UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, ~~2016~~2017

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission file number 333-142188

DJO Finance LLC

(Exact name of Registrant as specified in its charter)

Delaware

20-5653965

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

1430 Decision Street

Vista, California

92081

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (800) 336-5690

Securities registered pursuant to Section 12(b) of the Act:

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

Securities registered pursuant to Section 12(g) of the Act: None

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

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

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, ~~2017~~2018, 100% of the issuer’s membership interests were owned by DJO Holdings LLC.

DJO FINANCE LLC

FORM 10-K

TABLE OF CONTENTS

		Page No.
	PART I
Item 1.	Business	45
Item 1A.	Risk Factors	1920
Item 2.	Properties	3334
Item 3.	Legal Proceedings	3334
Item 4.	Mine Safety Disclosures	3435
	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	3536
Item 6.	Selected Financial Data	3637
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3738
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	9996
Item 9A.	Controls and Procedures	9996
Item 9B.	Other Information	~~100~~97
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	~~101~~98
Item 11.	Executive Compensation	~~105~~102
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	~~125~~118
Item 13.	Certain Relationships and Related Transactions, and Director Independence	~~126~~119
Item 14.	Principal Accounting Fees and Services	~~128~~121
	PART IV
Item 15.	Exhibits, Financial Statement Schedules	~~129~~122
Item 16.	Form 10-K Summary	~~133~~125
SIGNATURES		~~135~~127

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K (Annual Report) of DJO Finance LLC (DJOFL, or the Company) for the year ended December 31, ~~2016~~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.

PART I.

ITEM 1.

BUSINESS

Overview

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.

Business Transformation Initiative

In March 2017, ~~the~~we ~~Company~~ announced that itwe ~~has~~had embarked on a series of business transformation projects to improve ~~the~~our ~~Company’s~~ liquidity and profitability and to improve our customers’ experiences. ~~This~~During 2017, this business transformation initiative ~~will~~focused ~~focus~~ 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, ~~the~~we ~~Company has~~ established a team of senior managers to direct this effort and ~~has~~ engaged third party experts to assist in the planning and implementation of a significant number of cost-reduction, efficiency and other optimization activities. ~~The~~We ~~Company~~believe ~~expects~~ that the costs of the outside experts, tools and related activities ~~will~~have bebeen significantly offset by the cost savings ~~expected to be~~ realized from the implementation of ~~the~~these transformation ~~plan~~plans. As a part of this transformation initiative, ~~the~~we ~~Company~~took isaction ~~seeking~~ to improve ~~its~~our liquidity through significant cost reductions, efficiency improvements and other cash flow best practices; ~~improve~~improved our organizational effectiveness through the optimization of current organizational structure and opportunities to outsource certain activities; ~~optimize~~optimized ~~the~~our ~~Company’s~~ procurement of direct and indirect materials and services; ~~improve~~improved ~~the~~our ~~Company’s~~ manufacturing, distribution, and sales and sales operations planning; and ~~improve~~improved ~~the~~our ~~Company’s~~ profitability associated with the mix of ~~the~~our ~~Company’s~~ 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.

Operating Segments and Products

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.

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.

Bracing and Vascular Segment

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:

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

Recovery Sciences Segment

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.

Exit of Empi Business

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:

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

Surgical Implant Segment

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.

The following table summarizes our Surgical Implant segment product categories:

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

International Segment

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.

Research and Development

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.

Marketing and Sales

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.

Bracing and Vascular Segment

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~~/HBOC,~~ ~~Allegiance Healthcare~~ and ~~PSS~~Cardinal ~~World Medical~~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 ~~the~~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 23,~~800~~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.

Recovery Sciences Segment

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.

Surgical Implant Segment

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.

International Segment

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.

Manufacturing

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.

910

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.

Intellectual Property

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.

Competition

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:

•

develop new products and innovative technologies,

•

obtain regulatory clearance and compliance for our products,

•

manufacture and sell our products cost-effectively,

•

meet all relevant quality standards for our products and their markets,

•

respond to competitive pressures specific to each of our geographic markets, including our ability to enforce non-compete agreements,

•

protect the proprietary technology of our products and manufacturing processes,

•

market our products,

•

attract and retain skilled employees and sales representatives, and

•

establish and maintain distribution relationships.

1011

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.

Bracing and Vascular Segment

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.

Recovery Sciences Segment

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.

Surgical Implant Segment

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.

International Segment

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.

1112

Government Regulation

FDA and Similar Foreign Government Regulations

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.

1213

Third Party Reimbursement

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, ~~which~~as ~~subsequently was~~ amended ~~by the Health Care and Education Reconciliation Act~~ (~~collectively referred to as~~ 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 ~~2016~~2017, the update factor is -0.47%, based on a 0.1.0% inflation update that is reduced by a 0.53% productivity adjustment. ~~For~~ ~~2017,~~The ~~the~~2018 update factor is 01.71%, ~~based~~reflecting on a 1.06% inflation update that is reduced by a 0.35% 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 ~~(“Program”)~~ into a single round of competition; ~~– Round 2019, but~~ off-the-shelf orthotics still were not included. . Seven days later, the Medicare program announced a “temporary delay” in moving forward with ~~the~~this ~~next~~plan; ~~steps~~CMS ofhas ~~the~~not ~~Round~~released ~~2019~~additional ~~DMEPOS~~information ~~Competitive~~to ~~Bidding~~date. ~~Program~~In toits ~~allow~~proposed FY 2019 budget, the ~~new~~Trump ~~administration~~Administration ~~further~~proposes ~~opportunity~~a togeographic ~~review~~expansion ~~the~~of ~~program.~~competitive Asbidding ato ~~result,~~all ~~CMS~~areas ~~has~~of ~~removed~~the ~~all~~country, ~~information~~and ~~that~~it ~~was~~proposes ~~released~~to onpay ~~January~~winning ~~31,~~suppliers ~~2017,~~at ~~including~~their ~~information~~own onbid ~~the~~amount ~~CMS.gov~~rather ~~website~~than ~~and~~a ~~the~~single ~~Competitive~~payment ~~Bidding~~amount. ~~Implementation~~These ~~Contractor~~proposals ~~(CBIC)~~would ~~website~~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 ishas ~~seeking~~revised toits ~~tie~~DMEPOS ~~Medicare~~Quality ~~payment~~Standards to ~~quality~~include ~~and~~a ~~value~~new ~~through~~type aof ~~variety~~therapeutic ofshoe ~~innovative~~insert ~~Medicare~~for ~~payment~~individuals with diabetes that is fabricated without molding it to beneficiary-specific physical positive models. ~~For~~The ~~instance,~~revisions ~~under~~allow the ~~Medicare~~use ~~Comprehensive~~of ~~Care~~direct ~~for~~carving ~~Joint~~(milling) ~~Replacement~~using a Computer-Aided Design/Computer-Aided Manufacturing (~~CJR~~CAD-CAM) ~~model~~or similar system, ~~which~~without ~~began~~the oncreation ~~April~~of 1,a ~~2016,~~physical ~~CMS~~positive ~~makes~~model, ~~bundled~~as ~~payments~~a tocustom ~~hospitals~~fabricated intherapeutic 67shoe ~~metropolitan~~insert ~~statistical~~manufacturing ~~areas~~technique ~~for~~falling anunder ~~“episode~~the scope of ~~care”~~the ~~for~~Therapeutic ~~lower~~Shoes ~~extremity~~Part ~~joint~~B ~~replacement surgery~~benefit. ~~The~~To ~~bundled~~facilitate ~~payment~~implementation ~~covers~~of ~~all~~this ~~services~~new ~~provided~~category ~~during~~of ~~the~~therapeutic ~~inpatient~~shoe ~~admission~~inserts, ~~through~~CMS 90has ~~days~~created ~~post-discharge~~a new HCPCS code (K0903), ~~including~~which ~~DME~~will be effective April 1, ~~although~~2018, ~~suppliers~~and ~~still~~established ~~continue~~specific tocriteria ~~receive~~for ~~Medicare~~its ~~payment~~use. CMS ~~through~~has ~~the~~not ~~usual~~announced ~~Medicare~~the fee- schedule amount for~~-service~~ ~~payment~~this ~~systems~~new code. AManufacturers ~~similar~~wishing ~~program~~to ~~establishing~~use ~~mandatory~~K0903 ~~Medicare~~or ~~episode~~A5513 ~~payment~~(which ~~models~~describes ~~(EPM)~~a ~~for~~custom ~~surgical~~fabricated ~~hip/femur~~therapeutic ~~fracture~~shoe ~~and~~insert ~~certain~~created ~~cardiac~~on ~~cases~~a inphysical ~~designated~~model ~~geographic~~of ~~areas~~the ~~goes~~individual ~~into~~beneficiary's ~~effect~~foot) ~~July~~must 1,submit ~~2017.~~their ~~Because~~products ~~hospitals~~for ~~ultimately~~coding ~~are~~verification. There ~~held~~can ~~responsible~~be ~~for~~no ~~the~~assurance ~~episode~~that ~~spending~~our inproducts ~~these~~will ~~programs,~~be ~~such~~determined ~~bundled~~to ~~payment~~comply ~~arrangements~~with ~~could~~the ~~increase~~new ~~pressure~~coding onspecifications, ~~hospitals~~or tothat ~~control~~the ~~costs~~fee ~~associated~~established ~~with~~for ~~medical~~K0903 ~~products~~will ~~such~~be asadequate ~~ours~~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.

13In 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.

InEfforts ~~response to pressure from certain groups (primarily orthotists), the United States Congress and state legislatures~~ have ~~periodically~~also ~~considered~~been ~~proposals~~made ~~that~~to ~~limit~~establish ~~the~~similar ~~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 onat the ~~measuring,~~federal ~~fitting~~level ~~and~~for ~~adjusting~~the ofMedicare ~~certain orthotic devices~~program. ~~Although~~For ~~some~~example, ofin ~~these state laws exempt manufacturers’ representatives~~2000, ~~other~~Congress ~~states’~~passed ~~laws subject~~ the ~~activities~~Medicare, ofMedicaid ~~such~~and ~~representatives~~SCHIP toBenefits ~~certification~~Improvement orand ~~licensing~~Protection ~~requirements.~~Act ~~The state~~ of ~~Texas~~2000 ~~has~~(BIPA). ~~adopted~~BIPA ~~such~~contained a ~~licensure~~provision ~~law~~requiring, ~~which the state regulatory board has interpreted~~ as ~~not~~a ~~including~~condition ~~an exemption~~ for ~~manufacturer’s~~payment ~~sales~~by ~~representatives acting under~~ the ~~supervision~~Medicare ~~of a physician~~program, ~~and has issued a cease and desist letter directed to the fitting activities of our sales representatives in~~ that ~~state.~~certain Wecertification ~~have~~or ~~requested~~licensing ~~clarification~~requirements ~~of such letter. Additional states may~~ be ~~considering~~met ~~similar legislation. If these laws are enforced without an exemption~~ for ~~manufacturers’~~individuals ~~sales representatives or without our sales representatives qualifying as certified or licensed persons, our ability to fit~~ and ~~bill~~suppliers ~~these~~furnishing ~~products will be adversely impacted. In addition~~certain, inbut ~~July~~not ~~2013~~all, ~~we were served with a subpoena under HIPAA (as defined and further described below) seeking documents relating to the fitting of~~ custom-fabricated ororthotic ~~custom-fitted orthoses in the States of New Jersey, Washington and Texas~~devices. 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. 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. ~~The~~ ~~final~~On ~~provisions~~October ~~are~~4, ~~subject~~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 ~~change;~~enable weto agency to explore alternatives with stakeholders. We cannot predict at this time whether or when ~~the~~CMS ~~final~~will ~~rule~~proceed ~~may~~with bea ~~issued~~new orrulemaking, ~~when~~the scope of any new requirements, or when they would go into effect.

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. The final provisions are subject to change; we cannot predict at this time when the final rule may be issued or when any new requirements 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.

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.

Fraud and Abuse

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).

Anti-Kickback and Other Fraud Laws

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.

HIPAA

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.”

Physician Self-Referral Laws

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.

False Claims Laws

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.

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.

Just prior to the acquisition in 2011 of Dr. Comfort by DJO, Dr. Comfort entered into a settlement agreement with the U.S. Attorney’s Office for the Eastern District of Wisconsin and the Office of the Inspector General of HHS (OIG) resolving allegations by two whistleblowers that Dr. Comfort made false claims relating to products that allegedly did not meet Medicare standards. This settlement agreement required Dr. Comfort to, among other things, enter into a five-year Corporate Integrity Agreement (CIA) covering its compliance program. Dr. Comfort has complied with its obligations under the CIA for the past four years and expects that the OIG will confirm its compliance for the fifth and final year.

Customs and Import/Export Laws and Regulations

Foreign Corrupt Practices Act

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 ~~law~~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.

Governmental Audits and Surveys

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~~

1617

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.

Federal Privacy and Transaction Law and Regulations

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 ~~the Office of Civil Rights~~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 ~~breach~~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.

European Union Data Privacy Rules

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.

Iran Sanctions Related Disclosure

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, ~~2016~~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 ~~2016~~2017. ~~During 2016,~~ Blackstone ~~included~~or ~~information in~~ its ~~periodic reports filed with the SEC regarding activities of its~~ portfolio companies ~~that~~have ~~require~~in ~~disclosure under~~ the ~~ITRSHR.~~past ~~These~~and ~~disclosures~~may ~~are~~include ~~reproduced~~ in ~~Exhibit~~the ~~99.1~~future ofinformation ~~this~~in ~~report~~its ~~and~~periodic ~~are~~reports ~~incorporated~~filed bywith ~~reference~~the ~~herein.~~SEC Weregarding ~~have no involvement in or control over such~~ activities ~~and~~of weits ~~have~~portfolio ~~not~~companies ~~independently~~that ~~verified~~are orrequired ~~participated in the preparation of the~~ disclosures ~~described~~under in the ~~filing~~ITRSHR.

Employees

As of December 31, ~~2016~~2017, we had approximately 4,~~980~~420 employees. Of these, approximately 3,~~690~~030 were engaged in production and production support, approximately ~~110~~130 in research and development, approximately ~~830~~1,000 in sales and support, and approximately ~~350~~260 in various administrative capacities including third party billing. Of these employees, approximately 1,~~670~~480 were located in the United States, approximately 21,~~230~~940 were located in Mexico and approximately 1,~~080~~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.

Segment and Geographic Information

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.

Available Information

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.

1819

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.

ITEM 1A.

RISK FACTORS

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.

Risks Related To Our Indebtedness

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, ~~2016~~2017, our total indebtedness was $2,~~437~~440.3 million, exclusive of net unamortized debt issuance costs and original issue discount of $3426.52 million. We also had an additional $6168.8 million available for borrowing under our revolving credit facility. Our high degree of leverage could have important consequences, including:

•

making it difficult for us to make payments on our 8.125% second lien notes and our 10.75% third lien notes (collectively, the Notes), our credit facilities and other debt,

•

increasing our vulnerability to general economic and industry conditions,

•

requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities,

•

exposing us to the risk of increased interest rates as certain of our borrowings, including certain borrowings under our senior secured credit facilities, will be subject to variable rates of interest,

•

limiting our ability to make strategic acquisitions or causing us to make non-strategic divestitures,

•

limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions and general corporate or other purposes, and

•

limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged.

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:

•

incur additional indebtedness or issue certain preferred shares,

•

pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments,

•

make certain investments,

•

sell certain assets,

•

create liens,

•

consolidate, merge, sell or otherwise dispose of all or substantially all of our assets, and

•

enter into certain transactions with our affiliates.

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.

1920

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,~~041~~031.83 million principal amount of term loan borrowings under our senior secured credit facilities mature in June 2020 and approximately $1,313.05 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.

Risks Related To Our Business

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.

2021

~~Medicare~~fewer ~~payment~~elective ~~for~~surgical ~~DMEPOS~~procedures, ~~also~~including ~~can~~joint bereconstructive ~~impacted~~surgeries, by(ii) requiring the ~~DMEPOS~~use ~~competitive~~of ~~bidding~~the ~~program,~~least ~~under~~expensive ~~which~~product ~~Medicare rates are based on bid amounts for certain products in designated geographic areas~~available, ~~rather~~(iii) reducing ~~than~~ the ~~Medicare~~reimbursement ~~fee~~for ~~schedule~~or ~~amount.~~limiting ~~Only those suppliers selected through~~ the ~~competitive~~number ~~bidding~~of ~~process~~authorized ~~within~~visits ~~each~~for ~~designated~~rehabilitation ~~competitive~~procedures, ~~bidding area~~ (~~CBA~~iv) ~~are~~bundling ~~eligible~~reimbursement tofor ~~have~~all ~~their~~services ~~products~~related ~~reimbursed by Medicare. CMS also has adopted regulations~~ to ~~begin~~an ~~adjusting~~episode ~~national DMEPOS fee schedules to take into account competitive bidding pricing. See “Government Regulations—Third Party Reimbursement” in the “Business” section above. If any~~ of ~~our~~care, ~~products are included in competitive bidding and we are not selected as a contract supplier (~~or ~~subcontractor~~(v) otherwise inrestricting acoverage ~~particular region,~~ or ~~if contract or fee schedule prices are significantly below current Medicare fee schedule~~ reimbursement ~~levels,~~of itour ~~could~~products ~~have~~or anprocedures ~~adverse~~using ~~impact on~~ our ~~sales and profitability~~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. ~~ACA~~The ~~also~~Continuing ~~establishes~~Appropriations ~~enhanced Medicare and Medicaid program integrity provisions~~Act, 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. Recently, the U.S. House of Representatives and Senate passed legislation, which, if signed into law ~~by President Trump, would repeal certain aspects of the ACA. Further,~~ on January 2022, ~~2017,~~2018 ~~President~~extends ~~Trump signed an Executive Order directing federal agencies with authorities and responsibilities under~~ the ~~ACA~~moratorium tofor ~~waive,~~an ~~defer,~~additional ~~grant~~two ~~exemptions~~years; ~~from,~~as ~~or delay the implementation of any provision of the ACA that would impose~~ a ~~fiscal or regulatory burden on states~~result, ~~individuals,~~the ~~healthcare~~device ~~providers,~~tax ~~health~~will ~~insurers,~~not orapply ~~manufacturers of pharmaceuticals or medical devices. Congress also could consider subsequent legislation~~ to ~~replace~~sales ~~elements~~during ofcalendar ~~the~~years ~~ACA~~2018 ~~that~~and ~~are repealed~~2019. ~~There~~ACA ~~can~~also beestablishes noenhanced ~~assurances~~Medicare ~~that~~and ~~healthcare~~Medicaid ~~legislation~~program ~~will~~integrity ~~not have a material adverse impact on our business. Likewise~~provisions, ~~most~~including ~~states~~expanded ~~have~~documentation ~~adopted~~requirements orfor ~~are~~Medicare ~~considering~~DMEPOS ~~policies to reduce Medicaid spending as a result of state budgetary shortfalls~~orders, ~~which~~more instringent ~~some~~procedures ~~cases include reduced reimbursement~~ for ~~DMEPOS~~screening ~~items~~Medicare and~~/or~~ ~~other~~ Medicaid ~~coverage~~DMEPOS ~~restrictions. In addition~~suppliers, ~~future~~and ~~changes~~new todisclosure ~~the~~requirements ~~ACA~~regarding ~~may~~manufacturer ~~require~~payments ~~states~~ to ~~modify~~physicians ~~their own laws~~ and ~~regulations.~~teaching ~~As states continue to face significant financial pressures~~hospitals, italong iswith ~~possible~~broader ~~that~~expansion ~~state~~of ~~health~~federal ~~policy~~fraud ~~changes~~and ~~will~~abuse ~~adversely affect our profitability~~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 ~~have~~had embarked on a series of business transformation projects focused on delivering productivity improvements and reducing costs. This initiative ~~will~~involves ~~involve~~ 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 ~~expect~~have totransitioned ~~transition~~ certain business processes to third-party vendors. Reliance on such third-party vendors ~~will~~subjects ~~subject~~ 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 ~~will~~has ~~require~~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

•

demand for many of our products, which historically has been higher in the fourth quarter when scholastic sports and ski injuries are more frequent,

•

our ability to meet the demand for our products,

•

the direct distribution of our products in foreign countries that have seasonal variations,

•

the number, timing and significance of new products and product introductions and enhancements by us and our competitors, including delays in obtaining government review and clearance of medical devices,

•

our ability to develop, introduce and market new and enhanced versions of our products on a timely basis,

•

the impact of any acquisitions that occur in a quarter,

•

the impact of any changes in generally accepted accounting principles,

•

changes in pricing policies by us and our competitors and reimbursement rates by third party payors, including government healthcare agencies and private insurers,

•

the loss of any of our significant distributors,

•

changes in the treatment practices of orthopedic and spine surgeons, primary care physicians, and pain-management specialists, and their allied healthcare professionals, and

•

the timing of significant orders and shipments.

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

•

greater financial, marketing and other resources,

•

more widely accepted products,

•

a larger number of endorsements from healthcare professionals,

•

a larger product portfolio,

•

superior ability to maintain new product flow,

•

greater research and development and technical capabilities,

•

patent portfolios that may present an obstacle to the conduct of our business,

•

stronger name recognition,

•

larger sales and distribution networks, and/or

•

international manufacturing facilities that enable them to avoid the transportation costs and foreign import duties associated with shipping our products manufactured in the United States to international customers.

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.~~

2425

Inproducts ~~addition,~~by ~~legislation~~reducing ~~has~~the ~~been~~number ~~adopted,~~of ~~but~~professionals ~~not~~who ~~implemented~~fit ~~to date, requiring that certain certification or licensing requirements be met for individuals~~ and ~~suppliers~~sell ~~furnishing~~them. ~~certain~~The ~~custom-fabricated~~adoption ~~orthotic devices as a condition~~ of ~~Medicare~~such ~~payment.~~policies Oncould ~~January~~have ~~12, 2017, CMS published~~ a ~~proposed~~material ~~rule~~adverse ~~that~~impact ~~would~~on ~~implement~~our ~~these requirements, but the rule has not been finalized to date~~business. ~~Medicare currently follows state policies in those states that require the use of an orthotist or prosthetist for furnishing of orthotics or prosthetics.~~

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 2627.10% of our net revenues from customers outside the United States for the year ended December 31, ~~2016~~2017. Doing business in foreign countries exposes us to a number of risks, including the following:

•

fluctuations in currency exchange rates,

•

imposition of investment, currency repatriation and other restrictions by foreign governments,

•

potential adverse tax consequences, including the imposition or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries, which, among other things, may preclude payments or dividends from foreign subsidiaries from being used for our debt service, and exposure to adverse tax regimes,

•

difficulty in collecting accounts receivable and longer collection periods,

•

the imposition of additional foreign governmental controls or regulations on the sale of our products,

•

intellectual property protection difficulties,

•

changes in political and economic conditions, including the recent political changes in Tunisia in which we maintain a small manufacturing facility and security issues in Mexico in which we maintain a significant manufacturing facility,

•

difficulties in attracting high-quality management, sales and marketing personnel to staff our foreign operations,

•

labor disputes,

•

import and export restrictions and controls, tariffs and other trade barriers,

•

increased costs of transportation or shipping,

•

exposure to different approaches to treating injuries,

•

exposure to different legal, regulatory and political standards, and

•

difficulties of local governments in responding to severe weather emergencies, natural disasters or other such similar events.

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.

We may fail to comply with customs and import/export laws and regulations.

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 2324.4% of our consolidated net sales for the year ended December 31, ~~2016~~2017, of which 1516.97% 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.

2627

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.

2728

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.~~

2829

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 ~~incident~~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 ~~breach~~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, ~~2016~~2017, we obtained 1320.13% 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.

3031

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.

3132

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 97.76% 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.

3233

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.

ITEM 2.

PROPERTIES

Information about our facilities is set forth in the following table:

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 ~~2018~~2021		53
Vista, California	Office and distribution facility	Leased	April 2020		21
Surgical Implant Segment:
Austin, Texas	Operations and manufacturing facility, warehouse, research and ~~development~~distribution	Leased	~~March~~February ~~2019~~2020		53
Austin, Texas	Office and distribution facility	Leased	February 2020		3554
Austin, Texas	Office and distribution facility	Leased	June 2017		19
International Segment:
Freiburg, Germany	Research and development, distribution facility	Leased	December 2020		23
Freiburg, Germany	Research and development, distribution facility	Leased	~~Indefinite~~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	~~April~~September ~~2017~~2019		28
Mississauga, Canada	Office and distribution facility	Leased	April 2020		30
Freiburg, Germany	Office and distribution facility	Leased	~~Indefinite~~June 2019		26
Herentals, Belgium	Office and distribution facility	Leased	~~March~~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	~~January~~May ~~2020~~2021		12
Other various locations	Various	Leased	Various		6442

ITEM 3.

LEGAL PROCEEDINGS

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.

California Qui Tam Action

On October 11, 2013, we were served with a summons and complaint related to a qui tam action filed in U.S. District Court in Los Angeles, California in August 2012 and amended in December 2012 that names us as a defendant along with each of the other companies that manufactures and sells external bone growth stimulators for spinal applications. The case is captioned United States of America, et al.ex re. Doris Modglin and Russ Milko, v. DJO Global, Inc., DJO, LLC, DJO Finance LLC, Orthofix, Inc., Biomet, Inc., and EBI, LP., Case No. CV12-7152-MMM (JCGx) (C.D. Cal.). The plaintiffs, or relators, allege that the defendants have violated federal and state false claim acts by seeking reimbursement for bone growth stimulators for uses outside of the FDA approved indications for use for such products. The plaintiffs are seeking treble damages alleged to have been sustained by the United States and the states, penalties and attorney’s fees and costs. The federal government and all of the named states have declined to intervene in this case. We filed a motion to dismiss the second amended complaint, which motion was granted with leave to amend. Relators then filed a third amended complaint and we filed a motion to dismiss the third amended complaint and that motion has been granted without leave to amend as to the federal false claim act allegations. The Court declined jurisdiction over the remaining state claims. Relators have appealed the decision to the U.S. Court of Appeals for the Ninth Circuit. On February 27, 2017, the United States Court of Appeals for the Ninth Circuit affirmed the dismissal of the second amended complaint by the District Court.

Empi Investigation

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 is cooperating with the U.S. Attorney’s Office in Minnesota (USAO), which is handling the investigation of issues related to the subpoena. We have produced responsive documents to the USAO and are fully cooperating in the investigation. We may need to devote significant time and resources to this inquiry and can give no assurances as to the final outcome of the investigation or that any consequences will not have a material adverse effect on our reputation, business, prospects, financial condition and results of operations. Additionally, we cannot reasonably estimate the range of loss, if any, that may result from this matter.

~~New Jersey Orthotics Investigation~~34

Inperiod ~~July~~January ~~2013~~2010 wethrough ~~were~~May ~~served~~2015. ~~with~~The aCompany ~~subpoena~~has ~~under~~cooperated with the ~~Health~~U.S. ~~Insurance~~Attorney’s ~~Portability~~Office ~~and~~in ~~Accountability~~Minnesota ~~Act~~(USAO), ~~seeking~~which ~~documents~~jointly ~~relating~~handled the investigation of issues related to the ~~fitting~~subpoena. ofWe ~~custom-fabricated~~produced orresponsive ~~custom-fitted~~documents ~~orthoses~~and fully cooperated in the ~~states~~investigation. In ofOctober ~~New Jersey~~2017, ~~Washington~~we ~~and~~reached ~~Texas.~~a ~~The~~settlement ~~subpoena~~in ~~was~~principle ~~issued~~with by the ~~United~~USAO ~~States~~and ~~Attorney’s~~the ~~Office~~Civil ~~for~~Division to resolve the ~~District~~government’s investigation of ~~New~~claims ~~Jersey~~under inthe ~~connection~~False ~~with~~Claims anAct ~~investigation~~and ofsigned ~~compliance~~a ~~with~~formal ~~professional~~settlement ~~licensing~~agreement ~~statutes~~ in ~~those~~January ~~states~~2018. Pursuant ~~relating~~ to the ~~practice~~settlement ofagreement, ~~orthotics.~~the WeCompany ~~have~~agreed ~~supplied~~to ~~the~~pay ~~documents~~a ~~requested~~monetary ~~under~~penalty ~~the~~of ~~subpoena~~$7.62 Wemillion, ~~cannot~~plus ~~provide~~interest ~~any~~from ~~assurance~~October as2017 to ~~the~~January ~~outcome~~2018. The ofpayment ~~the~~was ~~investigation~~made orin ~~that~~January ~~any~~2018. As ~~consequences~~a ~~will~~part ~~not~~of ~~have~~the asettlement, ~~material~~the ~~adverse~~Company ~~effect~~did onnot ~~our~~admit ~~reputation,~~any ~~business,~~wrongdoing ~~prospects,~~and ~~financial~~is ~~condition~~not ~~and~~subject ~~results~~to ofany ~~operations~~ongoing corporate integrity agreement.

ITEM 4.

MINE SAFETY DISCLOSURES

None.

3435

PART II.

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

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, ~~2016~~2017, DJO issued 4345,~~086~~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 ~~312~~416,~~925~~206 shares of DJO’s common stock, from which we withheld ~~269~~370,~~839~~432 shares to cover $46.41 million of aggregate option exercise price and income tax withholdings and issued the remaining 4345,~~086~~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.

~~Pursuant~~During to the ~~Employment~~year ~~Agreement~~ended ~~entered~~December ~~into~~31, on2016, ~~November~~DJO 14issued 43,086 ~~2016~~shares ~~between~~of ~~DJO~~its ~~and~~common ~~Brady~~stock R.upon ~~Shirley,~~ the ~~Company’s~~net ~~new~~exercise ~~Chief~~of ~~Executive~~Rollover ~~Officer, Mr~~Options. ~~Shirley~~The ~~agreed~~employee toexercised ~~purchase~~these ~~$500,000~~Rollover inOptions ~~shares~~for a total of ~~the~~312,925 shares of DJO’s common stock, ~~valued~~from atwhich ~~$16.46~~we ~~per~~withheld ~~share~~269,839 ~~within~~shares ~~180~~to ~~days~~cover ~~after~~$4.4 ~~the~~million ~~date~~ of ~~said~~aggregate ~~agreement. Mr.~~option ~~Shirley~~exercise ~~completed~~price ~~the~~and ~~purchase~~income oftax ~~30,377~~withholdings ~~shares~~and ofissued ~~common~~the ~~stock~~remaining ~~on February 2~~43,086 ~~2017~~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.

~~During~~The ~~the~~proceeds ~~year~~from ~~ended~~these ~~December 31,~~stock ~~2014,~~sales were contributed by DJO ~~issued~~to ~~115~~us,~~693~~ ~~shares~~and were used for working capital purposes. All such sales were subject to execution of ~~its~~a ~~common~~stockholder ~~stock~~agreement ~~upon~~including ~~the~~certain ~~net~~rights ~~exercise~~and restrictions (See Note 14 of ~~Rollover~~the ~~Options~~Notes to Consolidated Financial Statements). ~~Two~~The ~~former~~issuances ~~directors~~described ~~and~~above ~~employees~~were ~~exercised~~exempt ~~these~~from ~~Rollover~~registration ~~Options~~under ~~for~~the aSecurities ~~total~~Act of ~~507~~1933,~~088~~ ~~shares~~amended, ofpursuant ~~DJO’s~~to ~~common~~Rule ~~stock,~~701 ~~from~~thereof ~~which~~as weto ~~withheld~~all ~~391~~such issuances,~~395~~ except for the sale of shares to ~~cover $6~~Mr.5 ~~million~~Shirley, ofwhich ~~aggregate~~was ~~option~~exempt ~~exercise~~from ~~price~~registration ~~and~~pursuant ~~income~~to ~~tax~~Section ~~withholdings~~4(a)(2) ~~and~~thereof ~~issued~~because the ~~remaining~~issuance ~~115,693~~did ~~shares~~not involve any public offering of securities.

Additionally, during the year ended December 31, 2014, DJO issued 6,447 shares of its common stock upon the exercise of stock options. Net proceeds are included in Member capital in our Consolidated Balance Sheet as of December 31, 2014.

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 17 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, ~~2017~~2018, there were 4142 holders of DJO’s common stock.

As of March 15, ~~2017~~2018, 100% of DJOFL’s membership interests were owned by DJO Holdings LLC.

3536

ITEM 6.

SELECTED FINANCIAL DATA

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)	~~2016~~2017			~~2015~~2016			~~2014~~2015			~~2013~~2014			~~2012~~2013
Statement of Operations Data:
Net sales	$	1,~~155~~186,~~288~~206		$	1,~~113~~155,~~627~~288		$	1,~~087~~113,~~529~~627		$	1,~~020~~087,~~784~~529		$	~~962~~1,~~785~~020,784
Loss from continuing operations		(~~286~~35,~~818~~404	)		(~~182~~286,~~507~~818	)		(~~111~~182,~~304~~507	)		(~~189~~111,~~461~~304	)		(~~170~~189,~~549~~461	)
Net loss attributable to DJOFL (1)		(~~286~~35,~~303~~894	)		(~~340~~286,~~927~~303	)		(90340,~~534~~927	)		(~~203~~90,~~452~~534	)		(~~119~~203,~~150~~452	)
Depreciation and amortization		~~117~~111,~~893~~261			117,~~455~~893			~~119~~117,~~157~~455			~~118~~119,~~919~~157			~~113~~118,~~016~~919
Balance Sheet Data (at period end):
Cash and cash equivalents	$	3531,~~212~~985		$	4835,~~943~~212		$	3148,~~144~~943		$	4331,~~578~~144		$	3143,~~223~~578
Total assets		2,~~050~~022,~~438~~025			2,~~309~~050,~~558~~438			2,~~569~~309,~~861~~558			2,~~660~~569,~~520~~861			2,~~822~~660,~~656~~520
Long-term debt, net of current portion		2,~~392~~398,~~238~~184			2,~~344~~392,~~562~~238			2,~~233~~344,~~309~~562			2,~~216~~233,~~908~~309			2,~~184~~216,~~056~~908
DJOFL membership (deficit) equity		(765,928	)		(468,170	)		(124,234	)		(21,926	)		182,092
DJOFL membership deficit		(792,493	)		(765,928	)		(468,170	)		(124,234	)		(21,926	)

(1)	Results for the years ended December 31, 2016, 2015 and 2013 include aggregate goodwill and intangible asset impairment charges of $160.0 million, $169.4 million and $106.6 million, respectively.

3637

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

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.

Introduction

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.

Overview of Business

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^™.

Operating Segments

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.

Recent Acquisitions

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.

Business Transformation Initiative

In March 2017, ~~the~~we ~~Company~~ announced that itwe ~~has~~had embarked on a series of business transformation projects to improve ~~the~~our ~~Company’s~~ liquidity and profitability and to improve our customers’ experiences. ~~This~~ During 2017, this business transformation initiative ~~will~~focused ~~focus~~ 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, ~~the~~we ~~Company has~~ established a team of senior managers to direct this effort and ~~has~~ engaged third party experts to assist in the planning and implementation of a significant number of cost-reduction, efficiency and other optimization activities. ~~The~~ We ~~Company~~believe ~~expects~~ that the costs of the outside experts, tools and related activities ~~will~~have bebeen significantly offset by the cost savings ~~expected to be~~ realized from the implementation of ~~the~~these transformation ~~plan~~plans. As a part of this transformation initiative, ~~the~~we ~~Company~~took is seeking to improve its liquidity through significant cost reductions, efficiency improvements and other cash flow best practices; improve organizational effectiveness through the optimization of current organizational structure and opportunities to outsource certain activities; optimize the Company’s procurement of direct and indirect materials and services; improve the Company’s manufacturing, distribution, and sales and sales operations planning; and improve the Company’s profitability associated with the mix of the Company’s customers and products.

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.

Exit of Empi Business

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,
	2016					2015					2014
	2017					2016					2015
Net sales	$	1,~~155~~186,~~288~~206		100	%	$	1,~~113~~155,~~627~~288		100.0	%	$	1,~~087~~113,~~529~~627		100.0	%
Costs and operating expenses:
Cost of sales (exclusive of amortization of intangible assets (1))		~~511~~498,~~414~~107		4442.30			~~466~~511,~~019~~414		4144.93			~~462~~466,~~000~~019		4241.59
Selling, general and administrative		~~490~~510,~~693~~523		4243.50			~~454~~490,~~724~~693		4042.85			~~439~~454,~~872~~724		40.58
Research and development		3735,~~710~~429		3.20			3537,~~105~~710		3.12			3735,~~277~~105		3.41
Amortization of intangible assets		7666,~~526~~146		65.6			7976,~~964~~526		76.26			8379,~~944~~964		7.72
Impairment of goodwill		~~160,000~~—		~~13.9~~—			—160,000		—14			—		—
		1,276,343		110.5			1,035,812		93.0			1,023,093		94.1
		1,110,205		93.6			1,276,343		110.5			1,035,812		93.0
Operating (loss) income		~~(121~~76,~~055~~001	)	~~(10~~6.54	)		77(121,~~815~~055	)	7(10.05	)		6477,~~436~~815		57.90
Other (expense) income:
Interest expense, net		(~~170~~174,~~082~~238	)	(14.7	)		(~~172~~170,~~290~~082	)	(1514.57	)		(~~174~~172,~~325~~290	)	(1615.05	)
Loss on modification and extinguishment of debt		—		—			~~(68,473~~—	)	~~(6.1~~—	)		(~~938~~68,473	)	(06.1	)
Other expense, net		(2,534	)	(0.2	)		(7,303	)	(0.7	)		(5,197	)	(0.5	)
Other income (expense), net		2,113		0.2			(2,534	)	(0.2	)		(7,303	)	(0.7	)
		(172,616	)	(14.9	)		(248,066	)	(22.3	)		(180,460	)	(16.6	)
		(172,125	)	(14.5	)		(172,616	)	(14.9	)		(248,066	)	(22.3	)
Loss from continuing operations before income taxes		(~~293~~96,~~671~~124	)	(258.41	)		(~~170~~293,~~251~~671	)	(1525.34	)		(~~116~~170,~~024~~251	)	(1015.73	)
Income tax provision (benefit)		(6,853	)	(0.6	)		12,256		1.1			(4,720	)	(0.5	)
Income tax (benefit) provision		(60,720	)	(5.0	)		(6,853	)	(0.6	)		12,256		1.1
Net loss from continuing operations		(~~286~~35,~~818~~404	)	(243.81	)		(~~182~~286,~~507~~818	)	(1624.48	)		(~~111~~182,~~304~~507	)	(1016.24	)
Net income (loss) from discontinued operations		~~1,138~~309		0.10			~~(157~~1,~~580~~138	)	~~(14~~0.1	)		21(157,~~742~~580	)	2(14.01	)
Net loss		(~~285~~35,~~680~~095	)	(243.71	)		(~~340~~285,~~087~~680	)	(3024.57	)		(89340,~~562~~087	)	(830.25	)
Net income attributable to noncontrolling interests		(~~623~~799	)	(0.1	)		(~~840~~623	)	(0.1	)		(~~972~~840	)	(0.1	)
Net loss attributable to DJOFL	$	(~~286~~35,~~303~~894	)	(243.80	)%	$	(~~340~~286,~~927~~303	)	(3024.68	)%	$	(90340,~~534~~927	)	(830.36	)%

(1) Cost of sales is exclusive of amortization of intangible assets of $2827,~~525~~732, $3028,~~719~~525 and $3230,~~962~~719 for the years ended December 31, ~~2016~~2017, ~~2015~~2016 and ~~2014~~2015, respectively.

38Year Ended December 31, 2017 (2017) Compared to Year Ended December 31, 2016 (2016)

~~Year~~Net ~~Ended~~Sales. ~~December 31~~Net sales for 2017 were $1,186.2 ~~2016~~million, ~~(2016) Compared~~compared to ~~Year~~net ~~Ended~~sales ~~December 31~~of $1,155.3 ~~2015~~million ~~(2015)~~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.

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. 39

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

	2016		% of Net Sales			2015		% of Net Sales			Increase (Decrease)			% Increase (Decrease)
	2017		% of Net Sales			2016		% of Net Sales			Increase (Decrease)			% Increase (Decrease)
Bracing and Vascular	$	~~522~~507,~~600~~435		4542.28	%	$	~~526~~522,~~295~~600		4745.32	%	$	(315,~~695~~165	)		(02.79	)%
Recovery Sciences		~~156~~158,~~998~~288		13.53			156,~~194~~998		1413.05			~~804~~1,290			0.48	%
Surgical Implant		~~174~~200,~~503~~384		1516.19			~~134~~174,~~843~~503		1215.1			3925,~~660~~881			2914.48	%
International		~~301~~320,~~187~~099		2627.10			~~296~~301,~~295~~187		26.61			418,~~892~~912			16.73	%
Total net sales	$	1,~~155~~186,~~288~~206		100.0	%	$	1,~~113~~155,~~627~~288		100.0	%	$	4130,~~661~~918			32.87	%

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)

	2016		% of Net Sales			2015		% of Net Sales			Increase (Decrease)			% Increase (Decrease)
Bracing and Vascular	$	522,600		45.2	%	$	526,295		47.3	%	$	(3,695	)		(0.7	)%
Recovery Sciences		156,998		13.6			156,194		14.0			804			0.5	%
Surgical Implant		174,503		15.1			134,843		12.1			39,660			29.4	%
International		301,187		26.1			296,295		26.6			4,892			1.7	%
Total net sales	$	1,155,288		100.0	%	$	1,113,627		100.0	%	$	41,661			30.9	%

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.

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 ~~8.75%~~previously ~~Notes,~~outstanding ~~9.875% Notes and 7.75% Notes (each as defined herein)~~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.

Year Ended December 31, 2015 (2015) Compared to Year Ended December 31, 2014 (2014)

Net Sales. Net sales for 2015 were $1,113.7 million, compared to net sales of $1,087.6 million for 2014. Excluding the unfavorable impact of foreign currency exchange rates, which resulted in a decrease in net sales of $46.8 million, net sales increased 6.6% for the year ended 2015. Net sales from acquisitions completed in 2015 were $18.4 million.

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

	2015		% of Net Sales			2014		% of Net Sales			Increase (Decrease)			% Increase (Decrease)
Bracing and Vascular	$	526,295		47.3	%	$	504,590		46.4	%	$	21,705			4.3	%
Recovery Sciences		156,194		14.0			157,485		14.5			(1,291	)		(0.8	)%
Surgical Implant		134,843		12.1			100,139		9.2			34,704			34.7	%
International		296,295		26.6			325,315		29.9			(29,020	)		(8.9	)%
Total net sales	$	1,113,627		100.0	%	$	1,087,529		100.0	%	$	26,098			2.4	%

Net sales in our Bracing and Vascular segment were $526.3 million for 2015, an increase of 4.3% from net sales of $504.6 million for 2014. The increase was primarily due to new account acquisition in our OfficeCare channel, an increase in third party payor billing and growth in sales of direct consumer products.

Net sales in our Recovery Sciences segment were $156.2 million for 2015, a decrease of 0.8% from net sales of $157.5 million for 2014. The decrease was driven primarily by continued slow market conditions affecting the sale of Chattanooga rehabilitation equipment, together with a mix shift in bone growth stimulation products from reimbursement to direct customers. The decrease was compensated by growth in retail sales of Compex electrostimulation devices.

Net sales in our Surgical Implant segment were $134.8 million for 2015, an increase of 34.7% from net sales of $100.1 million for 2014. The increase was driven by sales of bone cement, which was acquired with the assets purchased from Zimmer Biomet in third quarter 2015. The segment also 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 $296.3 million for 2015, a decrease of 8.9% from net sales of $325.3 million for 2014. In constant currency, excluding an unfavorable impact of $46.8 million related to changes in foreign exchange rates in effect during 2015 compared to the rates in effect in 2014, net sales increased 5.5% for 2015 compared to 2014. Growth in net sales in this segment is being driven by stronger sales in direct markets, primarily Germany and Spain, and increased sales penetration in emerging markets.

Cost of Sales. As a percentage of net sales, cost of sales decreased to 41.9% for 2015, compared to 42.5% for 2014 mainly due to a mix between and within the reporting segments.

Selling, General and Administrative (SG&A). SG&A expenses increased to $454.7 million for 2015, from $439.9 million in 2014. The increase was mainly driven by acquisition and related integrations costs in our Surgical Implant segment, variable selling expenses due to growth and legal settlements, offset by a decrease in accounts receivable allowance for doubtful accounts due to process improvements in our reimbursement channels and a reduction in expenses related to information technology projects.

Research and Development (R&D). R&D expenses were $35.1 million for 2015, compared to $37.3 million in 2014, or 3.2% and 3.4% of net sales, respectively. In 2014 the Company incurred consulting fees for testing, documentation and software implementation to enhance new product introductions and ensure FDA compliance.

Amortization of Intangible Assets. Amortization of intangible assets decreased to $80.0 million for 2015, from $83.9 million for 2014. 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 $172.3 million for 2015 compared to $174.3 million for 2014. 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 8.75% Notes, 9.875% Notes and 7.75% Notes (each as defined herein), $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. Loss on modification and extinguishment of debt for 2014 consists of $0.3 million of arrangement and amendment fees and other fees and expenses incurred in connection with the amendment of our prior senior secured credit facilities and $0.6 million related to the non-cash write off of unamortized debt issuance costs and original issue discount associated with the portion of our original term loans which were extinguished.

Other Expense, Net. Other expense, net, increased to $7.3 million for 2015 from $5.2 million for 2014. Results for both periods presented primarily represent net realized and unrealized foreign currency transaction gains and losses.

Income Tax Provision. 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%. For 2014, we recorded an income tax benefit of $4.7 million on pre-tax losses of $116.0 million, resulting in an effective tax rate of 4.1%.

Discontinued Operations. During the fourth quarter of 2015, we ceased production, selling and billing operations of our Empi product line. 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.

Recent Accounting Pronouncements

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 has 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 includes 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 is still assessing the impact of adoption on our consolidated financial statements. The Company expects to 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.

In April 2015, the FASB issued an accounting standards update related to the presentation of debt issuance costs. The standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. The guidance is effective for annual and interim periods beginning after December 15, 2015. Early application is permitted. The Company has early adopted this update and the impact is reflected in the current and prior periods presented.

In April 2015, the FASB issued an accounting standards update related to internal-use software. The standard provides guidance to clarify the customer’s accounting for fees paid in a cloud computing arrangement. The guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. The Company adopted this ASU with prospective application in the first quarter of 2016. Adoption of this new guidance did not have a material effect on the Company’s financial statements.

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. Early adoption is permitted. Adoption of this new guidance is not expected to have a material effect on the Company’s financial statements.

In September 2015, the FASB issued an accounting standards update which eliminates the requirement for an acquirer in a business combination to restate prior period financial statements for measurement period adjustments. The new guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The new guidance also sets forth new disclosure requirements related to the adjustments. The guidance is effective for annual and interim periods beginning after December 15, 2015. Early adoption is permitted. Adoption of this new guidance did not have a material effect on the Company’s financial statements.

In November 2015, the FASB issued an accounting standards update which requires all deferred income taxes be presented on the balance sheet as noncurrent. The new guidance is intended to simplify financial reporting by eliminating the requirement to classify deferred taxes between current and noncurrent. The guidance is effective for annual and interim periods beginning after December 15, 2016. The Company has early adopted this update and the impact is reflected prospectively in 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.

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 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. ~~Early adoption is permitted.~~ Adoption of this new guidance isdid not ~~expected to~~ 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.

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 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.

Liquidity and Capital Resources

As of December 31, ~~2016~~2017, our primary sources of liquidity consisted of cash and cash equivalents totaling $3532.20 million and our $150.0 million asset-based revolving credit facility (ABL Facility), of which $6168.8 million was available after taking into account $8275.0 million drawings and $6.2 million issuance of letters of credit. Working capital at December 31, ~~2016~~2017 was $~~184~~153.75 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.

Cash Flows

Operating activities from continuing operations provided $844.6 million and $108.26 million and used $810.12 million of cash for ~~2016~~2017, ~~2015~~2016 and ~~2014~~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 ~~accounts receivable,~~ inventories, and ~~accrued interest and~~ accounts payable. For ~~2016~~2017, 2016 and 2015, ~~2014,~~ cash paid for interest was $~~162~~164.61 million, $~~176~~162.76 million and $~~165~~176.57 million, respectively.

Investing activities from continuing operations used $5047.54 million, $6851.64 million and $5744.67 million of cash for ~~2016~~2017, ~~2015~~2016 and ~~2014~~2015, respectively. ~~Cash~~In 2017 and 2016, cash used in investing activities consists of purchases of property and consigned surgical instruments to support growth, ~~vascular~~and ~~system pumps used as rental units,~~ IT automation technology~~, and manufacturing equipment for new products and more efficient production~~. In 2015 ~~and 2014~~, cash used in investing activities was also used for the Zimmer Biomet asset acquisition ~~and the Speetec acquisition, respectively~~.

Financing activities ~~provided~~used cash of $382.87 million in 2017, and provided cash $3638.18 million in 2016 and ~~2015, respectively, and used cash of~~ $2336.1 ~~thousand~~million in ~~2014~~2015. Cash provided by financing activities in 2017 and 2016 consisted of net borrowings under and repayments of our ABL Facility. ~~Cash~~Additionally ~~provided~~in by2017 ~~financing~~cash ~~activities~~used in ~~2015~~financing activities consisted of ~~proceeds~~payments ~~from the borrowings~~ related to the ~~refinancing~~repurchase of ~~our~~shares ~~debt, offset by the repayments~~ of ~~our~~common ~~prior~~stock ~~senior~~from ~~secured credit facilities and~~ our ~~8.75%~~former ~~Notes,~~chief ~~9.875%~~executive ~~Notes~~officer ~~and~~upon ~~7.75%~~his ~~Notes~~departure. Cash ~~used~~provided inby financing activities in ~~2014~~2015 consisted of proceeds from the borrowings ~~under~~related ~~our~~to ~~senior~~the ~~secured~~refinancing ~~credit~~of ~~facilities~~our debt, offset by ~~payments~~the repayments of ~~the~~our prior senior secured credit facilities, ~~payments~~and ~~related to the repurchase of Rollover Options from~~ our ~~former~~previously ~~chief~~outstanding ~~financial officer upon her departure, and payment of contingent consideration related to the acquisition of Exos~~notes.

Indebtedness

As of December 31, ~~2016~~2017, we had $2,~~437~~440.3 million in aggregate indebtedness outstanding, exclusive of net unamortized debt issuance costs and original issue discount of $3426.52 million. The principal amount and carrying value of our debt was as follows for December 31, ~~2016~~2017 and ~~2015~~2016 (in thousands):

	2016				2015
	2017				2016
	Principal Amount		Carrying Value		Principal Amount		Carrying Value
Credit facilities:
ABL Facility	$	8275,000	$	8073,~~365~~843	$	3082,000	$	2780,~~886~~365
Term loans		1,~~041~~031,~~813~~263		1,~~029~~022,~~816~~630		1,~~052~~041,~~363~~813		1,~~037~~029,~~117~~816
		1,123,813		1,110,181		1,082,363		1,065,003
		1,106,263		1,096,473		1,123,813		1,110,181
Notes:
8.125% second lien notes due 2021		1,015,000		1,~~000~~003,~~649~~382		1,015,000		~~998~~1,~~137~~000,649
10.75% third lien notes due 2020		298,471		~~291~~293,~~958~~657		298,471		~~290~~291,~~443~~958
9.75% senior subordinated notes due 2017		—		—		1,529		1,529
		1,313,471		1,297,039		1,313,471		1,292,607
		1,313,471		1,292,607		1,315,000		1,290,109
Other debt		20,608		20,608		—		—
Total indebtedness	$	2,~~437~~440,~~284~~342	$	2,~~402~~414,~~788~~120	$	2,~~397~~437,~~363~~284	$	2,~~355~~402,~~112~~788

Credit Facilities.

Our credit facilities at December 31, ~~2016~~2017 consisted of $1,~~041~~031.83 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 $8275.0 million at December 31, ~~2016~~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~~Notes prior to their final maturity dates of the ~~notes~~Notes. We pay interest semi-annually on the Notes.

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

44Certain 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.

~~Certain~~Our ~~Covenants~~debt agreements restrict our ability to incur additional debt and ~~Related~~make ~~Compliance~~certain payments. ~~Our~~The ~~Term~~indentures ~~Loan~~for ~~requires~~our usNotes togenerally ~~maintain~~permit aadditional ~~leverage~~debt only if the ratio of ~~debt~~our ~~from~~Adjusted ~~our~~EBITDA ~~Credit~~to ~~Facilities~~fixed charges is at least 2.00:1, ~~net~~or, in the case of ~~cash~~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 57.3550:1, ~~computed~~ on a ~~trailing~~pro ~~twelve~~forma ~~month~~basis ~~period~~after ~~commencing~~giving ~~with~~effect ~~September 30,~~to ~~2015.~~acquisition ~~Adjusted~~and ~~EBITDA~~additional isdebt. The ~~defined~~indentures asfor ~~net~~our ~~income~~Notes ~~(loss)~~generally ~~attributable~~prevent tous ~~DJOFL~~from ~~plus:~~making ~~net~~certain ~~interest expense~~payments, ~~income~~ ~~tax~~such ~~expense, depreciation,~~as dividends and ~~amortization,~~junior ~~further~~debt ~~adjusted~~prepayments, ~~for~~unless ~~certain~~the ~~non-cash~~ratio ~~items,~~of ~~non-recurring~~Adjusted ~~items~~EBITDA ~~and~~to ~~other~~fixed ~~adjustment~~charges ~~items,~~is asat ~~described~~least in2.00:1 ~~our~~on ~~Term~~a ~~Loan~~pro ~~agreement~~forma basis. As Our ratio of ~~December 31,~~Adjusted ~~2016,~~EBITDA ~~our~~to ~~actual~~fixed ~~first~~charges ~~lien~~for ~~net~~the ~~leverage~~twelve ~~ratio~~months ended December 31, 2017 was 41.4472:1. Fixed charges, ~~meeting~~as defined in the ~~requirement.~~indentures, generally means consolidated interest expense plus all cash dividends or other distributions paid on equity.

~~Our~~Adjusted ~~debt~~EBITDA ~~agreements~~should ~~restrict~~not ~~our~~be ~~ability~~considered toas ~~incur~~an ~~additional~~alternative ~~debt~~to ~~and~~net ~~make~~income ~~certain~~or ~~payments.~~other ~~The~~performance ~~indentures~~measures ~~for~~presented ~~our~~in ~~Notes~~accordance ~~generally~~with ~~permit additional debt only if the ratio of our Adjusted EBITDA to fixed charges is at least 2.00:1~~GAAP, or, inas ~~the~~an ~~case~~alternative ~~of additional debt~~ to ~~finance~~cash anflow ~~acquisition,~~from ~~such~~operations ~~ratio~~as ~~improves on~~ a ~~pro~~measure ~~forma~~of ~~basis~~our ~~after giving effect to such incurrence~~liquidity. ~~Our Credit Facilities permit us to incur additional debt for an acquisition only if the ratio of~~ Adjusted EBITDA todoes ~~debt,~~not represent net ofincome ~~cash,~~(loss) ~~improves~~ or iscash noflow ~~higher~~from ~~than~~operations ~~7.50:1,~~as onthose aterms ~~pro~~are ~~forma~~defined ~~basis~~by ~~after~~GAAP ~~giving effect to acquisition~~ and ~~additional~~does ~~debt. The~~not ~~indentures~~necessarily ~~for~~indicate ~~our~~whether ~~Notes~~cash ~~generally~~flows ~~prevent~~will usbe ~~from~~sufficient ~~making~~to ~~certain~~fund ~~payments,~~cash ~~such~~needs. asIn ~~dividends and junior debt prepayments~~particular, ~~unless~~ the ~~ratio~~definition of Adjusted EBITDA toin ~~fixed~~our ~~charges~~debt isagreements atallows ~~least~~us ~~2.00:1 on a pro forma basis. Our ratio of Adjusted EBITDA~~ to ~~fixed~~add ~~charges~~back ~~for~~certain ~~the~~non-cash, ~~twelve months ended December 31~~extraordinary, ~~2016~~ ~~was~~unusual ~~1.46:1.~~or ~~Fixed~~non-recurring charges, asthat ~~defined~~are deducted in ~~the~~calculating ~~indentures,~~net ~~generally means consolidated interest expense plus all cash dividends or other distributions paid on equity~~loss.

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, 2016, 2015 and 2014. 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)	2016			2015			2014
Net loss attributable to DJO Finance LLC	$	(286,303	)	$	(340,927	)	$	(90,534	)
Net (income) loss from discontinued operations		(1,138	)		157,580			(21,742	)
Interest expense, net		170,082			172,290			174,325
Income tax (benefit) provision		(6,853	)		12,256			(4,720	)
Depreciation and amortization		117,893			117,455			119,157
Non-cash charges (a)		182,399			3,403			(142	)
Non-recurring and integration charges (b)		48,675			33,976			40,540
Other adjustment items (c)		10,553			83,908			14,386
		235,308			239,941			231,270
Permitted pro forma adjustments (d)
Future cost savings		9,620			9,050			—
Adjusted EBITDA	$	244,928		$	248,991		$	231,270

(a) Non-cash items are comprised of the following:

	Year Ended December 31,
(in thousands)	2016		2015		2014
Stock compensation expense	$	3,188	$	1,805	$	1,869
Impairment of goodwill (1)		160,000		—		—
Inventory adjustments (2)		18,013		—		—
Purchase accounting adjustments (3)		249		821		(1,250	)
Loss (gain) on disposal of assets, net		949		777		(761	)
Total non-cash items	$	182,399	$	3,403	$	(142	)

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.

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.

(a)Non-cash items are comprised of the following:

	Year Ended December 31,
(in thousands)	2017		2016		2015
Stock compensation expense	$	3,695	$	3,188	$	1,805
Impairment of goodwill (1)		—		160,000		—
Inventory adjustments (2)		—		18,013		—
Purchase accounting adjustments (3)		—		249		821
Loss on disposal of assets, net		1,403		949		777
	$	5,098	$	182,399	$	3,403

(1)

Impairment of goodwill and intangible assets for the year ended December 31, 2016 consisted of a goodwill impairment charge of $99.0 million and $61.0 million related to the CMF and Vascular reporting units, respectively. 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.

(2) 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.

(3) Purchase accounting adjustments for the twelve months ended December 31, 2016 and 2015 consisted of $0.2 million and $0.8 million of amortization of fair market value inventory adjustments, respectively. Purchase accounting adjustments for the twelve months ended December 31, 2014 consist of $0.2 million of amortization of fair market value inventory adjustments, net of $1.5 million in adjustments to the contingent consideration for Speetec.

(b) Non-recurring and integration charges are comprised of the following:

	Year Ended December 31,
(in thousands)	2016		2015		2014
Integration charges:
Global business unit reorganization and integration	$	9,794	$	8,596	$	9,753
Acquisition related expenses and integration (1)		10,350		8,635		331
CFO transition		2,805		—		227
CEO transition		2,051		—		—
Litigation and regulatory costs and settlements, net (2) (3) (4)		16,562		8,864		5,752
Other non-recurring items (5) (6) (7)		7,044		4,247		18,610
ERP implementation and other automation projects		69		3,634		5,867
Total non-recurring and integration charges	$	48,675	$	33,976	$	40,540

(1) Consists of direct acquisition costs and integration expenses related to acquired businesses and costs related to potential acquisitions

(2) For the twelve months ended December 31, 2016, litigation and regulatory costs consisted of $2.6 million in litigation costs related to ongoing product liability issues and $14.0 million related to other litigation and regulatory costs and settlements.

(3) For the twelve months ended December 31, 2015, litigation and regulatory costs consisted of $3.5 million in litigation costs related to ongoing product liability issues and $5.4 million related to other litigation and regulatory costs and settlements.

(4) For the twelve months ended December 31, 2014, litigation and regulatory costs consisted of $0.9 million in litigation costs related to ongoing product liability issues related to our discontinued pain pump products and $4.9 million related to other litigation and regulatory costs and settlements.

(5) For the twelve months ended December 31, 2016, other non-recurring items consisted of $4.3 million in specifically identified non-recurring operational and regulatory projects and $2.7 million in professional fees and other non-recurring charges.

(6) For the twelve months ended December 31, 2015, other non-recurring items consisted of $4.2 million in specifically identified non-recurring operational and regulatory projects.

~~(7)~~efforts, ~~For~~therefore limiting the ~~twelve~~range ~~months~~of ~~ended~~SKUs ~~December~~we ~~31,~~plan ~~2014~~to offer. As a result of these changes, ~~other~~the ~~non-recurring~~Company ~~items~~recorded ~~consisted~~a charge to cost of sales and corresponding reduction in inventory of approximately $1318.70 million. The E&O reserve expense in ~~specifically~~fiscal ~~identified~~2016 ~~non-recurring~~included ~~operational~~$5.7 million related to the Company’s decision to discontinue certain SKUs mainly within the Bracing and ~~regulatory~~Vascular ~~projects~~product lines, $28.23 million inrelated ~~expenses~~to holding inventory for shorter periods and the planned scrapping of long-dated inventory, $2.0 million related to ~~our~~new ~~Tunisia~~Surgical ~~factory~~Implant ~~fire~~products that changed the expected life cycle of its current product portfolio, and $2.70 million inof ~~professional~~slow ~~fees~~moving ~~and~~consigned ~~other~~inventory ~~non-recurring~~within ~~charges~~certain OfficeCare clinics for which management has decided not to strategically relocate.

(3)	Purchase accounting adjustments for the twelve months ended December 31, 2016 and 2015 consisted of $0.2 million and $0.8 million of amortization of fair market value inventory adjustments, respectively.

(b)	Non-recurring and integration charges are comprised of the following:

	Year Ended December 31,
(in thousands)	2017			2016		2015
Restructuring and reorganization (1)	$	58,775		$	16,838	$	12,843
Acquisition related expenses and integration (2)		2,106			10,350		8,635
Executive transition		(49	)		4,856		—
Litigation and regulatory costs and settlements, net (3)		7,738			16,562		8,864
IT automation projects		693			69		3,634
Total non-recurring and integration charges	$	69,263		$	48,675	$	33,976

(1)	Consists of costs related to the Company’s business transformation projects to improve the Company’s liquidity and profitability and to improve the Company’s customer’s experiences.

(2)	Consists of direct acquisition costs and integration expenses related to acquired businesses and costs related to potential acquisitions.

(3)

For the twelve months ended December 31, 2017, 2016 and 2015, respectively, litigation and regulatory costs consisted of $3.2 million, $2.6 million and $3.5 million, respectively, in litigation costs related to ongoing product liability issues and $4.6 million, $14.0 million and $5.4 million, respectively, related to other litigation and regulatory costs and settlements.

(c)	Other adjustment items before permitted pro forma adjustments are comprised of the following:

	For the Year Ended December 31,
(in thousands)	~~2016~~2017			~~2015~~2016		~~2014~~2015
Blackstone monitoring fee	$	76,~~000~~225		$	7,000	$	7,000
Noncontrolling interests		623			840		972
Loss on modification and extinguishment of debt (1)		—			—		68,473
Loss on modification and extinguishment of debt (1) (2)		—			68,473		938
Foreign currency transaction (gains) losses and other (income) expense		(2,112	)	$	2,539	$	7,287
Other (3)		2,930			7,595		5,476
Noncontrolling interests		799			623		840
Total other adjustment items before permitted pro forma adjustments	$	10,553		$	83,908	$	14,386
Franchise and other tax		344			391		308
Total other adjustment items before permitted pro forma adjustments	$	5,256		$	10,553	$	83,908

(1)

Loss on modification and extinguishment of debt for the twelve months ending December 31, 2015 consisted of $47.8 million in premiums related to the redemption of our 8.75% Second Priority Senior Secured Notes, 9.875% Senior Unsecured Notes and 7.75% Senior Unsecured 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.

(2) Loss on modification and extinguishment of debt for the twelve months ending December 31, 2014 consists of $0.3 million of arrangement and amendment fees and other fees and expenses incurred in connection with the amendment of our senior secured credit facilities and $0.6 million related to the non-cash write off of unamortized debt issuance costs and original issue discount associated with the portion of our original term loans which were extinguished.

(3) Other adjustments consist primarily of net realized and unrealized foreign currency transaction gains and losses.

(d) Permitted pro forma adjustments include future cost savings for the year ended December 31, 2016 related to the exit of our Empi business and the restructuring of our Recovery Sciences segment. Permitted pro forma adjustments include future cost savings for the year ended December 31, 2015 related to the exit of our Empi business.

Contractual Commitments

As of December 31, 2016, our consolidated contractual commitments are as follows (in thousands):

	Payment due:
	Total		2017		2018-2019		2020-2021		Thereafter
Long-term debt obligations	$	2,437,284	$	10,550	$	21,100	$	2,405,634	$	—
Interest payments (1)		634,492		161,200		325,352		147,940		—
Operating lease obligations		56,314		18,922		19,424		9,058		8,910
Purchase obligations		73,859		59,859		14,000		—		—
Total contractual commitments	$	3,201,949	$	250,531	$	379,876	$	2,562,632	$	8,910

(1) $1,313.5 million principal amount of long-term debt is subject to fixed interest rates and $1,123.8 million of principal amount of long-term debt is subject to a floating interest rate. Interest payments for the floating rate debt were determined using an average assumed effective interest rate of 4.25%, which is equal to the average assumed effective interest rate for the term loans under the credit facilities over the remainder of their term.

As of December 31, 2016, we had entered into purchase commitments for inventory, capital expenditures and other services totaling $52.9 million in the ordinary course of business. In addition, under the amended transaction and monitoring fee agreement entered into in November 2007, the purchase obligations shown above include DJO’s obligation to pay a $7.0 million annual monitoring fee to Blackstone Management Partners V L.L.C. through 2019. See Item 13. “Certain Relationships and Related Transactions and Director Independence” for a more detailed description of the monitoring fee agreement.

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.

Contractual Commitments

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

	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

(1)

$1,313.5 million principal amount of long-term debt is subject to fixed interest rates and $1,106.3 million of principal amount of long-term debt is subject to a floating interest rate. Interest payments for the floating rate debt were determined using an average assumed effective interest rate of 4.61%, which is equal to the average assumed effective interest rate for the term loans under the credit facilities over the remainder of their term.

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.

Critical Accounting Policies and Estimates

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, ~~2016~~2017, ~~2015~~2016 and ~~2014~~2015, we reserved for and reduced gross revenues from third party payors by estimated contractual allowances of 28%, 1828%, 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 8283%, 7482%, and 7374% of our net revenues for the year ended December 31, ~~2016~~2017, ~~2015~~2016 and ~~2014~~2015, respectively. Direct-billed customers represented approximately 83% and 7583% of our net accounts receivable at December 31, ~~2016~~2017 and ~~2015~~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, ~~2016~~2017, ~~2015~~2016 and ~~2014~~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 18%, 26%, and 27% of our net revenues for the years ended December 31, 2016, 2015 and 2014, respectively. Third party payor customers represented approximately 17% and 26%, respectively, of our net accounts receivable at December 31, 2016 and 2015. For each of the years ended December 31, 2016, 2015 and 2014, we estimate bad debt expense to be approximately 10%, 7% 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.48

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.

Inventory Reserves

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.

Goodwill and Intangible Assets

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 ~~2016~~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 (2)% and 11% 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 9.0% to 10.5%, and terminal value growth rates ranging from 0% to 3.0%. 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 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 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. We have four other reporting units with goodwill assigned to them. For each of those four reporting units, the estimated fair values 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 four reporting units exceeded their carrying value ranged from 54.6% to 389.1%. As such, we determined that the goodwill of our reporting units was not impaired.

Incapital ~~the~~requirements ~~fourth~~and ~~quarter~~the ofselection ~~2016~~and weuse ~~tested~~of ~~our~~an ~~indefinite~~appropriate ~~lived~~discount ~~trade name intangible assets for impairment~~rate. ~~This~~For ~~test~~purposes ~~work~~of ~~compares~~calculating the ~~fair~~discounted ~~value~~cash flows of ~~the~~our ~~asset~~reporting ~~with~~units, ~~its~~we ~~carrying~~used ~~amount.~~estimated Torevenue ~~determine~~growth ~~the~~rates ~~fair~~averaging ~~value~~between ~~we applied the relief from royalty~~ (~~RFR~~0.3)% ~~method~~and 10.5% ~~Under~~for the ~~RFR~~discrete ~~method,~~forecast ~~the~~period. ~~value~~Cash offlows beyond the ~~trade~~discrete ~~name~~forecasts iswere ~~determined~~estimated byusing ~~calculating~~a ~~the~~terminal ~~present~~ value ofcalculation, ~~the~~which ~~after-tax~~incorporated ~~cost~~historical ~~savings associated with owning the asset~~ and ~~therefore~~forecasted ~~not~~financial ~~being~~trends ~~required to pay royalties~~ for ~~its~~each ~~use~~identified ~~during~~reporting ~~the~~unit ~~asset’s indefinite life. Significant judgments inherent in this analysis include the selection of appropriate discount rates, estimating future cash flows~~ and ~~the~~considered ~~identification~~long-term ofearnings ~~appropriate terminal~~ growth ~~rate~~rates ~~assumptions.~~for ~~Discount~~publicly ~~rate~~traded ~~assumptions~~peer ~~are based on an assessment of the risk inherent in the projected future cash generated by the respective intangible assets~~companies. Future cash flows were then discounted to present value at discount rates ranging from 98.05% to 10.50%, and terminal value growth rates ranging from (0.3)% to 35.02%. ~~Also~~Publicly ~~subject~~available toinformation ~~judgment~~regarding ~~are~~comparable ~~assumptions~~market ~~about~~capitalization ~~royalty~~was ~~rates,~~also ~~which~~considered ~~are~~in ~~based~~assessing on the ~~estimated~~reasonableness ~~rates~~of atthe ~~which~~cumulative ~~similar~~fair ~~brands~~values ~~and~~of ~~trademarks~~our ~~are~~reporting ~~being~~units ~~licensed~~estimated inusing the ~~marketplace~~discounted cash flow methodology. We ~~used~~determined ~~market~~that ~~average~~the ~~royalty~~fair ~~rates~~value ~~ranging~~of ~~from~~the ~~0.5%~~six toreporting ~~5.0%.~~units ~~These~~with ~~fair~~goodwill ~~value~~assigned ~~measurements~~to ~~are~~them ~~categorized~~exceed ~~within~~their ~~Level~~carrying 3values ofand ~~the~~were ~~fair~~not ~~value~~at ~~hierarchy.~~risk Weof ~~determined~~failing ~~that~~the ~~that~~test. ~~the~~This fair value ofmeasurement ~~these~~is ~~trade~~categorized ~~names~~within ~~exceed~~Level ~~their~~3 ~~carrying~~of the fair value hierarchy. The percentage by which the fair value of ~~these~~the ~~trade~~six ~~names~~reporting units exceeded their carrying value ranged from 2244.74% to ~~103~~676.49%. As such, we determined that ~~these~~the ~~indefinite~~goodwill ~~lived~~of ~~intangible~~our ~~assets~~reporting ~~are~~units was not impaired. ~~This fair value measurement is categorized within Level 3 of the fair value hierarchy.~~

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.

Deferred Tax Asset Valuation Allowance

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 $~~366~~257.37 million at December 31, ~~2016~~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, ~~2016~~2017, we maintained a valuation allowance of $~~287~~219.04 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 ~~and capital 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.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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.

Interest Rate Risk

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, ~~2016~~2017, we have $1,313.5 million of aggregate fixed rate notes and $1,~~123~~106.83 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, ~~2016~~2017 by $46.40 million. As of December 31, ~~2016~~2017, our term loans are subject to a 1.00% minimum LIBOR rate which is ~~higher~~lower than the actual LIBOR rate of 04.694% as of December 31, ~~2016~~2017. ~~Accordingly, a hypothetical 100 basis point increase in the LIBOR rate during the year ended December 31, 2016 would have increased the rate applicable to our variable debt by 0.69%.~~ 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.

Foreign Currency Risk

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, ~~2016~~2017, sales denominated in foreign currencies accounted for 2324.4% of our consolidated net sales, of which 1516.97% 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. During the year ended December 31, 2014, we utilized 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 (see Note 10 of the Notes to the Consolidated Financial Statements included in Part II, Item 8, herein). As of December 31, ~~2016~~2017, we did not have any outstanding foreign currency exchange forward contracts.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

DJO Finance LLC

Annual Report on Form 10-K

For the year ended December 31, ~~2016~~2017

INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

	Page No.
Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm	53
Consolidated Balance Sheets at December 31, 2016 and 2015	54
Consolidated Balance Sheets at December 31, 2017 and 2016	54
Consolidated Statements of Operations for the Years Ended December 31, 2016, 2015 and 2014	55
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, 2016, 2015 and 2014	56
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, 2016, 2015 and 2014	57
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, 2016, 2015 and 2014	58
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015	58
Notes to Consolidated Financial Statements	59

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of DJO Finance LLC

WeOpinion ~~have~~on ~~audited~~ the ~~accompanying~~Financial consolidated balance sheets of DJO Finance LLC as of December 31, 2016 and 2015, 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, 2016. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.Statements

We ~~conducted~~have ~~our~~audited ~~audits~~the inaccompanying ~~accordance~~consolidated ~~with~~balance ~~the~~sheets ~~standards~~ of ~~the~~DJO ~~Public~~Finance ~~Company~~LLC ~~Accounting Oversight Board~~ (~~United~~the ~~States~~Company). ~~Those~~as ~~standards~~of ~~require~~December 31, ~~that~~2017 weand ~~plan~~2016, and ~~perform~~ the ~~audit~~related toconsolidated ~~obtain reasonable assurance about whether the financial~~ statements ~~are free~~ of ~~material~~operations, ~~misstatement.~~comprehensive Weloss, ~~were~~(deficit) ~~not~~equity ~~engaged~~and tocash ~~perform~~flows anfor ~~audit~~each of the ~~Company’s~~three ~~internal~~years ~~control~~in ~~over~~the ~~financial~~period ~~reporting.~~ended ~~Our~~December 31, ~~audits~~2017, ~~included~~and ~~consideration~~the ofrelated ~~internal~~notes ~~control~~and ~~over~~the financial ~~reporting~~statement asschedule alisted ~~basis for designing audit procedures that are appropriate~~ in the ~~circumstances,~~Index ~~but~~at ~~not~~Item 15(a) ~~for~~(collectively ~~the~~referred ~~purpose~~to ofas ~~expressing an opinion on~~ the ~~effectiveness~~“consolidated ~~of the Company’s internal control over~~ financial ~~reporting~~statements”). In ~~Accordingly~~our opinion, wethe ~~express~~consolidated nofinancial ~~such~~statements ~~opinion.~~present Anfairly, ~~audit~~in ~~also~~all ~~includes~~material ~~examining~~respects, onthe afinancial ~~test~~position ~~basis,~~of ~~evidence supporting~~ the ~~amounts~~Company ~~and~~at ~~disclosures~~December in31, ~~the~~2017 ~~financial~~and ~~statements~~2016, ~~assessing~~and the ~~accounting~~results ~~principles~~of ~~used~~its operations and ~~significant~~its ~~estimates~~cash ~~made~~flows byfor ~~management,~~each ~~and~~of ~~evaluating~~ the ~~overall~~three ~~financial~~years ~~statement~~in ~~presentation.~~the Weperiod ~~believe~~ended ~~that~~December ~~our~~31, ~~audits~~2017, ~~provide~~in aconformity ~~reasonable~~with ~~basis~~U.S. ~~for~~generally ~~our~~accepted ~~opinion~~accounting principles.

InBasis our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of DJO Finance LLC at December 31, 2016 and 2015 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.Opinion

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.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2007.

San Diego, California

March 15, ~~2017~~2018

DJO Finance LLC

Consolidated Balance Sheets

(in thousands)

	December 31,
	2016			2015
	2017			2016
Assets
Current assets:
Cash and cash equivalents	$	3531,~~212~~985		$	4835,~~943~~212
Accounts receivable, net		~~178~~190,~~193~~324			~~172~~178,~~360~~193
Inventories, net		~~151~~169,~~557~~137			~~174~~151,~~573~~557
Prepaid expenses and other current assets		2320,~~650~~218			2123,~~179~~650
Current assets of discontinued operations		511			~~2,878~~511
Total current assets		~~389~~412,~~123~~175			~~419~~389,~~933~~123
Property and equipment, net		~~128~~133,~~019~~522			~~117~~128,~~273~~019
Goodwill		~~855~~864,~~626~~112			1855,~~018,104~~626
Intangible assets, net		~~672~~607,~~134~~088			~~749~~672,~~045~~134
Other assets		5,~~536~~128			5,~~174~~536
Non current assets of discontinued operations		—			29
Total assets	$	2,022,025		$	2,050,438
Total assets	$	2,050,438		$	2,309,558
Liabilities and Deficit
Current liabilities:
Accounts payable	$	6398,~~822~~331		$	5863,~~492~~822
Accrued interest		1618,~~740~~015			16,~~998~~740
Current portion of debt obligations		1015,~~550~~936			10,550
Other current liabilities		~~113~~126,~~265~~360			~~102~~113,~~173~~265
Current liabilities of discontinued operations		—			13,371
Total current liabilities		258,642			204,377
Total current liabilities		204,377			201,584
Long-term debt obligations		2,398,184			2,392,238
Long-term debt obligations		2,392,238			2,344,562
Deferred tax liabilities, net		142,597			202,740
Deferred tax liabilities, net		202,740			213,856
Other long-term liabilities		13,080			14,932
Other long-term liabilities		14,932			15,092
Total liabilities	$	2,812,503		$	2,814,287
Total liabilities	$	2,814,287		$	2,775,094
Commitments and contingencies
Deficit:
DJO Finance LLC membership deficit:
Member capital		844,~~294~~115			~~841~~844,~~510~~294
Accumulated deficit		(1,~~579~~615,~~642~~536	)		(1,~~293~~579,~~339~~642	)
Accumulated other comprehensive loss		(3021,~~580~~072	)		(1630,~~341~~580	)
Total membership deficit		(~~765~~792,~~928~~493	)		(~~468~~765,~~170~~928	)
Noncontrolling interests		2,~~079~~015			2,~~634~~079
Total deficit		(~~763~~790,~~849~~478	)		(~~465~~763,~~536~~849	)
Total liabilities and deficit	$	2,~~050~~022,~~438~~025		$	2,~~309~~050,~~558~~438

See accompanying Notes to Consolidated Financial Statements.

DJO Finance LLC

Consolidated Statements of Operations

(in thousands)

	Year ended December 31,
	2016			2015			2014
	2017			2016			2015
Net sales	$	1,~~155~~186,~~288~~206		$	1,~~113~~155,~~627~~288		$	1,~~087~~113,~~529~~627
Costs and operating expenses:
Cost of sales (exclusive of amortization of intangible assets of $28,525, $30,719, and $32,962 for the year ended December 31, 2016, 2015, and 2014, respectively)		511,414			466,019			462,000
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		~~490~~510,~~693~~523			~~454~~490,~~724~~693			~~439~~454,~~872~~724
Research and development		3735,~~710~~429			3537,~~105~~710			3735,~~277~~105
Amortization of intangible assets		7666,~~526~~146			7976,~~964~~526			8379,~~944~~964
Impairment of goodwill		~~160,000~~—			—160,000			—
		1,276,343			1,035,812			1,023,093
		1,110,205			1,276,343			1,035,812
Operating (loss) income		(121,055	)		77,815			64,436
Operating income (loss)		76,001			(121,055	)		77,815
Other expense:
Interest expense, net		(~~170~~174,~~082~~238	)		(~~172~~170,~~290~~082	)		(~~174~~172,~~325~~290	)
Loss on modification and extinguishment of debt		—			~~(68,473~~—	)		(~~938~~68,473	)
Other expense, net		(2,534	)		(7,303	)		(5,197	)
Other income (expense), net		2,113			(2,534	)		(7,303	)
		(172,616	)		(248,066	)		(180,460	)
		(172,125	)		(172,616	)		(248,066	)
Loss before income taxes		(~~293~~96,~~671~~124	)		(~~170~~293,~~251~~671	)		(~~116~~170,~~024~~251	)
Income tax (benefit) provision		(660,~~853~~720	)		12(6,~~256~~853	)		(412,~~720~~256	)
Net loss from continuing operations		(~~286~~35,~~818~~404	)		(~~182~~286,~~507~~818	)		(~~111~~182,~~304~~507	)
Net income (loss) from discontinued operations		~~1,138~~309			~~(157~~1,~~580~~138	)		21(157,~~742~~580	)
Net loss		(~~285~~35,~~680~~095	)		(~~340~~285,~~087~~680	)		(89340,~~562~~087	)
Net income attributable to noncontrolling interests		(~~623~~799	)		(~~840~~623	)		(~~972~~840	)
Net loss attributable to DJO Finance LLC	$	(~~286~~35,~~303~~894	)	$	(~~340~~286,~~927~~303	)	$	(90340,~~534~~927	)

See accompanying Notes to Consolidated Financial Statements.

DJO Finance LLC

Consolidated Statements of Comprehensive Loss

(in thousands)

	Year Ended December 31,
	2016			2015			2014
	2017			2016			2015
Net loss	$	(~~285~~35,~~680~~095	)	$	(~~340~~285,~~087~~680	)	$	(89340,~~562~~087	)
Other comprehensive loss, net of taxes:
Other comprehensive income (loss), net of taxes:
Foreign currency translation adjustments, net of tax benefit of $34, $540, and $3,871, for the year ended December 31, 2016, 2015 and 2014, respectively		(10,342	)		(6,006	)		(13,167	)
Foreign currency translation adjustments, net of tax provision (benefit) of $7,400, $(34), and $(540), for the year ended December 31, 2017, 2016 and 2015, respectively		5,638			(10,342	)		(6,006	)
Unrealized (loss) gain on cash flow hedges, net of tax provision of zero for the year ended December 31, 2016 and 2015, respectively		(3,969	)		985			—
Unrealized gain (loss) on cash flow hedges, net of tax provision of $1,144, zero and zero for the year ended December 31, 2017, 2016 and 2015, respectively		3,007			(3,969	)		985
Other comprehensive loss		(14,311	)		(5,021	)		(13,167	)
Other comprehensive income (loss)		8,645			(14,311	)		(5,021	)
Comprehensive loss		(~~299~~26,~~991~~450	)		(~~345~~299,~~108~~991	)		(~~102~~345,~~729~~108	)
Comprehensive income attributable to non-controlling interests		(550	)		(557	)		(591	)
Comprehensive loss (income) attributable to non-controlling interests		64			(550	)		(557	)
Comprehensive loss attributable to DJO Finance LLC	$	(~~300~~26,~~541~~386	)	$	(~~345~~300,~~665~~541	)	$	(~~103~~345,~~320~~665	)

See accompanying Notes to Consolidated Financial Statements.

DJO Finance LLC

Consolidated Statements of (Deficit) Equity

(in thousands)

	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, 2013	$	838,769		$	(861,878	)	$	1,183		$	(21,926	)	$	2,644		$	(19,282	)
Balance at December 31, 2014	$	839,781		$	(952,412	)	$	(11,603	)	$	(124,234	)	$	2,618		$	(121,616	)
Net (loss) income		—			(90,534	)		—			(90,534	)		972			(89,562	)
Other comprehensive loss, net of taxes		—			—			(12,786	)		(12,786	)		(381	)		(13,167	)
Stock-based compensation		1,869			—			—			1,869			—			1,869
Exercise of stock options		(857	)		—			—			(857	)		—			(857	)
Dividend paid by subsidiary to owners of non-controlling interests		—			—			—			—			(617	)		(617	)
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	)

See accompanying Notes to Consolidated Financial Statements.

DJO Finance LLC

Consolidated Statements of Cash Flows

(in thousands)

	Year Ended December 31,
	2016			2015			2014
	2017			2016			2015
Cash Flows From Operating Activities:
Net loss	$	(~~285~~35,~~680~~095	)	$	(~~340~~285,~~087~~680	)	$	(89340,~~562~~087	)
Net (income) loss from discontinued operations		(~~1,138~~309	)		~~157~~(1,~~580~~138	)		~~(21~~157,~~742~~580	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		4145,~~367~~115			3741,~~491~~367			3537,~~213~~491
Amortization of intangible assets		7666,~~526~~146			7976,~~964~~526			8379,~~944~~964
Amortization of debt issuance costs and non-cash interest expense		78,~~755~~274			7,~~850~~755			87,~~692~~850
Stock-based compensation expense		3,~~188~~696			13,~~805~~188			1,~~869~~805
Impairment of goodwill		~~160,000~~—			—160,000			—
Loss (gain) on disposal of assets, net		642			1,447			(1,118	)
Loss on disposal of assets, net		1,321			642			1,447
Deferred income tax (benefit) provision		(1168,~~297~~449	)		5(11,~~940~~297	)		~~(10~~5,~~710~~940	)
Loss on modification and extinguishment of debt		—			~~68,473~~—			~~938~~68,473
Changes in operating assets and liabilities, net of acquired assets and liabilities:
Accounts receivable		(7,~~830~~219	)		(87,~~064~~830	)		(148,~~460~~064	)
Inventories		15(18,~~674~~339	)		(815,~~106~~674	)		(198,~~497~~106	)
Prepaid expenses and other assets		(23,~~516~~970	)		(72,516	)		11(7,~~424~~516	)
Accrued interest		~~(258~~1,274	)		(~~12,600~~258	)		(8112,600	)
Accounts payable and other		1244,~~184~~221			2612,~~064~~184			626,~~957~~064
Net cash provided by (used in) continuing operating activities		8,617			10,241			(8,133	)
Net cash provided by continuing operating activities		44,606			8,617			10,241
Net cash (used in) provided by discontinued operations		(9,837	)		39,861			53,852
Net cash provided by (used in) discontinued operations		309			(9,837	)		39,861
Net cash (used in) provided by operating activities		(1,220	)		50,102			45,719
Net cash provided by (used in) operating activities		44,915			(1,220	)		50,102
Cash Flows From Investing Activities:
Purchases of property and equipment		(5147,~~428~~361	)		(4451,~~665~~428	)		(5144,~~973~~665	)
Proceeds from disposition of assets		~~946~~—			—946			—
Cash paid in connection with acquisitions, net of cash acquired		—			~~(24,000~~—	)		(424,~~587~~000	)
Other investing activities, net		—			27—			~~(1,038~~27	)
Net cash used in investing activities from continuing operations		(5047,~~482~~361	)		(6850,~~638~~482	)		(5768,~~598~~638	)
Net cash used in investing activities from discontinued operations		—			~~(575~~—	)		(52575	)
Net cash used in investing activities		(5047,~~482~~361	)		(6950,~~213~~482	)		(5769,~~650~~213	)
Cash Flows From Financing Activities:
Proceeds from issuance of debt		~~107~~103,~~000~~552			2107,~~518,033~~000			12,~~000~~518,~~294~~033
Repayments of debt obligations		(67101,~~079~~335	)		(267,~~419,027~~079	)		(~~990~~2,~~219~~419,027	)
Payment of debt issuance, modification and extinguishment costs		—			~~(62,375~~—	)		(162,~~812~~375	)
Payment of contingent consideration		—			—			(5,690	)
Repurchase of common stock		(3,600	)		—			—
Cash paid in connection with the cancellation of vested options		—			—			(2,001	)
Dividend paid by subsidiary to owners of noncontrolling interests		(1,102	)		(1,106	)		(541	)
Dividend paid by subsidiary to owners of noncontrolling interests		(1,106	)		(541	)		(617	)
Other financing activities, net		(175	)		—			11
Exercise of stock options		—			11			22
Net cash (used in) provided by financing activities		(2,660	)		38,815			36,101
Net cash provided by (used in) financing activities		38,815			36,101			(23	)
Effect of exchange rate changes on cash and cash equivalents		1,879			(844	)		809
Effect of exchange rate changes on cash and cash equivalents		(844	)		809			(480	)
Net (decrease) increase in cash and cash equivalents		(3,227	)		(13,731	)		17,799
Net (decrease) increase in cash and cash equivalents		(13,731	)		17,799			(12,434	)
Cash and cash equivalents, beginning of year		35,212			48,943			31,144
Cash and cash equivalents, beginning of year		48,943			31,144			43,578
Cash and cash equivalents, end of year	$	31,985		$	35,212		$	48,943
Cash and cash equivalents, end of year	$	35,212		$	48,943		$	31,144
Supplemental disclosures of cash flow information:
Cash paid for interest	$	~~162~~164,~~644~~087		$	~~176~~162,~~739~~644		$	~~165~~176,~~469~~739
Cash paid for taxes, net	$	4,~~900~~278		$	74,~~584~~900		$	7,~~442~~584
Non-cash investing activities:
Purchases of surgical instruments included in accounts payable	$	~~310~~2,491		$	~~1,506~~310		$	~~930~~1,506

See accompanying Notes to Consolidated Financial Statements.

Notes to Consolidated Financial Statements

1. ORGANIZATION AND BASIS OF PRESENTATION

Organization and Business

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.

Infrequent Events

In September 2013, a fire occurred at our factory in Tunisia. As a result of the fire, certain inventory and fixed assets were destroyed and the leased facility became inoperable. Estimated losses of $5.0 million related to destroyed inventory and fixed assets, excess expenses incurred and building reconstruction costs were recorded for the year ended December 31, 2013. Additionally, we recorded $1.3 million in revenue from business interruption insurance proceeds for the year ended December 31, 2013. Final claims were settled against the policies in September 2014. As a result, estimated losses were adjusted to $3.3 million, and additional $2.3 million in revenue from business interruption insurance proceeds was recorded for the year ended December 31, 2014. The activity in the corresponding insurance receivable was as follows (in thousands):

	Year Ended
	December 31, 2014
Balance, beginning of period	$	6,261
Change in estimated losses		(1,617	)
Business interruption		2,274
Claim payments		(6,918	)
Balance, end of period	$	—

Segment Reporting

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.

Use of Estimates

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.

Basis of Presentation

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.

~~Reclassifications~~59

Certain reclassifications have been made to prior year amounts to conform to the current year presentation. The reclassifications were not material to the Consolidated Financial Statements.

2. SIGNIFICANT ACCOUNTING POLICIES

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.

60Software 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.

~~Software~~As 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~~December 31, ~~including~~2017 ~~external~~and ~~consulting costs~~2016, ~~cost~~we ofhad ~~software licenses, and internal payroll and payroll-related costs for employees who are directly associated with a software project~~$3.4 ~~Software~~million ~~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~~$5.1 ~~Amortization~~million ~~expense~~respectively, ~~related~~of tounamortized internally developed software ~~was~~costs ~~$1.7~~included ~~million,~~within ~~$1.7~~property ~~million~~ and ~~$2.0~~equipment ~~million~~in ~~for~~our ~~the~~Consolidated ~~years~~Balance ~~ended December 31, 2016, 2015 and 2014, respectively~~Sheets.

As of December 31, 2016 and 2015, we had $5.1 million and $6.8 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):

	Year Ended December 31,
	2016			2015			2014
	2017			2016			2015
Balance, beginning of year	$	1,~~694~~938		$	1,~~942~~694		$	1,~~847~~942
Amount charged to expense for estimated warranty costs		21,~~080~~787			12,~~517~~080			1,~~788~~517
Deductions for actual costs incurred		(1,~~836~~720	)		(1,~~765~~836	)		(1,~~693~~765	)
Balance, end of year	$	12,~~938~~005		$	1,~~694~~938		$	1,~~942~~694

61Selling, 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.

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, 2016, 2015 and 2014, advertising costs were $3.8 million, $3.9 million, and $4.7 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, ~~2016~~2017, ~~2015~~2016 and ~~2014~~2015, foreign transaction (gains) losses were $3.(1.8) million, $73.1 million, and $57.31 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.

During the year ended December 31, 2014, we used foreign exchange forward contracts to hedge expense commitments that are denominated in currencies other than the U.S. dollar. The purpose of our foreign currency hedging activities was to fix the dollar value of specific commitments and payments to foreign vendors. Before acquiring a derivative instrument to hedge a specific risk, potential natural hedges were evaluated. While our foreign exchange 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 Consolidated Statements of Operations. As of December 31, 2016, we did not have any outstanding foreign currency exchange forward contracts.

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 26 27.10%, 26.61%, and 2926.96% of our net sales for the years ended December 31, ~~2016~~2017, ~~2015~~2016 and ~~2014~~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, ~~2016~~2017, ~~2015~~2016 and ~~2014~~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.

Recent Accounting Standards.

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 ~~has~~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 ~~includes~~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 is still assessing the impact of adoption on our consolidated financial statements. The Company expects to 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.

Incommittee ~~April~~and ~~2015,~~has ~~the~~plans ~~FASB~~to ~~issued~~start andrafting its accounting ~~standards~~policies ~~update~~and ~~related~~evaluating tothe ~~internal-use~~new ~~software~~disclosure requirements and the impact they will have on its business processes, controls and systems in 2017. The ~~standard~~Company ~~provides~~will ~~guidance~~adopt tothe ~~clarify~~new standard using the ~~customer’s~~modified ~~accounting~~retrospective ~~for~~approach, ~~fees~~under ~~paid~~which inthe acumulative ~~cloud~~effect ~~computing~~of ~~arrangement.~~initially ~~The~~applying the new guidance is ~~effective~~recognized ~~for~~as ~~annual~~an ~~periods~~adjustment ~~and~~to ~~interim~~the ~~periods~~opening ~~within~~balance ~~those~~of ~~annual~~retained ~~periods~~earnings ~~beginning~~in ~~after~~the ~~December~~first ~~15,~~quarter ~~2015~~of 2018. The Company ~~adopted~~has ~~this~~completed ~~ASU~~the ~~with~~assessment ~~prospective~~of ~~application~~the innew ~~the~~standard ~~first~~and ~~quarter~~is offinalizing ~~2016~~the new required disclosures. ~~Adoption~~Overall, the Company does not expect the timing of ~~this~~revenue recognition under the new ~~guidance~~standards ~~did~~to ~~not~~be ~~have~~materially adifferent ~~material~~from ~~effect~~our current revenue recognition policy. Based on the Company’s ~~financial~~analysis ~~statements~~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. ~~Early adoption is permitted.~~ Adoption of this new guidance isdid not ~~expected to~~ have a material effect on the Company’s financial statements.

6463

3. ~~ACQUISITIONS AND~~ DIVESTITURES

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. The purchase price consisted of a cash payment of $24.0 million and was funded through the $20.0 million delayed draw term loan from our Credit Facilities (as defined below). Additional acquisition related costs were $3.4 million and are included in the Selling, general and administrative expense line item in the Consolidated Statement of Operations.

The primary reason for the acquisition was to further invest in our growing Surgical Implant segment and improve our position in the orthopedic implant market. The Discovery Elbow will be our first elbow technology and builds upon our successful upper extremity portfolio and shoulder arthroplasty experience. The Cobalt products have a substantial base of customers for hip, knee, shoulder, elbow and other orthopedic implant technologies.

Goodwill represents the excess of the purchase price over fair value of tangible and identifiable intangible assets acquired. All goodwill associated with the acquisition is allocated to our Surgical Implant segment.

Goodwill related to this acquisition is expected to be deductible for tax purposes.

On January 23, 2014, we acquired all of the outstanding shares of capital stock of Speetec Implantate GmbH (“Speetec”). Speetec is a distributor and manufacturer of knee, hip and shoulder arthroplasty products in Germany. The purchase price consisted of a cash payment at closing of $5.0 million, a holdback of $1.3 million for potential indemnity claims and $1.6 million for the fair value of contingent consideration. The fair value of contingent consideration was approximately 25% of the total potential contingent consideration of $7.3 million. The valuation was based on the probability weighted average estimate of achievement of revenue targets for 2014 and 2015.

The indemnity holdback accrues interest at the Euribor rate plus 100 basis points and is 50% payable in March 2015 and March 2016, respectively, if not used for indemnification claims. The first indemnity holdback payment was made on March 31, 2015. The contingent consideration is 50% payable in March 2015 and March 2016, respectively, if earned. The revenue targets were not met therefore no contingent consideration was paid related to this transaction.

Our primary reason for the Speetec acquisition was to move from an indirect sales model (i.e., sales to distributors at a discount) to a direct sales model, resulting in increased gross profit and operating income. All goodwill associated with these acquisitions is allocated to our International reporting segment.

The purchase price for each of these acquisitions was allocated to the fair values of the net tangible and intangible assets acquired as follows (in thousands):

(in thousands):	Zimmer Biomet		Speetec
Cash	$	—	$	489
Accounts receivable		—		608
Inventory		2,477		2,766
Other current assets		—		154
Property and equipment		—		379
Liabilities assumed		—		(1,642	)
Deferred tax liabilities		—		(1,003	)
Identifiable intangible assets (1):
Customer relationships		1,800		2,861
Technology		15,000		—
Non-compete		—		569
Trademarks and trade names		2,900		320
Goodwill (2)		1,823		2,383
Total purchase price	$	24,000	$	7,884

(1) The fair value of customer relationships was assigned to relationships with major customers existing on the acquisition date based upon an estimate of the future discounted cash flows that would be derived from those customers, after deducting contributory asset charges.The fair value of technology was determined primarily by estimating the present value of future royalty costs that will be

avoided due to our ownership of the patents and technology acquired.The fair value of non-compete agreements relate to non-compete agreements entered into with certain members of senior management. The values were determined by estimating the present value of the cash flows associated with having these agreements in place, less the present value of the cash flows assuming the non-compete agreements were not in place.The fair value of trademarks and trade names was determined primarily by estimating the present value of future royalty costs that will be avoided due to our ownership of the trade names and trademarks acquired.The useful lives of the intangible assets acquired were estimated based on the underlying agreements and/or the future economic benefit expected to be received from the assets.

(2) Goodwill represents the excess purchase price over the fair value of the identifiable net assets acquired. Among the factors which resulted in goodwill for the Zimmer Biomet acquisition was the opportunity to increase our revenue and expand our presence in the surgical implant market through the use of the acquired technology and customer relationships. Among the factors which resulted in the recognition of goodwill for the Speetec acquisition was the opportunity to expand our direct presences in the German market with our surgical products.

Discontinued Operations

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,
	2016		2015			2014
	2017		2016			2015
Net sales	$	—	$	~~95,342~~—		$	~~141~~95,~~637~~342
Costs and operating expenses:
Cost of sales		—		~~35,834~~—			3335,~~397~~834
Selling, general and administrative		—		~~50,729~~—			5950,~~333~~729
Research and development		—		~~249~~—			~~465~~249
Amortization of intangible assets		—		~~6,874~~—			96,~~127~~874
Impairment of goodwill		—		~~117,298~~—			—117,298
Impairment of intangible and long lived assets		—		~~52,150~~—			—52,150
Other income		~~1,138~~309		861,138			3786
Income (loss) from discontinued operations before income taxes	$	~~1,138~~309	$	~~(167~~1,~~706~~138	)	$	39(167,~~352~~706	)
Income tax benefit (provision)		—		10,126			(17,610	)
Income tax benefit		—		—			10,126
Net income (loss) from discontinued operations	$	~~1,138~~309	$	~~(157~~1,~~580~~138	)	$	21(157,~~742~~580	)

Net assets for discontinued operations are as follows:

	Year ended December 31,
	2016		2015
	2017		2016
Accounts receivable, net	$	—	$	2,743
Other current assets	$	511	$	511
Other current assets		511		135
Total assets		511		511
Property and equipment, net		—		22
Liabilities		—		—
Intangible and other non-current assets		—		7
Net assets	$	511	$	511
Total assets		511		2,907
Accounts payable and other liabilities		—		13,371
Net assets (liabilities)	$	511	$	(10,464	)

4. ACCOUNTS RECEIVABLE RESERVES

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

	Year Ended December 31,
	2016			2015			2014
	2017			2016			2015
Balance, beginning of year	$	3236,~~893~~070		$	2332,~~585~~893		$	1623,~~458~~585
Provision for doubtful accounts		3019,~~709~~386			2630,~~160~~709			26,~~083~~160
Write-offs, net of recoveries		(2726,~~532~~218	)		(1627,~~852~~532	)		(1816,~~956~~852	)
Balance, end of year	$	3629,~~070~~238		$	3236,~~893~~070		$	2332,~~585~~893

Our allowance for sales returns balance was $32.8 0 million, $43.18 million, and $34.61 million, as of December 31, ~~2016~~2017, ~~2015~~2016 and ~~2014~~2015, respectively.

5. INVENTORIES

Inventories consist of the following (in thousands):

	December 31, 2016			December 31, 2015
	December 31, 2017			December 31, 2016
Components and raw materials	$	1867,~~771~~220		$	5718,~~372~~771
Work in process		85,~~373~~652			108,~~330~~373
Finished goods		~~126~~89,~~974~~468			99126,~~167~~974
Inventory held on consignment		3538,~~751~~219			2935,~~746~~751
		189,869			196,615
		200,559			189,869
Inventory reserves		(3831,~~312~~422	)		(2238,~~042~~312	)
	$	~~151~~169,~~557~~137		$	~~174~~151,~~573~~557

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

	Year Ended December 31,
	2016			2015			2014
	2017			2016			2015
Balance, beginning of year	$	2238,~~042~~312		$	22,~~094~~042		$	2122,~~523~~094
Provision charged to costs of sales		263,~~409~~424			526,~~699~~409			65,~~800~~699
Write-offs, net of recoveries		(10,~~139~~314	)		(510,~~751~~139	)		(65,~~229~~751	)
Balance, end of year	$	3831,~~312~~422		$	2238,~~042~~312		$	22,~~094~~042

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.

6. PROPERTY AND EQUIPMENT, NET

Property and equipment consists of the following (in thousands):

December 31, 2016

December 31, 2015

Depreciable lives (years)

December 31, 2017

December 31, 2016

Depreciable lives (years)

Land

170

~~266~~170

Indefinite

Buildings and improvements

2527,~~919~~244

2625,~~187~~919

3 to 25

Equipment

~~132~~142,~~314~~544

~~128~~132,~~352~~314

2 to 7

Software

4752,~~368~~776

4247,~~495~~368

3 to 10

Furniture and fixtures

12,~~093~~779

12,~~065~~093

3 to 8

Surgical implant instrumentation

~~128~~159,~~983~~543

97128,~~489~~983

Construction in progress

6,~~656~~065

36,~~885~~656

N/A

353,503

310,739

401,121

353,503

Accumulated depreciation and amortization

(~~225~~267,~~484~~599

)

(~~193~~225,~~466~~484

)

Property and equipment, net

~~128~~133,~~019~~522

~~117~~128,~~273~~019

Depreciation and amortization expense relating to property and equipment was $4145.42 million, $3741.54 million and $3537.25 million for the years ended December 31, ~~2016~~2017, ~~2015~~2016 and ~~2014~~2015, respectively.

7. LONG-LIVED ASSETS

Goodwill

Changes in the carrying amount of goodwill for the year ended December 31, ~~2016~~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		$	~~333~~330,~~022~~544		$	1,~~115~~112,~~110~~632
Accumulated impairment losses		—(61,000	)		(49148,600	)		(47,406	)		—			(97257,006	)
Goodwill, net of accumulated impairment losses at December 31, 2015		483,258			200,001			1,823			333,022			1,018,104
Goodwill, net of accumulated impairment losses at December 31, 2016		422,258			101,001			1,823			330,544			855,626
Current Year Activity:
Impairment		(61,000	)		(99,000	)		—			—			(160,000	)
Foreign currency translation		—			—			—			8,486			8,486
Foreign currency translation		—			—			—			(2,478	)		(2,478	)
Balance, end of period
Goodwill		483,258			249,601			49,229			~~330~~339,~~544~~030			1,~~112~~121,~~632~~118
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
Goodwill, net of accumulated impairment losses at December 31, 2017	$	422,258		$	101,001		$	1,823		$	339,030		$	864,112

Intangible Assets

Identifiable intangible assets consisted of the following (in thousands):

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

December 31, 2015	Gross Carrying Amount		Accumulated Amortization			Intangible Assets, Net
Definite-lived intangible assets:
Customer relationships	$	475,776	$	(320,991	)	$	154,785
Patents and technology		446,854		(246,509	)		200,345
Trademarks and trade names		29,737		(12,695	)		17,042
Distributor contracts and relationships		4,693		(3,875	)		818
Non-compete agreements		6,607		(5,714	)		893
	$	963,667	$	(589,784	)		373,883
Indefinite-lived intangible assets:
Trademarks and trade names							375,162
Net identifiable intangible assets						$	749,045

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

In performing our 2016 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 (2)% and 11% 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 9.0% to 10.5%, and terminal value growth rates ranging from 0% to 3.0%. 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. 66

~~We determined that the carrying values of~~ our ~~CMF and Vascular~~ reporting units, ~~components~~we ofused ~~our~~estimated ~~Recovery~~revenue ~~Sciences~~growth ~~and~~rates ~~Bracing~~averaging ~~and~~between ~~Vascular~~(0.3)% ~~segments,~~and ~~respectively, were in excess of their estimated fair values~~10.5% Asfor ~~a result, in~~ the ~~fourth~~discrete ~~quarter~~forecast ofperiod. ~~2016~~Cash weflows ~~recorded~~beyond ~~goodwill impairment charges for~~ the ~~CMF~~discrete ~~and~~forecasts ~~Vascular~~were ~~and~~estimated ~~reporting~~using ~~units~~a ofterminal ~~$99.0~~value ~~million and $61.0 million~~calculation, ~~respectively.~~which ~~The~~incorporated ~~impairment~~historical ~~charges were included in Impairment of goodwill~~ and ~~intangible~~forecasted ~~assets~~financial intrends ~~our Consolidated Statement of Operations. The impairment charge~~ for ~~our~~each ~~CMF~~identified reporting unit ~~resulted~~and ~~from~~considered ~~reductions~~long-term inearnings ~~our~~growth ~~projected~~rates ~~operating~~for ~~results~~publicly ~~and~~traded ~~estimated~~peer ~~future~~companies. Future cash flows ~~due~~were tothen ~~disruption~~discounted ~~caused~~to bypresent ~~our~~value ~~exit~~at ofdiscount ~~the~~rates ~~Empi~~ranging ~~business~~from 8.5% ~~The~~to ~~impairment~~10.0%, ~~charge~~and ~~for~~terminal ~~our~~value ~~Vascular~~growth ~~reporting~~rates ~~unit~~ranging ~~resulted~~ from ~~reductions~~(0.3)% into ~~our~~5.2%. ~~projected~~Publicly ~~operating~~available ~~results~~information ~~and~~regarding ~~estimated~~comparable ~~future~~market ~~cash~~capitalization ~~flows~~was ~~due~~also toconsidered ain ~~loss~~assessing ofthe ~~revenue~~reasonableness ~~caused~~of bythe ~~disruption~~cumulative asfair wevalues ~~transitioned~~of our ~~Dr.~~reporting ~~Comfort~~units ~~therapeutic~~estimated ~~footwear~~using ~~manufacturing~~the ~~and~~discounted ~~distribution~~cash toflow amethodology. ~~new~~We ~~ERP~~determined ~~system~~that ~~and~~the ~~market~~fair ~~pressure~~value inof the ~~therapeutic~~six ~~shoe market. We have four other~~ reporting units with goodwill assigned to them. ~~For each of those four reporting units, the estimated fair values~~ 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 ~~four~~six reporting units exceeded their carrying value ranged from 5444.64% to ~~389~~676.19%. As such, we determined that the goodwill of our reporting units was not impaired.

69In 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.

In the fourth quarter of ~~2016~~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 98.05% to 10.50%, and terminal value growth rates ranging from (0.3)% to 35.0%. 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 2246.75% to ~~103~~232.41%. 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.

Our definite lived intangible assets are being amortized using the straight line method over their remaining weighted average useful lives of 43.05 years for customer relationships, 76.02 years for patents and technology, 1.34 years for distributor contracts and relationships, and 5.91 years for trademarks and trade names~~, and 1~~.0 ~~years for non-compete agreements.~~ Based on our amortizable intangible asset balance as of December 31, ~~2016~~2017 we estimate that amortization expense will be as follows for the next five years and thereafter (in thousands):

2017		66,062
2018		57,993
2018		57,850
2019		53,061
2019		53,029
2020		37,089
2020		37,058
2021		32,488
2021		32,458
2022		28,687
Thereafter		5022,~~860~~235
	$	~~297~~231,~~317~~553

Our goodwill and intangible assets by segment are as follows (in thousands):

December 31, 2017	Goodwill		Intangible Assets, Net
Bracing and Vascular	$	422,258	$	381,479
Recovery Sciences		101,001		106,468
International		339,030		98,542
Surgical Implant		1,823		20,599
	$	864,112	$	607,088

December 31, 2016	Goodwill		Intangible Assets, Net
Bracing and Vascular	$	422,258	$	411,079
Recovery Sciences		101,001		122,586
International		330,544		113,679
Surgical Implant		1,823		24,790
	$	855,626	$	672,134

December 31, 2015	Goodwill		Intangible Assets, Net
Bracing and Vascular	$	483,258	$	449,893
Recovery Sciences		200,001		138,732
International		333,022		131,019
Surgical Implant		1,823		29,401
	$	1,018,104	$	749,045

8. OTHER CURRENT LIABILITIES

Other current liabilities consist of the following (in thousands):

	December 31, 2016		December 31, 2015
	December 31, 2017		December 31, 2016
Accrued wages and related expenses	$	3041,~~340~~482	$	2930,~~031~~340
Accrued commissions		16,~~254~~994		2016,~~479~~254
Accrued rebates		1412,~~023~~896		1314,~~433~~023
Accrued other taxes		25,~~926~~743		42,~~196~~926
Accrued professional expenses		3,~~593~~879		3,~~164~~593
Income taxes payable		~~231~~1,937		~~1,612~~231
Derivative liability		~~1,497~~268		~~282~~1,497
Deferred tax liability		—		163
Other accrued liabilities		43,161		44,401
Other accrued liabilities		44,401		29,813
	$	126,360	$	113,265
	$	113,265	$	102,173

9. EMPLOYEE BENEFIT PLANS

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, $43.2 5 million, and $4.12 million, to the plans for the years ended December 31, ~~2016~~2017, ~~2015~~2016 and ~~2014~~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, ~~2016~~2017. In addition, we made contributions to our international pension plans of $23.1 0 million, $12.71 million, and $1.7 million for the years ended December 31, ~~2016~~2017, ~~2015~~2016 and ~~2014~~2015, respectively.

10. DERIVATIVE INSTRUMENTS

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, 2016 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.68

71instrument 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):

	Balance Sheet Location	December 31, ~~2016~~2017		December 31, ~~2015~~2016
Derivative Assets:
Interest rate cap agreements designated as cash flow hedges	Other long term assets	$	—84	$	~~1,313~~0
Derivative Liabilities:
Interest rate cap agreements designated as cash flow hedges	Other current liabilities	$	~~1,497~~268	$	~~282~~1,497
Interest rate cap agreements designated as cash flow hedges	Other long-term liabilities		~~1,283~~—		—1,283

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

		Year Ended December 31,
	Location of gain (loss)	~~2016~~2017		~~2015~~2016			~~2014~~2015
Interest rate cap agreements designated as cash flow hedges	Interest expense (1)	$	~~412~~482	$	—412		$	—
Foreign exchange forward contracts not designated as hedges	Other (expense~~) income~~, net		—		(4—	)		40(4	)
		$	~~412~~482	$	(4412	)	$	40(4	)

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

	Year Ended December 31,
	2016			2015			2014
	2017			2016			2015
Interest rate cap agreements designated as cash flow hedges	$	(3,969	)	$	985		$	—
Interest rate cap agreements designated as cash flow Hedges	$	3,007		$	(3,969	)	$	985

11. FAIR VALUE MEASUREMENTS

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):

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	$	—	$	—

As of December 31, 2016

Quoted Prices

in Active

Markets for

Identical Assets

(Level 1)

Significant

Other

Observable

Inputs

(Level 2)

Significant

Unobservable

Inputs

(Level 3)

Recorded

Balance

Liabilities:

Interest rate cap agreements designated as

cash flow hedges

—

2,780

—

2,780

As of December 31, 2015	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	$	—	$	1,313	$	—	$	1,313
Liabilities:
Interest rate cap agreements designated as cash flow hedges	$	—	$	282	$	—	$	282

12. DEBT

Debt obligations consist of the following (in thousands):

	December 31, 2016			December 31, 2015
	December 31, 2017			December 31, 2016
Credit facilities:
ABL Facility, net of unamortized debt issuance costs of $1.6 million and $2.1 million as of December 31, 2016 and 2015, respectively	$	80,365		$	27,886
ABL Facility, net of unamortized debt issuance costs of $1.2 million and $1.6 million as of December 31, 2017 and 2016, respectively	$	73,843		$	80,365
Term loan:
$1,041.8 million Term Loan, net of unamortized debt issuance costs and original issuance discount of $12.0 million and $15.3 million as of December 31, 2016 and 2015, respectively		1,029,816			1,037,117
$1,031.3 million Term Loan, net of unamortized debt issuance costs and original issuance discount of $8.6 million and $12.0 million as of December 31, 2017 and 2016, respectively		1,022,630			1,029,816
Notes:
$1,015.0 million 8.125% Second Lien notes, net of unamortized debt issuance costs and original issuance discount of $14.4 million and $16.9 million as of December 31, 2016 and 2015, respectively		1,000,649			998,137
$1,015.0 million 8.125% Second Lien notes, net of unamortized debt issuance costs and original issuance discount of $11.6 million and $14.4 million as of December 31, 2017 and 2016, respectively		1,003,382			1,000,649
$298.5 million 10.75% Third Lien notes, net of unamortized debt issuance costs and original issuance discount of $6.5 million and $8.1 million as of December 31, 2016 and 2015, respectively		291,958			290,443
$298.5 million 10.75% Third Lien notes, net of unamortized debt issuance costs and original issuance discount of $4.8 million and $6.5 million as of December 31, 2017 and 2016, respectively		293,657			291,958
$1.5 million 9.75% Senior Subordinated notes		—			1,529
Capital lease obligations and other		20,608			—
Total debt		2,~~402~~414,~~788~~120			2,~~355~~402,~~112~~788
Current maturities		(1015,~~550~~936	)		(10,550	)
Long-term debt	$	2,~~392~~398,~~238~~184		$	2,~~344~~392,~~562~~238

Credit Facilities

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. A portion of the proceeds from the Credit Facilities was used to repay in full all amounts due and owing under the revolving credit facility and Tranche B term loans, originally entered into on November 20, 2007.

As of December 31, 2016, the market values of our Term Loan and drawings under the ABL Facility were $1,001.4 million and $82.0 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.70

~~Our~~As ~~revolving~~of ~~loan~~December ~~balance~~31, ~~under~~2017, ~~our~~the ~~ABL~~market ~~Facility~~values ~~was~~of ~~$82.0~~our ~~million~~Term asLoan ofand ~~December~~drawings ~~31,~~under ~~2016,~~the inABL ~~addition~~Facility towere a $1,014.5 million and $75.70 million, ~~outstanding~~respectively. ~~letter~~We ofdetermine ~~credit~~market ~~related~~value tousing ~~our~~trading ~~travel~~prices ~~and~~for ~~entertainment~~the ~~corporate~~senior ~~card~~secured ~~program~~credit ~~and~~facilities aon ~~$0.5~~or ~~million~~near ~~outstanding~~that ~~letter~~date. ofThis ~~credit~~fair ~~related~~value tomeasurement ~~collateral~~is ~~requirements~~categorized ~~under~~within ~~our~~Level ~~product~~2 ~~liability~~of ~~insurance~~the ~~policy~~fair value hierarchy.

73Our 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.

Term Loan

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, ~~2016~~2017 our weighted average interest rate for all borrowings under the Credit Facilities was 4.1461%.

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:

•

50% (which percentage will be reduced to 25% and 0% upon attaining certain total net leverage ratios) of annual excess cash flow, as defined in the Term Loan agreement;

•

100% of the net cash proceeds above (i) $30.0 million in any single transaction or series of related transactions or (ii) an annual amount of $100.0 million of all non-ordinary course asset sales or other dispositions, if we do not reinvest the net cash proceeds in assets to be used in our business, generally within 12 months of the receipt of such net cash proceeds; and

•

100% of the net cash proceeds from issuances of debt by us and our restricted subsidiaries, other than proceeds from debt permitted to be incurred under the Credit Facilities.

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:

•

incur additional indebtedness and make guarantees;

•

create liens on assets;

•

enter into sale and leaseback transactions;

•

engage in mergers or consolidations;

•

sell assets;

•

pay dividends and other restricted payments;

•

make investments, loans or advances, including acquisitions;

•

repay subordinated indebtedness or amend material agreements governing our subordinated indebtedness;

•

engage in certain transactions with affiliates; and

•

change our lines of business.

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, ~~2016~~2017, our actual first lien net leverage ratio was 43.4466:1, and we were in compliance with all other applicable covenants.

Asset-Based Revolving Credit Facility

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 30th 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, ~~2016~~2017, we were in compliance with all applicable covenants.

Notes:

8.125% Second Lien Notes

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, 2016, the market value of the 8.125% Notes was $888.1 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.72

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.

10.75% Third Lien Notes

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, ~~2016~~2017, the market value of the 10.75% Notes was $~~244~~267.71 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.

9.75% Senior Subordinated Notes

On October 18, 2010, we issued $300.0 million aggregate principal amount of 9.75% Notes (collectively with the 10.75% Notes and the 8.125% Notes, the “Notes”) maturing on October 15, 2017.

On May 13, 2015, a total of $298.5 million aggregate principal of outstanding 9.75% Notes were validly tendered as part of the Exchange Offer. On September 15, 2016, we issued a notice of optional redemption redeeming the remaining $1.5 million aggregate principal amount of outstanding 9.75% Notes, plus accrued interest, at a redemption price of 100.000%, effective October 15, 2016.

Change of Control

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.

Covenants

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.

AtOther ~~December 31, 2016, the aggregate amounts of principal maturities of long-term~~ debt ~~for the next five years and thereafter are as follows (in thousands):~~

2017		10,550
2018		10,550
2019		10,550
2020		1,390,634
2021		1,015,000
Thereafter		—
	$	2,437,284

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.

7673

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):

2018		15,936
2019		20,825
2020		1,388,285
2021		1,015,296
2022		—
Thereafter		—
	$	2,440,342

Loss on Modification and Extinguishment of Debt

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.

During the year ended December 31, 2014, we recognized a loss on modification and extinguishment of debt of $0.9 million. The loss consists of $0.3 million of arrangement and amendment fees and other fees and expenses incurred in connection with the amendment of our senior secured credit facilities and $0.6 million related to the non-cash write off of unamortized debt issuance costs and original issue discount associated with the portion of our original term loans which were extinguished.

Debt Issuance Costs

As of December 31, ~~2016~~2017 and December 31, ~~2015~~2016, we had $118.6 million and $1411.56 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 ~~our debt refinancing. For~~ the ~~year ended December 31, 2014, we capitalized $1.5 million of debt issuance costs incurred in connection with the~~ amendment of our prior credit facilities.

For the years ended December 31, ~~2016~~2017, ~~2015~~2016 and ~~2014~~2015, amortization of debt issuance costs was $23.90 million, $42.79 million and $84.17 million, respectively. Amortization of debt issuance costs was included in Interest expense in our Consolidated Statements of Operations for each of the periods presented.

13. MEMBERSHIP DEFICIT

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.

During the year ended December 31, 2014, DJO issued 115,693 shares of its common stock upon the net exercise of vested stock options that had been granted to two former members of DJO’s Board of Directors in 2006 and to 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 two former directors and employees exercised these Rollover Options for a total of 507,088 shares of DJO’s common stock, from which we withheld 391,395 shares to cover $6.5 million of aggregate option exercise price and income tax withholdings and issued the remaining 115,693 shares.

Additionally, during the year ended December 31, 2014, DJO issued 6,447 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, 2014.

The proceeds from the DJO sales of shares were used for working capital purposes. All such sales were subject to execution of a stockholder agreement including certain rights and restrictions (See Note 17).

14. STOCK OPTION PLANS AND STOCK-BASED COMPENSATION

Stock Option Plan

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.

Options granted in 2014 to existing employees had the same terms as the Performance Options described above and options granted to new employees in 2014 were one-third of Time-Based Options, with the remaining two-thirds continuing to be Performance Options. 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. 75

InEBITDA ~~2014,~~in ~~2015~~the ~~and~~fourth ~~2016,~~vesting ~~options~~year ~~were~~equals ~~granted~~or toexceeds ~~employees following~~ the ~~net~~Adjusted ~~exercise~~EBITDA ofin the ~~options~~financial ~~they~~plan ~~received in 2007 in exchange~~ for ~~options~~such ~~that~~year. ~~had~~In ~~previously~~addition, ~~been~~as ~~granted~~amended in ~~DJO’s~~July ~~predecessor~~2015, ~~company~~such ~~(Rollover~~options ~~Options),~~also ~~which~~provide ~~were~~that ~~scheduled~~in tothe ~~expire~~event inBlackstone ~~2014,~~achieves ~~2015~~the ~~and~~same ~~2016,~~MOIC ~~respectively.~~requirement ~~These~~described ~~new~~above ~~options~~for ~~were~~the ~~fully~~Market ~~vested~~Return onOptions, ~~the~~any ~~date~~unvested ofinstallments ~~grant~~from ~~and~~prior ~~have~~years aand ~~term~~all ofinstallments ~~ten~~for future years ~~(Vested~~shall ~~Options)~~thereupon vest.

78Commencing 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.

Stock-Based Compensation

During the year ended December 31, ~~2016~~2017, the compensation committee granted 21,~~015~~475,~~318~~000 options to employees, of which 1,~~356~~047,~~164~~501 were Market Return Options, ~~484~~and 427,~~336~~499 were Time-Based Options ~~and 174,818 were Vested Options~~. Additionally, the compensation committee granted 1813,800 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 value of the Time-Based Options, and Director Service Options ~~and Vested Options~~ granted during the year ended December 31, ~~2016~~2017 was $6.~~12,~~30 ~~$5.98,~~ and $56.2560, 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~~2016, the compensation committee granted 12,~~343~~015,~~621~~318 options to employees, of which 1,~~065~~356,~~002~~164 were ~~Performance~~Market Return Options, ~~257~~484,~~498~~336 were Time-Based Options and 21174,~~121~~818 were Vested Options. Additionally, the compensation committee granted 2318,~~000~~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, ~~2015~~2016 were $6.09 12, $5.2798 and $65.9225, 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, ~~2014~~2015, the compensation committee granted 1,~~747~~343,~~268~~621 options to employees, of which 1,~~221~~065,~~162~~002 were Performance Options, ~~498~~257,~~338~~498 were Time-Based Options and 2721,~~768~~121 were Vested Options. The weighted average grant date fair values of the Time-Based Options, Vested Options and ~~the~~Director ~~Vested~~Service Options granted during the year ended December 31, ~~2014~~2015 were $6.0509, $5.27 and $56.2892, 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, 2016, 2015 and 2014:76

	Year Ended December 31,
	2016			2015			2014
Expected volatility	33.2%-33.4%				33	%		31.7-33.4	%
Risk-free interest rate	1.2%-2.0%			1.5-2.0%				1.7-2.2	%
Expected term until exercise	5.2-6.6			5.1-8.3			5.0-6.4
Expected dividend yield		0.0	%		0.0	%		0.0	%

	Year Ended December 31,
	2017			2016			2015
Expected volatility	33.1%-33.3%			33.2%-33.4%				33	%
Risk-free interest rate	2.0-2.9%			1.2%-2.0%			1.5-2.0%
Expected term until exercise	6.2-8.1			5.2-6.6			5.1-8.3
Expected dividend yield		0.0	%		0.0	%		0.0	%

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

	Year Ended December 31,
	2016		2015		2014
	2017		2016		2015
Cost of goods sold	$	84165	$	9084	$	8290
Operating expenses:
Selling, general and administrative		23,~~947~~425		12,~~696~~947		1,~~782~~696
Research and development		~~157~~106		19157		519
	$	3,~~188~~696	$	13,~~805~~188	$	1,~~869~~805

We have ~~determined~~met ~~that it is not probable that we will meet~~ the Adjusted EBITDA targets related to the Performance Options granted with vesting conditions related to 2017 Adjusted EBITDA. As such, we ~~did~~recognized ~~not recognize~~ expense for ~~any of~~ the options ~~which~~that ~~had~~vested ~~the potential to vest~~ in ~~2016~~2017. ~~Additionally,~~We we have not recognized expense for any of the options which have the potential to vest based on Adjusted EBITDA for ~~2016, 2017 and~~ 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 ~~only~~ 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.

A summary of option activity under the 2007 Plan is presented below:

	Number of Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Outstanding at December 31, 2015		8,928,859		$	16.13		5.9	$	2,964,949
Granted		2,044,118		$	16.46
Exercised		(312,918	)	$	12.90
Forfeited or expired		(978,432	)	$	15.97
Outstanding at December 31, 2016		9,681,627		$	16.32		5.5	$	1,370,670
Vested or expected to vest at December 31, 2016		4,534,115		$	16.16		4.2	$	1,370,670
Granted		1,488,800		$	16.46
Exercisable at December 31, 2016		2,794,796		$	15.97		3.3	$	1,370,670
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	$	—

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:

	Year Ended December 31,
	2016		2015
	2017		2016
Options exercised		~~312~~416,~~925~~206		30312,~~529~~925
Shares withheld		~~269~~370,~~839~~432		21269,~~681~~839
Shares issued		4345,~~086~~774		843,~~848~~086
Average market value per share withheld	$	16.46	$	16.46
Aggregate market value of shares withheld (in thousands)	$	46,~~442~~097	$	~~357~~4,442

As of December 31, ~~2016~~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 $3.4.7 million, net of expected forfeitures. We anticipate this expense to be recognized over a weighted-average period of approximately ~~five~~four years. Compensation expense associated with the Market Return ~~and Enhanced 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.

15. INCOME TAXES

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

	Year Ended December 31,
	2016			2015			2014
	2017			2016			2015
U.S. operations	$	(~~305~~130,~~813~~603	)	$	(~~184~~305,~~524~~813	)	$	(~~133~~184,~~463~~524	)
Foreign operations		1234,~~142~~479			1412,~~273~~142			1714,~~439~~273
	$	(~~293~~96,~~671~~124	)	$	(~~170~~293,~~251~~671	)	$	(~~116~~170,~~024~~251	)

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

	Year Ended December 31,
	2016			2015			2014
	2017			2016			2015
Current income taxes:
U.S. federal	$	(~~216~~995	)	$	~~597~~(216	)	$	~~(309~~597	)
U.S. state		~~181~~160			~~1,042~~181			~~310~~1,042
Foreign		48,~~479~~564			4,~~677~~479			54,~~989~~677
Total current income taxes		47,~~444~~729			64,~~316~~444			56,~~990~~316
Deferred income taxes:
U.S. federal		(969,~~893~~829	)		6(9,~~095~~893	)		(6,~~579~~095	)
U.S. state		~~(935~~460	)		~~919~~(935	)		~~(2,120~~919	)
Foreign		~~(469~~920	)		(~~1,074~~469	)		(21,~~011~~074	)
Total deferred income taxes		(1168,~~297~~449	)		5(11,~~940~~297	)		~~(10~~5,~~710~~940	)
Total income tax (benefit) provision	$	(660,~~853~~720	)	$	12(6,~~256~~853	)	$	(412,~~720~~256	)

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,
	2016			2015			2014
	2017			2016			2015
Income tax benefit derived by applying the U.S. federal statutory income tax rate to loss before income taxes	$	(~~102~~33,~~785~~643	)	$	(59102,~~586~~785	)	$	(4059,~~595~~586	)
Add (deduct) the effect of:
State tax benefit, net		(51,~~126~~960	)		(45,~~996~~126	)		(24,~~564~~996	)
Change in state effective tax rates		~~449~~20			~~(604~~449	)		(~~803~~604	)
Foreign earnings repatriation		~~236~~190			~~(622~~236	)		(~~1,646~~622	)
Unrecognized tax benefits		~~129~~2,191			~~1,678~~129			~~949~~1,678
Goodwill impairment		~~38,988~~—			—38,988			—
Valuation allowance		58,076			72,655			35,503
Revaluation of deferred taxes		48,529			—			—
Research tax credit		(489	)		(758	)		(647	)
Reclass of tax expense for gain in OCI		(6,982	)		—			—
Permanent differences and other, net		3,346			(2,726	)		4,912
Research tax credit		(1,124	)		(489	)		(758	)
Foreign rate differential		(897	)		5,875			—
Permanent differences and other, net		331			3,346			(2,726	)
Other		1,220			1,340			171
Foreign rate differential		(5,238	)		(897	)		5,875
	$	(6,853	)	$	12,256		$	(4,720	)
Other		(2,202	)		1,220			1,340
Valuation allowance		(60,832	)		58,076			72,655
	$	(60,720	)	$	(6,853	)	$	12,256

81ASC 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):

	December 31, 2016			December 31, 2015
	December 31, 2017			December 31, 2016
Deferred tax assets:
Net operating loss carryforwards	$	~~308~~219,~~615~~488		$	~~264~~308,~~343~~615
Receivables reserve		147,~~619~~291			1914,~~654~~619
Other		43,073			43,722
Accrued expenses and reserves		30,887			52,646
Gross deferred tax assets		~~366~~257,~~307~~666			~~327~~375,~~719~~880
Valuation allowance		(~~286~~219,~~974~~365	)		(~~223~~286,~~385~~974	)
Net deferred tax assets		7938,~~333~~301			~~104~~88,~~334~~906
Deferred tax liabilities:
Intangible assets		(~~269~~169,~~196~~145	)		(~~303~~269,~~993~~196	)
Foreign earnings repatriation		(116,~~080~~975	)		(11,~~730~~080	)
Other		—(3,346	)		(19,~~225~~573	)
Gross deferred tax liabilities		(~~280~~179,~~276~~466	)		(~~316~~289,~~948~~849	)
Net deferred tax liabilities	$	(~~200~~141,~~943~~165	)	$	(~~212~~200,~~614~~943	)

At December 31, ~~2016~~2017, we maintain federal and state net operating loss carryforwards of $~~813~~894.18 million and $~~527~~559.12 million, respectively, which expire over a period of 1 to 20 years. Our foreign net operating loss carryforwards of $1014.78 million will begin to expire in ~~2022~~2019.

At December 31, ~~2016~~2017 and ~~2015~~2016 we had gross deferred tax assets of $~~366~~257.37 million and $~~327~~375.79 million, respectively, which we reduced by valuation allowances of $~~287~~219.04 million and $~~223~~287.40 million, respectively.

We do not intend to permanently reinvest the earnings of foreign operations. Accordingly, we recorded a deferred tax (income) expense of $0.2 million, $(0.6) million, and $(0.6) million for the years ended December 31, 2016, 2015 and 2014, respectively, for unrepatriated foreign earnings in those years.79

~~The~~We ~~Company~~do ~~qualifies~~not ~~for~~intend ato ~~tax~~permanently ~~holiday~~reinvest inthe ~~Tunisia.~~earnings ~~Without~~of ~~the~~foreign ~~tax~~operations. ~~holiday~~Accordingly, ~~the~~we ~~Company~~recorded ~~would~~a ~~have~~deferred tax (benefit) expense of $0.52 million, in$0.2 million ~~Tunisia~~and in$(0.6) million for the years ended December 31, 2017, 2016. ~~The~~and ~~tax~~2015, ~~incentive~~respectively, ~~will~~for ~~last~~unrepatriated atforeign ~~least~~earnings ~~through~~in ~~2018~~those years.

WeThe ~~file~~Company ~~income~~qualifies for a tax ~~returns~~holiday in UTunisia.S. ~~federal,~~Without ~~state~~the ~~and~~tax ~~foreign jurisdictions. With few exceptions~~holiday, wethe ~~are~~Company nowould ~~longer~~have ~~subject to income~~ tax ~~examinations~~expense byof ~~tax authorities for years before 2011~~$1.0 ~~However~~million, to$0.5 ~~the~~million ~~extent~~and ~~allowed~~$0.3 bymillion ~~law,~~in ~~the~~Tunisia ~~tax~~for ~~authorities may have~~ the ~~right~~years toended ~~examine~~December ~~prior~~31, ~~periods~~2017, ~~where~~2016 ~~net operating losses or tax credits were generated~~ and ~~carried forward~~2015, ~~and~~respectively. ~~make~~The ~~adjustments~~tax upincentive towill ~~the~~last ~~amount~~at ofleast ~~the~~through ~~net operating loss or credit carryforward amount~~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):

	Year Ended December 31,
	2016		2015		2014
	2017		2016		2015
Balance, beginning of year	$	14,~~901~~528	$	1314,~~905~~901	$	1413,~~469~~905
Additions based on tax positions related to current year

Filing Compare · DJO Finance LLC