended december 31 , 2018 of $ 3.9 million represented cash outflows for capital additions pertaining to additional vehicles , tools and equipment , computer software and hardware purchases , office furniture and office related leasehold improvements , offset by $ 0.2 million in proceeds from the sale of property and equipment . cash used in investing activities for the year ended december 31 , 2017 of $ 3.2 million represented cash outflows for capital expenditures , offset by $ 0.1 million in proceeds from the sale of property and equipment . during both 2018 and 2017 , we obtained the use of various assets through operating and capital leases , which reduced the level of capital expenditures that would have otherwise been necessary to operate our business . 39 cash flows provided by ( used in ) financing activities cash flows provided by ( used in ) financing activities was $ ( 20.6 ) million for the year ended december 31 , 2018 as compared to $ 0.5 million for the year ended through december 31 , 2017. for the year ended december 31 , 2018 , we borrowed $ 109.7 million and repaid a total of $ 115.3 million on the credit agreement revolver , and borrowed$ 10.0 million under the bridge term loan which was used to redeem the company 's remaining 280,000 preferred shares for $ 10.0 million , including accrued but unpaid dividends of $ 0.9 million .