djo-10q_20180630.htm

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.

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 14, 2018, 100% of the issuer’s membership interests were owned by DJO Holdings LLC.

	June 30, 2018			December 31, 2017
ASSETS
Current assets:
Cash and cash equivalents	$	26,789		$	31,985
Accounts receivable, net		179,611			190,324
Inventories, net		177,273			169,137
Prepaid expenses and other current assets		32,144			20,218
Current assets of discontinued operations		511			511
Total current assets		416,328			412,175
Property and equipment, net		137,496			133,522
Goodwill		878,963			864,112
Intangible assets, net		585,268			607,088
Other assets		5,242			5,128
Total assets	$	2,023,297		$	2,022,025
LIABILITIES AND DEFICIT
Current liabilities:
Accounts payable	$	105,144		$	98,331
Accrued interest		18,615			18,015
Current portion of debt obligations		26,022			15,936
Other current liabilities		116,071			126,360
Total current liabilities		265,852			258,642
Long-term debt obligations		2,414,519			2,398,184
Deferred tax liabilities, net		146,108			142,597
Other long-term liabilities		20,968			13,080
Total liabilities	$	2,847,447		$	2,812,503
Commitments and contingencies (Note 15)
Deficit:
DJO Finance LLC membership deficit:
Member capital		845,708			844,115
Accumulated deficit		(1,646,850	)		(1,615,536	)
Accumulated other comprehensive loss		(25,579	)		(21,072	)
Total membership deficit		(826,721	)		(792,493	)
Noncontrolling interests		2,571			2,015
Total deficit		(824,150	)		(790,478	)
Total liabilities and deficit	$	2,023,297		$	2,022,025

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

	Three Months Ended						Six Months Ended
	June 30, 2018			July 1, 2017			June 30, 2018			July 1, 2017
Net sales	$	304,837		$	294,746		$	597,466		$	583,135
Operating expenses:
Cost of sales (exclusive of amortization of intangible assets of $6,935 and $13,293 for the three and six months ended June 30, 2018, respectively and $6,980 and $13,961 for the three and six months ended July 1, 2017, respectively)		126,443			124,885			246,379			244,454
Selling, general and administrative		117,626			135,739			232,942			269,901
Research and development		9,707			9,063			18,988			18,202
Amortization of intangible assets		15,289			16,016			29,888			34,861
		269,065			285,703			528,197			567,418
Operating income		35,772			9,043			69,269			15,717
Other (expense) income:
Interest expense, net		(45,779	)		(43,068	)		(89,701	)		(85,755	)
Other (expense) income, net		1,054			896			(487	)		1,184
		(44,725	)		(42,172	)		(90,188	)		(84,571	)
Loss before income taxes		(8,953	)		(33,129	)		(20,919	)		(68,854	)
Income tax provision		4,635			1,095			10,019			5,173
Net loss from continuing operations		(13,588	)		(34,224	)		(30,938	)		(74,027	)
Net income from discontinued operations		178			47			321			105
Net loss		(13,410	)		(34,177	)		(30,617	)		(73,922	)
Net income attributable to noncontrolling interests		(276	)		(206	)		(638	)		(430	)
Net loss attributable to DJO Finance LLC	$	(13,686	)	$	(34,383	)	$	(31,255	)	$	(74,352	)

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

	Three Months Ended						Six Months Ended
	June 30, 2018			July 1, 2017			June 30, 2018			July 1, 2017
Net loss	$	(13,410	)	$	(34,177	)	$	(30,617	)	$	(73,922	)
Other comprehensive income (loss), net of taxes:
Foreign currency translation adjustments, net of tax (benefit) provision of $(1,032) and $334 for the three and six months ended June 30, 2018, respectively and $4,080 and $4,192 for the three and six months ended July 1, 2017, respectively		(8,636	)		3,204			(7,134	)		4,953
Unrealized gain (loss) on cash flow hedges, net of tax (benefit) provision of $(471) and zero for the three and six months ended June 30, 2018 and $21 thousand for both the three and six months ended July 1, 2017, respectively		640			(786	)		2,545			60
Other comprehensive (loss) income		(7,996	)		2,418			(4,648	)		5,013
Comprehensive loss		(21,406	)		(31,759	)		(35,265	)		(68,909	)
Comprehensive (income) loss income attributable to noncontrolling interests		(136	)		768			(556	)		515
Comprehensive loss attributable to DJO Finance LLC	$	(21,542	)	$	(30,991	)	$	(35,821	)	$	(68,394	)

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

	DJO Finance LLC
	Member Capital		Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Membership Deficit			Non-Controlling Interests			Total Deficit
Balance at December 31, 2017	$	844,115	$	(1,615,536	)	$	(21,072	)	$	(792,493	)	$	2,015		$	(790,478	)
Net (loss) income		—		(31,255	)		—			(31,255	)		638			(30,617	)
Other comprehensive loss, net of tax benefit		—		(59	)		(4,507	)		(4,566	)		(82	)		(4,648	)
Investment by Parent		698		—			—			698			—			698
Stock-based compensation		895		—			—			895			—			895
Balance at June 30, 2018	$	845,708	$	(1,646,850	)	$	(25,579	)	$	(826,721	)	$	2,571		$	(824,150	)

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

	Six Months Ended
	June 30, 2018			July 1, 2017
Cash flows from operating activities:
Net loss	$	(30,617	)	$	(73,922	)
Net income from discontinued operations		(321	)		(105	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		23,488			21,855
Amortization of intangible assets		29,888			34,861
Amortization of debt issuance costs and non-cash interest expense		4,337			4,073
Stock-based compensation expense		895			846
Deferred purchase price consideration		13,708			—
Loss on disposal of assets, net		543			279
Deferred income tax (benefit) expense		(2,758	)		2,084
Changes in operating assets and liabilities, net of acquired assets and liabilities:
Accounts receivable		9,288			11,179
Inventories		(9,122	)		2,364
Prepaid expenses and other assets		(7,645	)		3,080
Accrued interest		882			(3,806	)
Accounts payable and other current liabilities		(23,678	)		35,307
Net cash provided by continuing operating activities		8,888			38,095
Net cash provided by discontinued operations		321			105
Net cash provided by operating activities		9,209			38,200
Cash flows from investing activities:
Acquisition of business, net of cash acquired		(9,104	)		—
Purchases of property and equipment		(19,025	)		(22,434	)
Other, net		248			—
Net cash used in investing activities		(27,881	)		(22,434	)
Cash flows from financing activities:
Proceeds from revolver borrowings		66,503			35,556
Proceeds from capital lease		15,000			—
Repayments of debt obligations		(66,538	)		(48,275	)
Repurchase of common stock		—			(3,600	)
Investment by parent		—			500
Other financing, net		(482	)		—
Dividends paid to minority interests		—			(1,102	)
Net cash provided (used) in financing activities		14,483			(16,921	)
Effect of exchange rate changes on cash and cash equivalents		(1,007	)		1,140
Net decrease in cash and cash equivalents		(5,196	)		(15	)
Cash and cash equivalents at the beginning of the period		31,985			35,212
Cash and cash equivalents at the end of the period	$	26,789		$	35,197

Non-cash investing activities:
Purchases of surgical instruments included in accounts payable	$	4,592		$	4,530
Stock issued as part of acquisition consideration	$	698		$	—

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

We are a global developer, manufacturer and distributor of high-quality medical devices with a broad range of products used for rehabilitation, pain management and physical therapy. Our products address the continuum of patient care from injury prevention to rehabilitation after surgery, injury or from degenerative disease, enabling people to regain or maintain their natural motion. Our products are used by orthopedic specialists, spine surgeons, primary care physicians, pain management specialists, physical therapists, podiatrists, chiropractors, athletic trainers and other healthcare professionals. Our product lines include rigid and soft orthopedic bracing, hot and cold therapy, bone growth stimulators, vascular therapy systems and compression garments, therapeutic shoes and inserts, electrical stimulators used for pain management and physical therapy products. Our surgical implant business offers a comprehensive suite of reconstructive joint products for the hip, knee and shoulder.

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

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

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.

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.

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, 2017.

We operate 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 2018 had the same number of shipping days as the first half of 2017.

On January 1, 2018, we adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) and related clarifying standards (“ASC 606”) on revenue recognition using the modified retrospective method for all contracts in place at January 1, 2018. This new accounting standard outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers. This standard supersedes existing revenue recognition requirements. The core principle of the revenue recognition standard is to require an entity to recognize as revenue the amount that reflects the consideration to which it expects to be entitled in exchange for goods or services as it transfers control to its customers.

The majority of our contracts are generally short term in nature. Revenue is recognized at the point of time when we transfer control of the good or service to the customer or patient. Under ASC 606, estimated uncollectible amounts due from self-pay patients, as well as co-pays, co-insurance and deductibles owed to us by patients with insurance are generally considered implicit price concessions and are now presented as a reduction of net revenue. Under prior guidance, these amounts were recognized as bad debt expense and were included in other operating costs. When estimating the variable consideration, we use historical collection experience to estimate amounts not expected to be collected. Conversely, subsequent changes in collectability due to a change in financial condition (i.e. bankruptcy) continues to be recognized as bad debt expense.

The adoption of this standard did not have a material impact on our results of operations as the timing of revenue recognition under the new standard is not materially different from our previous revenue recognition policy. Based on our analysis of open contracts as of January 1, 2018, the cumulative effect of applying the new standard was not material.

On January 1, 2018, we adopted ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10 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. Adoption of this new guidance did not have a material impact on our Condensed Consolidated Financial Statements.

On January 1, 2018, we adopted ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments) which affects the classification of certain cash receipts and cash payments. Adoption of this new guidance did not have a material impact on our Condensed Consolidated Financial Statements.

On January 1, 2018, we adopted ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which requires the recognition of the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. It was applied on a modified retrospective basis through a cumulative-effect adjustment directly to accumulated

deficit as of the beginning of the period of adoption. As a result of adoption, there was no material impact to our Condensed Consolidated Financial Statements.

On January 1, 2018, we adopted ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. As a result of adoption, there was no material impact on our condensed consolidated financial statements and we will apply the guidance to any future acquisitions should they occur.

On January 1, 2018, we adopted ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, which amends the scope of modification accounting for share-based payment arrangements and provides guidance on the types of changes to the terms or conditions of the share-based payment awards to which an entity would be required to apply modification accounting under Accounting Standards Codification (“ASC”) 718. The amendments in ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date. As a result of adoption, there was no material impact on our condensed consolidated financial statements and we will apply the guidance to any future changes to the terms or conditions of stock-based payment awards should they occur.

On January 1, 2018, we adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The objective of this new guidance is to improve the financial reporting of hedging relationships by, among other things, eliminating the requirement to separately measure and record hedge ineffectiveness. The adoption did not have a material impact on our Condensed Consolidated Financial Statements or disclosures.

On April 1, 2018, we adopted ASU No. 2018-05, Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, to add various SEC paragraphs pursuant to the issuance of SEC Staff Accounting Bulletin No. 118 (“SAB 118”), to ASC 740 Income Taxes. SAB 118 was issued by the SEC in December 2018 to provide immediate guidance for accounting implications of U.S. tax reform under the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), which became effective for the us on January 1, 2018. We have evaluated the potential impacts of SAB 118 and has applied this guidance to its consolidated financial statements and related disclosures beginning in the second quarter of its fiscal year 2018. For additional information on SAB 118 and the impacts of the Tax Act on our consolidated financial statements and related disclosures, see Part I – Item 1, “Notes to Condensed Consolidated Financial Statements” Note 11– Income Taxes, included in this report.

In June 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-07, Compensation - Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting, an update that expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The guidance will be effective for us beginning January 1, 2020 with early adoption permitted. We are currently evaluating the impact that adopting this guidance will have on our Condensed Consolidated Financial Statements.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02), which allows companies to reclassify stranded tax effects resulting from the Tax Act which was signed into law on December 22, 2017, from accumulated other comprehensive income to retained earnings. This new standard is effective for us beginning January 1, 2019, with early adoption permitted. We are currently evaluating the effects that the adoption of this guidance will have on our Condensed Consolidated Financial Statements and the related disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments in this ASU, and related clarifying standards, revise the accounting for leases. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases that extend beyond 12 months. The asset and liability will initially be measured at the present value of the lease payments. The new lease guidance also simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. The amendments in this ASU are effective for fiscal year 2019 and will be applied through a modified retrospective transition approach which includes a number of practical expedients for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the Condensed Consolidated Financial Statements. Early adoption is permitted. We have a consulting team in place to analyze the implementation of this accounting standard, however we have not yet concluded how the new standard will impact our Condensed Consolidated Financial Statements. Nonetheless, we anticipate that there will be a material increase to assets and lease liabilities for existing property leases that are not already included on our Condensed Consolidated Balance Sheets.

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. We have 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.

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

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

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

The assets acquired and liabilities assumed at the date of acquisition are recorded in the Unaudited Condensed Consolidated Financial Statements at their estimated respective fair values as of the acquisition date. The excess of the purchase price over the fair value of the acquired net assets is recorded as goodwill.

The determination of estimated fair value of acquired assets and liabilities requires management to make significant estimates and assumptions. We determine the fair value by applying established valuation techniques, based on information that management

believes to be relevant to this determination. Management worked with an independent valuation firm to assist in the valuation of goodwill and intangible assets. We used a combination of income approaches including relief from royalty and multi-period excess earnings methods. The valuation models were based on estimates of future operating projections of the acquired business and rights to sell products as well as judgments on the discount rates used and other variables. We determined the forecasts based on a number of factors, included their best estimate of near-term net sales expectations and long-term projections, which included review of internal and independent market analyses.

The results of operations from acquisitions are included in the Unaudited Condensed Consolidated Financial Statements from the date of the acquisition.

On April 30, 2018, we completed the acquisition of 100% of the capital stock of a legal entity containing the regional payor and other customer contracts and rights related to the sale of surgical, sports medicine and rehabilitative orthopedic products and the related medical billing operations of one of our distributor partners, for total consideration of $23.8 million, consisting of $3.9 million of debt re-paid at closing, $5.2 million cash consideration paid at closing and $14.0 million cash consideration to be paid in installments up to the third anniversary of the transaction. We also issued 42,528 shares of common stock of DJO priced at approximately $700,000 to the holders of a warrant in the acquired entity.

Acquisition-related expenses for the three months ended June 30, 2018 which are included in “Selling, general and administrative expenses” in our Unaudited Condensed Consolidated Statements of Operations are not significant.

The value of goodwill from the acquisition can be attributed to a number of business factors including the acquisition of these contract and related rights and the related billing system, in addition to synergies associated with combining the acquired business with our existing business.

The determination of estimated fair value requires management to make significant estimates and assumptions. We determined the fair value by applying established valuation techniques, based on information that management believed to be relevant to this determination. The following table summarizes the preliminary purchase price allocation of the fair value of the assets acquired and liabilities assumed as of the date of acquisition until we finalize the valuation of intangibles (in thousands):

Changes in the carrying amount of goodwill for the six months ended June 30, 2018 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		$	339,030		$	1,121,118
Accumulated impairment losses		(61,000	)		(148,600	)		(47,406	)		—			(257,006	)
Goodwill, net of accumulated impairment losses at December 31, 2017		422,258			101,001			1,823			339,030			864,112
Current Year Activity:
Foreign currency translation		—			—			—			(2,604	)		(2,604	)
Balance, end of period
Acquisitions (Note 5)		17,455			—			—			—			17,455
Goodwill		483,258			249,601			49,229			336,426			1,118,514
Accumulated impairment losses		(61,000	)		(148,600	)		(47,406	)		—			(257,006	)
Goodwill, net of accumulated impairment losses at June 30, 2018	$	439,713		$	101,001		$	1,823		$	336,426		$	878,963

Our definite lived intangible assets are being amortized using the straight line method over their remaining weighted average useful lives of 1.6 years for customer relationships, 4.9 years for patents and technology and 3.4 years for trademarks and trade names. Based on our amortizable intangible asset balance as of June 30, 2018, we estimate that amortization expense will be as follows for the next five years and thereafter (in thousands):

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 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 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):

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

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

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

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

On May 7, 2015, we entered into (i) a $1,055.0 million new term loan facility (the “Term Loan”) and (ii) a $150.0 million new asset-based revolving credit facility (the “ABL Facility” and together with the Term Loan, the “Credit Facilities”). The Term Loan provides for a $150.0 million incremental facility, subject to customary borrowing conditions and the ABL Facility provides for a $50.0 million facility increase, subject to customary borrowing conditions. 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 June 30, 2018, the market values of our Term Loan and drawings under the ABL Facility were $1,022.1 million and $87.5 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 $86.5 million as of June 30, 2018, in addition to a $5.7 million outstanding letter of credit related to our travel and entertainment corporate card program and a $0.5 million outstanding letter of credit related to collateral requirements under our product liability insurance policy.

Interest Rates. Borrowings under the Term Loan bear interest at a rate equal to, at our option, either (a) 2.25% plus a base rate equal to the highest of (1) the prime rate as reported by the Wall Street Journal, (2) the federal funds effective rate plus 0.50% and (3) the Eurodollar rate for a one-month interest period plus 1.00% or (b) 3.25% plus the Eurodollar rate determined by reference to the ICE Benchmark Administration London Interbank Offered Rate for U.S. dollar deposits, subject to a minimum Eurodollar rate of 1.00%. As of June 30, 2018 our weighted average interest rate for all borrowings under the Credit Facilities was 5.2%.

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:

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

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

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

In addition, the Term Loan requires us to maintain a maximum first lien net leverage ratio, as defined, of Credit Facilities debt, net of cash, to Adjusted EBITDA of no greater than 5.35:1 for a trailing twelve month period commencing with the period ending September 30, 2015. As of June 30, 2018, our actual first lien net leverage ratio was 3.52:1, and we were in compliance with all other applicable covenants.

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

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

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

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

In addition, we are required to maintain a minimum fixed charge coverage ratio, as defined in the agreement, of 1.0 to 1.0 if the unutilized facility is less than the greater of $9.0 million or 10% of the lesser of (1) $150.0 million and (2) the aggregate borrowing base. This coverage ratio requirement remains in place until the 30^th consecutive day the unutilized facility exceeds such threshold. The ABL Facility also contains certain customary affirmative covenants and events of default. As of June 30, 2018, we were in compliance with all applicable covenants.

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

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

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

As of June 30, 2018, the market value of the 8.125% Notes was $1,029.3 million. We determined market value using trading prices for the 8.125% Notes on or near that date. This fair value measurement is categorized within Level 2 of the fair value hierarchy.

Optional Redemption. Prior to June 15, 2018, we have the option to redeem some or all of the 8.125% Notes at a redemption price equal to 100% of the principal amount of the 8.125% Notes redeemed, plus accrued and unpaid interest plus the “make-whole” premium set forth in the indenture governing the 8.125% Notes. On and after June 15, 2018, we have the option to redeem some or all of the 8.125% Notes at the redemption prices set forth in the indenture, plus accrued and unpaid interest. In addition, we may redeem, using net proceeds from certain equity offerings, (i) up to 15% of the principal amount prior to June 15, 2019 at a price equal to 103% of the principal amount being redeemed, and/or (ii) up to 35% of the principal amount prior to June 15, 2018, at a price equal to

108.125% of the principal amount being redeemed, plus accrued and unpaid interest, in each case using an amount not to exceed the net proceeds from certain equity offerings.

On May 7, 2015, we issued $289.7 million aggregate principal amount of 10.75% Third Lien Notes (10.75% Notes) which mature on April 15, 2020. The 10.75% Notes are fully and unconditionally guaranteed on a secured basis by each of DJOFL’s existing and future direct and indirect wholly-owned domestic subsidiaries that guarantees any of DJOFL’s indebtedness or any indebtedness of DJOFL’s domestic subsidiaries.

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

As of June 30, 2018, the market value of the 10.75% Notes was $292.5 million. We determined market value using trading prices for the 10.75% Notes on or near that date. This fair value measurement is categorized within Level 2 of the fair value hierarchy.

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

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

The indentures for the 8.125% Notes and the 10.75% Notes each contain covenants limiting, among other things, our ability to (i) incur additional indebtedness or issue certain preferred and convertible shares, pay dividends on, redeem, repurchase or make distributions in respect of the capital stock of DJO or make other restricted payments, (ii) make certain investments, (iii) sell certain assets, (iv) create liens on certain assets to secure debt, (v) consolidate, merge, sell or otherwise dispose of all or substantially all of our assets, (vi) enter into certain transactions with affiliates, and (vii) designate our subsidiaries as unrestricted subsidiaries. As of June 30, 2018, 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.

As of June 30, 2018, we entered into a capital lease which provided $15.0 million of cash. The transaction is collaterized by equipment and other assets of the DJO surgical segment. The capital lease is payable in twenty-one installments through February 1, 2020.

On June 6, 2017, we entered into two new term loans at our French subsidiary, the first of which provides for borrowings of €6.0 million ($7.0 million based on the June 30, 2018 currency conversion rate). The second term loan provides for borrowings of €12.0 million ($14.0 million based on the June 30, 2018 currency conversion rate) with both being 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%.

As of June 30, 2018 and December 31, 2017, we had $7.0 million and $8.6 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 June 30, 2018 and July 1, 2017, amortization of debt issuance costs was $0.8 million and $1.6 million and $0.8 million and $1.5 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.

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 ended June 30, 2018, we recorded an income tax provision of $4.6 million on pre-tax losses of $9.0 million, resulting in a negative effective tax rate of 51.8%. For the three ended July 1, 2017, we recorded income tax provision of approximately $1.1 million on pre-tax losses of $33.1 million, resulting in a negative effective tax rate of 3.3%.

For the six months ended June 30, 2018, we recorded an income tax provision of $10.0 million on pre-tax losses of $20.9 million, resulting in a negative effective tax rate of 47.9%. For the six months ended July 1, 2017, we recorded an income tax provision of approximately $5.2 million on pre-tax losses of $68.9 million, resulting in a negative effective tax rate of 7.5%.

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 on the deferred tax assets generated in the three and six months ended June 30, 2018. 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 net operating losses and indefinite lived deferred tax assets, 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 2013. 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 June 30, 2018, our gross unrecognized tax benefits were $18.6 million reflecting an increase of $1.8 million from the unrecognized amount of $16.8 million at December 31, 2017. As of June 30, 2018, we have $3.3 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 $0.4 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 June 30, 2018, we have unrecognized various foreign and U.S. state tax benefits of approximately $7.0 million, which, if recognized, would impact our effective tax rate in future periods.

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

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Act. We continue to evaluate the impacts of the 2017 Act. In the Unaudited Condensed Consolidated Financial Statements for the quarter ended June 30, 2018, we have recorded the provisional amounts related to GILTI, BEAT, FDII, interest expense deferral and other changes included in the 2017 Act. The ultimate impact may differ from these provisional amounts due to, among other things, additional analysis, changes in interpretations and assumptions we made, additional regulatory guidance that may be issued, and actions we may take as a result of the 2017 Act. We continue to monitor guidance issued by the U.S. Treasury Department, the Internal Revenue Service, and other standard-setting bodies and expect to complete the accounting for tax effects of the 2017 Act in 2018.

We measure deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. We are still refining our calculations, in particular the potential utilization of indefinite lived deferred tax liabilities as a source of future taxable income when assessing the realizability of indefinite lived deferred assets, which could potentially affect the re-measurement of these balances in a future period.

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

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

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

with such percentage equal to a fraction, the numerator of which is the actual MOIC realized by Blackstone, less 1.5 and the denominator of which is 0.75.

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

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.

During the six months ended June 30, 2018, the compensation committee granted 1,163,000 options to employees, of which 976,333 were Market Return Options and 186,667 were Time-Based Options. Additionally, the compensation committee granted 9,200 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 June 30, 2018 was $6.15.

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.

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:

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

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 2018. 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.

Blackstone Management Partners LLC (BMP) provided certain monitoring, advisory and consulting services to us for an annual monitoring fee. The Transaction and Monitoring Fee Agreement was terminated effective November 20, 2017. DJO had 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.

On January 1, 2018, we adopted ASU 2014-09 Revenue from Contracts with Customers (Topic 606) using the modified retrospective method for contracts that were not completed as of January 1, 2018. As a practical expedient, we adopted a portfolio approach in evaluating our sources of revenue for implications of adoption. The cumulative impact of initially applying ASC 606 was an immaterial adjustment to decrease the opening balance of retained earnings as of January 1, 2018. In accordance with the modified retrospective approach, results of operations for the reporting periods after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with ASC 605, Revenue Recognition (“ASC 605”).

The impact of ASC 606 on our results of operations for the six months ended June 30, 2018 was not material and related primarily to the reclassification of certain costs previously presented as selling, general and administrative expenses to net sales.

Sales are recognized as the performance obligations to deliver products or services are satisfied and are recorded based on the amount of consideration we expect to receive in exchange for satisfying the performance obligations. In the United States most of our products and services are marketed directly to doctors, hospitals, and other healthcare facilities through company-owned subsidiaries and distributors. Our products are sold on a global basis through company-owned sales subsidiaries, as well as third party dealers and distributors.

Sales represents the amount of consideration that we expect to receive from customers in exchange for transferring products and services. Net sales exclude sales and other taxes we collect from customers. Other costs to obtain and fulfill contracts are expensed as incurred due to the short-term nature of a majority of our sales. We extend terms of payment to our customers based on commercially reasonable terms for the markets of our customers, while also considering their credit quality.

To the extent that the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing the most likely amount method. Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Variable consideration can include a provision for estimated sales returns, volume discounts, prompt payment discounts, list

price discounts, customer payment penalties and rebates. Variable consideration is recorded as a reduction of sales in the same period that the sales are recognized.

Our estimate of the provision for sales returns has been established based on contract terms with our customers and our historical business trends. Shipping and handling costs charged to customers are included in net sales.

Our sales continue to be recognized when title to the product, ownership and risk of loss transfers to the customer which can be the date of shipment, the date of receipt by the customer or, for most Orthopedics products, when we receive appropriate notification that the product has been used or implanted.

We disaggregate our net sales by sales channel for each of our segments as we believe it best depicts how the nature, amount and timing and uncertainty of our net sales and cash flows are affected by economic factors.

The following tables disaggregates our revenue by major sales channel for the three and six months ended June 30, 2018 and the three and six months ended July 1, 2017 (in thousands):

Three Months ended June 30, 2018
Segments	Bracing & Vascular		Recovery Sciences		Surgical		International		Total
Sales Channel
Dealers & Distributors	$	48,937	$	16,194	$	—	$	61,139	$	126,270
Insurance		30,418		18,295		—		5,704		54,417
Direct		43,593		2,965		53,918		19,907		120,383
Other		3,564		—		—		203		3,767
	$	126,512	$	37,454	$	53,918	$	86,953	$	304,837

Six Months ended June 30, 2018
Segments	Bracing & Vascular		Recovery Sciences		Surgical		International		Total
Sales Channel
Dealers & Distributors	$	93,790	$	31,851	$	—	$	124,216	$	249,857
Insurance		55,638		35,208		—		11,735		102,581
Direct		84,644		6,288		107,537		39,180		237,649
Other		6,929		—		—		450		7,379
	$	241,001	$	73,347	$	107,537	$	175,581	$	597,466

Three Months ended July 1, 2017
Segments	Bracing & Vascular		Recovery Sciences		Surgical		International		Total
Sales Channel
Dealers & Distributors	$	48,937	$	18,274	$	—	$	55,797	$	123,008
Insurance		27,923		17,465		—		5,220		50,608
Direct		46,350		3,035		49,991		18,332		117,708
Other		3,205		—		—		217		3,422
	$	126,415	$	38,774	$	49,991	$	79,566	$	294,746

Six Months ended July 1, 2017
Segments	Bracing & Vascular		Recovery Sciences		Surgical		International		Total
Sales Channel
Dealers & Distributors	$	94,195	$	36,527	$	—	$	111,774	$	242,496
Insurance		54,929		34,614		—		10,274		99,817
Direct		93,190		6,136		99,583		35,341		234,250
Other		6,154		—		—		418		6,572
	$	248,468	$	77,277	$	99,583	$	157,807	$	583,135

Dealers & Distributors. This sales channel represents products sold to independent dealers, distributors and retailers who then distribute or sell to orthopedic and sports medicine professionals, hospitals, podiatry practices, orthotic and prosthetic centers, home medical equipment providers and independent pharmacies or sell direct to end customers.

Insurance. This sales channel represents all products sold to patients which qualify for medical reimbursement, where we arrange billing to the patients and their third party payors.

Direct. This sales channel represents all sales made directly to orthopedic and sports medicine professionals, hospitals, podiatry practices, orthotic and prosthetic centers, home medical equipment providers and consumers.

Revenue is recognized when obligations under the terms of a contract with our customers are satisfied which occurs with the transfer of control of our products. This occurs either upon shipment or delivery of goods, depending on whether the contract is FOB Origin or FOB Destination. We record revenues from sales of our surgical implant products when the products are used in a surgical procedure (implanted in a patient). Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products to a customer (“transaction price”).

Under ASC 606, estimated uncollectible amounts due from self-pay patients, as well as co-pays, co-insurance and deductibles owed to us by patients with insurance are generally considered implicit price concessions and are now recorded as a reduction of net revenue in our unaudited condensed consolidated statements of operations. Under prior guidance, these amounts were recognized as bad debt expense and were included in selling, general and administrative expenses. When estimating the variable consideration, we use historical collection experience to estimate amounts not expected to be collected. Conversely, subsequent changes in collectability due to a change in financial condition (i.e. bankruptcy) continues to be recognized as bad debt expense. We estimate amounts recorded to bad debt expense using historical trends.

The following table discloses the impact under ASC 606 which we adopted on January 1, 2018 of estimated implicit price concessions on our net revenue for the three and six months ended June 30, 2018 (in thousands);

To the extent that the transaction price includes variable consideration, such as prompt payment discounts, list price discounts, rebates, volume discounts and customer payment penalties, we estimate the amount of variable consideration that should be included in the transaction price utilizing the most likely amount method. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available.

As a result of our adoption of Topic 606, we reclassed our sales return reserve from accounts receivable to a refund liability account within Other current liabilities in the Unaudited Condensed Consolidated Balance Sheet as of June 30, 2018. We estimate contractual discounts and allowances for reimbursement amounts from our third party payor customers based on negotiated contracts and historical experience. As of June 30, 2018 our refund liability and our allowance for sales discounts and other allowances was $1.4 million and $4.7 million, respectively.

We have made an accounting policy election to account for shipping and handling activities as fulfillment activities. As such we do not consider shipping and handling as promised services to our customers.

For the periods ended June 30, 2018 and July 1, 2017, we reported our business in four operating segments: Bracing and Vascular; Recovery Sciences; Surgical Implant and International.

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

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

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

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
	June 30, 2018			July 1, 2017			June 30, 2018			July 1, 2017
Net sales:
Bracing and Vascular	$	126,512		$	126,415		$	241,001		$	248,468
Recovery Sciences		37,454			38,774			73,347			77,277
Surgical Implant		53,918			49,991			107,537			99,583
International		86,953			79,566			175,581			157,807
	$	304,837		$	294,746		$	597,466		$	583,135
Operating income:
Bracing and Vascular	$	29,257		$	24,225		$	49,255		$	45,232
Recovery Sciences		9,656			10,709			18,249			19,616
Surgical Implant		11,166			10,062			22,930			18,202
International		19,436			13,509			38,849			27,119
Expenses not allocated to segments and eliminations		(33,743	)		(49,462	)		(60,014	)		(94,452	)
	$	35,772		$	9,043		$	69,269		$	15,717

	Three Months Ended				Six Months Ended
	June 30, 2018		July 1, 2017		June 30, 2018		July 1, 2017
Net sales:
United States	$	217,884	$	215,180	$	421,885	$	425,328
Other Europe, Middle East and Africa		44,013		38,301		48,851		76,341
Germany		23,888		20,673		88,397		42,031
Australia and Asia Pacific		11,306		11,921		22,859		22,764
Canada		6,320		6,418		12,462		12,360
Latin America		1,426		2,253		3,012		4,311
	$	304,837	$	294,746	$	597,466	$	583,135

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.

	DJOFL			Guarantors			Non- Guarantors		Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	5,885		$	(3,354	)	$	24,236	$	22		$	26,789
Accounts receivable, net		—			137,237			42,374		—			179,611
Inventories, net		—			143,997			39,023		(5,747	)		177,273
Deferred tax assets, net		—			—			—		—			—
Prepaid expenses and other current assets		2,856			17,540			11,756		(8	)		32,144
Current assets of discontinued operations		—			511			—		—			511
Total current assets		8,741			295,931			117,389		(5,733	)		416,328
Property and equipment, net		—			123,289			13,939		268			137,496
Goodwill		—			808,898			101,329		(31,264	)		878,963
Intangible assets, net		—			577,289			7,979		—			585,268
Investment in subsidiaries		1,297,699			1,685,106			54,173		(3,036,978	)		—
Intercompany receivables		280,100			—			—		(280,100	)		—
Other non-current assets		834			1,834			2,574		—			5,242
Total assets	$	1,587,374		$	3,492,347		$	297,383	$	(3,353,807	)	$	2,023,297
Liabilities and (Deficit) Equity
Current liabilities:
Accounts payable	$	—		$	89,768		$	15,369	$	7		$	105,144
Current portion of debt obligations		19,486			3,757			5,265		(2,486	)	$	26,022
Other current liabilities		18,609			84,887			31,230		(40	)		134,686
Total current liabilities		38,095			178,412			51,864		(2,519	)		265,852
Long-term debt obligations		2,400,588			1,143			12,788		—			2,414,519
Deferred tax liabilities, net		—			141,540			4,568		—			146,108
Intercompany payables, net		—			129,459			57,021		(186,480	)		—
Other long-term liabilities		—			20,769			199		—			20,968
Total liabilities		2,438,683			471,323			126,440		(188,999	)		2,847,447
Noncontrolling interests		—			—			2,571		—			2,571
Total membership (deficit) equity		(851,309	)		3,021,024			168,372		(3,164,808	)		(826,721	)
Total liabilities and (deficit) equity	$	1,587,374		$	3,492,347		$	297,383	$	(3,353,807	)	$	2,023,297

	DJOFL			Guarantors			Non- Guarantors			Eliminations			Consolidated
Net sales	$	—		$	248,730		$	91,212		$	(35,105	)	$	304,837
Costs and operating expenses:
Cost of sales (exclusive of amortization of intangible assets of $6,935 for three months ended June 30, 2018)		—			96,817			66,325			(36,699	)		126,443
Selling, general and administrative		—			93,348			24,278			—			117,626
Research and development		—			8,519			1,188			—			9,707
Amortization of intangible assets		—			14,949			340			—			15,289
		—			213,633			92,131			(36,699	)		269,065
Operating income (loss)		—			35,097			(919	)		1,594			35,772
Other (expense) income:
Interest (expense) income, net		(45,607	)		21			(193	)		—			(45,779	)
Other (expense) income, net		—			(9,768	)		10,822			—			1,054
Intercompany income (expense), net		—			4,500			(6,801	)		2,301			—
Equity in income (loss) of subsidiaries, net		45,627			—			—			(45,627	)		—
		20			(5,247	)		3,828			(43,326	)		(44,725	)

Income (loss) before income taxes		20			29,850			2,909			(41,732	)		(8,953	)
Income tax provision		—			3,119			1,516			—			4,635
Net income (loss) from continuing operations		20			26,731			1,393			(41,732	)		(13,588	)
Net income from discontinued operations		—			178			—			—			178
Net income (loss)		20			26,909			1,393			(41,732	)		(13,410	)
Net income attributable to noncontrolling interests		—			—			(276	)		—			(276	)
Net income (loss) attributable to DJOFL	$	20		$	26,909		$	1,117		$	(41,732	)	$	(13,686	)

	DJOFL			Guarantors			Non- Guarantors			Eliminations			Consolidated
Net sales	$	—		$	481,045		$	184,239		$	(67,818	)	$	597,466
Costs and operating expenses:
Cost of sales (exclusive of amortization of intangible assets of $13,293 for the six months ended June 30, 2018)		—			183,336			134,593			(71,550	)		246,379
Selling, general and administrative		—			183,169			49,773			—			232,942
Research and development		—			16,744			2,244			—			18,988
Amortization of intangible assets		—			29,198			690			—			29,888
		—			412,447			187,300			(71,550	)		528,197
Operating income (loss)		—			68,598			(3,061	)		3,732			69,269
Other (expense) income:
Interest (expense) income, net		(89,437	)		67			(331	)		—			(89,701	)
Other (expense) income, net		—			(22,349	)		21,862			—			(487	)
Intercompany income (expense), net		—			5,867			(5,718	)		(149	)		—
Equity in income (loss) of subsidiaries, net		71,889			—			—			(71,889	)		—
		(17,548	)		(16,415	)		15,813			(72,038	)		(90,188	)
(Loss) income before income taxes		(17,548	)		52,183			12,752			(68,306	)		(20,919	)
Income tax provision		—			5,413			4,606			—			10,019
Net (loss) income from continuing operations		(17,548	)		46,770			8,146			(68,306	)		(30,938	)
Net income from discontinued operations		—			321			—			—			321
Net (loss) income		(17,548	)		47,091			8,146			(68,306	)		(30,617	)
Net income attributable to noncontrolling interests		—			—			(638	)		—			(638	)
Net (loss) income attributable to DJOFL	$	(17,548	)	$	47,091		$	7,508		$	(68,306	)	$	(31,255	)

	DJOFL		Guarantors		Non- Guarantors			Eliminations			Consolidated
Net (loss) income	$	20	$	26,909	$	1,393		$	(41,732	)	$	(13,410	)
Other comprehensive income (loss), net of taxes:
Foreign currency translation adjustments, net of tax (benefit) of $(1,032) for the three months ended June 30, 2018		—		—		(8,636	)		—			(8,636	)
Unrealized gain on cash flow hedges, net of tax (benefit) of $(471) for the three months ended June 30, 2018		640		—		—			—			640
Other comprehensive income		640		—		(8,636	)		—			(7,996	)
Comprehensive (loss) income		660		26,909		(7,243	)		(41,732	)		(21,406	)
Comprehensive income (loss) attributable to noncontrolling interests		—		—		(136	)		—			(136	)
Comprehensive (loss) income attributable to DJO Finance LLC	$	660	$	26,909	$	(7,379	)	$	(41,732	)	$	(21,542	)

	DJOFL			Guarantors		Non- Guarantors			Eliminations			Consolidated
Net (loss) income	$	(17,548	)	$	47,091	$	8,146		$	(68,306	)	$	(30,617	)
Other comprehensive loss, net of taxes:
Foreign currency translation adjustments, net of tax provision of $334 for the six months ended June 30, 2018		—			—		(7,134	)		—			(7,134	)
Unrealized (loss) gain on cash flow hedges, net of tax provision of zero for the six months ended June 30, 2018		2,545			—		—			—			2,545
Other comprehensive income		2,545			—		(7,134	)		—			(4,648	)
Comprehensive (loss) income		(15,003	)		47,091		1,012			(68,306	)		(35,265	)
Comprehensive income attributable to noncontrolling interests		—			—		(556	)		—			(556	)
Comprehensive (loss) income attributable to DJO Finance LLC	$	(15,003	)	$	47,091	$	456		$	(68,306	)	$	(35,821	)

	DJOFL			Guarantors			Non- Guarantors			Eliminations			Consolidated
Cash Flows From Operating Activities:
Net loss	$	(17,548	)	$	47,091		$	8,146		$	(68,306	)	$	(30,617	)
Net income from discontinued operations		—			(321	)		—			—		$	(321	)
Adjustments to reconcile net cash (used in) provided by operating activities:
Depreciation		—			20,890			2,611			(13	)		23,488
Amortization of intangible assets		—			29,198			690			—			29,888
Amortization of debt issuance costs and non-cash interest expense		4,337			—			—			—			4,337
Stock-based compensation expense		—			895			—			—			895
Deferred purchase price consideration		—			13,708			—			—			13,708
Loss on disposal of assets, net		—			412			130			1			543
Deferred income tax expense		—			(2,355	)		(403	)		—			(2,758	)
Equity in (loss) income of subsidiaries, net		(71,889	)		—			—			71,889			—
Changes in operating assets and liabilities, net of acquired assets and liabilities:
Accounts receivable		—			4,328			4,960			—			9,288
Inventories		—			(7,040	)		1,597			(3,679	)		(9,122	)
Prepaid expenses and other assets		(3,845	)		(3,182	)		(838	)		220			(7,645	)
Accounts payable and other current liabilities		3,364			(28,167	)		(4,756	)		6,763			(22,796	)
Net cash provided by (used in) continuing operating activities		(85,581	)		75,457			12,137			6,875			8,888
Net cash provided by discontinued operations		—			321			—			—			321
Net cash (used in) provided by operating activities		(85,581	)		75,778			12,137			6,875			9,209
Cash Flows From Investing Activities:
Purchases of property and equipment		—			(16,079	)		(2,946	)		—			(19,025	)
Acquisition of business and intangibles, net of cash acquired		—			(9,104	)		—			—			(9,104	)
Proceeds from disposal of assets		—			220			28			—			248
Net cash used in investing activities from continuing operations		—			(24,963	)		(2,918	)		—			(27,881	)
Cash Flows From Financing Activities:
Intercompany		51,185			(39,814	)		(5,265	)		(6,106	)		—
Proceeds from revolver borrowings		66,500			—			3			—			66,503
Proceeds from capital lease		15,000			—			—			—			15,000
Repayments of debt obligations		(64,464	)		—			(2,074	)		—			(66,538	)
Dividend paid to minority interest		—			—			—			(482	)		(482	)
Net cash (used in) provided by financing activities		68,221			(39,814	)		(7,336	)		(6,588	)		14,483
Effect of exchange rate changes on cash and cash equivalents		—			(1	)		(741	)		(265	)		(1,007	)
Net (decrease) increase in cash and cash equivalents		(17,360	)		11,000			1,142			22			(5,196	)
Cash and cash equivalents, beginning of year		23,245			(14,354	)		23,094			—			31,985
Cash and cash equivalents, end of year	$	5,885		$	(3,354	)	$	24,236		$	22		$	26,789

	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
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

	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	)
Other (expense) income, net		—			(11,200	)		12,096			—			896
Intercompany (expense) income, net		—			742			(584	)		(158	)		—
Equity in income 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	)

	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 (expense) income, net		—			289			(45	)		(244	)		—
Equity in income 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	)

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

	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 on cash flow hedges, net of tax provision of $21 thousand		60			—		—			—		60
Other comprehensive loss		60			—		4,953			—		5,013
Comprehensive (loss) income		(74,292	)		13,860		(14,378	)		5,901		(68,909	)
Comprehensive loss attributable to noncontrolling interests		—			—		515			—		515
Comprehensive (loss) income attributable to DJO Finance LLC	$	(74,292	)	$	13,860	$	(13,863	)	$	5,901	$	(68,394	)

	DJOFL			Guarantors			Non - Guarantors			Eliminations			Consolidated
Cash Flows from Operating Activities:
Net (loss) income	$	(74,352	)	$	13,860		$	(19,331	)	$	5,901		$	(73,922	)
Net loss from discontinued operations		—			(105	)		—			—			(105	)
Adjustments to reconcile net (loss) income to 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
Gain on disposal of assets, net		—			187			92			—			279
Deferred income tax expense (benefit)		—			2,011			73			—			2,084
Equity in income (loss) of subsidiaries, net		(11,451	)		—			—			11,451			—
Changes in operating 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 (used in) provided by continuing operating activities		(86,161	)		128,225			590			(4,559	)		38,095
Net cash provided by discontinued operations		—			105			—			—			105
Net cash (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) provided by 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		(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 at beginning of period		15,818			(372	)		19,766			—			35,212
Cash and cash equivalents at end of period	$	18,101		$	4,106		$	12,990		$	—		$	35,197

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

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.

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 2017 Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 16, 2018 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.

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^™.

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

The Company’s continuing operations consist of four operating segments; Bracing and Vascular; Recovery Sciences; Surgical Implant; and International. See Note 16 “Segment and Geographic Information” 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)	June 30, 2018			July 1, 2017			June 30, 2018			July 1, 2017
Bracing and Vascular:
Net sales	$	126,512		$	126,415		$	241,001		$	248,468
Operating income		29,257			24,225			49,255			45,232
Operating income as a percent of net segment sales		23.1	%		19.2	%		20.4	%		18.2	%
Recovery Sciences:
Net sales	$	37,454		$	38,774		$	73,347		$	77,277
Operating income		9,656			10,709			18,249			19,616
Operating income as a percent of net segment sales		25.8	%		27.6	%		24.9	%		25.4	%
Surgical Implant:
Net sales	$	53,918		$	49,991		$	107,537		$	99,583
Operating income		11,166			10,062			22,930			18,202
Operating income as a percent of net segment sales		20.7	%		20.1	%		21.3	%		18.3	%
International:
Net sales	$	86,953		$	79,566		$	175,581		$	157,807
Operating income		19,436			13,509			38,849			27,119
Operating income as a percent of net segment sales		22.4	%		17.0	%		22.1	%		17.2	%

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

	Three Months Ended										Six Months Ended
	June 30, 2018					July 1, 2017					June 30, 2018					July 1, 2017
Net sales	$	304,837		100.0	%	$	294,746		100.0	%	$	597,466		100.0	%	$	583,135		100.0	%
Costs and operating expenses:
Cost of sales (1)		126,443		41.5			124,885		41.5			246,379		41.2			244,454		42.0
Selling, general and administrative		117,626		38.6			135,739		46.5			232,942		39.0			269,901		41.8
Research and development		9,707		3.2			9,063		3.2			18,988		3.2			18,202		3.3
Amortization of intangible assets		15,289		5.0			16,016		6.5			29,888		5.0			34,861		6.7
		269,065		88.3			285,703		97.7			528,197		88.4			567,418		93.8
Operating income		35,772		11.7			9,043		2.3			69,269		11.6			15,717		6.2
Other (expense) income:
Interest expense, net		(45,779	)	(15.0	)		(43,068	)	(14.8	)		(89,701	)	(15.0	)		(85,755	)	(14.8	)
Other (expense) income, net		1,054		0.3			896		0.1			(487	)	(0.1	)		1,184		0.1
		(44,725	)	(14.7	)		(42,172	)	(14.7	)		(90,188	)	(15.1	)		(84,571	)	(14.7	)
Loss before income taxes		(8,953	)	(2.9	)		(33,129	)	(12.4	)		(20,919	)	(3.5	)		(68,854	)	(8.5	)
Income tax provision		4,635		1.5			(1,095	)	(1.4	)		10,019		1.7			(5,173	)	(1.3	)
Net loss from continuing operations		(13,588	)	(1.4	)		(34,224	)	(13.8	)		(30,938	)	(1.8	)		(74,027	)	(9.8	)
Net income from discontinued operations		178		0.1			47		—			321		0.1			105		0.1
Net loss		(13,410	)	(1.4	)		(34,177	)	(13.8	)		(30,617	)	(1.8	)		(73,922	)	(9.7	)
Net income attributable to noncontrolling interests		(276	)	(0.1	)		(206	)	(0.1	)		(638	)	(0.1	)		(430	)	(0.1	)
Net loss attributable to DJO Finance LLC	$	(13,686	)	(6.0	)%	$	(34,383	)	(13.9	)%	$	(31,255	)	(12.8	)%	$	(74,352	)	9.8	%

Three Months Ended June 30, 2018 Compared to the Three Months Ended July 1, 2017

Net Sales. Net sales for the three months ended June 30, 2018 increased 3.4% to $304.8 million, compared to net sales of $294.7 million for the three months ended July 1, 2017. Excluding the impact of ASC 606, our net sales increased 5.3% to $310.3 million. The increase was primarily driven by a sales increase in both our Surgical Implant and in our International segments, partially offset by decreases in sales in our Recovery Science and Bracing and Vascular segments. Only our Bracing and Vascular segment was impacted by ASC 606.

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

Net sales in our Bracing and Vascular segment were $126.5 million for the three months ended June 30, 2018, an increase of 0.1% from net sales of $126.4 million for the second quarter of 2017. Excluding the impact of ASC 606 which lowered net revenue by $5.4 million, net sales increased 4.4% to $131.9 million for the three months ended June 30, 2018. The increase included increases in revenue of our Office Care channel and the transition of billing revenue associated with the acquisition of payor contracts and related rights and the related medical billing operations of one of our distributors, partially offset by declines in our Foot Care Solutions business, Dr. Comfort product line and in our Bell-Horn business.

Net sales in our Recovery Sciences segment were $37.5 million for the three months ended June 30, 2018, a decrease of 3.4% from net sales of $38.8 million for the three months ended July 1, 2017. The decrease was driven by weakness in the segment’s Chattanooga product line.

Net Sales in our Surgical Implant segment were $53.9 million for the three months ended June 30, 2018, an increase of 7.9% from net sales of $50.0 million for the same quarter of 2017. The increase is primarily due to a 19.1% increase in sales of Shoulder implants, partially offset by a 7.9% decrease in elbow implants and a 15.7% decline in sales of Cobalt bone cement products.

Net sales in our International segment were $87.0 million for the three months ended June 30, 2018, an increase of 9.3% from net sales of $79.6 million for the three months ended July 1, 2017. In constant currency, excluding the favorable impact of $4.6 million related to changes in foreign exchange rates in effect during second quarter 2018 compared to second quarter 2017, net sales increased 3.5%. Our international segment included strong sales growth in Germany of 7.2%, in France of 5.8%, and in Australia of 14.5%, partially offset by sales declines in Spain of 23.4% and in Canada of 5.4%.

Cost of Sales. As a percentage of net sales, cost of sales decreased to 38.9% for the three months ended June 30, 2018 compared to 42.4% for the three months ended July 1, 2017, mainly due to a mix between and within the reporting segments and the impact of ASC 606. Excluding the impact of ASC 606, cost of sales as a percentage of net sales would have been 38.1% or 0.8% lower.

Selling, General and Administrative (SG&A). SG&A expenses decreased to $117.6 million for the three months ended June 30, 2018, from $135.7 million in the same quarter of 2017. As a percentage of net sales, SG&A expenses decreased to 38.6% for the second quarter of 2018 from 46.1% for the second quarter of 2017, mainly due to our business transformation plan to reduce expenses that began in 2017 and continues in 2018 coupled with the impact of ASC 606. Excluding the impact of ASC 606 which lowered our bad debt expense by $5.4 million, SG&A expenses would have been $123.0 million or 39.6% of net sales.

Research and Development (R&D). R&D expenses were $9.7 million for the three months ended June 30, 2018, compared to $9.1 million for the three months ended July 1, 2017. As a percentage of net sales, R&D expenses were flat at 3.1% for the second quarter of 2018 compared to 3.1% for the second quarter of 2017. We continue 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 $14.6 million for the three months ended June 30, 2018, from $15.3 million for the same quarter of 2017. 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 $45.8 million for the three months ended June 30, 2018 compared to $43.1 million for the three months ended July 1, 2017. The increase was due to a higher weighted average interest rate on our floating rate borrowings coupled with increased borrowings under our revolving credit facility for the second quarter of 2018 compared to the second quarter of 2017.

Other (Expense) Income, Net. Other (expense) income, net, increased to other income of $1.1 million for the second quarter of 2018 compared to other income of $0.9 million for the second quarter of 2017. Results for both periods presented primarily represent net realized and unrealized foreign currency transaction gains and losses.

Income Tax Provision. For the three months ended June 30, 2018, we recorded an income tax provision of $4.6 million on a pre-tax loss of $9.0 million, resulting in a negative effective tax rate of 51.8%. For the three months ended July 1, 2017 we recorded a tax provision of $1.1 million on pre-tax losses of $33.1 million, which resulted in a negative effective tax rate of 3.3%.

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. Net income from discontinued operations of $0.2 million was recognized in the second quarter 2018. Net income from discontinued operations was $47 thousand for the second quarter of 2017, primarily consisting of income from liquidation of certain assets offset by severance and other termination costs.

Net Sales. Net sales for the six months ended June 30, 2018 increased 2.5% to $597.5 million, compared to net sales of $583.1 million for the six months ended July 1, 2017. Excluding the impact of ASC 606, net sales increased 3.4% to $602.9 million for the six months ended June 30, 2018. The increase was primarily driven by increases in sales of our Surgical Implant and International segments, partially offset by decreases in sales of our Bracing and Vascular and Recovery Science segments. Only our Bracing and Vascular segment was impacted by ASC 606.

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

Net sales in our Bracing and Vascular segment were $241.0 million for the six months ended June 30, 2018, a decrease of 3.0% from net sales of $248.5 million for the six months ended July 1, 2017. Excluding the impact of ASC 606 which lowered net revenue by $5.4 million, net sales decreased 0.8% to $246.4 million for the six months ended June 30, 2018. The decrease was driven by ongoing challenges in the segment’s Dr. Comfort product line and mid-single digit declines across several bracing product lines including our direct sales channel which decreased 1.9% and Distribution which decreased 2.9%, partially offset by the transition of billing revenue associated with the acquisition of payor contracts and related rights and the related medical billing operations of one of our distributors.

Net sales in our Recovery Sciences segment were $73.3 million for the six months ended June 30, 2018, a decrease of 5.1% from net sales of $77.3 million for the same quarter in 2017. The decrease was driven by weakness in our Chattanooga product line.

Net Sales in our Surgical Implant segment were $107.5 million for the first six months of 2018, an increase of 8.0% from net sales of $99.6 million for the same six month period of 2017. The increase is primarily due to a 20.1% increase in sales of shoulder implants, partially offset by a 9.5% decline in elbow implants and a 9.9% decline in Cobalt bone cement products.

Net sales in our International segment were $175.6 million for the six months ended June 30, 2018, an increase of 11.3% from net sales of $157.8 million for the six months ended July 1, 2017. In constant currency, excluding the favorable impact of $13.4 million related to changes in foreign exchange rates in effect during the six months ended June 30, 2018 compared to the same period in 2017,

net sales increased 11.3%. Our international segment included strong sales growth in Germany of 4.5%, in France of 5.8%, in Australia of 11.1%, in Italy of 9.6%, and in South Africa of 13.2%, partially offset by sales declines in Spain of 12.3%, the United Kingdom of 3.0% and Canada of 3.4%.

Cost of Sales. As a percentage of net sales, cost of sales decreased to 41.2% for the six months ended June 30, 2018 compared to 41.9% for the same six month period of 2017, mainly due to the product mix between and within the reporting segments. Excluding the impact of ASC 606, cost of sales as a percentage of net sales would have been 40.8% or 0.4% lower.

Selling, General and Administrative (SG&A). SG&A expenses decreased to $232.9 million for the six months ended June 30, 2018 from $269.9 million for the six months ended July 1, 2017. As a percentage of net sales, SG&A expenses decreased to 39.0% for the six months ended June 30, 2018 from 41.9% for the same period in 2017, mainly due to our business transformation plan to reduce expenses that began in 2017 and continues in 2018 coupled with the impact of ASC 606. Excluding the impact of ASC 606 which lowered our bad debt expense by $5.4 million, SG&A expenses would have been $238.3 million or 39.9% of net sales.

Research and Development (R&D). R&D expenses were $19.0 million for the six months ended June 30, 2018, compared to $18.2 million for the six months ended July 1, 2017. As a percentage of net sales, R&D expenses were flat at 3.2% for the first six months of 2018 compared to 3.2% for the same six month period in 2017. We continue 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 $29.9 million for the six months ended June 30, 2018 from $34.9 million for the six months ended July 1, 2017. 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 $89.7 million for the first six months of 2018 compared to $85.8 million for the first six months of 2017. The increase was due to a higher weighted average interest rate on our floating interest rate borrowings coupled with increased borrowings under our revolving credit facility for the six months ended June 30, 2018 compared to the same period in 2017.

Other (Expense) Income, Net. Other (expense) income, net, decreased to other expense of $(0.5) million for the six months ended June 30, 2018 compared to other income of $1.2 million for the six months ended July 1, 2017. Results for both periods presented primarily represent net realized and unrealized foreign currency transaction gains and losses.

Income Tax Provision. For the six months ended June 30, 2018, we recorded an income tax provision of $10.0 million on a pre-tax loss of $20.9 million, resulting in a negative effective tax rate of 47.9%. For the same six month period in 2017, we recorded a tax provision of $5.2 million on pre-tax losses of $68.9 million, resulting in a negative effective tax rate of 7.5%.

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. Net income from discontinued operations of $0.3 million was recognized for the six months ended June 30, 2018. Net income from discontinued operations was $0.1 million for the six months ended July 1, 2017, primarily consisting of income from liquidation of certain assets offset by severance and other termination costs.

As of June 30, 2018, our primary sources of liquidity consisted of cash and cash equivalents totaling $26.8 million and our $150.0 million ABL Facility, of which $56.3 million was available. Our revolving loan balance under our ABL Facility was $87.5 million as of June 30, 2018 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 June 30, 2018 increased $18.1 million to $150.5 million compared with $132.4 million of working capital at July 1, 2017 due to increases in current assets of $40.7 million, partially offset by increases in current liabilities of $22.6 million.

Our current assets increased primarily due to a $28.7 million increase in inventories and a $9.6 million increase in accounts receivable and a $10.8 million increase in prepaid expenses and other current assets, partially offset by an $8.4 million decrease in cash and cash equivalents.

Our current liabilities increased primarily due to an $11.6 million increase in accounts payable, a $13.5 million increase in current portion of debt obligations and a $5.7 million increase in accrued interest, partially offset by an $8.2 million decrease in other current liabilities.

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.

ASU 2014-15 Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern requires that we evaluate whether there is substantial doubt about our ability to meet our financial obligations when they become due during the twelve month period from the date these financial statements are available to be issued. We have performed such an evaluation and, based on the results of that assessment, we are not aware of any relevant conditions or events that raise substantial doubt regarding our ability to continue as a going concern within one year of the financial statements are issued.

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

Operating activities from continuing operations provided $8.9 million and provided $38.1 million of cash in the six months ended June 30, 2018 and July 1, 2017, 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, deferred purchase price consideration) and changes in working capital. The change in working capital accounts is primarily attributable to accounts receivable, inventories, accrued interest and accounts payable. For the first six months of 2018 and 2017, cash paid for interest was $85.5 million and $85.4 million, respectively.

Investing activities from continuing operations used $27.9 million and $22.4 million of cash in the six months ended June 30, 2018 and July 1, 2017, respectively. Cash used in investing activities for the first six months of 2018 was for the acquisition of the distribution rights and related medical billing system of one of our distributors and for purchases of property and consigned surgical instruments to support growth and IT automation technology. Cash used in investing activities for the first six months of 2017 was for consigned surgical instruments to support growth and IT automation technology.

Financing activities provided cash of $14.5 million and used cash of $16.9 million in the six months ended June 30, 2018 and July 1, 2017, respectively. Cash provided by and used in financing activities in the first six months of 2018 and 2017 consisted of net borrowings under and repayments of our ABL Facility. Additionally in 2018, cash provided in financing activities included proceeds under a capital lease obligation. In 2017, cash used in financing activities included payments related to the repurchase of shares of common stock from our former chief executive officer upon his departure.

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 June 30, 2018 (in thousands):

	June 30, 2018				December 31, 2017
	Principal Amount		Carrying Value		Principal Amount		Carrying Value
Credit facilities:
ABL Facility	$	87,500	$	86,582	$	75,000	$	73,843
Term loans		1,025,987		1,019,074		1,031,263		1,022,630
		1,113,487		1,105,656		1,106,263		1,096,473
Notes:
8.125% second lien notes due 2021		1,015,000		1,004,833		1,015,000		1,003,382
10.75% third lien notes due 2020		298,471		294,584		298,471		293,657
		1,313,471		1,299,417		1,313,471		1,297,039
Other debt		35,468		35,468		20,608		20,608
Total indebtedness	$	2,462,426	$	2,440,541	$	2,440,342	$	2,414,120

Our credit facilities at June 30, 2018 consisted of $1,026.0 million term loan (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 $86.6 million at June 30, 2018, 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 10 “Debt” 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 June 30, 2018, our actual first lien net leverage ratio was 3.52:1, 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 June 30, 2018 was 1.78:1. Fixed charges, as defined in the indentures, generally means consolidated interest expense plus all cash dividends or other distributions paid on certain preferred equity.

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 June 30, 2018 and July 1, 2017 and the twelve months ended June 30, 2018 (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
	June 30,			July 1,			June 30,			July 1,			June 30,
	2018			2017			2018			2017			2018
Net loss attributable to DJO Finance LLC	$	(13,686	)	$	(34,383	)	$	(31,255	)	$	(74,352	)	$	7,203
Income loss from discontinued operations, net		(178	)		(47	)		(321	)		(105	)		(525	)
Interest expense, net		45,779			43,068			89,701			85,755			178,184
Income tax provision (benefit)		4,635			1,095			10,019			5,173			(55,873	)
Depreciation and amortization		27,871			26,942			53,376			56,716			107,921
Non-cash charges (a)		524			537			749			1,108			4,742
Non-recurring and integration charges (b)		10,737			25,195			16,257			43,584			41,922
Other adjustment items (c)		(68	)		1,142			1,888			2,911			4,242
		75,614			63,549			140,414			120,790			287,816
Permitted pro forma adjustments applicable to the twelve month period only (d) Future cost savings														24,810
Adjusted EBITDA	$	75,614		$	63,549		$	140,414		$	120,790		$	312,626

											Twelve
											Months
	Three Months Ended					Six Months Ended					Ended
	June 30,		July 1,			June 30,		July 1,			June 30,
	2018		2017			2018		2017			2018
Restructuring and reorganization (1)	$	7,823	$	23,273		$	11,492	$	39,069		$	32,665
Acquisition related expenses and integration (2)		379		277			749		579			2,276
Executive transition		—		(49	)		—		(49	)		—
Litigation and regulatory costs and settlements, net (3)		2,535		1,290			4,016		3,392			6,881
IT automation projects		—		404			—		593			100
Total non-recurring and integration charges	$	10,737	$	25,195		$	16,257	$	43,584		$	41,922

												Twelve
												Months
	Three Months Ended						Six Months Ended					Ended
	June 30,			July 1,			June 30,		July 1,			June 30,
	2018			2017			2018		2017			2018
Blackstone monitoring fees	$	—		$	1,750		$	—	$	3,500		$	2,725
Non-controlling interests		276			206			638		430			1,007
Foreign currency transaction losses (gains) and other expense (income)		(1,054	)		—			487		—			(444	)
Franchise and other tax		710			—			763		—			954
Other (1)		—			(814	)		—		(1,019	)		—
Total other adjustment items	$	(68	)	$	1,142		$	1,888	$	2,911		$	4,242

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

(d) Permitted pro forma adjustments include future cost savings related to our business transformation initiative.

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.

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, 2017.

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, 2017.

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

We are exposed to the risk of rising interest rates. We have historically managed our interest rate risk by including components of both fixed and variable debt in our capital structure. For our fixed rate debt, interest rate changes may affect the market value of the debt, but do not impact our earnings or cash flow. Conversely, for our variable rate debt, interest rate changes generally do not affect the fair market value of the debt, but do impact future earnings and cash flow, assuming other factors are constant. As of June 30, 2018, we have $1,313.5 million of aggregate fixed rate notes and $1,026.0 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 June 30, 2018 by $3.2 million. As of June 30, 2018, our term loans are subject to a 1.00% minimum LIBOR rate which is lower than the actual LIBOR rate of 2.20% as of June 30, 2018. 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 “Derivative Instruments” 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.

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 three and six months ended June 30, 2018, sales reported in foreign currencies accounted for approximately 32.4% and 26.7%, respectively of our consolidated net sales. For the three and six months ended June 30, 2018, approximately 17.5% and 18.6%, respectively were reported in the euro currency. 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.

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.

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.

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, 2017.

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, 2017 filed with the SEC on March 15, 2018. There have been no material changes to the risk factors disclosed in such Form 10-K.

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.

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)

Large accelerated filer	☐	Accelerated filer	☐

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

		Page Number
	PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements	1
	Unaudited Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017	1
	Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2018 and July 1, 2017	2
	Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2018 and July 1, 2017	3
	Unaudited Condensed Consolidated Statement of Deficit for the six months ended June 30, 2018	4
	Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and July 1, 2017	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 4.	Controls and Procedures	48
	PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	50
Item 1A.	Risk Factors	50
Item 6.	Exhibits	51

	Six Months Ended
	June 30, 2018			July 1, 2017
Balance, beginning of period	$	29,238		$	36,070
Provision for doubtful accounts		1,214			10,533
Write-offs, net of recoveries		(5,474	)		(17,137	)
Balance, end of period	$	24,978		$	29,466

	June 30, 2018			December 31, 2017
Components and raw materials	$	65,006		$	67,220
Work in process		7,059			5,652
Finished goods		98,618			89,468
Inventory held on consignment		37,222			38,219
		207,905			200,559
Inventory reserves		(30,632	)		(31,422	)
	$	177,273		$	169,137

Accounts receivable, net	$	3,841
Inventories, net		1,132
Prepaid expenses and other assets		119
Property and equipment, net		192
Intangible assets		8,450
Goodwill		17,455
Current portion of long-term debt		(1,143	)
Accounts payable		(1,853	)
Accrued expenses		(612	)
Long-term debt		(3,757	)
Other short-term liabilities		(20	)
Total purchase price	$	23,804

June 30, 2018	Gross Carrying Amount		Accumulated Amortization			Intangible Assets, Net
Definite-lived intangible assets:
Customer relationships	$	478,581	$	(415,404	)	$	63,177
Patents and Technology		446,759		(315,964	)		130,795
Trademarks and trade names		29,815		(19,980	)		9,835
Distributor contracts and relationships		11,567		(5,284	)		6,283
Non-compete agreements		6,672		(6,672	)		—
Definite-lived intangible assets:	$	973,394	$	(763,304	)	$	210,090
Indefinite-lived intangible assets:
Trademarks and trade names							375,178
Net identifiable intangible assets						$	585,268

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

Remaining 2018	$	31,280
2019		57,278
2020		38,138
2021		32,481
2022		28,680
Thereafter		22,233
	$	210,090

	June 30, 2018		December 31, 2017
Accrued wages and related expenses	$	31,098	$	41,482
Accrued commissions		14,710		16,994
Accrued rebates		9,984		12,896
Accrued other taxes		5,362		5,743
Accrued professional expenses		5,405		3,879
Income taxes payable		2,198		1,937
Derivative liability		—		268
Other accrued liabilities		47,314		43,161
	$	116,071	$	126,360

	Balance Sheet Location	June 30, 2018		December 31, 2017
Derivative Assets:
Interest rate cap agreements designated as cash flow hedges	Other current assets	$	1,916	$	—
Interest rate cap agreements designated as cash flow hedges	Other long-term assets		834		84
		$	2,750	$	84
Derivative Liabilities:
Interest rate cap agreements designated as cash flow hedges	Other current liabilities	$	—	$	268
		$	—	$	268

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

	Three Months Ended June 30, 2018		Six Months Ended June 30, 2018
Net revenue as reported	$	304,837	$	597,466
Estimated implicit price concessions		5,430		5,430
Net revenue excluding implicit price concessions	$	310,267	$	602,896

	Second Quarter 2018		% of Net Sales			Second Quarter 2017		% of Net Sales			Increase (Decrease)			% Increase (Decrease)
Bracing and Vascular	$	126,512		41.5	%	$	126,415		42.3	%	$	97			0.1	%
Recovery Sciences		37,454		12.2			38,774		13.4			(1,320	)		(3.4	)
Surgical Implant		53,918		17.7			49,991		17.2			3,927			7.9
International		86,953		28.6			79,566		27.1			7,387			9.3
Total net sales	$	304,837		100.0	%	$	294,746		100.0	%	$	10,091			3.4	%

	Six Months 2018		% of Net Sales			Six Months 2017		% of Net Sales			Increase (Decrease)			% Increase (Decrease)
Bracing and Vascular	$	241,001		40.3	%	$	248,468		45.5	%	$	(7,467	)		(3.0	)%
Recovery Sciences		73,347		12.3			77,277		13.4			(3,930	)		(5.1	)
Surgical Implant		107,537		18.0			99,583		14.7			7,954			8.0
International		175,581		29.4			157,807		26.4			17,774			11.3
Total net sales	$	597,466		100.0	%	$	583,135		100.0	%	$	14,331			2.5	%

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 June 30, 2018, formatted in XBRL: (i) the Unaudited Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017, (ii) the Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2018 and July 1, 2017, (iii) the Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2018 and July 1, 2017, (iv) the Unaudited Consolidated Statement of Deficit for the six months ended June 30, 2018, (v) the Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and July 1, 2017 and (vi) the Notes to the Unaudited Condensed Consolidated Financial Statements.

	DJO FINANCE LLC

Date: August 14, 2018	By:	/s/ BRADY R. SHIRLEY
		Brady R. Shirley
		President and Chief Executive Officer

Date: August 14, 2018	By:	/s/ MICHAEL C. EKLUND
		Michael C. Eklund
		Chief Financial Officer and Chief Operating Officer