What changed in this filing

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Item 1. Financial Statements

2022-08-05 compared with 2022-05-06 · 204 added, 114 removed, 563 unchanged (36% of the section changed)

52 unchanged sentences

Stockholders' equity:

Preferred stock — 5,000 shares authorized as of March 31, 2022 and December 31, 2021;

Preferred stock — 5,000 shares authorized as of June 30, 2022 and December 31, 2021;

no shares issued

1 unchanged sentence

shares authorized — 2022 and 2021 - 100,000 ;

issued and outstanding as of March 31, 2022 - 56,655 and December 31, 2021 - 56,570

issued and outstanding as of June 30, 2022 - 56,745 and December 31, 2021 - 56,570

Retained earnings

8 unchanged sentences

Three Months Ended

Six Months Ended

Cost of sales

4 unchanged sentences

Contingent consideration expense

Acquired in-process research and development

Total operating expenses

15 unchanged sentences

Three Months Ended

Six Months Ended

Other comprehensive income (loss):

19 unchanged sentences

Balance — March 31, 2022

Other comprehensive loss

Stock-based compensation expense

Options exercised

Issuance of common stock under Employee Stock Purchase Plan

Shares issued from time-vested restricted stock units

Balance — June 30, 2022

See condensed notes to consolidated financial statements.

MERIT MEDICAL SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands - unaudited)

Accumulated Other

9 unchanged sentences

Balance — March 31, 2021

Other comprehensive income

Stock-based compensation expense

Options exercised

Issuance of common stock under Employee Stock Purchase Plan

Shares issued from time-vested restricted stock units

Balance — June 30, 2021

See condensed notes to consolidated financial statements.

3 unchanged sentences

(In thousands - unaudited)

Three Months Ended

Six Months Ended

CASH FLOWS FROM OPERATING ACTIVITIES:

1 unchanged sentence

Depreciation and amortization

Loss (gain) on sales and/or abandonment of property and equipment

Loss on disposition of business

Loss on sale or abandonment of property and equipment

Write-off of certain intangible assets and other long-term assets

Acquired in-process research and development

Amortization of right-of-use operating lease assets

Fair value adjustments to contingent consideration

Adjustments and payments related to contingent consideration liability

Amortization of deferred credits

19 unchanged sentences

Proceeds from the sale of property and equipment

Payments from disposition of business

Cash paid in acquisitions, net of cash acquired

5 unchanged sentences

(In thousands - unaudited)

Three Months Ended

Six Months Ended

CASH FLOWS FROM FINANCING ACTIVITIES:

19 unchanged sentences

Property and equipment purchases in accounts payable

Acquisition purchases in other long-term obligations

Merit common stock surrendered ( 0 and 2 shares, respectively) in exchange for exercise of stock options

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"we"

or "us") for the three-month periods ended March 31, 2022 and 2021 are not audited.

or "us") for the three and six-month periods ended June 30, 2022 and 2021 are not audited.

Our consolidated financial statements are prepared in accordance with the requirements for unaudited interim periods and, consequently, do not include all disclosures required to be made in conformity with accounting principles generally accepted in the United States of America (“U.S.

In the opinion of our management, the accompanying consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of our financial position as of March 31, 2022 and December 31, 2021, and our results of operations and cash flows for the three-month periods ended March 31, 2022 and 2021.

The results of operations for the three-month periods ended March 31, 2022 and 2021 are not necessarily indicative of the results for a full-year period.

In the opinion of our management, the accompanying consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of our financial position as of June 30, 2022 and December 31, 2021, and our results of operations and cash flows for the three and six-month periods ended June 30, 2022 and 2021.

The results of operations for the three and six-month periods ended June 30, 2022 and 2021 are not necessarily indicative of the results for a full-year period.

Amounts presented in this report are rounded, while percentages and earnings per share amounts presented are calculated from the underlying amounts.

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In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848):

Scope , which amends the scope of ASU 2020-04.

ASU 2020-04 and ASU 2021-01 were effective as of March 12, 2020, and t he provisions of these updates may be applied prospectively to transactions through December 31, 2022, when reference rate reform activity is expected to be completed.

As of March 31, 2022, we had not modified any contracts as a result of reference rate reform.

Scope , which amended the scope of ASU 2020-04.

ASU 2020-04 and ASU 2021-01 became effective as of March 12, 2020, and t he provisions of these updates may be applied prospectively to transactions through December 31, 2022, when reference rate reform activity is expected to be completed.

As of June 30, 2022, we had not modified any contracts as a result of reference rate reform.

W e are currently assessing the anticipated impact of these standards on our consolidated financial statements.

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Our endoscopy segment consists of gastroenterology and pulmonology devices which assist in the palliative treatment of expanding esophageal, tracheobronchial and biliary strictures caused by malignant tumors.

The following tables present revenue from contracts with customers by reporting segment, product category and geographical region for the three-month periods ended March 31, 2022 and 2021 (in thousands):

The following tables present revenue from contracts with customers by reporting segment, product category and geographical region for the three and six-month periods ended June 30, 2022 and 2021 (in thousands):

Three Months Ended

March 31, 2022

March 31, 2021

June 30, 2022

June 30, 2021

United States

7 unchanged sentences

Endoscopy Devices

Inventories at March 31, 2022 and December 31, 2021 consisted of the following (in thousands):

March 31, 2022

Six Months Ended

June 30, 2022

June 30, 2021

United States

International

United States

International

Cardiovascular

Peripheral Intervention

Cardiac Intervention

Custom Procedural Solutions

Endoscopy Devices

Acquisitions.

On April 30, 2022, we acquired the Restore Endosystems Bifurcated Stent System pursuant to the terms of a unit purchase agreement we executed with all of the members of Restore Endosystems, LLC (“Restore Endosystems”).

Subject to the terms and conditions of the unit purchase agreement, we paid $ 3 million in cash at closing.

We also accrued $ 3.5 million of other long-term obligations, which represents the fair value of two separate $ 2 million payments which are payable no later than two and four years following the closing of the acquisition, respectively, or earlier upon the achievement of specified milestones.

We will impute interest on these liabilities with the passage of time.

We have accounted for this transaction as an asset purchase and recorded $ 6.5 million of acquired in-process research and development expense, because the technological feasibility of the underlying research and development project has not yet been reached and such technology has no identified future alternative use as of the date of acquisition.

During April 2022, we paid $ 1.4 million to acquire shares of series A preferred stock of Fluidx Medical Technology, Inc.

("Fluidx"), owner of certain technology proposed to be used in the development of embolic and adhesive agents for use in arterial, venous, vascular graft and cardiovascular applications inside and outside the heart and related appendages.

We had previously purchased, and continue to hold, $ 4.7 million of participating preferred shares of Fluidx.

Our investments have been recorded as equity investments accounted for at cost and reflected within other assets in the accompanying consolidated balance sheets because we are not able to exercise significant influence over the operations of Fluidx.

Our total current investment in Fluidx represents an ownership of approximately 17 % of its outstanding capital stock.

Inventories at June 30, 2022 and December 31, 2021 consisted of the following (in thousands):

June 30, 2022

December 31, 2021

4 unchanged sentences

Goodwill and Intangible Assets.

The change in the carrying amount of goodwill for the three-month period ended March 31, 2022 is detailed as follows (in thousands):

The change in the carrying amount of goodwill for the six-month period ended June 30, 2022 is detailed as follows (in thousands):

Goodwill balance at January 1

Effect of foreign exchange

Goodwill balance at March 31

Total accumulated goodwill impairment losses aggregated to $ 8.3 million as of March 31, 2022 and December 31, 2021.

We did no t have any goodwill impairments for the three-month periods ended March 31, 2022 and 2021.

The total goodwill balance as of March 31, 2022 and December 31, 2021 was related to our cardiovascular segment.

Other intangible assets at March 31, 2022 and December 31, 2021 consisted of the following (in thousands):

March 31, 2022

Goodwill balance at June 30

Total accumulated goodwill impairment losses aggregated to $ 8.3 million as of June 30, 2022 and December 31, 2021.

We did no t have any goodwill impairments for the six-month periods ended June 30, 2022 and 2021.

The total goodwill balances as of June 30, 2022 and December 31, 2021 were related to our cardiovascular segment.

Other intangible assets at June 30, 2022 and December 31, 2021 consisted of the following (in thousands):

June 30, 2022

Gross Carrying

7 unchanged sentences

Customer lists

Aggregate amortization expense for the three-month periods ended March 31, 2022 and 2021 was $ 12.2 million and $ 12.5 million, respectively.

Aggregate amortization expense for the three and six-month periods ended June 30, 2022 was $ 12.1 million and $ 24.2 million, respectively.

Aggregate amortization expense for the three and six-month periods ended June 30, 2021 was $ 12.4 million and $ 24.9 million, respectively.

We evaluate long-lived assets, including amortizing intangible assets, for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable.

1 unchanged sentence

We determine the fair value of our amortizing assets based on estimated future cash flows discounted back to their present value using a discount rate that reflects the risk profiles of the underlying activities.

During the three-month period ended March 31, 2022, we identified indicators of impairment associated with certain acquired intangible assets based on our qualitative assessment, which led us to complete an interim quantitative impairment assessment.

The primary indicator of impairment was our planned divestiture of the STD Pharmaceutical Products Limited (“STD Pharmaceutical”) business acquired in our August 2019 acquisition of Fibrovein Holdings Limited.

On April 30, 2022, we completed the divestiture of Fibrovein Holdings Limited, in exchange for the termination of our obligations arising from the acquisition transaction in August 2019 and the purchaser’s agreement to make potential future payments upon a qualifying disposition of the STD Pharmaceutical business.

We recorded an impairment charge for the carrying value of $ 1.7 million of intangible assets during the three months ended March 31, 2022, all of which pertained to our cardiovascular segment.

We did no t identify indicators of impairment in any intangible assets based on our qualitative assessment for the three-month period ended March 31, 2021.

Estimated amortization expense for the developed technology and other intangible assets for the next five years consisted of the following as of March 31, 2022 (in thousands):

During the three-month period ended June 30, 2022, we did no t identify indicators of impairment in any intangible assets based on our qualitative assessment.

During the six-month period ended June 30, 2022, we identified indicators of impairment associated with certain acquired intangible assets based on our qualitative assessment, which led us to complete an interim quantitative impairment assessment.

The primary indicator of impairment was our divestiture on April 30, 2022 of the STD Pharmaceutical Products Limited (“STD Pharmaceutical”) business acquired in our August 2019 acquisition of Fibrovein Holdings Limited.

We recorded an impairment charge for the carrying value of $ 1.7 million of intangible assets during the six months ended June 30, 2022, all of which pertained to our cardiovascular segment.

During the three-month period ended June 30, 2021, we identified indicators of impairment associated with certain acquired intangible assets based on our qualitative assessment, which led us to complete an interim quantitative impairment assessment.

During the three-month period ended June 30, 2021, the primary indicator of impairment was our planned discontinuance of the Advocate™ Peripheral Angioplasty Balloon product line, sold under our license agreements with ArraVasc Limited (“ArraVasc”).

We recorded an impairment charge for the remaining carrying value of ArraVasc intangible assets of approximately $ 1.6 million during the three months ended June 30, 2021, all of which pertained to our cardiovascular segment.

Estimated amortization expense for developed technology and other intangible assets for the next five years consisted of the following as of June 30, 2022 (in thousands):

Year Ending December 31,

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Income Taxes.

Our provision for income taxes for the three-month periods ended March 31, 2022 and 2021 was a tax expense of $ 3.6 million and $ 1.7 million, respectively, which resulted in an effective tax rate of 25.6 % and 13.7 %, respectively.

The increase in the income tax expense and the corresponding change in the effective income tax rate for the three-month period ended March 31, 2022, when compared to the prior-year period, was primarily due to decreased benefit from discrete items such as share-based compensation.

Our provision for income taxes for the three-month periods ended June 30, 2022 and 2021 was a tax expense of $ 5.4 million and $ 1.9 million, respectively, which resulted in an effective tax rate of 26.1 % and 28.4 %, respectively.

Our provision for income taxes for the six-month periods ended June 30, 2022 and 2021 was a tax expense of $ 9.0 million and $ 3.7 million, respectively, which resulted in an effective tax rate of 25.9 % and 18.8 %, respectively.

The increase in the income tax expense and the corresponding change in the effective income tax rate for the three and six-month periods ended June 30, 2022, when compared to the prior-year periods, was primarily due to decreased benefit from discrete items such as share-based compensation and deferred compensation.

Our effective tax rate differs from the U.S.

1 unchanged sentence

Revolving Credit Facility and Long-Term Debt.

Principal balances outstanding under our long-term debt obligations as of March 31, 2022 and December 31, 2021 consisted of the following (in thousands):

March 31, 2022

Principal balances outstanding under our long-term debt obligations as of June 30, 2022 and December 31, 2021 consisted of the following (in thousands):

June 30, 2022

December 31, 2021

7 unchanged sentences

The Third Amended Credit Agreement is a syndicated loan agreement with Wells Fargo Bank, National Association and other parties.

The Third Amended Credit Agreement amends and restates in its entirety our previously outstanding Second Amended and Restated Credit Agreement and all amendments thereto.

The Third Amended Credit Agreement provides for a term loan of $ 150 million and a revolving credit commitment up to an aggregate amount of $ 600 million, inclusive of sub-facilities for multicurrency borrowings, standby letters of credit and swingline loans.

The Third Amended Credit Agreement amended and restated in its entirety our previously outstanding Second Amended and Restated Credit Agreement and all amendments thereto.

The Third Amended Credit Agreement provides for a term loan of $ 150 million and a revolving credit commitment of up to an aggregate amount of $ 600 million, inclusive of sub-facilities for multicurrency borrowings, standby letters of credit and swingline loans.

On July 31, 2024, all principal, interest and other amounts outstanding under the Third Amended Credit Agreement are payable in full.

15 unchanged sentences

(3) Maximum level of the aggregate amount of all Facility Capital Expenditures (as defined in the Third Amended Credit Agreement) in any fiscal year.

We believe we were in compliance with all covenants set forth in the Third Amended Credit Agreement as of March 31, 2022.

As of March 31, 2022, we had outstanding borrowings of $ 253 million and issued letter of credit guarantees of $ 3.4 million under the Third Amended Credit Agreement, with additional available borrowings of approximately $ 475 million, based

on the maximum net leverage ratio and the aggregate revolving credit commitment pursuant to the Third Amended Credit Agreement.

Our interest rate as of March 31, 2022 was a fixed rate of 2.71 % on $ 75 million as a result of an interest rate swap (see Note 8) and a variable floating rate of 1.46 % on $ 177.8 million.

We believe we were in compliance with all covenants set forth in the Third Amended Credit Agreement as of June 30, 2022.

As of June 30, 2022, we had outstanding borrowings of $ 246.3 million and issued letter of credit guarantees of $ 1.9 million under the Third Amended Credit Agreement, with additional available borrowings of approximately $ 481 million, based on the maximum net leverage ratio and the aggregate revolving credit commitment pursuant to the Third Amended Credit Agreement.

Our interest rate as of June 30, 2022 was a fixed rate of 2.71 % with respect to $ 75 million of the principal amount, as a result of an interest rate swap (see Note 9), and a variable floating rate of 2.67 % with respect to $ 171.3 million of the principal amount.

Our interest rate as of December 31, 2021 was a fixed rate of 2.71 % on $ 75 million as a result of an interest rate swap and a variable floating rate of 1.10 % on $ 168.1 million.

The foregoing fixed rates do not reflect potential future changes in the applicable margin.

Future minimum principal payments on our long-term debt, as of March 31, 2022, were as follows (in thousands):

Future minimum principal payments on our long-term debt, as of June 30, 2022, were as follows (in thousands):

Future Minimum

18 unchanged sentences

On a monthly basis, the interest rates under both the interest rate swap and the underlying debt reset, the swap is settled with the counterparty, and interest is paid.

On March 31, 2022 and December 31, 2021, our interest rate swap qualified as a cash flow hedge.

The fair value of our interest rate swap on March 31, 2022 was an asset of $ 1.2 million, which was partially offset by $ 0.3 million in deferred taxes.

On June 30, 2022 and December 31, 2021, our interest rate swap qualified as a cash flow hedge.

The fair value of our interest rate swap on June 30, 2022 was an asset of $ 2.0 million, which was partially offset by ($ 0.5 ) million in deferred taxes.

The fair value of our interest rate swap on December 31, 2021 was a liability of ($ 1.4 ) million, partially offset by $ 0.4 million in deferred taxes.

7 unchanged sentences

Derivative Instruments Designated as Cash Flow Hedges

For derivative instruments that are designated and qualify as cash flow hedges, the gain or loss on the derivative instrument is temporarily reported as a component of other comprehensive income (loss) and then reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings.

For derivative instruments that are designated and qualify as cash flow hedges, the gain or loss on the derivative instrument is temporarily reported as a component of other comprehensive income and then reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings.

We entered into forward contracts on various foreign currencies to manage the risk associated with forecasted exchange rates which impact revenues, cost of sales, and operating expenses in various international markets.

1 unchanged sentence

We enter into approximately 100 cash flow foreign currency hedges every month.

As of March 31, 2022 and December 31, 2021, we had entered into foreign currency forward contracts, which qualified as cash flow hedges, with aggregate notional amounts of $ 141.0 million and $ 123.0 million, respectively.

As of June 30, 2022 and December 31, 2021, we had entered into foreign currency forward contracts, which qualified as cash flow hedges, with aggregate notional amounts of $ 103.4 million and $ 123.0 million, respectively.

Derivative Instruments Not Designated as Cash Flow Hedges

1 unchanged sentence

We enter into approximately 50 foreign currency fair value hedges every month.

As of March 31, 2022 and December 31, 2021, we had entered into foreign currency forward contracts related to those balance sheet accounts with aggregate notional amounts of $ 87.9 million and $ 86.0 million, respectively.

As of June 30, 2022 and December 31, 2021, we had entered into foreign currency forward contracts related to those balance sheet accounts with aggregate notional amounts of $ 94.0 million and $ 86.0 million, respectively.

Balance Sheet Presentation of Derivative Instruments.

As of March 31, 2022 and December 31, 2021, all derivative instruments, both those designated as hedging instruments and those that were not designated as hedging instruments, were recorded at fair value on a gross basis on our consolidated balance sheets.

As of June 30, 2022 and December 31, 2021, all derivative instruments, both those designated as hedging instruments and those that were not designated as hedging instruments, were recorded at fair value on a gross basis on our consolidated balance sheets.

We are not subject to any master netting agreements.

2 unchanged sentences

Balance Sheet Location

March 31, 2022

June 30, 2022

December 31, 2021

14 unchanged sentences

Balance Sheet Location

March 31, 2022

June 30, 2022

December 31, 2021

12 unchanged sentences

Reclassified from AOCI

Three Months Ended March 31,

Three Months Ended June 30,

Derivative instrument

4 unchanged sentences

Cost of sales

As of March 31, 2022, ($ 1.0 ) million, or ($ 0.8 ) million after taxes, was expected to be reclassified from accumulated other comprehensive income (loss) to earnings in revenue and cost of sales over the succeeding twelve months.

As of March 31, 2022, $ 34,000 , or $ 26,000 after taxes, was expected to be reclassified from accumulated other comprehensive income (loss) to earnings in interest expense over the succeeding twelve months.

Amount of Gain/(Loss)

Consolidated Statements

Amount of Gain/(Loss)

Recognized in OCI

Reclassified from AOCI

Six Months Ended June 30,

Derivative instrument

Location in statements of income

Interest rate swaps

Interest expense

Foreign currency forward contracts

Cost of sales

As of June 30, 2022, $ 3.2 million, or $ 2.4 million after taxes, was expected to be reclassified from AOCI to earnings in revenue and cost of sales over the succeeding twelve months.

As of June 30, 2022, $ 1.0 million, or $ 0.8 million after taxes, was expected to be reclassified from AOCI to earnings in interest expense over the succeeding twelve months.

Derivative Instruments Not Designated as Hedging Instruments

The following gains/(losses) from these derivative instruments were recognized in our consolidated statements of income (loss) for the periods presented (in thousands):

Three Months Ended March 31,

The following gains/(losses) from these derivative instruments were recognized in our consolidated statements of income for the periods presented (in thousands):

Three Months Ended June 30,

Six Months Ended June 30,

Derivative Instrument

1 unchanged sentence

Foreign currency forward contracts

Other income (expense)

Other expense — net

Commitments and Contingencies.

In the ordinary course of business, we are involved in various proceedings, legal actions and claims.

These proceedings, actions and claims may involve product liability, intellectual property, contract disputes, employment, governmental inquiries or other matters, including those more fully described below.

These proceedings, actions and claims may involve product liability, intellectual property, contract disputes, employment, governmental inquiries, audits or proceedings, or other matters, including those more fully described below.

The outcomes of these matters will generally not be known for prolonged periods of time.

4 unchanged sentences

The ultimate cost to us with respect to such proceedings, actions and claims could be materially different than the amount of the current estimates and accruals and could have a material adverse effect on our financial position, results of operations and cash flows.

Securities Litigation

On December 5, 2019, the Bucks County Employees Retirement Fund filed a complaint against Merit, our Chief Executive Officer and our Chief Financial Officer in the United States District Court for the Central District of California (the “California Central District Court”), individually and on behalf of all purchasers of our common stock between February 26, 2019 and October 30, 2019.

On February 24, 2020, the court appointed the City of Atlanta Police Pension Fund, the Atlanta Firefighters’ Pension Fund, and the Employees’ Retirement System of the City of Baton Rouge and Parish of East Baton Rouge as Lead Plaintiffs.

This action is captioned In re Merit Medical Systems, Inc.

Securities Litigation (Master File No.

8:19-cv-02326-DOC-ADS).

On June 30, 2020, Lead Plaintiffs filed a consolidated class action complaint for violations of federal securities laws against Merit, our Chief Executive Officer and our Chief Financial Officer in the California Central District Court, individually and on behalf of all purchasers of our common stock between February 26, 2019 and October 30, 2019.

The consolidated class action complaint alleged that defendants violated Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder, and sought unspecified damages, costs and attorneys’ fees, and equitable relief.

As of December 31, 2021, we had accrued approximately $ 10 million of net expense in connection with an agreement in principle to settle the consolidated class action complaint.

The parties executed a settlement agreement, settling all claims asserted in the class action complaint, and the settlement agreement was approved by the Central California District Court on April 13, 2022.

Shareholder Derivative Action

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The stay has expired, however, the parties have been engaged in mediation in an attempt to resolve the dispute.

We have not recorded an expense related to this matter because any potential loss is not reasonably estimable.

Additionally, we cannot presently estimate the range of loss, if any, that may result from the matter.

It is possible that the ultimate resolution of the foregoing matter, or other matters, if resolved in a manner unfavorable to us, may be materially adverse to our business, financial condition, results of operations or liquidity.

The parties have negotiated a tentative agreement to settle the dispute;

however, that agreement is not final and remains subject to court approval.

As currently proposed, the settlement would result in an expense to Merit of $ 1.0 million.

The estimated expense associated with the tentative settlement has been reflected in our financial results reported for the three and six-month periods ended June 30, 2022.

We have received a request from the Division of Enforcement of the U.S, Securities and Exchange Commission (“SEC”) seeking the voluntary production of information relating to the business activities of Merit’s subsidiary in China, including interactions with hospitals and health care officials in China.

We are cooperating with this request and investigating the matter and, at this time, are unable to predict the scope, timing, significance or outcome of this matter.

Legal costs for proceedings, legal actions and claims discussed, such as outside counsel fees and expenses, are charged to expense in the period(s) incurred.

Earnings Per Common Share (EPS).

The computation of weighted average shares outstanding and the basic and diluted earnings per common share for the three-month periods ended March 31, 2022 and 2021 consisted of the following (in thousands, except per share amounts):

The computation of weighted average shares outstanding and the basic and diluted earnings per common share for the three and six-month periods ended June 30, 2022 and 2021 consisted of the following (in thousands, except per share amounts):

Three Months Ended

Six Months Ended

Average common shares outstanding

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Stock-Based Compensation Expense.

Stock-based compensation expense before income tax expense (benefit) for the three-month periods ended March 31, 2022 and 2021 consisted of the following (in thousands):

Stock-based compensation expense before income tax expense for the three and six-month periods ended June 30, 2022 and 2021 consisted of the following (in thousands):

Three Months Ended

Six Months Ended

Cost of sales

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Nonqualified Stock Options

During the three-month periods ended March 31, 2022 and 2021, we granted stock options representing 123,606 and 125,850 shares of our common stock, respectively.

We use the Black-Scholes methodology to value the stock-based

compensation expense for options.

During the six-month periods ended June 30, 2022 and 2021, we granted stock options representing 168,606 and 125,850 shares of our common stock, respectively.

We use the Black-Scholes methodology to value the stock-based compensation

expense for options.

In applying the Black-Scholes methodology to the option grants, the fair value of our stock-based awards granted was estimated using the following assumptions for the periods indicated below:

Three Months Ended

Six Months Ended

Risk-free interest rate

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For awards with a vesting period, compensation expense is recognized on a straight-line basis over the service period, which corresponds to the vesting period.

As of March 31, 2022, the total remaining unrecognized compensation cost related to non-vested stock options was $ 25.9 million, which was expected to be recognized over a weighted average period of 2.4 years.

As of June 30, 2022, the total remaining unrecognized compensation cost related to non-vested stock options was $ 24.0 million, which was expected to be recognized over a weighted average period of 2.6 years.

Stock-Settled Performance-Based Restricted Stock Units (“Performance Stock Units”)

During the three-month periods ended March 31, 2022 and 2021, we granted performance stock units to certain of our executive officers which represent up to 109,178 and 128,883 shares of our common stock, respectively.

During the six-month periods ended June 30, 2022 and 2021, we granted performance stock units to certain of our executive officers which represent up to 120,710 and 128,883 shares of our common stock, respectively.

Conversion of the performance stock units occurs at the end of the relevant performance periods, or one year after the agreement date, whichever is later.

2 unchanged sentences

The fair value of each performance stock unit was estimated as of the grant date using the following assumptions for awards granted in the periods indicated below:

Three Months Ended

Six Months Ended

Risk-free interest rate

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At the end of the performance period, cumulative expense is calculated based on the actual level of FCF achieved.

As of March 31, 2022, the total remaining unrecognized compensation cost related to stock-settled performance stock units was $ 9.3 million, which is expected to be recognized over a weighted average period of 2.2 years.

As of June 30, 2022, the total remaining unrecognized compensation cost related to stock-settled performance stock units was $ 8.0 million, which is expected to be recognized over a weighted average period of 2.0 years.

Liability Awards

During the three-month periods ended March 31, 2022 and 2021, we granted liability awards to our Chief Executive Officer with total target cash incentives, each in the amount of $ 1.0 million.

During the six-month periods ended June 30, 2022 and 2021, we granted liability awards to our Chief Executive Officer with total target cash incentives, each in the amount of $ 1.0 million.

These awards entitle him to a target cash payment based upon attaining targeted levels of FCF and rTSR, as defined in the award agreements.

2 unchanged sentences

These awards are classified as liabilities and reported in accrued expenses and other long-term obligations within our consolidated balance sheet.

As of March 31, 2022, the total remaining unrecognized compensation cost related to cash-settled performance-based share-based awards was $ 3.7 million, which is expected to be recognized over a weighted average period of 2.2 years.

As of June 30, 2022, the total remaining unrecognized compensation cost related to cash-settled performance-based share-based awards was $ 3.2 million, which is expected to be recognized over a weighted average period of 2.0 years.

Restricted Stock Units

On June 17, 2021, we granted restricted stock units to our non-employee directors representing 26,226 shares of our common stock.

During the three-month periods ended June 30, 2022 and 2021, we granted restricted stock units to our non-employee directors representing 30,500 and 26,226 shares of our common stock.

The expense recognized for restricted stock units is equal to the closing stock price on the date of grant, which is recognized over the vesting period.

Restricted stock units granted to each director are subject to such director’s continued service through the vesting date, which is one year from the date of grant.

As of March 31, 2022, the total remaining unrecognized compensation cost related to restricted stock units was $ 0.3 million, which will be recognized over the remaining vesting period.

As of June 30, 2022, the total remaining unrecognized compensation cost related to restricted stock units was $ 1.6 million, which will be recognized over the remaining vesting period.

Segment Reporting.

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We evaluate the performance of our operating segments based on net sales and operating income.

Financial information relating to our reportable operating segments and reconciliations to the consolidated totals for the three-month periods ended March 31, 2022 and 2021, were as follows (in thousands):

We evaluate the performance of our operating segments based on net sales and income from operations.

Financial information relating to our reportable operating segments and reconciliations to the consolidated totals for the three and six-month periods ended June 30, 2022 and 2021, were as follows (in thousands):

Three Months Ended

Six Months Ended

Cardiovascular

Total net sales

Operating Income

Income from operations

Cardiovascular

Total operating income

Total income from operations

Total other expense — net

2 unchanged sentences

Assets (Liabilities) Measured at Fair Value on a Recurring Basis

Our financial assets and (liabilities) carried at fair value and measured on a recurring basis as of March 31, 2022 and December 31, 2021 consisted of the following (in thousands):

Our financial assets and (liabilities) carried at fair value and measured on a recurring basis as of June 30, 2022 and December 31, 2021 consisted of the following (in thousands):

Fair Value Measurements Using

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unobservable inputs

March 31, 2022

June 30, 2022

Interest rate contract asset, long-term (1)

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We measure the initial liability and re-measure the liability on a recurring basis using Level 3 inputs as defined under authoritative guidance for fair value measurements.

Changes in the fair value of our contingent consideration liabilities during the three-month periods ended March 31, 2022 and 2021 consisted of the following (in thousands):

Changes in the fair value of our contingent consideration liabilities during the three and six-month periods ended June 30, 2022 and 2021 consisted of the following (in thousands):

Three Months Ended

Six Months Ended

Beginning balance

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Ending balance

As of March 31, 2022, $ 5.8 million in contingent consideration liability was included in other long-term obligations and $ 20.5 million in contingent consideration liability was included in accrued expenses in our consolidated balance sheet.

As of June 30, 2022, $ 5.7 million in contingent consideration liability was included in other long-term obligations and $ 11.7 million in contingent consideration liability was included in accrued expenses in our consolidated balance sheet.

As of December 31, 2021, $ 13.5 million in contingent consideration liability was included in other long-term obligations and $ 34.7 million in contingent consideration liability was included in accrued expenses in our consolidated balance sheet.

Cash paid to settle the contingent consideration liability recognized at fair value as of the applicable acquisition date has been reflected as a cash outflow from financing activities in the accompanying consolidated statements of cash flows.

The recurring Level 3 measurement of our contingent consideration liabilities included the following significant unobservable inputs at March 31, 2022 and December 31, 2021 (amounts in thousands):

Payments related to the settlement of the contingent consideration liability recognized at fair value as of the applicable acquisition date of $ 32.8 million and $ 0.5 million for the six-month periods ended June 30, 2022 and 2021, respectively, have been reflected as a cash outflow from financing activities in the accompanying consolidated statements of cash flows.

Payments related to increases in the contingent consideration liability subsequent to the date of acquisition of $ 1.8 million for the six-month period ended June 30, 2022 are reflected as operating cash flows.

The recurring Level 3 measurement of our contingent consideration liabilities included the following significant unobservable inputs at June 30, 2022 and December 31, 2021 (amounts in thousands):

Fair value at

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Contingent Payments to Related Parties

During the three-month period ended March 31, 2022, we made contingent payments of $ 1.6 million to a current director of Merit and former shareholder of Cianna Medical, Inc.

During the six-month period ended June 30, 2022, we made contingent payments of $ 1.6 million to a former director of Merit and former shareholder of Cianna Medical, Inc.

(“Cianna Medical”), which we acquired in 2018.

We made no such payments during the three-month period ended March 31, 2021.

We made no such payments during the six-month period ended June 30, 2021.

The terms of the acquisition, including contingent consideration payments, were determined prior to the appointment of the former Cianna Medical shareholder as a Merit director.

As a former shareholder of Cianna Medical, the Merit director may be eligible for additional payments for the achievement of sales milestones specified in our merger agreement with Cianna Medical.

As a former shareholder of Cianna Medical, the former Merit director may be eligible for additional payments for the achievement of sales milestones specified in our merger agreement with Cianna Medical.

Fair Value of Other Assets (Liabilities)

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All our nonrecurring valuations use significant unobservable inputs and therefore fall under Level 3 of the fair value hierarchy.

During the three-month period ended March 31, 2022, we recorded an impairment charge of $ 1.7 million related to the acquired intangible assets from our August 2019 acquisition of STD Pharmaceutical.

As of March 31, 2022, the net assets associated with the STD Pharmaceutical business were not material.

On April 30, 2022, we divested our ownership of the STD Pharmaceutical business.

We do not anticipate the recognition of a material loss upon the divestiture of this business.

During the three-month period ended March 31, 2021, we had no losses related to acquired intangible assets (see Note 5).

Intangible Assets.

During the six-month period ended June 30, 2022, we had impairment losses related to acquired intangible assets of $ 1.7 million (see note 6) in connection with this disposition.

In addition to the intangible asset impairment, during the three-month period ended June 30, 2022, we recorded a loss within other expense – net of $ 1.3 million primarily associated with the transfer of net assets of the divested entity including approximately $ 1.0 million of cash and $ 1.2 million of inventory, partially offset by a gain of $ 1.0 million from reclassification of foreign currency translation gains.

During the six-month period ended June 30, 2021 we had losses related to acquired intangible assets of $ 1.6 million (see note 6).

Right of Use Operating Lease Assets.

During the three-month period ended June 30, 2021, we identified changes in events and circumstances relating to certain right-of-use (“ROU”) operating lease assets.

We compared the anticipated undiscounted cash flows generated by a sublease to the carrying value of the ROU operating lease and related long-lived assets and determined that the carrying values were not recoverable.

Consequently, we recorded impairment losses in the three-month period ended June 30, 2021 of approximately $ 1.4 million, which is equal to the excess of the carrying value of the assets over their estimated fair value.

The impairment losses were driven primarily by site consolidation decisions and changes in our projected cash flows for the ROU operating lease assets and related long-lived assets, due to changes in the real estate market as a result of the COVID-19 pandemic.

These changes include an increase in the anticipated time to identify lessees, an increase in anticipated lease concessions, and a decrease in the expected lease rates for the properties.

The ROU operating lease asset impairment losses in 2021 pertained to our cardiovascular segment.

We had no such losses during the three and six-month periods ended June 30, 2022.

Property and Equipment.

During the three and six-month periods ended June 30, 2021, we had losses of $ 1.3 million related to the measurement of property and equipment at fair value based on the planned discontinuance of the Advocate™ Peripheral Angioplasty Balloon product line, sold under our license agreements with ArraVasc, which pertained to our cardiovascular segment.

Notes Receivable

Our outstanding long-term notes receivable, including accrued interest and our allowance for current expected credit losses, were $ 2.4 million and $ 2.3 million as of March 31, 2022 and December 31, 2021, respectively.

As of March 31, 2022 and December 31, 2021, we had an allowance for current expected credit losses of $ 0.2 million and $ 0.2 million, respectively, associated with these notes receivable.

Our outstanding long-term notes receivable, including accrued interest and our allowance for current expected credit losses, were $ 2.4 million and $ 2.3 million as of June 30, 2022 and December 31, 2021, respectively.

As of June 30, 2022 and December 31, 2021, we had an allowance for current expected credit losses of $ 0.2 million and $ 0.2 million, respectively, associated with these notes receivable.

We assess the allowance for current expected credit losses on an individual security basis, due to the limited number of securities, using a probability of default model, which is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the expected collectability of securities, and other security specific factors.

below presents a rollforward of the allowance for current expected credit losses on our notes receivable for the three-month periods ended March 31, 2022 and 2021 (in thousands):

The table below presents a rollforward of the allowance for current expected credit losses on our notes receivable for the three and six-month periods ended June 30, 2022 and 2021 (in thousands):

Three Months Ended

Six Months Ended

Beginning balance

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Accumulated Other Comprehensive Income (Loss).

The changes in each component of accumulated other comprehensive income (loss) for the three-month periods ended March 31, 2022 and 2021 were as follows:

The changes in each component of accumulated other comprehensive income (loss) for the three and six-month periods ended June 30, 2022 and 2021 were as follows:

Cash Flow Hedges

Foreign Currency Translation

Balance as of April 1, 2022

Other comprehensive income (loss)

Reclassifications to:

Cost of sales

Interest expense

Other expense — net

Net other comprehensive income (loss)

Balance as of June 30, 2022

Cash Flow Hedges

Foreign Currency Translation

Balance as of April 1, 2021

Other comprehensive income (loss)

Reclassifications to:

Cost of sales

Interest expense

Net other comprehensive income (loss)

Balance as of June 30, 2021

Cash Flow Hedges

Foreign Currency Translation

Balance as of January 1, 2022

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Interest expense

Other expense — net

Net other comprehensive income (loss)

Balance as of March 31, 2022

Balance as of June 30, 2022

Cash Flow Hedges

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Net other comprehensive income (loss)

Balance as of March 31, 2021

Subsequent Events.

On April 30, 2022, we entered into a unit purchase agreement to acquire Restore Endosystems, LLC (“Restore Endosystems”), developer of the Restore Endosystems Bifurcated Stent System.

Subject to the terms and conditions of the unit purchase agreement, we paid $ 3 million in cash at closing, with additional payments totaling $ 4 million payable in separate $ 2 million payments no later than two and four years following the closing of the acquisition, respectively, or earlier upon the achievement of specified milestones.

We intend to account for this transaction as an asset purchase and include the purchase price in our consolidated statements of income as acquired in-process research and development expense, because the technological feasibility of the underlying research and development project has not yet been reached and such technology had no identified future alternative use as of the date of acquisition.

Balance as of June 30, 2021

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements