(4) Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and all subsidiaries and entities controlled by the Company through the Company’s direct or indirect ownership of a majority interest and/or exclusive rights granted to the Company as the general partner of such entities. The Company has determined that none of its existing management services agreements with its Groups meet the requirements for consolidation of the Groups under U.S. generally accepted accounting principles. Specifically, the Company does not have an equity ownership interest in any of the Groups. Furthermore, the Company’s service agreements specifically do not give the Company “control” of the Groups as the Company does not have exclusive authority over decision making and the Company does not have a financial interest in the Groups. All intercompany accounts and transactions have been eliminated.

Variable Interest Entities

The Company has evaluated certain radiation oncology practices in order to determine if they are variable interest entities (“VIEs”). This evaluation resulted in the Company determining that certain of its radiation oncology practices were potential VIEs. For each of these practices, the Company has evaluated (1) the sufficiency of the fair value of the entity’s equity investments at risk to absorb losses, (2) that, as a group, the holders of the equity investments at risk have (a) the direct or indirect ability through voting rights to make decisions about the entity’s significant activities, (b) the obligation to absorb the expected losses of the entity and that their obligations are not protected directly or indirectly, and (c) the right to receive the expected residual return of the entity, and (3) substantially all of the entity’s activities do not involve or are not conducted on behalf of an investor that has disproportionately fewer voting rights in terms of its obligation to absorb the expected losses or its right to receive expected residual returns of the entity, or both. The Accounting Standards Codification (ASC), 810, Consolidation (ASC 810), requires a company to consolidate VIEs if the company is the primary beneficiary of the activities of those entities. Certain of the Company’s radiation oncology practices are VIEs and the Company has a variable interest in each of these practices through its administrative services agreements. Other of the Company’s radiation oncology practices (primarily consisting of partnerships) are VIEs and the Company has a variable interest in each of these practices because the total equity investment at risk is not sufficient to permit the legal entity to finance its activities without the additional subordinated financial support provided by its members.

In accordance with ASC 810, the Company consolidates certain radiation oncology practices where the Company provides administrative services pursuant to long‑term management agreements. The noncontrolling interests in these entities represent the interests of the physician owners of the oncology practices in the equity and results of operations of these consolidated entities. The Company, through its variable interests in these practices, has the power to direct the activities of these practices that most significantly impact the entity’s economic performance and the Company would absorb a majority of the expected losses of these practices should they occur. Based on these determinations, the Company has consolidated these radiation oncology practices in its consolidated financial statements for all periods presented.

The Company could be obligated, under the terms of the operating agreements governing certain of its joint ventures, upon the occurrence of various fundamental regulatory changes and or upon the occurrence of certain events outside of the Company’s control to purchase some or all of the noncontrolling interests related to the Company’s consolidated subsidiaries. These repurchase requirements would be triggered by, among other things, regulatory changes prohibiting the existing ownership structure. While the Company is not aware of events that would make the occurrence of such a change probable, regulatory changes are outside the control of the Company. Accordingly, the noncontrolling interests subject to these repurchase provisions have been classified outside of equity on the Company’s consolidated balance sheets.

As of December 31, 2014 and 2013, the combined total assets included in the Company’s consolidated balance sheets relating to the VIEs were approximately $114.6 million and $71.3 million, respectively.

As of December 31, 2014 and 2013, the Company was the primary beneficiary of, and therefore consolidated, 27 and 23 VIEs, which operate 45 and 46 centers, respectively. Any significant amounts of assets and liabilities related to the consolidated VIEs are identified parenthetically on the accompanying consolidated balance sheets. The assets are owned by, and the liabilities are obligations of the VIEs, not the Company. Only the VIE’s assets can be used to settle the liabilities of the VIE. The assets are used pursuant to operating agreements established by each VIE. The VIEs are not guarantors of the Company’s debts. In the states of California, Massachusetts, Michigan, Nevada, New York and North Carolina, the Company’s treatment centers are operated as physician office practices. The Company typically provides technical services to these treatment centers in addition to administrative services. For the years ended December 31, 2014, 2013, and 2012, approximately 14.9%, 18.6% and 19.4% of the Company’s net patient service revenue, respectively, was generated by professional corporations with which it has administrative services agreements.

As of December 31, 2014 and 2013, the Company also held equity interests in six VIEs for which the Company is not the primary beneficiary. Those VIEs consist of partnerships that primarily provide radiation oncology services. The Company is not the primary beneficiary of these VIEs as it does not retain the power and rights in the operations of the entities. The Company’s investments in the unconsolidated VIEs are approximately $1.6 million and $2.6 million at December 31, 2014 and 2013, respectively, with ownership interests ranging between 33.3% and 50.1% general partner or equivalent interest. Accordingly, substantially all of these equity investment balances are attributed to the Company’s noncontrolling interests in the unconsolidated partnerships. The Company’s maximum risk of loss related to the investments in these VIEs is limited to the equity interest.

Net Patient Service Revenue and Allowances for Contractual Discounts

The Company has agreements with third‑party payers that provide for payments to the Company at amounts different from its established rates. Net patient service revenue is reported at the estimated net realizable amounts due from patients, third‑party payers and others for services rendered. Net patient service revenue is recognized as services are provided.

Medicare and other governmental programs reimburse physicians based on fee schedules, which are determined by the related government agency. The Company also has agreements with managed care organizations to provide physician services based on negotiated fee schedules. Accordingly, the revenues reported in the Company’s consolidated financial statements are recorded at the amount that is expected to be received.

The Company derives a significant portion of its revenues from Medicare, Medicaid, and other payers that receive discounts from its standard charges. The Company must estimate the total amount of these discounts to prepare its consolidated financial statements. The Medicare and Medicaid regulations and various managed care contracts under which these discounts must be calculated are complex and subject to interpretation and adjustment. The Company estimates the allowance for contractual discounts on a payer class basis given its interpretation of the applicable regulations or contract terms. These interpretations sometimes result in payments that differ from the Company’s estimates. Additionally, updated regulations and contract renegotiations occur frequently necessitating regular review and assessment of the estimation process by management.

On an annual basis the Company performs a hindsight analysis in reviewing estimates to its contractual adjustments and bad debt allowance. The Company’s review of the estimates is based on a full year look‑back of actual adjustments taken in the calculation of the contractual allowance and bad debt allowance. Adjustments to revenue related to changes in prior period estimates decreased net patient service revenue for the year ended December 31, 2014 approximately 0.7% and increased net patient service revenue for the years ended December 31, 2013 and 2012 approximately 0.3% and 0.5%, respectively of the net patient service revenue for each of the respective periods.

For the years ended December 31, 2014, 2013, and 2012, approximately 42%, 45%, and 45%, respectively, of net patient service revenue related to services rendered under the Medicare and Medicaid programs. In the ordinary course of business, the Company is potentially subject to a review by regulatory agencies concerning the accuracy of billings and sufficiency of supporting documentation of procedures performed. Laws and regulations governing the Medicare and Medicaid programs are extremely complex and subject to interpretation. As a result, there is a possibility that such estimates will change by a significant amount in the near term.

In the ordinary course of business, the Company provides services to patients who are financially unable to pay for their care. Accounts written off as charity and indigent care are not recognized in net patient service revenue. The Company’s policy is to write off a patient’s account balance upon determining that the patient qualifies under certain charity care and/or indigent care policies. The Company’s policy includes the completion of an application for eligibility for charity care. The determination for charity care eligibility is based on income relative to federal poverty guidelines, family size, and assets available to the patient. A sliding scale discount is then applied to the balance due with discounts up to 100%. The Company estimates the costs of charity care services it provides by developing a ratio of foregone charity care charges compared to total charges and applying that ratio to the costs of providing services. Costs of providing services includes select direct and indirect costs such as salaries and benefits, medical supplies, facility rent expenses, other operating expenses, general and administrative expenses, depreciation and amortization, provision for doubtful accounts, and interest expense. The Company’s estimated cost to provide charity care services is approximately $21.1 million, $28.3 million, and $16.6 million for the years ended December 31, 2014, 2013, and 2012, respectively. Funds received to offset or subsidize charity services provided were approximately $0.6 million, $1.9 million, and $0.4 million for the years ended December 31, 2014, 2013, and 2012, respectively.

Revenue Recognition

Medical Developers, LLC

The Company recognizes revenue in accordance with FASB ASC Topic 605, Revenue Recognition (“ASC 605”). Accordingly, the Company recognizes revenue when all of the following criteria are met: (i) persuasive evidence of an arrangement exists; (ii) services have been rendered; (iii) the fee is fixed or determinable; and (iv) collectability is reasonably assured. MDL Argentina recognizes revenue at invoicing when it cannot conclude that criteria (ii) or (iii) have been met at an earlier point.

Specifically, the Company has determined that MDL Argentina needs to defer revenue recognition on all of its revenue until those contingencies (evidence that services have been rendered and that the fee is fixed or determinable) have been removed which generally occurs when the invoicing process is complete (negotiations, as applicable, with the insurance company are also complete at invoicing). Accordingly, the Company recognizes net patient revenue at invoicing to the insurer.

Management Fees

The Company’s physician groups receive payments for their services and treatments rendered to patients covered by Medicare, Medicaid, third‑party payors and self‑pay. Revenue consists primarily of net patient service revenue that is recorded based upon established billing rates less allowances for contractual adjustments. Third‑party payors include private health insurance, as well as related payments for co‑insurance and co‑payments. Estimates of contractual allowances for patients with healthcare coverage are based upon the payment terms specified in the related contractual agreements. Revenue related to uninsured patients and co‑payment and deductible amounts for patients who have health care coverage may have discounts applied (uninsured discounts and contractual discounts). The Company also records a provision for bad debts based primarily on historical collection experience related to these uninsured accounts to record the net self‑pay accounts receivable at the estimated amounts it expects to collect. The affiliated physician groups assign their accounts receivable to the Company. Accounts receivable and the related cash flows upon collection of these accounts receivable are reported net of estimated allowances for doubtful accounts and contractual adjustments.

Management fees are recorded at the amount earned by the Company under the management services agreements. Services rendered by the respective Groups are billed by the Company, as the exclusive billing agent of the Groups, to patients, third‑party payors, and others. The Company’s management fees are dependent on the EBITDA (or in one case, revenue) of each treatment center. As such, revenues generated by the Groups significantly impact the amount of management fees recognized by the Company. If differences between the Groups’ revenues and the expected reimbursement are identified based on actual final settlements, there would be an impact to the Company’s management fees. Amounts distributed to the Groups for their services under the terms of the management services agreements totaled $21.5 million and $3.8 million, for the years ended December 31, 2014 and 2013, respectively. As of December 31, 2014 and 2013 amounts payable to the Groups for their services of $2.7 million and $2.6 million, respectively was included in accounts payable.

Cost of Revenues

The cost of revenues for the years ended December 31, 2014, 2013, and 2012 are approximately $744.3 million, $532.2 million, and $483.7 million, respectively. The cost of revenues includes costs related to expenses incurred for the delivery of patient care. These costs include salaries and benefits of physicians, physicists, dosimetrists, radiation technicians, etc., medical supplies, facility rent expenses, other operating expenses, depreciation and amortization.

Accounts Receivable and Allowances for Doubtful Accounts

Accounts receivable in the accompanying consolidated balance sheets are reported net of estimated allowances for doubtful accounts and contractual adjustments. Accounts receivable are uncollateralized and primarily consist of amounts due from third‑party payers and patients. To provide for accounts receivable that could become uncollectible in the future, the Company establishes an allowance for doubtful accounts to reduce the carrying value of such receivables to their estimated net realizable value. Approximately $29.8 million and $24.2 million of accounts receivable were due from the Medicare and Medicaid programs at December 31, 2014 and 2013, respectively. The credit risk for any other concentrations of receivables is limited due to the large number of insurance companies and other payers that provide payments for services. Management does not believe that there are other significant concentrations of accounts receivable from any particular payer that would subject the Company to any significant credit risk in the collection of its accounts receivable.

The allowance for doubtful accounts is based upon management’s assessment of historical and expected net collections, business and economic conditions, trends in federal and state governmental health‑care coverage, and other collection indicators. The primary tool used in management’s assessment is an annual, detailed review of historical collections and write‑offs of accounts receivable. The results of the detailed review of historical collections and write‑off experience, adjusted for changes in trends and conditions, are used to evaluate the allowance amount for the current period. Accounts receivable are written off after collection efforts have been followed in accordance with the Company’s policies.

Adjustments to bad debt expense related to changes in prior period estimates increased bad debt expense by approximately $2.3 million and $1.6 million for the years ended December 31, 2014 and 2013, respectively, and decreased bad debt expense by approximately $0.1 million, for the year ended December 31, 2012.

A summary of the activity in the allowance for doubtful accounts is as follows:



	Year Ended December 31,
(in thousands):	2014		2013		2012
	(Restated)
Balance, beginning of period	$	29,878	$	23,878	$	25,042
Acquisitions		7,746		2,591		87
Additions charged to provision for doubtful accounts		19,253		12,146		16,916
Accounts receivable written off, net of recoveries		(14,110)		(8,659)		(18,116)
Foreign currency translation		(223)		(78)		(51)
Balance, end of period	$	42,544	$	29,878	$	23,878

Goodwill and Other Intangible Assets

The Company’s policy is to evaluate indefinite‑lived intangible assets and goodwill for possible impairment at least annually on October 1, or whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. An intangible asset with an indefinite life (a major trade name) is evaluated for possible impairment by comparing the fair value of the asset with its carrying value. Fair value is estimated as the discounted value of future revenues arising from a trade name using a royalty rate that an independent party would pay for use of that trade name. An impairment charge is recorded if the trade name’s carrying value exceeds its estimated fair value. Goodwill is evaluated for possible impairment by comparing the fair value of a reporting unit with its carrying value, including goodwill assigned to that reporting unit. Fair value of a reporting unit is estimated using a combination of income‑based and market‑based valuation methodologies. Under the income approach, forecasted cash flows of a reporting unit are discounted to a present value using a discount rate commensurate with the risks of those cash flows. Under the market approach, the fair value of a reporting unit is estimated based on the revenues and earnings multiples of a group of comparable public companies and from recent transactions involving comparable companies. An impairment charge is recorded if the carrying value of the goodwill exceeds its implied fair value.

Goodwill represents the excess purchase price over the estimated fair value of net assets acquired by the Company in business combinations. Goodwill and indefinite life intangible assets are not amortized, but are reviewed annually for impairment, or more frequently if impairment indicators arise. Goodwill impairment was recognized for the years ended December 31, 2014 and 2012 of approximately $228.3 million, and $80.6 million, respectively. No goodwill impairment loss was recognized for the year ended December 31, 2013.

Intangible assets consist of management fee agreements, trade names (indefinite life and amortizable), noncompete agreements, hospital contracts and licenses. Management fee agreements are amortized over the term of each respective agreement, including renewal options which range from 4.7 to 15.2 years using the straight‑line method. Indefinite life trade names are tested at least annually for impairment. Noncompete agreements, hospital contracts and licenses are amortized over the life of the agreement (which typically ranges from 1.0 to 18.5 years) using the straight‑line method. No intangible asset impairment loss was recognized for the years ended December 31, 2014, 2013, and 2012.

Derivative Agreements

The Company recognizes all derivatives in the consolidated balance sheets at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship based on its effectiveness in hedging against the exposure. Derivatives that do not meet hedge accounting requirements must be adjusted to fair value through operating results. If the derivative meets hedge accounting requirements, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of assets, liabilities, or firm commitments through operating results or recognized in other comprehensive loss until the hedged item is recognized in operating results. The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings.

Interest rate swap agreements

The Company enters into interest rate swap agreements to reduce the impact of changes in interest rates on its floating rate senior secured credit facility. The interest rate swap agreements are contracts to exchange floating rate interest payments for fixed interest payments over the life of the agreements without the exchange of the underlying notional amounts. The notional amounts of interest rate swap agreements are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. The differential paid or received on interest rate swap agreements is recognized in interest expense in the consolidated statements of operations and comprehensive loss. The related accrued payable is included in other long term liabilities.

On May 27, 2008, the Company entered into an interest rate swap agreement for its $407.0 million of floating rate senior debt governed by the Credit Agreement dated February 21, 2008 (senior secured credit facility). The Company designated this derivative financial instrument as a cash flow hedge (i.e., the interest rate swap agreement hedges the exposure to variability in expected future cash flows that is attributable to interest rate risk). The initial notional amount of the swap agreement was $290.6 million with amounts scaling down during various quarters throughout the term of the interest rate swap agreement to $116.0 million. The effect of this agreement is to fix the interest rate exposure to 3.67% plus a margin on $116.0 million of the Company’s senior secured credit facility. The interest rate swap agreement was scheduled to expire on March 30, 2012. In December 2011, the Company terminated the interest rate swap agreement and paid approximately $1.9 million representing the fair value of the interest rate hedge at time of termination. No ineffectiveness was recorded as a result of the termination of the interest rate swap agreement. The amount of accumulated other comprehensive loss related to the terminated interest rate swap agreement of approximately $84,000, net of tax was amortized through interest expense through the original term of the interest rate swap agreement on March 30, 2012. At December 31, 2013 and 2012 no amount of the floating rate senior debt was subject to an interest rate swap.

In July 2011, the Company entered into two interest rate swap agreements whereby the Company fixed the interest rate on the notional amounts totaling approximately $116.0 million of the Company’s senior secured term credit facility, effective as of March 30, 2012. The rate and maturity of the interest rate swap agreements were 0.923% plus a margin, which was 475 basis points, and was scheduled to expire on December 31, 2013. In May 2012, the Company terminated the interest rate swap agreements and paid approximately $1.0 million representing the fair value of the interest rate hedges at time of termination. No ineffectiveness was recorded as a result of the termination of the interest rate swap agreement. The amount of accumulated other comprehensive loss related to the terminated interest rate swap agreements of approximately $1.0 million, net of tax, is reflected as interest expense in the consolidated statements of operations and comprehensive loss.

The swaps are derivatives and are accounted for under ASC 815, “Derivatives and Hedging” (“ASC 815”). The fair value of the swap agreements, representing the estimated amount that the Company would pay to a third party assuming the Company’s obligations under the interest rate swap agreements terminated at December 31, 2012 and 2011, was approximately $‑0‑ million and $0.7 million, respectively, which is included in other long term liabilities in the accompanying consolidated balance sheets. The estimated fair value of the Company’s interest rate swap was determined using the income approach that considers various inputs and assumptions, including LIBOR swap rates, cash flow activity, yield curves and other relevant economic measures, all of which are observable market inputs that are classified under Level 2 of the fair value hierarchy. The fair value also incorporates valuation adjustments for credit risk. No ineffectiveness was recorded for the year ended December 31, 2013 and 2012.

Since the Company has the ability to elect different interest rates on the debt at each reset date, and the senior secured credit facility contains certain prepayment provisions, the hedging relationships do not qualify for use of the shortcut method under ASC 815. Therefore, the effectiveness of the hedge relationship is assessed on a quarterly basis during the life of the hedge through regression analysis. The entire change in fair market value is recorded in equity, net of tax, as other comprehensive income (loss).

Foreign currency derivative contracts

Foreign currency risk is the risk that fluctuations in foreign exchange rates could impact the Company’s results from operations. The Company is exposed to a significant amount of foreign exchange risk, primarily between the U.S. dollar and the Argentine Peso. This exposure relates to the provision of radiation oncology services to patients at the Company’s Latin American operations and purchases of goods and services in foreign currencies. The Company enters into foreign exchange option contracts to convert a significant portion of the Company’s forecasted foreign currency denominated net income into U.S. dollars to limit the adverse impact of a potential weakening Argentine Peso against the U.S. dollar. On April 26, 2013 the Company entered into a foreign exchange option contract which matured on March 31, 2014 to replace the contract maturing on December 31, 2013. Because the Company’s Argentine forecasted foreign currency denominated net income is expected to increase commensurate with inflationary expectations, any adverse impact on net income from a weakening Argentine Peso against the U.S. dollar is limited to the cost of the option contracts, which was approximately $0.2 million in aggregate at inception of the contracts. Under the Company’s foreign currency management program, the Company expects to monitor foreign exchange rates and periodically enter into forward contracts and other derivative instruments. The Company does not use derivative financial instruments for speculative purposes.

These programs reduce, but do not entirely eliminate, the impact of currency exchange movements. The Company’s current practice is to use currency derivatives without hedge accounting designation. The maturity of these instruments generally occurs within twelve months. Gains or losses resulting from the fair valuing of these instruments are reported in (gain) loss on forward currency derivative contracts on the consolidated statements of operations and comprehensive loss. For the years ended December 31, 2014, 2013, and 2012, the Company incurred a gain of approximately $4,000, and losses of approximately $0.5 million, and $1.2 million, respectively, relating to foreign currency derivative program. The fair value of the foreign currency derivative is recorded in other current assets in the accompanying consolidated balance sheet. At December 31, 2014 and 2013, the fair value of the foreign currency derivative was approximately $0 and $22,000, respectively.

The following represents the current foreign currency derivative agreements as of December 31, 2013 (in thousands):



Foreign Currency Derivative Agreements (in thousands):	Notional Amount		Maturity Date	Premium Amount		Fair Value

Foreign currency derivative Argentine Peso to U.S. dollar	$	1,250	March 31, 2014	$	171	$	22

The Argentine government has implemented certain measures that control and restrict the ability of companies and individuals to exchange Argentine pesos for foreign currencies. Those measures include, among other things, the requirement to obtain the prior approval from the Argentine Tax Authority of the foreign currency transaction (for example and without limitation, for the payment of non‑Argentine goods and services, payment of principal and interest on non‑Argentine debt and also payment of dividends to parties outside of the country), which approval process could delay, and eventually restrict, the ability to exchange Argentine pesos for other currencies, such as U.S. dollars. Those approvals are administered by the Argentine Central Bank through the Mercado Unico Libre de Cambios, which is the only market where exchange transactions may be lawfully made.

During January 2014, the Argentinean peso exchange rate against the U.S. Dollar increased by approximately 23% from 6.52 Argentinean Pesos per U.S. Dollar as of December 31, 2013 to approximately 8.0 Argentinean Pesos per U.S. Dollar. As of December 31, 2014, the Argentinean Peso exchange rate was 8.55 Argentine Pesos per U.S. Dollar. A depreciation of this currency against the U.S. dollar will decrease the U.S. dollar equivalent of the amounts derived from these operations reported in the consolidated financial statements. In addition, currency fluctuations may affect the comparability of the results of operations between fiscal periods.

Series A Preferred Stock embedded derivative

The Company’s Series A Preferred Stock contains provisions for contingent events that could trigger the conversion of the Series A Preferred Stock to common stock and require the issuance of warrants to CPPIB. The Company determined that the contingent conversion features qualify as an embedded derivative, requiring bifurcation and classification as a liability, measured at fair value. The Company evaluates the fair value of those embedded derivatives and adjusts changes in fair value through the fair value adjustment of embedded derivative caption in the consolidated statements of operations and comprehensive loss.

Professional and General Liability Claims

The Company is subject to claims and legal actions in the ordinary course of business, including claims relating to patient treatment, employment practices, and personal injuries. To cover these types of claims, the Company maintains general liability and professional liability insurance in excess of self‑insured retentions through commercial insurance carriers in amounts that the Company believes to be sufficient for its operations, although, potentially, some claims may exceed the scope of coverage in effect. The Company expenses an estimate of the costs it expects to incur under the self‑insured retention exposure for general and professional liability claims. The Company maintains insurance for the majority of its physicians up to $1 million on individual malpractice claims and up to $3 million on aggregate claims on a claims‑made basis. The Company purchases medical malpractice insurance from an insurance company partially owned by a related party. The Company’s reserves for professional and general liability claims are based upon independent actuarial calculations, which consider historical claims data, demographic considerations, severity factors, industry trends, and other actuarial assumptions.

Actuarial calculations include a large number of variables that may significantly impact the estimate of ultimate losses that are recorded during a reporting period. Professional judgment is used by the actuary in determining the loss estimate, by selecting factors that are considered appropriate by the actuary for the Company’s specific circumstances. Changes in assumptions used by the Company’s actuary with respect to demographics, industry trends, and judgmental selection of factors may impact the Company’s recorded reserve levels.

The amount accrued for professional and general liability claims as of the consolidated balance sheet dates reflects the current estimates of all outstanding losses, including incurred but not reported losses, based upon actuarial calculations. The loss estimates included in the actuarial calculations may change in the future based upon updated facts and circumstances. As of December 31, 2014 and 2013 the amount accrued for incurred but not reported professional liability claims was $15.9 million and $10.8 million, respectively. In accordance with Accounting Standards Update (“ASU”) 2010‑24, amounts accrued for reported claims as of December 31, 2014 total approximately $12.8 million. Of the approximate $12.8 million, approximately $3.8 million is recorded as other current liabilities and approximately $9.0 million is reported as other long‑term liabilities. In addition the Company has recorded estimated insurance recoveries for both reported, and incurred but not reported claims totaling approximately $19.1 million as of December 31, 2014. Of the approximate $19.1 million of estimated insurance recoveries, approximately $4.0 million is recorded as other current assets and approximately $15.1 million is reported as other long‑term assets. Amounts accrued for reported claims as of December 31, 2013 total approximately $10.6 million. Of the approximate $10.6 million, approximately $3.0 million is recorded as other current liabilities and approximately $7.6 million is reported as other long‑term liabilities. In addition the Company has recorded estimated insurance recoveries for both reported, and incurred but not reported claims totaling approximately $15.6 million as of December 31, 2013. Of the approximate $15.6 million of estimated insurance recoveries, approximately $3.2 million is recorded as other current assets and approximately $12.4 million is reported as other long‑term assets.

Defined Benefit Pension Plan

The Company recognizes the underfunded status of its defined benefit pension plan as an asset or a liability in its consolidated balance sheets. Each year’s actuarial gains or losses are a component of other comprehensive loss, which is then included in accumulated other comprehensive loss. Pension benefit expenses are recognized over the period in which the employee renders service and becomes eligible to receive benefits. The Company makes significant assumptions (including discount rate, expected rate of return on plan assets, and future increases in compensation) in computing the pension benefit expense and obligations.

Noncontrolling Interest in Consolidated Entities

The Company currently maintains equity interests in nine treatment center facilities with ownership interests ranging from 50.0% to 90.0%. Since the Company controls 50% or more of the voting interest in these facilities, the Company consolidates these treatment centers. The noncontrolling interests represent the equity interests of outside investors in the equity and results of operations of these consolidated entities.

In addition, in accordance with ASC 810, Consolidation, the Company consolidates certain radiation oncology practices where the Company provides administrative services pursuant to long‑term management agreements. The noncontrolling interests in these entities represent the interests of the physician owners of the oncology practices in the equity and results of operations of these consolidated entities.

On January 1, 2009, the Company adopted changes issued by the Financial Accounting Standards Board (“FASB”) to the accounting for noncontrolling interests in consolidated financial statements. These changes require, among other items, that a noncontrolling interest be included within equity separate from the parent’s equity; consolidated net income be reported at amounts inclusive of both the parent’s and noncontrolling interest’s shares; and, separately, the amounts of consolidated net income attributable to the parent and noncontrolling interest all be reported on the consolidated statements of operations and comprehensive loss.

The Company could be obligated, under the terms of the operating agreements governing certain of its joint ventures, upon the occurrence of various fundamental regulatory changes and/or upon the occurrence of certain events outside of the Company’s control to purchase some or all of the noncontrolling interests related to the Company’s consolidated subsidiaries. These repurchase requirements would be triggered by, among other things, regulatory changes making the existing ownership structure illegal. While the Company is not aware of events that would make the occurrence of such a change probable, regulatory changes are outside the control of the Company. Accordingly, the noncontrolling interests subject to these repurchase provisions have been classified outside of equity on the Company’s consolidated balance sheets.

Use of Estimates

The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include highly liquid investments with original maturities of three months or less when purchased. Cash at December 31, 2014 and 2013 held by the Company’s foreign operating subsidiaries was $4.5 million and $3.6 million, respectively. The Company considers these cash amounts to be permanently invested in the Company’s foreign operating subsidiaries and therefore does not anticipate repatriating any excess cash flows to the U.S. The Company anticipates it can adequately fund its domestic operations from cash flows generated solely from the U.S. business. Of the $4.5 million of cash held by the Company’s foreign operating subsidiaries at December 31, 2014, $0.9 million is held in U.S. Dollars, $0.1 million of which is held at banks in the United States, with the remaining held in foreign currencies in foreign banks. The Company believes that the magnitude of its growth opportunities outside of the U.S. will cause the Company to continuously reinvest foreign earnings. The Company does not require access to the earnings and cash flow of its international subsidiaries to fund its U.S. operations.

Restricted Cash

Restricted cash totals approximately $7.3 million and $4.1 million as of December 31, 2014 and 2013, respectively. Restricted cash consists of claim reserve accounts established to address any pre‑acquisition claims presented to the Company as they relate to the Company’s recent acquisitions, including OnCure Holdings, Inc. (together with its subsidiaries, “OnCure”) and SFRO Holdings, LLC (together with its subsidiaries, “SFRO”). Any balance of the claim reserve accounts will be released to sellers, once claims have been settled.

Inventories

Inventories consist of medical drugs used for patient care services as follows:



	December 31,		December 31,
(in thousands):	2014		2013
	(Restated)		(Restated)
Medical drugs		3,162		2,674
	$	3,162	$	2,674

Inventories are valued at the lower of cost or market. The cost of medical drugs is determined using the first‑in, first‑out method.

Property and Equipment

Property and equipment are recorded at historical cost less accumulated depreciation and are depreciated over their estimated useful lives utilizing the straight‑line method. Leasehold improvements are amortized over the lesser of the estimated useful life of the improvement or the life of the lease. Amortization of leased assets is included in depreciation and amortization in the accompanying consolidated statements of operations and comprehensive loss. Expenditures for repairs and maintenance are charged to operating expense as incurred, while equipment replacement and betterments are capitalized.

Major asset classifications and useful lives are as follows:



Buildings and leasehold improvements	10-50	years
Office, computer, and telephone equipment	3-10	years
Medical and medical testing equipment	5-10	years
Automobiles and vans	5	years

The weighted‑average useful life of medical and medical testing equipment is 8.4 and 8.6 years in 2014 and 2013, respectively.

The Company evaluates its long‑lived assets for possible impairment whenever circumstances indicate that the carrying amount of the asset, or related group of assets, may not be recoverable from estimated future cash flows, in accordance with ASC 360, Property, Plant, and Equipment. Fair value estimates are derived from independent appraisals, established market values of comparable assets, or internal calculations of estimated future net cash flows. The Company’s estimates of future cash flows are based on assumptions and projections it believes to be reasonable and supportable for a market.

Recent Pronouncements

In July 2013, the FASB issued ASU 2013‑11, Income Taxes (Topic 740):Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (ASU 2013‑11), which amends ASC 740 to clarify balance sheet presentation requirements of unrecognized tax benefits. ASU 2013‑11 is effective for the Company on January 1, 2014. The Company adopted ASC 740 and reclassified approximately $1.2 million of unrecognized tax benefits from income taxes payable to other long term liabilities.

In April 2014, the FASB issued ASU No. 2014‑08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014‑08 changes the requirements for reporting discontinued operations in FASB Accounting Standards Codification Subtopic 205‑20, such that a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. ASU 2014‑08 requires an entity to present, for each comparative period, the assets and liabilities of a disposal group that includes a discontinued operation separately in the asset and liability sections, respectively, of the statement of financial position, as well as additional disclosures about discontinued operations. Additionally, ASU 2014‑08 requires disclosures about a disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation in the financial statements and expands the disclosures about an entity’s significant continuing involvement with a discontinued operation. The accounting update is effective for annual periods beginning on or after December 15, 2014. Early adoption is permitted but only for disposals that have not been reported in financial statements previously issued. The Company is currently evaluating the potential impact of this guidance.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The core principle of the guidance in ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14 that defers the effective date of ASU 2014-09 for all affected entities. As a result, ASU 2014-09 is effective for the Company beginning January 1, 2018. The Company intends to adopt the new guidance on January 1, 2018 and is currently evaluating the potential impact of this guidance.

In August 2014, the FASB issued ASU 2014‑15, Presentation of Financial Statements—Going Concern (Subtopic 205‑40). The new guidance addresses management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company is currently assessing the impact of this guidance on its consolidated financial statements.

In November 2014, the FASB issued ASU 2014‑16, Derivatives and Hedging (Topic 815): Determining Whether the host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or Equity (ASU 2014‑06). The new guidance eliminates use of diversity in practice when evaluating whether the nature of the host contract within a hybrid financial instrument issued in the form of a share is more akin to debt or to equity. Pursuant to ASU 2014‑06, entities should determine the nature of the host contract by considering all stated and implied substantive terms and features of the hybrid financial instrument, weighing each term and feature on the basis of relevant facts and circumstances. That is, an entity should determine the nature of the host contract by considering the economic characteristics and risks of the entire hybrid financial instrument, including the embedded derivative feature that is being evaluated for separate accounting from the host contract. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company is currently evaluating the potential impact of this guidance.

In February 2015, the FASB issued ASU 2015‑02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (ASU 2015‑02). The new guidance intends to reduce the number of consolidation models as well as place more emphasis on risk of loss when determining a controlling financial interest. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company is currently evaluating the potential impact of this guidance.

Advertising Costs

Advertising costs are charged to general and administrative expenses as incurred and amounted to approximately $3.8 million, $3.9 million and $3.4 million, for the years ended December 31, 2014, 2013, and 2012, respectively.

Comprehensive Loss

Comprehensive loss consists of net loss and other comprehensive loss. Other comprehensive loss refers to revenue, expenses, gains, and losses that under accounting principles generally accepted in the United States are recorded as an element of equity but are excluded from net loss. The Company’s other comprehensive loss is composed of unrealized gains and losses on interest rate swap agreements accounted for as cash flow hedges, the Company’s foreign currency translation of its operations in South America, Central America and the Caribbean, and unrealized gains and losses on the fair value of pension plan assets. The impact of the unrealized net loss decreased total equity on a consolidated basis by approximately $12.2 million, $15.8 million and $8.3 million for the years ended December 31, 2014, 2013, and 2012, respectively.

Accumulated Other Comprehensive Loss. The components of accumulated other comprehensive loss were as follows (in thousands):


									Interests
	21st Century Oncology Holdings, Inc. Shareholder								Noncontrolling Interests
(in thousands):	Foreign Currency Translation Adjustments			Net periodic benefit cost of pension plan		Derivative Losses on Interest Rate Swap Agreements	Total		Foreign Currency Translation Adjustments		Other Comprehensive Loss
	(Restated)						(Restated)		(Restated)		(Restated)
Year ended December 31, 2011	$	(4,650)	$	—	$	(625)	$	(5,275)	$	(537)	$
Other comprehensive loss		(7,173)		—		(333)		(7,506)		(838)		(8,344)
Amortization of other comprehensive income for termination of interest rate swap agreement, net of tax		—		—		958		958		—		—
Balance, December 31, 2012	$	(11,823)	$	—	$	—	$	(11,823)	$	(1,375)	$	(8,344)
Other comprehensive loss		(14,279)		—		—		(14,279)		(1,534)		(15,813)
Balance, December 31, 2013	$	(26,102)	$	—	$	—	$	(26,102)	$	(2,909)	$	(15,813)
Other comprehensive loss		(10,727)		(91)		—		(10,818)		(1,371)		(12,189)
Balance, December 31, 2014	$	(36,829)	$	(91)	$	—	$	(36,920)	$	(4,280)	$	(12,189)

Income Taxes

The Company provides for federal, foreign and state income taxes currently payable, as well as for those deferred due to timing differences between reporting income and expenses for financial statement purposes versus tax purposes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in income tax rates is recognized as income or expense in the period that includes the enactment date.

ASC 740, Income Taxes (ASC 740), clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under ASC 740, the impact of an uncertain tax position on the income tax return must be recognized at the largest amount that is more‑likely‑than‑not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, ASC 740, provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

Stock‑Based Compensation

21st Century Oncology Investments, LLC (“21CI”), the shareholder of 21st Century Oncology Holdings, Inc. adopted equity‑based incentive plans in February 2008 and June 2012, and issued units of limited liability company interests designated Class B Units, Class C Units, Class MEP and Class EMEP Units pursuant to such plans. The Class B Units and Class C Units were modified and replaced under the June 2012 equity plan with the issuance of the Class MEP Units and Class EMEP Units. The units are limited liability company interests and are available for issuance to the Company’s employees and members of the Board of Directors for incentive purposes. For purposes of determining the compensation expense associated with these grants, management valued the business enterprise using a variety of widely accepted valuation techniques, which considered a number of factors such as the financial performance of the Company, the values of comparable companies and the lack of marketability of the Company’s equity at grant date. The Company then used the option pricing method to determine the fair value of these units at the time of grant using valuation assumptions consisting of the expected term in which the units will be realized; a risk‑free interest rate equal to the U.S. federal treasury bond rate consistent with the term assumption; expected dividend yield, for which there is none; and expected volatility based on the historical data of equity instruments of comparable companies. The Company also uses the probability‑weighted expected return method (“PWERM”) to determine the fair value of certain units at the time of grant. Under the PWERM, the value of the units is estimated based upon an analysis of future values for the enterprise assuming various future outcomes (exits) as well as the rights of each unit class. In developing assumptions for the various exit scenarios, management considered the Company’s ability to achieve certain growth and profitability milestone in order to maximize shareholder value at the time of potential exit. Generally, for Class MEP units awarded, 66.6% vest upon issuance, while the remaining 33.4% vest on the 18 month anniversary of the issuance date. There are no performance conditions for the MEP units to vest. For newly hired individuals after January 1, 2012, vesting occurs at 33.3% in years one and two, and 33.4% in year three of the individual’s hire date. Vesting of the Class EMEP units is dependent upon achievement of an implied equity value target. The right to receive proceeds from vested units is dependent upon the occurrence of a qualified sale or liquidation event. The estimated fair value of the units, less an assumed forfeiture rate, are recognized in expense on a straight‑line basis over the requisite service periods of the awards for the Class MEP Units and the accelerated attribution method approach is utilized for the Class EMEP Units.

Executive Bonus Plan

On December 9, 2013, the Company adopted the Executive Bonus Plan to provide certain senior level employees of the Company with an opportunity to receive additional compensation based on the Equity Value, as defined in the plan and described in general terms as noted below, of 21CI. Upon the occurrence of the first company sale or initial public offering to occur following the effective date of the plan, a bonus pool was established equal in value of 5% of the Equity Value of 21CI, subject to a maximum bonus pool of $12.7 million. Each participant in the plan will participate in the bonus pool based on the participant’s award percentage.

Payments of awards under the plan generally will be made as follows:

If the applicable liquidity event is a company sale, payment of the awards under the plan will be made within 30 days following consummation of the company sale in the same form as the proceeds received by 21CI. If the applicable liquidity event is an initial public offering, one‑third of the award will be paid within 45 days following the effective date of the initial public offering, and the remaining two‑thirds of the award will be payable in two equal annual installments on each of the first and second anniversaries of the effective date of the initial public offering. Payment of the award may be made in cash or stock or a combination thereof.

For purposes of the plan, the term “Equity Value” generally refers to: (i) if the applicable liquidity event is a company sale, the aggregate fair market value of the cash and non‑cash proceeds received by 21CI and its equity holders in connection with the sale of equity interests in the Company; or (ii) if the applicable liquidity event is an initial public offering, the aggregate fair market value of 100% of the common stock of the Company on the effective date of its initial public offering.

Grants under 2013 Plan

On December 9, 2013, 21CI entered into a Fourth Amended and Restated Limited Liability Company Agreement (the “Fourth Amended LLC Agreement”) which replaced the Third Amended LLC Agreement in its entirety. The Fourth Amended LLC Agreement established new classes of incentive equity units (such new units, together with Class MEP Units, as modified under the Fourth Amended LLC Agreement, the “2013 Plan”) in 21CI in the form of Class M Units, Class N Units and Class O Units for issuance to employees, officers, directors and other service providers, eliminated 21CI’s Class L Units and Class EMEP Units, and modified the distribution entitlements for holders of each existing class of equity units of 21CI.

Fair Value of Financial Instruments

The carrying values of the Company’s financial instruments, which include cash and cash equivalents, accounts receivable and accounts payable approximate their fair values due to the short‑term maturity of these instruments.

The carrying values of the Company’s long‑term debt approximates fair value due either to the length to maturity or the existence of interest rates that approximate prevailing market rates unless otherwise disclosed in these consolidated financial statements.

Segments

The Company operates in one line of business, which is operating physician group practices. As of March 1, 2011, the Company’s operations are structured into two geographically organized groups: the Domestic U.S. includes 144 treatment centers and International includes 36 treatment centers. The Company assesses performance of and makes decisions on how to allocate resources to its operating segments based on multiple factors including current and projected facility gross profit and market opportunities.