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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2015.

For the transition period from                          to                         .

Commission file number: 333-170812

21ST CENTURY ONCOLOGY HOLDINGS, INC.

(Exact Name of Registrant as Specified in Its Charter)

(239) 931-7275

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. *   oYes      xNo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that registrant was required to submit and post such files.) Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    o Yes      x No

* The registrant has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934, but is not required to file such reports under such Sections.

As of August 1, 2015, we had outstanding 1,059 shares of Common Stock, par value $0.01 per share, which are 100% owned by 21st Century Oncology Investments, LLC.

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21ST CENTURY ONCOLOGY HOLDINGS, INC.

Form 10-Q

INDEX

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PART I
FINANCIAL INFORMATION

Item 1.    Financial Statements

21ST CENTURY ONCOLOGY HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

See accompanying notes.

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21ST CENTURY ONCOLOGY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(unaudited)

See accompanying notes.

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21ST CENTURY ONCOLOGY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

continued

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21ST CENTURY ONCOLOGY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(unaudited)

See accompanying notes.

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21ST CENTURY ONCOLOGY HOLDINGS, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1.     Organization

21st Century Oncology Holdings, Inc., through its wholly-owned subsidiaries (collectively, the “Company”), is a leading global, physician-led provider of integrated cancer care (“ICC”) services. The Company’s physicians provide comprehensive, academic quality, cost-effective coordinated care for cancer patients in personal and convenient community settings (its “ICC model”). The Company provides its physicians with the advanced medical technology necessary to achieve optimal outcomes. The Company’s provision of care includes a full spectrum of cancer care services by employing and affiliating with physicians in their related specialties. This innovative approach to cancer care through its ICC model enables the Company to collaborate across its physician base, integrate services and payments for related medical needs and disseminate best practices.

As of June 30, 2015, the Company was comprised of approximately 786 community-based physicians in the fields of radiation oncology, medical oncology, breast, gynecological and general surgery, urology and primary care in the United States. The Company’s physicians provide medical services at approximately 393 locations, including our 183 radiation therapy centers, of which 54 operate in partnership with health systems. The Company’s cancer treatment centers in the United States are operated predominantly under the 21st Century Oncology brand and are strategically clustered in 17 states: Alabama, Arizona, California, Florida, Indiana, Kentucky, Maryland, Massachusetts, Michigan, Nevada, New Jersey, New York, North Carolina, Rhode Island, South Carolina, Washington, and West Virginia, as well as countries in Latin America, Central America and the Caribbean. The Company’s 35 international radiation therapy centers, located in Argentina, Mexico, Costa Rica, Dominican Republic, Guatemala, and El Salvador operate under the 21st Century Oncology brand or a local brand and, in many cases, are operated with local minority partners, including hospitals.

The Company is also engaged in providing capital equipment and business management services to oncology physician groups (“Groups”) that treat patients at cancer centers (“Centers”). The Company owns the Centers’ assets and provides services to the Groups through exclusive, long-term management services agreements. The Company provides the Groups with oncology business management expertise and new technologies including radiation oncology equipment and related treatment software. Business services that the Company provides to the Groups include non-physician clinical and administrative staff, operations management, purchasing, managed care contract negotiation assistance, reimbursement, billing and collecting, information technology, human resource and payroll, compliance, accounting, and treasury. Under the terms of the management service agreements, the Company is reimbursed for certain operating expenses of each Center and earns a monthly management fee from each Group.  The management fees are primarily based on a predetermined percentage of each Group’s earnings before interest, income taxes, depreciation, and amortization (“EBITDA”) associated with the provision of radiation therapy.  The Company manages the radiation oncology business operations of six Groups in California, and one Group in Indiana.  The Company’s management fees range from 50% to 60% of EBITDA, with one Group in California whose fee ranges from 20% to 30% of cash collections.

2.  Leverage and Liquidity

The Company is highly leveraged. As of June 30, 2015, the Company had approximately $1.0 billion of long-term debt outstanding.  The Company has experienced and continues to experience losses from its operations. The Company reported a net loss of approximately $349.3 million, $78.2 million and $151.1 million for the years ended December 31, 2014, 2013 and 2012, respectively, and $75.4 million and $233.8 million for the six month periods ended June 30, 2015 and 2014, respectively.

The Company’s high level of debt could have material adverse effects on its business and financial condition. Specifically, the Company’s high level of debt could have important consequences, including the following:

·              making it more difficult for the Company to satisfy its obligations with respect to debt;

·              limiting the Company’s ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements;

·              requiring a substantial portion of the Company’s cash flows to be dedicated to debt service payments instead of other purposes;

·              increasing the Company’s vulnerability to general adverse economic and industry conditions;

·              limiting the Company’s flexibility in planning for and reacting to changes in the industry in which the Company competes;

·              placing the Company at a disadvantage compared to other, less leveraged competitors; and

·              increasing the Company’s cost of borrowing.

As discussed in Note 15, the Company is involved in disputes, litigation, and regulatory matters incidental to its operations, including governmental investigations and other matters arising out of the normal conduct of business.  The resolution of these matters could have a material adverse effect on the Company’s business and financial position.

At June 30, the Company had $62 million of unrestricted cash and $122 million of availability under its revolver.  The Company believes that it has sufficient liquidity to fund operations for the next year.

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3.   Basis of presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements.  All adjustments necessary for a fair presentation have been included. All such adjustments are considered to be of a normal and recurring nature. Interim results for the six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2015.

These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated audited financial statements and the notes thereto included in the Company’s Form 10-K for the year ended December 31, 2014.

The Company’s results of operations historically have fluctuated on a quarterly basis and can be expected to continue to fluctuate. Many of the patients of the Company’s Florida treatment centers are part-time residents during the winter months. Hence, these treatment centers have historically experienced higher utilization rates during the winter months than during the remainder of the year. In addition, volume is typically lower in the summer months due to traditional vacation periods.

The accompanying interim condensed 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 management company of such entities or by contract. All significant intercompany accounts and transactions have been eliminated.

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 condensed 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 June 30, 2015 and December 31, 2014, the combined total assets included in the Company’s condensed consolidated balance sheet relating to the VIEs were approximately $153.7 million and $114.6 million, respectively.

As of June 30, 2015, the Company was the primary beneficiary of, and therefore consolidated, 29 VIEs, which operate 50 radiation therapy centers. Any significant amounts of assets and liabilities related to the consolidated VIEs are identified parenthetically on the accompanying condensed 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, North Carolina, and Washington, 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 six months ended June 30, 2015 and 2014 approximately 13.4% and 15.0% of the Company’s net patient service revenue, respectively, was generated by professional corporations for which it has administrative management agreements.

As of June 30, 2015, 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 $1.3 million and $1.6 million at June 30, 2015 and December 31, 2014, 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.

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The cost of revenues for the three months ended June 30, 2015 and 2014 are approximately $200.6 million and $188.7 million, respectively. The cost of revenues for the six months ended June 30, 2015 and 2014 are approximately $402.2 million and $359.8 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 physician, physicists, dosimetrists, radiation technicians etc., medical supplies, facility rent expenses, other operating expenses, depreciation and amortization.

Foreign currency translation

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 and royalties 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 Local Exchange Market (“Mercado Unico Libre de Cambios”, or “MULC”), 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 June 30, 2015, the Argentinean Peso exchange rate was 9.14 Argentine Pesos per U.S. Dollar.

Recent Pronouncements

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The new guidance requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. 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 April 2015, the FASB issued ASU 2015-05, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. The new guidance establishes guidelines for evaluating whether a cloud computing arrangement involves the sale of a software license and the appropriate accounting. 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 July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. The new guidance requires inventories to be valued at the lower of cost or net realizable value. This guidance does not apply to entities using the last in, first out valuation method. 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 evaluating the potential impact of this guidance.

In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606), Deferral of the Effective Date. ASU 2015-14 defers the effective date of ASU 2014-09, Revenue from Contracts with Customers (Topic 606) for all affected entities. As a result, ASU 2014-09 is effective for the Company beginning January 1, 2018.

4.  Stock-based compensation

2012 Equity-based incentive plans

Effective as of June 11, 2012, 21st Century Oncology Investments, LLC, the Company’s direct parent (“21CI”), entered into a Third Amended and Restated LLC Agreement (the “Amended LLC Agreement”). The Amended LLC Agreement established new classes of equity units (such new units, the “2012 Plan”) in 21CI in the form of Class MEP Units, Class EMEP Units, Class L Units and Class G Units for issuance to employees, officers, directors and other service providers, establishes new distribution entitlements related thereto, and modifies the distribution entitlements for holders of Preferred units and Class A Units of 21CI. In addition to the Preferred Units and Class A Units of 21CI, the Amended LLC Agreement authorized for issuance under the 2012 Plan 1,100,200 units of limited liability company interests consisting of 1,000,000 Class MEP Units, 100,000 Class EMEP Units, 100 Class L Units, and 100 Class G Units.

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. In the event of a sale or public offering of the Company prior to termination of employment, all unvested Class MEP units would vest upon consummation of the transaction. The MEP units are eligible to receive distributions only upon a return of all capital invested in 21CI, plus the amounts to which the Class EMEP Units, are entitled to receive under the Amended LLC Agreements; which effectively creates a market condition that is reflected in the value of the Class MEP units.

The Class EMEP Units were eliminated under the Fourth Amended and Restated Limited Liability Company Agreement (the “Fourth Amended LLC Agreement”) in December 2013.

For purposes of determining the compensation expense associated with the 2012 equity-based incentive plan 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. The Company then used the probability-weighted expected return method (“PWERM”) to determine the fair value of these 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. Management considers an initial public offering of the Company’s stock to be one of the exit scenarios for the current shareholders, although sale or merger/acquisition are possible future exit options as well. For the scenarios the enterprise value at exit was estimated based on a multiple

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of the Company’s EBITDA for the fiscal year preceding the exit date. The enterprise value for the Staying Private Scenario was estimated based on a discounted cash flow analysis as well as guideline company market approach. The guideline companies were publicly-traded companies that were deemed comparable to the Company. The discount rate analysis also leveraged market data of the same guideline companies.

For each PWERM scenario, management estimated probability factors based on the outlook of the Company and the industry as well as prospects for potential exit at the exit date based on information known or knowable as of the grant date. The probability-weighted unit values calculated at each potential exit date was present-valued to the grant date to estimate the per-unit value. The discount rate utilized in the present value calculation was the cost of equity calculated using the Capital Asset Pricing Model (“CAPM”) and based on the market data of the guideline companies as well as historical data published by Morningstar, Inc. For each PWERM scenario, the per unit values were adjusted for lack of marketability discount to conclude on unit value on a minority, non-marketable basis.

The estimated fair value of the units, less an assumed forfeiture rate of 3.9%, is recognized in expense in the Company’s condensed consolidated financial statements over the requisite service period and in accordance with the vesting conditions of the awards for Class MEP Units, which is approximately 18 months. The assumed forfeiture rate is based on an average historical forfeiture rate.

Grants under 2013 Plan

On December 9, 2013, 21CI entered into the Fourth Amended LLC Agreement which replaced the 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.

The Company recorded approximately $4,000 and $36,000 of stock-based compensation for the three months ended June 30, 2015 and 2014, respectively, and $5,000 and $71,000 for the six months ended June 30, 2015 and 2014, respectively, which is included in salaries and benefits in the condensed consolidated statements of operations and comprehensive loss.

The summary of activity under the 2012 and 2013 Plans is presented below:

As of June 30, 2015, there was approximately $0.1 million of total unrecognized compensation expense related to the MEP Units. These costs are expected to be recognized over a weighted-average period of 0.82 years.

As of June 30, 2015, there was approximately $2.7 million, and $33,000 of total unrecognized compensation expense related to the M Units, and O Units, respectively. The Class M Units and O Units compensation will be recognized upon the sale of the Company or an initial public offering. Under the terms of the incentive unit grant agreements governing the grants of the Class M Units and Class O Units, in the event of an initial public offering of the Company’s common stock, holders have certain rights to receive shares of restricted common stock of the Company in exchange for their Class M Units and Class O 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

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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.

As of June 30, 2015, there was approximately $7.1 million total unrecognized compensation expense related to the Executive Bonus Plan. The Executive Bonus Plan compensation will be recognized upon the sale of the Company or an initial public offering.

Grant of Class N Units

In December, 2013, 10 class N units were granted to an employee. 50% of the Class N Units vest upon the sale of the Company or an initial public offering. The remaining 50% is amortized over five years subsequent to an initial public offering. As of June 30, 2015, there was approximately $6,000 total unrecognized compensation expense related to the Class N Units.

Grant of Class G Units

In May, 2014, 10 class G units were granted to an employee. 100% of the Class G Units vest upon the sale of the Company or an initial public offering. As of June 30, 2015, there was approximately $1.5 million total unrecognized compensation expense related to the Class G Units.

5.  Comprehensive loss

Comprehensive loss consists of two components, 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 the Company’s foreign currency translation of its operations in Latin America, Central America and the Caribbean and unrealized gains and losses on the fair value of pension plan assets. There were no reclassifications from other comprehensive income into earnings for the periods presented.

The components of accumulated other comprehensive loss were as follows (in thousands):

6.   Redeemable preferred stock

On September 26, 2014, the Company entered into a Subscription Agreement (the “Subscription Agreement”) with Canada Pension Plan Investment Board (“CPPIB”). Pursuant to the Subscription Agreement, the Company issued to CPPIB an aggregate of 385,000 newly issued shares of its Series A Preferred Stock, par value $0.001 per share, stated value $1,000 per share, for a purchase price of $325.0 million.

As set forth in the Certificate of Designations of Series A Convertible Preferred Stock (the “Certificate of Designations”), holders of Series A Preferred Stock are entitled to receive, as and if declared by the board of directors of the Company, dividends at an applicable rate per annum, payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year.  During the first three years after issuance, any dividends when and if declared, shall be paid by the Company in the form of additional shares of Series A Preferred Stock.  During the first twelve months after issuance, the applicable dividend rate on the Series A Preferred Stock shall be 9.875%, thereafter increasing on a periodic basis, as set forth in the Certificate of Designations.  Such dividends accrue daily, whether or not declared by the board of directors of the Company.  After the third anniversary of issuance and only if the Company’s outstanding 97/8% senior subordinated notes due 2017 are repaid in

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full, or upon certain other events of default, dividends shall be paid in cash upon the election of a majority of the holders of Series A Preferred Stock (the “Majority Preferred Holders”).

The Series A Preferred Stock is mandatorily convertible into common stock, par value $0.01 per share (the “Common Stock”) of the Company upon the occurrence of a qualifying initial public offering of the Company or a qualifying merger.  In the case of a qualifying initial public offer, the conversion price is the initial public offering price of the qualifying initial public offer.  In the case of a qualifying merger, the conversion price is the price per share of Common Stock pursuant to the qualifying merger. The Series A Preferred Stock also becomes convertible on the tenth anniversary of issuance at the option of either the Company or CPPIB. Absent a qualifying initial public offering or qualifying merger, the conversion price shall be determined upon appraisal. If upon conversion, the Series A Preferred Stock converted to Common Stock represents greater than 29% of the Company’s outstanding Common Stock (“Excess Common Stock”), CPPIB has the option to convert amounts in excess of 29% to newly issued preferred stock (the “Excess Preferred Stock”). Holders of the Excess Preferred Stock are entitled to receive dividends, payable in additional shares of Excess Preferred Stock at 12% per annum. The Excess Preferred Stock becomes mandatorily convertible upon the 15th anniversary of issuance and may be redeemed by the Company at any time at 100% of its stated value. If CPPIB does not elect to receive Excess Preferred Stock, the Company is required to issue a new Class B common stock that will be exchanged for the Excess Common Stock. As long as CPPIB holds the Class B common stock, CPPIB is not entitled to voting rights with respect to the election or removal of directors.

Holders of Series A Preferred Stock also have, among other rights, the right to require the Company to repurchase their shares upon the occurrence of certain events of default and certain change of control transactions, at the prices set forth in the Certificate of Designations.  In addition, the Certificate of Designations also provides for certain consent rights of the Majority Preferred Holders in connection with specified corporate events of 21CI or its subsidiaries, including, among other things, with respect to certain equity issuances and certain acquisitions, financing transactions and asset sale transactions.  Upon certain events of default and the obtaining of applicable anti-trust regulatory approvals, holders of Series A Preferred Stock are also entitled to vote together with holders of Common Stock, on an as-converted basis. In addition, the Series A Preferred Stock is senior in preference to the Company’s Common Stock with respect to dividend rights, rights upon liquidation, winding up or dissolution.

Pursuant to the terms of the Subscription Agreement, immediately following the occurrence of a qualifying initial public offering of the Company, a qualifying merger, or on September 26, 2024 at the option of CPPIB or the Company, the Company will execute and deliver to CPPIB a Warrant Agreement (the “Warrant Agreement”) and issue to CPPIB warrants to purchase shares of Common Stock having a then-current value of $30 million, at a purchase price of $0.01 per share.  The warrants expire on the tenth anniversary of the date of issuance. The Company evaluated the contingent events that could trigger the conversion of the Series A Preferred Stock to Common Stock and issuance of warrants and determined those contingent conversion features to qualify as an embedded derivative, requiring bifurcation and classification as a liability, measured at fair value.

The Company is accreting changes to the Series A Preferred Stock redemption value through the tenth anniversary of issuance utilizing the interest method. If the Series A Preferred Stock were redeemable as of the balance sheet date, the Series A Preferred Stock would be redeemable at its stated value plus accrued dividends.

Changes to the Series A Preferred Stock are as follows:

7. Reconciliation of total equity

The condensed consolidated financial statements include the accounts of the Company and its majority owned subsidiaries in which it has a controlling financial interest.  Noncontrolling interests-nonredeemable principally represent minority shareholders’ proportionate share of the equity of certain consolidated majority owned entities of the Company. The Company has certain arrangements whereby the noncontrolling interest may be redeemed upon the occurrence of certain events outside of the Company’s control. These noncontrolling interests have been classified outside of permanent equity on the Company’s condensed consolidated balance sheets.

The following table presents changes in total equity for the respective periods:

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Redeemable equity securities with redemption features that are not solely within the Company’s control are classified outside of permanent equity. Those securities are initially recorded at their estimated fair value on the date of issuance. Securities that are currently redeemable or redeemable after the passage of time are adjusted to their redemption value as changes occur. In the unlikely event that a redeemable equity security will require redemption, any subsequent adjustments to the initially recorded amount will be recognized in the period that a redemption becomes probable. Contingent redemption events vary by joint venture and generally include either the holder’s discretion or circumstances jeopardizing: the joint ventures’ ability to provide services, the joint ventures’ participation in Medicare, Medicaid, or other third party reimbursement programs, the tax-exempt status of minority shareholders, and violation of federal statutes, regulations, ordinances, or guidelines. Amounts required to redeem noncontrolling interests are based on either fair value or a multiple of trailing financial performance. These amounts are not limited.

8. Derivative Agreements

The Company recognizes all derivatives in the condensed 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.

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. 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. 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 loss (gain) on foreign currency derivative contracts on the condensed consolidated statements of operations and comprehensive loss.  For the six months ended June 30, 2015 and 2014, the Company recognized a gain of approximately $0 and a $4,000, respectively relating to the change in fair market value of its foreign currency derivatives.

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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 condensed consolidated statements of operations and comprehensive loss.

9. Fair value of financial instruments

ASC 820, Fair Value Measurement (“ASC 820”), requires disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy for which these assets and liabilities must be grouped, based on significant levels of inputs. The three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies, is as follows:

Level 1 — Quoted prices for identical assets and liabilities in active markets.

Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3 — Unobservable inputs for the asset or liability.

In accordance with ASC 820, the fair values of the Term Loan Facility due April 30, 2022, the Senior Notes due May 1, 2023, and the 113/4% Senior Secured Notes due 2017 were based on prices quoted from third-party financial institutions (Level 2). At June 30, 2015, the fair values are as follows (in thousands):

At December 31, 2014, the fair values of the Term Facility, the Senior Subordinated Notes, Senior Secured Second Lien Notes, and Senior Secured Notes are as follows (in thousands):

As of June 30, 2015 and December 31, 2014, the Company held certain items that are required to be measured at fair value on a recurring basis, including the embedded derivative feature of its Series A Preferred Stock. The primary Level 3 valuation technique used to value the embedded derivative was comparing the difference between the present value of discounted cash flows, assuming no triggering events occur and the present value of discounted cash flows assuming a triggering event does occur. The assumptions incorporated management’s estimates of timing and probability of each triggering event, with those cash flows discounted using rates commensurate with the risks of those cash flows.

Cash and cash equivalents are reflected in the financial statements at their carrying value, which approximate their fair value due to their short maturity. The carrying values of the Company’s long-term debt other than the Term Loan Facility, Senior Notes, Senior Secured Notes, Term Facility, Senior Subordinated Notes, and Senior Secured Second Lien Notes approximates fair value due to the length of time to maturity and/or the existence of interest rates that approximate prevailing market rates. There have been no transfers between levels of valuation hierarchies for the six months ended June 30, 2015 and 2014.

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The following items are measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820, as of June 30, 2015:

The following table presents changes during the three months and six months ended June 30, 2015 in Level 3 liabilities measured at fair value on a recurring basis: