What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2023-04-28 compared with 2022-10-28 · 123 added, 278 removed, 537 unchanged (43% of the section changed)

4 unchanged sentences

(In thousands)

September 30,

Current assets:

27 unchanged sentences

(In thousands)

September 30,

LIABILITIES AND STOCKHOLDERS’ EQUITY

17 unchanged sentences

Stockholders' equity:

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

Preferred stock — 5,000 shares authorized as of March 31, 2023 and December 31, 2022;

no shares issued

1 unchanged sentence

100,000 shares authorized;

issued and outstanding as of September 30, 2022 - 56,918 and December 31, 2021 - 56,570

issued and outstanding as of March 31, 2023 - 57,472 and December 31, 2022 - 57,306

Retained earnings

8 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

Cost of sales

4 unchanged sentences

Contingent consideration expense

Acquired in-process research and development

Total operating expenses

15 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

Other comprehensive income (loss):

2 unchanged sentences

Foreign currency translation adjustment

Income tax benefit (expense)

Total other comprehensive income (loss)

Income tax expense

Total other comprehensive income

Total comprehensive income

4 unchanged sentences

Accumulated Other

Comprehensive Income (Loss)

Comprehensive Loss

Balance — January 1, 2023

6 unchanged sentences

Balance — March 31, 2023

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

Other comprehensive loss

Stock-based compensation expense

Options exercised

Issuance of common stock under Employee Stock Purchase Plan

Shares surrendered in exchange for payment of payroll tax liabilities

Shares surrendered in exchange for exercise of stock options

Balance — September 30, 2022

See condensed notes to consolidated financial statements.

MERIT MEDICAL SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands - unaudited)

Accumulated Other

Comprehensive Income (Loss)

Comprehensive Loss

Balance — January 1, 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

Shares surrendered in exchange for payment of payroll tax liabilities

Shares surrendered in exchange for exercise of stock options

Balance — March 31, 2021

Other comprehensive income

3 unchanged sentences

Shares issued from time-vested restricted stock units

Balance — June 30, 2021

Other comprehensive loss

Stock-based compensation expense

Options exercised

Issuance of common stock under Employee Stock Purchase Plan

Shares surrendered in exchange for payment of payroll tax liabilities

Shares surrendered in exchange for exercise of stock options

Balance — September 30, 2021

Balance — March 31, 2022

See condensed notes to consolidated financial statements.

3 unchanged sentences

(In thousands - unaudited)

Nine Months Ended

September 30,

Three Months Ended

CASH FLOWS FROM OPERATING ACTIVITIES:

1 unchanged sentence

Depreciation and amortization

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

Adjustments and payments related to contingent consideration liability

Adjustments related to contingent consideration liabilities

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)

Nine Months Ended

September 30,

Three Months Ended

CASH FLOWS FROM FINANCING ACTIVITIES:

6 unchanged sentences

Effect of exchange rates on cash, cash equivalents, and restricted cash

Net increase (decrease) in cash, cash equivalents and restricted cash

Net decrease in cash, cash equivalents and restricted cash

CASH, CASH EQUIVALENTS AND RESTRICTED CASH:

10 unchanged sentences

Property and equipment purchases in accounts payable

Acquisition purchases in accrued expenses and other long-term obligations

Merit common stock surrendered ( 15 and 3 shares, respectively) in exchange for exercise of stock options

Acquisition purchases in other long-term obligations

Right-of-use operating lease assets obtained in exchange for operating lease liabilities

7 unchanged sentences

"we"

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

or "us") for the three-month periods ended March 31, 2023 and 2022 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 September 30, 2022 and December 31, 2021, and our results of operations and cash flows for the three and nine-month periods ended September 30, 2022 and 2021.

The results of operations for the three and nine-month periods ended September 30, 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 March 31, 2023 and December 31, 2022, and our results of operations and cash flows for the three-month periods ended March 31, 2023 and 2022.

The results of operations for the three-month periods ended March 31, 2023 and 2022 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.

1 unchanged sentence

Recently Issued Financial Accounting Standards.

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848):

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting , which provides temporary optional expedients and exceptions in accounting for modifications of contracts that reference the London interbank offered rate (“LIBOR”) or another reference rate expected to be discontinued as a result of reference rate reform.

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

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 September 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.

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

In December 2022, the FASB issued ASU 2022-06, Deferral of the Sunset Date of Topic 848 , which defers the sunset date of the guidance in ASC 848 to December 31, 2024.

ASU 2020-04 and ASU 2021-01 were effective as of March 12, 2020;

ASU 2022-06 was effective upon its issuance in December 2022.

The provisions of these updates may be applied prospectively to transactions through December 31, 2024, when reference rate reform activity is expected to be completed.

As of March 31, 2023, we had not modified any contracts as a result of reference rate reform.

We currently believe that all other issued and not yet effective accounting standards are not materially relevant to our financial statements.

12 unchanged sentences

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 and nine-month periods ended September 30, 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-month periods ended March 31, 2023 and 2022 (in thousands):

Three Months Ended

September 30, 2022

September 30, 2021

United States

International

United States

International

Cardiovascular

Peripheral Intervention

Cardiac Intervention

Custom Procedural Solutions

Endoscopy Devices

Nine Months Ended

September 30, 2022

September 30, 2021

March 31, 2023

March 31, 2022

United States

8 unchanged sentences

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 the members of Restore Endosystems, LLC (“Restore Endosystems”).

Pursuant 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 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 had 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.

During the three-month period ended September 30, 2022, we met the criteria requiring the final payment pursuant to our asset purchase agreement with QX Medical, LLC executed on December 15, 2011, for the acquisition of the intellectual property rights to certain support guide catheter technology.

As of September 30, 2022, we recorded a liability of $ 1.0 million within accrued expenses based upon our obligation to pay the sales milestone payment in accordance with the terms of the asset purchase agreement and capitalized a developed technology intangible asset.

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

September 30, 2022

During January 2023, we paid $ 2.0 million to acquire shares of Series Seed-1 Preferred Stock of Solo Pace Inc.

("Solo Pace"), owner and developer of a temporary external pulse generator and grounding pad with associated remote control module.

Our investment has been recorded as an equity investment accounted for at cost and reflected within other assets in the accompanying consolidated balance sheets because the equity interest does not have a readily determinable fair value and because we are not able to exercise significant influence over the operations of Solo Pace.

Our investment in Solo Pace represents an ownership of approximately 19 % of its outstanding capital stock.

Inventories at March 31, 2023 and December 31, 2022 consisted of the following (in thousands):

March 31, 2023

December 31, 2022

4 unchanged sentences

Goodwill and Intangible Assets.

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

The change in the carrying amount of goodwill for the three-month period ended March 31, 2023 is detailed as follows (in thousands):

Goodwill balance at January 1

Effect of foreign exchange

Goodwill balance at September 30

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

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

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

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

September 30, 2022

Goodwill balance at March 31

Total accumulated goodwill impairment losses aggregated $ 8.3 million as of March 31, 2023 and December 31, 2022.

We did no t have any goodwill impairments for the three-month periods ended March 31, 2023 and 2022.

The total goodwill balances as of March 31, 2023 and December 31, 2022 were related to our cardiovascular segment.

Other intangible assets at March 31, 2023 and December 31, 2022 consisted of the following (in thousands):

March 31, 2023

Gross Carrying

7 unchanged sentences

Customer lists

Aggregate amortization expense for the three and nine-month periods ended September 30, 2022 was $ 12.1 million and $ 36.3 million, respectively.

Aggregate amortization expense for the three and nine-month periods ended September 30, 2021 was $ 12.4 million and $ 37.3 million, respectively.

Aggregate amortization expense for the three-month period ended March 31, 2023 and 2022 was $ 12.3 million and $ 12.2 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 nine-month period ended September 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 nine months ended September 30, 2022 , all of which pertained to our cardiovascular segment.

During the nine-month period ended September 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 nine-month period ended September 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 nine-month period ended September 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 September 30, 2022 (in thousands):

Year Ending December 31,

During the three-month period ended March 31, 2023, we did no t identify indicators of impairment in any intangible assets based on our qualitative

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.

There were no impairments during the three-month period ended March 31, 2023 .

Estimated amortization expense for developed technology and other intangible assets for the next five years consisted of the following as of March 31, 2023 (in thousands):

Estimated Amortization Expense

1 unchanged sentence

Income Taxes.

Our provision for income taxes for the three-month periods ended September 30, 2022 and 2021 was a tax expense of $ 2.3 million and $ 2.2 million, respectively, which resulted in an effective tax rate of 13.2 % and 15.6 %, respectively.

Our provision for income taxes for the nine-month periods ended September 30, 2022 and 2021 was a tax expense of $ 11.4 million and $ 5.9 million, respectively, which resulted in an effective tax rate of 21.6 % and 17.5 %, respectively.

The increase in the income tax expense and the corresponding change in the effective income tax rate for the three and nine-month periods ended September 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 provision for income taxes for the three-month periods ended March 31, 2023 and 2022 was a tax expense of $ 4.8 million and $ 3.6 million, respectively, which resulted in an effective tax rate of 18.8 % and 25.6 %, respectively.

The decrease in the effective income tax rate for the three-month period ended March 31, 2023, when compared to the prior-year period, was primarily due to increased benefit from discrete items such as contingent liabilities and deferred compensation, and the increase in the income tax expense when compared to the prior-year period was primarily due to increased pre-tax book income.

Our effective tax rate differs from the U.S.

statutory rate primarily due to the impact of global intangible low-taxed income (“GILTI”) inclusions, state income taxes, foreign taxes, other non-deductible permanent items and discrete items (such as share-based compensation).

On August 16, 2022, the Inflation Reduction Act of 2022 was signed into law.

We currently do not anticipate the recently enacted law, including the corporate alternative minimum tax, one percent excise tax on stock repurchases, or tax incentives to promote clean energy, to have a material impact on our consolidated financial statements.

Revolving Credit Facility and Long-Term Debt.

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

September 30, 2022

Principal balances outstanding under our long-term debt obligations as of March 31, 2023 and December 31, 2022 consisted of the following (in thousands):

March 31, 2023

December 31, 2022

12 unchanged sentences

Revolving credit loans denominated in dollars and term loans made under the Third Amended Credit Agreement bear interest, at our election, at either the Base Rate or the Eurocurrency Rate (as such terms are defined in the Third Amended Credit Agreement) plus the Applicable Margin (as defined in the Third Amended Credit Agreement).

Revolving credit

loans denominated in an Alternative Currency (as defined in the Third Amended Credit Agreement) bear interest at the Eurocurrency Rate plus the Applicable Margin.

Revolving credit loans denominated in an Alternative Currency (as defined in the Third Amended Credit Agreement) bear interest at the Eurocurrency Rate plus the Applicable Margin.

Swingline loans bear interest at the Base Rate plus the Applicable Margin (as defined in the Third Amended Credit Agreement).

11 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 September 30, 2022.

As of September 30, 2022, we had outstanding borrowings of $ 216.9 million and issued letter of credit guarantees of $ 1.9 million under the Third Amended Credit Agreement, with additional available borrowings of approximately $ 509 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 September 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 4.12 % with respect to $ 141.9 million of the principal amount.

We believe we were in compliance with all covenants set forth in the Third Amended Credit Agreement as of March 31, 2023.

As of March 31, 2023, we had outstanding borrowings of $ 197.8 million and issued letter of credit guarantees of $ 3.2 million under the Third Amended Credit Agreement, with additional available borrowings of approximately $ 521 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, 2023 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 5.84 % with respect to $ 122.8 million of the principal amount.

Our interest rate as of December 31, 2022 was a fixed rate of 2.71 % on $ 75 million as a result of an interest rate swap and a variable floating rate of 5.38 % on $ 123.2 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 September 30, 2022, were as follows (in thousands):

Future minimum principal payments on our long-term debt, as of March 31, 2023, 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 September 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 September 30, 2022 was an asset of $ 3.4 million, which was partially offset by ($ 0.8 ) 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.

On March 31, 2023 and December 31, 2022, our interest rate swap qualified as a cash flow hedge.

The fair value of our interest rate swap on March 31, 2023 was an asset of $ 2.8 million, which was partially offset by ($ 0.7 ) million in deferred taxes.

The fair value of our interest rate swap on December 31, 2022 was an asset of $ 3.4 million, partially offset by ($ 0.8 ) million in deferred taxes.

Foreign Currency Risk.

10 unchanged sentences

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

As of September 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 $ 72.8 million and $ 123.0 million, respectively.

As of March 31, 2023 and December 31, 2022, we had entered into foreign currency forward contracts, which qualified as cash flow hedges, with aggregate notional amounts of $ 98.0 million and $ 87.8 million, respectively.

Derivative Instruments Not Designated as Cash Flow Hedges

We forecast our net exposure in various receivables and payables to fluctuations in the value of various currencies, and we enter into foreign currency forward contracts to mitigate that exposure.

We enter into approximately 50 foreign currency

fair value hedges every month.

As of September 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 $ 79.3 million and $ 86.0 million, respectively.

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

As of March 31, 2023 and December 31, 2022, we had entered into foreign currency forward contracts related to those balance sheet accounts with aggregate notional amounts of $ 129.0 million and $ 92.4 million, respectively.

Balance Sheet Presentation of Derivative Instruments.

As of September 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.

As of March 31, 2023 and December 31, 2022, 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

September 30, 2022

March 31, 2023

December 31, 2022

6 unchanged sentences

(Liabilities)

Interest rate swaps

Other long-term obligations

Foreign currency forward contracts

4 unchanged sentences

Balance Sheet Location

September 30, 2022

March 31, 2023

December 31, 2022

12 unchanged sentences

Reclassified from AOCI

Three Months Ended September 30,

Derivative instrument

Location in statements of income

Interest rate swaps

Interest expense

Foreign currency forward contracts

Cost of sales

Amount of Gain/(Loss)

Consolidated Statements

Amount of Gain/(Loss)

Recognized in OCI

Reclassified from AOCI

Nine Months Ended September 30,

Three Months Ended March 31,

Derivative instrument

4 unchanged sentences

Cost of sales

As of September 30, 2022, $ 5.5 million, or $ 4.2 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 September 30, 2022, $ 1.9 million, or $ 1.5 million after taxes, was expected to be reclassified from AOCI to earnings in interest expense over the succeeding twelve months.

As of March 31, 2023, $ 1.7 million, or $ 1.3 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 March 31, 2023, $ 2.3 million, or $ 1.7 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 for the periods presented (in thousands):

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Derivative Instrument

11 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.

Shareholder Derivative Action

On June 3, 2021, Steffen Maute filed a complaint, derivatively on behalf of Merit, against Merit (as a nominal defendant), our Chief Executive Officer, our Chief Financial Officer, our former President of Europe, Middle East and Africa (“EMEA,”) and certain of our directors in the United States District Court for the District of Utah (Case No.

2:21-cv-00346-DBP).

The derivative complaint alleges that the individual defendants violated their fiduciary duties owed to Merit and were unjustly enriched at the expense of and to the detriment of Merit between February 2019 and October 2019, and seeks unspecified damages, costs, and professional fees.

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 nine-month period ended September 30, 2022.

On October 18, 2022, the court entered an order preliminarily approving the settlement and providing for notice to the Company’s shareholders, subject to further consideration at a settlement hearing scheduled for February 16, 2023.

We 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 above, such as outside counsel fees and expenses, are charged to expense in the period(s) incurred.

We have received requests 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 the requests and investigating the matter and, at this time, are unable to predict the scope, timing, significance or outcome of this matter.

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

Legal costs for these matters, such as outside counsel fees and expenses, are charged to expense in the period 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 and nine-month periods ended September 30, 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-month periods ended March 31, 2023 and 2022 consisted of the following (in thousands, except per share amounts):

Three Months Ended

Nine Months Ended

September 30,

Average common shares outstanding

5 unchanged sentences

Stock-Based Compensation Expense.

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

Stock-based compensation expense before income tax expense for the three-month periods ended March 31, 2023 and 2022 consisted of the following (in thousands):

Three Months Ended

Nine Months Ended

September 30,

Cost of sales

12 unchanged sentences

Nonqualified Stock Options

During the nine-month periods ended September 30, 2022 and 2021, we granted stock options representing 203,606 and 656,350 shares of our common stock, respectively.

During the three-month periods ended March 31, 2023 and 2022, we granted stock options representing 293,294 and 123,606 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:

Nine Months Ended

September 30,

Three Months Ended

Risk-free interest rate

5 unchanged sentences

46.2 % - 46.6 %

46.3 % - 46.7 %

The average risk-free interest rate is determined using the U.S.

3 unchanged sentences

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 September 30, 2022, the total remaining unrecognized compensation cost related to non-vested stock options was $ 22.0 million, which was expected to be recognized over a weighted average period of 2.3 years.

As of March 31, 2023, the total remaining unrecognized compensation cost related to non-vested stock options was $ 25.5 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 nine-month periods ended September 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.

During the three-month periods ended March 31, 2023 and 2022, we granted performance stock units which represent up to 301,230 and 109,178 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.

The conversion ratio is based upon attaining targeted levels of free cash flow (“FCF”) and relative shareholder return as compared to the Russell 2000 Index (“rTSR”), as defined in the award agreements.

The number of shares delivered upon vesting at the end of the performance periods are based upon performance against specified financial performance metrics and relative total shareholder return as compared to the Russell 2000 Index (“rTSR”), as defined in the award agreements.

We use Monte-Carlo simulations to estimate the grant-date fair value of the performance stock units linked to total shareholder return.

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:

Nine Months Ended

September 30,

Three Months Ended

Risk-free interest rate

1.6 % - 2.7 %

0.1 % - 0.3 %

Performance period

2.6 - 2.8 years

1.8 - 2.8 years

Expected dividend yield

Expected price volatility

38.5 % - 46.2 %

43.7 % - 49.3 %

The risk-free interest rate of return was determined using the U.S.

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The expected dividend yield was assumed to be zero because, at the time of the grant, we had no plans to declare a dividend.

Compensation expense is recognized using the grant-date fair value for the number of shares that are probable of being awarded based on the performance conditions.

Each reporting period, this probability assessment is updated, and cumulative adjustments are recorded based on the level of FCF that is expected to be achieved.

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

September 30, 2022, the total remaining unrecognized compensation cost related to stock-settled performance stock units was $ 6.5 million, which is expected to be recognized over a weighted average period of 1.7 years.

Compensation expense is recognized using the grant-date fair value for the number of shares that are probable of being awarded based on the performance metrics.

Each reporting period, this probability assessment is updated, and cumulative adjustments are recorded based on the financial performance metrics expected to be achieved.

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

As of March 31, 2023, the total remaining unrecognized compensation cost related to stock-settled performance stock units was $ 15.9 million, which is expected to be recognized over a weighted average period of 2.4 years.

Liability Awards

During the nine-month periods ended September 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.

Settlement generally occurs based upon the same performance metrics, vesting period, and performance period as our performance stock units.

The fair value of these awards is remeasured at each reporting period until the awards are settled.

During the three-month periods ended March 31, 2023 and 2022, we granted liability awards to our Chief Executive Officer with total target cash incentives in the amount of $ 1.3 million and $ 1.0 million, respectively.

These awards entitle him to a target cash payment based upon the Company’s relative shareholder return as compared to the rTSR and achievement of specified performance metrics, as defined in the award agreements.

The fair value of these awards is measured at each reporting period until the awards are settled.

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

As of September 30, 2022, the total remaining unrecognized compensation cost related to cash-settled performance-based share-based awards was $ 2.7 million, which is expected to be recognized over a weighted average period of 1.9 years.

As of March 31, 2023, the total remaining unrecognized compensation cost related to cash-settled performance-based share-based awards was $ 4.5 million, which is expected to be recognized over a weighted average period of 2.3 years.

Restricted Stock Units

During the nine-month periods ended September 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, respectively.

On June 24, 2022, we granted restricted stock units to our non-employee directors representing a total of 30,500 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 September 30, 2022, the total remaining unrecognized compensation cost related to restricted stock units was $ 1.2 million, which will be recognized over the remaining vesting period.

As of March 31, 2023, the total remaining unrecognized compensation cost related to restricted stock units was $ 0.3 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 income from operations.

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

Financial information relating to our reportable operating segments and reconciliations to the consolidated totals for the three-month periods ended March 31, 2023 and 2022, were as follows (in thousands):

Three Months Ended

Nine Months Ended

September 30,

Cardiovascular

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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 September 30, 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 March 31, 2023 and December 31, 2022 consisted of the following (in thousands):

Fair Value Measurements Using

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unobservable inputs

September 30, 2022

March 31, 2023

Marketable securities (1)

Interest rate contract asset, long-term (2)

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December 31, 2022

Interest rate contract liability, long-term (1)

Marketable securities (1)

Interest rate contract asset, long-term (2)

Foreign currency contract assets, current and long-term (3)

1 unchanged sentence

Contingent consideration liabilities

(1) The fair value of the interest rate contract is determined using Level 2 fair value inputs and is reported with other long-term assets or other long-term obligations in the consolidated balance sheets.

(1) Our marketable securities, which consist entirely of available-for-sale equity securities, are valued using market prices in active markets.

Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets.

(2) The fair value of the interest rate contract is determined using Level 2 fair value inputs and is reported with other long-term assets in the consolidated balance sheets.

(3) The fair value of the foreign currency contract assets (including those designated as hedging instruments and those not designated as hedging instruments) is determined using Level 2 fair value inputs and is recorded as prepaid expenses and other current assets or other long-term assets in the consolidated balance sheets.

(4) The fair value of the foreign currency contract liabilities (including those designated as hedging instruments and those not designated as hedging instruments) is determined using Level 2 fair value inputs and is recorded as accrued expenses or other long-term obligations in the consolidated balance sheets.

Certain of our business combinations involve the potential for the payment of future contingent consideration, generally based on a percentage of future product sales or upon attaining specified future revenue or other milestones.

Certain of our past business combinations involve the potential for the payment of future contingent consideration, generally based on a percentage of future product sales or upon attaining specified future revenue or other milestones.

The contingent consideration liability is re-measured at the estimated fair value at the end of each reporting period with the change in fair value recognized within operating expenses in the accompanying consolidated statements of income for such period.

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 and nine-month periods ended September 30, 2022 and 2021 consisted of the following (in thousands):

Changes in the fair value of our contingent consideration liabilities during the three-month periods ended March 31, 2023 and 2022 consisted of the following (in thousands):

Three Months Ended

Nine Months Ended

September 30,

Beginning balance

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Ending balance

As of September 30, 2022, $ 5.5 million in contingent consideration liability was included in other long-term obligations and $ 12.8 million in contingent consideration liability was included in accrued expenses in our consolidated balance sheet.

As of March 31, 2023, $ 2.4 million in contingent consideration liability was included in other long-term obligations and $ 13.6 million in contingent consideration liability was included in accrued expenses in our consolidated balance sheet.

As of December 31, 2022, $ 2.3 million in contingent consideration liability was included in other long-term obligations and $ 15.8 million in contingent consideration liability was included in accrued expenses in our consolidated balance sheet.

Payments related to the settlement of the contingent consideration liability recognized at fair value as of the applicable acquisition date of $ 32.9 million and $ 10.6 million for the nine-month periods ended September 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 nine-month period ended September 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 September 30, 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 $ 2.6 million and $ 24.5 million for the three-month periods ended March 31, 2023 and 2022, 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 $ 26,000 for the three-month period ended March 31, 2023 are reflected as operating cash flows.

The recurring Level 3 measurement of our contingent consideration liabilities included the following significant unobservable inputs at March 31, 2023 and December 31, 2022 (amounts in thousands):

Fair value at

September 30,

Contingent consideration liability

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Contingent Payments to Related Parties

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

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

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

We made no such payments during the nine-month period ended September 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 former 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 is also eligible for additional payments for the achievement of sales milestones specified in our merger agreement with Cianna Medical.

We made no such payments during the three-month period ended March 31, 2023.

Fair Value of Other Assets (Liabilities)

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Intangible Assets.

On April 30, 2022, we completed the divestiture of Fibrovein Holdings Limited, which was the owner of all of the capital stock of STD Pharmaceutical Products 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.

During the nine-month period ended September 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 income (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 nine-month period ended September 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 nine-month period ended September 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 nine-month period ended September 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 included 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 nine-month periods ended September 30, 2022.

Property and Equipment.

During the three and nine-month periods ended September 30, 2021, we had losses of $ 1.3 million related to the measurement of property and equipment at fair value based on the 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 an allowance for current expected credit losses, were $ 2.4 million and $ 2.3 million as of September 30, 2022, and December 31, 2021, respectively.

As of September 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.

During the three-month period ended March 31, 2023, we had no losses related to acquired intangible assets.

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 (see note 6).

Current Expected Credit Losses

Our outstanding long-term notes receivable, including accrued interest and an allowance for current expected credit losses, were $ 2.4 million and $ 2.4 million as of March 31, 2023 and December 31, 2022, respectively.

As of March 31, 2023 and December 31, 2022, we had an allowance for current expected credit losses of $ 290,000 and $ 281,000 , 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.

The table below presents a rollforward of the allowance for current expected credit losses on our notes receivable for the three and nine-month periods ended September 30, 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-month periods ended March 31, 2023 and 2022 (in thousands):

Three Months Ended

Nine Months Ended

September 30,

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 and nine-month periods ended September 30, 2022 and 2021 were as follows:

Cash Flow Hedges

Foreign Currency Translation

Balance as of June 30, 2022

Other comprehensive income (loss)

Reclassifications to:

Cost of sales

Interest expense

Net other comprehensive income (loss)

Balance as of September 30, 2022

Cash Flow Hedges

Foreign Currency Translation

Balance as of June 30, 2021

Other comprehensive income (loss)

Reclassifications to:

Cost of sales

Interest expense

Net other comprehensive income (loss)

Balance as of September 30, 2021

The changes in each component of accumulated other comprehensive income (loss) for the three-month periods ended March 31, 2023 and 2022 were as follows:

Cash Flow Hedges

Foreign Currency Translation

Balance as of December 31, 2021

Balance as of January 1, 2023

Other comprehensive income (loss)

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Interest expense

Other expense — net

Net other comprehensive income (loss)

Balance as of September 30, 2022

Balance as of March 31, 2023

Cash Flow Hedges

Foreign Currency Translation

Balance as of December 31, 2020

Balance as of January 1, 2022

Other comprehensive income (loss)

3 unchanged sentences

Net other comprehensive income (loss)

Balance as of September 30, 2021

Subsequent Events.

On October 3, 2022, we entered into an asset purchase agreement to acquire substantially all the assets of BioTrace Medical, Inc.

(“BioTrace”), developer of the Tempo® Temporary Pacing Lead device.

Subject to the terms and conditions of the asset purchase agreement, we paid $ 2.5 million in cash at closing.

Additionally, upon achievement of the first device sold in the United States, we are obligated to pay a total of six annual royalty payments at an amount of up to 10 % of net sales.

We intend to account for this transaction as an asset purchase and will capitalize the acquired assets, including developed technology, in our consolidated balance sheet.

Balance as of March 31, 2022

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