Djo Finance 10-Q 2017 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended July 1, 2017

or

☐ 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)

State of Delaware	20-5653965
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
1430 Decision Street Vista, California	92081
(Address of principal executive offices)	(Zip Code)

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

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

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 Exchange Act).    Yes  ☐    No  ☒

As of August 10, 2017, 100% of the issuer’s membership interests were owned by DJO Holdings LLC.

DJO Finance LLC

INDEX

		Page Number
	PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Unaudited Condensed Consolidated Balance Sheets as of July 1, 2017 and December 31, 2016	1
	Unaudited Condensed Consolidated Statements of Operations for the three and six months ended July 1, 2017 and July 1, 2016	2
	Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended July 1, 2017 and July 1, 2016	3
	Unaudited Condensed Consolidated Statement of Deficit for the six months ended July 1, 2017	4
	Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended July 1, 2017 and July 1, 2016	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43
Item 4.	Controls and Procedures	44
	PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	45
Item 1A.	Risk Factors	45
Item 6.	Exhibits	46

PART 1 – FINANCIAL INFORMATION

Item 1. Financial Statements

DJO Finance LLC

Unaudited Condensed Consolidated Balance Sheets

(in thousands)

	July 1, 2017			December 31, 2016
Assets
Current assets:
Cash and cash equivalents	$	35,197		$	35,212
Accounts receivable, net		170,057			178,193
Inventories, net		148,585			151,557
Prepaid expenses and other current assets		21,300			23,650
Current assets of discontinued operations		511			511
Total current assets		375,650			389,123
Property and equipment, net		133,889			128,019
Goodwill		860,597			855,626
Intangible assets, net		637,989			672,134
Other assets		5,137			5,536
Total assets	$	2,013,262		$	2,050,438
Liabilities and Deficit
Current liabilities:
Accounts payable	$	93,514		$	63,822
Accrued interest		12,934			16,740
Current portion of debt obligations		12,557			10,550
Other current liabilities		124,227			113,265
Total current liabilities		243,232			204,377
Long-term debt obligations		2,381,701			2,392,238
Deferred tax liabilities, net		208,213			202,740
Other long-term liabilities		15,744			14,932
Total liabilities	$	2,848,890		$	2,814,287
Commitments and contingencies
Deficit:
DJO Finance LLC membership deficit:
Member capital		841,424			844,294
Accumulated deficit		(1,653,994	)		(1,579,642	)
Accumulated other comprehensive loss		(24,622	)		(30,580	)
Total membership deficit		(837,192	)		(765,928	)
Noncontrolling interests		1,564			2,079
Total deficit		(835,628	)		(763,849	)
Total liabilities and deficit	$	2,013,262		$	2,050,438

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

1

DJO Finance LLC

Unaudited Condensed Consolidated Statements of Operations

(in thousands)

	Three Months Ended						Six Months Ended
	July 1, 2017			July 1, 2016			July 1, 2017			July 1, 2016
Net sales	$	294,746		$	292,852		$	583,135		$	571,758
Operating expenses:
Cost of sales (exclusive of amortization of intangible assets of $6,980 and $13,961 and $7,080 and $14,487 for three and six months ended July 1, 2017 and 2016, respectively)		124,885			120,474			244,454			238,557
Selling, general and administrative		135,739			121,627			269,901			243,556
Research and development		9,063			10,122			18,202			19,976
Amortization of intangible assets		16,016			19,085			34,861			38,663
		285,703			271,308			567,418			540,752
Operating income		9,043			21,544			15,717			31,006
Other (expense) income:
Interest expense, net		(43,068	)		(42,396	)		(85,755	)		(84,666	)
Other income, net		896			468			1,184			752
		(42,172	)		(41,928	)		(84,571	)		(83,914	)
Loss before income taxes		(33,129	)		(20,384	)		(68,854	)		(52,908	)
Income tax provision		(1,095	)		(3,577	)		(5,173	)		(8,990	)
Net loss from continuing operations		(34,224	)		(23,961	)		(74,027	)		(61,898	)
Net income from discontinued operations		47			855			105			665
Net loss		(34,177	)		(23,106	)		(73,922	)		(61,233	)
Net income attributable to noncontrolling interests		(206	)		(169	)		(430	)		(362	)
Net loss attributable to DJO Finance LLC	$	(34,383	)	$	(23,275	)	$	(74,352	)	$	(61,595	)

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

2

DJO Finance LLC

Unaudited Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

	Three Months Ended						Six Months Ended
	July 1, 2017			July 1, 2016			July 1, 2017			July 1, 2016
Net loss	$	(34,177	)	$	(23,106	)	$	(73,922	)	$	(61,233	)
Other comprehensive income (loss), net of taxes:
Foreign currency translation adjustments, net of tax (provision) benefit of $(4,080) and $(4,192) and $111 and $(166) for the three and six months ended July 1, 2017 and 2016, respectively		3,204			(8,458	)		4,953			(2,850	)
Unrealized (loss) gain on cash flow hedges, net of tax provision of $21 thousand for the three and six months ended July 1, 2017 and Zero for the three and six months ended July 1, 2016, respectively		(786	)		(2,651	)		60			(8,042	)
Other comprehensive income (loss)		2,418			(11,109	)		5,013			(10,892	)
Comprehensive loss		(31,759	)		(34,215	)		(68,909	)		(72,125	)
Comprehensive income (loss) attributable to noncontrolling interests		768			(101	)		515			(402	)
Comprehensive loss attributable to DJO Finance LLC	$	(30,991	)	$	(34,316	)	$	(68,394	)	$	(72,527	)

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

3

DJO Finance LLC

Unaudited Condensed Consolidated Statement of Deficit

(in thousands)

	DJO Finance LLC
	Member capital			Accumulated deficit			Accumulated other comprehensive loss			Total membership deficit			Non-controlling interests			Total deficit
Balance at December 31, 2016	$	844,294		$	(1,579,642	)	$	(30,580	)	$	(765,928	)	$	2,079		$	(763,849	)
Net (loss) income		—			(74,352	)		—			(74,352	)		430			(73,922	)
Repurchase of common stock		(3,600	)		—			—			(3,600	)		—			(3,600	)
Investment by parent		500			—			—			500			—			500
Other comprehensive (loss) income, net of taxes		—			—			5,958			5,958			(945	)		5,013
Stock-based compensation		846			—			—			846			—			846
Exercise of stock options		(616	)		—			—			(616	)		—			(616	)
Balance at July 1, 2017	$	841,424		$	(1,653,994	)	$	(24,622	)	$	(837,192	)	$	1,564		$	(835,628	)

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

4

DJO Finance LLC

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

	Six Months Ended
	July 1, 2017			July 1, 2016
Cash flows from operating activities:
Net loss	$	(73,922	)	$	(61,233	)
Net income from discontinued operations		(105	)		(665	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation		21,855			20,513
Amortization of intangible assets		34,861			38,663
Amortization of debt issuance costs and non-cash interest expense		4,073			3,815
Stock-based compensation expense		846			1,521
Loss on disposal of assets, net		279			530
Deferred income tax expense		2,084			3,812
Changes in operating assets and liabilities, net of acquired assets and liabilities:
Accounts receivable		11,179			(4,209	)
Inventories		2,364			(5,650	)
Prepaid expenses and other assets		3,080			(637	)
Accrued interest		(3,806	)		(5,937	)
Accounts payable and other current liabilities		35,307			(1,082	)
Net cash provided by (used in) continuing operating activities		38,095			(10,559	)
Net cash provided by (used in) discontinued operations		105			(8,853	)
Net cash provided by (used in) operating activities		38,200			(19,412	)
Cash flows from investing activities:
Purchases of property and equipment		(22,434	)		(33,007	)
Proceeds from disposition of assets		—			700
Net cash used in investing activities from continuing operations		(22,434	)		(32,307	)
Cash flows from financing activities:
Proceeds from issuance of debt		35,556			63,000
Repayments of debt obligations		(48,275	)		(18,913	)
Repurchase of common stock		(3,600	)		—
Investment by parent		500			—
Dividend paid to minority interests		(1,102	)		—
Net cash (used in) provided by financing activities		(16,921	)		44,087
Effect of exchange rate changes on cash and cash equivalents		1,140			388
Net increase (decrease) in cash and cash equivalents		(15	)		(7,244	)
Cash and cash equivalents at the beginning of the period		35,212			48,943
Cash and cash equivalents at the end of the period	$	35,197		$	41,699
Supplemental disclosures of cash flow information:
Cash paid for interest	$	85,448		$	86,793
Cash paid for taxes, net	$	2,027		$	2,684
Non-cash investing activities:
Purchases of surgical instruments included in accounts payable	$	4,530		$	4,234

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

5

Notes to Unaudited Condensed 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.

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 15 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

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 non-controlling interests in our Unaudited Condensed 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.

6

Interim Reporting

The accompanying Unaudited Condensed Consolidated Financial Statements include our accounts and all voting interest entities where we exercise a controlling financial interest through the ownership of a direct or indirect majority voting interest. All significant intercompany accounts and transactions have been eliminated in consolidation. Our Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with GAAP and with the instructions to Form 10–Q and Article 10 of Regulation S–X for interim financial information. Accordingly, these financial statements do not include all of the information required by GAAP or Securities and Exchange Commission (SEC) rules and regulations for complete annual financial statements. In the opinion of management, these financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the results of operations for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year. These Unaudited Condensed Consolidated Financial Statements should be read in conjunction with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016.

The Company operates on a manufacturing calendar. Each quarter consists of thirteen weeks, two four week and one five week period. Our first quarters may have more or fewer shipping days from year to year based on the days of week holidays fall. The first half of 2017 had one less shipping day than the first half of 2016.

Recent Accounting Standards

In May 2014, the Financial Accounting Standards Board (FASB) issued an accounting standards update 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 accounting standards update 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 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.

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 of this update and developing tools for the tracking of and accounting for lease contracts. The Company is still assessing the impact of adoption on our consolidated financial statements.

7

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 did not have a material effect on the Company’s financial statements.

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

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

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.

2. DIVESTITURES

Discontinued Operations

For disposal transactions that occur on or after 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 Unaudited Condensed Consolidated Financial Statements. The impact of these results is immaterial to the periods presented.

3. ACCOUNTS RECEIVABLE RESERVES

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

	Six Months Ended
	July 1, 2017			July 1, 2016
Balance, beginning of period	$	36,070		$	32,893
Provision for doubtful accounts		10,533			11,861
Write-offs, net of recoveries		(17,137	)		(11,495	)
Balance, end of period	$	29,466		$	33,259

Our allowance for sales returns balance was $2.3 million and $3.1 million as of July 1, 2017 and 2016, respectively.

8

4. INVENTORIES

Inventories consist of the following (in thousands):

	July 1, 2017			December 31, 2016
Components and raw materials	$	50,559		$	52,977
Work in process		6,922			8,374
Finished goods		87,684			92,299
Inventory held on consignment		35,270			36,219
		180,435			189,869
Inventory reserves		(31,850	)		(38,312	)
	$	148,585		$	151,557

A summary of the activity in our reserves for estimated slow moving, excess, obsolete and otherwise impaired inventory is presented below (in thousands):

	Six Months Ended
	July 1, 2017			July 1, 2016
Balance, beginning of period	$	38,312		$	22,042
Provision charged to costs of sales		2,550			4,922
Write-offs, net of recoveries		(9,012	)		(4,124	)
Balance, end of period	$	31,850		$	22,840

The write-offs to the reserve were principally related to the disposition of fully reserved inventory.

5. LONG-LIVED ASSETS

Goodwill

Changes in the carrying amount of goodwill for the six months ended July 1, 2017 are presented in the table below (in thousands):

	Bracing & Vascular			Recovery Sciences			Surgical Implant			International		Total
Balance, beginning of period
Goodwill	$	483,258		$	249,601		$	49,229		$	330,544	$	1,112,632
Accumulated impairment losses		(61,000	)		(148,600	)		(47,406	)		—		(257,006	)
Goodwill, net of accumulated impairment losses at    December 31, 2016		422,258			101,001			1,823			330,544		855,626
Current Year Activity:
Foreign currency translation		—			—			—			4,971		4,971
Balance, end of period
Goodwill		483,258			249,601			49,229			335,515		1,117,603
Accumulated impairment losses		(61,000	)		(148,600	)		(47,406	)		—		(257,006	)
Goodwill, net of accumulated impairment losses at    July 1, 2017	$	422,258		$	101,001		$	1,823		$	335,515	$	860,597

9

Intangible Assets

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

July 1, 2017	GrossCarrying Amount		Accumulated Amortization			Intangible Assets, Net
Definite-lived intangible assets:
Customer relationships	$	477,018	$	(385,189	)	$	91,829
Patents and technology		446,846		(288,986	)		157,860
Trademarks and trade names		29,790		(17,074	)		12,716
Distributor contracts and relationships		4,794		(4,684	)		110
Non-compete agreements		6,699		(6,509	)		190
	$	965,147	$	(702,442	)		262,705
Indefinite-lived intangible assets:
Trademarks and trade names							375,284
Net identifiable intangible assets						$	637,989

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

Our definite lived intangible assets are being amortized using the straight line method over their remaining weighted average useful lives of 3.8 years for customer relationships, 6.6 years for patents and technology, 1.9 years for distributor contracts and relationships, 5.5 years for trademarks and trade names, and 0.5 years for non-compete agreements. Based on our amortizable intangible asset balance as of July 1, 2017, we estimate that amortization expense will be as follows for the next five years and thereafter (in thousands):

Remaining 2017	$	31,265
2018		57,938
2019		53,048
2020		37,077
2021		32,476
Thereafter		50,901
	$	262,705

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6. OTHER CURRENT LIABILITIES

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

	July 1, 2017		December 31, 2016
Accrued wages and related expenses	$	37,523	$	30,340
Accrued commissions		13,846		16,254
Accrued rebates		7,065		14,023
Accrued other taxes		4,755		2,926
Accrued professional expenses		4,755		3,593
Income taxes payable		69		231
Derivative liability		1,109		1,497
Other accrued liabilities		55,105		44,401
	$	124,227	$	113,265

7. 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 Unaudited Condensed 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).

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 Unaudited Condensed Consolidated Statement of Operations in the period in which it affected income (loss).

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

	Balance Sheet Location	July 1, 2017		December 31, 2016
Derivative Liabilities:
Interest rate cap agreements designated    as cash flow hedges	Other current liabilities	$	1,109	$	1,497
Interest rate cap agreements designated    as cash flow hedges	Other long-term liabilities		1,612		1,283
		$	2,721	$	2,780

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

		Three Months Ended				Six Months Ended
	Locationofgain(loss)	July 1, 2017		July 1, 2016		July 1, 2017		July 1, 2016
Interest rate cap agreements designated    as cash flow hedges	Interest expense, net	$	410	$	65	$	705	$	75

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

	Three Months Ended						Six Months Ended
	July 1, 2017			July 1, 2016			July 1, 2017		July 1, 2016
Interest rate cap agreements designated as cash flow hedges	$	(786	)	$	(2,651	)	$	60	$	(8,042	)

8. 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 table presents the balances of financial assets and liabilities measured at fair value on a recurring basis (in thousands):

As of July 1, 2017	Quoted Prices in Active Markets for IdenticalAssets (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	$	—	$	2,721	$	—	$	2,721

As of December 31, 2016	Quoted Prices in Active Markets for IdenticalAssets (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

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9. DEBT

Debt obligations consist of the following (in thousands):

	July 1, 2017			December 31, 2016
Credit facilities:
Revolving credit facility, net of unamortized debt issuance    costs of $1.4 million and $1.6 million as of    July 1, 2017 and December 31, 2016,    respectively	$	66,604		$	80,365
Term loan:
$1,036.5 million Term Loan, net of unamortized debt    issuance costs and original issuance discount of    $10.3 million and $12.0 million as of    July 1, 2017 and December 31, 2016,    respectively		1,026,211			1,029,816
Notes:
$1,015.0 million 8.125% Second Lien Notes, net    of unamortized debt issuance costs and original issuance    discount of $13 million and $14.4 million as of    July 1, 2017 and December 31, 2016,    respectively		1,001,987			1,000,649
$298.5 million 10.75% Third Lien Notes, net of    unamortized debt issuance costs and original    issuance discount of $5.7 million and $6.5 million as of    July 1, 2017 and December 31, 2016,    respectively		292,783			291,958
Other Debt		6,673			—
Total debt		2,394,258			2,402,788
Current maturities		(12,557	)		(10,550	)
Long-term debt	$	2,381,701		$	2,392,238

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 July 1, 2017, the market values of our Term Loan and drawings under the ABL Facility were $1,023.6 million and $68.0 million, respectively. We determine market value using trading prices for the senior secured credit facilities on or near that date. This fair value measurement is categorized within Level 2 of the fair value hierarchy.

Our revolving loan balance under our ABL Facility was $68.0 million as of July 1, 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 July 1, 2017 our weighted average interest rate for all borrowings under the Credit Facilities was 4.43%.

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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.

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 July 1, 2017, our actual first lien net leverage ratio was 4.13:1, 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

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rate borrowings and 2.25% with respect to Eurodollar borrowings, each subject to step-downs based upon the amount of the available, unused facility.

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

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

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

In addition, we are required to maintain a minimum fixed charge coverage ratio, as defined in the agreement, of 1.0 to 1.0 if the unutilized facility is less than the greater of $9.0 million or 10% of the lesser of (1) $150.0 million and (2) the aggregate borrowing base. This coverage ratio requirement remains in place until the 30^th consecutive day the unutilized facility exceeds such threshold. The ABL Facility also contains certain customary affirmative covenants and events of default. As of July 1, 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 July 1, 2017, the market value of the 8.125% Notes was $945.2 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.

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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 July 1, 2017, the market value of the 10.75% Notes was $252.2 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.

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 April 1, 2017, 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.

Other debt

On June 6, 2017, we entered into new a loan at our French subsidiary. The loan provides for borrowings of €6.0 million and is subject to customary borrowing conditions. We are required to make principal repayments under the loan in monthly 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%.

Debt Issuance Costs

As of July 1, 2017 and December 31, 2016, we had $10.1 million and $11.6 million, respectively, of unamortized debt issuance costs, which are reflected as a direct deduction from the debt liability included in Long-term debt obligations in our Unaudited Condensed Consolidated Balance Sheets.

For the three and six months ended July 1, 2017 and July 1, 2016, amortization of debt issuance costs was $0.8 million and $1.5 million and $0.7 million and $1.4 million, respectively. Amortization of debt issuance costs was included in Interest expense in our Unaudited Consolidated Statements of Operations for each of the periods presented.

10. INCOME TAXES

Income taxes for the interim periods presented have been included in our Unaudited Condensed Consolidated Financial Statements on the basis of an estimated annual effective tax rate, adjusted for discrete items. The income tax expense for these periods differed from the amounts which would have been recorded using the U.S. statutory rate due primarily to certain valuation allowances provided against deferred tax assets, the impact of nondeductible expenses, foreign taxes, deferred taxes on the assumed repatriation of foreign earnings and tax amortization of goodwill and indefinite-lived intangibles.

For the three and six months ended July 1, 2017, we recorded income tax provision of $1.1 million and $5.2 million on pre-tax losses of $33.1 million and $68.9 million, resulting in negative effective tax rates of 3.3% and 7.5%, respectively. For the three and six

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months ended July 1, 2016 , we recorded income tax provision of approximately $3.6 million and $9.0 million on pre-tax losses of $20.4 million and $52.9 million, resulting in a negative effective tax rates of 17.5% and 17.0%, respectively.

Our tax rates are at times negative because our U.S. federal tax losses, and certain state tax losses, are unavailable to offset income taxes arising in other states and in the foreign jurisdictions where we are subject to tax.

We record net deferred tax assets to the extent we conclude that it is more likely than not that the related deferred tax assets will be realized. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. At this time, we cannot conclude that it is more likely than not that the benefit from certain U.S. federal and state net operating loss carryforwards will be available to offset future taxable income. Accordingly, we have provided a valuation allowance of $16.6 million and $32.1 million on the deferred tax assets related to the net operating loss carryforwards generated in the three and six months ended July 1, 2017. If our assumptions change and we determine that it is more likely than not that we will be able to realize the deferred tax assets related to these net operating losses, reversal of the valuation allowances we have recorded against those deferred tax assets will be recognized as a reduction of income tax expense. The establishment of valuation allowances does not preclude us from utilizing our loss carryforwards or other deferred tax assets in the future and does not impact our cash resources.

We and our subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or foreign 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.

At July 1, 2017, our gross unrecognized tax benefits were $16.0 million reflecting an increase of $1.5 million from the unrecognized amount of $14.5 million at December 31, 2016. As of July 1, 2017, we have $3.1 million accrued for interest and penalties related to these unrecognized tax benefits. To the extent all or a portion of our gross unrecognized tax benefits are recognized in the future, no U.S. federal tax benefit for related state income tax deductions would result due to the existence of the U.S. federal valuation allowance. We anticipate that approximately $0.8 million aggregate of unrecognized tax benefits, each of which are individually immaterial, will decrease in the next twelve months due to the expiration of statutes of limitation. As of July 1, 2017, we have unrecognized various foreign and U.S. state tax benefits of approximately $5.8 million, which, if recognized, would impact our effective tax rate in future periods.

11. 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

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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.

In 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 2016. 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 six months ended July 1, 2017, the compensation committee granted 615,000 options to employees, of which 467,500 were Market Return Options and 147,500 were Time-Based Options. Additionally, the compensation committee granted 13,800 Director Service Options to members of the Board of Directors. The weighted average grant date fair value of the Time-Based Options and Director Service Options granted during the six months ended July 1, 2017 was $6.10 and $6.59, respectively.

During the six months ended July 1, 2016, the compensation committee granted 667,818 options to employees, of which 426,998 were Market Return Options, 66,002 were Time-Based Options and 174,818 were Vested Options. Additionally, the compensation committee granted 13,800 Director Service Options to members of the Board of Directors. The weighted average grant date fair value of the Time-Based Options, Director Service Options and Vested Options granted during the six months ended July 1, 2016 was $5.99, $5.99, and $5.25, 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 granted:

	Three Months Ended						Six Months Ended
	July 1, 2017			July 1, 2016			July 1, 2017			July 1, 2016
Expected volatility		33.4	%		33.3	%		33.4	%		33.3	%
Risk-free interest rate		2.0	%	1.2%-1.5%			2.0-2.2%			1.2%-1.6%
Expected years until exercise		6.3		5.2-6.6			6.3-7.4			5.2-6.6
Expected dividend yield		0.0	%		0.0	%		0.0	%		0.0	%

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

	Three Months Ended				Six Months Ended
	July 1, 2017		July 1, 2016		July 1, 2017		July 1, 2016
Cost of sales	$	29	$	31	$	62	$	61
Operating expenses:
Selling, general and administrative		361		1,146		782		1,318
Research and development		2		139		2		142
	$	392	$	1,316	$	846	$	1,521

We have determined that it is not probable that we will meet the Adjusted EBITDA targets related to the Performance Options granted. As such, we did not recognize expense for any of the options which had the potential to vest in 2017. Additionally, we have not recognized expense for any of the options which have the potential to vest based on Adjusted EBITDA for 2018 as some of these targets have not yet been established and we are unable to assess the probability of achieving such targets. Accordingly, during each of the periods presented above we recognized stock-based compensation expense only for the Time-Based Options, the Vested Options and the Director Service Options.

In each of the periods presented above, we recognized stock-based compensation expense only for Time-Based Options granted to employees, as the performance components of the Market Return Options are not deemed probable at this time.

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 Unaudited Condensed Consolidated Statements of Operations.

12. MEMBERSHIP DEFICIT

During the six months ended July 1, 2017, DJO issued 45,774 shares of its common stock upon the net exercise of vested stock options that had been granted to current and former employees in 2007 in exchange for options that had previously been granted in the predecessor company to DJO (“Rollover Options”). Our stock incentive plan permits participants to exercise stock options using a net exercise method. In a net exercise, we withhold from the total number of shares that otherwise would be issued to a participant upon exercise of the stock option such number of shares having a fair market value at the time of exercise equal to the aggregate option exercise price and applicable income tax withholdings, and remit the remaining shares to the participant. The current and former employees exercised these Rollover Options for a total of 416,206 shares of DJO’s common stock, from which we withheld 370,432 shares to cover $6.1 million of aggregate option exercise price and income tax withholdings and issued the remaining 45,774 shares.

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

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.

13. RELATED PARTY TRANSACTIONS

Blackstone Management Partners LLC (BMP) has agreed to provide certain monitoring, advisory and consulting services to us for an annual monitoring fee equal to the greater of $7.0 million or 2% of consolidated EBITDA as defined in the Transaction and Monitoring Fee Agreement, payable in the first quarter of each year. The Transaction and Monitoring Fee Agreement will continue until the earlier of November 2019, or such date as DJO and BMP may mutually determine. DJO has agreed to indemnify BMP and its affiliates, directors, officers, employees, agents and representatives from and against all liabilities relating to the services contemplated by the Transaction and Monitoring Fee Agreement and the engagement of BMP pursuant to, and the performance of BMP and its affiliates of the services contemplated by, the Transaction and Monitoring Fee Agreement. At any time in connection with or in anticipation of a change of control of DJO, a sale of all or substantially all of DJO’s assets or an initial public offering of common stock of DJO, BMP may elect to receive, in lieu of remaining annual monitoring fee payments, a single lump sum cash payment equal to the then-present value of all then-current and future annual monitoring fees payable under the Transaction and Monitoring Fee

19

Agreement, assuming a hypothetical termination date of the agreement to be November 2019. For each of the three and six month periods presented, we expensed $1.75 million and $3.5 million, respectively, related to the annual monitoring fee, which is recorded as a component of Selling, general and administrative expense in the Unaudited Condensed Consolidated Statements of Operations.

14. COMMITMENTS AND CONTINGENCIES

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. The Company's accrued expenses for this matter are included within other current liabilities on the Unaudited Condensed Consolidated Balance Sheets.  Additionally, we cannot reasonably estimate the range of loss, if any, that may result from this matter.        

New Jersey Orthotics Investigation

In July 2013 we were served with a subpoena under the Health Insurance Portability and Accountability Act 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. We cannot provide any assurance as to the 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.

15. SEGMENT AND GEOGRAPHIC INFORMATION

For the periods ended July 1, 2017 and July 1, 2016, we reported our business in four operating segments: Bracing and Vascular; Recovery Sciences; Surgical Implant and International.

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

Recovery Sciences Segment

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

• CMF. Our CMF channel sells our bone growth stimulation products. We sell these products either directly to patients or to independent distributors. For products sold to patients, we arrange billing to the patients and their third party payors.

• Chattanooga. Our Chattanooga channel offers products in the clinical rehabilitation market in the category of clinical electrotherapy devices, clinical traction devices, and other clinical products and supplies such as treatment tables, CPM devices and dry heat therapy.

20

• Consumer. Our consumer channel offers professional and consumer retail customers our Compex electrostimulation device, which is used in training programs to aid muscle development and to accelerate muscle recovery after training sessions.

Surgical Implant Segment

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

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.

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

	Three Months Ended						Six Months Ended
	July 1, 2017			July 1, 2016			July 1, 2017			July 1, 2016
Net sales:
Bracing and Vascular	$	126,415		$	131,751		$	248,468		$	255,967
Recovery Sciences		38,774			38,449			77,277			75,024
Surgical Implant		49,991			42,575			99,583			85,625
International		79,566			80,077			157,807			155,142
	$	294,746		$	292,852		$	583,135		$	571,758
Operating income:
Bracing and Vascular	$	24,225		$	29,072		$	45,232		$	49,606
Recovery Sciences		10,709			8,056			19,616			14,501
Surgical Implant		10,062			6,053			18,202			13,282
International		13,509			14,653			27,119			23,642
Expenses not allocated to segments and eliminations		(49,462	)		(36,290	)		(94,452	)		(70,025	)
	$	9,043		$	21,544		$	15,717		$	31,006

Geographic Area

Following are our net sales by geographic area (in thousands):

	Three Months Ended				Six Months Ended
	July 1, 2017		July 1, 2016		July 1, 2017		July 1, 2016
Net sales:
United States	$	215,180	$	212,775	$	425,328	$	416,616
Other Europe, Middle East and Africa		38,301		38,057		76,341		74,516
Germany		20,673		21,960		42,031		42,963
Australia and Asia Pacific		11,921		11,400		22,764		21,402
Canada		6,418		6,697		12,360		12,434
Latin America		2,253		1,963		4,311		3,827
	$	294,746	$	292,852	$	583,135	$	571,758

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16. SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

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

The 8.125% Notes are jointly and severally, fully and unconditionally guaranteed, on a senior secured basis by all of DJOFL’s domestic subsidiaries (other than the co-issuer) that are 100% owned, directly or indirectly, by DJOFL (the Guarantors). The 10.75% Notes are jointly and severally, fully and unconditionally guaranteed, on a secured basis by the Guarantors. Our foreign subsidiaries (the Non-Guarantors) do not guarantee the notes.

The following tables present the financial position, results of operations and cash flows of DJOFL, the Guarantors, the Non-Guarantors and certain eliminations for the periods presented.

DJO Finance LLC

Unaudited Condensed Consolidating Balance Sheets

As of July 1, 2017

(in thousands)

	DJOFL			Guarantors		Non- Guarantors		Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	18,101		$	4,106	$	12,990	$	—		$	35,197
Accounts receivable, net		—			124,074		45,983		—			170,057
Inventories, net		—			117,329		33,203		(1,947	)		148,585
Deferred tax assets, net		—			—		—		—			—
Prepaid expenses and other current assets		103			14,170		7,026		1			21,300
Current assets of discontinued operations		—			511		—		—			511
Total current assets		18,204			260,190		99,202		(1,946	)		375,650
Property and equipment, net		—			120,033		13,894		(38	)		133,889
Goodwill		—			791,005		100,766		(31,174	)		860,597
Intangible assets, net		—			628,633		9,356		—			637,989
Investment in subsidiaries		1,297,699			1,677,336		53,060		(3,028,095	)		—
Intercompany receivables		250,135			—		—		(250,135	)		—
Other non-current assets		—			2,545		2,595		(3	)		5,137
Total assets	$	1,566,038		$	3,479,742	$	278,873	$	(3,311,391	)	$	2,013,262
Liabilities and (Deficit) Equity
Current liabilities:
Accounts payable	$	—		$	81,092	$	12,422	$	—		$	93,514
Current portion of debt obligations		10,550			—		2,007		—			12,557
Other current liabilities		14,033			94,014		29,116		(2	)		137,161
Total current liabilities		24,583			175,106		43,545		(2	)		243,232
Long-term debt obligations		2,377,035			—		4,666		—			2,381,701
Deferred tax liabilities, net		—			204,009		4,204		—			208,213
Intercompany payables, net		—			205,147		109,909		(315,056	)		—
Other long-term liabilities		1,612			13,951		181		—			15,744
Total liabilities		2,403,230			598,213		162,505		(315,058	)		2,848,890
Noncontrolling interests		—			—		1,564		—			1,564
Total membership (deficit) equity		(837,192	)		2,881,529		114,804		(2,996,333	)		(837,192	)
Total liabilities and (deficit) equity	$	1,566,038		$	3,479,742	$	278,873	$	(3,311,391	)	$	2,013,262

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DJO Finance LLC

Unaudited Condensed Consolidating Statements of Operations

For the Three Months Ended July 1, 2017

(in thousands)

	DJOFL			Guarantors			Non- Guarantors			Eliminations			Consolidated
Net sales	$	—		$	249,021		$	82,199		$	(36,474	)	$	294,746
Costs and operating expenses:
Cost of sales (exclusive of amortization of intangible assets of    $6,980)		—			96,622			77,009			(48,746	)		124,885
Selling, general and administrative		—			111,048			24,691			—			135,739
Research and development		—			8,190			873			—			9,063
Amortization of intangible assets		—			15,721			295			—			16,016
		—			231,581			102,868			(48,746	)		285,703
Operating income (loss)		—			17,440			(20,669	)		12,272			9,043
Other (expense) income:
Interest (expense) income, net		(43,082	)		39			(25	)		—			(43,068	)
Loss on modification and extinguishment of debt
Other (expense) income, net		—			(11,200	)		12,096			—			896
Intercompany income (expense), net		—			742			(584	)		(158	)		—
Equity in income (loss) of subsidiaries, net		8,699			—			—			(8,699	)		—
		(34,383	)		(10,419	)		11,487			(8,857	)		(42,172	)
(Loss) income before income taxes		(34,383	)		7,021			(9,182	)		3,415			(33,129	)
Income tax provision		—			(282	)		(813	)		—			(1,095	)
Net (loss) income from continuing operations		(34,383	)		6,739			(9,995	)		3,415			(34,224	)
Net income from discontinued operations		—			47			—			—			47
Net (loss) income		(34,383	)		6,786			(9,995	)		3,415			(34,177	)
Net income attributable to noncontrolling interests		—			—			(206	)		—			(206	)
Net (loss) income attributable to DJOFL	$	(34,383	)	$	6,786		$	(10,201	)	$	3,415		$	(34,383	)

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DJO Finance LLC

Unaudited Condensed Consolidating Statements of Operations

For the Six Months Ended July 1, 2017

(in thousands)

	DJOFL			Guarantors			Non- Guarantors			Eliminations			Consolidated
Net sales	$	—		$	496,493		$	165,957		$	(79,315	)	$	583,135
Costs and operating expenses:
Cost of sales (exclusive of amortization of intangible assets of    $13,961)		—			188,428			152,937			(96,911	)		244,454
Selling, general and administrative		—			222,215			47,686			—			269,901
Research and development		—			16,513			1,689			—			18,202
Amortization of intangible assets		—			34,247			614			—			34,861
		—			461,403			202,926			(96,911	)		567,418
Operating income (loss)		—			35,090			(36,969	)		17,596			15,717
Other (expense) income:
Interest (expense) income, net		(85,803	)		80			(32	)		—			(85,755	)
Other (expense) income, net		—			(18,288	)		19,472			—			1,184
Intercompany income (expense), net		—			289			(45	)		(244	)		—
Equity in income (loss) of subsidiaries, net		11,451			—			—			(11,451	)		—
		(74,352	)		(17,919	)		19,395			(11,695	)		(84,571	)
(Loss) income before income taxes		(74,352	)		17,171			(17,574	)		5,901			(68,854	)
Income tax provision		—			(3,416	)		(1,757	)		—			(5,173	)
Net (loss) income from continuing operations		(74,352	)		13,755			(19,331	)		5,901			(74,027	)
Net income from discontinued operations		—			105			—			—			105
Net (loss) income		(74,352	)		13,860			(19,331	)		5,901			(73,922	)
Net income attributable to noncontrolling interests		—			—			(430	)		—			(430	)
Net (loss) income attributable to DJOFL	$	(74,352	)	$	13,860		$	(19,761	)	$	5,901		$	(74,352	)

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DJO Finance LLC

Unaudited Condensed Consolidating Statements of Comprehensive Loss

For the Three Months Ended July 1, 2017

(in thousands)

	DJOFL			Guarantors		Non- Guarantors			Eliminations		Consolidated
Net (loss) income	$	(34,383	)	$	6,786	$	(9,995	)	$	3,415	$	(34,177	)
Other comprehensive (loss) income, net of taxes:
Foreign currency translation adjustments, net of tax provision of $4,080		—			—		3,204			—		3,204
Unrealized loss on cash flow hedges, net of tax provision of $21 thousand		(786	)		—		—			—		(786	)
Other comprehensive (loss) income		(786	)		—		3,204			—		2,418
Comprehensive (loss) income		(35,169	)		6,786		(6,791	)		3,415		(31,759	)
Comprehensive loss attributable to noncontrolling    interests		—			—		768			—		768
Comprehensive (loss) income attributable to DJO    Finance LLC	$	(35,169	)	$	6,786	$	(6,023	)	$	3,415	$	(30,991	)

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DJO Finance LLC

Unaudited Condensed Consolidating Statements of Comprehensive Loss

For the Six Months Ended July 1, 2017

(in thousands)

	DJOFL			Guarantors		Non- Guarantors			Eliminations		Consolidated
Net (loss) income	$	(74,352	)	$	13,860	$	(19,331	)	$	5,901	$	(73,922	)
Other comprehensive loss, net of taxes:
Foreign currency translation adjustments, net of tax provision of $4,192		-			-		4,953			-		4,953
Unrealized loss gain on cash flow hedges, net of tax provision of $21 thousand		60			-		-			-		60
Other comprehensive income		60			-		4,953			-		5,013
Comprehensive (loss) income		(74,292	)		13,860		(14,378	)		5,901		(68,909	)
Comprehensive income attributable to noncontrolling    interests		-			-		515			-		515
Comprehensive (loss) income attributable to DJO    Finance LLC	$	(74,292	)	$	13,860	$	(13,863	)	$	5,901	$	(68,394	)

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DJO Finance LLC

Unaudited Condensed Consolidating Statements of Cash Flows

For the Six Months Ended July 1, 2017

(in thousands)

	DJOFL			Guarantors			Non- Guarantors			Eliminations			Consolidated
Cash Flows From Operating Activities:
Net loss	$	(74,352	)	$	13,860		$	(19,331	)	$	5,901		$	(73,922	)
Net income from discontinued operations					(105	)							$	(105	)
Adjustments to reconcile net cash (used in) provided by operating activities:
Depreciation		-			19,412			2,457			(14	)		21,855
Amortization of intangible assets		-			34,247			614			-			34,861
Amortization of debt issuance costs and non-cash    interest expense		4,073			-			-			-			4,073
Stock-based compensation expense		-			846			-			-			846
Loss on disposal of assets, net		-			187			92			-			279
Deferred income tax expense		-			2,011			73			-			2,084
Equity in (loss) income of subsidiaries, net		(11,451	)		-			-			11,451			-
Changes in operating assets and liabilities, net of acquired    assets and liabilities:
Accounts receivable		-			10,108			1,071			-			11,179
Inventories		-			4,921			16,392			(18,949	)		2,364
Prepaid expenses and other assets		(62	)		3,007			(582	)		717			3,080
Accounts payable and other current liabilities		(4,369	)		39,731			(196	)		(3,665	)		31,501
Net cash provided by (used in) continuing operating activities		(86,161	)		128,225			590			(4,559	)		38,095
Net cash provided (used in) by discontinued operations		-			105			-			-			105
Net cash provided by (used in) provided by operating activities		(86,161	)		128,330			590			(4,559	)		38,200
Cash Flows From Investing Activities:
Purchases of property and equipment		-			(20,596	)		(1,838	)		-			(22,434	)
Net cash used in investing activities from continuing    operations		-			(20,596	)		(1,838	)		-			(22,434	)
Cash Flows From Financing Activities:
Intercompany		110,819			(103,256	)		(12,122	)		4,559			-
Proceeds from issuance of debt		29,000			-			6,556			-			35,556
Repayments of debt obligations		(48,275	)		-			-			-			(48,275	)
Repurchase of common stock		(3,600	)		-			-			-			(3,600	)
Investment by parent		500			-			-			-			500
Dividend paid to minority interest		-			-			(1,102	)		-			(1,102	)
Net cash provided by (used in) financing activities		88,444			(103,256	)		(6,668	)		4,559			(16,921	)
Effect of exchange rate changes on cash and cash    equivalents		-			-			1,140			-			1,140
Net (decrease) increase in cash and cash equivalents		2,283			4,478			(6,776	)		-			(15	)
Cash and cash equivalents, beginning of year		15,818			(372	)		19,766			-			35,212
Cash and cash equivalents, end of year	$	18,101		$	4,106		$	12,990		$	-		$	35,197

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DJO Finance LLC

Condensed Consolidating Balance Sheets

As of December 31, 2016

(in thousands)

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

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DJO Finance LLC

Unaudited Condensed Consolidating Statements of Operations

For the Three Months Ended July 1, 2016

(in thousands)

	DJOFL			Guarantors			Non - Guarantors			Eliminations			Consolidated
Net sales	$	—		$	252,212		$	83,178		$	(42,538	)	$	292,852
Costs and operating expenses:
Cost of sales (exclusive of amortization of intangible    assets of $7,080)		—			94,465			74,317			(48,308	)		120,474
Selling, general and administrative		—			97,827			23,800			—			121,627
Research and development		—			9,228			894			—			10,122
Amortization of intangible assets		—			18,699			386			—			19,085
		—			220,219			99,397			(48,308	)		271,308
Operating income (loss)		—			31,993			(16,219	)		5,770			21,544
Other (expense) income:
Interest (expense) income, net		(42,448	)		51			1			—			(42,396	)
Other (expense) income, net		(8	)		(8,553	)		9,029			—			468
Intercompany (expense) income, net		—			(15,147	)		14,634			513			—
Equity in income of subsidiaries, net		19,181			—			—			(19,181	)		—
		(23,275	)		(23,649	)		23,664			(18,668	)		(41,928	)
(Loss) income before income taxes		(23,275	)		8,344			7,445			(12,898	)		(20,384	)
Income tax provision		—			(1,671	)		(1,906	)		—			(3,577	)
Net (loss) income from continuing operations		(23,275	)		6,673			5,539			(12,898	)		(23,961	)
Net income from discontinued operations		—			855			—			—			855
Net (loss) income		(23,275	)		7,528			5,539			(12,898	)		(23,106	)
Net income attributable to noncontrolling interests		—			—			(169	)		—			(169	)
Net (loss) income attributable to DJOFL	$	(23,275	)	$	7,528		$	5,370		$	(12,898	)	$	(23,275	)

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DJO Finance LLC

Unaudited Condensed Consolidating Statements of Operations

For the Six Months Ended July 1, 2016

(in thousands)

	DJOFL			Guarantors			Non - Guarantors			Eliminations			Consolidated
Net sales	$	—		$	495,872		$	158,673		$	(82,787	)	$	571,758
Costs and operating expenses:
Cost of sales (exclusive of amortization of intangible    assets of $14,487)		—			189,306			138,711			(89,460	)		238,557
Selling, general and administrative		—			195,637			47,919			—			243,556
Research and development		—			18,109			1,867			—			19,976
Amortization of intangible assets		—			37,846			817			—			38,663
		—			440,898			189,314			(89,460	)		540,752
Operating income (loss)		—			54,974			(30,641	)		6,673			31,006
Other (expense) income:
Interest (expense) income, net		(84,731	)		71			(6	)		-			(84,666	)
Other (expense) income, net		(8	)		(16,573	)		17,333			-			752
Intercompany (expense) income, net		—			(14,784	)		14,752			32			-
Equity in income of subsidiaries, net		23,143			—			—			(23,143	)		-
		(61,596	)		(31,286	)		32,079			(23,111	)		(83,914	)
(Loss) income before income taxes		(61,596	)		23,688			1,438			(16,438	)		(52,908	)
Income tax provision		—			(6,078	)		(2,912	)		—			(8,990	)
Net (loss) income from continuing operations		(61,596	)		17,610			(1,474	)		(16,438	)		(61,898	)
Net income from discontinued operations		—			665			—			—			665
Net (loss) income		(61,596	)		18,275			(1,474	)		(16,438	)		(61,233	)
Net income attributable to noncontrolling interests		—			—			(362	)		—			(362	)
Net (loss) income attributable to DJOFL	$	(61,596	)	$	18,275		$	(1,836	)	$	(16,438	)	$	(61,595	)

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DJO Finance LLC

Unaudited Condensed Consolidating Statements of Comprehensive Loss

For the Three Months Ended July 1, 2016

(in thousands)

	DJOFL			Guarantors		Non - Guarantors			Eliminations			Consolidated
Net (loss) income	$	(23,275	)	$	7,528	$	5,539		$	(12,898	)	$	(23,106	)
Other comprehensive loss, net of taxes:
Foreign currency translation adjustments, net of tax    benefit of $111		—			—		(8,458	)		—			(8,458	)
Unrealized loss on cash flow hedges, net of tax provision of zero		(2,651	)		—		—			—			(2,651	)
Other comprehensive loss		(2,651	)		—		(8,458	)		—			(11,109	)
Comprehensive (loss) income		(25,926	)		7,528		(2,919	)		(12,898	)		(34,215	)
Comprehensive income attributable to noncontrolling    interests		—			—		(101	)		—			(101	)
Comprehensive (loss) income attributable to    DJO Finance LLC	$	(25,926	)	$	7,528	$	(3,020	)	$	(12,898	)	$	(34,316	)

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DJO Finance LLC

Unaudited Condensed Consolidating Statements of Comprehensive Loss

For the Six Months Ended July 1, 2016

(in thousands)

	DJOFL			Guarantors		Non - Guarantors			Eliminations			Consolidated
Net (loss) income	$	(61,596	)	$	18,275	$	(1,474	)	$	(16,438	)	$	(61,233	)
Other comprehensive loss, net of taxes:
Foreign currency translation adjustments, net of tax    provision of $166		-			-		(2,850	)		-			(2,850	)
Unrealized loss on cash flow hedges, net of tax provision of zero		(8,042	)		-		-			-			(8,042	)
Other comprehensive loss		(8,042	)		-		(2,850	)		-			(10,892	)
Comprehensive (loss) income		(69,638	)		18,275		(4,324	)		(16,438	)		(72,125	)
Comprehensive loss attributable to noncontrolling    interests		-			-		(402	)		-			(402	)
Comprehensive (loss) income attributable to    DJO Finance LLC	$	(69,638	)	$	18,275	$	(4,726	)	$	(16,438	)	$	(72,527	)

32

DJO Finance LLC

Unaudited Condensed Consolidating Statements of Cash Flows

For the Six Months Ended July 1, 2016

(in thousands)

	DJOFL			Guarantors			Non - Guarantors			Eliminations			Consolidated
Cash Flows from Operating Activities:
Net (loss) income	$	(61,596	)	$	18,275		$	(1,474	)	$	(16,438	)	$	(61,233	)
Net loss from discontinued operations		—			(665	)		—			—			(665	)
Adjustments to reconcile net (loss) income to net    cash (used in) provided by operating activities:
Depreciation		—			18,055			2,486			(28	)		20,513
Amortization of intangible assets		—			37,846			817			—			38,663
Amortization of debt issuance costs and non-cash    interest expense		3,815			—			—			—			3,815
Stock-based compensation expense		—			1,521			—			—			1,521
Gain on disposal of assets, net		—			471			55			4			530
Deferred income tax expense (benefit)		—			4,133			(321	)		—			3,812
Equity in income (loss) of subsidiaries, net		(23,143	)		—			—			23,143			—
Changes in operating assets and liabilities:
Accounts receivable		—			(559	)		(3,650	)		—			(4,209	)
Inventories		—			(1,244	)		2,793			(7,199	)		(5,650	)
Prepaid expenses and other assets		1,251			(2,763	)		(252	)		1,127			(637	)
Accounts payable and other current liabilities		(7,721	)		4,029			(69	)		(3,258	)		(7,019	)
Net cash (used in) provided by continuing operating    activities		(87,394	)		79,099			385			(2,649	)		(10,559	)
Net cash used in discontinued operations		—			(8,853	)		—			—			(8,853	)
Net cash (used in) provided by operating activities		(87,394	)		70,246			385			(2,649	)		(19,412	)
Cash Flows from Investing Activities:
Purchases of property and equipment		—			(30,745	)		(2,261	)		(1	)		(33,007	)
Proceeds from disposition of assets					700			—			—			700
Net cash (used in) provided by investing activities    from continuing operations		—			(30,045	)		(2,261	)		(1	)		(32,307	)
Cash Flows from Financing Activities:
Intercompany		31,070			(38,991	)		5,271			2,650			—
Proceeds from issuance of debt		63,000			—			—			—			63,000
Repayments of debt		(18,913	)		—			—			—			(18,913	)
Net cash provided by (used in) financing activities		75,157			(38,991	)		5,271			2,650			44,087
Effect of exchange rate changes on cash and    cash equivalents		—			—			388			—			388
Net increase in cash and cash equivalents		(12,237	)		1,210			3,783			—			(7,244	)
Cash and cash equivalents at beginning of period		29,673			160			19,110			—			48,943
Cash and cash equivalents at end of period	$	17,436		$	1,370		$	22,893		$	—		$	41,699

17. SUBSEQUENT EVENTS

In July 2017, we executed an agreement with Intelenet Global Services, a global business process outsourcing firm and a Blackstone portfolio company. Intelenet will provide certain mid and back office functions including certain accounting, information technology and customer care services. We will partner with Intelenet to centralize, standardize and automate our transactional processes.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 Unaudited Condensed Consolidated Financial Statements and notes thereto as well as the other financial data included elsewhere in this Quarterly Report on Form 10-Q. References to “us,” “we,” “DJOFL,” “our,” or “the Company,” refers to DJO Finance LLC and its consolidated subsidiaries.

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. The section entitled “Risk Factors” in our 2016 Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 15, 2017 describes these important risk factors that may affect our business, financial condition, results of operation, and/or liquidity. Results actually achieved may differ materially from expected results included in these statements as a result of these or other factors.

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^™.

34

Business Transformation Initiative

In March 2017, the Company announced that it has embarked on a series of business transformation projects to improve the Company’s liquidity and profitability and to improve our customers’ experiences.  This business transformation initiative will 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 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 Company expects that the costs of the outside experts, tools and related activities will be significantly offset by the cost savings expected to be realized from the implementation of the transformation plan.  As a part of this transformation initiative, the Company 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.

Operating Segments

The Company’s continuing operations consist of four operating segments; Bracing and Vascular; Recovery Sciences; Surgical Implant; and International. See Note 15 to our Unaudited Condensed Consolidated Financial Statements for financial and other additional information regarding our segments.

The following table presents financial information for our reportable segments for the periods presented. Segment results exclude the impact of amortization of intangible assets, certain general corporate expenses, and non-recurring and integration charges.

	Three Months Ended						Six Months Ended
($ in thousands)	July 1, 2017			July 1, 2016			July 1, 2017			July 1, 2016
Bracing and Vascular:
Net sales	$	126,415		$	131,751		$	248,468		$	255,967
Operating income		24,225			29,072			45,232			49,606
Operating income as a percent of net segment    sales		19.2	%		22.1	%		18.2	%		19.4	%
Recovery Sciences:
Net sales	$	38,774		$	38,449		$	77,277		$	75,024
Operating income		10,709			8,056			19,616			14,501
Operating income as a percent of net segment    sales		27.6	%		21.0	%		25.4	%		19.3	%
Surgical Implant:
Net sales	$	49,991		$	42,575		$	99,583		$	85,625
Operating income		10,062			6,053			18,202			13,282
Operating income as a percent of net segment    sales		20.1	%		14.2	%		18.3	%		15.5	%
International:
Net sales	$	79,566		$	80,077		$	157,807		$	155,142
Operating income		13,509			14,653			27,119			23,642
Operating income as a percent of net segment    sales		17.0	%		18.3	%		17.2	%		15.2	%

35

Results of Operations

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

	Three Months Ended											Six Months Ended
	July 1, 2017					July 1, 2016						July 1, 2017					July 1, 2016
Net sales	$	294,746		100.0	%	$	292,852			100.0	%	$	583,135		100.0	%	$	571,758		100.0	%
Costs and operating expenses:
Cost of sales (1)		124,885		42.4			120,474			41.1			244,454		41.9			238,557		41.7
Selling, general and administrative		135,739		46.1			121,627		41.5				269,901		46.3			243,556		42.6
Research and development		9,063		3.1			10,122			3.5			18,202		3.1			19,976		3.5
Amortization of intangible assets		16,016		5.4			19,085			6.5			34,861		6.0			38,663		6.8
		285,703		96.9			271,308			92.6			567,418		97.3			540,752		94.6
Operating income		9,043		3.1			21,544			7.4			15,717		2.7			31,006		5.4
Other (expense) income:
Interest expense, net		(43,068	)	(14.6	)		(42,396	)		(14.5	)		(85,755	)	(14.7	)		(84,666	)	(14.7	)
Other income, net		896		0.3			468			0.2			1,184		0.2			752		0.1
		(42,172	)	(14.3	)		(41,928	)		(14.3	)		(84,571	)	(14.5	)		(83,914	)	(14.6	)
Loss before income taxes		(33,129	)	(11.2	)		(20,384	)		(6.9	)		(68,854	)	(11.8	)		(52,908	)	(9.2	)
Income tax provision		(1,095	)	(0.4	)		(3,577	)		(1.2	)		(5,173	)	(0.9	)		(8,990	)	(1.6	)
Net loss from continuing operations		(34,224	)	(11.6	)		(23,961	)		(8.1	)		(74,027	)	(12.7	)		(61,898	)	(10.8	)
Net income (loss) from discontinued    operations		47		0.0			855			0.3			105		0.0			665		0.1
Net loss		(34,177	)	(11.6	)		(23,106	)		(7.8	)		(73,922	)	(12.7	)		(61,233	)	(10.7	)
Net income attributable to noncontrolling    interests		(206	)	(0.1	)		(169	)		(0.1	)		(430	)	(0.1	)		(362	)	(0.1	)
Net loss attributable to DJO Finance    LLC	$	(34,383	)	(11.7	)%	$	(23,275	)		(7.9	)%	$	(74,352	)	(12.8	)%	$	(61,595	)	(10.8	)%

(1) Cost of sales is exclusive of amortization of intangible assets of $6,980 and $13,961 for the three and six months ended July 1, 2017 and $7,080 and $14,487 for the three and six months ended July 1, 2016, respectively.

Three Months Ended July 1, 2017 (second quarter 2017) compared to Three Months Ended July 1, 2016 (second quarter 2016)

Net Sales. Net sales for second quarter 2017 increased 0.6% to $294.7 million, compared to net sales of $292.9 million for second quarter 2016. The increase was primarily driven by our Surgical Implant segment. Excluding the unfavorable impact of foreign currency exchange rates, which resulted in a decrease in net sales of $2.2 million, net sales increased 1.4% for the second quarter 2017.  

The following table sets forth our net sales by operating segment ($ in thousands):

	Second Quarter 2017		% of Net Sales			Second Quarter 2016		% of Net Sales			Increase (Decrease)			% Increase (Decrease)
Bracing and Vascular	$	126,415		42.9	%	$	131,751		45.0	%	$	(5,336	)		(4.1	)%
Recovery Sciences		38,774		13.1			38,449		13.1			325			0.8
Surgical Implant		49,991		17.0			42,575		14.6			7,416			17.4
International		79,566		27.0			80,077		27.3			(511	)		(0.6	)
Total net sales	$	294,746		100.0	%	$	292,852		100.0	%	$	1,894			0.6	%

Net sales in our Bracing and Vascular segment were $126.4 million for second quarter 2017, a decrease of 4.1% from net sales of $131.8 million for second quarter 2016. The decrease was primarily due to general softness across the Company’s bracing and support 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 $38.8 million for second quarter 2017, an increase of 0.8% from net sales of $38.4 million for second quarter 2016. The increase was driven by increased sales of Chattanooga products as well as our direct consumer product sales.

36

Net sales in our Surgical Implant segment were $50.0 million for second quarter 2017, an increase of 17.4% from net sales of $42.6 million for second quarter 2016. The segment had strong organic growth in knee, hip and shoulder products due to new product introductions and new accounts.

Net sales in our International segment were $79.6 million for second quarter 2017, a decrease of 0.6% from net sales of $80.1 million for second quarter 2016. In constant currency, excluding an unfavorable impact of $2.2 million related to changes in foreign exchange rates in effect during second quarter 2017 compared to second quarter 2016, net sales increased 2.1%. Growth was driven by stronger sales in direct markets, primarily Australia, France and Spain, as well as continued growth in our export markets.

Cost of Sales. As a percentage of net sales, cost of sales increased to 42.4% for second quarter 2017, compared to 41.1% for second quarter 2016 mainly due to a mix between and within the reporting segments.

Selling, General and Administrative (SG&A). SG&A expenses increased to $135.7 million for second quarter 2017, from $121.6 million in second quarter 2016. As a percentage of net sales, SG&A expenses increased to 46.1% for second quarter 2017 from 41.5% for second quarter 2016 mainly due to business transformation expenses.

Research and Development (R&D). R&D expenses were $9.1 million for second quarter 2017, compared to $10.1 million in second quarter 2016. As a percentage of net sales, R&D expenses decreased to 3.1% for second quarter 2017 compared to 3.5% for second quarter 2016. The company continues to focus on the development of new products, as well as the enhancement of existing products with the latest technology and updated designs, primarily in our Bracing and Vascular and Surgical Implant segments.

Amortization of Intangible Assets. Amortization of intangible assets decreased to $16.0 million for second quarter 2017, from $19.1 million for second quarter 2016. The decrease was due to certain intangible assets reaching full amortization primarily in our patents and technology category.

Interest Expense, net. Our interest expense, net was $43.1 million for second quarter 2017 compared to $42.4 million for second quarter 2016. The increase was due to a higher balance on our senior secured credit facilities for second quarter 2017 compared to second quarter 2016.

Other Income, Net. Other income, net, increased to $0.9 million for second quarter 2017 compared to $0.5 million for the second quarter 2016. Results for both periods presented primarily represent net realized and unrealized foreign currency transaction gains and losses.

Income Tax Provision. For second quarter 2017, we recorded an income tax provision of $1.1 million on a pre-tax loss of $33.1 million, resulting in a negative effective tax rate of 3.3%. For second quarter 2016, we recorded a tax provision of $3.6 million on pre-tax losses of $20.4 million, resulting in a negative effective tax rate of 17.5%.

We recorded income tax expense in the period, although there were pre-tax losses.  The income tax expense recorded primarily relates to foreign tax expense and the accrual of non-cash tax expense related to an additional valuation allowance recorded in connection with the tax amortization of indefinite-lived intangible assets.

Our tax rates are sometimes negative because our U.S. federal tax losses, and certain state tax losses, are unavailable to offset income taxes arising in other states and in the foreign jurisdictions where we are subject to tax. In addition, we do not currently recognize a tax benefit for our U.S. and state tax loss carryovers because we cannot conclude that it is more likely than not the carryovers will be available to offset future taxable income.

Discontinued Operations. During the fourth quarter of 2015, we ceased production, selling and billing operations of our Empi product line, and as a result, our Empi business is reported as a discontinued operation. Income of $47 thousand was recognized for second quarter 2017. Net income from discontinued operations was $0.9 million for second quarter of 2016, primarily consisting of income from liquidation of certain assets offset by severance and other termination costs.

Six Months Ended July 1, 2017 (first half 2017) compared to Six Months Ended July 1, 2016 (first half 2016)

Net Sales. Net sales for first half 2017 increased 2.0% to $583.1 million, compared to net sales of $571.8 million for first half 2016. Excluding the unfavorable impact of foreign currency exchange rates, which resulted in a decrease in net sales of $4.1 million, net sales increased 2.7% for first half 2017 compared to first half 2016. The Company operates on a manufacturing calendar. Each quarter consists of thirteen weeks, two four week and one five week period. Our first half may have more or fewer shipping days from year to year based on the days of the week on which holidays fall. The first half of 2017 had one less shipping day than in the first half

37

2016. Adjusted for the number of shipping days and the 0.7% negative impact of currency exchange rates, net sales grew 3.5% over the prior year first half. The increase was primarily driven by our Surgical Implant segment.

The following table sets forth our net sales by operating segment ($ in thousands):

	Six Months 2017		% of Net Sales			Six Months 2016		% of Net Sales			Increase (Decrease)			% Increase (Decrease)
Bracing and Vascular	$	248,468		42.6	%	$	255,967		44.8	%	$	(7,499	)		(2.9	)%
Recovery Sciences		77,277		13.3			75,024		13.1			2,253			3.0
Surgical Implant		99,583		17.1			85,625		15.0			13,958			16.3
International		157,807		17.0			155,142		27.1			2,665			1.7
Total net sales	$	583,135		100.0	%	$	571,758		100.0	%	$	11,377			2.0	%

Net sales in our Bracing and Vascular segment were $248.5 million for first half 2017, a decrease of 2.9% from net sales of $256.0 million for first half 2016. Adjusted for the number of shipping days, net sales decreased 2.2% in first half 2017 compared to first half 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 $77.3 million for first half 2017, an increase of 3.0% from net sales of $75.0 million for first half 2016. Adjusted for the number of shipping days, net sales in our Recovery Sciences segment increased 3.8% for first half 2017 compared to the prior year first half. 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 $99.6 million for first half 2017, an increase of 16.3% from net sales of $85.6 million for first half 2016. Adjusted for the number of shipping days, net sales in our Surgical Implant segment grew 17.2% over the prior year first half. The segment had strong organic growth in knee, hip and shoulder products due to new product introductions and new accounts.

Net sales in our International segment were $157.8 million for first half 2017, an increase of 1.7% from net sales of $155.1 million for first half 2016. In constant currency, excluding an unfavorable impact of $4.1 million related to changes in foreign exchange rates in effect during first half 2017 compared to the rates in effect in first half 2016, net sales increased 4.3% for first half 2017 compared to first half 2016. Adjusted for the number of shipping days, net sales in our International segment increased 5.0% for first half 2017 compared to first half 2016. Growth was driven by stronger sales in direct markets, primarily France, Germany and Australia, as well as continued growth in our export markets.  

Cost of Sales. As a percentage of net sales, cost of sales remained essentially flat at 41.9% for first half 2017, compared to 41.7% for first half 2016.

Selling, General and Administrative (SG&A). SG&A expenses increased to $269.9 million for first half 2017, from $243.6 million in first half 2016. The increase was mainly due to business transformation expenses.

Research and Development (R&D). R&D expenses were $18.2 million for first half 2017, compared to $20.0 million in first half 2016, relatively consistent as a percentage of net sales at 3.1% and 3.5% of net sales, respectively. The company continues to focus on the development of new products, as well as the enhancement of existing products with the latest technology and updated designs, primarily our Bracing and Vascular and Surgical Implant segments.

Amortization of Intangible Assets. Amortization of intangible assets decreased to $34.9 million for first half 2017, from $38.7 million for first half 2016. 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 $85.8 million for first half 2017 compared to $84.7 million for first half 2016. The increase was due to a higher balance on our senior secured credit facilities for first half 2017 compared to second quarter 2016.

Other Income, Net. Other income, net, increased to $1.2 million for first half 2017 from $0.8 million for first half 2016. Results for both periods presented primarily represent net realized and unrealized foreign currency transaction gains and losses.

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Income Tax Provision. For first half 2017, we recorded an income tax provision of $5.2 million on a pre-tax loss of $68.9 million, resulting in a negative effective tax rate of 7.5%. For first half 2016, we recorded a tax provision of $9.0 million on pre-tax losses of $52.9 million, resulting in a negative effective tax rate of 17.0%.

We recorded income tax expense in the period, although there were pre-tax losses.  The income tax expense 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.

Our tax rates are sometimes negative because our U.S. federal tax losses, and certain state tax losses, are unavailable to offset income taxes arising in other states and in the foreign jurisdictions where we are subject to tax. In addition, we do not currently recognize a tax benefit for our U.S. and state tax loss carryovers because we cannot conclude that it is more likely than not the carryovers will be available to offset future taxable income.

Discontinued Operations. During the fourth quarter of 2015, we ceased production, selling and billing operations of our Empi product line, and as a result, our Empi business is reported as a discontinued operation. Income of $0.1 million was recognized for first half 2017. Net income from discontinued operations was $0.7 million for first half of 2016, primarily consisting of income from liquidation of certain assets offset by severance and other termination costs.

Liquidity and Capital Resources

As of July 1, 2017, our primary sources of liquidity consisted of cash and cash equivalents totaling $35.2 million and our $150.0 million ABL Facility, of which $75.8 million was available. Our revolving loan balance under our ABL Facility was $68.0 million as of July 1, 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. Working capital at July 1, 2017 was $132.4 million.

We believe that our existing cash, plus the amounts we expect to generate from operations, amounts we expect to generate from receivables 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 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 $38.1 million and used $10.6 million of cash for first half 2017 and 2016, 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 increase in working capital accounts is primarily attributable to accounts payable and accounts receivable.  For six months 2017 and 2016, cash paid for interest was $85.4 million and $86.8 million, respectively.

Investing activities from continuing operations used $22.4 million and $32.3 million of cash for six months 2017 and 2016, respectively. Cash used in investing activities for six months 2017 and 2016 was for purchases of property and consigned surgical instruments to support growth and IT automation technology.

Financing activities used cash of $16.9 million and provided cash of $44.1 million in six months 2017 and 2016, respectively. Cash used in and provided by financing activities in six months 2017 and 2016 consisted of net borrowings under and repayments of

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our ABL Facility. Additionally in 2017 cash used in financing activities consisted of payments related to the repurchase of shares of common stock from our former chief executive officer upon his departure.

Indebtedness

The principal amount and carrying value of our debt, exclusive of debt issuance costs and net unamortized original issue discount of $30.4 million, was as follows for July 1, 2017 (in thousands):

	July 1, 2017				December 31, 2016
	Principal Amount		Carrying Value		Principal Amount		Carrying Value
Credit facilities:
ABL Facility	$	68,000	$	66,604	$	82,000	$	80,365
Term loans		1,036,538		1,026,211		1,041,813		1,029,816
		1,104,538		1,092,815		1,123,813		1,110,181
Notes:
8.125% second lien notes due 2021		1,015,000		1,001,987		1,015,000		1,000,649
10.75% third lien notes due 2020		298,471		292,783		298,471		291,958
		1,313,471		1,294,770		1,313,471		1,292,607
Other debt		6,673		6,673		—		—
Total indebtedness	$	2,424,682	$	2,394,258	$	2,437,284	$	2,402,788

Credit Facilities.

Our credit facilities at July 1, 2017 consisted of $1,036.5 million term loans (the “Term Loan”) and a $150.0 million asset-based revolving credit facility (the “ABL Facility”), which mature on June 7, 2020 (collectively, the “Credit Facilities”). Our revolving loan balance under our ABL Facility was $68.0 million at July 1, 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.

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% Notes and 10.75% Notes we are not required to repay principal related to any of the notes prior to their final maturity dates of the notes. We pay interest semi-annually on the Notes.

See Note 9 to our Unaudited Condensed Consolidated Financial Statements for additional information regarding our indebtedness.

Certain Covenants and Related Compliance. Our Term Loan requires us to maintain a leverage ratio of debt from our Credit Facilities, net of cash, to Adjusted EBITDA of no higher than 5.35:1, computed on a trailing twelve month period commencing on 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 July 1, 2017, our actual first lien net leverage ratio was 4.13:1, meeting the requirement.

Our debt agreements restrict our ability to incur additional debt and make certain payments. The indentures governing our Notes generally permit additional debt only if the ratio of our Adjusted EBITDA to fixed charges is at least 2.00:1, or, in the case of additional debt to finance an acquisition, such ratio improves on a pro forma basis after giving effect to such incurrence. Our Credit Facilities permit us to incur additional debt for an acquisition only if the ratio of Adjusted EBITDA to debt, net of cash, improves or is no higher than 7.50:1, on a pro forma basis after giving effect to acquisition and additional debt.  The indentures governing our Notes generally prevent us from making certain payments, such as dividends and junior debt prepayments, unless the ratio of Adjusted EBITDA to fixed charges is at least 2.00:1 on a pro forma basis. Our ratio of Adjusted EBITDA to fixed charges for the twelve months ended July 1, 2017 was 1.55:1. Fixed charges, as defined in the indentures, generally means consolidated interest expense plus all cash dividends or other distributions paid on certain preferred equity.

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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 Credit Facilities and investors in our Notes 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 three and six months ended July 1, 2017 and July 1, 2016 and the twelve months ended July 1, 2017 (in thousands). The terms and related calculations are defined in the credit agreement relating to our Credit Facilities and the Indentures.

													Twelve
													Months
	Three Months Ended						Six Months Ended						Ended
	July 1,			July 1,			July 1,			July 1,			July 1,
	2017			2016			2017			2016			2017
Net loss attributable to DJO Finance LLC	$	(34,383	)	$	(23,275	)	$	(74,352	)	$	(61,595	)	$	(299,060	)
Income from discontinued operations, net		(47	)		(855	)		(105	)		(665	)		(579	)
Interest expense, net		43,068			42,396			85,755			84,666			171,168
Income tax provision (benefit)		1,095			3,577			5,173			8,990			(10,669	)
Depreciation and amortization		26,942			29,274			56,716			59,176			115,432
Non-cash charges (a)		537			2,204			1,108			2,603			180,904
Non-recurring and integration charges (b)		25,195			8,605			43,584			15,937			76,322
Other adjustment items (c)		1,142			1,636			2,911			3,366			10,102
		63,549			63,562			120,790			112,478			243,620
Permitted pro forma adjustments applicable to the twelve month period only (d)      Future cost savings														14,988
Adjusted EBITDA	$	63,549		$	63,562		$	120,790		$	112,478		$	258,608

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

									Twelve
									Months
	Three Months Ended				Six Months Ended				Ended
	July 1,		July 1,		July 1,		July 1,		July 1,
	2017		2016		2017		2016		2017
Stock compensation expense	$	392	$	1,316	$	846	$	1,521	$	2,513
Loss on disposal of fixed assets and assets held for    sale, net		145		783		262		890		321
Impairment of goodwill (1)		—		—		—		—		160,000
Inventory adjustments (2)		—		—		—		—		18,013
Purchase accounting adjustments (3)		—		105		—		192		57
Total non-cash charges	$	537	$	2,204	$	1,108	$	2,603	$	180,904

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(1) Impairment of goodwill and intangible assets for the twelve months ended July 1, 2017 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 consisted of amortization of fair market value inventory adjustments for all periods presented.

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

											Twelve
											Months
	Three Months Ended					Six Months Ended					Ended
	July 1,			July 1,		July 1,			July 1,		July 1,
	2017			2016		2017			2016		2017
Restructuring and reorganization	$	23,273		$	1,476	$	39,069		$	3,469	$	52,478
Acquisition related expenses and integration (1)		277			2,657		579			5,982		4,947
Executive transition		(49	)		—		(49	)		—		4,767
Litigation and regulatory costs and settlements, net (2)		1,290			4,472		3,392			6,486		13,468
IT automation projects		404			—		593			—		662
Total non-recurring and integration charges	$	25,195		$	8,605	$	43,584		$	15,937	$	76,322

(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 July 1, 2017, litigation and regulatory costs consisted of $1.4 million in litigation costs related to ongoing product liability issues and $12.1 million related to other litigation and regulatory costs and settlements.

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

													Twelve
													Months
	Three Months Ended						Six Months Ended						Ended
	July 1,			July 1,			July 1,			July 1,			July 1,
	2017			2016			2017			2016			2017
Blackstone monitoring fees	$	1,750		$	1,750		$	3,500		$	3,500		$	7,000
Non-controlling interests		206			169			430			362			691
Other (1)		(814	)		(283	)		(1,019	)		(496	)		2,411
Total other adjustment items	$	1,142		$	1,636		$	2,911		$	3,366		$	10,102

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

(d) Permitted pro forma adjustments include future cost savings related to the exit of our Empi business and our business transformation initiative.

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Off-Balance Sheet Arrangements

There are currently no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition.

Contractual Commitments

There have been no material changes outside the normal course of business in our contractual obligations as previously disclosed in our Annual Report on Form 10-K for fiscal year ended December 31, 2016.

Critical Accounting Policies and Estimates

There have been no material changes to our critical accounting policies and estimates as previously disclosed in our Annual Report on Form 10-K for fiscal year ended December 31, 2016.

ITEM 3. 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 July 1, 2017, we have $1,313.5 million of aggregate fixed rate notes and $1,104.5 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 six months ended July 1, 2017 by $2.5 million. As of July 1, 2017, our term loans are subject to a 1.00% minimum LIBOR rate which is higher than the actual LIBOR rate of 1.16% as of July 1, 2017.  In October 2015, we executed interest rate caps with an aggregate notional amount of $500.0 million and a cap rate of 1.00% to mitigate some of the exposure. We may use additional derivative financial instruments where appropriate to manage our interest rate risk (see Note 7 to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item 2, 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. For the three and six months ended July 1, 2017, sales denominated in foreign currencies accounted for 24.3% and 24.3% of our consolidated net sales, of which 16.4% and 16.7% were denominated in the euro, respectively. 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.

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ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as the term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

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

Changes in Internal Control over Financial Reporting

There has been no change in the Company’s internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1. 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. There have been no material developments in the Legal Proceedings discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

ITEM 1A. RISK FACTORS

For a discussion of the Company’s potential risks or uncertainties, please see Part I, Item IA, of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 filed with the SEC on March 15, 2017. There have been no material changes to the risk factors disclosed in such Form 10-K.

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ITEM 6. EXHIBITS

(a) Exhibits

3.1	Certificate of Formation of DJOFL and amendments thereto (incorporated by reference to Exhibit 3.1 to DJOFL’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007).
3.2	Limited Liability Company Agreement of DJOFL (incorporated by reference to Exhibit 3.2 to DJOFL’s Registration Statement on Form S-4, filed April 18, 2007 (File No. 333-142188)).
31.1+	Certification (pursuant to Securities Exchange Act Rule 13a-14a) by Chief Executive Officer.
31.2+	Certification (pursuant to Securities Exchange Act Rule 13a-14a) by Chief Financial Officer.
32.1+	Section 1350—Certification (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) by Chief Executive Officer.
32.2+	Section 1350—Certification (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) by Chief Financial Officer.
101+	The following financial information from DJO Finance LLC’s Quarterly Report on Form 10-Q for the quarterly period ended July 1, 2017, formatted in XBRL: (i) the Unaudited Condensed Consolidated Balance Sheets as of July 1, 2017 and December 31, 2016, (ii) the Unaudited Condensed Consolidated Statements of Operations for the three and six months ended July 1, 2017 and July 1, 2016, (iii) the Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended July 1, 2017 and July 1, 2016, (iv) the Unaudited Consolidated Statement of Deficit for the six months ended July 1, 2017, (v) the Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended July 1, 2017 and July 1, 2016 and (vi) the Notes to the Unaudited Condensed Consolidated Financial Statements.

+ Filed herewith

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SIGNATURES

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

	DJO FINANCE LLC
Date: August 10, 2017	By:	/s/ BRADY R. SHIRLEY
		Brady R. Shirley
		President and Chief Executive Officer
Date: August 10, 2017	By:	/s/ MICHAEL C. EKLUND
		Michael C. Eklund
		Chief Financial Officer and Chief Operating Officer

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