djo-10k_20171231.htm

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☒ No ☐

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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. Yes ☐ No ☒ (Note: Prior to the effectiveness of the registrant’s Registration Statement on Form S-4 (File No. 333-213164) on August 31, 2016, the registrant was a voluntary filer not subject to the filing requirements of Section 13 or 15(d) of the Exchange Act. As of January 1, 2017, the registrant became a voluntary filer again and was no longer subject to the filing requirements of Section 13 or 15(d) of the Exchange Act; however, the registrant has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant would have been required to file such reports) as if it were subject to such filing requirements.)

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of March 15, 2018, 100% of the issuer’s membership interests were owned by DJO Holdings LLC.

This Annual Report on Form 10-K (Annual Report) of DJO Finance LLC (DJOFL, or the Company) for the year ended December 31, 2017 contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act) and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), which are intended to be covered by the safe harbors created thereby. To the extent that any statements are not recitations of historical fact, such statements constitute forward-looking statements that, by definition, involve risks and uncertainties. Specifically, the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” may contain forward-looking statements. These statements can be identified because they use words like “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “future,” “intends,” “plans,” and similar terms. These statements reflect only our current expectations. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, capital expenditures, future results, our competitive strengths, our business strategy, the trends in our industry and the benefits of our acquisitions.

Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy, and actual results may differ materially from those we anticipated due to a number of uncertainties, many of which are unforeseen, including, among others, the risks we face as described elsewhere in this filing. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Annual Report. In any forward-looking statement where we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and is believed to have a reasonable basis, but there can be no assurance that any future results or events expressed by the statement of expectation or belief will be achieved or accomplished.

We believe it is important to communicate our expectations to holders of our notes. There may be events in the future, however, that we are unable to predict accurately or over which we have no control. The risk factors listed in Item 1A below, as well as any cautionary language in this Annual Report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements.

DJO Finance LLC (DJOFL) is a wholly owned indirect subsidiary of DJO Global, Inc (DJO). DJOFL is a Delaware limited liability company organized in 2006. Substantially all business activities of DJO are conducted by DJOFL and its wholly owned subsidiaries.

Except as otherwise indicated, references to “us”, “we”, “our”, or “the Company” in this Annual Report refers to DJOFL and its consolidated subsidiaries. Each one of the following trademarks, trade names or service marks, which is used in this Annual Report, is either (i) our registered trademark, (ii) a trademark for which we have a pending application, or (iii) a trademark or service mark for which we claim common law rights: Cefar^®, Exos™, Bell-Horn^®, Compex^®, Aircast^®, DonJoy^®, DonJoy Performance®, OfficeCare^®, ProCare^®, MotionCare™, SpinaLogic^®, Dr. Comfort™, CMF™, OL1000™, and OL1000 SC™. All other trademarks, trade names or service marks of any other company appearing in this Annual Report belong to their respective owners.

In March 2017, we announced that we had embarked on a series of business transformation projects to improve our liquidity and profitability and to improve our customers’ experiences. During 2017, this business transformation initiative focused on delivering productivity improvements throughout the Company, including eliminating an estimated 7% to 10% of annualized cost across the Company by the end of 2018. In connection with this effort, we established a team of senior managers to direct this effort and engaged third party experts to assist in the planning and implementation of a significant number of cost-reduction, efficiency and other optimization activities. We believe that the costs of the outside experts, tools and related activities have been significantly offset by the cost savings realized from the implementation of these transformation plans. As a part of this transformation initiative, we took action to improve our liquidity through significant cost reductions, efficiency improvements and other cash flow best practices; improved our organizational effectiveness through the optimization of current organizational structure and opportunities to outsource certain activities; optimized our procurement of direct and indirect materials and services; improved our manufacturing, distribution, and sales and sales operations planning; and improved our profitability associated with the mix of our customers and products. Our transformation projects will continue through the end of 2018 as we shift our emphasis to improving revenue growth, including increasing our new product development and increasing our investment in our reimbursement business; improving the Customer Experience, including improving service levels and implementing online order entry; and achieving operational excellence, including improving production procurement spend, enhancing our distribution center network, optimizing our overall facility footprint in North America and improving our overall liquidity.

We currently develop, manufacture and distribute our products through the following four operating segments: Bracing and Vascular; Recovery Sciences; Surgical Implant; and International.

Our products are used by orthopedic specialists, spine surgeons, primary care physicians, pain management specialists, physical therapists, podiatrists, chiropractors, athletic trainers and other healthcare professionals to treat patients with musculoskeletal conditions resulting from degenerative diseases, deformities, traumatic events and sports related injuries. In addition, many of our non-surgical medical devices and related accessories are used by athletes and patients for injury prevention and at-home physical therapy treatment. Our product lines include rigid and soft orthopedic bracing, hot and cold therapy, bone growth stimulators, vascular therapy systems and compression garments, therapeutic shoes and inserts, electrical stimulators used for pain management and physical therapy products. Our surgical implant business offers a comprehensive suite of reconstructive joint products for the hip, knee, shoulder and elbow.

Our products are marketed under a portfolio of brands including Aircast^®, DonJoy^®, DonJoy Performance^®, ProCare^®, CMF™, MotionCare™, Chattanooga, DJO Surgical, Dr. Comfort™, Compex^®, Bell-Horn™ and Exos^TM.

Our four operating segments enable us to reach a diverse customer base through multiple distribution channels and give us the opportunity to provide a wide range of medical devices and related products to orthopedic specialists and other healthcare professionals operating in a variety of patient treatment settings and to the retail consumer. These four segments constitute our

reportable segments. See Note 18 of the Notes to the Audited Consolidated Financial Statements included in Part II, Item 8, herein for financial and other additional information regarding our segments.

Our Bracing and Vascular segment, which generates its revenues in the United States, offers our rigid knee bracing products, orthopedic soft goods, cold therapy products, vascular systems, therapeutic footwear for the diabetes care market and compression therapy products, primarily under the DonJoy, ProCare, Aircast, Dr. Comfort, Bell-Horn and Exos brands. This segment also includes our OfficeCare channel, through which we maintain an inventory of soft goods and other products at healthcare facilities, primarily orthopedic practices, for immediate distribution to patients. The Bracing and Vascular segment primarily sells its products to orthopedic and sports medicine professionals, hospitals, podiatry practices, orthotic and prosthetic centers, home medical equipment providers and independent pharmacies. In 2014 we expanded our consumer channel to focus on marketing, selling and distributing our products, including bracing and vascular products, to professional and consumer retail customers and on-line. The bracing and vascular products sold through this channel are principally sold under the DonJoy Performance, Bell-Horn and Doctor Comfort brands.

The following table summarizes our Bracing and Vascular segment product categories:

Our Recovery Sciences segment, which generates its revenues in the United States, consists of two key brands: CMF and Chattanooga. The CMF and Chattanooga products are sold to medical clinics, independent distributors or direct to patients for consumer home use. For products sold directly to patients, we arrange billing to the patients and their third party payors, if applicable. The CMF brand of bone growth stimulation products provides medical professionals with an effective tool for healing problem fractures and spinal fusion procedures. Chattanooga rehabilitation equipment is used for treating musculoskeletal, neurological and soft tissue disorders. These products include clinical electrotherapy devices, clinical traction devices, and other clinical products and supplies such as treatment tables, continuous passive motion (CPM) devices and dry heat therapy. This segment also provides professional and consumer retail customers with our Compex electrostimulation device, which is used in training programs to aid muscle development and to accelerate muscle recovery after training sessions.

During the fourth quarter of 2015, we ceased manufacturing, selling and distributing products of our Empi business and the related insurance billing operations domestically. The Empi business primarily manufactured and sold home electrotherapy devices, such as TENS devices for pain relief, other electrotherapy and orthopedic products and related supplies. Facing a challenging regulatory and compliance environment and decreasing reimbursement rates, Empi revenues remained below the level needed to reach adequate profitability within an economically justified period of time. Empi was part of our Recovery Sciences operating segment. For financial statement purposes, the results of the Empi business are reported within discontinued operations in the Audited Consolidated Financial Statements included in Part II, Item 8, herein.

The following table summarizes our Recovery Sciences segment product categories:

Our Surgical Implant segment, which generates its revenues in the United States, develops, manufactures and markets a wide variety of shoulder, hip and knee implant products that serve the orthopedic reconstructive joint implant market. On June 30, 2015, our subsidiary Encore Medical, L.P., dba DJO Surgical, acquired from Zimmer Biomet Holdings, Inc., the U.S. rights to an elbow implant product marketed under the name Discovery® Elbow System, and a line of bone cement for use with implants marketed as Cobalt™ Bone Cement, Optivac® Cement Mixing Accessories and SoftPac™ Pouch.

Our International segment, which generates most of its revenues in Europe, sells all of our products and certain third party products through a combination of direct sales representatives and independent distributors. The product categories for our International segment are similar to the product categories for our domestic segments except certain products are tailored to international market requirements and preferences. In addition, our International segment sells a number of products, none of which is individually significant, that we do not sell domestically.

Our research and development programs focus on the development of new products, as well as the enhancement of existing products with the latest technology and updated designs. We seek to develop new technologies to improve durability, performance and usability of existing products, and to develop our manufacturing process to improve product performance and reduce manufacturing costs. In addition to our own research and development, we receive new product and invention ideas from orthopedic surgeons and other healthcare professionals. We also seek to obtain rights to ideas we consider promising from a clinical and commercial perspective through entering into either assignment or licensing agreements. We conduct research and development programs at our facilities in Vista, California; Austin, Texas; and Ecublens, Switzerland.

We maintain contractual relationships with orthopedic surgeons who assist us in developing our products and provide consulting services in connection with our products. In addition to providing design input into our new products, some of these orthopedic surgeons may give demonstrations using our products, speak about our products at medical seminars, train other orthopedic surgeons in the use of our products, and provide us with feedback on the acceptance of our products. We have also established relationships with surgeons who conduct clinical studies on various products, establish protocols for use of the products and participate at various symposia.

Our products reach our customers, including hospitals and other healthcare facilities, physicians and other healthcare providers and end user patients and consumers, through several sales and distribution channels.

We market and sell our Bracing and Vascular segment products in several different ways. The DonJoy brand is primarily dedicated to the sale of our bracing and supports products to orthopedic surgeons, podiatrists, orthotic and prosthetic centers, hospitals, surgery centers, physical therapists, athletic trainers and other healthcare professionals. The DonJoy brand is mostly sold through independent commissioned sales representatives who are employed by independent sales agents. Because the DonJoy products generally require customer education in the application and use, DonJoy sales representatives are technical specialists who receive extensive training, and use their expertise to help fit the patient with the product and assist the orthopedic professional in choosing the appropriate product to meet the patient’s needs. After a sales representative receives a product order, we generally ship and bill the product directly to the orthopedic professional, and pay a sales commission to the agent. For certain custom rigid braces and other products, we sell directly to the patient and bill a third party payor, if applicable, on behalf of the patient. We enjoy long-standing relationships with most of our agents and sales representatives. Under the arrangements with the agents, each agent is granted an exclusive geographic territory for sales of our products and is not permitted to market products, or represent competitors who sell or distribute products, that compete with our existing products. The agents receive a commission, which varies based on the type of product being sold. If an agent fails to achieve specified sales quotas, we have the right to terminate our relationship with the agent. Certain DonJoy sales representatives also sell our Recovery Sciences and Vascular products.

The ProCare/Aircast brand is sold by direct and independent sales representatives that manage a network of distributors focused on selling our bracing and supports products to primary and acute care facilities. Vascular systems are also included in this brand. These products are generally sold in non-exclusive territories to third party distributors as well as through our direct sales force. Our distributors include large, national third party distributors such as Owens & Minor Inc., McKesson and Cardinal Health, regional medical and surgical distributors, outpatient surgery centers and medical products buying groups that consist of a number of healthcare providers who make purchases through the buying group. These distributors and our direct sales force generally sell our products to large hospital chains, primary care networks and orthopedic physicians for use by their patients. In addition, we sell our products through group purchasing organizations (GPOs) that are a preferred purchasing source for members of a buying group. These products generally do not require significant customer education for their use. Our vascular pumps are provided to primary and acute care facilities, supplemented by vascular system specialists. Our vascular systems pumps and related equipment are typically consigned to hospitals, and the hospitals then purchase the cuffs that are applied to each patient. We have recently introduced vascular pumps for home use.

Under the Dr. Comfort brand, we market and distribute our therapeutic footwear and related medical and comfort products primarily through the podiatry, home medical equipment (HME), pharmacy, and orthotic and prosthetic (O&P) channels through our sales force of direct and independent sales representatives. Compression hosiery is private labeled and sold to customers who resell the products.

OfficeCare provides stock and bill arrangements for physician practices. Through OfficeCare, we maintain an inventory of bracing and supports products at approximately 3,200 orthopedic practices and other healthcare facilities for immediate distribution to patients. We then bill the patient or, if applicable, a third party payor.

Our Consumer channel, which we expanded in 2014, sells or plans to sell certain of our bracing products, primarily orthopedic soft goods, and footwear based on our therapeutic footwear in the professional retail and consumer retail markets. The Consumer channel is also developing products designed for consumers in the athletic and sports retail market. A wide variety of our bracing and vascular products are offered by the Consumer channel through an on-line web site.

In a marketing program conducted under the framework of Motion is Medicine™ and coordinated by the Bracing and Vascular and Recovery Sciences segments, we are offering to physicians and clinics a protocol of products that address the full spectrum of requirements to treat common indications, such as osteoarthritis of the knee or anterior cruciate ligament (ACL) injuries. Under this program, called MotionCare™, the physician has readily available for prescription our preventative products, pain management products and rehabilitative products to provide a conservative care regimen to patients. We plan to expand this MotionCare approach to other indications where a range of conservative care products would be beneficial to patients in treating chronic conditions or injuries and in preparing for and recovering from surgery.

We market and sell our Recovery Sciences segment products in several different ways, including the MotionCare program described under the Bracing and Vascular segment. CMF non-union fracture bone growth stimulator devices (OL1000) and spine bone growth stimulator device (SpinaLogic) are sold by our direct and independent sales representatives specially trained to sell the product. Most of our bone growth stimulator products are sold directly to the patient and a third party payor is billed, if applicable, on behalf of the patient.

We sell our Chattanooga rehabilitation product lines to physical therapy clinics, primarily through a national network of independent distributors, which are managed by our employed sales managers. These distributors sell our clinical rehabilitation products to a variety of healthcare professionals, including physical therapists, athletic trainers, chiropractors, and sports medicine physicians. Except for distributors outside of the United States, we do not maintain formal distribution contracts for our clinical rehabilitation products. These distributors purchase products from us at discounts off our published list price. We maintain an internal marketing and sales support program to support our distributor network. This program comprises a group of individuals who provide distributor and end-user training, develop promotional materials, and attend trade shows each year.

Our Consumer Compex electrostimulation device is marketed and sold to fitness enthusiasts and competitive athletes in a direct-to-consumer model and through our on-line web site. We market and sell this device, as well as other Recovery Sciences products appropriate for sale directly to the end user, in the professional and consumer retail markets.

We market and sell our Surgical Implant products to hospitals and orthopedic surgeons through a network of independent commissioned sales representatives who are employed by independent sales agents. Generally, our independent sales representatives sell a range of reconstructive joint products, including our products. We usually enter into agreements with sales agents for a term of one to five years. Agents are typically paid a sales commission and are eligible for bonuses if sales exceed certain preset objectives. Our independent sales representatives work for these agents. We assign each of our sales agents to an exclusive sales territory and require them to meet specific periodic sales targets. Substantially all of our sales agents agree not to sell competitive products. We provide our sales agents with product inventories, on consignment, for their use in marketing and filling customer orders.

We sell our products internationally through a network of wholly owned subsidiaries and independent distributors. In Europe, we use sales forces of direct and independent salespersons and a network of independent distributors who call on healthcare professionals, as well as consumer retail stores, such as sporting equipment providers and pharmacies, to sell our products. We intend to continue to expand our direct and indirect distribution capabilities in attractive foreign markets.

We use both in-house manufacturing capabilities and relationships with third party vendors to supply our products. Generally, we use third party vendors only when they have special manufacturing capabilities or when we believe it is appropriate based on certain factors, including our in-house capacity, lead-time control and cost. Although we have certain sole source supply agreements, we believe alternate vendors are available, and we believe that adequate capacity exists at our current vendors to meet our anticipated needs.

Our manufacturing facilities are generally certified by the International Organization for Standardization (ISO) and generally comply with the U.S. Food and Drug Administration (FDA) current Good Manufacturing Practice and Quality System Regulations (QSRs) requirements, which provide standards for safe and consistent manufacturing of medical devices and appropriate documentation of the manufacturing and distribution process. Many of our products carry the European Community Medical Device Directive (CE) certification mark.

Our manufacturing facility in Tijuana, Mexico is our largest manufacturing facility. Our Mexico facility has achieved ISO 13485 certification. This certification reflects internationally recognized quality standards for manufacturing and assists us in marketing our products. Our Vista, California facility has achieved certification to ISO 13485, the Canadian Medical Device Regulation and the European Medical Device Directive. Products manufactured at the Vista, California facility include our custom rigid knee bracing products, the pump portion of our vascular systems products, and our CMF, bone growth stimulation products. Products manufactured at our Tijuana, Mexico facility include most of our bracing and supports product lines, and most of our Chattanooga products including electrotherapy devices, patient care products and continuous passive motion (CPM) devices. Within both our Vista and Tijuana facilities, we operate vertically integrated manufacturing and packaging operations and many subassemblies and components are produced in-house. These include metal stamped parts, injection molded components and fabric-strapping materials. We also have extensive in-house tool and die fabrication capabilities, which typically provide savings in the development of tools and molds as well as flexibility to respond to and capitalize on market opportunities as they are identified.

In our Bracing and Vascular segment, the ETI factory in Asheboro, North Carolina, manufactures a full range of compression products, such as anti-embolism stockings; men’s and women’s daily wear and sports compression socks; sheer and surgical weight below knee, thigh length, and pantyhose compression stockings; and lymphedema arm sleeves. The products are sold to worldwide OEM customers as well as to our internal distribution network. The factory specializes in circular knitting and is FDA and ISO 9001:2008 certified and sells under the CE mark in Europe. The primary raw materials used for the compression hosiery are yarn (spandex, nylon, and polyester), dyes, and woven elastics.

Also in our Bracing and Vascular segment, the Dr. Comfort manufacturing facility in Mequon, Wisconsin, manufactures therapeutic footwear and related medical and comfort products. These products are the custom insoles provided primarily as additional product with our Diabetic footwear collections as well as shoe modifications. The primary raw material is a foam ethylene vinyl acetate (EVA) copolymer that is machined to closely match the plantar surface of our customer. The facility is a registered manufacturer with the FDA.

In our Surgical Implant segment, we manufacture our products in our Austin, Texas facility. This manufacturing facility includes computer controlled machine tools, belting, polishing, cleaning, packaging and quality control. Our Austin facility has achieved the ISO 13485:2003 certification. The primary raw materials used in the manufacture of our surgical implant products are cobalt chromium alloy, stainless steel alloys, titanium alloy and ultra high molecular weight polyethylene. All products in our Surgical Implant segment go through in-house quality control, cleaning and packaging operations.

Many of the products for our International segment are manufactured in the same facilities as our domestic segments. We operate a manufacturing facility in Tunisia that provides Bracing and Vascular and Recovery Sciences products for the European markets. In addition, our German and French channels source certain of the products they sell from third party suppliers. Our French channel currently utilizes a single vendor for many of its home electrotherapy devices.

In May 2016 and August 2016, we sold our Clear Lake, South Dakota land and the facility that manufactured home electrotherapy devices and a variety of clinical devices. We entered into a supply agreement with the purchaser of the manufacturing facility to continue the supply of certain products which had been manufactured in such facility.

Many of the component parts and raw materials we use in our manufacturing and assembly operations are available from more than one supplier and are generally available on the open market. We source some of our finished products from manufacturers in China as well as other third party manufacturers. We also currently purchase certain CPM devices from a single supply source, Medireha, which is 50% owned by us. Our distribution agreement with Medireha grants us exclusive rights to the distribution of products that Medireha manufactures. The distribution agreement also requires that we purchase a certain amount of product annually and that we seek Medireha’s approval if we choose to manufacture or distribute products that are identical or similar, or otherwise compete with the products that are the subject of the distribution agreement.

We own or have licensing rights to U.S. and foreign patents covering a wide range of our products and have filed applications for additional patents. We have numerous trademarks registered in the United States, a number of which are also registered in countries around the world. We also assert ownership of numerous unregistered trademarks, some of which have been submitted for registration in the United States and foreign countries. In the future, we will continue to apply for such additional patents and trademarks as we deem appropriate. Additionally, we seek to protect our non-patented know-how, trade secrets, processes and other proprietary confidential information, through a variety of methods, including having our vendors, employees and consultants sign invention assignment agreements, proprietary information agreements and confidentiality agreements and having our independent sales agents and distributors sign confidentiality agreements. Because many of our products are regulated, proprietary information created during our development of a new or improved product may have to be disclosed to the FDA or another U.S. or foreign regulatory agency in order for us to have the lawful right to market such product. We have distribution rights for certain products that are manufactured by others and hold both exclusive and nonexclusive licenses under third party patents and trade secrets that cover some of our existing products and products under development.

The validity of any of the patents or other intellectual property owned by or licensed to us may not be upheld if challenged by others in litigation. Due to these and other risks described in this Annual Report, we do not rely solely on our patents and other intellectual property to maintain our competitive position. We believe that the development and marketing of new products and improvement of existing ones is, and will continue to be, more important to our competitive position than relying solely on existing products and intellectual property.

The markets we compete in are highly competitive and fragmented. Some of our competitors, either alone or in conjunction with their respective corporate parent groups, have greater research and development, sales and marketing, and manufacturing capabilities than we do, and thus may have a competitive advantage over us. Although we believe that the design and quality of our products compare favorably with those of our competitors, if we are unable to offer products with the latest technological advances at competitive prices, our ability to compete successfully could be materially adversely affected.

Given our sales history, our history of product development and the experience of our management team, we believe we are capable of effectively competing in our markets in the future. Further, we believe the comprehensive range of products we offer enables us to reach a diverse customer base and to use multiple distribution channels in an attempt to increase our growth across our markets. In addition, we believe the various company and product line acquisitions we have made in recent years continue to improve the name recognition of our company and our products. Our ability to compete is affected by, among other things, our ability to:

All of our segments compete with large, diversified corporations and companies that are part of corporate groups that have significantly greater financial, marketing and other resources than we do, as well as numerous smaller niche companies.

Our primary competitors in the rigid knee bracing market include companies such as Össur hf., Breg, Inc. (Breg), and Townsend Design. Competition in the rigid knee brace market is primarily based on product technology, quality and reputation, relationships with customers, service and price.

In the soft goods products market, our competitors include DeRoyal Industries, Össur hf. and Zimmer Biomet Holdings, Inc. (Zimmer Biomet). In the cold therapy products market, our competitors include Breg and Stryker Corporation (Stryker). Competition in the soft goods and pain management markets is less dependent on innovation and technology and is primarily based on product range, quality, service and price.

The therapeutic footwear and related medical and comfort products market is highly fragmented with multiple channels, servicing customers as diverse as podiatrists, home medical equipment users, orthotists, retail pharmacy and numerous other service categories. Our competitors include several multi-product companies and numerous smaller niche competitors. Competition in the therapeutic footwear market tends to be based on product technology, quality and reputation, relationships with customers, service and price.

Several competitors have initiated stock and bill programs similar to our OfficeCare program, and there are numerous regional stock and bill competitors.

The primary competitors of our Chattanooga products are Dynatronics Corporation, Mettler Electronics Corporation, Rich-Mar, Patterson Medical, Enraf-Nonius, Gymna-Uniphy and Acorn Engineering. The physical therapy products market is highly competitive and fragmented. Our competitors in the CPM devices market include several multi-product companies with significant market share and numerous smaller niche competitors. Competition in these markets is based primarily on the quality and technical features of products, product pricing and contractual arrangements with third party payors and national accounts.

Our competitors for CMF products are large, diversified orthopedic companies. In the non-union bone growth stimulation market, our competitors include Orthofix International, N.V. (Orthofix), Zimmer Biomet and Bioventus LLC, formerly known as Smith & Nephew plc, and in the spinal fusion market, we compete with Zimmer Biomet and Orthofix. Competition in bone growth stimulation devices is limited as higher regulatory thresholds provide a barrier to market entry.

The market for orthopedic products similar to those produced by our surgical implant business is dominated by a number of large companies, including, DePuy, Inc. (a Johnson & Johnson company), Smith & Nephew plc, Stryker, and Zimmer Biomet, which are much larger and have significantly greater financial resources than we do. Our Surgical Implant segment also faces competition from U.S.-based companies similar in size to ours, such as Wright Medical Group, Inc. and Exactech, Inc. Competition in the market in which our Surgical Implant segment participates is based primarily on innovative design and technical capability, scale of field sales and service organization, breadth of product line, quality and price.

Competition for the products in our International segment arises from many of the companies and types of companies that compete with our domestic segments and from foreign manufacturers whose costs may be lower due to their ability to manufacture products within their respective countries. Competition is based primarily on quality, innovative design and technical capability, breadth of product line, availability of and qualification for reimbursement, and price.

Our products are subject to rigorous government agency regulation in the United States and in other countries. In the United States, the FDA regulates the development, testing, labeling, manufacturing, storage, recordkeeping, pre-market clearance or approval, promotion, distribution and marketing of medical devices to ensure that medical products distributed in the United States are safe and effective for their intended uses. The FDA also regulates the export of medical devices manufactured in the United States to international markets. Our medical devices are subject to such FDA regulation.

Under the Food, Drug and Cosmetic Act, as amended, medical devices are generally classified into one of three classes depending on the degree of risk to patients using the device. Class I is the lowest risk classification and most Class I devices are exempt from pre-market submission requirements. Some Class I devices and most Class II devices require a pre-market notification to and clearance from FDA as set forth under § 510(k) of the Food, Drug and Cosmetic Act, as amended, also known as a “510(k)” submission. The 510(k) process is one in which the FDA seeks to determine if a device is “substantially equivalent” to a legally marketed device. Class III devices are the highest risk devices, and a Pre-Market Approval (PMA) application must be submitted to and approved by the FDA before the manufacturer of a Class III product can proceed in marketing the product.

We sell products in all three of the FDA classifications. All our currently marketed devices are either exempt from the FDA clearance and approval process (based on our interpretation of those regulations) or we have obtained the requisite clearances or approvals, as appropriate, required under federal medical device law. The FDA may disagree with our conclusion that clearances or approvals were not required for specific products and may require clearances or approval for such products. In these circumstances, we may be required to cease distribution of the product, the devices may be subject to seizure by the FDA or to a voluntary or mandatory recall, and we could be subject to significant fines and penalties.

Our manufacturing processes are also required to comply with the FDA’s current Good Manufacturing Practice requirements for medical devices, which are specified in FDA’s Quality System Regulation (QSRs). The QSRs cover the methods and documentation of the design, testing, production processes, control, quality assurance, labeling, packaging and shipping of our products. Furthermore, our facilities, records and manufacturing processes are subject to periodic unscheduled inspections by the FDA and other agencies. We are also required to report to the FDA if our products cause or contribute to death or serious injury or malfunction in a way that would likely cause or contribute to death or serious injury were the malfunction to recur, and the FDA or other agencies may require the recall of products in the event of material defects or deficiencies in design or manufacturing. The FDA can also withdraw or limit our product approvals or clearances in the event of serious unanticipated health or safety concerns.

Even if regulatory approval or clearance of a medical device is granted, the FDA may impose limitations or restrictions on the use and indications for which the device may be labeled or promoted. Medical devices may be marketed only for the uses and indications for which they are cleared or approved. FDA regulations prohibit a manufacturer from promotion for an unapproved or off-label use.

The FDA has broad regulatory and enforcement powers. If the FDA determines we have failed to comply with applicable regulatory requirements, it can impose a variety of enforcement actions, from warning letters, fines, injunctions, consent decrees, and civil penalties, to suspension or delayed issuance of applications, seizure or recall of our products, total or partial shutdowns, withdrawals of approvals or clearances already granted, and criminal prosecution. The FDA can also require us to repair, replace, or refund the costs of devices we manufactured or distributed.

We must obtain export certificates from the FDA before we can export certain of our products. We are also subject to extensive regulations that are similar to those of the FDA in many of the foreign countries in which we sell our products, including those in Europe, our largest foreign market. These include product standards, packaging requirements, labeling requirements, import restrictions, tariff regulations, duties and tax requirements. In addition, the national health or social security organizations of certain countries, including certain countries outside Europe, require our products to be qualified before they can be marketed in those countries. In order to sell medical devices in Europe, the devices must meet the requirements of the Medical Device Directive. We are in the process of transitioning to a new Notified Body which issues device-specific EC Certificates which certifies that our products meet the Medical Device Directive. This transition could cause material delays in our European product sales if this transition does not proceed within the proposed timeframe.

Our rigid knee braces, CMF products, diabetic shoes and inserts, and certain of our soft goods are generally prescribed by physicians and health care professionals such as podiatrists and are eligible for third party reimbursement by government payors, such as Medicare and Medicaid, and private payors. Customer selection of our products depends, in part, on coverage of our products and whether third party payment amounts will be adequate. We believe that Medicare and other third party payors will continue to focus on measures to contain or reduce their costs through managed care, selective contracting, and other methods. Medicare policies are important to our business not only because we must continue to meet the criteria for a qualified Medicare supplier, but also because private payors often model their policies after the Medicare program’s coverage and reimbursement policies.

In recent years, Congress has enacted a number of laws that affect Medicare reimbursement for and coverage of durable medical equipment (DME), prosthetics, orthotics and supplies (DMEPOS), including many of our products. These laws have included temporary freezes or reductions in Medicare fee schedule updates. For instance, in March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, as amended (the Affordable Care Act or ACA). Several provisions of the ACA specifically impact the medical equipment industry. Among other things, the ACA eliminated the full inflation update to the DMEPOS fee schedule for the years 2011 through 2014. Instead, beginning in 2011, the ACA reduced the inflation update for DMEPOS by a “productivity adjustment” factor intended to reflect productivity gains in delivering health care services. For 2017, the update factor is 0.7%, based on a 1.0% inflation update that is reduced by a 0.3% productivity adjustment. The 2018 update factor is 1.1%, reflecting a 1.6% inflation update that is reduced by a 0.5% productivity adjustment. As discussed below, Medicare fee schedule rates are further adjusted to take into account DMEPOS competitive bidding rates, beginning in 2016.

Medicare payment for DMEPOS also can be impacted by the DMEPOS competitive bidding program, under which Medicare rates are based on bid amounts for certain products in designated geographic areas, rather than the Medicare fee schedule amount. Only those suppliers selected through the competitive bidding process within each designated competitive bidding area (CBA) are eligible to have their products reimbursed by Medicare. Although off-the-shelf orthotics are eligible to be competitively bid, CMS has not yet included these items in any rounds of competitive bidding. On January 31, 2017, CMS announced plans to consolidate all rounds and areas included in the Competitive Bidding Program into a single round of competition; off-the-shelf orthotics still were not included. Seven days later, the Medicare program announced a “temporary delay” in moving forward with this plan; CMS has not released additional information to date. In its proposed FY 2019 budget, the Trump Administration proposes a geographic expansion of competitive bidding to all areas of the country, and it proposes to pay winning suppliers at their own bid amount rather than a single payment amount. These proposals would require Congressional approval. The ACA also authorizes the Secretary to use competitive bidding payment information to adjust OTS orthotics payments and other fee schedule amounts in areas outside of CBAs beginning in 2016. CMS finalized the methodology for making such fee schedule adjustments in a November 6, 2014 final rule, but the methodology does not apply to OTS orthotics until such time as these items are subject to competitive bidding. On February 9, 2016, President Obama issued his fiscal year 2017 budget proposal, in which he called for competitive bidding to be expanded to additional categories of DMEPOS, including all orthotics (not just OTS orthotics) in order to achieve budget savings; such a change would require Congress to enact legislation to modify the Social Security Act. Congress did not act on this proposal during President Obama’s term. There can be no assurances that Congress will not consider legislation to expand the products subject to competitive bidding in the future.

CMS has revised its DMEPOS Quality Standards to include a new type of therapeutic shoe insert for individuals with diabetes that is fabricated without molding it to beneficiary-specific physical positive models. The revisions allow the use of direct carving (milling) using a Computer-Aided Design/Computer-Aided Manufacturing (CAD-CAM) or similar system, without the creation of a physical positive model, as a custom fabricated therapeutic shoe insert manufacturing technique falling under the scope of the Therapeutic Shoes Part B benefit. To facilitate implementation of this new category of therapeutic shoe inserts, CMS has created a new HCPCS code (K0903), which will be effective April 1, 2018, and established specific criteria for its use. CMS has not announced the fee schedule amount for this new code. Manufacturers wishing to use K0903 or A5513 (which describes a custom fabricated therapeutic shoe insert created on a physical model of the individual beneficiary's foot) must submit their products for coding verification. There can be no assurance that our products will be determined to comply with the new coding specifications, or that the fee established for K0903 will be adequate to support sales.

CMS is seeking to tie Medicare payment to quality and value through a variety of innovative Medicare payment models. For instance, under the Medicare Comprehensive Care for Joint Replacement (CJR) model, which began on April 1, 2016, CMS makes bundled payments to hospitals in 67 metropolitan statistical areas (MSAs) for an “episode of care” for lower extremity joint replacement surgery. The bundled payment covers all services provided during the inpatient admission through 90 days post-discharge, including DME, although suppliers still continue to receive Medicare payment through the usual Medicare fee-for-service payment systems. On December 1, 2017, CMS published a final rule that gives hospitals in 33 of the 67 MSAs a one-time option to choose whether to continue their participation in the model. On January 9, 2018, CMS announced plans for a new, voluntary Bundled Payments for Care Improvement Advanced (BPCI Advanced) initiative for 29 inpatient and 3 outpatient clinical episodes. Services

encompassed in the clinical episode also include DME; because hospitals ultimately are held responsible for the episode spending in these programs, such bundled payment arrangements could increase pressure on hospitals to control costs associated with medical products such as ours.

The ACA established disclosure requirements (sometimes referred to as the Physician Payment Sunshine Act) regarding financial arrangements between medical device and supplies manufacturers, among others, and physicians, including physicians who serve as consultants. The recordkeeping requirements became effective August 1, 2013. The regulations require us to report annually to CMS all payments and other transfers of value to physicians and teaching hospitals for products payable under federal health care programs, as well as ownership or investments held by physicians or their family members. Failure to fully and accurately disclose transfers of value to physicians could subject us to civil monetary penalties. Several states also have enacted specific marketing and payment disclosure requirements and other states may do so in the future.

In response to pressure from certain groups (primarily orthotists), the United States Congress and state legislatures have periodically considered proposals that limit the types of individuals who can fit our orthotic device products or who can seek reimbursement for them. Several states have adopted legislation which imposes certification or licensing requirements on the measuring, fitting and adjusting of certain orthotic devices. Although some of these state laws exempt manufacturers’ representatives, other states’ laws subject the activities of such representatives to certification or licensing requirements. The state of Texas has adopted such a licensure law which the state regulatory board has interpreted as not including an exemption for manufacturer’s sales representatives acting under the supervision of a physician, and has issued a cease and desist letter directed to the fitting activities of our sales representatives in that state. We have requested clarification of such letter. Additional states may be considering similar legislation. If these laws are enforced without an exemption for manufacturers’ sales representatives or without our sales representatives qualifying as certified or licensed persons, our ability to fit and bill these products will be adversely impacted. In addition, in July 2013, we were served with a subpoena under HIPAA (as defined and further described below) seeking documents relating to the fitting of custom-fabricated or custom-fitted orthoses in the States of New Jersey, Washington and Texas. The subpoena was issued by the United States Attorney’s Office for the District of New Jersey in connection with an investigation of compliance with professional licensing statutes in those states relating to the practice of orthotics. We have supplied the documents requested under the subpoena.

Efforts have also been made to establish similar certification requirements at the federal level for the Medicare program. For example, in 2000, Congress passed the Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA). BIPA contained a provision requiring, as a condition for payment by the Medicare program, that certain certification or licensing requirements be met for individuals and suppliers furnishing certain, but not all, custom-fabricated orthotic devices. On January 12, 2017, CMS published a proposed rule that would implement the BIPA requirements by specifying the qualifications that providers and suppliers must meet in order to furnish, fabricate, or bill for certain custom-fabricated orthotics under the Medicare program. As proposed, the rule would impact the types of professionals who are eligible to furnish our custom knee braces and the physical standards for our fabrication facilities. On October 4, 2017, CMS published a notice formally withdrawing the proposed rule, citing concerns about the cost and time burdens the rule could impose on providers and suppliers, and to enable to agency to explore alternatives with stakeholders. We cannot predict at this time whether or when CMS will proceed with a new rulemaking, the scope of any new requirements, or when they would go into effect.

In July 2014, CMS promulgated regulations to define the “specialized training” that is needed to provide custom fitting of orthotics under the Medicare program if the fitter is not a certified orthotist. Under the proposed definition, CMS would consider only the following four categories of individuals to have such specialized training: a physician, a treating practitioner, an occupational therapist, or a physical therapist. Under this proposal, trained manufacturers’ representatives, certified athletic trainers, certified orthotic fitters, and other categories of individuals would not have been considered qualified to provide custom-fitting of orthotics. However, in the final rule published on November 6, 2014, CMS specified that it was not finalizing changes to this standard at this time.

Our international sales also depend in part upon the eligibility of our products for reimbursement through third party payors, the amount of reimbursement, and the allocation of payments between the patient and third party payors. Reimbursement practices vary significantly by country, with certain countries requiring products to undergo a lengthy regulatory review in order to be eligible for third party reimbursement. In addition, healthcare cost containment efforts similar to those we face in the United States are prevalent in many of the foreign countries in which our products are sold, and these efforts are expected to continue in the future, possibly resulting in the adoption of more stringent reimbursement standards. For example, in Germany, our largest foreign market, new regulations generally require adult patients to pay a portion of the cost of each medical technical device prescribed. This may adversely affect our sales and profitability by making it more difficult for patients in Germany to pay for our products.

A 2015 court decision in Germany has resulted in reimbursement coverage for CPM and continuous active motion devices (CAM) to be challenged by the Federal Joint Committee authorities. The Federal Joint Committee is the highest decision-making

body of the joint self-government of physicians, dentists, hospitals and health insurance funds in Germany. These authorities have mandated that an independent scientific institute compile a dossier on the safety and effectiveness of CAM devices in an outpatient setting. The institute must report by August 2017 on its findings.

Any developments in our foreign markets that eliminate, reduce or materially modify coverage of, and reimbursement rates for, our products could have an adverse impact on our ability to sell our products.

We are subject to various and frequently changing federal and state laws and regulations pertaining to healthcare fraud and abuse. Many of these laws and regulations are vague or indefinite and may be interpreted or applied by a prosecutorial, regulatory, or judicial authority in a manner that could require us to make changes to our operations. Violations of these laws are punishable by criminal, civil and administrative sanctions, including, in some instances, loss of licenses and exclusion from participation in federal and state healthcare programs, including Medicare, Medicaid, Veterans Administration health programs and TRICARE (the health care program for active duty military, retirees and their families managed by the Department of Defense).

Our operations are subject to federal and state anti-kickback laws. Certain provisions of the Social Security Act, commonly referred to as the Anti-Kickback Statute, prohibit persons from knowingly and willfully soliciting, receiving, offering or providing remuneration directly or indirectly to induce either the referral of an individual, or the furnishing, recommending, or arranging for a good or service, for which payment may be made under a federal healthcare program such as Medicare and Medicaid. The definition of remuneration has been broadly interpreted to include anything of value, including such items as gifts, discounts, waivers of payment, and providing anything at less than its fair market value. The U.S. Department of Health and Human Services (HHS) has issued regulations, commonly known as safe harbors, which set forth certain conditions, which if fully met, will assure healthcare providers and other parties that they will not be prosecuted under the Anti-Kickback Statute for their involvement in certain types of arrangements or activities. The penalties for violating the Anti-Kickback Statute include imprisonment for up to five years, fines of up to $25,000 per violation and possible exclusion from federal healthcare programs such as Medicare and Medicaid. Many states have adopted prohibitions similar to the Anti-Kickback Statute, some of which apply to the referral of patients for healthcare services reimbursed by any source, not only by the Medicare and Medicaid programs.

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) created two new federal crimes effective as of August 21, 1996, relating to healthcare fraud and false statements regarding healthcare matters. The healthcare fraud statute prohibits knowingly and willfully executing or attempting to execute a scheme or artifice to defraud any healthcare benefit program, including private payors. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement or representation in connection with the delivery of or payment for healthcare benefits, items or services. HIPAA applies to any healthcare benefit plan, not just Medicare and Medicaid. Additionally, HIPAA granted expanded enforcement authority to HHS and the DOJ and provided enhanced resources to support the activities and responsibilities of the HHS, OIG and DOJ by authorizing large increases in funding for investigating fraud and abuse violations relating to healthcare delivery and payment. In addition, HIPAA mandates the adoption of standards for the electronic exchange of health information, as described below in greater detail under “Federal Privacy and Transaction Law and Regulations.”

We may also be subject to federal and state physician self-referral laws. Federal physician self-referral legislation, commonly known as the Stark Law, prohibits, subject to certain exceptions, physician referrals of Medicare and Medicaid patients to an entity providing certain “designated health services” if the physician or an immediate family member of the physician or a physician organization in which the physician participates has any financial relationship with the entity. DME and orthotics are included as designated health services. The Stark Law also prohibits the entity receiving the referral from billing any good or service furnished pursuant to an unlawful referral, and any person collecting any amounts in connection with an unlawful referral is obligated to refund such amounts. A person who engages in a scheme to circumvent the Stark Law’s referral prohibition may be fined up to $161,692 for each such arrangement or scheme. The penalties for violating the Stark Law also include civil monetary penalties of up to $24,253 per referral and possible exclusion from federal healthcare programs such as Medicare and Medicaid. Various states have corollary laws to the Stark Law, including laws that require physicians to disclose any financial interest they may have with a healthcare provider to their patients when referring patients to that provider. Both the scope and exceptions for such laws vary from state to state.

Under multiple state and federal statutes, submissions of claims for payment that are “not provided as claimed” may lead to civil money penalties, criminal fines and imprisonment and/or exclusion from participation in Medicare, Medicaid and other federally funded state health programs. These false claims statutes include the federal False Claims Act, which prohibits the knowing filing of a false claim or the knowing use of false statements to obtain payment from the federal government. When an entity is determined to have violated the False Claims Act, it must pay three times the actual damages sustained by the government, plus mandatory civil penalties of between $10,957 and $21,916 for each separate false claim. Suits filed under the False Claims Act, known as “qui tam” actions, can be brought by any individual on behalf of the government, and such individuals, commonly known as whistleblowers, may share in any amounts paid by the entity to the government in fines or settlement. In addition, certain states have enacted laws modeled after the federal False Claims Act. Qui tam actions have increased significantly in recent years, causing greater numbers of healthcare companies to have to defend a false claim action, which may be costly and protracted, pay fines or be excluded from Medicare, Medicaid or other federal or state healthcare programs as a result of an investigation arising out of such action. A number of states have enacted false claims acts that are similar to the federal False Claims Act.

The federal government has used the federal False Claims Act to prosecute a wide variety of alleged false claims and fraud allegedly perpetrated against Medicare and state healthcare programs. Under the ACA, claims for items and services resulting from a violation of the federal Anti-Kickback Statute constitute a false claim. The government and a number of courts also have taken the position that claims presented in violation of certain other statutes, including the Stark Law, and of regulations and conditions of participation, can be considered a violation of the federal False Claims Act, based on the theory that a provider impliedly certifies compliance with all applicable laws, regulations and other rules when submitting claims for reimbursement.

On May 20, 2009, President Obama signed into law the Fraud Enforcement and Recovery Act of 2009 (FERA). Among other things, FERA modified the federal False Claims Act by expanding liability to contractors and subcontractors who do not directly present claims to the federal government. FERA also expanded False Claims Act liability for what is referred to as a “reverse false claim” by explicitly making it unlawful to knowingly conceal or knowingly and improperly avoid or decrease an obligation owed to the federal government. FERA also sought to clarify that liability exists for attempts to avoid repayment of overpayments, including improper retention of federal funds. In February 2016, CMS issued implementing regulations on the FERA requirements to return overpayments. FERA and its implementing regulations are likely to increase both the volume and liability exposure of False Claims Act cases brought against healthcare entities. Additional fraud and abuse measures were adopted as part of the ACA, as noted above.

We are also subject to the U.S. Foreign Corrupt Practices Act (the FCPA), antitrust and anti-competition laws, and similar laws in foreign countries, any violation of which could create a substantial liability for us and also cause a loss of reputation in the market. The FCPA prohibits U.S. companies and their representatives, officers, directors, employees, shareholders acting on their behalf and agents from corruptly offering, promising, authorizing or making payments, or giving anything of value, directly or indirectly, to foreign officials for the purpose of obtaining or retaining business abroad or otherwise obtaining favorable treatment. Companies must also maintain records that fairly and accurately reflect transactions and maintain an adequate system of internal accounting controls. In many countries, hospitals and clinics are government-owned and healthcare professionals employed by such hospitals and clinics, with whom we regularly interact, may be considered as meeting the definition of foreign officials for purposes of the FCPA. If we are found to have violated the FCPA or similar laws, we may face sanctions including fines, criminal penalties, disgorgement of profits and suspension or debarment of our ability to contract with government agencies or receive export licenses.

Because we participate in governmental programs as a supplier of medical devices, our operations are subject to periodic surveys and audits by governmental entities or contractors to assure compliance with Medicare and Medicaid standards and requirements. To maintain our billing privileges, we are required to comply with certain supplier standards, including licensure and documentation requirements for our claims submissions. From time to time in the ordinary course of business, we, like other

healthcare companies, are audited by, or receive claims documentation requests from, governmental entities, which may identify certain deficiencies based on our alleged failure to comply with applicable supplier standards or other requirements. Medicare contractors and Medicaid agencies periodically conduct pre-payment and post-payment reviews and other audits of claims and are under increasing pressure to more closely scrutinize healthcare claims and supporting documentation, as well as on-site operations. Among other things, the ACA expanded the Recovery Audit Contractors (RAC) program, an audit tool that utilizes private companies operating on a contingent fee basis to identify and recoup Medicare overpayments. The Medicare and Medicaid programs also have broad authority to impose payment suspensions and supplier number revocations when they believe credible allegations of fraud or other supplier standard noncompliance issues exist. We have historically been subject to pre and post-payment reviews as well as audits of claims, as well as supplier number revocations we were able to resolve in a short period of time. We may experience such reviews and audits of claims in the future. We review and assess such claims’ audits or reports and attempt to take appropriate corrective action. We are also subject to surveys of our facilities for compliance with the supplier standards. Noncompliance can result in, among other things, a revocation of Medicare billing privileges or termination from the Medicare program.

The Health Insurance Portability and Accountability Act of 1996, and its implementing regulations, as amended by the regulations promulgated pursuant to the Health Information Technology for Economic and Clinical Health Act (HITECH Act), which we collectively refer to as HIPAA, contain substantial restrictions and requirements with respect to the use and disclosure of certain individually identifiable health information (referred to as protected health information, or PHI). These restrictions and requirements are set forth in the HIPAA Privacy, Security and Breach Notification Rules.

In many of our operations, we are a “covered entity” under HIPAA and therefore required to comply with the Privacy, Security and Breach Notification Rules, and are subject to significant civil and criminal penalties for failure to do so. We also provide services to customers that are covered entities themselves, and we are required to provide satisfactory written assurances to these customers through our written agreements that we will provide our services in accordance with HIPAA. Failure to comply with these contractual agreements could lead to loss of customers, contractual liability to our customers, and direct action by the federal government, including penalties.

On January 25, 2013, the Office for Civil Rights (OCR) of the Department of Health and Human Services published its final rule to modify the HIPAA Privacy, Security, Breach Notification and Enforcement Rules, including most revisions/additions made by the HITECH Act. The rule expanded the privacy and security requirements for business associates that create, receive, maintain or transmit protected health information for or on behalf of covered entities, increased penalties for noncompliance, and strengthened requirements for reporting of breaches of unsecured protected health information, among other changes. The rule also made business associates and their subcontractors directly liable for civil monetary penalties for impermissible uses and disclosures of protected health information. The rule became effective on March 23, 2013, and, with limited exception, entities and business associates covered by the rule were required to comply with most of the applicable requirements by September 23, 2013.

In addition to HIPAA, we must adhere to state patient confidentiality laws that are not preempted by HIPAA, including those that are more stringent than HIPAA requirements.

In November 2014, the Company experienced the loss of certain electronic protected health information following the theft of a laptop computer from the car of an IT consultant who was working for our Empi business in Shoreview, MN. The laptop belonged to the Company and contained reports which included patient data for approximately 160,000 patients. The data saved on the laptop computer was not encrypted. The Company has taken actions to notify all of the affected individuals and the media in most states as required by HIPAA. The Company has also provided the required notice to OCR. As a result of this breach, the Company has undertaken additional remedial actions to strengthen its privacy and information security policies and infrastructure. In February 2016, the Company received notice from OCR indicating that OCR would be investigating the incident and the Company’s compliance with the Privacy, Security and Breach Notification Rules and requesting certain information related to the incident and the Company’s compliance with the Privacy, Security and Breach Notification Rules. We are unable to predict at this time whether or to what extent OCR, or other federal or state agencies, will impose any civil monetary penalties or take other action as a result of this incident.

During the timeframe of July and October 2017, the Company experienced the loss of paper forms utilized by DJO when a healthcare clinic dispenses a DJO product to a patient. The forms contained the protected health information of approximately 1,200 patients. To the best of the Company’s knowledge, the forms were likely lost in transit between the time they were picked up from healthcare clinics where the Company’s products were dispensed, and dropped off at Federal Express for further delivery to DJO. DJO provided substitute notice of the incident to affected patients in January 2018. The Company also provided notice to OCR. Following the Company’s notice to OCR in January 2018, the Company received a letter from OCR; it stated that OCR would be investigating the incident and the Company’s compliance with the Privacy Breach Notification Rules, and OCR requested certain information related to the incident and the Company’s compliance with the Privacy and Breach Notification Rules. We are unable to

predict at this time whether or to what extent OCR, or other federal or state agencies, will impose any civil monetary penalties or take other action as a result of this incident.

There are costs and administrative burdens associated with ongoing compliance with HIPAA and similar state law requirements. Any failure or perceived failure to comply carries with it the risk of significant penalties and sanctions. We cannot predict at this time the costs associated with ongoing compliance, or the ultimate impact of such laws and regulations on our results of operations, cash flows or financial condition.

The European Union (“EU”) has adopted a comprehensive law, called the Data Protection Directive 95/46/EC (the “Directive”), regulating the transfer of personal data from each EU state, including transfers to the US. These rules impacted, among other things, the transfer of human resources information from our subsidiaries in the EU states to our headquarters in the US. Failure to comply with the Directive would expose the Company to substantial fines and penalties. The Company, like other multinational companies doing business in the EU, had agreed to a set of principles and guidelines negotiated between the US and the EU (called the “Safe Harbor”) which, if followed, assured compliance with the Directive. In October 2015 the European Court of Justice declared the Safe Harbor to be invalid. The Company and each of its subsidiaries are in the process of adopting a set of standard contractual clauses approved by the European Commission which are deemed to comply with the Directive. The Company has also negotiated an arrangement with a vendor to cover all transfers of human resources data from EU states to the US in accordance with a set of these standard contractual clauses and we intend to include such clauses in other arrangements we may enter into with the third parties who may process such data. The EU and the US continue to negotiate an alternative structure to the former Safe Harbor to provide a framework under which private data can be transferred and processed in a manner consistent with the Directive. If such a framework is finalized, the Company may be required to proceed thereunder or may be permitted to continue to act in accordance with the standard contractual clauses.

Under the Iran Threat Reduction and Syrian Human Rights Act of 2012 (“ITRSHRA”), which added Section 13(r) of the Exchange Act, we are required to include certain disclosures in our periodic reports if we or any of our “affiliates” knowingly engaged in certain specified activities, transactions or dealings related to Iran or certain designated parties during the period covered by the report. An issuer must also concurrently file a separate notice with the SEC that such activities have been disclosed. We are not presently aware that we or our consolidated subsidiaries have knowingly engaged in any transaction or dealing reportable under Section 13(r) of the Exchange Act during the year ended December 31, 2017.

Because the SEC defines the term “affiliate” broadly, it includes any entity controlled by us as well as any person or entity that controls us or is under common control with us (“control” is also construed broadly by the SEC). As a result, The Blackstone Group L.P. (“Blackstone”), an affiliate of our major shareholder, and certain of the companies in which Blackstone’s affiliated funds are invested (“portfolio companies”), may be deemed to have been our affiliates during all or a portion of fiscal 2017. Blackstone or its portfolio companies have in the past and may include in the future information in its periodic reports filed with the SEC regarding activities of its portfolio companies that are required disclosures under the ITRSHR.

As of December 31, 2017, we had approximately 4,420 employees. Of these, approximately 3,030 were engaged in production and production support, approximately 130 in research and development, approximately 1,000 in sales and support, and approximately 260 in various administrative capacities including third party billing. Of these employees, approximately 1,480 were located in the United States, approximately 1,940 were located in Mexico and approximately 1,000 were located in various other countries, primarily in Europe. We have not experienced any strikes or work stoppages, and our management considers our relationship with our employees to be good.

Information about our segments and geographic areas can be found in Note 18 of the Notes to Consolidated Financial Statements included in Part II, Item 8, herein.

We have made available free of charge through our website, www.DJOglobal.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, other Exchange Act reports and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (SEC). This information can be found under the “Corporate Information—Investors-SEC reports” page of our website. DJO uses its website as a

channel of distribution of material Company information. Financial and other material information regarding the Company is routinely posted and accessible on our website. Our SEC reports are also available free of charge on the SEC website at, www.sec.gov. Such reports can also be inspected and copied at the Public Reference Room of the SEC located at 100 F Street, N.E., Washington, D.C. 20549. Copies of such material can be obtained from the Public Reference Room of the SEC at prescribed rates. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Our Code of Business Conduct and Ethics is available free of charge under the “Corporate Information—Investors-Corporate Governance” page of our website.

Our ability to achieve our operating and financial goals is subject to a number of risks, including risks relating to our business operations, our debt level and government regulations. If any of the following risks actually occur, our business, operating results, prospects or financial condition could be materially and adversely affected. The risks described below are not the only ones that we face. Additional risks not presently known to us or that we currently deem immaterial may also affect our business operations.

Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations under our indebtedness.

We are highly leveraged. As of December 31, 2017, our total indebtedness was $2,440.3 million, exclusive of net unamortized debt issuance costs and original issue discount of $26.2 million. We also had an additional $68.8 million available for borrowing under our revolving credit facility. Our high degree of leverage could have important consequences, including:

Our debt agreements contain restrictions that limit our flexibility in operating our business.

Our senior secured credit facilities and the Indentures contain various covenants that limit our ability to engage in specified types of transactions. These covenants limit our and our restricted subsidiaries’ ability to, among other things:

In addition, we are required to satisfy and maintain a specified senior secured leverage ratio under our credit facilities. This covenant could materially adversely affect our ability to finance our future operations or capital needs. Furthermore, it may restrict our

ability to conduct and expand our business and pursue our business strategies. Our ability to meet this senior secured leverage ratio can be affected by events beyond our control, including changes in general economic and business conditions, and we cannot assure you that we will meet the senior secured leverage ratio in the future or at all.

A breach of any of these covenants could result in a default under one or more of these agreements, including as a result of cross default provisions. Upon the occurrence of an event of default under our senior secured credit facilities, the lenders could elect to declare all amounts outstanding under our senior secured credit facilities to be immediately due and payable and terminate all commitments to extend further credit. Such actions by those lenders could cause cross defaults under our other indebtedness. If we were unable to repay those amounts, the lenders under our senior secured credit facilities could proceed against the collateral granted to them to secure that indebtedness. We have pledged substantially all of our assets as collateral under our senior secured credit facilities. If the lenders under our senior secured credit facilities accelerate the repayment of borrowings, we cannot assure you that we will have sufficient assets to repay the amounts borrowed under our senior secured credit facilities, as well as our unsecured indebtedness.

We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We cannot assure you that we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness. These alternative measures could affect the operation and growth of our business and may not be successful and may not permit us to meet our scheduled debt service obligations. If our operating results and available cash are insufficient to meet our debt service obligations, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. In that case, we may not be able to consummate those dispositions or to obtain the proceeds that we could realize from them, and the proceeds from those dispositions may not be adequate to meet any debt service obligations then due. Additionally, our senior secured credit facilities and the Indentures limit the use of the proceeds from dispositions of assets; as a result, we may not be permitted to use the proceeds from such dispositions to satisfy all current debt service obligations.

Substantially all of our indebtedness matures in 2020 and 2021 and changes in the debt financing markets could negatively impact our ability to obtain attractive financing or re-financing for repayment of such indebtedness which would lead to increased financing costs and reduce our income.

Approximately $1,031.3 million principal amount of term loan borrowings under our senior secured credit facilities mature in June 2020 and approximately $1,313.5 million aggregate principal amount of our notes mature between April 2020 and June 2021. Any recurrence of the significant contraction in the market for debt financing that occurred in 2008 and 2009 or other adverse change relating to the terms of such debt financing with, for example, higher rates and/or more restrictive covenants, would have a material adverse impact on our business. To the extent that the credit markets and/or regulatory changes render such financing difficult to obtain or more expensive, this may negatively impact our operating performance. In addition, to the extent that the markets and/or regulatory changes make it difficult or impossible to refinance debt that is maturing in the near term, we may be unable to repay such debt at maturity and may be forced to sell assets, undergo a recapitalization or seek bankruptcy protection.

If adequate levels of reimbursement and coverage from third party payors for our products are not obtained, healthcare providers and patients may be reluctant to use our products; our margins may suffer and our revenue and profits may decline.

Our sales depend largely on whether there is adequate reimbursement and coverage by government healthcare programs, such as Medicare and Medicaid, and by private payors. We believe that surgeons, hospitals, physical therapists and other healthcare providers may not use, purchase or prescribe our products and patients may not purchase our products if these third party payors do not provide satisfactory coverage of and reimbursement for the costs of our products or the procedures involving the use of our products. Reduced reimbursement rates will also lower our margins on product sales and could adversely impact the profitability and viability of the affected products.

Third party payors continue to review their coverage policies carefully and can, without notice, reduce or eliminate reimbursement for our products or treatments that use our products. For instance, they may attempt to control costs by (i) authorizing

fewer elective surgical procedures, including joint reconstructive surgeries, (ii) requiring the use of the least expensive product available, (iii) reducing the reimbursement for or limiting the number of authorized visits for rehabilitation procedures, (iv) bundling reimbursement for all services related to an episode of care, or (v) otherwise restricting coverage or reimbursement of our products or procedures using our products.

Because many private payors model their coverage and reimbursement policies on Medicare, other third party payors’ coverage of, and reimbursement for, our products also could be negatively impacted by legislative, regulatory or other measures that restrict Medicare coverage or reduce Medicare reimbursement.

Our international sales also depend in part upon the coverage and eligibility for reimbursement of our products through government-sponsored healthcare payment systems and third party payors, the amount of reimbursement, and the cost allocation of payments between the patient and government-sponsored healthcare payment systems and third party payors. Coverage and reimbursement practices vary significantly by country, with certain countries requiring products to undergo a lengthy regulatory review in order to be eligible for third party coverage and reimbursement. In addition, healthcare cost containment efforts similar to those we face in the United States are prevalent in many of the foreign countries in which our products are sold, and these efforts are expected to continue in the future, possibly resulting in the adoption of more stringent reimbursement standards relating to our international operations.

Federal and state health reform and cost control efforts include provisions that could adversely impact our business and results of operations.

ACA is a sweeping measure designed to expand access to affordable health insurance, control health care spending, and improve health care quality. Several provisions of the ACA specifically affect the medical equipment industry. In addition to changes in Medicare DMEPOS reimbursement and an expansion of the DMEPOS competitive bidding program, the ACA provides that for sales on or after January 1, 2013, manufacturers, producers, and importers of specified taxable medical devices must pay an annual excise tax of 2.3% of a deemed price for these products. A limited number of our products are subject to the new tax. A two-year suspension of the medical device tax was passed in late 2015, resulting in no medical device tax obligations for 2016 and 2017. The Continuing Appropriations Act, signed into law on January 22, 2018 extends the moratorium for an additional two years; as a result, the device tax will not apply to sales during calendar years 2018 and 2019. ACA also establishes enhanced Medicare and Medicaid program integrity provisions, including expanded documentation requirements for Medicare DMEPOS orders, more stringent procedures for screening Medicare and Medicaid DMEPOS suppliers, and new disclosure requirements regarding manufacturer payments to physicians and teaching hospitals, along with broader expansion of federal fraud and abuse authorities.

A sweeping tax bill signed into law on December 22, 2017 repealed the ACA’s penalty for failure to maintain health insurance coverage that provides at least minimum essential coverage. Congress also could consider subsequent legislation to repeal additional provisions of the ACA and potentially impose alternative health coverage policies. Further, on January 20, 2017, President Trump signed an Executive Order directing federal agencies with authorities and responsibilities under the ACA to waive, defer, grant exemptions from, or delay the implementation of any provision of the ACA that would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. There can be no assurances that any future healthcare legislation will not have a material adverse impact on our business.

Likewise, most states have adopted or are considering policies to reduce Medicaid spending as a result of state budgetary shortfalls, which in some cases include reduced reimbursement for DMEPOS items and/or other Medicaid coverage restrictions. Federal policy may also impact state Medicaid policy. For instance, effective January 1, 2018, the 21st Century Cures Act prohibits federal financial participation (FFP) payments to states for certain Medicaid DME spending that exceeds what Medicare would have paid for such items. Congress also could consider legislation to replace or revise elements of the ACA, which in turn may require states to modify their own laws and regulations. As states continue to face significant financial pressures, it is possible that state health policy changes will adversely affect our profitability.

If we fail to meet Medicare accreditation and surety bond requirements or DMEPOS supplier standards, it could negatively affect our business operations.

Medicare DMEPOS suppliers (other than certain exempted professionals) must be accredited by an approved accreditation organization as meeting DMEPOS quality standards adopted by CMS including specific requirements for suppliers of custom-fabricated and custom-fitted orthoses and certain prosthetics. Medicare suppliers also are required to meet surety bond requirements. In addition, Medicare DMEPOS suppliers must comply with Medicare supplier standards in order to obtain and retain billing privileges, including meeting all applicable federal and state licensure and regulatory requirements. CMS periodically expands or otherwise clarifies the Medicare DMEPOS supplier standards and states periodically change licensure requirements, including licensure rules imposing more stringent requirements on out-of-state DMEPOS suppliers. We believe we currently are in compliance with these requirements. If we fail to maintain our Medicare accreditation status and/or do not comply with Medicare surety bond or supplier standard requirements or state licensure requirements in the future, or if these requirements are changed or expanded, it could adversely affect our profits and results of operations.

Our Business Transformation Initiative may cause a disruption in our operations and may not be successful.

As discussed under “Item 1. Business—Business Transformation Initiative,” in March 2017 we announced that we had embarked on a series of business transformation projects focused on delivering productivity improvements and reducing costs. This initiative involves costs relating to hiring outside experts and implementing these projects, may result in restructuring and asset impairments charges, and could have other unanticipated costs and consequences. While we expect to realize efficiencies from this initiative, there is no guarantee that we will recognize the full efficiency, cost reduction and other benefits of these activities that we expect. In connection with such activities, we may experience a disruption in our ability to perform functions critical to our strategy. If our business transformation initiative is not successful, or if it is not executed effectively, it could adversely affect our business, financial condition and results of operations.

As part of our Business Transformation Initiative, we have transitioned certain business processes to third-party vendors. Reliance on such third-party vendors subjects us to risks arising from the loss of control of such business processes, changes in pricing that may affect our results of operations, and, potentially, disruption from the termination of provision of these services by such third-party vendors. In addition, the role of outsource providers has required us to implement changes to our existing operations and to adopt new procedures to deal with and manage the performance of these outsource providers. Any delay or failure in the implementation of our operational changes and new procedures could adversely affect our customer relationships. A failure of these third-party vendors to provide services in a satisfactory manner could have an adverse effect on our business, financial condition and results of operations, or our ability to accomplish our financial and management reporting. We may outsource additional functions in the future, which would increase our reliance on third parties.

If we, our contract manufacturers, or our component suppliers fail to comply with the Food and Drug Administration’s (the FDA) Quality System Regulation, our manufacturing could be delayed, and our product sales and profitability could suffer.

Our manufacturing processes, and the manufacturing processes of our contract manufacturers and component suppliers are required to comply with the FDA’s Quality System Regulation, which covers current Good Manufacturing Practice requirements including procedures concerning (and documentation of) the design, testing, production processes, controls, quality assurance, labeling, packaging, storage and shipping of our devices. We also are subject to state requirements and licenses applicable to manufacturers of medical devices. In addition, we must engage in extensive recordkeeping and reporting and must make available our manufacturing facilities and records for periodic unscheduled inspections by governmental agencies, including the FDA, state authorities and comparable agencies in other countries. Moreover, if we fail to pass a Quality System Regulation inspection or to comply with these and other applicable regulatory requirements, we may receive a notice of a violation in the form of inspectional observations on Form FDA-483 or a warning letter, or we could otherwise be required to take corrective action and, in severe cases, we could suffer a disruption of our operations and manufacturing delays. If we fail to take adequate corrective actions, we could be subject to certain enforcement actions, including, among other things, significant fines, suspension of approvals, seizures or recalls of products, operating restrictions and criminal prosecutions. We cannot assure you that the FDA or other governmental authorities would agree with our interpretation of applicable regulatory requirements or that we have in all instances fully complied with all applicable requirements. Any notice or communication from the FDA regarding a failure to comply with applicable requirements could adversely affect our product sales and profitability. We have received FDA warnings letters in the past and we cannot assure you that the FDA will not take further action in the future.

Our contract manufacturers and our component suppliers are also required to comply with the FDA’s Quality System Regulations. We cannot assure anyone that our contract manufacturers’ or component suppliers’ facilities would pass any future quality system inspection. If our or any of our contract manufacturers’ or component suppliers’ facilities fail a quality system inspection, our product sales and profitability could be adversely affected.

The loss of the services of our key management and personnel could adversely affect our ability to operate our business.

Our executive officers have substantial experience and expertise in our industry. Our future success depends, to a significant extent, on the abilities and efforts of our executive officers and other members of our management team. We compete for such personnel with other companies, academic institutions, government entities and other organizations, and our failure to hire and retain qualified individuals for senior executive positions could have a material adverse impact on our business.

We may experience substantial fluctuations in our quarterly operating results and you should not rely on them as an indication of our future results.

Our quarterly operating results may vary significantly due to a combination of factors, many of which are beyond our control. These factors include

Accordingly, our quarterly sales and operating results may vary significantly in the future and period-to-period comparisons of our results of operations may not be meaningful and should not be relied upon as indications of future performance. We cannot assure you that our sales will increase or be sustained in future periods or that we will be profitable in any future period.

Our reported results may be adversely affected by increases in reserves for contractual allowances, rebates, product returns, uncollectible accounts receivable and inventory.

We have established reserves to account for contractual allowances, rebates, product returns and reserves for rental credits. Significant management judgment must be used and estimates must be made in connection with establishing the reserves for contractual allowances, rebates, product returns, uncollectible accounts receivable and inventory and other allowances in any accounting period. If such judgments and estimates are inaccurate, our reserves for such items may have to be increased which could adversely affect our reported financial results by reducing our net revenues and/or profitability for the reporting period.

We operate in a highly competitive business environment, and our inability to compete effectively could adversely affect our business prospects and results of operations.

We operate in highly competitive and fragmented markets. Our Bracing and Vascular, Recovery Sciences and International segments compete with both large and small companies, including several large, diversified companies with significant market share and numerous smaller niche companies, particularly in the physical therapy products market. Our Surgical Implant segment competes with a small number of very large companies that dominate the market, as well as other companies similar to our size. We may not be able to offer products similar to, or more desirable than, those of our competitors or at a price comparable to that of our competitors. Compared to us, many of our competitors have

Accordingly, we may be at a disadvantage with respect to our competitors. These factors may materially impair our ability to develop and sell our products.

The success of all of our products depends heavily on acceptance by healthcare professionals who prescribe and recommend our products, and our failure to maintain a high level of confidence by key healthcare professionals in our products could adversely affect our business.

We have maintained customer relationships with numerous orthopedic surgeons, primary care physicians, other specialist physicians, physical therapists, athletic trainers, chiropractors and other healthcare professionals. We believe that sales of our products depend significantly on their confidence in, and recommendations of, our products. Acceptance of our products depends on educating the healthcare community as to the distinctive characteristics, perceived benefits, clinical efficacy and cost-effectiveness of our products compared to the products offered by our competitors and on training healthcare professionals in the proper use and application of our products. Failure to maintain these customer relationships and develop similar relationships with other leading healthcare professionals could result in fewer recommendations of our products, which may adversely affect our sales and profitability.

In addition, from time to time, CMS or its contractors have considered imposing restrictions on the ability of DMEPOS suppliers to maintain consigned inventory in physicians’ offices and then for bill for such inventory once a physician prescribes the item for a patient. In December 2015, the National Supplier Clearinghouse (NSC), a CMS contractor, suggested limits on the ability of a DMEPOS supplier to perform functions at the provider’s facility and then bill for the consigned inventory. The NSC policy was subsequently rescinded. There can be no assurances that CMS or its contractors will not adopt more restrictive policies regarding consignment arrangements in the future.

The success of our surgical implant products depends on our relationships with leading surgeons who assist with the development and testing of our products, and our ability to comply with enhanced disclosure requirements regarding payments to physicians.

A key aspect of the development and sale of our surgical implant products is the use of designing and consulting arrangements with orthopedic surgeons who are well recognized in the healthcare community. These surgeons assist in the development and clinical testing of new surgical implant products. They also participate in symposia and seminars introducing new surgical implant products and assist in the training of healthcare professionals in using our new products. We may not be successful in maintaining or renewing our current designing and consulting arrangements with these surgeons or in developing similar arrangements with new surgeons. In that event, our ability to develop, test and market new surgical implant products could be adversely affected.

In addition, the Physician Payment Sunshine Act and related state marketing and payment disclosure requirements and industry guidelines could have an adverse impact on our relationships with surgeons, and there can be no assurances that such requirements and guidelines would not impose additional costs on us and/or adversely impact our consulting and other arrangements with surgeons.

Proposed laws or regulations that would limit the types of orthopedic professionals who can fit, sell or seek reimbursement for our products could, if adopted, adversely affect our business.

Federal and state legislatures and regulators have periodically considered proposals to limit the types of orthopedic professionals who can fit or sell our orthotic products or who can seek reimbursement for them. Several states have adopted legislation imposing certification or licensing requirements on the measuring, fitting and adjusting of certain orthotic devices, and additional states may do so in the future. Although some of these state laws exempt manufacturers’ representatives, others do not. Such laws could reduce the number of potential customers by restricting our sales representatives’ activities in those jurisdictions and/or reduce demand for our

products by reducing the number of professionals who fit and sell them. The adoption of such policies could have a material adverse impact on our business.

In addition, legislation has been adopted, but not implemented to date, requiring that certain certification or licensing requirements be met for individuals and suppliers furnishing certain custom-fabricated orthotic devices as a condition of Medicare payment. On January 12, 2017, CMS published a proposed rule that would implement these requirements, but CMS subsequently withdrew the rule. Medicare currently follows state policies in those states that require the use of an orthotist or prosthetist for furnishing of orthotics or prosthetics.

In 2014, CMS proposed, but ultimately did not adopt, a regulatory change that would have narrowly defined the “specialized training” that is needed to provide custom fitting of orthotics under the Medicare program if the fitter is not a certified orthotist. We cannot predict whether additional restrictions will be implemented at the state or federal level or the impact of such policies on our business.

We rely on our own direct sales force for certain of our products, which may result in higher fixed costs than our competitors and may slow our ability to reduce costs in the face of a sudden decline in demand for our products.

We rely on our own direct sales force of representatives in the United States and in Europe to market and sell certain of the orthopedic rehabilitation products which are intended for use in the home and in rehabilitation clinics. Some of our competitors rely predominantly on independent sales agents and third party distributors. A direct sales force may subject us to higher fixed costs than those of companies that market competing products through independent third parties, due to the costs that we will bear associated with employee benefits, training, and managing sales personnel. As a result, we could be at a competitive disadvantage. Additionally, these fixed costs may slow our ability to reduce costs in the face of a sudden decline in demand for our products, which could have a material adverse impact on our results of operations.

If we fail to establish new sales and distribution relationships or maintain our existing relationships, or if our third party distributors and independent sales representatives fail to commit sufficient time and effort or are otherwise ineffective in selling our products, our results of operations and future growth could be adversely impacted.

The sale and distribution of certain of our orthopedic products, CMF products and our surgical implant products depend, in part, on our relationships with a network of third party distributors and independent commissioned sales representatives. These third party distributors and independent sales representatives maintain the customer relationships with the hospitals, orthopedic surgeons, physical therapists and other healthcare professionals that purchase, use and recommend the use of our products. Although our internal sales staff trains and manages these third party distributors and independent sales representatives, we do not directly monitor the efforts that they make to sell our products. In addition, some of the independent sales representatives that we use to sell our surgical implant products also sell products that directly compete with our core product offerings. These sales representatives may not dedicate the necessary effort to market and sell our products. If we fail to attract and maintain relationships with third party distributors and skilled independent sales representatives or fail to adequately train and monitor the efforts of the third party distributors and sales representatives that market and sell our products, or if our existing third party distributors and independent sales representatives choose not to carry our products, our results of operations and future growth could be adversely affected.

Our international operations expose us to risks related to conducting business in multiple jurisdictions outside the United States.

The international scope of our operations exposes us to economic, regulatory and other risks in the countries in which we operate. We generated 27.0% of our net revenues from customers outside the United States for the year ended December 31, 2017. Doing business in foreign countries exposes us to a number of risks, including the following:

In addition, as we grow our operations internationally, we will become increasingly dependent on foreign distributors and sales agents for our compliance and adherence to foreign laws and regulations that we may not be familiar with, and we cannot assure you that these distributors and sales agents will adhere to such laws and regulations or adhere to our own business practices and policies. Any violation of laws and regulations by foreign distributors or sales agents or a failure of foreign distributors or sales agents to comply with our business practices and policies could result in legal or regulatory sanctions against us or potentially damage our reputation in that respective international market. If we fail to manage these risks effectively, we may not be able to grow our international operations, and our business and results of operations may be materially adversely affected.

Our business is conducted world-wide, with raw material and finished goods imported from and exported to a substantial number of countries. In particular, a significant portion of our products are manufactured in our plant in Tijuana, Mexico and imported to the United States before shipment to domestic customers or export to other countries. We are subject to customs and import/export rules in the U.S., including FDA regulatory requirements applicable to medical devices, detailed below, and in other countries, and to requirements for payment of appropriate duties and other taxes as goods move between countries. Customs authorities monitor our shipments and payments of duties, fees and other taxes and can perform audits to confirm compliance with applicable laws and regulations. Our failure to comply with import/export rules and restrictions or to properly classify our products under tariff regulations and pay the appropriate duty could expose us to fines and penalties and adversely affect our financial condition and business operations.

Fluctuations in foreign exchange rates may adversely affect our financial condition and results of operations and may affect the comparability of our results between financial periods.

Our foreign operations expose us to currency fluctuations and exchange rate risks. We are exposed to the risk of currency fluctuations between the U.S. Dollar and the Euro, Pound Sterling, Canadian Dollar, Mexican Peso, Swiss Franc, Australian Dollar, Japanese Yen, Norwegian Krone, Danish Krone, Swedish Krona, South African Rand, Tunisian Dinar, Chinese Yuan Renminbi and Indian Rupee. Sales denominated in foreign currencies accounted for 24.4% of our consolidated net sales for the year ended December 31, 2017, of which 16.7% were denominated in the Euro. Our exposure to fluctuations in foreign currencies arises because certain of our subsidiaries’ results are recorded in these currencies and then translated into U.S. Dollars for inclusion in our consolidated financial statements, and certain of our subsidiaries enter into purchase or sale transactions using a currency other than our functional currency. As we continue to distribute and manufacture our products in selected foreign countries, we expect that future sales and costs associated with our activities in these markets will continue to be denominated in the applicable foreign currencies, which could cause currency fluctuations to materially impact our operating results. Changes in currency exchange rates may adversely affect our financial condition and results of operations and may affect the comparability of our results between reporting periods.

We may not be able to effectively manage our currency translation risks, and volatility in currency exchange rates may adversely affect our financial condition and results of operations.

Our success depends on receiving regulatory approval for our products, and failure to do so could adversely affect our growth and operating results.

Our products are subject to extensive regulation in the United States by the FDA and by similar governmental authorities in the foreign countries where we do business. The FDA regulates virtually all aspects of a medical device’s development, testing, manufacturing, labeling, promotion, distribution and marketing, as well as modifications to existing products and the marketing of existing products for new indications. In general, unless an exemption applies, a medical device and modifications to the device or its

indications must receive either pre-market approval or pre-market clearance from the FDA before it can be marketed in the United States. While in the past we have received such approvals and clearances, we may not be successful in the future in receiving such approvals and clearances in a timely manner or at all. See “Government Regulations—FDA and Similar Foreign Government Regulations” in the “Business” section above. If we begin to have significant difficulty obtaining such FDA approvals or clearances in a timely manner or at all, it could have a material adverse impact on our revenues and growth.

We may fail to receive positive clinical results for our products in development that require clinical trials, and even if we receive positive clinical results, we may still fail to receive the necessary clearance or approvals to market our products.

In the development of new products or new indications for, or modifications to, existing products, we may conduct or sponsor clinical trials. Clinical trials are expensive and require significant investment of time and resources and may not generate the data we need to support a submission to the FDA. Clinical trials are subject to regulation by the FDA and, if federal funds are involved or if an investigator or site has signed a federal assurance, are subject to further regulation by the Office for Human Research Protections and the National Institutes of Health. Failure to comply with such regulation, including, but not limited to, failure to obtain adequate consent of subjects, failure to adequately disclose financial conflicts or failure to report data or adverse events accurately, could result in fines, penalties, suspension of trials, and the inability to use the data to support an FDA submission.

If we fail to comply with the various regulatory regimes for the foreign markets in which we operate, our operational results could be adversely affected.

In many of the foreign countries in which we market our products, we are subject to extensive regulations, including those in Europe. The regulation of our products in the European Economic Area (which consists of the twenty-seven member states of the European Union, as well as Iceland, Liechtenstein and Norway) is governed by various directives and regulations promulgated by the European Commission and national governments. Only medical devices that comply with certain conformity requirements are allowed to be marketed within the European Economic Area. In addition, the national health or social security organizations of certain foreign countries, including certain countries outside Europe, require our products to be qualified before they can be marketed in those countries. Failure to receive or delays in the receipt of, relevant foreign qualifications in the European Economic Area or other foreign countries could have a material adverse impact on our business.

The FDA regulates the export of medical devices from the United States to foreign countries and certain foreign countries may require FDA certification that our products are in compliance with U.S. law. If we fail to obtain or maintain export certificates required for the export of our products, we could suffer a material adverse impact on our revenues and growth.

We are subject to laws concerning our marketing activities in foreign countries where we conduct business. For example, within the EU, the control of unlawful marketing activities is a matter of national law in each of the member states of the EU. The member states of the EU closely monitor perceived unlawful marketing activity by companies. We could face civil, criminal and administrative sanctions if any member state determines that we have breached our obligations under its national laws. In particular, as a result of conducting business in the U.K. through our subsidiary in that country, we are, in certain circumstances, subject to the anti-corruption provisions of the U.K. Bribery Act in our activities conducted in any country in the world. Industry associations also closely monitor the activities of member companies. If these organizations or authorities name us as having breached our obligations under their regulations, rules or standards, our reputation would suffer and our business and financial condition could be adversely affected. We are also subject to the U.S. Foreign Corrupt Practices Act (the FCPA), antitrust and anti-competition laws, and similar laws in foreign countries, any violation of which could create a substantial liability for us and also cause a loss of reputation in the market. The EU and various of its constituent states have promulgated extensive rules regulating the process and means by which personal data can be exported out of the EU or its constituent states to the US and elsewhere, including for human resources purposes by multinational companies. From time to time, we may face audits or investigations by one or more domestic or foreign government agencies, compliance with which could be costly and time-consuming, and could divert our management and key personnel from our business operations. An adverse outcome under any such investigation or audit could subject us to fines or other penalties, which could adversely affect our business and financial results.

If the Department of Health and Human Services (HHS), the Office of Inspector General (OIG), the FDA or another regulatory agency determines that we have promoted off-label use of our products, we may be subject to various penalties, including civil or criminal penalties, and the off-label use of our products may result in injuries that lead to product liability suits, which could be costly to our business.

The OIG, the FDA and other regulatory agencies actively enforce regulations prohibiting the promotion of a medical device for a use that has not been cleared or approved by the FDA. Use of a device outside its cleared or approved indications is known as “off-label” use. Physicians may prescribe our products for off-label uses, as the FDA does not restrict or regulate a physician’s choice of treatment within the practice of medicine. However, if the OIG or the FDA, or another regulatory agency determines that our promotional materials, training, or activities constitute improper promotion of an off-label use, the regulatory agency could request that we modify our promotional materials, training, or activities, or subject us to regulatory enforcement actions, including the

issuance of a warning letter, injunction, seizure, civil fine and criminal penalties. Although our policy is to refrain from statements and activities that could be considered off-label promotion of our products, the FDA, another regulatory agency, or the U.S. Department of Justice could disagree and conclude that we have engaged in off-label promotion and, potentially, caused the submission of false claims. In addition, the off-label use of our products may increase the risk of injury to patients, and, in turn, the risk of product liability claims. Product liability claims are expensive to defend and could divert our management’s attention and result in substantial damage awards against us.

Our compensation, marketing and sales practices may contain certain risks with respect to the manner in which these practices were historically conducted that could have a material adverse impact on us.

Although we believe our agreements and arrangements with healthcare providers are in compliance with applicable laws, under applicable federal and state healthcare fraud and abuse, anti-kickback, false claims and self-referral laws, it could be determined that our designing and consulting arrangements with surgeons, our marketing and sales practices, and our OfficeCare program fall outside permitted arrangements, thereby subjecting us to possible civil and/or criminal sanctions (including exclusion from the Medicare and Medicaid programs), which could have a material adverse impact on our business. These arrangements are now subject to increased visibility under the provisions of the Physician Payments Sunshine Act/Open Payments provisions. Although we believe we maintain a satisfactory compliance program, it may not be adequate in the detection or prevention of violations. The form and effectiveness of our compliance program may be taken into account by the government in assessing sanctions, if any, should it be determined that violations of laws have occurred.

Audits or denials of our claims by government agencies could reduce our revenues or profits.

As part of our business operations, we submit claims on behalf of patients directly to, and receive payments directly from, the Medicare and Medicaid programs and private payors. Therefore, we are subject to extensive government regulation, including detailed requirements for submitting reimbursement claims under appropriate codes and maintaining certain documentation to support our claims. Medicare contractors and Medicaid agencies periodically conduct pre- and post-payment reviews and other audits of claims and are under increasing pressure to more closely scrutinize healthcare claims and supporting documentation. We have historically been subject to pre-payment and post-payment reviews as well as audits of claims and may experience such reviews and audits of claims in the future. Such reviews and/or similar audits of our claims including by RACs (private companies operating on a contingent fee basis to identify and recoup Medicare overpayments) and ZPICs (contractors charged with investigating potential fraud and abuse) could result in material delays in payment, as well as material recoupment or denials, which would reduce our net sales and profitability, or in exclusion from participation in the Medicare or Medicaid programs. Private payors may from time to time conduct similar reviews and audits.

Additionally, we participate in the government’s Federal Supply Schedule program for medical equipment, whereby we contract with the government to supply certain of our products. Participation in this program requires us to follow certain pricing practices and other contract requirements. Failure to comply with such pricing practices and/or other contract requirements could result in delays in payment or fines or penalties, which could reduce our revenues or profits.

Federal and state agencies have become increasingly vigilant in recent years in their investigation of various business practices under various healthcare “fraud and abuse” laws with respect to our business arrangements with prescribing physicians and other healthcare professionals, as well as our filing of DMEPOS claims for reimbursement.

We are, directly or indirectly through our customers, subject to various federal and state laws pertaining to healthcare fraud and abuse, including the Federal Anti-Kickback Statute, several federal False Claims statutes, HIPAA’s healthcare fraud statute and false statements statute, federal physician self-referral prohibition (Stark Law) and state equivalents to these statutes.

The federal government has significantly increased investigations of and enforcement activity involving medical device manufacturers with regard to alleged kickbacks and other forms of remuneration to physicians who use and prescribe their products. Such investigations can arise based on allegations by the government or private whistleblowers of violations of the federal Anti-Kickback Statute and/or the civil False Claims Act, in connection with or separate from alleged off-label marketing of products to physicians and others. In addition, significant state and federal investigative and enforcement activity addresses alleged improprieties in the filings of claims for payment or reimbursement by Medicare, Medicaid, and other payors.

The fraud and abuse laws and regulations are complex, and even minor, inadvertent irregularities in submissions can potentially give rise to investigations and claims that the law has been violated. Any violations of these laws or regulations could result in a material adverse impact on our business, financial condition and results of operations. If there is a change in law, regulation or administrative or judicial interpretations, we may have to change one or more of our business practices to be in compliance with these

laws. Required changes could be costly and time consuming. Any failure to make required changes could result in our losing business or our existing business practices being challenged as unlawful.

The OIG announced in January 2018 that it is investigating questionable Medicare billing for off-the-shelf orthotic devices industry wide. In particular, the OIG is reviewing potential lack of documentation of medical necessity in patients' medical records for three types of off-the-shelf orthotic devices (L0648, L0650, and L1833). The OIG will evaluate the extent to which Medicare beneficiaries are being supplied these orthotic devices without an encounter with the referring physician within 12 months prior to their orthotic claim and will analyze billing trends on a nation-wide scale. The results of this investigation could potentially lead to more restrictive Medicare policies and/or increased claims denials.

Our activities are subject to Federal Privacy and Transaction Law and Regulations, which could have an impact on our operations.

HIPAA and the HIPAA Rules impact the transmission, maintenance, use and disclosure of PHI. As such, HIPAA and the HIPAA Rules apply to certain aspects of our business. To the extent applicable to our operations, we believe we are currently in compliance with HIPAA and the applicable HIPAA Rules. There are costs and administrative burdens associated with ongoing compliance with the HIPAA Rules and similar state law requirements. Any failure to comply with current and applicable future requirements could adversely affect our profitability. Related to the incidents described in the “Government Regulations—Federal Privacy and Transaction Law and Regulations” subsection in the “Business” section above, our compliance with the HIPAA Rules is currently under investigation by the Office for Civil Rights. If OCR does not agree that we are in compliance with the HIPAA Rules, we may be subject to civil money penalties or other actions. We are unable to predict at this time whether or to what extent OCR will impose any civil monetary penalties or take other action as a result of the incidents.

Managed care and buying groups have put downward pressure on the prices of our products.

The growth of managed care and the advent of buying groups in the United States have caused a shift toward coverage and payments based on more cost-effective treatment alternatives. Buying groups enter into preferred supplier arrangements with one or more manufacturers of medical products in return for price discounts to members of these buying groups. Our failure to obtain new preferred supplier commitments from major group purchasing organizations or our failure to retain our existing preferred supplier commitments could adversely affect our sales and profitability. In international markets where we sell our products, we have historically experienced downward pressure on product pricing and other effects of healthcare cost control efforts that are similar to that which we have experienced in the United States. We expect a continued emphasis on healthcare cost controls, alternate payment models such as bundled payments, and managed care in the United States and in these international markets, which could put further downward pressure on product pricing, which, in turn may adversely affect our sales and profitability.

Our marketed, approved, or cleared products are subject to the recall authority of U.S. and foreign regulatory bodies. Product recalls could harm our reputation and business.

We are subject to ongoing medical device reporting regulations that require us to report to the FDA and similar governmental authorities in other countries if we receive a report or otherwise learn that any of our products may have caused, or contributed to death or serious injury, or that any of our products has malfunctioned in a way that would be likely to cause, or contribute to, death or serious injury if the malfunction were to recur. The FDA and similar governmental authorities in other countries have the authority to require us to recall our products in the event of actual or potential material deficiencies or defects in design manufacturing, or labeling, and we have been subject to product recalls in the past. In addition, in light of an actual or potential material deficiency or defect in design, manufacturing, or labeling, we may voluntarily elect to recall our products. A government mandated recall or a voluntary recall initiated by us could occur as a result of actual or potential component failures, manufacturing errors, or design defects, including defects in labeling. Any recall would divert managerial and financial resources and could harm our reputation with our customers and with the healthcare professionals that use, prescribe and recommend our products. We could have product recalls that result in significant costs to us in the future, and such recalls could have a material adverse impact on our business.

Product liability claims may harm our business, particularly if the number of claims increases significantly or our product liability insurance proves inadequate.

The manufacture and sale of orthopedic devices and related products exposes us to a significant risk of product liability claims. From time to time, we have been, and we are currently, subject to a number of product liability claims alleging that the use of our products resulted in adverse effects. Even if we are successful in defending against any liability claims, such claims could nevertheless distract our management, result in substantial costs, harm our reputation, adversely affect the sales of all our products and otherwise harm our business. If there is a significant increase in the number of product liability claims, our business could be adversely affected. Further, a significant increase in claims or adverse outcomes could result in our product liability insurance being inadequate.

Our concentration of manufacturing operations in Mexico increases our business and competitive risks.

Our most significant manufacturing facility is our facility in Tijuana, Mexico, and we also have a relatively small manufacturing operation in Tunisia. Our current and future foreign operations are subject to risks of political and economic instability inherent in activities conducted in foreign countries. Because there are no readily accessible alternatives to these facilities, any event that disrupts manufacturing at or distribution or transportation from these facilities would materially adversely affect our operations. In addition, as a result of this concentration of manufacturing activities, our sales in foreign markets may be at a competitive disadvantage to products manufactured locally due to freight costs, custom and import duties and favorable tax rates for local businesses.

If we lose one of our key suppliers or one of our contract manufacturers stops making the raw materials and components used in our products, we may be unable to meet customer orders for our products in a timely manner or within our budget.

We rely on a limited number of foreign and domestic suppliers for the raw materials and components used in our products. One or more of our suppliers may decide to cease supplying us with raw materials and components for reasons beyond our control. FDA regulations may require additional testing of any raw materials or components from new suppliers prior to our use of those materials or components. In addition, in the case of a device which is the subject of a pre-market approval, we may be required to obtain prior FDA permission (which may or may not be given), which could delay or prevent our access or use of such raw materials or components. If we are unable to obtain materials we need from our suppliers or our agreements with our suppliers are terminated, and we cannot obtain these materials from other sources, we may be unable to manufacture our products to meet customer orders in a timely manner or within our manufacturing budget. In that event, our business and results of operations could be adversely affected.

In addition, we rely on third parties to manufacture some of our products. For example, we use a single source for many of the home electrotherapy devices our French channel distributes. If our agreements with these manufacturing companies were terminated, we may not be able to find suitable replacements within a reasonable amount of time or at all. Any such cessation, interruption or delay may impair our ability to meet scheduled deliveries of our products to our customers and may cause our customers to cancel orders. In that event, our reputation and results of operations may be adversely affected.

Some of our important suppliers are in China and other parts of Asia and provide predominately finished soft goods products. In the year ended December 31, 2017, we obtained 20.3% of our total purchased materials from suppliers in China and other parts of Asia. During the election campaign, President Trump made comments suggesting that he was not supportive of certain existing international trade agreements, including the North America Free Trade Agreement (“NAFTA”) and raised the possibility of imposing significant increases on tariffs of goods imported into the United States, particularly from China and Mexico. At this time, it remains unclear what President Trump would or would not do with respect to these international trade agreements and whether or not increased import tariffs will be imposed. If President Trump takes action to withdraw from or materially modify NAFTA or certain other international trade agreements or otherwise influence U.S. trade relations with other countries, our business, financial condition and results of operations could be adversely affected. In addition, political and economic instability and changes in government regulations in China and other parts of Asia could affect our ability to continue to receive materials from suppliers there. The loss of suppliers in these areas, any other interruption or delay in the supply of required materials or our inability to obtain these materials at acceptable prices and within a reasonable amount of time could impair our ability to meet scheduled product deliveries to our customers and could hurt our reputation and cause customers to cancel orders.

In addition, we purchase the microprocessor used in the OL1000 and SpinaLogic devices from a single manufacturer. Although there are feasible alternate microprocessors that might be used immediately, all are produced by a single supplier. In addition, there are single suppliers for other components used in the OL1000 and SpinaLogic devices and only two suppliers for the magnetic field sensor employed in them. Establishment of additional or replacement suppliers for these components cannot be accomplished quickly.

If our patents and other intellectual property rights do not adequately protect our products, we may lose market share to our competitors and may not be able to operate our business profitably. We may also become involved in litigation regarding our patents and other intellectual property rights which can have a material adverse effect on our operating results and financial condition.

We rely on a combination of patents, trade secrets, copyrights, trademarks, license agreements and contractual provisions to establish and protect our intellectual property rights in our products and the processes for the development, manufacture and marketing of our products.

We use non-patented, proprietary know-how, trade secrets, processes and other proprietary information and currently employ various methods to protect this proprietary information, including confidentiality agreements, invention assignment agreements and proprietary information agreements with vendors, employees, independent sales agents, distributors, consultants, and others. However, these agreements may be breached. The FDA or another governmental agency may require the disclosure of such information in order

for us to have the right to market a product. The FDA may also disclose such information on its own initiative if it should decide that such information is not confidential business or trade secret information. Trade secrets, know-how and other unpatented proprietary technology may also otherwise become known to or independently developed by our competitors.

In addition, we also hold U.S. and foreign patents relating to a number of our components and products and have patent applications pending with respect to other components and products. We also apply for additional patents in the ordinary course of our business, as we deem appropriate. However, these precautions offer only limited protection, and our proprietary information may become known to, or be independently developed by, competitors, or our proprietary rights in intellectual property may be challenged, any of which could have a material adverse impact on our business, financial condition and results of operations. Additionally, we cannot assure you that our existing or future patents, if any, will afford us adequate protection or any competitive advantage, that any future patent applications will result in issued patents or that our patents will not be circumvented, invalidated or declared unenforceable.

We may become a party to lawsuits involving patents or other intellectual property. Such litigation is costly and time consuming. If we lose any of these proceedings, a court or a similar foreign governing body could invalidate or render unenforceable our owned or licensed patents or other intellectual property, require us to pay significant damages, seek licenses and/or pay ongoing royalties to third parties (which may not be available under terms acceptable to us, or at all), require us to redesign our products, or prevent us from manufacturing, using or selling our products, any of which would have an adverse impact on our results of operations and financial condition.

Any proceedings before the U.S. Patent and Trademark Office could result in adverse decisions as to the priority of our inventions and the narrowing or invalidation of claims in issued or pending patents. We could also incur substantial costs in any such proceedings. In addition, the laws of some of the countries in which our products are or may be sold may not protect our products and intellectual property to the same extent as U.S. laws, if at all. We may also be unable to protect our rights in trade secrets, trademarks and unpatented proprietary technology in these countries.

In addition, we hold patent, trademark and other intellectual property licenses from third parties for some of our products and on technologies that are necessary in the design and manufacture of some of our products. The loss of such licenses could prevent us from manufacturing, marketing and selling these products, which in turn could harm our business.

Our business strategy relies on certain assumptions concerning demographic and other trends that impact the market for our products. If these assumptions prove to be incorrect, demand for our products may be lower than we currently expect.

Our ability to achieve our business objectives is subject to a variety of factors, including the relative increase in the aging of the general population and an increase in participation in exercise and sports and more active lifestyles. In addition, our business strategy relies on an increasing awareness and clinical acceptance of non-invasive, non-systemic treatment and rehabilitation products, such as electrotherapy. We believe that these trends will increase the need for our orthopedic, physical therapy, regenerative and surgical implant products. The projected demand for our products could materially differ from actual demand if our assumptions regarding these trends and acceptance of our products by healthcare professionals and patients prove to be incorrect or do not materialize. If our assumptions regarding these factors prove to be incorrect, we may not be able to successfully implement our business strategy, which could adversely affect our results of operations. In addition, the perceived benefits of these trends may be offset by competitive or business factors, such as the introduction of new products by our competitors or the emergence of other countervailing trends.

We rely on information technology in our operations, and any material failure, inadequacy, interruption or security failure of that technology could harm our business, financial condition, results of operations and prospects.

We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information, and manage or support a variety of business processes, including medical records, financial transactions and records, personal identifying information, and payroll data. We rely on commercially available systems, software, tools and monitoring to provide security for processing, transmission and storage of confidential patient and other customer information, such as individually identifiable information, including information relating to health protected by HIPAA. Although we have taken steps to protect the security of our information systems and the data maintained in those systems, it is possible that our safety and security measures will not prevent the systems’ improper functioning or damage or the improper access or disclosure of personally identifiable information such as in the event of cyber-attacks. Security breaches, including physical or electronic break-ins, theft of mobile equipment, computer viruses, attacks by hackers and similar breaches can create system disruptions or shutdowns or the unauthorized disclosure of confidential information. If personal or otherwise protected information of our patients is improperly accessed, tampered with or distributed, we may incur significant costs to remediate possible injury to the affected patients and we may be subject to sanctions and civil or criminal penalties if we are found to be in violation of the privacy or security rules under HIPAA or other similar federal or state laws protecting confidential patient health information. Any failure to maintain proper functionality and security of our

information systems could interrupt our operations, damage our reputation, subject us to liability claims or regulatory penalties and could have a material adverse effect on our business, financial condition, results of operations and prospects.

We could incur significant costs complying with environmental and health and safety requirements, or as a result of liability for contamination or other harm caused by hazardous materials that we use.

Our research and development and manufacturing processes involve the use of hazardous materials. We are subject to federal, state, local and foreign environmental requirements, including regulations governing the use, manufacture, handling, storage and disposal of hazardous materials, discharge to air and water, the cleanup of contamination and occupational health and safety matters. We cannot eliminate the risk of contamination or injury resulting from hazardous materials, and we may incur liability as a result of any contamination or injury. Under some environmental laws and regulations, we could also be held responsible for costs relating to any contamination at our past or present facilities and at third party waste disposal sites where we have sent wastes. These could include costs relating to contamination that did not result from any violation of law, and in some circumstances, contamination that we did not cause. We may incur significant expenses in the future relating to any failure to comply with environmental laws. Any such future expenses or liability could have a significant negative impact on our financial condition. The enactment of stricter laws or regulations, the stricter interpretation of existing laws and regulations or the requirement to undertake the investigation or remediation of currently unknown environmental contamination at our own or third party sites may require us to make additional expenditures, which could be material.

If a natural or man-made disaster strikes our manufacturing facilities, we will be unable to manufacture our products for a substantial amount of time and our sales will decline.

A significant portion of our rehabilitation products are manufactured in a facility in Tijuana, Mexico, with a number of products for the European market manufactured in a Tunisian facility. In Vista, California we manufacture our custom rigid bracing products, which remain in the United States to facilitate quick turnaround on custom orders, vascular products, and our CMF product line. Our clinical electrotherapy devices, patient care products, physical therapy and certain CPM devices are now manufactured in our facilities located in Tijuana, Mexico. In our Surgical Implant business, we manufacture our products in our manufacturing facility at Austin, Texas. These facilities and the manufacturing equipment we use to produce our products would be difficult to repair or replace. Our facilities may be affected by natural or man-made disasters. If one of our facilities were affected by a disaster, we would be forced to rely on third party manufacturers or shift production to another manufacturing facility. In such an event, we would face significant delays in manufacturing which would prevent us from being able to sell our products. In addition, our insurance may not be sufficient to cover all of the potential losses and may not continue to be available to us on acceptable terms, or at all.

Affiliates of Blackstone own substantially all of the equity interest in us and may have conflicts of interest with us or investors in the future.

As of March 15, 2017, affiliates of Blackstone collectively beneficially own 97.6% of DJO’s issued and outstanding capital stock and Blackstone designees hold a majority of the seats on DJO’s board of directors. As a result, affiliates of Blackstone have control over our decisions to enter into any corporate transaction and have the ability to prevent any transaction that requires the approval of security holders regardless of whether other security holders, including holders of the Notes, believe that any such transactions are in their own best interests. For example, affiliates of Blackstone could collectively cause us to make acquisitions that increase the amount of indebtedness or to sell assets, or could cause us to issue additional capital stock or declare dividends. So long as affiliates of Blackstone continue to directly or indirectly own a significant amount of the outstanding shares of our common stock, they will continue to be able to strongly influence or effectively control our decisions. In addition, Blackstone has no obligation to provide us with any additional debt or equity financing.

Additionally, Blackstone and its affiliates are in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. Blackstone and its affiliates may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us.

If we do not achieve and maintain effective internal controls over financial reporting, we could fail to accurately report our financial results.

During the course of the preparation of our financial statements, we evaluate our internal controls to identify and correct deficiencies in our internal controls over financial reporting. In the event we are unable to identify and correct deficiencies in our internal controls in a timely manner, we may not record, process, summarize and report financial information accurately and within the time periods required for our financial reporting under the terms of the agreements governing our indebtedness.

It is possible that control deficiencies could be identified by our management or independent registered public accounting firm in the future or may occur without being identified. Such a failure could negatively impact the market price and liquidity of the Notes,

cause holders of our Notes to lose confidence in our reported financial condition, lead to a default under our senior secured credit facilities and the Indentures and otherwise materially adversely affect our business and financial condition.

Location	Use	Status	Lease Termination Date	Square Feet (in thousands)
Bracing and Vascular and Recovery Sciences Segments:
Vista, California	Corporate headquarters, operations, research and development	Leased	August 2021		112
Tijuana, Mexico	Manufacturing and distribution facility	Leased	January 2027		286
Asheboro, North Carolina	Manufacturing and distribution facility	Owned	N/A		115
Plainfield, Indiana	Distribution facility	Leased	October 2019		110
Mequon, Wisconsin	Office, manufacturing and distribution facility	Leased	June 2024		95
New Brighton, Minnesota	Office, operations, medical billing	Leased	December 2023		32
Vista, California	Manufacturing facility	Leased	December 2021		53
Vista, California	Office and distribution facility	Leased	April 2020		21
Surgical Implant Segment:
Austin, Texas	Operations and manufacturing facility, warehouse, research and distribution	Leased	February 2020		53
Austin, Texas	Office and distribution facility	Leased	February 2020		54
International Segment:
Freiburg, Germany	Research and development, distribution facility	Leased	December 2020		23
Freiburg, Germany	Research and development, distribution facility	Leased	December 2020		20
Mouguerre, France	Office and distribution facility	Leased	December 2021		51
Sfax, Tunisia	Manufacturing facility	Leased	December 2019		19
Sydney, Australia	Office and distribution facility	Leased	September 2019		28
Mississauga, Canada	Office and distribution facility	Leased	April 2020		30
Freiburg, Germany	Office and distribution facility	Leased	June 2019		26
Herentals, Belgium	Office and distribution facility	Leased	December 2018		26
Malmo, Sweden	Office and distribution facility	Leased	March 2020		14
Guildford, United Kingdom	International headquarters, office, operations	Leased	January 2025		12
Guildford, United Kingdom	Warehouse and distribution facility	Leased	May 2021		12
Other various locations	Various	Leased	Various		42

From time to time, we are plaintiffs or defendants in various litigation matters in the ordinary course of our business, some of which involve claims for damages that are substantial in amount. We believe that the disposition of claims currently pending will not have a material adverse impact on our financial position or results of operations.

period January 2010 through May 2015. The Company has cooperated with the U.S. Attorney’s Office in Minnesota (USAO), which jointly handled the investigation of issues related to the subpoena. We produced responsive documents and fully cooperated in the investigation. In October 2017, we reached a settlement in principle with the USAO and the Civil Division to resolve the government’s investigation of claims under the False Claims Act and signed a formal settlement agreement in January 2018. Pursuant to the settlement agreement, the Company agreed to pay a monetary penalty of $7.62 million, plus interest from October 2017 to January 2018. The payment was made in January 2018. As a part of the settlement, the Company did not admit any wrongdoing and is not subject to any ongoing corporate integrity agreement.

As a result of the acquisition of DJO by Blackstone in November 2006, the common stock of DJO is privately held and there is no established trading market for DJO’s common stock. DJO has not paid cash dividends on its common stock over the past two fiscal years and does not expect to pay cash dividends in the next twelve months. The agreements governing our indebtedness limit the ability of DJO to pay dividends and its ability to obtain funds from certain of its subsidiaries through dividends, loans or advances.

During the year ended December 31, 2017, DJO issued 45,774 shares of its common stock upon the net exercise of vested stock options that had been granted to current and former employees in 2007 in exchange for options that had previously been granted in the predecessor company to DJO (“Rollover Options”). Our stock incentive plan permits participants to exercise stock options using a net exercise method. In a net exercise, we withhold from the total number of shares that otherwise would be issued to a participant upon exercise of the stock option such number of shares having a fair market value at the time of exercise equal to the aggregate option exercise price and applicable income tax withholdings, and remit the remaining shares to the participant. The current and former employees exercised these Rollover Options for a total of 416,206 shares of DJO’s common stock, from which we withheld 370,432 shares to cover $6.1 million of aggregate option exercise price and income tax withholdings and issued the remaining 45,774 shares.

Pursuant to the Retirement Agreement and Amendment to Stock Option Agreements entered into on November 14, 2016 between DJO and Mike Mogul, the Company’s former Chief Executive Officer, DJO agreed to repurchase a total of 218,712 shares of the DJO’s common stock owned by Mr. Mogul for a per share price of $16.46 per share by no later than January 31, 2017. This repurchase was completed on January 30, 2017.

During the year ended December 31, 2016, DJO issued 43,086 shares of its common stock upon the net exercise of Rollover Options. The employee exercised these Rollover Options for a total of 312,925 shares of DJO’s common stock, from which we withheld 269,839 shares to cover $4.4 million of aggregate option exercise price and income tax withholdings and issued the remaining 43,086 shares.

During the year ended December 31, 2015, DJO issued 8,848 shares of its common stock upon the net exercise of Rollover Options. An employee exercised these Rollover Options for a total of 30,529 shares of DJO’s common stock, from which we withheld 21,681 shares to cover $0.4 million of aggregate option exercise price and income tax withholdings and issued the remaining 8,848 shares.

The proceeds from these stock sales were contributed by DJO to us, and were used for working capital purposes. All such sales were subject to execution of a stockholder agreement including certain rights and restrictions (See Note 14 of the Notes to Consolidated Financial Statements). The issuances described above were exempt from registration under the Securities Act of 1933, amended, pursuant to Rule 701 thereof as to all such issuances, except for the sale of shares to Mr. Shirley, which was exempt from registration pursuant to Section 4(a)(2) thereof because the issuance did not involve any public offering of securities.

Information with respect to compensation plans under which equity securities of DJO are authorized for issuance is contained in “Equity Compensation Plan Information” in Item 12 of this Report and is incorporated herein by this reference.

As of March 15, 2018, 100% of DJOFL’s membership interests were owned by DJO Holdings LLC.

The following table presents data as of and for the periods indicated and has been derived from the audited historical consolidated financial statements. The data reported for all periods includes the results of operations attributable to businesses acquired from the date of acquisition. This selected financial data should be read in conjunction with the audited consolidated financial statements and related notes thereto, and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report.

($ in thousands)	2017			2016			2015			2014			2013
Statement of Operations Data:
Net sales	$	1,186,206		$	1,155,288		$	1,113,627		$	1,087,529		$	1,020,784
Loss from continuing operations		(35,404	)		(286,818	)		(182,507	)		(111,304	)		(189,461	)
Net loss attributable to DJOFL (1)		(35,894	)		(286,303	)		(340,927	)		(90,534	)		(203,452	)
Depreciation and amortization		111,261			117,893			117,455			119,157			118,919
Balance Sheet Data (at period end):
Cash and cash equivalents	$	31,985		$	35,212		$	48,943		$	31,144		$	43,578
Total assets		2,022,025			2,050,438			2,309,558			2,569,861			2,660,520
Long-term debt, net of current portion		2,398,184			2,392,238			2,344,562			2,233,309			2,216,908
DJOFL membership deficit		(792,493	)		(765,928	)		(468,170	)		(124,234	)		(21,926	)

This report, and the following management’s discussion and analysis, contain “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. To the extent that any statements are not recitations of historical fact, such statements constitute forward-looking statements that, by definition, involve risks and uncertainties. These statements can be identified because they use words like “anticipates”, “believes”, “estimates”, “expects”, “forecasts”, “future”, “intends”, “plans” and similar terms. Specifically, statements referencing, without limitation, growth in sales of our products, profit margins and the sufficiency of our cash flow for future liquidity and capital resource needs may be forward-looking statements. These forward-looking statements are further qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements. These factors are described in Item 1A, Risk Factors, noted above. Results actually achieved may differ materially from expected results included in these statements as a result of these or other factors.

This management’s discussion and analysis of financial condition and results of operations is intended to provide an understanding of our results of operations, financial condition and where appropriate, factors that may affect future performance. The following discussion should be read in conjunction with the audited consolidated financial statements and notes thereto as well as the other financial data included elsewhere in this Annual Report.

We are a global developer, manufacturer and distributor of high-quality medical devices with a broad range of products used for rehabilitation, pain management, and physical therapy. Our products address the continuum of patient care from injury prevention to rehabilitation after surgery, injury or from degenerative disease, enabling people to regain or maintain their natural motion.

Our products are used by orthopedic specialists, spine surgeons, primary care physicians, pain management specialists, physical therapists, podiatrists, chiropractors, athletic trainers and other healthcare professionals. In addition, many of our medical devices and related accessories are used by athletes and patients for injury prevention and at-home physical therapy treatment. Our product lines include rigid and soft orthopedic bracing, hot and cold therapy, bone growth stimulators, vascular therapy systems and compression garments, therapeutic shoes and inserts, electrical stimulators used for pain management and physical therapy products. Our surgical implant business offers a comprehensive suite of reconstructive joint products for the hip, knee and shoulder.

Our products are marketed under a portfolio of brands including Aircast^®, DonJoy^®, Donjoy Performance^®_,ProCare^®, MotionCare™, CMF^™, Chattanooga, DJO Surgical, Dr. Comfort^™, Compex^®, Bell-Horn^™ and Exos^™.

The company’s continuing operations fall into four operating segments: Bracing and Vascular; Recovery Sciences; Surgical Implant; and International. See Note 18 to our Consolidated Financial Statements for financial and other additional information regarding our segments.

On June 30, 2015, our subsidiary Encore Medical, L.P., dba DJO Surgical, acquired certain assets from Zimmer Biomet Holdings, Inc., including the Biomet Cobalt^™ Bone Cement, Optivac^® Cement Mixing Accessories, SoftPac^™ Pouch and Discovery^® Elbow System product lines.

action to improve our liquidity through significant cost reductions, efficiency improvements and other cash flow best practices; improved our organizational effectiveness through the optimization of current organizational structure and opportunities to outsource certain activities; optimized our procurement of direct and indirect materials and services; improved our manufacturing, distribution, and sales and sales operations planning; and improved our profitability associated with the mix of our customers and products. Our transformation projects will continue through the end of 2018 as we shift our emphasis to improving revenue growth, including increasing our new product development and increasing our investment in our reimbursement business; improving the Customer Experience, including improving service levels and implementing online order entry; and achieving operational excellence, including improving production procurement spend, enhancing our distribution center network, optimizing our overall facility footprint in North America and improving our overall liquidity.

During the fourth quarter of 2015, we ceased manufacturing, selling and distributing products of our Empi business and the related insurance billing operations domestically. The Empi business primarily manufactured and sold home electrotherapy devices, such as TENS devices for pain relief, other electrotherapy and orthopedic products and related supplies. Facing a challenging regulatory and compliance environment and decreasing reimbursement rates, Empi revenues remained below the level needed to reach adequate profitability within an economically justified period of time. Empi was part of our Recovery Sciences operating segment. For financial statement purposes, the results of the Empi business are reported within discontinued operations in the Consolidated Financial Statements included in Part II, Item 8, herein.

The following table sets forth our statements of operations as a percentage of net sales ($ in thousands):

	Year Ended December 31,
	2017					2016					2015
Net sales	$	1,186,206		100	%	$	1,155,288		100.0	%	$	1,113,627		100.0	%
Costs and operating expenses:
Cost of sales (exclusive of amortization of intangible assets (1))		498,107		42.0			511,414		44.3			466,019		41.9
Selling, general and administrative		510,523		43.0			490,693		42.5			454,724		40.8
Research and development		35,429		3.0			37,710		3.2			35,105		3.1
Amortization of intangible assets		66,146		5.6			76,526		6.6			79,964		7.2
Impairment of goodwill		—		—			160,000		14			—		—
		1,110,205		93.6			1,276,343		110.5			1,035,812		93.0
Operating (loss) income		76,001		6.4			(121,055	)	(10.5	)		77,815		7.0
Other (expense) income:
Interest expense, net		(174,238	)	(14.7	)		(170,082	)	(14.7	)		(172,290	)	(15.5	)
Loss on modification and extinguishment of debt		—		—			—		—			(68,473	)	(6.1	)
Other income (expense), net		2,113		0.2			(2,534	)	(0.2	)		(7,303	)	(0.7	)
		(172,125	)	(14.5	)		(172,616	)	(14.9	)		(248,066	)	(22.3	)
Loss from continuing operations before income taxes		(96,124	)	(8.1	)		(293,671	)	(25.4	)		(170,251	)	(15.3	)
Income tax (benefit) provision		(60,720	)	(5.0	)		(6,853	)	(0.6	)		12,256		1.1
Net loss from continuing operations		(35,404	)	(3.1	)		(286,818	)	(24.8	)		(182,507	)	(16.4	)
Net income (loss) from discontinued operations		309		0.0			1,138		0.1			(157,580	)	(14.1	)
Net loss		(35,095	)	(3.1	)		(285,680	)	(24.7	)		(340,087	)	(30.5	)
Net income attributable to noncontrolling interests		(799	)	(0.1	)		(623	)	(0.1	)		(840	)	(0.1	)
Net loss attributable to DJOFL	$	(35,894	)	(3.0	)%	$	(286,303	)	(24.8	)%	$	(340,927	)	(30.6	)%

Year Ended December 31, 2017 (2017) Compared to Year Ended December 31, 2016 (2016)

Net Sales. Net sales for 2017 were $1,186.2 million, compared to net sales of $1,155.3 million for 2016. Excluding the favorable impact of foreign currency exchange rates, which resulted in an increase in net sales of $4.6 million, net sales increased 2.3% for the year ended 2017.

The following table sets forth the mix of our net sales by business segment ($ in thousands):

Net sales in our Bracing and Vascular segment were $507.4 million for 2017, a decrease of 2.9% from net sales of $522.6 million for 2016. The decrease was primarily due to lower sales of our DonJoy deep vein thrombosis, Aircast and Procare products as well as Dr. Comfort therapeutic footwear due to market pressure in the therapeutic shoe market, offset by growth in our direct consumer products.

Net sales in our Recovery Sciences segment were $158.3 million for 2017, an increase of 0.8% from net sales of $157.0 million for 2016. The increase was driven by strong sales of consumer retail Compex muscle stimulator devices as well as clinic electrotherapy devices.

Net sales in our Surgical Implant segment were $200.4 million for 2017, an increase of 14.8% from net sales of $174.5 million for 2016. The segment had strong organic growth in shoulder, hip and knee products due to new product introductions and new accounts.

Net sales in our International segment were $320.1 million for 2017, an increase of 6.3% from net sales of $301.2 million for 2016. In constant currency, excluding a favorable impact of $4.6 million related to changes in foreign exchange rates in effect during 2017 compared to the rates in effect in 2016, net sales increased 4.7% for 2017 compared to 2016. Growth in net sales in this segment was being driven by performance in Germany, France and Australia, as well as continued growth in our export markets.

Cost of Sales. As a percentage of net sales, cost of sales decreased to 42.0% for 2017, compared to 44.3% for 2016 mainly due to excess and obsolete (E&O) reserve expense. In the fourth quarter of fiscal 2016, current management implemented a new strategy relating to our procurement, manufacturing and liquidation philosophies in order to significantly reduce inventory levels. Historically, our strategy was to purchase inventory in large quantities to capture purchase discounts and rebates and provide an expansive mix of products for our customers. Our new strategy aims to integrate our supply chain services with customer demand through focused forecasted consumption and sales efforts, therefore limiting the range of SKUs we plan to offer. As a result of these changes, the Company recorded a charge to cost of sales and corresponding reduction in inventory of approximately $18.0 million. The E&O reserve expense in fiscal 2016 included $5.7 million related to the Company’s decision to discontinue certain SKUs mainly within the Bracing and Vascular product lines, $8.3 million related to holding inventory for shorter periods and the planned scrapping of long-dated inventory, $2.0 million related to new Surgical Implant products that changed the expected life cycle of its current product portfolio, and $2.0 million of slow moving consigned inventory within certain OfficeCare clinics for which management has decided not to strategically relocate. This is a prospective change in estimate as a result of implementing new strategies in the fourth quarter. The Company also recorded a $2.4 million charge to cost of sales related to purchase commitments with a supplier for quantities in excess of our future demand forecasts, which were updated in the fourth quarter of 2016.

Selling, General and Administrative (SG&A). SG&A expenses increased to $510.5 million for 2017, from $490.7 million in 2016. The increase was mainly due to business transformation expenses.

Research and Development (R&D). R&D expenses were $35.4 million for 2017, compared to $37.7 million for 2016, remaining consistent at 3.0% and 3.2% of net sales, respectively.

Amortization of Intangible Assets. Amortization of intangible assets decreased to $66.1 million for 2017, from $76.5 million for 2016. The decrease is due to certain intangible assets reaching full amortization primarily in our patents and technology and customer relationships categories.

Impairment of Goodwill. During the year ended December 31, 2016, we determined that the carrying values of our CMF and Vascular reporting units were in excess of its estimated fair values. As a result, we recorded aggregate goodwill impairment charges of $160.0 million consisting of $99.0 million for the CMF reporting unit and $61.0 million for the Vascular reporting unit. There were no goodwill or intangible asset impairment charges recognized during 2017.

Interest Expense, net. Our interest expense, net was $174.2 million for 2017 compared to $170.1 million for 2016. The increase is due to higher weighted average interest rates on our senior secured credit facilities.

Other Income (Expense), Net. Other income (expense), net, increased to $2.1 million for 2017 from ($2.5) million for 2016. Results for both periods presented primarily represent net realized and unrealized foreign currency transaction gains and losses.

Income Tax (Benefit) Provision. For 2017, we recorded an income tax benefit of $60.7 million on a pre-tax loss of $96.1 million, resulting in an effective tax rate of 63.2% primarily as a result of revaluing our deferred tax liabilities in connection with changes in the U.S. federal tax rates. For 2016, we recorded an income tax benefit of $6.9 million on a pre-tax loss of $293.7 million, resulting in an effective tax rate of 2.3%.

Discontinued Operations. During the fourth quarter of 2015, we ceased production, selling and billing operations of our Empi product line. Income of $0.3 million and $1.1 million was recognized for 2017 and 2016, primarily consisting of income from liquidation of certain assets offset by severance and other termination costs.

Year Ended December 31, 2016 (2016) Compared to Year Ended December 31, 2015 (2015)

Net Sales. Net sales for 2016 were $1,155.3 million, compared to net sales of $1,113.6 million for 2015. Excluding the unfavorable impact of foreign currency exchange rates, which resulted in a decrease in net sales of $5.2 million, net sales increased 4.2% for the year ended 2016. The following table sets forth the mix of our net sales by business segment ($ in thousands):

Net sales in our Bracing and Vascular segment were $522.6 million for 2016, a decrease of 0.7% from net sales of $526.3 million for 2015. The decrease was primarily due to lower sales of our Dr. Comfort therapeutic footwear due to disruption as we transitioned our Dr. Comfort therapeutic footwear manufacturing and distribution to a new ERP system and market pressure in the therapeutic shoe market, offset by growth in our OfficeCare channel and direct consumer products.

Net sales in our Recovery Sciences segment were $157.0 million for 2016, an increase of 0.4% from net sales of $156.2 million for 2015. Strong sales of consumer retail Compex muscle stimulator devices were mostly offset by a decline in CMF bone growth stimulators related to disruption and reorganization of the selling organization after exiting the Empi business.

Net sales in our Surgical Implant segment were $174.5 million for 2016, an increase of 29.4% from net sales of $134.8 million for 2015. The segment had strong organic growth in shoulder, hip and knee products due to new product introductions and new accounts. The contribution from the acquisition of assets purchased from Zimmer Biomet in the third quarter of 2015 contributed to a $6.3 million increase to net sales in 2016 compared to 2015.

Net sales in our International segment were $301.2 million for 2016, an increase of 1.7% from net sales of $296.3 million for 2015. In constant currency, excluding an unfavorable impact of $5.2 million related to changes in foreign exchange rates in effect during 2016 compared to the rates in effect in 2015, net sales increased 3.4% for 2016 compared to 2015. Growth in net sales in this segment was being driven by stronger sales in direct markets, primarily France, Australia and Spain, and increased sales penetration in emerging markets.

Cost of Sales. As a percentage of net sales, cost of sales increased to 44.3% for 2016, compared to 41.9% for 2015 mainly due to excess and obsolete (E&O) reserve expense. In the fourth quarter of fiscal 2016, current management implemented a new strategy relating to our procurement, manufacturing and liquidation philosophies in order to significantly reduce inventory levels. Historically, our strategy was to purchase inventory in large quantities to capture purchase discounts and rebates and provide an expansive mix of products for our customers. Our new strategy aims to integrate our supply chain services with customer demand through focused forecasted consumption and sales efforts, therefore limiting the range of SKUs we plan to offer. As a result of these changes, the Company recorded a charge to cost of sales and corresponding reduction in inventory of approximately $18.0 million. The E&O reserve expense in fiscal 2016 included $5.7 million related to the Company’s decision to discontinue certain SKUs mainly within the

Bracing and Vascular product lines, $8.3 million related to holding inventory for shorter periods and the planned scrapping of long-dated inventory, $2.0 million related to new Surgical Implant products that changed the expected life cycle of its current product portfolio, and $2.0 million of slow moving consigned inventory within certain OfficeCare clinics for which management has decided not to strategically relocate. This is a prospective change in estimate as a result of implementing new strategies in the fourth quarter. The Company also recorded a $2.4 million charge to cost of sales related to purchase commitments with a supplier for quantities in excess of our future demand forecasts, which were updated in the fourth quarter of 2016.

Selling, General and Administrative (SG&A). SG&A expenses increased to $490.7 million for 2016, from $454.7 million in 2015. The increase was mainly driven by variable selling expenses due to sales growth and integration costs in our Surgical Implant segment related to our asset purchase from Zimmer Biomet as well as increased executive compensation costs driven by our CEO and CFO transitions.

Research and Development (R&D). R&D expenses were $37.7 million for 2016, compared to $35.1 million for 2015, or 3.2% and 3.1% of net sales, respectively.

Amortization of Intangible Assets. Amortization of intangible assets decreased to $76.5 million for 2016, from $80.0 million for 2015. The decrease is due to certain intangible assets reaching full amortization primarily in our patents and technology category.

Interest Expense, net. Our interest expense, net was $170.1 million for 2016 compared to $172.3 million for 2015. The decrease is due to lower weighted average interest rates on our senior secured credit facilities.

Loss on Modification and Extinguishment of Debt. Loss on modification and extinguishment of debt for 2015 consists of $47.8 million in premiums related to the redemption of our previously outstanding notes, $11.9 million related to the non-cash write off of unamortized debt issuance costs and original issue discount associated with the portion of our debt that was extinguished and $8.8 million of arrangement and amendment fees and other fees and expenses incurred in connection with the refinancing.

Other Expense, Net. Other expense, net, decreased to $2.5 million for 2016 from $7.3 million for 2015. Results for both periods presented primarily represent net realized and unrealized foreign currency transaction gains and losses.

Income Tax (Benefit) Provision. For 2016, we recorded an income tax benefit of $6.9 million on a pre-tax loss of $293.7 million, resulting in an effective tax rate of 2.3%. For 2015, we recorded an income tax provision of $12.3 million on a pre-tax loss of $170.3 million, resulting in a negative effective tax rate of 7.2%.

During the year ended December 31, 2016 we recorded aggregate goodwill impairment charges of $160.0 million. The recognition of the book impairment loss attributable to the portion of the goodwill which was tax deductible resulted in the reversal of previously recorded deferred tax liabilities and a corresponding tax benefit of $18.5 million.

We recorded income tax expense, although there were pretax losses, for the year ended December 31, 2015 primarily because of the existence of a full deferred tax asset valuation allowance at the beginning of the period. The income tax expense recorded for the year ended December 31, 2015 primarily relates to foreign tax expense and the accrual of non-cash tax expense related to an additional valuation allowance in connection with the tax amortization of indefinite-lived intangible assets.

Discontinued Operations. During the fourth quarter of 2015, we ceased production, selling and billing operations of our Empi product line. Income of $1.1 million was recognized for 2016, primarily consisting of income from liquidation of certain assets offset by severance and other termination costs. Loss of $157.6 million was recognized for 2015, primarily consisting of asset impairment charges, net income from Empi operations, severance and other termination costs.

defer the effective date of the standard. The guidance is now effective for fiscal years beginning after December 15, 2017 and interim periods within that reporting period. Early adoption is permitted as early as the original effective date of December 15, 2016. The Company put a team in place to analyze the impact of this ASU across all revenue streams to evaluate the impact of the new standard on revenue contracts. This included reviewing current accounting policies and practices to identify potential differences that would result from applying the requirements under the new standard. In 2016, the Company presented its initial findings to the audit committee and has plans to start drafting its accounting policies and evaluating the new disclosure requirements and the impact they will have on its business processes, controls and systems in 2017. The Company will adopt the new standard using the modified retrospective approach, under which the cumulative effect of initially applying the new guidance is recognized as an adjustment to the opening balance of retained earnings in the first quarter of 2018. The Company has completed the assessment of the new standard and is finalizing the new required disclosures. Overall, the Company does not expect the timing of revenue recognition under the new standards to be materially different from our current revenue recognition policy. Based on the Company’s analysis of open contracts as of December 31, 2017, the cumulative effect of applying the new standards is not material.

In July 2015, the FASB issued an accounting standards update which requires an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This guidance does not apply to inventory that is measured using last-in, first-out (LIFO). The guidance is effective for annual and interim periods beginning after December 15, 2016. Adoption of this new guidance did not have a material effect on the Company’s financial statements.

In January 2016, the FASB issued an accounting standards update which affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. This guidance retains the current accounting for classifying and measuring investments in debt securities and loans but requires equity investments to be measured at fair value with subsequent changes recognized in net income, except for those accounted for under the equity method or requiring consolidation. The guidance also changes the accounting for investments without a readily determinable fair value and that do not qualify for the practical expedient permitted by the guidance to estimate fair value. A policy election can be made for these investments whereby estimated fair value may be measured at cost and adjusted in subsequent periods for any impairment or changes in observable prices of identical or similar investments. The guidance is effective for annual periods beginning after December 15, 2017. Early adoption is permitted. Adoption of this new guidance is not expected to have a material effect on the Company’s financial statements.

In February 2016, the FASB issued an accounting standards update which affects the accounting for leases. The guidance requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. The amendment also will require qualitative and quantitative disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. The guidance is effective for interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. The Company has a team in place to analyze the impact of this ASU which includes reviewing current lease contracts to identify potential differences that would result from applying the requirements under the new standard. In 2016, the Company presented its initial plan to the audit committee which includes compiling an inventory of all of its current leases to assess the global impact and developing tools for the tracking of and accounting for lease contracts. As such, we are still assessing the impact of adoption on our consolidated financial statements.

In March 2016, the FASB issued an accounting standards update which affects the accounting for employee share-based payments. The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. The guidance is effective for interim and annual reporting periods beginning after beginning after December 15, 2016. Adoption of this new guidance did not have a material effect on the Company’s financial statements.

In August 2016, the FASB issued an accounting standards update which affects the classification of certain cash receipts and cash payments. This ASU is intended to clarify the presentation of cash receipts and payments in specific situations. The guidance is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted. We are still assessing the impact of adoption on our consolidated financial statements.

In October 2016, the FASB issued an accounting standards update which will require companies to recognize the income tax effects of intercompany sales and transfers of assets other than inventory in the period in which the transfer occurs. This guidance is effective for annual and interim reporting periods beginning after December 15, 2017, and should be applied on a modified retrospective approach with a cumulative catch-up adjustment to opening retained earnings in the period of adoption. Early adoption is permitted. We are still assessing the impact of adoption on our consolidated financial statements.

for the amount by which the carrying amount exceeds the reporting unit’s fair value. The guidance is effective for annual and interim goodwill impairment tests beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.We are still assessing the impact of adoption on our consolidated financial statements.

As of December 31, 2017, our primary sources of liquidity consisted of cash and cash equivalents totaling $32.0 million and our $150.0 million asset-based revolving credit facility (ABL Facility), of which $68.8 million was available after taking into account $75.0 million drawings and $6.2 million issuance of letters of credit. Working capital at December 31, 2017 was $153.5 million.

We believe that our existing cash, plus the amounts we expect to generate from operations, amounts we expect to generate from receivables and instrument financing and amounts available through our ABL Facility, will be sufficient to meet our operating needs for the next twelve months, including working capital requirements, capital expenditures, debt and interest repayment obligations. While we currently believe that we will be able to meet all of the financial covenants imposed by our Credit Facilities (as defined below), there is no assurance that we will in fact be able to do so or that, if we do not, we will be able to obtain from our lenders waivers of default or amendments to the senior secured credit facilities.

As market conditions warrant, we and our equity holders, including Blackstone, its affiliates and members of our management, may from time to time, seek to purchase our outstanding debt securities or loans, including the notes and borrowings under our credit facilities, in privately negotiated or open market transactions, by tender offer or otherwise. Subject to any applicable limitations contained in the agreements governing our indebtedness, any purchases made by us may be funded by the use of cash on our balance sheet or the incurrence of new secured or unsecured debt, including borrowings under our credit facilities. The amounts involved in any such purchase transactions, individually or in the aggregate, may be material. Any such purchases may be with respect to a substantial amount of a particular class or series of debt, with the attendant reduction in the trading liquidity of such class or series. In addition, any such purchases made at prices below the “adjusted issue price” (as defined for U.S. federal income tax purposes) may result in taxable cancellation of indebtedness income to us, which amounts may be material, and in related adverse tax consequences to us.

Operating activities from continuing operations provided $44.6 million and $8.6 million and used $10.2 million of cash for 2017, 2016 and 2015, respectively. Net cash provided by operating activities is comprised of net loss, non-cash items (including depreciation and amortization, provision for doubtful accounts, stock compensation, deferred taxes and impairment losses) and changes in working capital. The change in working capital accounts is primarily attributable to inventories and accounts payable. For 2017, 2016 and 2015, cash paid for interest was $164.1 million, $162.6 million and $176.7 million, respectively.

Investing activities from continuing operations used $47.4 million, $51.4 million and $44.7 million of cash for 2017, 2016 and 2015, respectively. In 2017 and 2016, cash used in investing activities consists of purchases of property and consigned surgical instruments to support growth and IT automation technology. In 2015, cash used in investing activities was also used for the Zimmer Biomet asset acquisition.

Financing activities used cash of $2.7 million in 2017, and provided cash $38.8 million in 2016 and $36.1 million in 2015. Cash provided by financing activities in 2017 and 2016 consisted of net borrowings under and repayments of our ABL Facility. Additionally in 2017 cash used in financing activities consisted of payments related to the repurchase of shares of common stock from our former chief executive officer upon his departure. Cash provided by financing activities in 2015 consisted of proceeds from the borrowings related to the refinancing of our debt, offset by the repayments of our prior senior secured credit facilities and our previously outstanding notes.

As of December 31, 2017, we had $2,440.3 million in aggregate indebtedness outstanding, exclusive of net unamortized debt issuance costs and original issue discount of $26.2 million. The principal amount and carrying value of our debt was as follows for December 31, 2017 and 2016 (in thousands):

	2017				2016
	Principal Amount		Carrying Value		Principal Amount		Carrying Value
Credit facilities:
ABL Facility	$	75,000	$	73,843	$	82,000	$	80,365
Term loans		1,031,263		1,022,630		1,041,813		1,029,816
		1,106,263		1,096,473		1,123,813		1,110,181
Notes:
8.125% second lien notes due 2021		1,015,000		1,003,382		1,015,000		1,000,649
10.75% third lien notes due 2020		298,471		293,657		298,471		291,958
		1,313,471		1,297,039		1,313,471		1,292,607
Other debt		20,608		20,608		—		—
Total indebtedness	$	2,440,342	$	2,414,120	$	2,437,284	$	2,402,788

Our credit facilities at December 31, 2017 consisted of $1,031.3 million term loans (the “Term Loan”) and a $150.0 million ABL Facility, which mature on June 7, 2020 (collectively, the “Credit Facilities”). Our revolving credit balance under our ABL Facility was $75.0 million at December 31, 2017 in addition to a $5.7 million outstanding letter of credit securing our travel and entertainment corporate card program and a $0.5 million outstanding letter of credit related to collateral requirements under our product liability insurance policy.

We are required to repay installments on the term loans in quarterly installments equal to 0.25% of the original principal amount of the term loans, with the remaining amount payable at maturity in June 2020.

Notes. Assuming we are in compliance with the terms of the indentures governing our 8.125% second lien notes due 2021 (“8.125% Notes”) and 10.75% third lien notes due 2020 (“10.75% Notes”)(collectively, “the Notes”), we are not required to repay principal related to any of the Notes prior to their final maturity dates of the Notes. We pay interest semi-annually on the Notes.

See Note 12 to our Consolidated Financial Statements for additional information regarding our indebtedness.

Certain Covenants and Related Compliance. Our Term Loan requires us to maintain a leverage ratio of debt from our Credit Facilities, net of cash, to Adjusted EBITDA of no higher than 5.35:1, computed on a trailing twelve month period commencing with September 30, 2015. Adjusted EBITDA is defined as net income (loss) attributable to DJOFL plus: net interest expense, income tax expense, depreciation, and amortization, further adjusted for certain non-cash items, non-recurring items and other adjustment items, as described in our Term Loan agreement. As of December 31, 2017, our actual first lien net leverage ratio was 3.66:1, meeting the requirement.

Our debt agreements restrict our ability to incur additional debt and make certain payments. The indentures for our Notes generally permit additional debt only if the ratio of our Adjusted EBITDA to fixed charges is at least 2.00:1, or, in the case of additional debt to finance an acquisition, such ratio improves on a pro forma basis after giving effect to such incurrence. Our Credit Facilities permit us to incur additional debt for an acquisition only if the ratio of Adjusted EBITDA to debt, net of cash, improves or is no higher than 7.50:1, on a pro forma basis after giving effect to acquisition and additional debt. The indentures for our Notes generally prevent us from making certain payments, such as dividends and junior debt prepayments, unless the ratio of Adjusted EBITDA to fixed charges is at least 2.00:1 on a pro forma basis. Our ratio of Adjusted EBITDA to fixed charges for the twelve months ended December 31, 2017 was 1.72:1. Fixed charges, as defined in the indentures, generally means consolidated interest expense plus all cash dividends or other distributions paid on equity.

Adjusted EBITDA should not be considered as an alternative to net income or other performance measures presented in accordance with GAAP, or as an alternative to cash flow from operations as a measure of our liquidity. Adjusted EBITDA does not represent net income (loss) or cash flow from operations as those terms are defined by GAAP and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. In particular, the definition of Adjusted EBITDA in our debt agreements allows us to add back certain non-cash, extraordinary, unusual or non-recurring charges that are deducted in calculating net loss.

However, these are expenses that may recur, vary greatly and are difficult to predict. While Adjusted EBITDA and similar measures are frequently used as measures of operations and the ability to meet debt service requirements, Adjusted EBITDA is not necessarily comparable to other similarly titled captions of other companies due to the potential inconsistencies in the method of calculation.

As described above, our Credit Facilities and Notes represent significant components of our capital structure. We have pledged substantially all of our assets as collateral under the Credit Facilities and Notes. If we fail to comply with the leverage and other requirements of our Credit Facilities and Notes, we would be in default. Upon the occurrence of an event of default, the lenders and the trustee for the Notes could, subject to certain provisions described in the agreements by which we can cure the default, declare all amounts outstanding to be immediately due and payable. In addition, the lenders could terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders under the senior secured credit facilities could proceed against the collateral granted to them to secure that indebtedness. Our ability to meet the covenants described in our Credit Facilities and Notes will depend on future events, some of which are beyond our control, and we cannot assure you that we will meet those covenants.

The following table provides a reconciliation from our net loss to Adjusted EBITDA for the years ended December 31, 2017, 2016 and 2015. The terms and related calculations are defined in the credit agreement relating to our senior secured credit facilities and the Indentures.

	Year Ended December 31,
(in thousands)	2017			2016			2015
Net loss attributable to DJO Finance LLC	$	(35,894	)	$	(286,303	)	$	(340,927	)
Net (income) loss from discontinued operations		(309	)		(1,138	)		157,580
Interest expense, net		174,238			170,082			172,290
Income tax (benefit) provision		(60,720	)		(6,853	)		12,256
Depreciation and amortization		111,261			117,893			117,455
Non-cash charges (a)		5,098			182,399			3,403
Non-recurring and integration charges (b)		69,263			48,675			33,976
Other adjustment items (c)		5,256			10,553			83,908
		268,193			235,308			239,941
Permitted pro forma adjustments (see note 1)
Future cost savings		25,538			9,620			9,050
Adjusted EBITDA	$	293,731		$	244,928		$	248,991

Note 1 — Permitted pro forma adjustments include future cost savings from cost reduction actions related to the exit of our Empi business and our business transformation initiative, recognized as permitted under our credit agreement and the indentures governing our Notes.

As of December 31, 2017, our consolidated contractual commitments are as follows (in thousands):

As of December 31, 2017, we had entered into purchase commitments for inventory, capital expenditures and other services totaling $158.2 million in the ordinary course of business. The amounts presented in the table above may not necessarily reflect our actual future cash funding requirement because the actual timing of future payments made may vary from the stated contractual obligation.

Our management’s discussion and analysis of financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to reserves for contractual allowances, doubtful accounts, rebates, product returns, goodwill and intangible assets, deferred tax assets and liabilities and inventory. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. To the extent that actual events differ from our estimates and assumptions, there could be a material adverse effect on our consolidated financial statements.

We believe the following critical accounting policies reflect our more significant judgments and estimates used in the preparation of our consolidated financial statements and this discussion and analysis of our financial condition and results of operations.

Reserves for Contractual Allowances, Doubtful Accounts, Rebates, Product Returns

We have established reserves to account for contractual allowances, doubtful accounts, rebates and product returns. Significant management judgment must be used and estimates must be made in connection with establishing these reserves. We have excluded the results of our discontinued operations of Empi from the below discussion.

We maintain provisions for estimated contractual allowances for reimbursement amounts from our third party payor customers based on negotiated contracts and historical experience for non-contracted payors. We report these allowances as reductions to our gross revenue. We estimate the amount of the reduction based on historical experience and invoices generated in the period, and we consider the impact of new contract terms or modifications of existing arrangements with our customers. We have contracts with certain third party payors for our third party reimbursement billings, which call for specified reductions in reimbursement of billed amounts based upon contractual reimbursement rates. For the years ended December 31, 2017, 2016 and 2015, we reserved for and reduced gross revenues from third party payors by estimated contractual allowances of 28%, 28%, and 18%, respectively.

Our reserve for doubtful accounts is based upon estimated losses from customers who are billed directly and the portion of third party reimbursement billings that ultimately become the financial responsibility of the end user patients. Direct-billed customers represented approximately 83%, 82%, and 74% of our net revenues for the year ended December 31, 2017, 2016 and 2015, respectively. Direct-billed customers represented approximately 83% and 83% of our net accounts receivable at December 31, 2017 and 2016, respectively. We experienced write-offs related to direct-billed customers of less than 1% of related net revenues in each of the years ended December 31, 2017, 2016 and 2015.

Our third party reimbursement customers including insurance companies, managed care companies and certain governmental payors, such as Medicare, include all of our OfficeCare customers and certain other customers of our Recovery Sciences and Bracing and Vascular segments. Our third party payor customers represented approximately 17%, 18%, and 26% of our net revenues for the years ended December 31, 2017, 2016 and 2015, respectively. Third party payor customers represented approximately 17% and 17%, respectively, of our net accounts receivable at December 31, 2017 and 2016. For each of the years ended December 31, 2017, 2016 and 2015, we estimate bad debt expense to be approximately 6%, 10% and 7% of gross revenues from these third party reimbursement customers. If the financial condition of our customers were to deteriorate resulting in an impairment of their ability to make payments or if third party payors were to deny claims for late filings, incomplete information or other reasons, additional provisions may be required. Additions to this reserve are reflected as Selling, general and administrative expense in our Consolidated Statements of Operations.

Our reserve for rebates accounts for incentives that we offer certain of our distributors. These rebates are substantially attributable to sales volume, sales growth or to reimburse the distributor for certain discounts. We record estimated reductions to revenue for customer rebate programs based upon historical experience and estimated revenue levels.

Our reserve for product returns accounts for estimated customer returns of our products after purchase. These returns are mainly attributable to a third party payor’s refusal to provide reimbursement for the product or the inability of the product to adequately address the patient’s condition. We provide for this reserve by reducing gross revenue based on our historical rate of returns.

We provide reserves for estimated excess and obsolete inventories equal to the difference between the costs of inventories on hand and the costs of projected inventories required based upon assumptions about future demand. If future demand is less favorable than currently projected by management, additional inventory write-downs may be required. We also provide reserves for newer product inventories, as appropriate, based on any minimum purchase commitments and our level of sales of the new products.

We consign a portion of our inventory to allow our products to be immediately dispensed to patients. This requires inventory to be on hand for the products we sell through consignment arrangements. It also increases the sensitivity of these products to obsolescence reserve estimates. As this inventory is not in our possession, we maintain additional reserves for estimated shrinkage of these inventories based on the results of periodic inventory counts and historical trends.

In the fourth quarter of fiscal 2016, current management implemented a new strategy relating to our procurement, manufacturing and liquidation philosophies in order to significantly reduce inventory levels. Historically, our strategy was to purchase inventory in large quantities to capture purchase discounts and rebates and provide an expansive mix of products for our customers. Our new strategy aims to integrate our supply chain services with customer demand through focused forecasted consumption and sales efforts, therefore limiting the range of SKUs we plan to offer. As a result of these changes, the Company recorded a charge to cost of sales and corresponding reduction in inventory of approximately $18.0 million. The E&O reserve expense in fiscal 2016 included $5.7 million related to the Company’s decision to discontinue certain SKUs mainly within the Bracing and Vascular product lines, $8.3 million related to holding inventory for shorter periods and the planned scrapping of long-dated inventory, $2.0 million related to new Surgical Implant products that changed the expected life cycle of its current product portfolio, and $2.0 million of slow moving consigned inventory within certain OfficeCare clinics for which management has decided not to strategically relocate. This is a prospective change in estimate as a result of implementing new strategies in the fourth quarter. The Company also recorded a $2.4 million charge to cost of sales related to purchase commitments with a supplier for quantities in excess of our future demand forecasts, which were updated in the fourth quarter of 2016.

We evaluate the carrying value of goodwill and indefinite life intangible assets annually on the first day of the fourth quarter or whenever events or circumstances indicate the carrying value may not be recoverable. We evaluate the carrying value of finite life intangible assets whenever events or circumstances indicate the carrying value may not be recoverable. Significant assumptions are required to estimate the fair value of goodwill and intangible assets, most notably estimated future cash flows generated by these assets. As such, these fair valuation measurements use significant unobservable inputs. Changes to these assumptions could require us to record impairment charges on these assets.

In performing our 2017 goodwill impairment test, we estimated the fair values of our reporting units using the income approach which includes the discounted cash flow method and the market approach which includes the use of market multiples. These fair value measurements are categorized within Level 3 of the fair value hierarchy. The discounted cash flows for each reporting unit were based on discrete financial forecasts developed by management for planning purposes, and required significant judgment with respect to forecasted sales, gross margin, selling, general and administrative expenses, depreciation, income taxes, capital expenditures, working

capital requirements and the selection and use of an appropriate discount rate. For purposes of calculating the discounted cash flows of our reporting units, we used estimated revenue growth rates averaging between (0.3)% and 10.5% for the discrete forecast period. Cash flows beyond the discrete forecasts were estimated using a terminal value calculation, which incorporated historical and forecasted financial trends for each identified reporting unit and considered long-term earnings growth rates for publicly traded peer companies. Future cash flows were then discounted to present value at discount rates ranging from 8.5% to 10.0%, and terminal value growth rates ranging from (0.3)% to 5.2%. Publicly available information regarding comparable market capitalization was also considered in assessing the reasonableness of the cumulative fair values of our reporting units estimated using the discounted cash flow methodology. We determined that the fair value of the six reporting units with goodwill assigned to them exceed their carrying values and were not at risk of failing the test. This fair value measurement is categorized within Level 3 of the fair value hierarchy. The percentage by which the fair value of the six reporting units exceeded their carrying value ranged from 44.4% to 676.9%. As such, we determined that the goodwill of our reporting units was not impaired.

In the fourth quarter of 2017 we tested our indefinite lived trade name intangible assets for impairment. This test work compares the fair value of the asset with its carrying amount. To determine the fair value we applied the relief from royalty (RFR) method. Under the RFR method, the value of the trade name is determined by calculating the present value of the after-tax cost savings associated with owning the asset and therefore not being required to pay royalties for its use during the asset’s indefinite life. Significant judgments inherent in this analysis include the selection of appropriate discount rates, estimating future cash flows and the identification of appropriate terminal growth rate assumptions. Discount rate assumptions are based on an assessment of the risk inherent in the projected future cash generated by the respective intangible assets. Future cash flows were discounted to present value at discount rates ranging from 8.5% to 10.0%, and terminal value growth rates ranging from (0.3)% to 5.0%. Also subject to judgment are assumptions about royalty rates, which are based on the estimated rates at which similar brands and trademarks are being licensed in the marketplace. We used market average royalty rates ranging from 0.5% to 5.0%. These fair value measurements are categorized within Level 3 of the fair value hierarchy. We determined that that the fair value of these trade names exceed their carrying value. The percentage by which the fair value of these trade names exceeded their carrying value ranged from 46.5% to 232.1%. As such, we determined that these indefinite lived intangible assets are not impaired. This fair value measurement is categorized within Level 3 of the fair value hierarchy. The estimates we have used are consistent with the plans and estimates that we use to manage our business, however, it is possible that the plans may change and estimates used may prove to be inaccurate. If our actual results, or the plans and estimates used in future impairment analyses, are lower than the original estimates used to assess the recoverability of these assets, we could incur significant impairment charges.

See Note 7 of the Notes to Consolidated Financial Statements included in Part II, Item 8, herein for further discussion of goodwill and intangible assets.

We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amount and the tax basis of assets, liabilities and net operating loss carryforwards. We establish valuation allowances when the recovery of a deferred tax asset is not likely based on historical income, projected future income, the expected timing of the reversals of temporary differences and the implementation of tax-planning strategies.

We generated additional deferred tax liabilities related to tax amortization of acquired indefinite lived intangible assets because these assets were not amortized for financial reporting purposes. The tax amortization in current and future years gives rise to a deferred tax liability which will only reverse at the time of ultimate sale or book impairment. Due to the uncertain timing of this reversal, the temporary differences associated with indefinite lived intangibles cannot be considered a source of future taxable income for purposes of determining a valuation allowance. As such, the deferred tax liability cannot be used to offset the deferred tax asset related to the net operating loss carry forward for tax purposes that is generated by the same amortization. This “naked credit” gives rise to the need for additional valuation allowance.

Our gross deferred tax asset balance was $257.7 million at December 31, 2017 and is primarily related to reserves for accounts receivable and inventory, accrued expenses, and net operating loss carryforwards (see Note 15 of the notes to Consolidated Financial Statements included in Part II, Item 8, herein). As of December 31, 2017, we maintained a valuation allowance of $219.4 million due to uncertainties related to our ability to realize certain deferred tax assets. The valuation allowance maintained is primarily related to net operating loss carryforwards not expected to be realized.

provisional amounts due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the 2017 Act.

We are exposed to certain market risks as part of our ongoing business operations, primarily risks from changing interest rates and foreign currency exchange rates that could impact our financial condition, results of operations, and cash flows.

We are exposed to the risk of rising interest rates. We have historically managed our interest rate risk by including components of both fixed and variable debt in our capital structure. For our fixed rate debt, interest rate changes may affect the market value of the debt, but do not impact our earnings or cash flow. Conversely, for our variable rate debt, interest rate changes generally do not affect the fair market value of the debt, but do impact future earnings and cash flow, assuming other factors are constant. As of December 31, 2017, we have $1,313.5 million of aggregate fixed rate notes and $1,106.3 million of borrowings under our credit facilities which bear interest at floating rates. A hypothetical 100 basis point increase in variable interest rates for the floating rate borrowings would have impacted our earnings and cash flow for the year ended December 31, 2017 by $6.0 million. As of December 31, 2017, our term loans are subject to a 1.00% minimum LIBOR rate which is lower than the actual LIBOR rate of 4.4% as of December 31, 2017. In October 2015, we executed interest rate caps with an aggregate notional amount of $500.0 million and a cap rate of 1.00% to mitigate some of the exposure. We may use additional derivative financial instruments where appropriate to manage our interest rate risk (see Note 10 of the Notes to the Consolidated Financial Statements included in Part II, Item 8, herein). However, as a matter of policy, we do not enter into derivative or other financial investments for trading or speculative purposes.

Our wholly owned foreign subsidiaries are consolidated into our financial results and are subject to risks typical of an international business including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions and foreign exchange volatility. To date, we have not used international currency derivatives to hedge against our investment in our subsidiaries or their operating results, which are converted into U.S. Dollars at period-end and average foreign exchange rates, respectively. However, as we continue to expand our business through acquisitions and organic growth, the sales of our products that are denominated in foreign currencies has increased, as well as the costs associated with our foreign subsidiaries which operate in currencies other than the U.S. dollar. Accordingly, our future results could be materially impacted by changes in these or other factors.

We are exposed to risk from changes in foreign currency exchange rates, particularly with respect to the Euro and the Mexican Peso (MXN). For the year ended December 31, 2017, sales denominated in foreign currencies accounted for 24.4% of our consolidated net sales, of which 16.7% were denominated in the Euro. In addition, our exposure to fluctuations in foreign currencies arises because certain of our subsidiaries enter into purchase or sale transactions using a currency other than the subsidiaries’ functional currencies. Accordingly, our future results could be materially impacted by changes in foreign exchange rates or other factors. Occasionally, we seek to reduce the potential impact of currency fluctuations on our business through hedging transactions. As of December 31, 2017, we did not have any outstanding foreign currency exchange forward contracts.

We have audited the accompanying consolidated balance sheets of DJO Finance LLC (the Company) as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive loss, (deficit) equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and the financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our December 31, 2017 audit in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. We conducted our December 31, 2016 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

	December 31,
	2017			2016
Assets
Current assets:
Cash and cash equivalents	$	31,985		$	35,212
Accounts receivable, net		190,324			178,193
Inventories, net		169,137			151,557
Prepaid expenses and other current assets		20,218			23,650
Current assets of discontinued operations		511			511
Total current assets		412,175			389,123
Property and equipment, net		133,522			128,019
Goodwill		864,112			855,626
Intangible assets, net		607,088			672,134
Other assets		5,128			5,536
Total assets	$	2,022,025		$	2,050,438
Liabilities and Deficit
Current liabilities:
Accounts payable	$	98,331		$	63,822
Accrued interest		18,015			16,740
Current portion of debt obligations		15,936			10,550
Other current liabilities		126,360			113,265
Total current liabilities		258,642			204,377
Long-term debt obligations		2,398,184			2,392,238
Deferred tax liabilities, net		142,597			202,740
Other long-term liabilities		13,080			14,932
Total liabilities	$	2,812,503		$	2,814,287
Commitments and contingencies
Deficit:
DJO Finance LLC membership deficit:
Member capital		844,115			844,294
Accumulated deficit		(1,615,536	)		(1,579,642	)
Accumulated other comprehensive loss		(21,072	)		(30,580	)
Total membership deficit		(792,493	)		(765,928	)
Noncontrolling interests		2,015			2,079
Total deficit		(790,478	)		(763,849	)
Total liabilities and deficit	$	2,022,025		$	2,050,438

	Year ended December 31,
	2017			2016			2015
Net sales	$	1,186,206		$	1,155,288		$	1,113,627
Costs and operating expenses:
Cost of sales (exclusive of amortization of intangible assets of $27,732 $28,525 and $30,719 for the year ended December 31, 2017, 2016, and 2015, respectively)		498,107			511,414			466,019
Selling, general and administrative		510,523			490,693			454,724
Research and development		35,429			37,710			35,105
Amortization of intangible assets		66,146			76,526			79,964
Impairment of goodwill		—			160,000			—
		1,110,205			1,276,343			1,035,812
Operating income (loss)		76,001			(121,055	)		77,815
Other expense:
Interest expense, net		(174,238	)		(170,082	)		(172,290	)
Loss on modification and extinguishment of debt		—			—			(68,473	)
Other income (expense), net		2,113			(2,534	)		(7,303	)
		(172,125	)		(172,616	)		(248,066	)
Loss before income taxes		(96,124	)		(293,671	)		(170,251	)
Income tax (benefit) provision		(60,720	)		(6,853	)		12,256
Net loss from continuing operations		(35,404	)		(286,818	)		(182,507	)
Net income (loss) from discontinued operations		309			1,138			(157,580	)
Net loss		(35,095	)		(285,680	)		(340,087	)
Net income attributable to noncontrolling interests		(799	)		(623	)		(840	)
Net loss attributable to DJO Finance LLC	$	(35,894	)	$	(286,303	)	$	(340,927	)

	DJO Finance LLC
	Member capital			Accumulated Deficit			Accumulated other comprehensive income (loss)			Total membership (deficit) equity			Non-controlling interests			Total (deficit) equity
Balance at December 31, 2014	$	839,781		$	(952,412	)	$	(11,603	)	$	(124,234	)	$	2,618		$	(121,616	)
Net (loss) income		—			(340,927	)		—			(340,927	)		840			(340,087	)
Other comprehensive loss, net of taxes		—			—			(4,738	)		(4,738	)		(283	)		(5,021	)
Stock-based compensation		1,805			—			—			1,805			—			1,805
Exercise of stock options		(76	)		—			—			(76	)		—			(76	)
Dividend paid by subsidiary to owners of non-controlling interests		—			—			—			—			(541	)		(541	)
Balance at December 31, 2015		841,510			(1,293,339	)		(16,341	)		(468,170	)		2,634			(465,536	)
Net (loss) income		—			(286,303	)		—			(286,303	)		623			(285,680	)
Other comprehensive loss, net of taxes		—			—			(14,239	)		(14,239	)		(72	)		(14,311	)
Stock-based compensation		3,188			—			—			3,188			—			3,188
Exercise of stock options		(404	)		—			—			(404	)		—			(404	)
Dividend paid by subsidiary to owners of non-controlling interests		—			—			—			—			(1,106	)		(1,106	)
Balance at December 31, 2016		844,294			(1,579,642	)		(30,580	)		(765,928	)		2,079			(763,849	)
Net (loss) income					(35,894	)		—			(35,894	)		799			(35,095	)
Other comprehensive income (loss), net of taxes		—			—			9,508			9,508			(863	)		8,645
Stock-based compensation		3,698			—			—			3,698			—			3,698
Repurchase of common stock		(3,600	)		—			—			(3,600	)		—			(3,600	)
Investment in parent		500			—			—			500			—			500
Exercise of stock options		(777	)		—			—			(777	)		—			(777	)
Balance at December 31, 2017	$	844,115		$	(1,615,536	)	$	(21,072	)	$	(792,493	)	$	2,015		$	(790,478	)

	Year Ended December 31,
	2017			2016			2015
Cash Flows From Operating Activities:
Net loss	$	(35,095	)	$	(285,680	)	$	(340,087	)
Net (income) loss from discontinued operations		(309	)		(1,138	)		157,580
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		45,115			41,367			37,491
Amortization of intangible assets		66,146			76,526			79,964
Amortization of debt issuance costs and non-cash interest expense		8,274			7,755			7,850
Stock-based compensation expense		3,696			3,188			1,805
Impairment of goodwill		—			160,000			—
Loss on disposal of assets, net		1,321			642			1,447
Deferred income tax (benefit) provision		(68,449	)		(11,297	)		5,940
Loss on modification and extinguishment of debt		—			—			68,473
Changes in operating assets and liabilities, net of acquired assets and liabilities:
Accounts receivable		(7,219	)		(7,830	)		(8,064	)
Inventories		(18,339	)		15,674			(8,106	)
Prepaid expenses and other assets		3,970			(2,516	)		(7,516	)
Accrued interest		1,274			(258	)		(12,600	)
Accounts payable and other		44,221			12,184			26,064
Net cash provided by continuing operating activities		44,606			8,617			10,241
Net cash provided by (used in) discontinued operations		309			(9,837	)		39,861
Net cash provided by (used in) operating activities		44,915			(1,220	)		50,102
Cash Flows From Investing Activities:
Purchases of property and equipment		(47,361	)		(51,428	)		(44,665	)
Proceeds from disposition of assets		—			946			—
Cash paid in connection with acquisitions, net of cash acquired		—			—			(24,000	)
Other investing activities, net		—			—			27
Net cash used in investing activities from continuing operations		(47,361	)		(50,482	)		(68,638	)
Net cash used in investing activities from discontinued operations		—			—			(575	)
Net cash used in investing activities		(47,361	)		(50,482	)		(69,213	)
Cash Flows From Financing Activities:
Proceeds from issuance of debt		103,552			107,000			2,518,033
Repayments of debt obligations		(101,335	)		(67,079	)		(2,419,027	)
Payment of debt issuance, modification and extinguishment costs		—			—			(62,375	)
Repurchase of common stock		(3,600	)		—			—
Dividend paid by subsidiary to owners of noncontrolling interests		(1,102	)		(1,106	)		(541	)
Other financing activities, net		(175	)		—			11
Net cash (used in) provided by financing activities		(2,660	)		38,815			36,101
Effect of exchange rate changes on cash and cash equivalents		1,879			(844	)		809
Net (decrease) increase in cash and cash equivalents		(3,227	)		(13,731	)		17,799
Cash and cash equivalents, beginning of year		35,212			48,943			31,144
Cash and cash equivalents, end of year	$	31,985		$	35,212		$	48,943
Supplemental disclosures of cash flow information:
Cash paid for interest	$	164,087		$	162,644		$	176,739
Cash paid for taxes, net	$	4,278		$	4,900		$	7,584

Non-cash investing activities:
Purchases of surgical instruments included in accounts payable	$	2,491		$	310		$	1,506

We are a global developer, manufacturer and distributor of high-quality medical devices with a broad range of products used for rehabilitation, pain management and physical therapy. Our products address the continuum of patient care from injury prevention to rehabilitation after surgery, injury or from degenerative disease, enabling people to regain or maintain their natural motion. Our products are used by orthopedic specialists, spine surgeons, primary care physicians, pain management specialists, physical therapists, podiatrists, chiropractors, athletic trainers and other healthcare professionals.

Our product lines include rigid and soft orthopedic bracing, hot and cold therapy, bone growth stimulators, vascular therapy systems and compression garments, therapeutic shoes and inserts, electrical stimulators used for pain management and physical therapy products. Our surgical implant business offers a comprehensive suite of reconstructive joint products for the hip, knee and shoulder.

DJO Finance LLC (DJOFL) is a wholly owned indirect subsidiary of DJO Global, Inc. (DJO). Substantially all business activities of DJO are conducted by DJOFL and its wholly owned subsidiaries. Except as otherwise indicated, references to “us,” “we,” “DJOFL,” “our,” or “the Company,” refers to DJOFL and its consolidated subsidiaries.

We market and distribute our products through four operating segments: Bracing and Vascular; Recovery Sciences; Surgical Implant; and International. Our Bracing and Vascular, Recovery Sciences, and Surgical Implant segments generate their revenues within the United States. Our Bracing and Vascular segment offers rigid knee braces, orthopedic soft goods, cold therapy products, vascular systems, compression therapy products and therapeutic footwear for the diabetes care market. Our Recovery Sciences segment offers clinical electrotherapy, iontophoresis, home traction products, bone growth stimulation products and clinical physical therapy equipment. Our Surgical Implant segment offers a comprehensive suite of reconstructive joint products for the knee, hip, shoulder and elbow. Our International segment offers all of our products to customers outside the United States. See Note 18 for additional information about our reportable segments.

During the fourth quarter of 2015, we ceased manufacturing, selling and distributing products of our Empi business and the related insurance billing operations domestically. The Empi business primarily manufactured and sold home electrotherapy devices, such as TENS devices for pain relief, other electrotherapy and orthopedic products and related supplies. Empi was facing a challenging regulatory and compliance environment, decreasing reimbursement rates and remained below the level needed to reach adequate profitability within an economically justified period of time. Empi was part of our Recovery Sciences operating segment. For financial statement purposes, the results of the Empi business are reported within discontinued operations.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Estimates and assumptions are used in accounting for, among other things, contractual allowances, rebates, product returns, warranty obligations, allowances for doubtful accounts, valuation of inventories, self-insurance reserves, income taxes, loss contingencies, fair values of derivative instruments, fair values of long-lived assets and any related impairments, capitalization of costs associated with internally developed software and stock-based compensation. Actual results could differ from those estimates.

The Consolidated Financial Statements include the Company and its controlled subsidiaries. Intercompany transactions are eliminated. We consolidate the results of operations of our 50% owned subsidiary, Medireha GmbH (Medireha), and reflect the 50% share of results not owned by us as noncontrolling interests in our Consolidated Statements of Operations. We maintain control of Medireha through certain rights that enable us to prohibit certain business activities that are not consistent with our plans for the business and provide us with exclusive distribution rights for products manufactured by Medireha.

Cash and Cash Equivalents. Cash consists of deposits with financial institutions. We consider all short-term, highly liquid investments and investments in money market funds and commercial paper with remaining maturities of less than three months at the time of purchase to be cash equivalents. While our cash and cash equivalents are on deposit with high-quality institutions, such deposits exceed Federal Deposit Insurance Corporation insured limits.

Accounts Receivable and Allowance for Doubtful Accounts. Accounts receivable are recorded at the invoiced amount and do not bear interest. The company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to pay amounts due. Management analyzes accounts receivable based on historical collection rates and bad debts write-offs, customer concentrations, customer credit-worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. Account balances are charged off against the allowance when the company believes it is probable the receivable will not be recovered.

Sales Returns and Allowances. We make estimates of the amount of sales returns and allowances that will eventually be incurred. Management analyzes sales programs that are in effect, contractual arrangements, market acceptance and historical trends when evaluating the adequacy of sales returns and allowance accounts. We estimate contractual discounts and allowances for reimbursement amounts from our third party payor customers based on negotiated contracts and historical experience.

Inventories. Inventories are valued at the lower of cost or market. We use standard cost methodology to determine cost basis for our inventories. This methodology approximates actual cost on a first-in, first-out basis. We establish reserves for slow moving and excess inventory, product obsolescence, shrinkage and other valuation allowances based on future demand and historical experience to make corresponding adjustments to the carrying value of these inventories to reflect the lower of cost or market value.

Property and Equipment. Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets that range from three to 25 years. Leasehold improvements and equipment under capital leases are amortized on a straight-line basis over the shorter of the lease term or estimated useful life of the asset. We capitalize surgical implant instruments that we provide to surgeons, free of charge, for use while implanting our products and the related depreciation expense is recorded as a component of Selling, general and administrative expense. We also capitalize electrotherapy devices that we rent to patients and record the related depreciation expense in cost of sales.

Software Developed For Internal Use. Software is stated at cost less accumulated amortization and is amortized on a straight-line basis over estimated useful lives ranging from three to ten years. We capitalize costs of internally developed software during the development stage, including external consulting costs, cost of software licenses, and internal payroll and payroll-related costs for employees who are directly associated with a software project. Software assets are reviewed for impairment when events or circumstances indicate that the carrying value may not be recoverable. Upgrades and enhancements are capitalized if they result in added functionality. Amortization expense related to internally developed software was $1.7 million, $1.7 million and $1.7 million for the years ended December 31, 2017, 2016 and 2015, respectively.

As of December 31, 2017 and 2016, we had $3.4 million and $5.1 million respectively, of unamortized internally developed software costs included within property and equipment in our Consolidated Balance Sheets.

Intangible Assets and Amortization. Our primary intangible assets are goodwill, customer relationships, patents and technology and trademarks and trade names. Goodwill represents the excess purchase price over the fair value of the identifiable net assets acquired in business combinations. Goodwill and intangible assets with indefinite useful lives are not amortized, but instead are tested for impairment at least annually. Intangible assets with definite lives are amortized over their respective estimated useful lives and reviewed for impairment when circumstances warrant.

We evaluate the carrying value of goodwill and indefinite life intangible assets annually on the first day of the fourth quarter or whenever events or circumstances indicate the carrying value may not be recoverable. We evaluate the carrying value of finite life intangible assets whenever events or circumstances indicate the carrying value may not be recoverable. Significant assumptions are required to estimate the fair value of goodwill and intangible assets, most notably estimated future cash flows generated by these assets. As such, these fair valuation measurements use significant unobservable inputs, which are inputs that are classified as Level 3 in the fair value hierarchy. Changes to these assumptions could require us to record impairment charges on these assets.

Self Insurance. We are partially self-insured for certain employee health benefits and product liability claims. Accruals for losses are provided based upon claims experience and actuarial assumptions, including provisions for incurred but not reported losses.

Revenue Recognition. Revenues are recognized when they are realized or realizable, and are earned. Our policy is to recognize revenue when title to the product, ownership and risk of loss transfer to the customer, which is on the date of shipment or the date of receipt by the customer. We include amounts billed to customers for freight in revenue.

We recognize revenue, both rental and purchase, for products sold directly to patients or their third party insurance payors, when our product has been dispensed or shipped to the patient and the patient’s insurance has been verified.

We record revenues from sales or our surgical implant products when the products are used in a surgical procedure (implanted in a patient).

We reduce revenue by estimates of potential future product returns and other allowances. Revenues are also reduced by rebates related to sales transacted through distribution agreements that provide the distributors with a right to return inventory or take certain pricing adjustments based on sales mix or volume. Provisions for product returns and other allowances are recorded as a reduction to revenue in the period sales are recognized.

Cost of Sales. Cost of sales is primarily comprised of direct materials and supplies consumed in the manufacture of product, as well as manufacturing labor, depreciation expense and direct overhead expense necessary to acquire and convert the purchased materials and supplies into finished product. Cost of products sold also includes the cost to distribute products to customers, inbound freight costs, internal transfer costs, warehousing costs and other shipping and handling activity.

Warranty Costs. We provide express warranties on certain products for periods typically ranging from one to three years. We estimate our warranty obligations at the time of sale based upon historical experiences and known product issues, if any.

A summary of the activity in our warranty reserves is as follows (in thousands):

Selling, General and Administrative Expense. Selling, general and administrative expense (SG&A) is primarily comprised of marketing expenses, selling expenses, administrative and other indirect overhead costs, depreciation expense on non-manufacturing assets and other miscellaneous operating items. Advertising costs are charged to expense as incurred. For the years ended December 31, 2017, 2016 and 2015, advertising costs were $4.3 million, $3.8 million, and $3.9 million, respectively.

Research and Development. The company conducts research and development activities to broaden our product offering and for improvement of existing products or manufacturing processes. Research and development costs include employee compensation and benefits, consultants, facilities related costs, material costs, depreciation and travel. Research and development costs are expensed as incurred.

Other Expense, Net. Other expense, net, primarily includes net realized and unrealized foreign currency transaction gains and losses.

Stock Based Compensation. We maintain a stock option plan under which stock options of our indirect parent, DJO, have been granted to both employees and non-employees. All share based payments to employees are recognized in the financial statements based on their grant date fair values and our estimates of forfeitures. We amortize stock-based compensation for service-based awards granted on a straight-line basis over the requisite service (vesting) period for the entire award. Other awards vest upon the achievement of certain pre-determined performance targets, and compensation expense is recognized to the extent the achievement of the performance targets is deemed probable.

Income Taxes. Income taxes are accounted for under the asset and liability method, whereby deferred tax assets and liabilities are recognized and measured using enacted tax rates in effect for each taxing jurisdiction in which we operate for the year in which those temporary differences are expected to be recognized. Net deferred tax assets are then reduced by a valuation allowance if we believe it more-likely-than-not such net deferred tax assets will not be realized.

Foreign Currency Translation and Transactions. We translate the financial statements of each foreign subsidiary with a functional currency other than the United States dollar into the United States dollar for consolidation using end-of-period exchange rates for assets and liabilities and average exchange rates during each reporting period for results of operations. Net gains or losses resulting from the translation of foreign financial statements and the effect of exchange rate changes on intercompany receivables and payables of a long-term investment nature are recorded, net of applicable income taxes, as a component of other comprehensive income (loss) in our Consolidated Statement of Comprehensive Loss. Cash flows from our operations in foreign countries are translated at the average rate for the applicable period. The effect of exchange rates on cash balances held in foreign currencies are separately reported in our Consolidated Statements of Cash Flows.

Transactions denominated in currencies other than our or our subsidiaries’ functional currencies are recorded based on exchange rates at the time such transactions arise. Changes in exchange rates with respect to amounts recorded in our Consolidated Balance Sheets related to such transactions result in transaction gains and losses that are reflected in our Consolidated Statements of Operations as either unrealized (based on the applicable period end translation) or realized (upon settlement of the transactions). For the years ended December 31, 2017, 2016 and 2015, foreign transaction (gains) losses were $(1.8) million, $3.1 million, and $7.1 million, respectively.

Derivative Financial Instruments. All derivative instruments are recognized in the financial statements and measured at fair value regardless of the purpose or intent for holding them.

We make use of debt financing as a source of funds and are therefore exposed to interest rate fluctuations in the normal course of business. Our credit facilities are subject to floating interest rates. We manage the risk of unfavorable movements in interest rates by hedging interest rate on a portion of the outstanding loan balance, thereby locking in a fixed rate on a portion of the principal, reducing the effect of possible rising interest rates and making interest expense more predictable. We have designated these interest rate cap agreements as cash flow hedges for accounting purposes. Therefore, changes in the fair values of the derivative are recorded in accumulated other comprehensive income (loss) and are subsequently recognized in earnings when the hedged item affects earnings.

The fair value of our derivative instruments has been determined through the use of models that consider various assumptions, including time value and other relevant economic measures, which are inputs that are classified as Level 2 in the fair value hierarchy (see Notes 10 and 11).

Comprehensive Income (Loss). Comprehensive income (loss) includes net income (loss) as per our Consolidated Statement of Operations and other comprehensive income (loss). Other comprehensive income (loss), which is comprised of unrealized gains and losses on foreign currency translation adjustments, net of tax, is included in our Consolidated Statement of Comprehensive Loss.

Concentration of Credit Risk. We sell the majority of our products in the United States to orthopedic professionals, hospitals, distributors, specialty dealers, insurance companies, managed care companies and certain governmental payors such as Medicare. International sales comprised 27.0%, 26.1%, and 26.6% of our net sales for the years ended December 31, 2017, 2016 and 2015, respectively. International sales are generated from a diverse group of customers through our wholly owned subsidiaries and certain independent distributors. Credit is extended based on an evaluation of the customer’s financial condition and generally collateral is not required. We provide a reserve for estimated bad debts. Management reviews and revises its estimates for credit losses from time to time and such credit losses have generally been within management’s estimates. In each of the years ended December 31, 2017, 2016 and 2015, we had no individual customer or distributor that accounted for 10% or more of our total annual net sales.

Fair Value of Financial Instruments. The carrying amounts of our short-term financial instruments, including cash and cash equivalents, accounts receivable and accounts payable, approximate fair values due to their short-term nature. See Note 12 for information concerning the fair value of our variable and fixed rate debt.

In May 2014, the Financial Accounting Standards Board (FASB) issued an accounting standards update (ASU) related to revenue from contracts with customers. The new standard provides a five-step approach to be applied to all contracts with customers. The accounting standards update also requires expanded disclosures about revenue recognition. On July 9, 2015, the FASB decided to defer the effective date of the standard. The guidance is now effective for fiscal years beginning after December 15, 2017 and interim periods within that reporting period. Early adoption is permitted as early as the original effective date of December 15, 2016. The Company put a team in place to analyze the impact of this ASU across all revenue streams to evaluate the impact of the new standard on revenue contracts. This included reviewing current accounting policies and practices to identify potential differences that would result from applying the requirements under the new standard. In 2016, the Company presented its initial findings to the audit

committee and has plans to start drafting its accounting policies and evaluating the new disclosure requirements and the impact they will have on its business processes, controls and systems in 2017. The Company will adopt the new standard using the modified retrospective approach, under which the cumulative effect of initially applying the new guidance is recognized as an adjustment to the opening balance of retained earnings in the first quarter of 2018. The Company has completed the assessment of the new standard and is finalizing the new required disclosures. Overall, the Company does not expect the timing of revenue recognition under the new standards to be materially different from our current revenue recognition policy. Based on the Company’s analysis of open contracts as of December 31, 2017, the cumulative effect of applying the new standards is not material.

In January 2017, the FASB issued an accounting standards update which will require an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The guidance is effective for annual and interim goodwill impairment tests beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.We are still assessing the impact of adoption on our consolidated financial statements.

For disposal transactions that occur on or after that January 1, 2015, a component of an entity is reported in discontinued operations after meeting the criteria for held-for-sale classification, is disposed of by sale or is disposed of other than by sale (e.g. abandonment) if the disposition represents a strategic shift that has (or will have) a major effect on the entity's operations and financial results. The Company has evaluated the quantitative and qualitative factors related to the disposal of the Empi business and concluded that those conditions for discontinued operations presentation have been met. For financial statement purposes, the Empi business financial results are reported within discontinued operations in the Consolidated Financial Statements.

Income (loss) from discontinued operations, net of taxes, is comprised of the following (in thousands):

	Year ended December 31,
	2017		2016		2015
Net sales	$	—	$	—	$	95,342
Costs and operating expenses:
Cost of sales		—		—		35,834
Selling, general and administrative		—		—		50,729
Research and development		—		—		249
Amortization of intangible assets		—		—		6,874
Impairment of goodwill		—		—		117,298
Impairment of intangible and long lived assets		—		—		52,150
Other income		309		1,138		86
Income (loss) from discontinued operations before income taxes	$	309	$	1,138	$	(167,706	)
Income tax benefit		—		—		10,126
Net income (loss) from discontinued operations	$	309	$	1,138	$	(157,580	)

A summary of activity in our accounts receivable allowance for doubtful accounts is presented below (in thousands):

Our allowance for sales returns balance was $2.0 million, $3.8 million, and $4.1 million, as of December 31, 2017, 2016 and 2015, respectively.

A summary of the activity in our inventory reserves is presented below (in thousands):

In the fourth quarter of fiscal 2016, current management implemented a new strategy relating to our procurement, manufacturing and liquidation philosophies in order to significantly reduce inventory levels. Historically, our strategy was to purchase inventory in large quantities to capture purchase discounts and rebates and provide an expansive mix of products for our customers. Our new strategy aims to integrate our supply chain services with customer demand through focused forecasted consumption and sales efforts, therefore limiting the range of SKUs we plan to offer. As a result of these changes, the Company recorded a charge to cost of sales and corresponding reduction in inventory of approximately $18.0 million. The E&O reserve expense in fiscal 2016 included $5.7 million related to the Company’s decision to discontinue certain SKUs mainly within the Bracing and Vascular product lines, $8.3 million related to holding inventory for shorter periods and the planned scrapping of long-dated inventory, $2.0 million related to new Surgical Implant products that changed the expected life cycle of its current product portfolio, and $2.0 million of slow moving consigned inventory within certain OfficeCare clinics. This is a prospective change in estimate as a result of implementing new strategies in the fourth quarter. The Company also recorded a $2.4 million charge to cost of sales related to purchase commitments with a supplier for quantities in excess of our future demand forecasts, which were updated in the fourth quarter of 2016.

Depreciation and amortization expense relating to property and equipment was $45.2 million, $41.4 million and $37.5 million for the years ended December 31, 2017, 2016 and 2015, respectively.

Changes in the carrying amount of goodwill for the year ended December 31, 2017 are presented in the table below (in thousands):

	Bracing & Vascular			Recovery Sciences			Surgical Implant			International		Total
Balance, beginning of period
Goodwill	$	483,258		$	249,601		$	49,229		$	330,544	$	1,112,632
Accumulated impairment losses		(61,000	)		(148,600	)		(47,406	)		—		(257,006	)
Goodwill, net of accumulated impairment losses at December 31, 2016		422,258			101,001			1,823			330,544		855,626
Current Year Activity:
Foreign currency translation		—			—			—			8,486		8,486
Balance, end of period
Goodwill		483,258			249,601			49,229			339,030		1,121,118
Accumulated impairment losses		(61,000	)		(148,600	)		(47,406	)		—		(257,006	)
Goodwill, net of accumulated impairment losses at December 31, 2017	$	422,258		$	101,001		$	1,823		$	339,030	$	864,112

our reporting units, we used estimated revenue growth rates averaging between (0.3)% and 10.5% for the discrete forecast period. Cash flows beyond the discrete forecasts were estimated using a terminal value calculation, which incorporated historical and forecasted financial trends for each identified reporting unit and considered long-term earnings growth rates for publicly traded peer companies. Future cash flows were then discounted to present value at discount rates ranging from 8.5% to 10.0%, and terminal value growth rates ranging from (0.3)% to 5.2%. Publicly available information regarding comparable market capitalization was also considered in assessing the reasonableness of the cumulative fair values of our reporting units estimated using the discounted cash flow methodology. We determined that the fair value of the six reporting units with goodwill assigned to them exceed their carrying values and were not at risk of failing the test. This fair value measurement is categorized within Level 3 of the fair value hierarchy. The percentage by which the fair value of the six reporting units exceeded their carrying value ranged from 44.4% to 676.9%. As such, we determined that the goodwill of our reporting units was not impaired.

In the fourth quarter of 2016, we determined that the carrying values of our CMF and Vascular reporting units, components of our Recovery Sciences and Bracing and Vascular segments, respectively, were in excess of their estimated fair values. As a result, in the fourth quarter of 2016 we recorded goodwill impairment charges for the CMF and Vascular and reporting units of $99.0 million and $61.0 million, respectively. The impairment charges were included in Impairment of goodwill and intangible assets in our Consolidated Statement of Operations. The impairment charge for our CMF reporting unit resulted from reductions in our projected operating results and estimated future cash flows due to disruption caused by our exit of the Empi business. The impairment charge for our Vascular reporting unit resulted from reductions in our projected operating results and estimated future cash flows due to a loss of revenue caused by disruption as we transitioned our Dr. Comfort therapeutic footwear manufacturing and distribution to a new ERP system and market pressure in the therapeutic shoe market.

Our definite lived intangible assets are being amortized using the straight line method over their remaining weighted average useful lives of 3.5 years for customer relationships, 6.2 years for patents and technology, 1.4 years for distributor contracts and relationships and 5.1 years for trademarks and trade names. Based on our amortizable intangible asset balance as of December 31, 2017 we estimate that amortization expense will be as follows for the next five years and thereafter (in thousands):

We have multiple qualified defined contribution plans, which allow for voluntary pre-tax contributions by employees. We pay all general and administrative expenses of the plans and make matching and may make certain discretionary contributions to the plans. Based on 100% of the first 1% and 50% of the next 5% of compensation deferred by employees (subject to IRS limits and non-discrimination testing), we made matching contributions of $3.5 million, $3.5 million, and $4.2 million, to the plans for the years ended December 31, 2017, 2016 and 2015, respectively. The plans provide for discretionary contributions by us, as approved by the Board of Directors. There have been no such discretionary contributions through December 31, 2017. In addition, we made contributions to our international pension plans of $3.0 million, $2.1 million, and $1.7 million for the years ended December 31, 2017, 2016 and 2015, respectively.

From time to time, we use derivative financial instruments to manage interest rate risk related to our variable rate credit facilities and risk related to foreign currency exchange rates. Our objective is to reduce the risk to earnings and cash flows associated with changes in interest rates and changes in foreign currency exchange rates. Before acquiring a derivative instrument to hedge a specific risk, we evaluate potential natural hedges. Factors considered in the decision to hedge an underlying market exposure include the materiality of the risk, the volatility of the market, the duration of the hedge, and the availability, effectiveness and cost of derivative instruments. We do not use derivative instruments for speculative or trading purposes.

All derivatives, whether designated as hedging relationships or not, are recorded on the balance sheet at fair value. The fair value of our derivatives is determined through the use of models that consider various assumptions, including time value, yield curves and other relevant economic measures which are inputs that are classified as Level 2 in the fair value hierarchy. The classification of gains and losses resulting from changes in the fair values of derivatives is dependent on the intended use of the derivative and its resulting designation. Our interest rate cap agreements were designated as cash flow hedges, and accordingly, effective portions of changes in the fair value of the derivatives were recorded in accumulated other comprehensive income (loss) and subsequently reclassified into our Consolidated Statement of Operations when the hedged forecasted transaction affects income (loss). Ineffective portions of changes in the fair value of cash flow hedges are recognized in income (loss). Our foreign exchange contracts have not been designated as hedges, and accordingly, changes in the fair value of the derivatives are recorded in income (loss).

Interest Rate Cap Agreements. We utilize interest rate caps to manage the risk of unfavorable movements in interest rates on a portion of our outstanding floating rate loan balances. Our interest rate cap agreements were designated as cash flow hedges for accounting purposes, and the hedges were considered effective. As such, the effective portion of the gain or loss on the derivative

instrument was reported as a component of accumulated other comprehensive income (loss) and reclassified into interest expense in our Consolidated Statement of Operations in the period in which it affected income (loss).

Foreign Exchange Rate Contracts. We have previously utilized Mexican Peso (MXN) foreign exchange forward contracts to hedge a portion of our exposure to fluctuations in foreign exchange rates, as our Mexico-based manufacturing operations incur costs that are largely denominated in MXN. As of December 31, 2017 we did not have any outstanding foreign currency exchange forward contracts. While our foreign exchange forward contracts act as economic hedges, we have not designated such instruments as hedges for accounting purposes. Therefore, gains and losses resulting from changes in the fair values of these derivative instruments are recorded in Other income (expense), net, in our accompanying Consolidated Statements of Operations.

The following table summarizes the fair value of derivative instruments in our Consolidated Balance Sheets (in thousands):

The following table summarizes the effect our derivative instruments have on our Consolidated Statements of Operations (in thousands):

The pre-tax loss on derivative instruments designated as cash flow hedges recognized in other comprehensive income (loss) is presented below (in thousands):

Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. Our assessment of the significance of a particular input to the fair value measurements requires judgment and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy.

The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis (in thousands):

On May 7, 2015, we entered into (i) a $1,055.0 million new term loan facility (the “Term Loan”) and (ii) a $150.0 million new asset-based revolving credit facility (the “ABL Facility” and together with the Term Loan, the “Credit Facilities”). The Term Loan provides for a $150.0 million incremental facility, subject to customary borrowing conditions and the ABL Facility provides for a $50.0 million facility increase, subject to customary borrowing conditions.

As of December 31, 2017, the market values of our Term Loan and drawings under the ABL Facility were $1,014.5 million and $75.0 million, respectively. We determine market value using trading prices for the senior secured credit facilities on or near that date. This fair value measurement is categorized within Level 2 of the fair value hierarchy.

Our revolving loan balance under our ABL Facility was $75.0 million as of December 31, 2017, in addition to a $5.7 million outstanding letter of credit related to our travel and entertainment corporate card program and a $0.5 million outstanding letter of credit related to collateral requirements under our product liability insurance policy.

Interest Rates. Borrowings under the Term Loan bear interest at a rate equal to, at our option, either (a) 2.25% plus a base rate equal to the highest of (1) the prime rate as reported by the Wall Street Journal, (2) the federal funds effective rate plus 0.50% and (3) the Eurodollar rate for a one-month interest period plus 1.00% or (b) 3.25% plus the Eurodollar rate determined by reference to the ICE Benchmark Administration London Interbank Offered Rate for U.S. dollar deposits, subject to a minimum Eurodollar rate of 1.00%. As of December 31, 2017 our weighted average interest rate for all borrowings under the Credit Facilities was 4.61%.

Principal Payments. We are required to make principal repayments under the Term Loan in quarterly installments equal to 0.25% of the original principal amount, with the remaining amount payable at maturity in June 2020 provided that, if on January 16, 2020 (or, if earlier, the 91st day prior to the scheduled maturity date of the 10.75% Notes), more than $50,000,000 in aggregate principal amount of the 10.75% Notes remains outstanding the scheduled maturity date of which is earlier than 91 days after June 7, 2020, then the maturity date with respect to the Term Loan shall be January 16, 2020 (or, if earlier, the 91st day prior to the scheduled maturity date of the 10.75% Notes).

Prepayments. The Term Loan requires us to prepay principal amounts outstanding, subject to certain exceptions, with:

We may voluntarily repay outstanding loans under the Credit Facilities at any time without premium or penalty, subject to payment of (i) customary breakage costs applicable to prepayments of Eurodollar loans made on a date other than the last day of an interest period applicable thereto and (ii) a prepayment premium of 1% applicable to prepayments made within 6 months from the date of the closing of the Term Loan.

Guarantee and Security. All obligations under the Credit Facilities are unconditionally guaranteed by DJO Holdings LLC and each of our existing and future direct and indirect wholly-owned domestic subsidiaries, subject to certain exceptions (collectively, the “Credit Facility Guarantors”). In addition, the Term Loan is secured by (i) a first priority security interest in certain of our tangible and intangible assets and those of each of the Credit Facility Guarantors and all the capital stock of, or other equity interests in, DJO Holdings and each of our material direct or indirect wholly-owned domestic subsidiaries and direct wholly-owned first-tier foreign subsidiaries (subject to certain exceptions and qualifications) (collectively, “Term Loan Collateral”), and (ii) a second priority security interest in the ABL Collateral (as defined below).

Certain Covenants and Events of Default. The Term Loan contains a number of covenants that restrict, subject to certain exceptions, our ability to:

In addition, the Term Loan requires us to maintain a maximum first lien net leverage ratio, as defined, of Credit Facilities debt, net of cash, to Adjusted EBITDA of no greater than 5.35:1 for a trailing twelve month period commencing with the period ending September 30, 2015. As of December 31, 2017, our actual first lien net leverage ratio was 3.66:1, and we were in compliance with all other applicable covenants.

Interest Rate. Borrowings under our ABL Facility bear interest at a rate equal to, at our option, a margin over, either (a) a base rate determined by reference to the highest of (1) the administrative agent’s prime lending rate, (2) the federal funds effective rate plus 0.50% and (3) the Eurodollar rate for a one-month interest period plus 1.00% or (b) a Eurodollar rate determined by reference to the Reuters LIBOR rate for the interest period relevant to such borrowing. The margin for the ABL Facility is 1.25% with respect to base rate borrowings and 2.25% with respect to Eurodollar borrowings, each subject to step-downs based upon the amount of the available, unused facility.

Fees. In addition to paying interest on outstanding principal, we are required to pay a commitment fee to the lenders based on the daily amount of the ABL Facility that is unutilized. The commitment fee is an annual rate of 0.25% if the average facility utilization in the previous fiscal quarter is equal to or greater than 50%, and 0.375% if the average facility utilization in the previous fiscal quarter was less than 50%.

Guarantee and Security. The ABL Facility is secured by a first priority security interest in personal property of DJOFL and each of the Credit Facility Guarantors consisting generally of accounts receivable, cash, deposit accounts and securities accounts, inventory, intercompany notes and intangible assets (other than intellectual property and investment property), subject to certain exceptions and qualifications (collectively, the “ABL Collateral”, and together with the Term Loan Collateral, the “Collateral”) and a fourth priority security interest in the Term Loan Collateral.

Certain Covenants and Events of Default. The ABL Facility contains a number of covenants that, among other things, restrict, subject to certain exceptions, our and our subsidiaries’ ability to undertake certain transactions or otherwise make changes to our assets and business. These are substantially similar to the Term Loan covenants described above.

In addition, we are required to maintain a minimum fixed charge coverage ratio, as defined in the agreement, of 1.0 to 1.0 if the unutilized facility is less than the greater of $9.0 million or 10% of the lesser of (1) $150.0 million and (2) the aggregate borrowing base. This coverage ratio requirement remains in place until the 30^th consecutive day the unutilized facility exceeds such threshold. The ABL Facility also contains certain customary affirmative covenants and events of default. As of December 31, 2017, we were in compliance with all applicable covenants.

On May 7, 2015 we issued $1,015.0 million aggregate principal amount of 8.125% Second Lien Notes (8.125% Notes), which mature on June 15, 2021. The 8.125% Notes are fully and unconditionally guaranteed on a senior secured basis by each of DJOFL’s existing and future direct and indirect wholly-owned domestic subsidiaries that guarantees any of DJOFL’s indebtedness or any indebtedness of DJOFL’s domestic subsidiaries.

The net proceeds from the issuance of the 8.125% Notes were used, together with borrowings under the Credit Facilities and cash on hand, to repay our prior notes (see below), repay prior credit facilities and pay all related fees and expenses.

The 8.125% Notes and related guarantees are secured by second-priority liens on the Term Loan Collateral and third-priority liens on the ABL Collateral, in each case subject to permitted liens.

As of December 31, 2017, the market value of the 8.125% Notes was $954.1 million. We determined market value using trading prices for the 8.125% Notes on or near that date. This fair value measurement is categorized within Level 2 of the fair value hierarchy.

Optional Redemption. Prior to June 15, 2018, we have the option to redeem some or all of the 8.125% Notes at a redemption price equal to 100% of the principal amount of the 8.125% Notes redeemed, plus accrued and unpaid interest plus the “make-whole” premium set forth in the indenture governing the 8.125% Notes. On and after June 15, 2018, we have the option to redeem some or all of the 8.125% Notes at the redemption prices set forth in the indenture, plus accrued and unpaid interest. In addition, we may redeem, using net proceeds from certain equity offerings, (i) up to 15% of the principal amount prior to June 15, 2019 at a price equal to 103% of the principal amount being redeemed, and/or (ii) up to 35% of the principal amount prior to June 15, 2018, at a price equal to 108.125% of the principal amount being redeemed, plus accrued and unpaid interest, in each case using an amount not to exceed the net proceeds from certain equity offerings.

On May 7, 2015, we issued $298.5 million aggregate principal amount of 10.75% Third Lien Notes (10.75% Notes) which mature on April 15, 2020. The 10.75% Notes are fully and unconditionally guaranteed on a secured basis by each of DJOFL’s existing and future direct and indirect wholly-owned domestic subsidiaries that guarantees any of DJOFL’s indebtedness or any indebtedness of DJOFL’s domestic subsidiaries.

The 10.75% Notes were issued in connection with our (i) offer (Exchange Offer) to exchange our 9.75% Senior Subordinated Notes due 2017 (9.75% Notes) for the 10.75% Notes and cash and (ii) solicitation of consents from registered holders of the 9.75% Notes to certain proposed amendments to the indenture for the 9.75% Notes. The 10.75% Notes and related guarantees are secured by third-priority liens on the Term Loan Collateral and fourth-priority liens on the ABL Collateral, in each case subject to permitted liens.

As of December 31, 2017, the market value of the 10.75% Notes was $267.1 million. We determined market value using trading prices for the 10.75% Notes on or near that date. This fair value measurement is categorized within Level 2 of the fair value hierarchy.

Optional Redemption. We have the option to redeem the 10.75% Notes, in whole or in part, after May 7, 2015, at the redemption prices set forth in the indenture governing the 10.75% Notes, plus accrued and unpaid interest.

Upon the occurrence of a change of control, DJOFL must give holders of the Notes an opportunity to sell to DJOFL some or all of their 8.125% Notes and 10.75% Notes at a price equal to 101% of their principal amount, plus accrued and unpaid interest to the repurchase date.

The indentures for the 8.125% Notes and the 10.75% Notes each contain covenants limiting, among other things, our ability to (i) incur additional indebtedness or issue certain preferred and convertible shares, pay dividends on, redeem, repurchase or make distributions in respect of the capital stock of DJO or make other restricted payments, (ii) make certain investments, (iii) sell certain assets, (iv) create liens on certain assets to secure debt, (v) consolidate, merge, sell or otherwise dispose of all or substantially all of our assets, (vi) enter into certain transactions with affiliates, and (vii) designate our subsidiaries as unrestricted subsidiaries. As of September 30, 2016, we were in compliance with all applicable covenants.

Our ability to continue to meet the covenants related to our indebtedness specified above in future periods will depend, in part, on events beyond our control, and we may not continue to meet those covenants. A breach of any of these covenants in the future could result in a default under the credit facilities or the Notes, at which time the lenders could elect to declare all amounts outstanding under the senior secured credit facilities to be immediately due and payable. Any such acceleration would also result in a default under the Indentures.

On June 6, 2017, we entered into two new term loans of €6.0 million each at our French subsidiary. The loan provides for borrowings of €12.0 million and is subject to customary borrowing conditions. We are required to make principal repayments under the loan in both monthly and quarterly installments through the maturity date of May 2020. The interest rate on this loan is the Euribor for a one month interest period plus 0.4%. Pursuant to the terms of the loan agreements, we have pledged €12.0 million of our French subsidiary’s tangible and intangible assets.

In the fourth quarter of 2017, our subsidiary, Ormed GmbH, entered into two financing arrangements with Deutsche Leasing AG and Sparkasse Freiburg. The arrangement with Deutsche Leasing provides for a sale and lease back of continuous passive motion (CPM) devices for a total of €3.5 million, maturing within 36 and 48 months. The second arrangement with Sparkasse Freiburg, is a loan agreement consisting of a term loan €4.0 million and a revolving line of credit of up to €1.5 million, with a maturity date of August 30, 2019.

At December 31, 2017, the aggregate amounts of principal maturities of long-term debt for the next five years and thereafter are as follows (in thousands):

During the year ended December 31, 2015, we recognized loss on modification and extinguishment of debt of $68.5 million. The loss consists of $47.8 million in premiums related to the redemption of our 8.75% Notes, 9.875% Notes, and 7.75% Notes, $11.9 million related to the non-cash write off of unamortized debt issuance costs and original issue discount associated with the portion of our debt that was extinguished and $8.8 million of arrangement and amendment fees and other fees and expenses incurred in connection with the refinancing.

As of December 31, 2017 and December 31, 2016, we had $8.6 million and $11.6 million, respectively, of unamortized debt issuance costs.

For the year ended December 31, 2015, we capitalized $5.9 million of debt issuance costs incurred in connection with the amendment of our prior credit facilities.

For the years ended December 31, 2017, 2016 and 2015, amortization of debt issuance costs was $3.0 million, $2.9 million and $4.7 million, respectively. Amortization of debt issuance costs was included in Interest expense in our Consolidated Statements of Operations for each of the periods presented.

Pursuant to the Employment Agreement entered into on November 14, 2016 between DJO and Brady R. Shirley, the Company’s new Chief Executive Officer, Mr. Shirley agreed to purchase $500,000 in shares of the DJO’s common stock valued at $16.46 per share, within 180 days after the date of said agreement. Mr. Shirley completed the purchase of 30,377 shares of common stock on February 2, 2017.

During the year ended December 31, 2016, DJO issued 43,086 shares of its common stock upon the net exercise of vested stock options that had been granted to an employee in 2006 in exchange for options that had previously been granted in the predecessor company to DJO (Rollover Options). Our stock incentive plan permits participants to exercise stock options using a net exercise method. In a net exercise, we withhold from the total number of shares that otherwise would be issued to a participant upon exercise of the stock option such number of shares having a fair market value at the time of exercise equal to the aggregate option exercise price and applicable income tax withholdings, and remit the remaining shares to the participant. The employee exercised these Rollover Options for a total of 312,925 shares of DJO’s common stock, from which we withheld 269,839 shares to cover $4.4 million of aggregate option exercise price and income tax withholdings and issued the remaining 43,086 shares.

During the year ended December 31, 2015, DJO issued 8,848 shares of its common stock upon the net exercise of vested stock options that had been granted to an employee in 2006 in exchange for options that had previously been granted in the predecessor company to DJO (Rollover Options). Our stock incentive plan permits participants to exercise stock options using a net exercise method. In a net exercise, we withhold from the total number of shares that otherwise would be issued to a participant upon exercise of the stock option such number of shares having a fair market value at the time of exercise equal to the aggregate option exercise price and applicable income tax withholdings, and remit the remaining shares to the participant. The employee exercised these Rollover Options for a total of 30,529 shares of DJO’s common stock, from which we withheld 21,681 shares to cover $0.4 million of aggregate option exercise price and income tax withholdings and issued the remaining 8,848 shares.

Additionally, during the year ended December 31, 2015, DJO issued 667 shares of its common stock upon the exercise of stock options. Net proceeds from the share sales were contributed by DJO to us, and are included in Member capital in our Consolidated Balance Sheet as of December 31, 2015.

We have one active equity compensation plan, the DJO 2007 Incentive Stock Plan (2007 Plan) under which we are authorized to grant awards of restricted and unrestricted stock, options, and other stock-based awards based on the shares of common stock of our indirect parent, DJO, subject to adjustment in certain events. The total number of shares available to grant under the 2007 Plan is 10,575,529.

Options issued under the 2007 Plan can be either incentive stock options or non-qualified stock options. The exercise price of stock options granted will not be less than 100% of the fair market value of the underlying shares on the date of grant and the options will expire no more than ten years from the date of grant.

In September 2015, all outstanding options granted to employees between 2008 and 2011 were amended to modify the vesting terms of the portion of the options which vest on achievement of a minimum multiple of invested capital (MOIC) from a MOIC of 2.25 for one-third of the options and a MOIC of 2.5 for an additional one-third of the options to a single MOIC vesting component covering two-thirds of the options with the terms described below. As amended, the options granted between 2008 and 2011 vest as follows: (i) one-third of each stock option grant vests over a specified period of time contingent solely upon the option holder’s continued employment or service with us (Time-Based Options) and (ii) two-thirds of each stock option grant will vest upon achieving MOIC with respect to Blackstone’s aggregate investment in DJO’s capital stock, to be achieved by Blackstone following a liquidation of all or a portion of its investment in DJO’s capital stock (Market Return Options). The Market Return Options provide for vesting within a range of achievement of a MOIC multiple between 1.5 and 2.25. If Blackstone sells all or a portion of its equity interests in DJO while the options are outstanding, then the unvested Market Return Options will vest and become exercisable as follows: 1) 25% of the options will vest and become exercisable if Blackstone realizes a MOIC of 1.5 times its equity investment in DJO; 2) 100% of the options will vest and become exercisable if Blackstone realizes a MOIC of at least 2.25 times its equity investment in DJO; and 3) if Blackstone realizes a MOIC of greater than 1.5 times its equity investment but less than 2.25 times its equity investment, then 25% of the options will vest and become exercisable and a percentage of the remaining unvested options will vest and become exercisable with such percentage equal to a fraction, the numerator of which is the actual MOIC realized by Blackstone, less 1.5 and the denominator of which is 0.75.

In July 2015, all outstanding options granted to employees in 2012 and later years were amended to modify the MOIC vesting provision as described below. These options vest in four equal installments beginning with the year of grant and for each of the three calendar years following the year of grant, with each such installment vesting only if the final reported financial results for such year show that the Adjusted EBITDA for such year equaled or exceeded the Adjusted EBITDA amount in the financial plan approved by DJO’s Board of Directors for such year (Performance Options). In the event that the Adjusted EBITDA in any of such four years falls short of the amount of Adjusted EBITDA in the financial plan for that year, the installment that did not therefore vest at the end of such year shall be eligible for subsequent vesting at the end of the four year vesting period if the cumulative Adjusted EBITDA for such four years equals or exceeds the cumulative Adjusted EBITDA in the financial plans for such four years and the Adjusted

EBITDA in the fourth vesting year equals or exceeds the Adjusted EBITDA in the financial plan for such year. In addition, as amended in July 2015, such options also provide that in the event Blackstone achieves the same MOIC requirement described above for the Market Return Options, any unvested installments from prior years and all installments for future years shall thereupon vest.

Commencing with options granted in September 2015, options granted to existing employees have the same terms as the Market Return Options, and options granted to new employees consist of one-third Time-Based Options and two-thirds Market Return Options.

In 2015 and 2016, options were granted to employees following the net exercise of the options they received in 2007 in exchange for options that had previously been granted in DJO’s predecessor company (Rollover Options), which were scheduled to expire in 2015 and 2016, respectively. These new options were fully vested on the date of grant and have a term of ten years (Vested Options).

Except for options granted to the Chairman of the Board and two other board members as described below, options are typically granted annually to members of our Board of Directors who are not affiliates of Blackstone (referred to as Director Service Options). The Director Service Options vest in increments of 33 1/3% per year on each of the first through third anniversary dates of the grant date, contingent upon the optionee’s continued service as a director. The options granted to the Chairman of the Board and the two other board members vest as follows: one-third of the stock option grant vests in increments of 33 1/3% per year on each of the first through third anniversary dates from the grant date contingent upon the optionee’s continued service as a director; and, as amended in July 2015, two-thirds of the stock option grant will vest in the same manner as the Market Return Options.

During the year ended December 31, 2017, the compensation committee granted 1,475,000 options to employees, of which 1,047,501 were Market Return Options and 427,499 were Time-Based Options. Additionally, the compensation committee granted 13,800 Director Service Options to members of the Board of Directors. The weighted average grant date fair value of the Time-Based Options and Director Service Options granted during the year ended December 31, 2017 was $6.30 and $6.60, respectively.

During the year ended December 31, 2016, the compensation committee granted 2,015,318 options to employees, of which 1,356,164 were Market Return Options, 484,336 were Time-Based Options and 174,818 were Vested Options. Additionally, the compensation committee granted 18,800 Director Service Options to members of the Board of Directors and 10,000 Market Return Options to non-employees. The weighted average grant date fair values of the Time-Based Options, Vested Options and Director Service Options granted during the year ended December 31, 2016 were $6.12, $5.98 and $5.25, respectively. In addition, during the year ended December 31, 2016, we granted 121,507 restricted stock units (RSUs) to Michael C. Eklund, our new chief financial officer and chief operating officer. The RSUs vest over four years, with 25% vesting on October 3, 2017 and an additional 25% vesting on each October 3 thereafter, contingent upon his continued employment with the Company on each vesting date. The grant date fair value of the RSUs was $16.46.

During the year ended December 31, 2015, the compensation committee granted 1,343,621 options to employees, of which 1,065,002 were Performance Options, 257,498 were Time-Based Options and 21,121 were Vested Options. The weighted average grant date fair values of the Time-Based Options, Vested Options and Director Service Options granted during the year ended December 31, 2015 were $6.09, $5.27 and $6.92, respectively.

The fair value of each option award is estimated on the date of grant, or modification, using the Black-Scholes option pricing model for service based awards, and a binomial model for market based awards. In estimating fair value for options issued under the 2007 Plan, expected volatility was based on historical volatility of comparable publicly-traded companies. As our historical share option exercise experience does not provide a reasonable basis upon which to estimate the expected term, we used the simplified method. Expected life is calculated in two tranches based on the employment level defined as executive or employee. The risk-free rate used in calculating fair value of stock options for periods within the expected term of the option is based on the U.S. Treasury yield bond curve in effect on the date of grant.

The following table summarizes certain assumptions we used to estimate the fair value of the Time-Based Options, the Vested Options and the Director Service Options of stock options granted during the years ended December 31, 2017, 2016 and 2015:

We recorded non-cash stock-based compensation expense during the periods presented as follows (in thousands):

We have met the Adjusted EBITDA targets related to the Performance Options granted with vesting conditions related to 2017 Adjusted EBITDA. As such, we recognized expense for the options that vested in 2017. We have not recognized expense for any of the options which have the potential to vest based on Adjusted EBITDA for 2018, as some of these targets have not yet been established and we are unable to assess the probability of achieving such targets. Accordingly, we recognized stock-based compensation expense for the Time-Based Options, the Performance Options with 2017 Adjusted EBITDA vesting conditions, Vested Options and the Director Service Options granted.

Stock based compensation expense for options granted to non-employees was not significant to the Company for all periods presented, and was included in Selling, general and administrative expense in our Consolidated Statements of Operations.

The Company’s stock incentive plan permits optionees to exercise stock options using a net exercise method. In a net exercise, the Company withholds from the total number of shares that otherwise would be issued to an optionee upon exercise of the stock option such number of shares having a fair market value at the time of exercise equal to the option exercise price and applicable income tax withholdings and remits the remaining shares to the optionee.

The following table provides information regarding the use of the net exercise method during the periods presented:

As of December 31, 2017, total unrecognized stock-based compensation expense related to unvested stock options granted under the 2007 Plan, excluding options subject to the performance components of the Market Return Options, was $4.7 million, net of expected forfeitures. We anticipate this expense to be recognized over a weighted-average period of approximately four years. Compensation expense associated with the Market Return Options granted under the 2007 Plan, with the exception of those that were issued in connection with a modification, will be recognized only to the extent achievement of the performance components are deemed probable.

The components of loss from continuing operations before income tax provision consist of the following (in thousands):

The income tax provision from continuing operations consists of the following (in thousands):

The difference between the income tax provision (benefit) derived by applying the U.S. federal statutory income tax rate of 35% and the recognized income tax provision is as follows (in thousands):

	Year Ended December 31,
	2017			2016			2015
Income tax benefit derived by applying the U.S. federal statutory income tax rate to loss before income taxes	$	(33,643	)	$	(102,785	)	$	(59,586	)
Add (deduct) the effect of:
State tax benefit, net		(1,960	)		(5,126	)		(4,996	)
Change in state effective tax rates		20			449			(604	)
Foreign earnings repatriation		190			236			(622	)
Unrecognized tax benefits		2,191			129			1,678
Goodwill impairment		—			38,988			—
Revaluation of deferred taxes		48,529			—			—
Reclass of tax expense for gain in OCI		(6,982	)		—			—
Research tax credit		(1,124	)		(489	)		(758	)
Permanent differences and other, net		331			3,346			(2,726	)
Foreign rate differential		(5,238	)		(897	)		5,875
Other		(2,202	)		1,220			1,340
Valuation allowance		(60,832	)		58,076			72,655
	$	(60,720	)	$	(6,853	)	$	12,256

ASC 740-20 requires total income tax expense or benefit to be allocated among continuing operations, discontinued operations, extraordinary items, other comprehensive income and items charged directly to shareholders’ equity. This allocation is referred to as intra-period tax allocation. As a result of the gain recognized in other comprehensive income, the Company is subject to ASC 740-20-45-7 which requires us to record a tax expense to other comprehensive income and a corresponding tax benefit to continuing operations. The amount of income tax benefit recorded as part of continuing operations is limited to the income tax expense from other comprehensive income. Accordingly, the Company has recorded a tax expense of $7.0 million in other comprehensive income and a corresponding income tax benefit from continuing operations.

The components of deferred income tax assets and liabilities are as follows (in thousands):

At December 31, 2017, we maintain federal and state net operating loss carryforwards of $894.8 million and $559.2 million, respectively, which expire over a period of 1 to 20 years. Our foreign net operating loss carryforwards of $14.8 million will begin to expire in 2019.

At December 31, 2017 and 2016 we had gross deferred tax assets of $257.7 million and $375.9 million, respectively, which we reduced by valuation allowances of $219.4 million and $287.0 million, respectively.

We do not intend to permanently reinvest the earnings of foreign operations. Accordingly, we recorded a deferred tax (benefit) expense of $0.2 million, $0.2 million and $(0.6) million for the years ended December 31, 2017, 2016 and 2015, respectively, for unrepatriated foreign earnings in those years.

The Company qualifies for a tax holiday in Tunisia. Without the tax holiday, the Company would have tax expense of $1.0 million, $0.5 million and $0.3 million in Tunisia for the years ended December 31, 2017, 2016 and 2015, respectively. The tax incentive will last at least through 2021.

We file income tax returns in U.S. federal, state and foreign jurisdictions. With few exceptions, we are no longer subject to income tax examinations by tax authorities for years before 2012. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses or tax credits were generated and carried forward, and make adjustments up to the amount of the net operating loss or credit carryforward amount.

The Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. Accordingly, the Company’s deferred tax assets and liabilities were re-measured to reflect the reduction in the U.S. corporate income tax rate from 35 percent to 21 percent .The re-measurement of the deferred tax assets and liabilities resulted in an income tax expense of $48.5 million, which was offset by a $(118.4) million benefit from the change in the valuation allowance, resulting in a net income tax benefit of $69.9 million that impacted the Company’s effective tax rate. We are still refining our calculations, in particular the potential utilization of indefinite lived deferred tax liabilities as a source of future taxable income when assessing the realizability of indefinite lived deferred assets, which could potentially affect the re-measurement of these balances in a future period.

In December 2017, the Tax Cuts and Jobs Act (the “2017 Act”) was enacted. The 2017 Act includes a number of changes to existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. corporate income tax rate from 35 percent to 21 percent for tax years beginning after December 31, 2017. The 2017 Act also provides for a one-time transition tax on certain foreign earnings and the acceleration of depreciation for certain assets placed in service after September 27, 2017. The 2017 Act also includes prospective changes beginning in 2018, including additional limitations on executive compensation, limitations on the deductibility of interest and capitalization of research and development expenditures. The 2017 Act includes two new U.S. tax base erosion provisions, the global intangible low-taxed income (“GILTI”) provisions and the base-erosion and anti-abuse tax (“BEAT”) provisions.

The 2017 Act provided for a one-time deemed mandatory repatriation of post-1986 undistributed foreign subsidiary earnings and profits (“E&P”) through the year ended December 31, 2017. The Company had an estimated $15.1 million of undistributed foreign E&P subject to the deemed mandatory repatriation. Such amounts are provisional and the Company expects to complete its analysis during the second half of 2018.

The Company also continues to analyze the GILTI and BEAT provisions of the 2017 Tax Act. The Company expects to complete its analysis of these provisions in the second half of 2018.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Act. The Company has recognized provisional tax impacts related to the one-time mandatory repatriation of post-1986 E&P and the revaluation of deferred tax assets and liabilities. The provisional amounts have included in its consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the 2017 Act.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):

To the extent all or a portion of our gross unrecognized tax benefits are recognized in the future, no U.S. federal tax benefit for related state income tax deductions would result due to the existence of a U.S. federal valuation allowance. We anticipate that approximately $1.1 million of uncertain tax positions, each of which are individually immaterial, will decrease in the next twelve months due to the expiration of the statutes of limitations. We have various unrecognized tax benefits totaling approximately $6.0 million, which, if recognized, would impact our effective tax rate in future periods. We recognized interest and penalties of $0.4 million, $0.1 million, and $0.4 million in the years ended December 31, 2017, 2016 and 2015, respectively, which was included as a component of income tax benefit in our Consolidated Statements of Operations. As of December 31, 2017 and 2016, we have $3.2 million and $2.8 million, respectively, accrued for interest and penalties.

Operating Leases. We lease building space, manufacturing facilities and equipment under non-cancelable operating lease agreements that expire at various dates. We record rent incentives as deferred rent and amortize as reductions to lease expense over the lease term. The aggregate minimum rental commitments under non-cancelable leases for the next five years and thereafter, as of December 31, 2017, are as follows (in thousands):

Rental expense under operating leases totaled $18.8 million, $17.8 million, and $18.0 million, for the years ended December 31, 2017, 2016 and 2015, respectively. Scheduled increases in rent expense are amortized on a straight line basis over the life of the lease.

Our subsidiary, Empi, Inc., was served with a federal administrative subpoena dated May 11, 2015, issued by the Office of Inspector General for the U.S. Department of Defense (“OIG”) seeking a variety of documents primarily relating to the supply of home electrotherapy units and supplies by Empi to beneficiaries covered under medical insurance programs sponsored or administered by TRICARE, the Defense Health Agency and the Department of Defense. The subpoena sought discovery of documents for the period January 2010 through May 2015. The Company has cooperated with the U.S. Attorney’s Office in Minnesota (USAO), which jointly handled the investigation of issues related to the subpoena. We produced responsive documents and fully cooperated in the investigation. In October 2017, we reached a settlement in principle with the USAO and the Civil Division to resolve the government’s investigation of claims under the False Claims Act signed a formal settlement agreement in January 2018. Pursuant to the settlement agreement, the Company agreed to pay a monetary penalty of $7.62 million, plus interest from October 2017 to January 2018. The payment was made in January 2018. As a part of the settlement, the Company did not admit and wrongdoing and is not subject to any ongoing corporate integrity agreement.

Blackstone Management Partners LLC (BMP) provides certain monitoring, advisory and consulting services to us for an annual monitoring fee equal to the greater of $7.0 million or 2% of consolidated EBITDA as defined in the Transaction and Monitoring Fee Agreement. The monitoring fee agreement was terminated effective November 20, 2017. DJO has agreed to indemnify BMP and its affiliates, directors, officers, employees, agents and representatives from and against all liabilities relating to the services contemplated by the Transaction and Monitoring Fee Agreement and the engagement of BMP pursuant to, and the performance of BMP and its affiliates of the services contemplated by, the Transaction and Monitoring Fee Agreement. We expensed $6.2 million, $7.0 million and $7.0 million related to the annual monitoring fee for the years ended December 31, 2017, 2016 and 2015, respectively, which is recorded as a component of Selling, general and administrative expense in the Consolidated Statements of Operations. The $6.2 million payment was made in the first quarter of 2018.

For the years ended December 31, 2017, 2016 and 2015, we reported our business in four operating segments: Bracing and Vascular; Recovery Sciences; Surgical Implant and International.

Our Bracing and Vascular segment, which generates its revenues in the United States, offers our rigid knee bracing products, orthopedic soft goods, cold therapy products, vascular systems, therapeutic shoes and inserts and compression therapy products, primarily under the DonJoy, ProCare, Aircast, Dr. Comfort, Bell-Horn and Exos brands. This segment also includes our OfficeCare channel, through which we maintain an inventory of soft goods and other products at healthcare facilities, primarily orthopedic practices, for immediate distribution to patients. The Bracing and Vascular segment primarily sells its products to orthopedic and sports medicine professionals, hospitals, podiatry practices, orthotic and prosthetic centers, home medical equipment providers and independent pharmacies. In 2014 we expanded our consumer channel to focus on marketing, selling and distributing our products, including bracing and vascular products, to professional and consumer retail customers and on-line. The bracing and vascular products sold through the channel will principally be sold under the DonJoy Performance, Bell-Horn and Doctor Comfort brands.

Our Recovery Sciences segment, which generates its revenues in the United States, is divided into three main channels:

Our Surgical Implant segment, which generates its revenues in the United States, develops, manufactures and markets a wide variety of knee, hip and shoulder implant products that serve the orthopedic reconstructive joint implant market.

Information regarding our reportable business segments is presented below (in thousands). Segment results exclude the impact of amortization and impairment of goodwill and intangible assets, certain general corporate expenses, and charges related to various integration activities, as defined by management. The accounting policies of the reportable segments are the same as the accounting policies of the Company. We allocate resources and evaluate the performance of segments based on net sales, gross profit, operating income and other non-GAAP measures, as defined in the senior secured credit facilities. We do not allocate assets to reportable segments because a significant portion of our assets are shared by the segments.

	Year Ended December 31,
	2017			2016			2015
Net sales:
Bracing and Vascular	$	507,435		$	522,600		$	526,295
Recovery Sciences		158,288			156,998			156,194
Surgical Implant		200,384			174,503			134,843
International		320,099			301,187			296,295
	$	1,186,206		$	1,155,288		$	1,113,627
Operating income (loss):
Bracing and Vascular	$	102,531		$	102,133		$	115,791
Recovery Sciences		43,284			32,944			29,035
Surgical Implant		40,482			32,621			25,531
International		61,794			45,864			48,578
Expenses not allocated to segments and eliminations		(172,090	)		(334,617	)		(141,120	)
	$	76,001		$	(121,055	)	$	77,815

Net sales are attributed to countries based on location of customer. In each of the years ended December 31, 2017, 2016 and 2015, no individual customer or distributor accounted for 10% or more of total annual net sales.

We operate our business on a manufacturing calendar, with our fiscal year always ending on December 31. Each quarter is 13 weeks, consisting of two four-week periods and one five-week period. Our first and fourth quarters may have more or fewer shipping days from year to year based on the days of the week on which holidays and December 31 fall.

The following table presents our unaudited quarterly consolidated financial data (in thousands):

DJOFL and its direct wholly-owned subsidiary, DJO Finco Inc. (DJO Finco), jointly issued the 8.125% Notes and 10.75% Notes. DJO Finco was formed solely to act as a co-issuer of the notes, has only nominal assets and does not conduct any operations. The Indentures generally prohibit DJO Finco from holding any assets, becoming liable for any obligations or engaging in any business activity.

The 8.125% Notes are jointly and severally, fully and unconditionally guaranteed, on a senior secured basis by all of DJOFL’s domestic subsidiaries (other than the co-issuer) that are 100% owned, directly or indirectly, by DJOFL (the Guarantors). The 10.75% Notes are jointly and severally, fully and unconditionally guaranteed, on a secured basis by the Guarantors.

	DJOFL			Guarantors			Non- Guarantors		Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	23,245		$	(14,354	)	$	23,094	$	—		$	31,985
Accounts receivable, net		—			141,565			48,759		—			190,324
Inventories, net		—			137,193			30,200		1,744			169,137
Prepaid expenses and other current assets		42			13,730			6,445		1			20,218
Current assets of discontinued operations		—			511			—		—			511
Total current assets		23,287			278,645			108,498		1,745			412,175
Property and equipment, net		—			119,691			13,861		(30	)		133,522
Goodwill		—			791,004			105,463		(32,355	)		864,112
Intangible assets, net		—			598,018			9,070		—			607,088
Investment in subsidiaries		1,297,699			1,677,336			55,723		(3,030,758	)		—
Intercompany receivables		298,021			—			—		(298,021	)		—
Other non-current assets		85			2,462			2,581		—			5,128
Total assets	$	1,619,092		$	3,467,156		$	295,196	$	(3,359,419	)	$	2,022,025
Liabilities and (Deficit) Equity
Current liabilities:
Accounts payable	$	—		$	84,943		$	13,388		—		$	98,331
Current portion of debt obligations		10,550			—			5,386		—			15,936
Other current liabilities		18,276			90,975			35,125		(1	)		144,375
Total current liabilities		28,826			175,918			53,899		(1	)		258,642
Long-term debt obligations		2,382,962			—			15,222		—			2,398,184
Deferred tax liabilities, net		—			137,424			5,173		—			142,597
Intercompany payables, net		—			167,667			65,108		(232,775	)		—
Other long-term liabilities		(203	)		13,063			220		—			13,080
Total liabilities		2,411,585			494,072			139,622		(232,776	)		2,812,503
Noncontrolling interests		—			—			2,015		—			2,015
Total membership (deficit) equity		(792,493	)		2,973,084			153,559		(3,126,643	)		(792,493	)
Total liabilities and (deficit) equity	$	1,619,092		$	3,467,156		$	295,196	$	(3,359,419	)	$	2,022,025

	DJOFL			Guarantors			Non- Guarantors			Eliminations			Consolidated
Net sales	$	—		$	992,689		$	334,319		$	(140,802	)	$	1,186,206
Costs and operating expenses:
Cost of sales (exclusive of amortization of intangible assets of $27,732)		—			379,339			281,100			(162,332	)		498,107
Selling, general and administrative		—			416,313			94,210			—			510,523
Research and development		—			31,856			3,573			—			35,429
Amortization of intangible assets		—			64,862			1,284			—			66,146
		—			892,370			380,167			(162,332	)		1,110,205
Operating (loss) income		—			100,319			(45,848	)		21,530			76,001
Other (expense) income:
Interest (expense) income, net		(174,004	)		140			(374	)		—			(174,238	)
Other expense, net		—			(40,114	)		42,227			—			2,113
Intercompany (expense) income, net		—			(23,694	)		26,663			(2,969	)		—
Equity in loss of subsidiaries, net		138,110			—			—			(138,110	)		—
		(35,894	)		(63,668	)		68,516			(141,079	)		(172,125	)
(Loss) income before income taxes		(35,894	)		36,651			22,668			(119,549	)		(96,124	)
Income tax (benefit) provision		—			(69,184	)		8,464			—			(60,720	)
Net (loss) income from continuing operations		(35,894	)		105,835			14,204			(119,549	)		(35,404	)
Net income from discontinued operations		—			309			—			—			309
Net income attributable to noncontrolling interests		—			—			(799	)		—			(799	)
Net (loss) income attributable to DJOFL	$	(35,894	)	$	106,144		$	13,405		$	(119,549	)	$	(35,894	)

	DJOFL			Guarantors		Non- Guarantors		Eliminations			Consolidated
Net (loss) income	$	(35,894	)	$	106,144	$	14,204	$	(119,549	)	$	(35,095	)
Other comprehensive income, net of taxes:
Foreign currency translation adjustments, net of tax provision of $7,400		—			—		5,638		—			5,638
Unrealized gain on cash flow hedges, net of tax provision of $1,144		3,007			—		—		—			3,007
Other comprehensive income		3,007			—		5,638		—			8,645
Comprehensive (loss) income		(32,887	)		106,144		19,842		(119,549	)		(26,450	)
Comprehensive income attributable to noncontrolling interests		—			—		64		—			64
Comprehensive (loss) income attributable to DJO Finance LLC	$	(32,887	)	$	106,144	$	19,906	$	(119,549	)	$	(26,386	)

	DJOFL			Guarantors			Non- Guarantors			Eliminations			Consolidated
Cash Flows From Operating Activities:
Net (loss) income	$	(35,894	)	$	106,144		$	14,204		$	(119,549	)	$	(35,095	)
Net income from discontinued operations					(309	)								(309	)
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Depreciation		—			39,856			5,285			(26	)		45,115
Amortization of intangible assets		—			64,862			1,284			—			66,146
Amortization of debt issuance costs and non-cash interest expense		8,274			—			—			—			8,274
Stock-based compensation expense		—			3,696			—			—			3,696
Loss on disposal of assets, net		—			1,205			116			—			1,321
Deferred income tax (benefit) expense		—			(69,392	)		943			—			(68,449	)
Equity in loss of subsidiaries, net		(138,110	)		—			—			138,110			—
Changes in operating assets and liabilities, net of acquired assets and liabilities:														0
Accounts receivable		—			(7,383	)		164			—			(7,219	)
Inventories		—			(15,797	)		20,067			(22,609	)		(18,339	)
Prepaid expenses and other assets		(85	)		3,117			402			536			3,970
Accounts payable and other		1,571			39,761			6,978			(2,815	)		45,495
Net cash (used in) provided by continuing operating activities		(164,244	)		165,760			49,443			(6,353	)		44,606
Net cash provided by discontinued operations		—			309			—			—			309
Net cash (used in) provided by operating activities		(164,244	)		166,069			49,443			(6,353	)		44,915
Cash Flows From Investing Activities:
Purchases of property and equipment		—			(42,931	)		(4,430	)		—			(47,361	)
Net cash (used in) provided by investing activities from continuing operations		—			(42,931	)		(4,430	)		—			(47,361	)
Cash Flows From Financing Activities:
Intercompany		192,996			(137,120	)		(62,229	)		6,353			—
Proceeds from issuance of debt		82,000			—			21,552			—			103,552
Repayments of debt obligations		(99,550	)		—			(1,785	)		—			(101,335	)
Repurchase of common stock		(3,600	)											(3,600	)
Dividend paid by subsidiary to owners of noncontrolling interests		—			—			(1,102	)		—			(1,102	)
Other financing activities, net		(175	)		—			—			—			(175	)
Net cash provided by (used in) financing activities		171,671			(137,120	)		(43,564	)		6,353			(2,660	)
Effect of exchange rate changes on cash and cash equivalents		—			—			1,879			—			1,879
Net increase (decrease) in cash and cash equivalents		7,427			(13,982	)		3,328			—			(3,227	)
Cash and cash equivalents, beginning of year		15,818			(372	)		19,766			—			35,212
Cash and cash equivalents, end of year	$	23,245		$	(14,354	)	$	23,094			—		$	31,985

	DJOFL			Guarantors			Non- Guarantors		Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	15,818		$	(372	)	$	19,766	$	—		$	35,212
Accounts receivable, net		—			134,182			44,011		—			178,193
Inventories, net		—			123,217			28,192		148			151,557
Prepaid expenses and other current assets		41			16,875			6,734		—			23,650
Current assets of discontinued operations		0			511			—		—			511
Total current assets		15,859			274,413			98,703		148			389,123
Property and equipment, net		—			114,073			13,993		(47	)		128,019
Goodwill		—			791,005			94,154		(29,533	)		855,626
Intangible assets, net		—			662,880			9,254		—			672,134
Investment in subsidiaries		1,297,698			1,680,893			48,923		(3,027,514	)		—
Intercompany receivables		345,539			—			—		(345,539	)		—
Other non-current assets		0			3,086			2,450		—			5,536
Total assets	$	1,659,096		$	3,526,350		$	267,477	$	(3,402,485	)	$	2,050,438
Liabilities and (Deficit) Equity
Current liabilities:
Accounts payable	$	—		$	54,628		$	9,194		—		$	63,822
Current portion of debt obligations		10,550			—			—		—			10,550
Other current liabilities		18,224			80,389			31,392		—			130,005
Total current liabilities		28,774			135,017			40,586		—			204,377
Long-term debt obligations		2,392,238			—			—		—			2,392,238
Deferred tax liabilities, net		—			198,920			3,820		—			202,740
Intercompany payables, net		—			301,456			121,350		(422,806	)		—
Other long-term liabilities		1,283			13,365			284		—			14,932
Total liabilities		2,422,295			648,758			166,040		(422,806	)		2,814,287
Noncontrolling interests		—			—			2,079		—			2,079
Total membership (deficit) equity		(763,199	)		2,877,592			99,358		(2,979,679	)		(765,928	)
Total liabilities and (deficit) equity	$	1,659,096		$	3,526,350		$	267,477	$	(3,402,485	)	$	2,050,438

	DJOFL			Guarantors			Non- Guarantors			Eliminations			Consolidated
Net sales	$	—		$	1,005,714		$	311,319		$	(161,745	)	$	1,155,288
Costs and operating expenses:
Cost of sales (exclusive of amortization of intangible assets of $28,525)		—			402,046			290,640			(181,272	)		511,414
Selling, general and administrative		—			399,466			91,227			—			490,693
Research and development		—			34,071			3,639			—			37,710
Amortization of intangible assets		—			74,982			1,544			—			76,526
Impairment of goodwill		—			160,000			—			—			160,000
		—			1,070,565			387,050			(181,272	)		1,276,343
Operating (loss) income		—			(64,851	)		(75,731	)		19,527			(121,055	)
Other (expense) income:
Interest (expense) income, net		(170,165	)		155			(72	)		—			(170,082	)
Loss on modification of debt		—			—			—			—			—
Other expense, net		(8	)		(33,345	)		30,819			—			(2,534	)
Intercompany (expense) income, net		—			(37,689	)		37,468			221			—
Equity in loss of subsidiaries, net		(113,402	)		—			—			113,402			—
		(283,575	)		(70,879	)		68,215			113,623			(172,616	)
(Loss) income before income taxes		(283,575	)		(135,730	)		(7,516	)		133,150			(293,671	)
Income tax (benefit) provision		—			(11,329	)		4,476			—			(6,853	)
Net (loss) income from continuing operations		(283,575	)		(124,401	)		(11,992	)		133,150			(286,818	)
Net income from discontinued operations		—			1,138			—			—			1,138
Net income attributable to noncontrolling interests		—			—			(623	)		—			(623	)
Net (loss) income attributable to DJOFL	$	(283,575	)	$	(123,263	)	$	(12,615	)	$	133,150		$	(286,303	)

	DJOFL			Guarantors			Non- Guarantors			Eliminations		Consolidated
Net (loss) income	$	(283,575	)	$	(123,263	)	$	(11,992	)	$	133,150	$	(285,680	)
Other comprehensive income, net of taxes:
Foreign currency translation adjustments, net of tax benefit of $34		—			—			(10,342	)		—		(10,342	)
Unrealized loss on cash flow hedges, net of tax provision of zero		(3,969	)		—			—			—		(3,969	)
Other comprehensive loss		(3,969	)		—			(10,342	)		—		(14,311	)
Comprehensive (loss) income		(287,544	)		(123,263	)		(22,334	)		133,150		(299,991	)
Comprehensive income attributable to noncontrolling interests		—			—			(550	)		—		(550	)
Comprehensive (loss) income attributable to DJO Finance LLC	$	(287,544	)	$	(123,263	)	$	(22,884	)	$	133,150	$	(300,541	)

	DJOFL			Guarantors			Non- Guarantors			Eliminations			Consolidated
Cash Flows From Operating Activities:
Net (loss) income	$	(283,575	)	$	(123,263	)	$	(11,992	)	$	133,150		$	(285,680	)
Net income from discontinued operations					(1,138	)								(1,138	)
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation		—			36,396			5,023			(52	)		41,367
Amortization of intangible assets		—			74,982			1,544			—			76,526
Amortization of debt issuance costs and non-cash interest expense		7,755			—			—			—			7,755
Stock-based compensation expense		—			3,188			—			—			3,188
Impairment of goodwill		—			160,000			—			—			160,000
Loss on disposal of assets, net		—			523			115			4			642
Deferred income tax benefit		—			(10,900	)		(397	)		—			(11,297	)
Equity in loss of subsidiaries, net		113,402			—			—			(113,402	)		0
Changes in operating assets and liabilities, net of acquired assets and liabilities:														0
Accounts receivable		—			(6,609	)		(1,221	)		—			(7,830	)
Inventories		—			17,356			18,413			(20,095	)		15,674
Prepaid expenses and other assets		1,313			(4,434	)		199			406			(2,516	)
Accounts payable and other		10,893			(1,358	)		5,381			(2,990	)		11,926
Net cash (used in) provided by continuing operating activities		(150,212	)		144,743			17,065			(2,979	)		8,617
Net cash used in discontinued operations		—			(9,837	)		—			—			(9,837	)
Net cash (used in) provided by operating activities		(150,212	)		134,906			17,065			(2,979	)		(1,220	)
Cash Flows From Investing Activities:
Purchases of property and equipment		—			(45,372	)		(6,055	)		(1	)		(51,428	)
Other investing activities, net		—			946			—			—			946
Net cash used in by investing activities from continuing operations		—			(44,426	)		(6,055	)		(1	)		(50,482	)
Cash Flows From Financing Activities:
Intercompany		96,436			(91,012	)		(8,404	)		2,980			—
Proceeds from issuance of debt		107,000			—			—			—			107,000
Repayments of debt obligations		(67,079	)		—			—			—			(67,079	)
Dividend paid by subsidiary to owners of noncontrolling interests		—			—			(1,106	)		—			(1,106	)
Net cash provided by (used in) financing activities		136,357			(91,012	)		(9,510	)		2,980			38,815
Effect of exchange rate changes on cash and cash equivalents		—			—			(844	)		—			(844	)
Net (decrease) increase in cash and cash equivalents		(13,855	)		(532	)		656			—			(13,731	)
Cash and cash equivalents, beginning of year		29,673			160			19,110			—			48,943
Cash and cash equivalents, end of year	$	15,818		$	(372	)	$	19,766			—		$	35,212

	DJOFL			Guarantors			Non- Guarantors			Eliminations			Consolidated
Net sales	$	—		$	976,412		$	293,899		$	(156,684	)	$	1,113,627
Costs and operating expenses:
Cost of sales (exclusive of amortization of intangible assets of $30,719)		—			408,987			227,635			(170,603	)		466,019
Selling, general and administrative		—			364,305			90,419			—			454,724
Research and development		—			31,456			3,649			—			35,105
Amortization of intangible assets		—			77,569			2,395			—			79,964
		—			882,317			324,098			(170,603	)		1,035,812
Operating income (loss)		—			94,095			(30,199	)		13,919			77,815
Other (expense) income:
Interest (expense) income, net		(172,237	)		42			(95	)		—			(172,290	)
Loss on modification of debt		(68,473	)		—			—			—			(68,473	)
Other expense, net		—			(960	)		(6,343	)		—			(7,303	)
Intercompany (expense) income, net		—			(21,994	)		34,167			(12,173	)		—
Equity in loss of subsidiaries, net		(100,217	)		—			—			100,217			—
		(340,927	)		(22,912	)		27,729			88,044			(248,066	)
(Loss) income before income taxes		(340,927	)		71,183			(2,470	)		101,963			(170,251	)
Income tax provision		—			10,027			2,229			—			12,256
Net (loss) income from continuing operations		(340,927	)		61,156			(4,699	)		101,963			(182,507	)
Net loss from discontinued operations		—			(157,580	)		—			—			(157,580	)
Net income attributable to noncontrolling interests		—			—			(840	)		—			(840	)
Net (loss) income attributable to DJOFL	$	(340,927	)	$	(96,424	)	$	(5,539	)	$	101,963		$	(340,927	)

	DJOFL			Guarantors			Non-Guarantors			Eliminations		Consolidated
Net (loss) income	$	(340,927	)	$	(96,424	)	$	(4,699	)	$	101,963	$	(340,087	)
Other comprehensive (loss) income, net of taxes:
Foreign currency translation adjustments, net of tax benefit of $540		—			—			(6,006	)		—		(6,006	)
Unrealized gain on cash flow hedges, net of tax provision of zero for the year ended December 31, 2015		985			—			—			—		985
Other comprehensive income (loss)		985			—			(6,006	)		—		(5,021	)
Comprehensive (loss) income		(339,942	)		(96,424	)		(10,705	)		101,963		(345,108	)
Comprehensive income attributable to noncontrolling interests		—			—			(557	)		—		(557	)
Comprehensive (loss) income attributable to DJO Finance LLC	$	(339,942	)	$	(96,424	)	$	(11,262	)	$	101,963	$	(345,665	)

	DJOFL			Guarantors			Non- Guarantors			Eliminations			Consolidated
Cash Flows from Operating Activities:
Net (loss) income	$	(340,927	)	$	(96,424	)	$	(4,699	)	$	101,963		$	(340,087	)
Net loss from discontinued operations		—			157,580			—			—			157,580
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation		—			32,495			5,096			(100	)		37,491
Amortization of intangible assets		—			77,569			2,395			—			79,964
Amortization of debt issuance costs and non-cash interest expense		7,850			—			—			—			7,850
Loss on modification and extinguishment of debt		68,473			—			—			—			68,473
Stock-based compensation expense		—			1,805			—			—			1,805
Loss (gain) on disposal of assets, net		—			1,380			75			(8	)		1,447
Deferred income tax expense (benefit)		—			6,901			(961	)		—			5,940
Equity in loss of subsidiaries, net		100,217			—			—			(100,217	)		—
Changes in operating assets and liabilities, net of acquired assets and liabilities:
Accounts receivable		—			(6,156	)		(1,908	)		—			(8,064	)
Inventories		—			(535	)		11,885			(19,456	)		(8,106	)
Prepaid expenses and other assets		(1,195	)		(3,924	)		(1,775	)		(622	)		(7,516	)
Accounts payable and other		(11,506	)		17,145			805			7,020			13,464
Net cash (used in) provided by continuing operating activities		(177,088	)		187,836			10,913			(11,420	)		10,241
Net cash provided by discontinued operations		—			39,861			—			—			39,861
Net cash (used in) provided by operating activities		(177,088	)		227,697			10,913			(11,420	)		50,102
Cash Flows From Investing Activities:
Cash paid in connection with acquisitions, net of cash acquired		—			(24,000	)		—			—			(24,000	)
Purchases of property and equipment		—			(38,671	)		(6,111	)		117			(44,665	)
Other investing activities, net		—			27			—			—			27
Net cash (used in) provided by investing activities from continuing operations		—			(62,644	)		(6,111	)		117			(68,638	)
Net cash used in investing activities from discontinued operations		—			(575	)		—			—			(575	)
Net cash (used in) provided by investing activities		—			(63,219	)		(6,111	)		117			(69,213	)
Cash Flows From Financing Activities:
Intercompany		157,053			(164,321	)		(4,035	)		11,303			—
Proceeds from issuance of debt		2,515,827			—			2,206			—			2,518,033
Repayments of debt obligations		(2,416,713	)		—			(2,314	)		—			(2,419,027	)
Payment of debt issuance, modification and extinguishment costs		(62,375	)		—			—			—			(62,375	)
Exercise of stock options		11			—			—			—			11
Dividend paid by subsidiary to owners of noncontrolling interests		—			—			(541	)		—			(541	)
Net cash provided by (used in) financing activities		193,803			(164,321	)		(4,684	)		11,303			36,101
Effect of exchange rate changes on cash and cash equivalents		—			—			809			—			809
Net increase in cash and cash equivalents		16,715			157			927			—			17,799
Cash and cash equivalents, beginning of year		12,958			3			18,183			—			31,144

We maintain disclosure controls and procedures (as the term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures. Based on this evaluation and subject to the foregoing, our Chief Executive Officer and our Chief Financial Officer concluded that, our disclosure controls and procedures were effective at December 31, 2017, to accomplish their objectives at the reasonable assurance level.

During the fourth quarter of fiscal 2017, we transitioned certain business processes to third party vendors, including payroll, general ledger, accounts receivables and payable functions. While the processes and controls performed by our outsourced providers are the same as the processes and controls we previously performed internally, we implemented certain additional controls and procedures to manage the performance of these outsource providers.

There have been no other changes in the Company’s internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is designed to provide reasonable assurances regarding the reliability of financial reporting and the preparation of the consolidated financial statements of the Company in accordance with U.S. generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate.

With the participation of our Chief Executive Officer and our Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2017 based on the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2017.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. As we are a non-accelerated filer, management’s report is not subject to attestation by our registered public accounting firm pursuant to Section 404(c) of the Sarbanes-Oxley Act of 2002 that permits us to provide only management’s report in this annual report.

Pursuant to the “Individual Modifier” component of the 2017 Bonus Plan, the CEO can recommend an increase or decrease of the calculated individual bonus payment by up to 50%. On March 14, 2018, the Compensation Committee recognized the need to reward the extraordinary efforts of certain members of the management team in 2017. As a result, the Compensation Committee approved the CEO’s recommendation for the payment of additional bonuses to certain of the NEOs as follows: an additional 20% bonus to Mr. Eklund ($104,000) and an additional 20% bonus to Mr. Tandy ($58,584). On March 14, 2018, the Compensation Committee also approved an additional 37.8% bonus to Mr. Shirley ($301,923) in recognition of his performance and leadership in 2017. The payment of these Individual Modifier portions is considered to be a discretionary award and is reflected in the “Bonus” column of the Summary Compensation Table below.

On March 14, 2018, the Compensation Committee approved the grant of options to purchase 100,000 shares to Mr. Eklund and options to purchase 160,000 shares to Mr. Murphy to provide additional retention and performance incentives. The options have a term of 10 years from the date of grant and an exercise price of $16.46 per share, which is not less than the fair market value of our common stock on the date of grant. All of these options vest based on the “Linear MOIC Vesting” condition described above. On March 14, 2018, the Compensation Committee also approved the award of 100,000 restricted stock units (RSUs) to Mr. Shirley. The RSUs will be settled in shares of DJO common stock pursuant to a restricted stock unit award agreement. Subject to his continued employment with DJO, twenty-five percent (25%) of the RSUs will vest and the shares will be delivered at the end of each year during the four years after the date of grant; provided, however, that 100% of the RSUs shall vest upon the occurrence of a change in control of the Company.

On March 14, 2018, the Compensation Committee approved the management incentive bonus plan for 2018 (the “2018 Bonus Plan”) for our NEOs, our other executive officers and other managers. Additional information regarding the terms of the 2018 Bonus Plan can be found in “Adoption of 2018 Bonus Plan” found in the “Annual Cash Incentive Compensation” section of the “Compensation Discussion and Analysis” in “Item 11. Executive Compensation” below which is incorporated by this reference herein.

Although DJOFL is the Registrant filing this Annual Report, the Board of Directors of DJO (“the Board”), DJOFL’s indirect parent, acts as the governing body of DJOFL’s businesses. The following table sets forth information about the directors and executive officers of DJO. The executive officers of DJO are also executive officers of DJOFL with the same titles.

Brady R. Shirley—President, Chief Executive Officer and Director; Manager of DJOFL. Mr. Shirley was appointed President, Chief Executive Officer and Director of DJO, and Manager of DJOFL in November 2016. Mr. Shirley previously served as President, DJO Surgical since March 2014. From August 2009 to September 2013, Mr. Shirley was CEO and a Director of Innovative Medical Device Solutions, a company that provides comprehensive product development, manufacturing and supply chain management solutions for medical device companies within the orthopedic medical device industry. At IMDS, Mr. Shirley managed the integration of four companies, consolidated the capital structure and led a successful sale of the business in 2013. From December 1992 to August 2009, Mr. Shirley had several key leadership positions with Stryker Corporation, including President of Stryker Communications and Senior Vice President of Stryker Endoscopy. At Stryker, Mr. Shirley was responsible for all domestic operations and profit and loss for the Communications division and was responsible for Global Product Development and Sales and Marketing for the Endoscopy division. Mr. Shirley received a Bachelor of Business Administration in Finance from the University of Texas, Austin.

Michael C. Eklund—Chief Financial Officer and Chief Operating Officer. Mr. Eklund was appointed Chief Financial Officer and Chief Operating Officer of DJO in September 2016. From 1997 to September 2016, Mr. Eklund served in various executive positions with Dell, Inc., where he served between September 2015 and September 2016 in the global leadership role as Senior Vice President, Dell / EMC Value Creation and Integration Management Office (IMO), responsible for leading the Value Creation and IMO function for the $67B combination of Dell and EMC. Prior to that role, from June 2014 to September 2015, Mr. Eklund served as Chief Financial Officer of Dell’s $40B Client Solutions Business Unit and Global Operations organization. In this role, he was also responsible for leading Dell’s Global Productivity Transformation Office. From June 2013 to June 2014, Mr. Eklund served as Vice President of Strategy, Business Planning and Operations for Dell’s $10B Enterprise Solutions organization. During his 19 year career with Dell, Mr. Eklund held positions of increasing responsibility in finance, treasury and operations, including a 3 year international assignment in the firm’s UK Office. Prior to joining Dell in 1997, Mr. Eklund held finance and accounting positions in public accounting with Kennemer, Masters and Clarke and The Texaco Company. Mr. Eklund received a bachelor’s degree in accounting from University of Houston and an MBA from St. Edwards University.

Jeanine Kestler—Executive Vice President and Chief Human Resources Officer. Ms. Kestler was appointed Executive Vice President, Global Human Resources of DJO in April, 2015. From 2008 to 2014, Ms. Kestler served in various human resources executive roles at Invitrogen/Life Technologies/Thermo Fisher Scientific, including as Vice President, Human Resources, Global Commercial Operations. In this role, she built a people strategy focused on creating a culture of accountability, driving employee engagement, building management capability, and delivering business results. Ms. Kestler played an integral role in the growth strategy and organizational design for the Greater China business and led the human resources integration of Invitrogen and Applied Biosystems. From 2000 to 2008, Ms. Kestler served in several senior HR positions with Dell Inc. in Austin, TX, including as Vice President, Human Resources, Global Services & IT and as Vice President, Human Resources supporting Product Development, Procurement, Finance, Legal, Marketing and other functions and responsible for driving the people strategy; including organizational effectiveness, developing leadership capability, and mergers and acquisitions. Prior to this, Ms. Kestler held various HR executive

leadership positions over a 13 year career with NCR and AT&T. Ms. Kestler received a Bachelor of Science in Business Administration from Miami University, Oxford, OH.

Jeffery A. McCaulley—Global President, DJO Surgical. Mr. McCaulley was appointed Global President, DJO Surgical in May 2017. From February 2014 to January, 2017, Mr. McCaulley served as the President and CEO of Smiths Medical, a $1.4 billion global manufacturer of Infusion Therapy, Vascular Access, Vital Care and other Specialty products and services for the world’s healthcare markets. Prior to joining Smiths Medical, Mr. McCaulley served as President of the $3.2 billion Global Reconstructive Division at Zimmer Holdings, Inc., from December 2009 to January 2014, where he oversaw five global business units and numerous functions. He has held previous roles as President and CEO of Wolters Kluwer Health and Vice President and General Manager of the Global Diabetes Business Unit at Medtronic. Mr. McCaulley began his career at GE Healthcare, where he held progressively more senior roles during his 13 years there, last serving as President and CEO of GE Clinical Services. Mr. McCaulley holds a B.S. in Aerospace Engineering from the University of Cincinnati and an Executive MBA from the Owen Graduate School of Management at Vanderbilt University.

Stephen J. Murphy—President, International Commercial Business. Mr. Murphy was appointed President, International Commercial Business of DJO in October 2013 and was Executive Vice President, International Commercial Business of DJO from September 2009 to October 2013. Prior to September 2009, Mr. Murphy served as Senior Vice President, International Sales and Marketing of DJO since the DJO Merger and before that in various international positions with DJO Opco since August 2001. Prior to this, Mr. Murphy served in similar positions with DonJoy, LLC, since June 1999 and served in various international sales and marketing positions since 1992 with affiliates of DonJoy, LLC’s predecessor, Smith & Nephew, Inc., assuming responsibility first for the Medical Business of Smith & Nephew in Ireland and later for the international business of the Smith & Nephew Homecraft Rehabilitation business, based in England. Mr. Murphy began his career as an accountant with Smith & Nephew Ireland in 1991. He is a Chartered Management Accountant and completed his studies at the Accountancy and Business College in Dublin in 1991. Mr. Murphy is not related to Mr. John R. Murphy, one of our directors.

Bradley J. Tandy—Executive Vice President, General Counsel and Secretary; Manager of DJOFL. Mr. Tandy was appointed Executive Vice President, General Counsel and Secretary of DJO, and Manager of DJOFL in May 2016. Prior to joining DJO, Mr. Tandy served for twenty three years in various executive positions with Biomet, Inc. From March 2006 to November 2014, Mr. Tandy served as Senior Vice President, General Counsel and Corporate Secretary of Biomet, Inc. From 1999 to March 2006, Mr. Tandy served as Vice President, Assistant General Counsel and Chief Compliance Officer of Biomet, and from 1992 to 1999 he was Assistant General Counsel of Biomet. Prior to his employment at Biomet, Mr. Tandy was a partner in the law firm of Rasor, Harris, Lemon and Reed, Warsaw, Indiana, where he focused his practice on representation of healthcare and medical device companies. Mr. Tandy was an elected public official in Kosciusko County from 1994 to 2016, serving as a County Councilman for 22 years. Mr. Tandy received his Doctorate of Jurisprudence from Indiana University School of Law at Bloomington, Indiana, and received his bachelor’s degree in Political Science from DePauw University in Greencastle, Indiana.

Mike S. Zafirovski—Chairman of the Board. Mr. Zafirovski became one of DJO’s directors and was named as non-executive Chairman of the Board of DJO in January 2012. Mr. Zafirovski is the founder and president of The Zaf Group LLC, established in November 2012. Mr. Zafirovski is also an Executive Advisor to The Blackstone Group, L.P., an affiliate of DJO’s primary shareholder (“The Blackstone Group”). He served as Director, President and Chief Executive Officer of Nortel Networks Corporation from November 2005 to August 2009. Previously, Mr. Zafirovski was Director, President and Chief Operating Officer of Motorola, Inc. from July 2002 to January 2005, and remained a consultant to, and a director of, Motorola until May 2005. He served as Executive Vice President and President of the Personal Communications Sector (mobile devices) of Motorola from June 2000 to July 2002. Prior to joining Motorola, Mr. Zafirovski spent nearly 25 years with General Electric Company, where he served in management positions, including 13 years as President and Chief Executive Officer of five businesses in the industrial and financial services arenas, his most recent being President and Chief Executive Officer of GE Lighting from July 1999 to May 2000. Mr. Zafirovski serves on the Boards of Directors of the Boeing Company, Stericycle, Inc and Apria Healthcare Group Inc. and served as Chairman of the Board of PGI until October 2015. Mr. Zafirovski holds a Bachelor of Arts in Mathematics from Edinboro University in Pennsylvania.

J. Joel Hackney, Jr. – Director. Mr. Hackney is currently the CEO of nThrive, Inc. Mr. Hackney is also the former President, Chief Executive Officer and Director of AVINTIV Specialty Materials (formerly PGI). Mr. Hackney served in this role from June 2013 to November 2015. From 2009 to 2013, Mr. Hackney was an executive at Avaya Inc., serving as Senior Vice President of Global Sales and Marketing, President of Field Operations, and President of Government and Data Solutions. Prior to Avaya, Mr. Hackney spent four years in various executive positions at Nortel Networks Corporation, including President of Nortel Enterprise Solutions and Senior Vice President of Global Operations and Quality. Mr. Hackney also spent fourteen years at General Electric Company. He was a member of GE’s senior executive team, where he led various businesses and functions in both the U.S. and Europe. Mr. Hackney holds a B.S. degree in Business Administration from the University of North Carolina, Chapel Hill.

Julia Kahr—Director. Ms. Kahr became one of DJO’s directors immediately after the completion of the acquisition of DJO by an affiliate of The Blackstone Group in November 2006. Ms. Kahr is a Senior Managing Director of Blackstone’s Corporate Private Equity Group. Since joining Blackstone in 2004, Ms. Kahr has been involved in the execution of Blackstone’s investments in SunGard Data Systems, Encore Medical Corporation, DJO Global, Summit Materials, Inc. and Gates Industrial Corporation plc. Before joining Blackstone, Ms. Kahr was a Project Leader at the Boston Consulting Group, where she worked with companies in a variety of industries, including health care, financial services, media and entertainment and consumer goods. Ms. Kahr is also the sole author of Working Knowledge, a book published by Simon & Schuster in 1998. Ms. Kahr currently serves on the Board of Directors of Gates Industrial Corporation plc and Barry-Wehmiller Companies, Inc. and is also a member of the Board of Directors of Episcopal Social Services.

David N. Kestnbaum—Director. Mr. Kestnbaum became one of DJO’s directors in April 2013. Mr. Kestnbaum is a Managing Director in the Private Equity Group of The Blackstone Group based in New York. Since joining Blackstone in 2013, Mr. Kestnbaum has been involved in the execution of Blackstone’s investments in SESAC Holdings, Tradesmen International, Outerstuff, Ltd., AlliedBarton Security Services, AVINTIV Specialty Materials and DJO. Prior to joining Blackstone in 2013, Mr. Kestnbaum was a Vice President at Vestar Capital Partners, where he analyzed and executed private equity investments in multiple different sectors. Prior to Vestar, Mr. Kestnbaum worked in investment banking as a member of JPMorgan’s Financial Sponsor Group, where he executed a variety of private equity-related M&A and financing transactions. He currently serves on the Board of Directors of SESAC Holdings, Tradesmen International and Outerstuff, Ltd. and previously served on the Board of AlliedBarton Security Services, each privately held companies. Mr. Kestnbaum holds a Bachelor of Arts in Political Science from The University of North Carolina at Chapel Hill.

Dr. Jacqueline Kosecoff—Director. Dr. Kosecoff became one of DJO’s directors in December 2014. Since March 2012, Dr. Kosecoff has served as managing partner of Moriah Partners, LLC, a private equity firm focused on health services and technology, and as a senior advisor to Warburg Pincus LLC, a global private equity company, since March 2012. From October 2007 to November 2011, Dr. Kosecoff served as chief executive officer of OptumRx (formerly Prescriptions Solutions), a pharmacy benefits management company and subsidiary of UnitedHealth Group, and continued to serve as a senior advisor to OptumRx from December 2011 to February 2012. She served as chief executive officer of Ovations Pharmacy Solutions, a subsidiary of UnitedHealth Group providing health and well-being services for people who are over 50, from December 2005 to October 2007. From July 2002 to December 2005, she served as executive vice president, Specialty Companies of PacifiCare Health Systems, Inc., a consumer health organization. Prior to joining PacifiCare, Dr. Kosecoff was founder, President and Chief Operating Officer of Protocare, a firm whose lines of business included the clinical development of drugs, devices, biopharmaceutical and nutritional products, and health services consulting. Dr. Kosecoff has served as a consultant and on the boards of several public and private companies and institutions and currently is a director of the following public companies: athenahealth, Inc., Houlihan Lokey, Sealed Air Corporation and STERIS Corporation. Dr. Kosecoff served as Professor of Medicine and Public Health at the University of California, Los Angeles from 1975 to 2006. Dr. Kosecoff holds a Bachelor of Arts in Mathematics from the University of California, Los Angeles (UCLA), a Master of Science in Applied Mathematics from Brown University, and a Ph.D. in Research Methods.

James R. Lawson—Director. Mr. Lawson became one of DJO’s directors in September 2012. Mr. Lawson has over 35 years of experience in the orthopedic medical device industry. He is currently a member of the board of directors of Cold Plasma Medical Technologies, a startup company specializing in the field of plasma medicine. Mr. Lawson has served in several senior management positions, including as Senior Vice President of Howmedica’s Worldwide Sales and Customer Service (prior to its acquisition by Stryker Corporation) and at Stryker as Senior Vice President of Sales, Marketing and Product Development, President EMEA, and Group President, International and Global Orthopedics. Until 2014, Mr. Lawson was Chairman of the Board of IMDS, an orthopedic contract manufacturing and innovation company and a member of the Health Care Advisory Board of Arsenal Capital Partners. Mr. Lawson has also been involved as an entrepreneur in several privately held businesses. Mr. Lawson retired from Stryker in 2007 and in 2008 he formed Lawson Group LLC which provides strategic consulting services specializing in the orthopedic medical technology field. Mr. Lawson holds a Bachelor of Arts in Business Administration and Economics from West Georgia University.

John R. Murphy—Director and Chairman of Audit Committee. Mr. Murphy became one of DJO’s directors and was named as Chairman of the Audit Committee in January 2012. From January to May 2013 and from July to October 2013, Mr. Murphy served as the interim Chief Financial Officer of Summit Materials, LLC, a major construction materials and service company. Mr. Murphy is currently a director, Audit Committee Chairman and member of the Nominating and Governance Committee of Summit. Since 2003, Mr. Murphy has served on the Board of Directors, the Nominating and Governance Committee and as Chairman of the Audit Committee of O’Reilly Automotive, Inc., a leading specialty automotive aftermarket retailer. In 2011, Mr. Murphy served as director and Audit Committee and Special Committee member of Graham Packaging, Inc. until it was sold in September 2011. Mr. Murphy served as Senior Vice President and Chief Financial Officer of Smurfit-Stone Container Corporation, a leading manufacturer of paperboard and paper-based packaging products, from 2009 to 2010 and led the financial restructuring of the company during its Chapter 11 reorganization. Mr. Murphy was President and Chief Executive Officer of Accuride Corporation and a member of its Board of Directors from November 2007 to October 2008. Accuride Corporation filed for Chapter 11 bankruptcy protection in October 2009, emerging in 2010. He served as Accuride’s President and Chief Operating Officer from January 2007 to October 2007,

as President and Chief Financial Officer from February 2006 to December 2006 and as Executive Vice President and Chief Financial Officer from March 1998 to January 2006. Mr. Murphy holds a Bachelor of Science in Accounting from The Pennsylvania State University and a Master of Business Administration from the University of Colorado, and is a Certified Public Accountant.

James Quella—Director and Chairman of the Compensation Committee. Mr. Quella became one of DJO’s directors in September 2012 and was named as Chairman of the Compensation Committee in February 2015. Since June 2013, Mr. Quella has been serving as a Blackstone Senior Advisor for Private Equity. From February 2004 to June 2013, Mr. Quella was a Senior Managing Director and Senior Operating Partner in the Corporate Private Equity Group of The Blackstone Group. Prior to joining The Blackstone Group in 2004, Mr. Quella was a Managing Director and Senior Operating Partner with DLJ Merchant Banking Partners and CSFB Private Equity from 2000 to 2004. Prior to that, Mr. Quella worked at Mercer Management Consulting and Strategic Planning Associates, its predecessor firm, now known as Oliver Wyman, where he served as a senior consultant to CEOs and senior management teams, and was Co-Vice Chairman with shared responsibility for overall management of the firm. Mr. Quella has been a member of various private equity company boards and currently serves as a director of Catalent, Inc., Lionbridge Technologies, Inc. and Michaels Stores, Inc. and previously served on the Board of Freescale Semiconductor. Mr. Quella holds a Bachelor of Arts from University of Chicago/University of Wisconsin—Madison and a Master of Business Administration from University of Chicago/Booth Graduate School of Business with Dean’s Honors.

Term of Directors. Each director of DJO serves until resignation or removal by a majority vote of the shareholders of DJO. Because affiliates of Blackstone own approximately 97.6% of the outstanding capital stock of DJO, no regular annual meetings of shareholders have been scheduled and the directors do not have specific annual terms.

Term of Officers. The executive officers of DJO and DJOFL are appointed by the DJO Board and serve at the pleasure of the Board and hold office until resignation or replacement.

Background and Experience of Directors. When considering whether directors and nominees have the experience, qualifications, attributes or skills, taken as a whole, to enable the DJO Board to satisfy its oversight responsibilities effectively in light of DJO’s business and structure, the DJO Board focused primarily on each person’s background and experience as reflected in the information discussed in each of the directors’ individual biographies set forth immediately above. In recommending directors, our Board considers the specific background and experience of the Board members and other personal attributes in an effort to provide a diverse mix of capabilities, contributions and viewpoints which the Board believes enables it to function effectively as the Board of a company with our size and nature of business. We believe that our directors provide an appropriate mix of experience and skills relevant to the size and nature of DJO’s business. In particular, the members of the DJO Board considered the following important characteristics: (i) Ms. Kahr and Mr. Kestnbaum are representatives appointed by The Blackstone Group, an affiliate of our principal stockholder, and have significant financial and investment experience from their involvement in The Blackstone Group’s investment in numerous portfolio companies and have played active roles in overseeing those businesses, (ii) our Chief Executive Officer has extensive experience in the orthopedic device industry and in executive management, (iii) our Chairman of the Board has significant experience as a CEO, COO and other senior management positions with large multi-national companies; and (iv) our outside directors have a diverse background of management, accounting and financial experience from the healthcare and medical device industries, as well as other industries. Specifically, Mr. Zafirovski brings extensive financial management and board experience; Mr. Murphy is the Chairman of our Audit Committee and is an audit committee financial expert, as defined in Item 407(d)(5)(ii) of Regulation S-K under the Exchange Act, by virtue of his years of experience in various senior financial management and board positions; Mr. Hackney has senior management experience with large multinational companies; Mr. Quella has extensive financial and investment experience from his involvement in The Blackstone Group and from his prior involvement in management consulting companies; Mr. Lawson has over 35 years of senior management and board of directors experience in the orthopedic medical device industry; and Dr. Kosecoff has extensive senior management experience with healthcare companies, as well as with private equity firms invested in healthcare services and technology, and senior academic positions at a major U.S. university.

In January 2009, Nortel Networks Corporation, for which Mr. Zafirovski served as Director, President and Chief Executive Officer, and subsidiary companies filed for bankruptcy protection in the United States, Canada and Europe. Mr. Zafirovski resigned from Nortel on August 14, 2009, at which time the two largest business units were under contract for sale, the board was reduced to three directors and the CEO position was eliminated. Mr. Hackney also served as an executive at Nortel until 2009. In October 2009, Accuride Corporation, for which Mr. John Murphy served in various senior management roles, including as Chief Financial Officer, President and Chief Executive Officer, filed for bankruptcy protection in the United States. Mr. Murphy resigned from Accuride in September 2008. The Board has concluded that neither of these events impair either Mr. Zafirovski’s, Mr. Hackney’s or Mr. Murphy’s ability to serve as a director.

Board Leadership Structure. Effective January 5, 2012, the Board elected Mr. Zafirovski as a member of the Board and as non-executive Chairman of the Board. The Chief Executive Officer position is and will remain separate from the Chairman position. We believe that the separation of the Chairman and CEO positions is appropriate for a company of the size and nature of DJO.

Role of Board in Risk Oversight. The Board has extensive involvement in the oversight of risk related to the Company and its business. The Audit Committee of the Board plays a key role in representing and assisting the Board in discharging its oversight responsibility relating to the accounting, reporting and financial practices of the Company, including the integrity of our financial statements, the surveillance of administrative and financial controls and the Company’s compliance with legal and regulatory requirements. Through its regular meetings with management, including legal, regulatory, compliance and internal audit functions, the Audit Committee reviews and discusses all of the principal functions of our business and updates the Board on all material matters.

Audit Committee. Our Audit Committee currently consists of two appointed Directors, Mr. Murphy (Chairman), and Ms. Kahr. As a privately held company, although our Audit Committee is not required to be composed of only independent directors, we believe that Mr. Murphy meets the definition of an independent director under the rules of the New York Stock Exchange. Our Board has determined that Mr. Murphy is an audit committee financial expert, as defined in SEC Regulation S-K Item 407 (d)(5)(ii). Our Board also believes that Ms. Kahr has the requisite level of financial literacy and financial sophistication to enable the Audit Committee to be effective in relation to the purposes outlined in its charter and in light of the scope and nature of our business and financial statements.

Compensation Committee. The Compensation Committee of the DJO Board currently consists of three appointed Directors, Mr. Quella (Chairman), and Ms. Kahr and Mr. Hackney. Because DJO is a privately held company, the Compensation Committee is not required to be composed of independent directors.

Code of Ethics. Our Business Ethics Policy and Code of Conduct, Code of Conduct for the Board of Directors, and Code of Ethics for the Chief Executive Officer and Senior Executives and Financial Officers, including our principal accounting officer and controller, are available, free of charge, on the Company’s website at www.DJOglobal.com. Please note, however, that the information contained on the website is not incorporated by reference in, or considered part of, this Annual Report. We will post any amendments to the Code of Ethics, and any waivers that are required to be disclosed by the SEC rules on our website within the required time period. We will also provide copies of these documents, free of charge, to any security holder upon written request to: Investor Relations, DJO Global, Inc., 1430 Decision Street, Vista, California 92081-8553.

The following Compensation Discussion and Analysis describes the objectives of our executive compensation program and the material elements of compensation for those executive officers who are identified in Item 11. “Executive Compensation—Summary Compensation Table” (the Named Executive Officers or NEOs), along with the role of the Compensation Committee of the DJO Board (the Compensation Committee) in reviewing and making decisions regarding our executive compensation program.

The Compensation Committee establishes salaries and reviews benefit programs for the Chief Executive Officer (“CEO”) and each of our other executive officers; reviews and approves our annual incentive compensation for management employees; reviews, administers and grants stock options and other equity awards under our stock incentive plan; advises the DJO Board and makes recommendations with respect to plans that require Board approval; and approves employment agreements with our executive

officers. The Compensation Committee establishes and maintains our executive compensation program through internal evaluations of performance, and analysis of compensation practices in industries where we compete for experienced senior management. The Compensation Committee reviews our compensation programs and philosophy regularly, particularly in connection with its evaluation and approval of changes in the compensation structure for a given year. The Compensation Committee met four times during 2017 and acted by written consent one time. The CEO makes recommendations for the salaries for executive officers other than himself and reviews such recommendations with the Compensation Committee.

Our executive compensation program is designed to attract, retain, and reward talented senior management who can contribute to our growth and success and thereby build long-term value for our stockholders. We believe that an effective executive compensation program is critical to our long-term success. By having an executive compensation program that is competitive with current market practices and focuses on driving superior and enduring performance, we believe we can align the interests of our executive officers with the interests of our stockholders and reward our executive officers for successfully improving stockholder returns and achieving long-term business goals. Our compensation program has the following objectives:

Base salaries provide a fixed form of compensation designed to reward an executive officer’s core competence in his or her role. The Compensation Committee determines base salaries by taking into consideration such factors as competitive industry salaries, the nature of the position, the contribution and experience of the officers and their length of service.

The Compensation Committee does not automatically or regularly make increases in annual base salary, but reviews base salaries and overall compensation from time-to-time. In May 2017, the Compensation Committee approved increases in base salaries to certain of the executive officers, as follows: Mr. Shirley’s annual base salary was increased from $750,000 to $850,000; Mr. Murphy’s base salary was increased from £245,000 to £253,000; and Mr. Tandy’s base salary was increased from $400,000 to $440,000. In connection with his hiring in August 2016, DJO entered into an employment agreement with Mr. Eklund which provides for an annual base salary of $650,000. In recognition of his leadership over the Company’s Transformation Plan, in March 2018 the Compensation Committee approved an increase in Mr. Eklund’s base salary to $675,000. In connection with his hiring in May 2017, DJO entered into an employment agreement with Mr. McCaulley which provides for an annual base salary of $590,000. The annual base salaries for each of the NEOs were determined based on salaries of comparable executive positions in the industry, DJO’s prior compensation practices and, in the case of the NEOs hired within the last three years, were the result of arm’s-length negotiations at the time of their hiring.

Performance-based cash incentive compensation is provided to motivate our NEOs to pursue financial objectives that the Compensation Committee believes are consistent with the overall goals and long-term strategic direction that the DJO Board has set for our company.

In March 2017, the Compensation Committee approved the management incentive bonus plan for 2017 (the “2017 Bonus Plan”) for our NEOs and other executive officers. Under the 2017 Bonus Plan, each NEO (other than the CEO and the CFO) had an opportunity to earn a target bonus of up to 70% of such NEO’s total salary paid in 2017 (the “Target Bonus”), with the possibility of earning an additional supplemental bonus based on overachievement of the annual financial targets. Pursuant to their respective employment agreements, Mr. Shirley’s Target Bonus is 100% of his total salary paid in 2017 and Mr. Eklund’s Target Bonus is 80% of his total salary paid in 2017. To further incentivize management, the Compensation Committee also authorized an “Individual Modifier” to allow the exercise of discretion by the CEO to increase or decrease the calculated individual bonus awards for the management plan participants, including the Company’s executive officers by up to 50% of the calculated bonus, with the sum of all bonus payments to remain within the total amount budgeted for the plan’s bonus payments.

Under the 2017 Bonus Plan, for the Corporate plan participants, including Mr. Shirley, Mr. Eklund and Mr. Tandy, 50% of their Target Bonus was based on meeting the Company’s annual Adjusted EBITDA target and 50% of their Target Bonus was based on meeting the Company’s annual Free Cash Flow target. For the Presidents of the Company’s Business Units, including Mr. McCaulley (Surgical) and Mr. Murphy (International), 50% of their Target Bonus was based on meeting the annual Adjusted EBITDA target of their respective Business Units, 20% of their Target Bonus was based on meeting the Company’s annual Adjusted EBITDA target, and 30% of their Target Bonus was based on meeting the Company’s annual Free Cash Flow target.

The 2017 Bonus Plan provided that a minimum bonus payment of 25% of the portion of the Target Bonus for each applicable financial metric would be awarded for achieving a 90% minimum threshold for such financial goal, with the bonus amount increasing from 25% to 100% on a linear basis for performance between the threshold amount and the achieved financial target. The 2017 Bonus Plan also provided for a Supplemental Bonus pursuant to which the executive officers (other than Mr. Eklund and Mr. Tandy) could earn an additional bonus of up to 50% of their applicable Target Bonus if the Company’s financial performance exceeded the applicable targets by up to 20% the respective goals. Pursuant to their employment agreements, Mr. Tandy and Mr. Eklund are eligible for a Supplemental Bonus of up to 100% of Target Bonus upon achievement of the same performance criteria for the Supplemental Bonus.

To emphasize the importance of improving DJO’s profitability and liquidity, the Compensation Committee selected Adjusted EBITDA and Free Cash Flow as the relevant Company-wide performance criteria for the 2017 Bonus Plan because the Compensation Committee believed that these criteria were consistent with the metrics by which the DJO Board of Directors measured the overall goals and long-term strategic direction for DJO in 2017. Further, these criteria were closely related to or reflective of DJO’s financial and operational improvements, growth and return to stockholders. Adjusted EBITDA was and is an important non-GAAP valuation tool that potential investors use to measure our Company’s profitability and liquidity against other companies in our industry. Adjusted EBITDA, for the purposes of the 2017 Bonus Plan, was calculated as earnings before interest, income taxes, depreciation and amortization, further adjusted for non-cash items, non-recurring items and other adjustment items pursuant to the definition of consolidated EBITDA contained in the credit agreement for our senior secured credit facilities. As with prior bonus plans, achievement of the Adjusted EBITDA goal is determined using the same foreign currency exchange rates used in the 2017 budget and the calculation of Adjusted EBITDA excludes future cash savings which is included in the calculation of Adjusted EBITDA under the Company’s credit agreements and note indentures. See definition of “Adjusted EBITDA” in “Liquidity and Capital Resources” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” above. Free Cash Flow was and is a critical measure and it reflects the Compensation Committee’s focus in 2017 on improving the Company’s cash flow. For the Presidents of the Company’s business units, the Compensation Committee determined that it was appropriate that their Bonus Plans include components related to the Adjusted EBITDA for such leader’s business unit in order to incentivize him or her to achieve the goals of the applicable business unit.

In establishing the specific financial performance goals for the 2017 Bonus Plan, the Compensation Committee set the annual Adjusted EBITDA and Free Cash Flow targets for the Company to reflect 14.7% and 15.5% improvement over the 2016 Adjusted EBITDA and Free Cash Flow, respectively.

At its February 21, 2018 meeting, the Compensation Committee confirmed the calculations of the Company’s financial performance and determined that the Company’s Adjusted EBITDA target was achieved at the 100% level, and the Company’s Free Cash Flow target was achieved at the 100% level. As a result, no Supplemental Bonus amounts as defined in the 2017 Bonus Plan were earned in 2017 by the participants in the Corporate bonus group. The Compensation Committee also determined that based on financial performance of the Surgical and International Segments in 2017, 100% of the Adjusted EBITDA and Free Cash Flow goals for these Business Units were achieved, resulting in 100% of the total annual Target Bonuses being achieved. On March 14, 2018, the Compensation Committee approved the calculated bonuses for each of the NEOs based on the achievement of the Corporate and Business Unit financial goals.

Pursuant to the “Individual Modifier” component of the 2017 Bonus Plan, the CEO can recommend an increase or decrease of the calculated individual bonus payment by up to 50%. On March 14, 2018, the Compensation Committee recognized the need to reward the extraordinary efforts of certain members of the management team in 2017. As a result, the Compensation Committee approved the CEO’s recommendation for the payment of additional bonuses to certain of the NEOs as follows: an additional 20% bonus to Mr. Eklund ($104,000) and an additional 20% bonus to Mr. Tandy ($58,584). The payment of these Individual Modifier portions is considered to be a discretionary award and is reflected in the “Bonus” column of the Summary Compensation Table below.

On March 14, 2018, the Compensation Committee also approved an additional 37.8% bonus to Mr. Shirley ($301,923) in recognition of his performance and leadership in 2017.

On March 14, 2018, the Compensation Committee approved the management incentive bonus plan for 2018 (the “2018 Bonus Plan”) for our NEOs and other executive officers. The terms of the 2018 Bonus Plan are substantially similar to the terms of the 2017 Bonus Plan, except as follows: 1) the Compensation Committee determined that it was advisable to include a revenue component in 2018 to encourage a greater focus on revenue growth in 2018; provided, however, the revenue component for the Business Unit participants will only be earned if the Business Unit’s Adjusted EBITDA goal exceeds 90% achievement; and 2) the minimum bonus payment for each financial goal was increased from 25% to 35% of the Target Bonus for such financial goal for achieving a 90% minimum threshold for the applicable financial goal, with the bonus payment increasing linearly from 35% to 100% between the minimum threshold amount and the financial target. For executive officers who are not Business Unit Presidents, including Mr. Shirley, Mr. Eklund and Mr. Tandy, 20% of their Target Bonus is based on achieving the Company’s revenue goal, 60% is based on achieving the Company’s Adjusted EBITDA goal, and 20% is based on achieving the Company’s Free Cash Flow goal. For executive officers who are Business Unit Presidents, including Mr. McCaulley and Mr. Murphy, 20% of their Target Bonus is based on achieving their Business Unit’s revenue goal, 40% is based on achieving their Business Unit’s Adjusted EBITDA goal, 20% is based on achieving the Company’s Adjusted EBITDA goal, and 20% is based on achieving either their Business Unit’s Cash Flow goal or the Company’s Free Cash Flow, as selected by the CEO.

In November 2007, the Compensation Committee adopted the DJO 2007 Incentive Stock Plan (as amended, the 2007 Plan). The 2007 Plan was amended in May 2017 to extend its term to December 31, 2019. The purpose of the 2007 Plan is to promote the interests of the Company and its shareholders by enabling selected key employees to participate in our long-term growth by receiving the opportunity to acquire shares of DJO common stock and to provide for additional compensation based on appreciation in DJO common stock. The 2007 Plan provides for the grant of stock options, restricted stock, restricted stock units (RSUs), and other stock-based awards to key employees, directors and independent sales agents. The Compensation Committee determines whether to grant equity awards and the terms of such awards. The Committee has broad discretion in determining the terms, restrictions and conditions of each award granted under the 2007 Plan, provided that no options or other equity awards may be granted after December 31, 2019 and no option may be exercisable after ten years from the date of grant. All option awards granted under the 2007 Plan have an exercise price of not less than the fair market value of DJO’s common stock on the date of grant. Fair market value is defined under the 2007 Plan to be the closing market price of a share of DJO’s common stock on the date of grant or if no market price is available, the fair market value as determined by the Compensation Committee. The Compensation Committee retains the discretion to make equity awards at any time in connection with the initial hiring of a new employee, for retention purposes, or otherwise. We do not have any program, plan or practice to time annual or ad hoc grants of stock options or other equity-based awards in coordination with the release of material non-public information or otherwise. The 2007 Plan may be amended or terminated at any time by the DJO Board. However, any amendment that would require shareholder approval in order for the 2007 Plan to continue to meet any applicable legal or regulatory requirements will be effective only if it is approved by DJO’s shareholders. The 2007 Plan authorizes the award of a maximum of 10,575,529 shares of common stock. As of December 31, 2017, options for a total of 8,435,895 shares were outstanding.

Pursuant to Mr. McCaulley’s Employment Agreement, the Company agreed to grant Mr. McCaulley options to purchase 450,000 shares, the issuance of which were approved by the Compensation Committee in August 2017. The options have a term of 10 years from the date of grant and an exercise price of $16.46 per share, which is not less than the fair market value of our common stock on the date of grant. One-third of these options will vest in equal annual installments over five years, contingent on Mr. McCaulley’s continued employment through each vesting date (“Time-Based Tranche”), subject to accelerated vesting upon a change of control of the Company. The other two-thirds of the options vest on achievement by Blackstone of a multiple of invested capital (MOIC) with respect to Blackstone’s aggregate investment in DJO’s capital stock following a liquidation of all or a portion of its

investment in DJO’s capital stock. This portion of the options vests within a range of achievement of a MOIC multiple between 1.5 and 2.25. If Blackstone sells all or a portion of its equity interests in DJO while the Options are outstanding, then the unvested Options will vest and become exercisable as follows: 1) 25% of the options will vest and become exercisable if Blackstone realizes a MOIC of 1.5 times its equity investment in DJO; 2) 100% of the options will vest and become exercisable if Blackstone realizes a MOIC of at least 2.25 times its equity investment in DJO; and 3) if Blackstone realizes a MOIC of greater than 1.5 times its equity investment but less than 2.25 times its equity investment, then 25% of the options will vest and become exercisable and a percentage of the remaining unvested options will vest and become exercisable with such percentage equal to a fraction, the numerator of which is the actual MOIC realized by the Blackstone, less 1.5 and the denominator of which is 0.75. For purposes of the discussion in this “Equity Compensation” section, this MOIC vesting condition is referred to as the “Linear MOIC Vesting” condition and the portion of the Options with this vesting condition is referred to as the “Linear MOIC Vesting Tranche.”

Pursuant to his Employment Agreement, Mr. McCaulley was also granted 151,884 restricted stock units (“RSUs”), the issuance of which was approved by the Compensation Committee in August 2017. The RSUs will be settled in shares of DJO common stock pursuant to a restricted stock unit award agreement. Subject to his continued employment with DJO, twenty-five percent (25%) of the RSUs will vest and the shares will be delivered at the end of each year during the four years after the date of grant; provided, however, that 100% of the RSUs shall vest upon the occurrence of a change in control of the Company.

On May 30, 2017, the Compensation Committee approved the grant of options to purchase 30,000 shares to Mr. Murphy to provide additional retention and performance incentives. The options have a term of 10 years from the date of grant and an exercise price of $16.46 per share, which is not less than the fair market value of our common stock on the date of grant. All of these options vest based on the “Linear MOIC Vesting” condition described above.

On March 14, 2018, the Compensation Committee approved the grant of options to purchase 100,000 shares to Mr. Eklund and options to purchase 160,000 shares to Mr. Murphy to provide additional retention and performance incentives. The options have a term of 10 years from the date of grant and an exercise price of $16.46 per share, which is not less than the fair market value of our common stock on the date of grant. All of these options vest based on the “Linear MOIC Vesting” condition described above. On March 14, 2018, the Compensation Committee also approved the award of 100,000 RSUs to Mr. Shirley. The RSUs will be settled in shares of DJO common stock pursuant to a restricted stock unit award agreement. Subject to his continued employment with DJO, twenty-five percent (25%) of the RSUs will vest and the shares will be delivered at the end of each year during the four years after the date of grant; provided, however, that 100% of the RSUs shall vest upon the occurrence of a change in control of the Company.

Change in Control Provisions in Option Awards. All options in the Time-Based Tranche of options and all RSUs granted under the 2007 Plan contain change-in-control provisions that cause the options in the Time-Based Tranche and RSUs to become immediately vested and exercisable upon the occurrence of a change-in-control if the holder remains in continuous employment of the Company until the consummation of the change in control.

On November 14, 2016, we entered into an employment agreement with Mr. Shirley, whereby he became President and Chief Executive Officer of DJO. Under this agreement, he is entitled to receive an annual base salary of $750,000 (subsequently increased in May 2017 to $850,000) and an annual bonus at a target rate of 100% of his total salary paid in such year, contingent on DJO achieving target performance objectives established by the DJO Board. Mr. Shirley also agreed to purchase at least $500,000 in shares of DJO Common Stock at $16.46 per share, which purchase was completed in 2017. Mr. Shirley was also granted options to acquire 450,000 shares of DJO Common Stock, one-third of which Time-Based Tranche options and two-thirds of which are Linear MOIC Vesting Tranche options. Mr. Shirley’s Employment Agreement provides for a four-year term, with automatic annual extensions unless either party provides notice of non-extension at least 60 days prior to the next annual extension date. If Mr. Shirley’s employment is terminated by DJO for Cause or if Mr. Shirley resigns other than as a result of a Constructive Termination (as both such terms are defined in his Employment Agreement), then he will be entitled to receive accrued but unpaid salary and bonus as of the date of termination, and other accrued employee benefits (“Accrued Rights”). If Mr. Shirley’s employment terminates as a result of his death or disability, then he or his estate shall be entitled to receive his Accrued Rights, and a pro rata portion of his actual annual bonus for the year of termination. If Mr. Shirley’s employment is terminated by DJO without Cause or if he resigns as a result of a Constructive Termination, then he will receive his Accrued Rights, a pro rata portion of the actual annual bonus paid for the year of termination, subject to his compliance with certain non-competition and confidentiality provisions, payment of an amount equal to 1.5 times the sum of his annual base salary plus his target annual bonus amount for the year of termination, payable in equal installments over 18 months, and continued coverage under DJO’s group health, life and disability plans for the lesser of 18 months or the date he receives

comparable coverage from another employer. Amounts payable other than Accrued Rights are subject to Mr. Shirley providing a release of all claims against DJO. In the event that the Company provides notice of the Company’s election not to extend the employment term and if Mr. Shirley provides notice of his resignation as a result of Constructive Termination within 60 days thereafter, then he shall be entitled to the rights associated with a resignation pursuant to a Constructive Termination described above.

On August 25, 2016, DJO entered into an employment agreement with Mr. Eklund (Eklund Employment Agreement). Pursuant to the Eklund Employment Agreement, Mr. Eklund’s annual base salary was set at $650,000 (subsequently increased in March 2018 to $675,000). He is eligible to participate in DJO’s management bonus plan with an annual bonus target of 80% of his total salary paid in such year and a maximum bonus target of 160% of total salary paid in such year, contingent on the Company achieving target and maximum performance objectives established by DJO’s Board of Directors. Mr. Eklund was granted options to acquire 450,000 shares of DJO’s common stock, one-third of which are Time-Based Tranche options and two-thirds of which are Linear MOIC Vesting Tranche options.

In order to compensate and make whole Mr. Eklund for certain cash and equity compensation and equity holdings that he forfeited by joining DJO, DJO agreed to pay Mr. Eklund a guaranteed annual bonus, a make-whole bonus and restricted stock units. For fiscal year 2016, Mr. Eklund was guaranteed payment of his annual bonus target amount of $520,000, payable at the time the 2016 annual bonus is paid to other DJO executive officers. For fiscal year 2017, Mr. Eklund was guaranteed an annual bonus of not less than $346,667, payable in accordance with the payment schedule for annual bonuses to other executive officers for fiscal year 2017. DJO also agreed to pay Mr. Eklund a make-whole bonus of $1,000,000, payable in two equal installments, with the first payment made within 30 days after his start date, and the second payment made at such time as annual bonuses for 2016 were paid to other DJO executives. Mr. Eklund was also granted 121,507 RSUs to be settled in shares of DJO common stock pursuant to a restricted stock unit award agreement. Subject to his continued employment with DJO, twenty-five percent (25%) of the RSUs will vest and the shares will be delivered at the end of each year during the four years after the date of grant; provided, however, that 100% of the RSUs shall vest upon the occurrence of a change in control of the Company.

The Eklund Employment Agreement provides for a two-year term, with automatic annual extensions unless either party provides notice of non-extension at least 60 days prior to the next annual extension date. If Mr. Eklund’s employment is terminated by DJO for Cause or if Mr. Eklund resigns other than as a result of a Constructive Termination, then he will be entitled to receive accrued but unpaid salary and bonus as of the date of termination, and other accrued employee benefits (“Accrued Rights”). If Mr. Eklund’s employment terminates as a result of his death or disability, then he or his estate shall be entitled to receive his Accrued Rights, and a pro rata portion of his actual annual bonus for the year of termination. If Mr. Eklund’s employment is terminated by DJO without Cause or if he resigns as a result of a Constructive Termination, then he will receive his Accrued Rights, a pro rata portion of the actual annual bonus paid for the year of termination, payment of an amount equal to the sum of his annual base salary plus his target annual bonus amount for the year of termination, payable in 12 equal monthly installments, and continued coverage under DJO’s group health, life and disability plans for the lesser of 12 months or the date he receives comparable coverage from another employer. If Mr. Eklund’s employment is terminated by DJO without Cause or if he resigns as a result of a Constructive Termination and such termination occurs within 90 days before or 12 months after a Change of Control (as defined in the Employment Agreement), then he shall be entitled to the amounts described above, but the severance amount will be equal to 1.5 times the sum of his annual base salary plus his target annual bonus for the year of termination, and such amount shall be payable in 18 equal monthly installments, and his health, life and disability coverage shall be continued for 18 months. Amounts payable other than Accrued Rights are subject to Mr. Eklund’s providing a release of all claims against DJO. In the event that the Company provides notice of the Company’s election not to extend the employment term and if Mr. Eklund provides notice of his resignation as a result of Constructive Termination within 60 days thereafter, then he shall be entitled to the rights associated with a resignation pursuant to a Constructive Termination described above.

On May 16, 2016, we entered into an employment agreement with Mr. Tandy, whereby he became Executive Vice President, General Counsel and Secretary of DJO. Under this agreement, he is entitled to receive an annual base salary of $400,000 (increased to $440,000 in May 2017) and an annual bonus at a target rate of 70% of his total salary paid for such year, and a maximum bonus target of 140% of total salary paid in such year, contingent on DJO achieving target performance objectives established by the DJO Board. Mr. Tandy was also granted options to acquire 250,000 shares of DJO Common Stock, one-third of which are Time-Based Tranche options and two-thirds of which are Linear MOIC Vesting Tranche options. Mr. Tandy also received a mortgage subsidy agreement which provides for payment of a 3% mortgage subsidy for the first year following his relocation to the Vista, California area, a 2% subsidy for the second year and a 1% subsidy for the third year (Mortgage Subsidy Agreement). Mr. Tandy’s Employment Agreement provides for a two year term, with automatic annual extensions unless either party provides notice of non-extension at least 60 days prior to the next annual extension date. If Mr. Tandy’s employment is terminated by DJO for Cause or if Mr. Tandy resigns

other than as a result of a Constructive Termination (as both terms are defined in his Employment Agreement), then he will be entitled to receive accrued but unpaid salary and bonus as of the date of termination, and other accrued employee benefits (“Accrued Rights”). If Mr. Tandy’s employment terminates as a result of his death or disability, then he or his estate shall be entitled to receive his Accrued Rights, and a pro rata portion of his actual annual bonus for the year of termination. If Mr. Tandy’s employment is terminated by DJO without Cause or if he resigns as a result of a Constructive Termination, then he will receive his Accrued Rights, a pro rata portion of the actual annual bonus paid for the year of termination, subject to his compliance with certain non-competition and confidentiality provisions, payment of an amount equal to the sum of his annual base salary plus his target annual bonus amount for the year of termination, payable in equal installments over 12 months, and continued coverage under DJO’s group health, life and disability plans for the lesser of 12 months or the date he receives comparable coverage from another employer. If Mr. Tandy’s employment is terminated by DJO without Cause or he resigns as a result of a Constructive Termination within 90 days before or 12 months after a change of control of DJO, then he will be entitled to receive 1.5 times the amount described in the preceding sentence and the length of coverage for the health, life and disability plans described above shall be 18 months. Amounts payable other than Accrued Rights are subject to Mr. Tandy providing a release of all claims against DJO. In the event that the Company provides notice of the Company’s election not to extend the employment term and if Mr. Tandy provides notice of his resignation as a result of Constructive Termination within 60 days thereafter, then he shall be entitled to the rights associated with a resignation pursuant to a Constructive Termination described above.

On May 23, 2017, we entered into an employment agreement with Mr. McCaulley, whereby he became Global President, DJO Surgical. Under this agreement, he is entitled to receive an annual base salary of $590,000 and an annual bonus at a target rate of 70% of his total salary paid in such year, and a maximum bonus target of 105% of his total salary paid in such year, contingent on DJO achieving target performance objectives established by the DJO Board. Mr. McCaulley was also granted options to acquire 450,000 shares of DJO Common Stock, one-third of which are Time-Based Tranche options and two-thirds of which are Linear MOIC Vesting Tranche options. Mr. McCaulley’s Employment Agreement provides for a two year term, with automatic annual extensions unless either party provides notice of non-extension at least 60 days prior to the next annual extension date. If Mr. McCaulley’s employment is terminated by DJO for Cause or if Mr. McCaulley resigns other than as a result of a Constructive Termination (as defined in his Employment Agreement), then he will be entitled to receive accrued but unpaid salary and bonus as of the date of termination, and other accrued employee benefits (“Accrued Rights”). If Mr. McCaulley’s employment terminates as a result of his death or disability, then he or his estate shall be entitled to receive his Accrued Rights, and a pro rata portion of his actual annual bonus for the year of termination. If Mr. McCaulley’s employment is terminated by DJO without Cause or if he resigns as a result of a Constructive Termination, then he will receive his Accrued Rights, a pro rata portion of the actual annual bonus paid for the year of termination, subject to his compliance with certain non-competition and confidentiality provisions, payment of an amount equal to the sum of his annual base salary plus his target annual bonus amount for the year of termination, payable in equal installments over 12 months, and continued coverage under DJO’s group health, life and disability plans for the lesser of 12 months or the date he receives comparable coverage from another employer. Amounts payable other than Accrued Rights are subject to Mr. McCaulley providing a release of all claims against DJO. In the event that the Company provides notice of the Company’s election not to extend the employment term and if Mr. McCaulley provides notice of his resignation as a result of Constructive Termination within 60 days thereafter, then he shall be entitled to the rights associated with a resignation pursuant to a Constructive Termination described above. The Employment Agreement also provides that the Company will reimburse Mr. McCaulley for the reasonable cost of housing in the Austin, Texas metropolitan area in an amount not to exceed $2,500 per month, and for the reasonable cost for weekly air travel to and from his residence in Minnesota.

Mr. Murphy is party to a Severance Protection Agreement, entered into in 2011, which provides that if he is terminated by DJO without “cause” (as defined in the severance agreement) and for so long as he is in compliance with the restrictive covenants described below, he will be paid the following amounts: (a) a monthly payment equal to his monthly base salary for 12 months; (b) a monthly payment equal to one-twelfth of his target bonus amount under the annual bonus plan for the year of termination for the 12 month period; (c) a pro-rata share of any quarterly bonus for the quarter in which his employment is terminated plus a pro-rata share of the annual bonus that he would have received for the year of termination but for the termination of employment; and (d) Company-paid COBRA benefits for the 12 month period following such termination. Payment of the benefits under this agreement is contingent on compliance with a covenant not to compete against DJO and a covenant not to solicit customers or employees for 12 months. Such payments will not be made if his employment terminates due to death or disability. Receipt of severance under this agreement is conditioned upon receiving a full release of any claims from Mr. Murphy.

Section 162(m) of the Internal Revenue Code of 1986 generally provides that compensation in excess of $1,000,000 paid to the CEO or to other named executive officers of a publicly held corporation (as defined under Section 162(m)) will not be deductible for federal income tax purposes, subject to certain exceptions. As a non-publicly held corporation, we are not subject to the Section 162(m) deductibility limitations.

The Compensation Committee of the DJO Board of Directors oversees our company’s compensation program on behalf of the Board. In fulfilling its oversight responsibilities, the Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis set forth in this Annual Report. Based upon the review and discussions referred to above, the Compensation Committee recommended to the DJO Board that the Compensation Discussion and Analysis be included in this Annual Report.

The following table sets forth summary information about the compensation during 2017, 2016 and 2015 for services rendered in all capacities by our Chief Executive Officer, our Chief Financial Officer, and each of our three other most highly compensated executive officers. All of the individuals listed in the following table are referred herein collectively as the Named Executive Officers or NEOs.

Name and Principal Position	Year	Salary ($)		Bonus (1) ($)		Stock Awards ($) (2)		Option Awards (3) ($)		Non-Equity Incentive Plan Compensation (4) ($)		All Other Compensation (10) ($)		Total ($)
Brady R. Shirley (5)	2017		798,077		301,923		—		—		798,077		22,078		1,920,155
President, Chief Executive	2016		491,154		250,000		—		931,500		137,832		90,855		1,901,341
Officer and Director	2015		439,231		96,528		—		—		273,349		49,812		858,920

Michael C. Eklund (6)	2017		650,000		104,000		—		—		520,000		84,958		1,358,958
Chief Financial Officer and	2016		187,500		1,520,000		2,000,005		931,500		—		24,275		4,663,280
Chief Operating Officer

Jeffery McCaulley (7)	2017		349,461		—		2,500,011		903,000		244,623		21,794		4,018,889
Global President,
DJO Surgical

Stephen J. Murphy (8)	2017		327,653		—		—		0		229,357		47,699		604,709
President, International Commercial Business	2016		318,919		70,000		—		141,267		63,533		70,477		664,196
	2015		439,231		96,528		—		—		273,349		49,812		858,920

Bradley J. Tandy (9)	2017		419,231		58,584		—		—		292,923		51,936		822,674
Executive Vice President,	2016		246,154		175,000		—		495,831		—		123,154		1,040,139
General Counsel and Secretary

The following table sets forth certain information with respect to grants of plan-based awards made to the NEOs during 2017.

		Estimated Future Payouts Under Non-Equity Incentive Plan Awards (1)						Estimated Future Payouts Under Equity Incentive Plan Awards (4)						All Other Stock Awards: Number of Shares of Stock or			All Other Option Awards: Number of Securities Underlying			Exercise or Base Price of Option		Grant Date Fair Value of Stock and
Name	Grant Date	Threshold ($)(2)		Target ($)		Maximum ($)(3)		Threshold (#)		Target (#)		Maximum (#)		Units (#)			Options (#)			Awards ($/Share)		Option Awards ($)(7)
Brady R. Shirley	3/13/17		212,500		850,000		1,275,000		—		—		—	—			—				—		—
Michael C. Eklund	3/13/17		130,000		520,000		1,040,000		—		—		—		—		—				—		—
Jeff McCaulley	3/13/17		103,250		413,000		619,500		—		—		—		—			—			—		—
	8/8/17		—		—		—		75,000		300,000		300,000		—			150,000	(6)		16.46		903,000
	8/8/17		—		—		—		—		—		—		151,884	(5)		—			16.46		2,500,011
Stephen J. Murphy	3/13/17		57,022		228,087		342,131		—		—		—		—			—			—		—
	5/30/17		—		—		—		7,500		30,000		30,000		—			—			16.46		0
Bradley J. Tandy	3/13/17		77,000		308,000		616,000		—		—		—		—			—			—		—

The following table sets forth certain information regarding equity-based awards held by each of the NEOs as of December 31, 2017.

	Option Awards												Stock Awards
Name	Number of Securities Underlying Unexercised Options (#) Exercisable			Number of Securities Underlying Unexercised Options (#) Unexercisable			Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)			Option Exercise Price ($)		Option Expiration Date	Number of Shares or Units of Stock That Have Not Vested (#)		Market Value of Shares or Units That Have Not Vested ($)		Equity Incentive Plan Awards: Number of Unearned Shares, Units, or Other Rights That Have Not Vested (#)		Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units, or Other Rights That Have Not Vested ($)
Brady R. Shirley		91,667	(1)		33,332	(7)		125,001	(8)		16.46	4/24/2024		—		—		—		—
		—			—			100,000	(9)		16.46	2/17/2026		—		—		—		—
		30,000	(2)		120,000	(7)		300,000	(9)		16.46	11/14/2026		—		—		—		—
		121,667			153,332			525,001						—		—		—		—
Michael C. Eklund		30,000	(2)		120,000	(7)		300,000	(9)		16.46	11/14/2026		—		—		—		—
		—			—			—						91,130		1,500,000		—		—
		30,000			120,000			300,000
Jeffery McCaulley	—				150,000	(7)		300,000	(9)		16.46	8/8/2028		—		—		—		—
	—			—			—							151,884		2,500,011		—		—
	—				150,000			300,000
Stephen J. Murphy		83,284	(3)		—			74,119	(9)		16.46	2/21/2018		—		—		—		—
		7,372	(4)		—			12,531	(9)		16.46	12/9/2019		—		—		—		—
		—			—			100,000	(8)		16.46	2/16/2022		—		—		—		—
		6,103	(5)		—			—			16.46	12/5/2023		—		—		—		—
		18,791	(5)		—			—			16.46	12/8/2024		—		—		—		—
		26,908	(5)		—			—			16.46	4/4/2026		—		—		—		—
		—			—			30,000	(9)		16.46	5/30/2027		—		—		—		—
		142,458			—			216,650
Bradley J. Tandy		16,667	(6)		66,666	(7)		166,667	(9)		16.46	7/20/2026		—		—		—		—

that were granted in 2009 under the 2007 Plan, and (b) the number of shares underlying certain performance vesting options that were granted in 2009 under the 2007 Plan, and were earned (i.e., their performance conditions were satisfied) in 2009. These options have a term of 10 years from the date of grant.

The following table provides information regarding the amounts received by our NEOs as a result of exercises of stock options and vesting of restricted stock units (RSUs) during the year ended December 31, 2017.

Certain executives may defer receipt of part or all of their cash compensation under the DJO, LLC Executive Deferred Compensation Plan (the Deferred Plan), a plan sponsored by DJO, LLC, a subsidiary of DJOFL. The Deferred Plan allows executives to save for retirement in a tax-effective way at minimal cost to DJO, LLC. Under this program, amounts deferred by the executive are deposited into a trust for investment and eventual benefit payment. The obligations of DJO, LLC under the Deferred Plan are unsecured obligations to pay deferred compensation in the future from the assets of the trust. Participants will have the status of unsecured general creditors with respect to the benefit obligations of the Deferred Plan, and the assets set aside in the trust for those benefits will be available to creditors of DJO, LLC in the event of bankruptcy or insolvency. Each participant may elect to defer under the Deferred Plan all or a portion of his or her cash compensation that may otherwise be payable in a calendar year. A participant’s compensation deferrals are credited to the participant’s account under the Deferred Plan and the trust. Each participant may elect to have the amounts in such participant’s account invested in one or more investment options available under the Deferred Plan, which investment options are substantially the same investment options available to participants in DJO, LLC’s 401(k) Savings Plan. The Deferred Plan also permits DJO, LLC to make contributions to the Deferred Plan, including matching contributions, at its discretion, but no such contributions have been made to date. To the extent that Company contributions are made to the Deferred Plan, the Committee may impose vesting criteria to aid in the employment retention of participants. A participant’s eventual benefit will depend on his or her level of contributions, DJO, LLC’s contributions, if any, and the investment performance of the particular investment options selected.

Certain employees of our U.K. subsidiary, including Mr. Murphy, are participants in Personal Pension Plan contracts which provide for the deferral of part or all of their cash compensation (UK Deferral Plan). The UK Deferral Plan allows the UK employees to save for retirement in a tax-effective way. Neither DJO nor its affiliates have any obligations under the UK Deferral Plan. Each participant may elect to defer under the UK Deferral Plan all or a portion of his or her cash compensation that may otherwise be payable in a calendar year. A participant’s compensation deferrals are credited to the participant’s account under the UK Deferral Plan. Each participant may elect to have the amounts in such participant’s account invested in one or more investment options available under the UK Deferral Plan. The UK Deferral Plan also permits DJO’s UK subsidiary to make contributions to the Deferred Plan at its discretion and monthly contributions have been made. A participant’s eventual benefit will depend on his or her level of contributions, the Company’s contributions and the investment performance of the particular investment options selected.

The following table sets forth information for each of the NEO’s who participate or participated in DJO LLC’s non-qualified deferred compensation plan or in the U.K deferral plan.

See “Employment Agreements with NEOs” and “Other Severance, Separation and Retirement Agreements with NEOs” in the “Compensation Discussion and Analysis” above for the terms of agreements which provide for payments upon termination or change-in-control.

The following table shows the amount of potential cash payments and the value of other severance benefits each of the NEOs would be entitled to if his employment were terminated “without cause” or if he resigned for “good reason” as of December 31, 2017.

The portion of any options granted to our executive officers and other members of management that contain a Time-Based Tranche contain change-in-control provisions that would result in accelerated vesting of the Time-Based Tranche upon the occurrence of a change-in-control. Specifically, the Time-Based Tranche would become immediately exercisable upon the occurrence of a change-in-control if the NEO remains in continuous employment of the Company until the consummation of the change-in-control. Currently there is no public market for DJO’s Common Stock and the Company has determined that the fair market value of its shares is $16.46 per share. At such value, there is no “spread” value for the options in the Time-Based Tranche. However, this change-in-control provision does not apply to the Adjusted EBITDA Tranche (as described above), the vesting of which requires the achievement of annual Adjusted EBITDA targets or the Linear MOIC Vesting Tranche (as described above), vesting of which requires the achievement of a minimum return on MOIC following a liquidation by Blackstone of all or a portion of its equity interest in DJO. The RSUs awarded to Mr. Eklund in 2016 and to Mr. McCaulley in 2017 contain change-in-control provisions that would result in accelerated vesting of the RSUs and issuance of the underlying shares. The value of the RSUs on acceleration would be equal to the fair market value of the shares, or $16.46 per share.

The Compensation Committee of the DJO Board reviews the compensation of our non-employee directors on an annual basis. During 2017, our Board consisted of the following persons: Mike S. Zafirovski, Brady Shirley, John R. Murphy, Julia Kahr, David N. Kestnbaum, Dr. Jacqueline Kosecoff (until December 2017), Ron Lawson, James Quella and Joel Hackney. Ms. Kahr and Mr. Kestnbaum are affiliated with Blackstone and are not compensated for serving as members of our Board. Mr. Shirley is our Chief Executive Officer and is not separately compensated for serving as a member of the Board or as manager of DJOFL.

The standard compensation package for directors who are not employed by, and who do not consult for, the Company or by any Blackstone-controlled entity (the “Eligible Directors”), consists of an annual fee of $80,000 for each such director, except as described below, and annual stock option grants valued at $75,000. In addition, the Chairman of the Audit Committee receives an annual fee of $25,000.

On January 5, 2012, the Compensation Committee approved Mr. Zafirovski’s compensation as Chairman of the Board of DJO, consisting of annual cash compensation of $400,000 per year, and options to acquire 303,767 shares of the Company’s common stock at an exercise price of $16.46 per share. These options have a term of ten years and vest as follows: one-third of the options vest over three years and two-thirds are subject to the Linear MOIC Vesting condition as amended as described in “Equity Compensation Awards” in the “Compensation Discussion and Analysis”. In consideration for the annual fee, Mr. Zafirovski agrees to provide 40 days of consulting services to DJO’s CEO and executive management.

On September 11, 2012, the Compensation Committee approved Mr. Lawson’s compensation as director of DJO, consisting of annual cash compensation of $200,000 per year, and options to acquire 100,000 shares of the Company’s common stock at an exercise price of $16.46 per share. These options have a term of ten years and vest as follows: one-third of the options vest over three years and two-thirds are subject to the Linear MOIC Vesting condition as amended as described in “Equity Compensation Awards” in the “Compensation Discussion and Analysis”. In consideration for the annual fee, Mr. Lawson agrees to provide 40 days of consulting services related to the U.S. Surgical business and worldwide for DJO’s other products.

On October 22, 2013, the Compensation Committee approved Mr. Quella’s compensation as director of DJO, consisting of annual cash compensation of $200,000 per year, and options to acquire 100,000 shares of the Company’s common stock at an exercise price of $16.46 per share. These options have a term of ten years and vest as follows: one-third of the options vest over three years and two-thirds are subject to the Linear MOIC Vesting condition as amended as described in “Equity Compensation Awards” in the “Compensation Discussion and Analysis”. In consideration for the annual fee, Mr. Quella agrees to provide 40 days per year of consulting services for strategic planning, operations and other matters requested by the Chairman or CEO.

The following table sets forth the compensation earned by our non-employee directors for their services in 2017 (excluding Mr. Shirley, Ms. Kahr and Mr. Kestnbaum, who are not separately compensated as directors):

As required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and Item 402(u) of Regulation S-K, we are providing the following information about the relationship between the annual total compensation of Mr. Shirley, President and Chief Executive officer (“CEO”) and the annual total compensation of our employees. For 2017, the last completed fiscal year,

•the annual total compensation of the CEO was $1,920,155, as shown in the Summary Compensation Table

•the annual total compensation of the employee identified at the median of our company (other than the CEO) was $21,312

Based on this information, for 2017, the ratio of the annual total compensation of Mr. Shirley, CEO, to the median of the annual total compensation of all employees was estimated to be 90 to 1.

To identify the median employee used to calculate the ratio we used target total cash compensation for all employees as of December 31, 2017. Median employee actual cash compensation for the 12-month period ending December 31, 2017 was used to calculate the ratio. Exchange rate used to convert the median employee’s compensation to U.S. Dollars was based on the spot inter-bank market close rate on December 31, 2017.

During 2017, our Compensation Committee consisted has one designee of Blackstone, Ms. Kahr. None of the members of the Compensation Committee is or has been an officer or employee of DJO. See “Item 13. Certain Relationships and Related Transactions, and Director Independence” below for a description of certain agreements with Blackstone and its affiliates. None of our executive officers has served as a director or a member of the compensation committee (or other committee serving an equivalent function) of any other entity, which has one or more executive officers serving as a director of DJO or member of our Compensation Committee.

DJOFL is a wholly owned subsidiary of DJO, which owns all of our issued and outstanding capital stock. The following table sets forth as of March 15, 2018, certain information regarding the beneficial ownership of the voting securities of DJO by each person who beneficially owns more than five percent of DJO’s common stock, and by each of the directors and NEOs of DJO, individually, and by our directors and executive officers as a group.

	Aggregate Number of Shares Beneficially Owned (1)
Name and Address of Beneficial Owner	Number of Issued Shares		Acquirable within 60 days (2)		Percent of Class
Grand Slam Holdings, LLC (3)		48,098,209		—		97.60	%
Directors and Executive Officers:
Brady Shirley
President, Chief Executive Officer and Director		30,377		138,333	*
Michael C. Eklund
Chief Financial Officer and Chief Operating Officer		17,789		30,000	*
Jeffery McCaulley
Global President, DJO Surgical		—		—		—
Stephen J. Murphy
President, International Commercial Business		35,554		59,174	*
Bradley J. Tandy
Executive Vice President, General Counsel and Secretary		—		16,667	*
Mike S. Zafirovski
Chairman of the Board		60,753		101,256	*
Joel Hackney, Jr.
Director		—		4,585	*
Julia Kahr (4)
Director		—		—		—
David N. Kestnbaum (4)
Director		—		—		—
James R. Lawson
Director		60,753		33,334	*
John R. Murphy
Director		—		24,652	*
James Quella
Director		—		33,334	*
All Directors and executive officers as a group (13 persons)		205,226		533,003		1.48	%

The following table provides information as of December 31, 2017 with respect to the number of shares to be issued upon the exercise of outstanding stock options and RSUs under our 2007 Plan, which is our only equity compensation plan and has been approved by the stockholders:

All members of DJO’s management who own shares of DJO common stock or options to purchase DJO common stock are parties to a Management Stockholders Agreement, dated November 3, 2006, among DJO, Grand Slam Holdings, LLC (BCP Holdings), Blackstone Capital Partners V L.P. (Blackstone), certain of its affiliates (BCP Holdings and Blackstone and its affiliates are referred to as Blackstone Parent Stockholders), and such members of DJO’s management, as amended by the First Amendment to Management Stockholders Agreement (the Management Stockholders Agreement).

The Management Stockholders Agreement provides a right of first refusal to DJO or Blackstone, if DJO fails to exercise such right, on any proposed sale of DJO’s common stock held by a management stockholder following the lapse of the transfer restrictions and prior to the occurrence of a qualified public offering (as such term is defined in that agreement) of DJO. In addition, prior to a qualified public offering, Blackstone will have drag-along rights, and management stockholders will have tag-along rights, in the event of a sale of DJO’s common stock by Blackstone to a third party (or in the event of a sale of BCP Holdings’ equity interests to a third party) in the same proportion as the shares or equity interests sold by Blackstone. The Management Stockholders Agreement also provides that, after the occurrence of a qualified public offering, the management stockholders will receive customary piggyback registration rights with respect to shares of DJO common stock held by them.

All DJO directors who have been granted options or purchased shares of common stock and all other holders of options or purchasers of common stock who are not employees are parties to a Stockholders Agreement which has the same material terms and conditions as the Management Stockholders Agreement.

Blackstone Management Partners LLC (BMP) provided certain monitoring, advisory and consulting services to us for an annual monitoring fee equal to the greater of $7.0 million or 2% of consolidated EBITDA as defined in the Transaction and Monitoring Fee Agreement. The agreement was terminated effective November 20, 2017. DJO has agreed to indemnify BMP and its affiliates, directors, officers, employees, agents and representatives from and against all liabilities relating to the services contemplated by the

Transaction and Monitoring Fee Agreement and the engagement of BMP pursuant to, and the performance of BMP and its affiliates of the services contemplated by, the Transaction and Monitoring Fee Agreement.

The Board of Directors has not adopted a formal written policy for the review and approval of transactions with related persons. However, all such transactions will be reviewed by the Board on an as-needed basis.

As a privately held company, the DJO Board is not required to have a majority of independent directors. However, we believe that Messrs. Murphy, Hackney, Lawson and Quella would be deemed independent directors according to the independence definition promulgated under the New York Stock Exchange listing standards.

The following table sets forth the aggregate fees billed by Ernst & Young LLP for audit services rendered in connection with the consolidated financial statements and reports, and for other services rendered during fiscal years 2017 and 2016 on behalf of DJOFL and its subsidiaries, as well as all out-of-pocket costs incurred in connection with these services, which have been billed to DJOFL. All audit and audit related services were pre-approved by the audit committee.

All services to be performed for us by our independent auditors must be pre-approved by the audit committee, or a designated member of the audit committee, to assure that the provision of such services does not impair the auditor’s independence.

The annual audit services engagement terms and fees are subject to the specific pre-approval of the audit committee. The audit committee will approve, if necessary, any changes in terms, conditions, and fees resulting from changes in audit scope or other matters. All other audit services not otherwise included in the annual audit services engagement must be specifically pre-approved by the audit committee.

Audit-related services are services that are reasonably related to the performance of the audit or review of our financial statements or traditionally performed by the independent auditors. Examples of audit-related services include employee benefit and compensation plan audits, due diligence related to mergers and acquisitions, attestations by the auditors that are not required by statute or regulation, consulting on financial accounting and reporting standards, internal controls, and consultations related to compliance with Section 404 of the Sarbanes-Oxley Act of 2002. All audit-related services must be specifically pre-approved by the audit committee.

The audit committee may grant pre-approval of other services that are permissible under applicable laws and regulations and that would not impair the independence of the auditors. All of such permissible services must be specifically pre-approved by the audit committee.

Requests or applications for the independent auditors to provide services that require specific approval by the audit committee are considered after consultation with management and the auditors.

All audit fees and audit-related fees during 2017 were pre-approved by the audit committee.

All other financial statement schedules are not required under the related instructions or are inapplicable and therefore have been omitted.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Large accelerated filer	☐		Accelerated filer	☐

Non-accelerated filer	☒ (Do not check if a smaller reporting company)		Smaller reporting company	☐
Emerging growth company		☐

		Page No.
	PART I
Item 1.	Business	5
Item 1A.	Risk Factors	20
Item 2.	Properties	34
Item 3.	Legal Proceedings	34
Item 4.	Mine Safety Disclosures	35

	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	36
Item 6.	Selected Financial Data	37
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	51
Item 8.	Financial Statements and Supplementary Data	52
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	96
Item 9A.	Controls and Procedures	96
Item 9B.	Other Information	97

	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	98
Item 11.	Executive Compensation	102
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	118
Item 13.	Certain Relationships and Related Transactions, and Director Independence	119
Item 14.	Principal Accounting Fees and Services	121

	PART IV
Item 15.	Exhibits, Financial Statement Schedules	122
Item 16.	Form 10-K Summary	125
SIGNATURES		127

Product Category		Description
Rigid bracing and soft goods		Soft goods Lower extremity fracture boots Ligament braces Post-operative braces Osteoarthritis braces Ankle bracing Shoulder, elbow and wrist braces Back braces Neck braces Thermoformable braces
Cold and compression therapy		Cold and compression therapy products
Vascular therapy		Vascular system pumps Compression hosiery
Therapeutic shoes and inserts		Therapeutic footwear and related medical and comfort products

Product Category		Description
Iontophoresis		Needle-free transdermal drug delivery
Bone growth stimulation (CMF)		Non-union fracture bone growth stimulation devices Adjunct to spinal fusion bone growth stimulation devices
Clinical electrotherapy		TENS NMES Ultrasound / Acoustic wave therapy Laser / Light therapy Shortwave Diathermy Electrodes
Patient care		Patient safety devices Continuous passive motion devices (CPM) Back braces Compounded pain relief cream
Physical therapy tables and traction products		Treatment tables Traction tables Cervical traction for home use Lumbar traction for home use
Hot, cold and compression therapy		Dry heat therapy Hot/cold therapy Paraffin wax therapy Moist heat therapy Cold therapy Compression therapy

Product Category		Description
Shoulder implants		Primary total joint replacement Fracture repair system Revision total joint replacement (including reverse shoulder)
Hip implants		Primary replacement stems Acetabular cup system Revision joint replacement
Knee implants		Primary total joint replacement Revision total joint replacement Unicondylar joint replacement
Elbow Implants		Primary total joint replacement
Bone Cement		Bone cement and cement mixing accessories

Title of each class	Name of each exchange on which registered
None	None

	2017		% of Net Sales			2016		% of Net Sales			Increase (Decrease)			% Increase (Decrease)
Bracing and Vascular	$	507,435		42.8	%	$	522,600		45.2	%	$	(15,165	)		(2.9	)%
Recovery Sciences		158,288		13.3			156,998		13.5			1,290			0.8	%
Surgical Implant		200,384		16.9			174,503		15.1			25,881			14.8	%
International		320,099		27.0			301,187		26.1			18,912			6.3	%
Total net sales	$	1,186,206		100.0	%	$	1,155,288		100.0	%	$	30,918			2.7	%

	For the Year Ended December 31,
(in thousands)	2017			2016		2015
Blackstone monitoring fee	$	6,225		$	7,000	$	7,000
Loss on modification and extinguishment of debt (1)		—			—		68,473
Foreign currency transaction (gains) losses and other (income) expense		(2,112	)	$	2,539	$	7,287
Noncontrolling interests		799			623		840
Franchise and other tax		344			391		308
Total other adjustment items before permitted pro forma adjustments	$	5,256		$	10,553	$	83,908

	Payment due:
	Total		2018		2019-2020		2021-2022		Thereafter
Long-term debt and capital lease obligations	$	2,440,342	$	15,936	$	1,409,110	$	1,015,296	$	—
Interest payments (1)		490,024		169,797		282,429		37,798		—
Operating lease obligations		42,787		11,534		15,107		8,119		8,027
Purchase obligations		158,218		115,033		24,457		18,728		—
Total contractual commitments	$	3,131,371	$	312,300	$	1,731,103	$	1,079,941	$	8,027

	Page No.
Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm	53
Consolidated Balance Sheets at December 31, 2017 and 2016	54
Consolidated Statements of Operations for the Years Ended December 31, 2017, 2016 and 2015	55
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2017, 2016 and 2015	56
Consolidated Statements of (Deficit) Equity for the Years Ended December 31, 2017, 2016 and 2015	57
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015	58
Notes to Consolidated Financial Statements	59

	December 31, 2017			December 31, 2016
Components and raw materials	$	67,220		$	18,771
Work in process		5,652			8,373
Finished goods		89,468			126,974
Inventory held on consignment		38,219			35,751
		200,559			189,869
Inventory reserves		(31,422	)		(38,312	)
	$	169,137		$	151,557

	December 31, 2017			December 31, 2016			Depreciable lives (years)
Land	$	170		$	170		Indefinite
Buildings and improvements		27,244			25,919		3 to 25
Equipment		142,544			132,314		2 to 7
Software		52,776			47,368		3 to 10
Furniture and fixtures		12,779			12,093		3 to 8
Surgical implant instrumentation		159,543			128,983			5
Construction in progress		6,065			6,656		N/A
		401,121			353,503
Accumulated depreciation and amortization		(267,599	)		(225,484	)
Property and equipment, net	$	133,522		$	128,019

December 31, 2017	Gross Carrying Amount		Accumulated Amortization			Intangible Assets, Net
Definite-lived intangible assets:
Customer relationships	$	478,114	$	(402,005	)	$	76,109
Patents and technology		446,894		(302,805	)		144,089
Trademarks and trade names		29,851		(18,576	)		11,275
Distributor contracts and relationships		4,805		(4,725	)		80
Non-compete agreements		6,750		(6,750	)		—
	$	966,414	$	(734,861	)		231,553
Indefinite-lived intangible assets:
Trademarks and trade names							375,535
Net identifiable intangible assets						$	607,088

December 31, 2016	Gross Carrying Amount		Accumulated Amortization			Intangible Assets, Net
Definite-lived intangible assets:
Customer relationships	$	475,280	$	(364,582	)	$	110,698
Patents and technology		446,734		(274,914	)		171,820
Trademarks and trade names		29,695		(15,543	)		14,152
Distributor contracts and relationships		4,753		(4,486	)		267
Non-compete agreements		6,604		(6,224	)		380
	$	963,066	$	(665,749	)		297,317
Indefinite-lived intangible assets:
Trademarks and trade names							374,817
Net identifiable intangible assets						$	672,134

2018		57,993
2019		53,061
2020		37,089
2021		32,488
2022		28,687
Thereafter		22,235
	$	231,553

	December 31, 2017		December 31, 2016
Accrued wages and related expenses	$	41,482	$	30,340
Accrued commissions		16,994		16,254
Accrued rebates		12,896		14,023
Accrued other taxes		5,743		2,926
Accrued professional expenses		3,879		3,593
Income taxes payable		1,937		231
Derivative liability		268		1,497
Other accrued liabilities		43,161		44,401
	$	126,360	$	113,265

	Balance Sheet Location	December 31, 2017		December 31, 2016
Derivative Assets:
Interest rate cap agreements designated as cash flow hedges	Other long term assets	$	84	$	0
Derivative Liabilities:
Interest rate cap agreements designated as cash flow hedges	Other current liabilities	$	268	$	1,497
Interest rate cap agreements designated as cash flow hedges	Other long-term liabilities		—		1,283

		Year Ended December 31,
	Location of gain (loss)	2017		2016		2015
Interest rate cap agreements designated as cash flow hedges	Interest expense (1)	$	482	$	412	$	—
Foreign exchange forward contracts not designated as hedges	Other expense, net		—		—		(4	)
		$	482	$	412	$	(4	)

As of December 31, 2017	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Recorded Balance
Assets:
Interest rate cap agreements designated as cash flow hedges	$	—	$	84	$	—	$	—
Liabilities:
Interest rate cap agreements designated as cash flow hedges	$	—	$	268	$	—	$	—

	Number of Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Outstanding at December 31, 2016		9,681,627		$	16.32		5.5	$	1,370,670
Granted		1,488,800		$	16.46
Exercised		(416,206	)	$	13.17
Forfeited or expired		(2,318,326	)	$	16.46
Outstanding at December 31, 2017		8,435,895		$	16.46		6.1	$	—
Vested or expected to vest at December 31, 2017		3,657,499		$	16.46		4.3	$	—
Exercisable at December 31, 2017		2,431,238		$	16.46		3.8	$	—

	December 31, 2017			December 31, 2016
Deferred tax assets:
Net operating loss carryforwards	$	219,488		$	308,615
Receivables reserve		7,291			14,619
Accrued expenses and reserves		30,887			52,646
Gross deferred tax assets		257,666			375,880
Valuation allowance		(219,365	)		(286,974	)
Net deferred tax assets		38,301			88,906
Deferred tax liabilities:
Intangible assets		(169,145	)		(269,196	)
Foreign earnings repatriation		(6,975	)		(11,080	)
Other		(3,346	)		(9,573	)
Gross deferred tax liabilities		(179,466	)		(289,849	)
Net deferred tax liabilities	$	(141,165	)	$	(200,943	)

Years Ending December 31,
2018		11,534
2019		8,325
2020		6,781
2021		5,159
2022		2,959
Thereafter		8,029
	$	42,787

	December 31, 2017		December 31, 2016
United States	$	122,208	$	117,112
International		16,442		16,443
	$	138,650	$	133,555

	Three months ended
	April 1, 2017			July 1, 2017			September 30, 2017			December 31, 2017
Net sales	$	288,389		$	294,746		$	290,876		$	312,195
Operating income		6,674			9,043			21,769			38,515
Net (loss) income from continuing operations		(39,803	)		(34,224	)		(22,602	)		61,225
Net (loss) income attributable to DJOFL		(39,969	)		(34,383	)		(22,693	)		61,151

	Three months ended
	March 28, 2016			June 27, 2016			September 26, 2016			December 31, 2016
Net sales	$	278,906		$	292,852		$	287,040		$	296,490
Operating income		9,462			21,544			22,244			(174,305	)
Net loss from continuing operations		(37,937	)		(23,961	)		(22,625	)		(202,295	)
Net loss attributable to DJOFL		(38,320	)		(23,275	)		(22,582	)		(202,126	)

Name	Age	Position
Brady R. Shirley	52	President, Chief Executive Officer and Director; Manager of DJOFL
Michael C. Eklund	49	Chief Financial Officer and Chief Operating Officer
Jeanine Kestler	52	Executive Vice President and Chief Human Resources Officer
Jeffery A. McCaulley	52	Global President, DJO Surgical
Stephen J. Murphy	53	President, International Commercial Business
Bradley J. Tandy	59	Executive Vice President, General Counsel and Secretary; Manager of DJOFL
Mike S. Zafirovski	64	Chairman of the Board
J. Joel Hackney, Jr.	48	Director
Julia Kahr	39	Director
David N. Kestnbaum	36	Director
Dr. Jacqueline Kosecoff	68	Director
James R. (Ron) Lawson	73	Director
John R. Murphy	67	Director
James Quella	68	Director

	Mr. Shirley (3)		Mr. Eklund (4)		Mr. McCaulley (3)		Mr. Murphy		Mr. Tandy (5)
Relocation expenses	$	—	$	3,508	$	—	$	—	$	42,486
Housing Expenses		12,628		72,000		15,894		—		—
Company contributions to deferred compensation plans (2)		9,450		9,450		5,900		22,538		9,450
Vehicle allowance		—		—		—		13,482		—
Medical insurance, Life insurance and Income protection		—		—		—		11,679		—
Total	$	22,078	$	84,958	$	21,794	$	47,699	$	51,936

Name	Base Salary Payment		Bonus Payment		Health Benefits		Total
Brady R. Shirley	$	1,275,000	$	1,275,000	$	23,933	$	2,573,933
Michael C. Eklund		975,000		780,000		35,342		1,790,342
Jeffery McCaulley		590,000		413,000		23,562		1,026,562
Bradley J. Tandy		440,000		308,000		28,225		776,225
Stephen J. Murphy		350,035		245,025		11,679		606,739

	Directors Compensation for 2017
Name	Fees Earned or Paid in Cash		Option Awards (1)		Total
Joel Hackney	$	80,000	$	30,354	$	110,354
Dr. Jacqueline Kosecoff		80,000		30,354		110,354
James R. Lawson		200,000		—		200,000
John R. Murphy		105,000		30,354		135,354
James Quella		200,000		—		200,000
Mike Zafirovski		400,000		—		400,000

	2017		2016
Audit fees (1)	$	1,615,842	$	1,368,000
Audit-related fees (2)		26,706		41,496
Tax Fees		—		—
All Other Fees		—		—

	Allowance for Sales Discounts and Other Allowances
Balance as of December 31, 2014	$	39,255
Provision		72,723
Write-offs, net of recoveries		(68,630	)
Balance as of December 31, 2015	$	43,348
Provision		64,878
Write-offs, net of recoveries		(54,918	)
Balance as of December 31, 2016	$	53,308
Provision		79,044
Write-offs, net of recoveries		(103,481	)
Balance as of December 31, 2017	$	28,871

Date: March 15, 2018		DJO FINANCE LLC

	By:	/s/ Brady R. Shirley
		Brady R. Shirley President, Chief Executive Officer and Manager

Signature	Title	Date

/s/ Brady R. Shirley	President, Chief Executive Officer and Manager	March 15, 2018
Brady R. Shirley	(Principal Executive Officer)

/s/ Michael C. Eklund	Chief Financial Officer and Chief Operating Officer	March 15, 2018
Michael C. Eklund	(Principal Financial Officer and Principal Accounting Officer)

/s/ Bradley J. Tandy	Executive Vice President, General Counsel,	March 15, 2018
Bradley J. Tandy	Secretary and Manager

/s/ David H. Smith	Senior Vice President, Tax & Treasury (Treasurer), and	March 15, 2018
David H. Smith	Manager