Table of Contents

** **

 

** **

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

** **

**x****      QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**FOR THE QUARTERLY PERIOD ENDED MARCH 31,2010.**

** **

**OR**

** **

**o****         TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

** **

**FOR THETRANSITION PERIOD FROM             TO            .**

** **

**Commission File Number  0-18592**

** **

**MERIT MEDICAL SYSTEMS, INC.**

(Exact name of Registrant as specified in its charter)

 

| **Utah**                                                       | ** ** | **87-0447695**              |
|----------------------------------------------------------------|------------|-----------------------------|
| (State or other jurisdiction of incorporation or organization) |       | (I.R.S. Identification No.) |

 

**1600 WestMerit Parkway, South Jordan, UT, 84095**

(Address of Principal Executive Offices,including Zip Code)

 

**(801)253-1600**

(Registrant’s telephone number, including areacode)

 

Indicate by check mark whether the Registrant: (1) hasfiled all reports required to be filed by Sections 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the Registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes  x  No  o

 

Indicate by check mark whether the Registrant hassubmitted electronically and posted on its corporate web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T during the preceding 12 months (or for such shorter periodthat the Registrant was required to submit and post such files).  Yes  o  No  o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer, or asmaller public company. . See the definitions of “large accelerated filer,” “acceleratedfiler” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

| Large Accelerated Filer  o |   | Accelerated Filer  x         |
|--------------------------------------|--------|----------------------------------------|
|                                 |   |                                   |
| Non-Accelerated Filer  o   |   | Smaller Reporting Company  o |

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  x

 

Indicate the number of shares outstanding of each ofthe Registrant’s classes of common stock, as of the latest practicable date.

 
| **Common  Stock** |   | **28,186,716**                   |
|-------------------|--------|----------------------------------|
| Title or class    |   | Number of Shares                 |
|              |   | Outstanding at May 5,  2010 |

 

 

 

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**MERITMEDICAL SYSTEMS, INC.**

** **

**INDEXTO FORM 10-Q**

** **
| ** **        | ** ** | ** **                                                                                     | ** ** | **PAGE**   |
|-------------------|------------|------------------------------------------------------------------------------------------------|------------|------------|
| **PART I.**  | ** ** | **FINANCIAL  INFORMATION**                                                                     | ** ** | ** ** |
|              |       |                                                                                           |       |       |
| Item 1.           |       | Financial Statements                                                                           |       |       |
|              |       |                                                                                           |       |       |
|              |       | Consolidated Balance Sheets as of March 31, 2010  and December 31, 2009              |       | 1          |
|              |       |                                                                                           |       |       |
|              |       | Consolidated Statements of Operations for the three  months ended March 31, 2010 and 2009 |       | 3          |
|              |       |                                                                                           |       |       |
|              |       | Consolidated Statements of Cash Flows for the three  months ended March 31, 2010 and 2009 |       | 4          |
|              |       |                                                                                           |       |       |
|              |       | Notes to Consolidated Financial Statements                                                     |       | 6          |
|              |       |                                                                                           |       |       |
| Item 2.           |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations    |       | 11         |
|              |       |                                                                                           |       |       |
| Item 3.           |       | Quantitative  and Qualitative Disclosures About Market Risk                                    |       | 15         |
|              |       |                                                                                           |       |       |
| Item 4.           |       | Controls and  Procedures                                                                       |       | 15         |
|              |       |                                                                                           |       |       |
| **PART II.** | ** ** | **OTHER INFORMATION**                                                                          | ** ** | ** ** |
| ** **        | ** ** | ** **                                                                                     | ** ** | ** ** |
| Item 1.           |       | Legal Proceedings                                                                              |       | 15         |
|              |       |                                                                                           |       |       |
| Item 1A.          |       | Risk Factors                                                                                   |       | 15         |
|              |       |                                                                                           |       |       |
| Item 6.           |       | Exhibits                                                                                       |       | 16         |
|              |       |                                                                                           |       |       |
| SIGNATURES        |       | 17                                                                                             |
|                   |            |                                                                                                |            |            |  |  |

 

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**PART I - FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

 

**MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES**

CONSOLIDATED BALANCE SHEETS

MARCH 31,2010 AND DECEMBER 31, 2009

(In thousands -unaudited)

 
| ** **                                                                        | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                        | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| ASSETS                                                                            |       |               |       |                  |       |
|                                                                              |       |               |       |                  |       |
| CURRENT  ASSETS:                                                                  |       |               |       |                  |       |
| Cash  and cash equivalents                                                        |       | $                  | 5,992      |                  | $          | 6,133 |   |
| Trade  receivables - net of allowances of $487 and $541, respectively             |       | 34,770             |       | 30,954                |       |
| Employee  receivables                                                             |       | 129                |       | 145                   |       |
| Other  receivables                                                                |       | 644                |       | 827                   |       |
| Inventories                                                                       |       | 46,818             |       | 47,170                |       |
| Prepaid  expenses and other assets                                                |       | 2,238              |       | 1,801                 |       |
| Deferred  income tax assets                                                       |       | 3,287              |       | 3,289                 |       |
| Income  tax refunds receivable                                                    |       | 267                |       | 295                   |       |
|                                                                              |       |               |       |                  |       |
| Total  current assets                                                             |       | 94,145             |       | 90,614                |       |
|                                                                              |       |               |       |                  |       |
| PROPERTY  AND EQUIPMENT:                                                          |       |               |       |                  |       |
| Land  and land improvements                                                       |       | 10,316             |       | 9,777                 |       |
| Building                                                                          |       | 50,295             |       | 50,040                |       |
| Manufacturing  equipment                                                          |       | 78,965             |       | 77,069                |       |
| Furniture  and fixtures                                                           |       | 16,390             |       | 15,586                |       |
| Leasehold  improvements                                                           |       | 10,487             |       | 10,280                |       |
| Construction-in-progress                                                          |       | 14,371             |       | 13,968                |       |
|                                                                              |       |               |       |                  |       |
| Total                                                                             |       | 180,824            |       | 176,720               |       |
| Less  accumulated depreciation                                                    |       | (64,612            | )          | (62,074               | )          |
|                                                                              |       |               |       |                  |       |
| Property  and equipment—net                                                  |       | 116,212            |       | 114,646               |       |
|                                                                              |       |               |       |                  |       |
| OTHER  ASSETS:                                                                    |       |               |       |                  |       |
| Intangibles  - net of accumulated amortization of $6,120 and $5,450, respectively |       | 27,294             |       | 26,898                |       |
| Goodwill                                                                          |       | 33,002             |       | 33,002                |       |
| Other  assets                                                                     |       | 6,483              |       | 6,353                 |       |
|                                                                              |       |               |       |                  |       |
| Total  other assets                                                               |       | 66,779             |       | 66,253                |       |
|                                                                              |       |               |       |                  |       |
| TOTAL  ASSETS                                                                     |       | $                  | 277,136    |                  | $          | 271,513 |   |

 
| See notes to  consolidated financial statements. |   | (Continued) |
|--------------------------------------------------|--------|-------------|

 

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**MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES**

CONSOLIDATEDBALANCE SHEETS

MARCH 31,2010 AND DECEMBER 31, 2009

(In thousands -unaudited)

 
| ** **                                                                                                                                                   | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                   | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                                                   |       |               |       |                  |       |
|                                                                                                                                                         |       |               |       |                  |       |
| CURRENT  LIABILITIES:                                                                                                                                        |       |               |       |                  |       |
| Trade  payables                                                                                                                                              |       | $                  | 11,958     |                  | $          | 13,352 |   |
| Accrued  expenses                                                                                                                                            |       | 12,761             |       | 12,196                |       |
| Line  of credit                                                                                                                                              |       | 6,500              |       | 7,000                 |       |
| Advances  from employees                                                                                                                                     |       | 763                |       | 212                   |       |
| Income  taxes payable                                                                                                                                        |       | 1,742              |       | 148                   |       |
|                                                                                                                                                         |       |               |       |                  |       |
| Total  current liabilities                                                                                                                                   |       | 33,724             |       | 32,908                |       |
|                                                                                                                                                         |       |               |       |                  |       |
| DEFERRED  INCOME TAX LIABILITIES                                                                                                                             |       | 11,098             |       | 11,251                |       |
|                                                                                                                                                         |       |               |       |                  |       |
| LIABILITIES  RELATED TO UNRECOGNIZED TAX BENEFITS                                                                                                            |       | 2,945              |       | 2,945                 |       |
|                                                                                                                                                         |       |               |       |                  |       |
| DEFERRED  COMPENSATION PAYABLE                                                                                                                               |       | 3,441              |       | 3,382                 |       |
|                                                                                                                                                         |       |               |       |                  |       |
| DEFERRED  CREDITS                                                                                                                                            |       | 1,846              |       | 1,874                 |       |
|                                                                                                                                                         |       |               |       |                  |       |
| OTHER  LONG-TERM OBLIGATIONS                                                                                                                                 |       | 269                |       | 344                   |       |
|                                                                                                                                                         |       |               |       |                  |       |
| Total  liabilities                                                                                                                                           |       | 53,323             |       | 52,704                |       |
|                                                                                                                                                         |       |               |       |                  |       |
| STOCKHOLDERS’  EQUITY:                                                                                                                                  |       |               |       |                  |       |
| Preferred  stock—5,000 shares authorized as of March 31, 2010 and December 31,  2009; no shares issued                                        |       |               |       |                  |       |
| Common  stock—no par value; 100,000 shares authorized; 28,187 and 28,181 shares  issued at March 31, 2010 and December 31, 2009, respectively |       | 64,214             |       | 63,690                |       |
| Retained  earnings                                                                                                                                           |       | 159,712            |       | 155,204               |       |
| Accumulated  other comprehensive loss                                                                                                                        |       | (113               | )          | (85                   | )          |
|                                                                                                                                                         |       |               |       |                  |       |
| Total  stockholders’ equity                                                                                                                             |       | 223,813            |       | 218,809               |       |
|                                                                                                                                                         |       |               |       |                  |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                             |       | $                  | 277,136    |                  | $          | 271,513 |   |

 
| See notes to  consolidated financial statements. |   | (Concluded) |
|--------------------------------------------------|--------|-------------|

 

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**MERITMEDICAL SYSTEMS, INC. AND SUBSIDIARIES**

CONSOLIDATED STATEMENTSOF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND2009

(In thousands, except earnings per common share -unaudited)

 
| ** **                           | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------|------------|------------------------|------------|
| ** **                           | ** ** | **March 31,**     | ** ** |
| ** **                           | ** ** | **2010**               | ** ** | **2009** | ** ** |
|                                 |       |                   |       |   |   |
| NET  SALES                           |       | $                      | 67,432     |   | $ | 58,371 |   |
|                                 |       |                   |       |   |   |
| COST  OF SALES                       |       | 38,997                 |       | 33,563 |   |
|                                 |       |                   |       |   |   |
| GROSS  PROFIT                        |       | 28,435                 |       | 24,808 |   |
|                                 |       |                   |       |   |   |
| OPERATING  EXPENSES:                 |       |                   |       |   |   |
| Selling,  general and administrative |       | 19,032                 |       | 14,829 |   |
| Research  and development            |       | 3,057                  |       | 2,079 |   |
|                                 |       |                   |       |   |   |
| Total  operating expenses            |       | 22,089                 |       | 16,908 |   |
|                                 |       |                   |       |   |   |
| INCOME  FROM OPERATIONS              |       | 6,346                  |       | 7,900 |   |
|                                 |       |                   |       |   |   |
| OTHER  INCOME (EXPENSE):             |       |                   |       |   |   |
| Interest  income                     |       | 8                      |       | 122 |   |
| Other  income (expense) - net        |       | (24                    | )          | 52 |   |
|                                 |       |                   |       |   |   |
| Other  income (expense) - net        |       | (16                    | )          | 174 |   |
|                                 |       |                   |       |   |   |
| INCOME  BEFORE INCOME TAXES          |       | 6,330                  |       | 8,074 |   |
|                                 |       |                   |       |   |   |
| INCOME  TAX EXPENSE                  |       | 1,822                  |       | 2,537 |   |
|                                 |       |                   |       |   |   |
| NET  INCOME                          |       | $                      | 4,508      |   | $ | 5,537 |   |
|                                 |       |                   |       |   |   |
| EARNINGS  PER COMMON SHARE:          |       |                   |       |   |   |
| Basic                                |       | $                      | .16        |   | $ | .20 |   |
| Diluted                              |       | $                      | .16        |   | $ | .19 |   |
|                                 |       |                   |       |   |   |
| AVERAGE  COMMON SHARES:              |       |                   |       |   |   |
| Basic                                |       | 28,181                 |       | 28,057 |   |
| Diluted                              |       | 28,758                 |       | 28,547 |   |

 

See notes toconsolidated financial statements.

 

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**MERITMEDICAL SYSTEMS, INC. AND SUBSIDIARIES**

CONSOLIDATED STATEMENTSOF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND2009

(In thousands - unaudited)

 
| ** **                                                                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                         | ** ** | **March 31,**     | ** ** |
| ** **                                                                         | ** ** | **2010**               | ** ** | **2009** | ** ** |
|                                                                               |       |                   |       |   |   |
| CASH  FLOWS FROM OPERATING ACTIVITIES:                                             |       |                   |       |   |   |
| Net  income                                                                        |       | $                      | 4,508      |   | $ | 5,537 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                   |       |   |   |
| Depreciation  and amortization                                                     |       | 3,290                  |       | 2,681 |   |
| Losses  on sales and/or abandonment of property and equipment                      |       | 108                    |       | 205 |   |
| Write-off  of certain patents and trademarks                                       |       | 24                     |       | 27 |   |
| Amortization  of deferred credits                                                  |       | (29                    | )          | (28 | ) |
| Purchase  of trading investments                                                   |       | (141                   | )          | (93 | ) |
| Net  unrealized (gains)/losses on trading investments                              |       | (33                    | )          | 237 |   |
| Deferred  income taxes                                                             |       | 1                      |       | 2 |   |
| Stock-based  compensation                                                          |       | 304                    |       | 298 |   |
| Excess  tax benefit attributable to appreciation of common stock options exercised |       |                   |       | (372 | ) |
| Changes  in operating assets and liabilities, net of effects from acquisitions:    |       |                   |       |   |   |
| Trade  receivables                                                                 |       | (4,101                 | )          | (1,277 | ) |
| Employee  receivables                                                              |       | 11                     |       | 8 |   |
| Other  receivables                                                                 |       | 171                    |       | 78 |   |
| Inventories                                                                        |       | 353                    |       | (2,370 | ) |
| Prepaid  expenses and other assets                                                 |       | (451                   | )          | 42 |   |
| Income  tax refund receivable                                                      |       | 16                     |       | (23 | ) |
| Deposits                                                                           |       |                   |       | (54 | ) |
| Trade  payables                                                                    |       | (1,108                 | )          | 1,781 |   |
| Accrued  expenses                                                                  |       | (58                    | )          | 570 |   |
| Advances  from employees                                                           |       | 563                    |       | 105 |   |
| Income  taxes payable                                                              |       | 1,612                  |       | 2,135 |   |
| Deferred  compensation payable                                                     |       | 59                     |       | (143 | ) |
| Other  long-term obligations                                                       |       | (29                    | )          | 2 |   |
|                                                                               |       |                   |       |   |   |
| Total  adjustments                                                                 |       | 562                    |       | 3,811 |   |
|                                                                               |       |                   |       |   |   |
| Net  cash provided by operating activities                                         |       | 5,070                  |       | 9,348 |   |
|                                                                               |       |                   |       |   |   |
| CASH  FLOWS FROM INVESTING ACTIVITIES:                                             |       |                   |       |   |   |
| Capital  expenditures for:                                                         |       |                   |       |   |   |
| Property  and equipment                                                            |       | (4,322                 | )          | (3,323 | ) |
| Patents  and trademarks                                                            |       | (218                   | )          | (593 | ) |
| Proceeds  from the sale of property and equipment                                  |       | 7                      |       | 5 |   |
| Cash  paid in acquisitions                                                         |       | (250                   | )          | (20,658 | ) |
|                                                                               |       |                   |       |   |   |
| Net  cash used in investing activities                                             |       | (4,783                 | )          | (24,569 | ) |
|                                                                                    |            |                        |            |  |  |  |  |

 
| See notes to  consolidated financial statements. |   | (Continued) |
|--------------------------------------------------|--------|-------------|

 

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**MERITMEDICAL SYSTEMS, INC. AND SUBSIDIARIES**

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND2009

(In thousands - unaudited)

 
| ** **                                                                               | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                               | ** ** | **March 31,**     | ** ** |
| ** **                                                                               | ** ** | **2010**               | ** ** | **2009** | ** ** |
|                                                                                     |       |                   |       |   |   |
| CASH  FLOWS FROM FINANCING ACTIVITIES:                                                   |       |                   |       |   |   |
| Proceeds  from issuance of common stock                                                  |       | $                      | 220        |   | $ | 101 |   |
| Borrowings  on line of credit                                                            |       | 1,500                  |       |   |   |
| Payments  on line of credit                                                              |       | (2,000                 | )          |   |   |
| Payment  of taxes related to an exchange of common stock                                 |       |                   |       | (254 | ) |
| Common  stock repurchased and retired                                                    |       |                   |       | (2,474 | ) |
| Excess  tax benefits from stock-based compensation                                       |       |                   |       | 372 |   |
|                                                                                     |       |                   |       |   |   |
| Net  cash used in financing activities                                                   |       | (280                   | )          | (2,255 | ) |
|                                                                                     |       |                   |       |   |   |
| EFFECT  OF EXCHANGE RATES ON CASH                                                        |       | (148                   | )          | (124 | ) |
|                                                                                     |       |                   |       |   |   |
| NET  DECREASE IN CASH AND CASH EQUIVALENTS                                               |       | (141                   | )          | (17,600 | ) |
|                                                                                     |       |                   |       |   |   |
| CASH  AND CASH EQUIVALENTS:                                                              |       |                   |       |   |   |
| Beginning  of period                                                                     |       | 6,133                  |       | 34,030 |   |
|                                                                                     |       |                   |       |   |   |
| End  of period                                                                           |       | $                      | 5,992      |   | $ | 16,430 |   |
|                                                                                     |       |                   |       |   |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION—Cash paid during the period for: |       |                   |       |   |   |
| Interest                                                                                 |       | $                      | 30         |   | $ | 2 |   |
|                                                                                     |       |                   |       |   |   |
| Income  taxes                                                                            |       | $                      | 353        |   | $ | 463 |   |
|                                                                                     |       |                   |       |   |   |
| SUPPLEMENTAL  DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES                 |       |                   |       |   |   |
| Property  and equipment purchases in accounts payable                                    |       | $                      | 1,619      |   | $ | 1,689 |   |
|                                                                                     |       |                   |       |   |   |
| Accrued  purchase price                                                                  |       | $                      | 750        |   | $ | 533 |   |

 

During the three monthsended March 31, 2009, 23,829 of the Company’s common stock weresurrendered in exchange for the Company’s recording of payroll tax liabilitiesin the amount of approximately $254,000, related to the exercise of stockoptions.  The shares were valued based upon the closing price of theCompany’s common stock on the surrender date.

 

During the three monthsended March 31, 2009, 21,556 shares of the Company’s common stock, with avalue of approximately $230,000 were surrendered in exchange for the exerciseof stock options.

 
| See notes to  consolidated financial statements. |   | (Concluded) |
|--------------------------------------------------|--------|-------------|

 

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**MERITMEDICAL SYSTEMS, INC. AND SUBSIDIARIES**

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

(Unaudited)

 

**1**.   **Basis of Presentation**. The interimconsolidated financial statements of Merit Medical Systems, Inc. (“Merit,”“we” or “us”) for the three months ended March 31, 2010 and 2009 are notaudited. Our consolidated financial statements are prepared in accordance withthe requirements for unaudited interim periods, and consequently, do notinclude all disclosures required to be made in conformity with accountingprinciples generally accepted in the United States of America. In the opinionof management, the accompanying consolidated financial statements contain all adjustments,consisting of normal recurring accruals, necessary for a fair presentation ofour financial position as of March 31, 2010, and our results of operationsand cash flows for the three month periods ended March 31, 2010 and 2009.The results of operations for the three month period ended March 31, 2010are not necessarily indicative of the results for a full-year period.  These interim consolidated financialstatements should be read in conjunction with the financial statements includedin our Annual Report on Form 10-K for the year ended December 31,2009 filed with the Securities and Exchange Commission (the “SEC”).

 

**2.   Inventories**. Inventories are stated at the lower ofcost or market.  Inventories at March 31,2010 and December 31, 2009 consisted of the following (in thousands):

 
| ** **      | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------|------------|--------------------|------------|-----------------------|------------|
| ** **      | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| Finished  goods |       | $                  | 21,693     |                  | $          | 24,502 |   |
| Work-in-process |       | 8,170              |       | 5,542                 |       |
| Raw  materials  |       | 16,955             |       | 17,126                |       |
|            |       |               |       |                  |       |
| Total           |       | $                  | 46,818     |                  | $          | 47,170 |   |

 

**3.   ****ComprehensiveIncome. **Comprehensive income for the three month periods endedMarch 31, 2010 and 2009 consisted of net income and foreign currencytranslation adjustments.  As of March 31,2010 and December 31, 2009, the cumulative effect of such adjustmentsdecreased stockholders’ equity by approximately $113,000 and $85,000,respectively.  Comprehensive income forthe three month periods ended March 31, 2010 and 2009 has been computed asfollows (in thousands):

 
| ** **                           | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------|------------|------------------------|------------|
| ** **                           | ** ** | **March 31,**     | ** ** |
| ** **                           | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Net  income                          |       | $                      | 4,508      |   | $ | 5,537 |   |
| Foreign  currency translation losses |       | (28                    | )          | (69 | ) |
| Comprehensive  income                |       | $                      | 4,480      |   | $ | 5,468 |   |

 

**4.   Stock-based****Compensation.**  Stock-basedcompensation expense for the three month periods ended March 31, 2010 and2009 has been categorized as follows (in thousands):

 
| ** **                           | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------|------------|------------------------|------------|
| ** **                           | ** ** | **March 31,**     | ** ** |
| ** **                           | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Cost  of sales                       |       | $                      | 51         |   | $ | 50 |   |
| Research  and development            |       | 14                     |       | 13 |   |
| Selling,  general and administrative |       | 239                    |       | 235 |   |
| Stock-based  compensation            |       | $                      | 304        |   | $ | 298 |   |

 

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The excess income tax benefit created from theexercises of stock options was approximately $0 and $372,000 for the threemonth periods ended March 31, 2010 and 2009, respectively.  Asof March 31, 2010, the total remaining unrecognized compensation costrelated to non-vested stock options, net of expected forfeitures, wasapproximately $3.6 million and is expected to be recognized over a weighted averageperiod of 3.1 years. We use the Black-Scholes methodology to value thestock-based compensation expense for options.

 

**5.   Earnings Per Common Share.**The following table sets forth thecomputation of the number of shares used in calculating basic and diluted netincome  per share  (in thousands, except per share amounts):

** **
| ** **                                                                                                                             | ** ** | **Net**    | ** ** | ** ** | ** ** | **Per Share** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|---------------|------------|
| ** **                                                                                                                             | ** ** | **Income** | ** ** | **Shares** | ** ** | **Amount**    | ** ** |
| Three  months ended March 31, 2010:                                                                                               |       |       |       |       |       |          |       |
| Basic  EPS                                                                                                                             |       | $          | 4,508      |       | 28,181     |          | $          | 0.16 |   |
| Effect  of dilutive stock options and warrants                                                                                         |       |       |       | 577        |       |          |       |
|                                                                                                                                   |       |       |       |       |       |          |       |
| Diluted  EPS                                                                                                                           |       | $          | 4,508      |       | 28,758     |          | $          | 0.16 |   |
|                                                                                                                                   |       |       |       |       |       |          |       |
| Weighted-average  shares under stock options excluded from the calculation of common stock  equivalents as the impact was antidilutive |       |       |       | 1,049      |       |          |       |
|                                                                                                                                   |       |       |       |       |       |          |       |
| Three  months ended March 31, 2009:                                                                                               |       |       |       |       |       |          |       |
| Basic  EPS                                                                                                                             |       | $          | 5,537      |       | 28,057     |          | $          | 0.20 |   |
| Effect  of dilutive stock options and warrants                                                                                         |       |       |       | 490        |       |          |       |
|                                                                                                                                   |       |       |       |       |       |          |       |
| Diluted  EPS                                                                                                                           |       | $          | 5,537      |       | 28,547     |          | $          | 0.19 |   |
|                                                                                                                                   |       |       |       |       |       |          |       |
| Weighted-average  shares under stock options excluded from the calculation of common stock  equivalents as the impact was antidilutive |       |       |       | 2,025      |       |          |       |

** **

**6.   Acquisitions.**** **On February 19, 2010, we entered into a manufacturing and technologylicense agreement with a medical device manufacturer for certain medicalproducts.  We made an initial payment of$250,000 in February of 2010 and have accrued an additional $750,000 inaccrued expenses.  The additionalpayments are payable upon reaching certain milestones set forth in theagreement.  We believe there is areasonable likelihood that we will be required to make those payments.  We have included the $1.0 million intangibleasset in license agreements and intend to amortize the asset over an estimatedlife of 10 years.

 

On March 9, 2009, we entered into an asset purchase agreement withAlveolus, Inc., a North Carolina corporation, (“Alveolus”) to purchasetheir non-vascular interventional stents used for esophageal, tracheobronchialand biliary stenting procedures.  We paidAlveolus $19.1 million in March 2009.  The grossamount of trade receivables we acquired from Alveolus was approximately $1.0million, of which $49,000 was expected to be uncollectible.  Our consolidated financial statements for thethree months ended March 31, 2010 and 2009 reflect sales subsequent to theacquisition date of approximately $1.9 million and $486,000, respectively, anda net loss of approximately $560,000 and $146,000, respectively, related to ouracquisition of the Alveolus assets.  Thepurchase price was allocated as follows (in thousands):

 

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| **Assets Acquired**                  |   |   |   |
|--------------------------------------|--------|--------|--------|
| Inventories                          |   | $      | 1,741  |   |
| Trade  receivables                   |   | 974    |   |
| Other  assets                        |   | 241    |   |
| Property  and equipment              |   | 547    |   |
| **Intangibles**                      |   |   |   |
| Developed  technology                |   | 5,700  |   |
| Trademarks                           |   | 1,400  |   |
| Customer  lists                      |   | 1,100  |   |
| In-process  research and development |   | 400    |   |
| Goodwill                             |   | 8,028  |   |
| Total  assets acquired               |   | 20,131 |   |
|                                 |   |   |   |
| **Liabilities Assumed**              |   |   |   |
| Accounts  payable                    |   | 467    |   |
| Other  liabilities                   |   | 572    |   |
| Total  liabilities assumed           |   | 1,039  |   |
|                                 |   |   |   |
| Net  assets acquired                 |   | $      | 19,092 |   |

 

With respect to theassets we acquired from Alveolus, we intend to amortize the developedtechnology and trademarks over 15 years and customer lists on an acceleratedbasis over seven years.  We intend toamortize the in-process research and development over 15 years, which willbegin if the resulting product is successfully launched in the market.  The acquired trademarks are scheduled forrenewal in 3.27 years (based on a weighted-average calculation, from March 31,2010 until the trademark renewal date). While U.S. trademarks can be renewed indefinitely, we currently estimatethat we will generate cash flow from the acquired trademarks for a period of 15years from the acquisition date.

 

On March 3,2009, we paid $500,000 to GMA Company, Ltd (“GMA”) representing the finalpayment due on our distribution agreement. The total amount paid to GMA under this agreement was approximately $2.0million and was allocated as a distribution agreement.  We anticipate that the distribution agreementwill be amortized over an estimated life of 11 years.

 

On February 19,2009, we entered into an asset purchase and supply agreement with BiosearchMedical Products, Inc., a wholly-owned subsidiary of Hydromer, Inc.,a New Jersey corporation (“Biosearch”), to purchase a bipolar coagulation probeand grafted biliary stents. We paid $1.1 million in February 2009 and paid an additional$500,000 in June 2009.  Our consolidated financialstatements for the three month periods ended March 31, 2010 and 2009reflect sales subsequent to the acquisition date of approximately $613,000 and$133,000, respectively and net income of approximately $132,000 and $30,000,respectively, related to the Biosearch acquisition.  The purchase price was allocated as follows(in thousands):

 
| **Assets Acquired**     |   |   |   |
|-------------------------|--------|--------|--------|
| Inventories             |   | $      | 188    |   |
| Property  and equipment |   | 31     |   |
| **Intangibles**         |   |   |   |
| Developed  technology   |   | 380    |   |
| Customer  lists         |   | 660    |   |
| Non-compete             |   | 25     |   |
| Goodwill                |   | 316    |   |
| Total  assets acquired  |   | 1,600  |   |
|                    |   |   |   |
| **Liabilities Assumed** |   | None   |   |
|                    |   |   |   |
| Net  assets acquired    |   | $      | 1,600  |   |

 

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With respect tothe assets we acquired from Biosearch, we intend to amortize developedtechnology over 15 years, customer lists on an accelerated basis over eightyears and a non-compete covenant over seven years.

 

Thegoodwill arising from the acquisitions discussed above consists largely of thesynergies and economies of scale we hope to achieve from combining the acquiredassets and operations with our historical operations.  The goodwill recognized from theseacquisitions is expected to be deductible for income tax purposes.

 

The following tablesummarizes our unaudited consolidated result of operations for the three monthsended March 31, 2009, as well as the unaudited pro forma consolidatedresults of operations as though the Alveolus and Biosearch acquisitions hadoccurred on January 1, 2009:

 
| ** **                  | ** ** | **Three Months Ended**  | ** ** |
|-----------------------------|------------|-------------------------|------------|
| ** **                  | ** ** | **March 31, 2009** | ** ** |
| ** **                  | ** ** | **As Reported**         | ** ** | **Pro Forma** | ** ** |
|                        |       |                    |       |   |   |
| Sales                       |       | $                       | 58,371     |   | $ | 60,202 |   |
| Net  income                 |       | 5,537                   |       | 5,305 |   |
| Earnings  per common share: |       |                    |       |   |   |
| Basic                       |       | $                       | .20        |   | $ | .19 |   |
| Diluted                     |       | $                       | .19        |   | $ | .19 |   |

 

The unaudited pro formacondensed consolidated income statements are for informational purposes onlyand should not be considered indicative of actual results that would have beenachieved if Alveolus and Bioserach had been acquired the beginning of 2009, orresults that may be obtained in any future period.

 

**7.   RecentAccounting Pronouncements.**In January 2010, the Financial AccountingStandards Board (“FASB”) issued additional guidance on fair value disclosures.The new guidance clarifies two existing disclosure requirements and requirestwo new disclosures as follows: (1) a “gross” presentation of activities(purchases, sales, and settlements) within the Level 3 rollforwardreconciliation, which will replace the “net” presentation format; and (2) detaileddisclosures about the transfers in and out of Level 1 and 2 measurements. Thisguidance is effective for the first interim or annual reporting periodbeginning after December 15, 2009, except for the gross presentation ofthe Level 3 rollforward information, which is required for annual reportingperiods beginning after December 15, 2010, and for interim reportingperiods within those years. We adopted the fair value disclosures guidance on January 1,2010, except for the gross presentation of the Level 3 rollforward informationwhich we are not required to adopt until January 1, 2011.  The adoption of this guidance did not have amaterial effect on our consolidated financial statements.

 

In October 2009, theFASB issued Accounting Standards Update (“ASU”) 2009-13, Revenue Recognition(Topic 605): *Multiple Deliverable RevenueArrangements — A Consensus of the FASB Emerging Issues Task Force.* This update provides application guidance onwhether multiple deliverables exist, how the deliverables should be separatedand how the consideration should be allocated to one or more units ofaccounting.  This update establishes aselling price hierarchy for determining the selling price of adeliverable.  The selling price used foreach deliverable will be based on vendor-specific objective evidence, ifavailable, third-party evidence if vendor-specific objective evidence is notavailable, or estimated selling price if neither vendor-specific or third-partyevidence is available.  We will berequired to apply this guidance prospectively for revenue arrangements enteredinto or materially modified after January 1, 2011; however, earlierapplication is permitted.  We do notexpect the adoption of this guidance to have a material effect on ourconsolidated financial statements.

 

**8.   IncomeTaxes.**  Our overall effective tax rate for the three monthperiods ended March 31, 2010 and 2009 was 28.8% and 31.4%, respectively,which resulted in a provision for income taxes of $1.8 million and $2.5million, respectively.  The decrease inthe effective income tax rate for the first quarter of 2010, when compared tothe first quarter of 2009, was primarily related to the increased profitabilityof our Irish operations which are taxed at a lower tax rate than our U.S. andother foreign operations.

 

**9.   FairValue Measurements**.  The fair value of a financial instrumentis the amount that could be received upon the sale of an asset or paid totransfer a liability in an orderly transaction between market participants atthe measurement date.  Financial assetsare marked to bid prices and financial liabilities are marked to offerprices.  Fair value measurements do notinclude transaction costs.  A fair value hierarchy is used toprioritize the quality 

 

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and reliability of theinformation used to determine fair values. Categorization within the fair value hierarchy is based on the lowestlevel of input that is significant to the fair value measurement.  The fair value hierarchy is defined into thefollowing three categories:

 

Level 1: Quoted marketprices in active markets for identical assets or liabilities.

Level 2: Observablemarket based inputs or unobservable inputs that are corroborated by marketdata.

Level 3: Unobservableinputs that are not corroborated by market

 

The following tableidentifies our financial assets and liabilities carried at fair value measuredon a recurring basis as of March 31, 2010 (in thousands):

 
| ** **                       | ** ** | ** **              | ** ** | **Fair Value Measurements Using** | ** ** |
|----------------------------------|------------|-------------------------|------------|-----------------------------------|------------|
| ** **                       | ** ** | **Total Fair**          | ** ** | **Quoted prices in**              | ** ** | **Significant other** | ** ** | **Significant** | ** ** |
| ** **                       | ** ** | **Value at**            | ** ** | **active markets**                | ** ** | **observable inputs** | ** ** | **Unobservable inputs** | ** ** |
| **Description**                  | ** ** | **March 31, 2010** | ** ** | **(Level 1)**                     | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
|                             |       |                    |       |                              |       |   |   |   |   |
| Deferred compensation assets (1) |       | $                       | 3,451      |                              |       |   | $ | 3,451 |   |   |   |
|                                  |            |                         |            |                                   |            |  |  |  |  |  |  |

 

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(1)          The deferred compensation investments areheld in a Rabbi trust under an insurance-based deferred compensation plan.  The investments of the Rabbi trust are valuedbased upon unit values multiplied by the number of units held.  The unit value is based upon the investment’snet asset value adjusted for some administrative fees.

 

During the three monthperiods ended March 31, 2010 and 2009, we had write-offs of approximately$24,000 and $27,000, respectively, related to the measurement of non-financialassets at fair value on a nonrecurring basis subsequent to their initialrecognition.

 

**10.  ****Goodwill and Intangible Assets. **There were no changes in the carryingamount of goodwill for the three months ended March 31, 2010.

 

Intangible assets at March 31, 2010 and December 31,2009 consisted of the following (in thousands):

 
| ** **                            | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** |
|---------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                            | ** ** | **Gross**               | ** ** | ** **                 | ** ** | **Net** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Net** | ** ** |
| ** **                            | ** ** | **Carrying**            | ** ** | **Accumulated**            | ** ** | **Carrying** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | **Carrying** | ** ** |
| ** **                            | ** ** | **Amount**              | ** ** | **Amortization**           | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
|                                  |       |                    |       |                       |       |   |   |   |   |   |   |   |   |
| Covenant not to compete               |       | $                       | 315        |                       | $          | (36 | ) | $ | 279 |   | $ | 315 |   | $ | (25 | ) | $ | 290 |   |
| Customer lists                        |       | 4,755                   |       | (2,558                     | )          | 2,197 |   | 4,755 |   | (2,380 | ) | 2,375 |   |
| Developed technology                  |       | 17,386                  |       | (840                       | )          | 16,546 |   | 17,513 |   | (535 | ) | 16,978 |   |
| Distribution agreement                |       | 2,400                   |       | (449                       | )          | 1,951 |   | 2,400 |   | (385 | ) | 2,015 |   |
| In-process research and development * |       | 400                     |       |                       |       | 400 |   | 400 |   |   |   | 400 |   |
| License agreements                    |       | 1,403                   |       | (298                       | )          | 1,105 |   | 403 |   | (287 | ) | 116 |   |
| Patents                               |       | 3,950                   |       | (1,261                     | )          | 2,689 |   | 3,757 |   | (1,214 | ) | 2,543 |   |
| Royalty agreements                    |       | 267                     |       | (227                       | )          | 40 |   | 267 |   | (213 | ) | 54 |   |
| Trademark                             |       | 2,538                   |       | (451                       | )          | 2,087 |   | 2,538 |   | (411 | ) | 2,127 |   |
|                                  |       |                    |       |                       |       |   |   |   |   |   |   |   |   |
| Total                                 |       | $                       | 33,414     |                       | $          | (6,120 | ) | $ | 27,294 |   | $ | 32,348 |   | $ | (5,450 | ) | $ | 26,898 |   |

 

----

* In-process research anddevelopment was capitalized in connection with our acquisition of Alveolusassets.  Our in-process research anddevelopment intangible is currently not subject to amortization butamortization will commence upon the related product launch.

 

The aggregateamortization expense for the three months ended March 31, 2010 wasapproximately $670,000.

 

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Estimated amortization expense for the intangibleassets for the next five years consisted of the following (in thousands):

 
| Remaining  2010 |   | $     | 2,017  |   |
|-----------------|--------|-------|--------|--------|
| 2011            |   | 2,381 |   |
| 2012            |   | 2,208 |   |
| 2013            |   | 2,178 |   |
| 2014            |   | 2,012 |   |

 

**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

## ***Disclosure Regarding Forward-Looking Statements***

## *** ***

This Report includes “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended (the “Exchange Act”).  Allstatements in this Report, other than statements of historical fact, areforward-looking statements for purposes of these provisions, including anyprojections of earnings, revenues or other financial items, any statements ofthe plans and objectives of management for future operations, any statementsconcerning proposed new products or services, any statements regarding theintegration, development or commercialization of the business or assetsacquired from other parties, any statements regarding future economic conditionsor performance, and any statements of assumptions underlying any of theforegoing.  All forward-lookingstatements included in this Report are made as of the date hereof and are basedon information available to us as of such date. We assume no obligation to update any forward-looking statement.   In some cases, forward-looking statementscan be identified by the use of terminology such as “may,” “will,” “expects,” “plans,”“anticipates,”  “intends,” “believes,” “estimates,”“potential,” or “continue,” or the negative thereof or other comparableterminology.  Although we believe thatthe expectations reflected in the forward-looking statements contained hereinare reasonable, there can be no assurance that any such expectation or anyforward-looking statement will prove to be correct.  Our actual results will vary, and may varymaterially, from those projected or assumed in the forward-lookingstatements.  Our financial condition andresults of operations, as well as any forward-looking statements, are subjectto inherent risks and uncertainties, including, healthcare policy changes whichmay have a material adverse effect on Merit’s operations or financial results;infringement of Merit's technology or the assertion that Merit's technologyinfringes the rights of other parties; national economic and industry changesand their effect on Merit's revenues, collections and supplier relations;termination or interruptions of supplier relationships, or failure of suppliersto perform; product recalls and product liability claims; inability tosuccessfully manage growth, through acquisitions; delays in obtainingregulatory approvals, or the failure to maintain such approvals; failure tocomply with governing regulations and laws; concentration of Merit's revenuesamong a few products and procedures; development of new products and technologythat could render Merit's products obsolete; market acceptance of new products;introduction of products in a timely fashion; price and product competition;availability of labor and materials; cost increases; fluctuations in andobsolescence of inventory; volatility of the market price of Merit's commonstock; foreign currency fluctuations; changes in key personnel; work stoppageor transportation risks; modification or limitation of governmental or privateinsurance reimbursements; changes in health care markets related to health carereform initiatives; limits on reimbursement imposed by governmental programs;impact of force majeure events on Merit's business, including severe weatherconditions; failure to comply with applicable environmental laws; and otherfactors referred to in Merit's Annual Report on Form 10-K for the year endedDecember 31, 2009, and other reports filed with the Securities and ExchangeCommission.  All subsequentforward-looking statements attributable to us or persons acting on our behalfare expressly qualified in their entirety by these cautionary statements.  Additional factors that may have a directbearing on our operating results are discussed in Part I, Item 1A “RiskFactors” in our Annual Report on Form 10-K for the year ended December 31,2009.

 

**Overview**

 

For the quarter ended March 31,2010, we reported record revenues of $67.4 million, up 16% from the threemonths ended March 31, 2009 of $58.4 million.

 

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Gross profit as apercentage of sales was down to 42.2% for the first quarter of 2010, comparedto 42.5% for the first quarter of 2009. This decrease can be attributedprimarily to higher average fixed overhead unit costs as the result of higherproduction costs and a decrease in productivity as fixed costs are shared overa decreased number of units produced and an increase in material costs, all ofwhich were partially offset by an increase of 1.0% in gross margin improvementrelated primarily to the launch of our En Snare® device.

 

Net incomedecreased for the three months ended March 31, 2010 to $4.5 million,compared to $5.5 million for the three months ended March 31, 2009, adecrease of 19%.  When compared to thefirst quarter of 2009, net income for the quarter ended March 31, 2010 wasprimarily affected by lower gross margins, higher selling, general andadministrative expenses and increased research and development expenses.

 

**Resultsof Operations**

 

The followingtable sets forth certain operational data as a percentage of sales for thethree month periods ended March 31, 2010 and 2009:

 
| ** **                                    | ** ** | **March 31,** | ** ** |
|-----------------------------------------------|------------|--------------------|------------|
| ** **                                    | ** ** | **2010**           | ** ** | **2009** | ** ** |
| Sales                                         |       | 100.0              | %          | 100.0 | % |
| Gross  profit                                 |       | 42.2               |       | 42.5 |   |
| Selling,  general and administrative expenses |       | 28.2               |       | 25.4 |   |
| Research  and development expenses            |       | 4.5                |       | 3.6 |   |
| Income  from operations                       |       | 9.4                |       | 13.5 |   |
| Other  income                                 |       | 0.0                |       | 0.3 |   |
| Net  income                                   |       | 6.7                |       | 9.5 |   |

 

**Sales.**   Sales for the three months ended March 31,2010 increased by 16%, or approximately $9.1 million, compared to the firstthree months of 2009.   We report salesin five product categories.  Listed beloware the sales relating to these product categories for the three month periodsended March 31, 2010 and 2009 (in thousands):

 
| ** **                      | ** ** | **Three Months Ended** | ** ** |
|---------------------------------|------------|----------------------------------|------------|
| ** **                      | ** ** | **March 31,**               | ** ** |
| ** **                      | ** ** | **% Change**                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Stand-alone devices             |       | 19                               | %          | $ | 20,766 |   | $ | 17,434 |   |
| Custom kits and procedure trays |       | 12                               | %          | 19,510 |   | 17,397 |   |
| Inflation devices               |       | 0                                | %          | 14,224 |   | 14,287 |   |
| Catheters                       |       | 21                               | %          | 10,460 |   | 8,634 |   |
| Gastroenterology devices        |       | 299                              | %          | 2,472 |   | 619 |   |
| Total                           |       | 16                               | %          | $ | 67,432 |   | $ | 58,371 |   |

 

The sales growthof 16% for the first quarter of 2010, when compared to the first quarter of2009, was favorably affected by increased sales of stand-alone devices.  The increase was primarily related to the EnSnare® device sales of $2.1 million, an increase in sales of custom kits andprocedure trays, increased sales of catheters (particularly our Prelude® sheathproduct line, mini access catheter product line, and vessel sizing catheters,)and increased stent sales resulting from our acquisition of Alveolus in March of2009.  These sales increases helpedoffset a decrease in sales of .35% related to the exchange rate between ourforeign currencies (primarily the Euro) and the U.S. Dollar and a decrease ininflation device sales to an OEM customer of 30%.

 

**Gross Profit.** Gross profit as a percentage of salesdecreased to 42.2% for the first quarter of 2010, compared to 42.5% of salesfor the first quarter of 2009. This decrease can be attributed primarily tohigher average fixed overhead unit costs, which results from higher productioncosts and a decrease in productivity as fixed costs are shared over a decreasednumber of units produced.  We alsoexperienced an increase in material costs, which were partially offset by anincrease of 1.0% in gross margin improvement related to the launch of our EnSnare® device during the first quarter of 2010.

 

**Operating Expenses.**** **Selling, general and administrative expenses increasedto 28.2% of sales for the three months ended March 31, 2010, compared with25.4% of sales for the three months ended March 31, 2009.  The 

 

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increase in selling,general and administrative expenses as a percentage of sales during the threemonths ended March 31, 2010, when compared to the first three months of2009, was due primarily to expenses associated with our acquisition andoperation of the business and assets acquired from Alveolus, a one-time legalsettlement of $477,000, and the hiring of additional domestic and internationalsales representatives. Research and development expenses were 4.5% of sales forthe three months ended March 31, 2010, compared with 3.6% of sales for thethree months ended March 31, 2009. The increase in research and development expenses, when compared to thefirst three months of 2010, was due primarily to the development of projects forthe Alveolus business we acquired, head count additions for regulatory support,and increases in research and development staff to support various newdevelopment projects.

 

**OtherIncome (Expense). **Other expense for the first quarter of2010 was approximately ($16,000), compared to other income of approximately$174,000 for the first quarter of 2009. The decrease in other income during the first quarter of 2010, whencompared to the comparable period in 2009, was primarily the result of adecrease in interest income attributable to lower average cash balances, whencompared to the corresponding periods in 2009.

 

**IncomeTaxes.**  Our overall effective tax rate for the threemonths ended March 31, 2010 and 2009 was 28.8% and 31.4%, respectively,which resulted in a provision for income taxes of $1.8 million and $2.5million, respectively.  The decrease inthe effective income tax rate for the first quarter of 2010, when compared tothe first quarter of 2009, was primarily related to the increased profitabilityof our Irish operations which are taxed at a lower tax rate than our U.S. andforeign operations.

 

**Income****.** During the first quarter of 2010, we reported income from operations of$6.3 million, a  decrease of 22% from$7.9 million for the first quarter of 2009. When compared to the prior year period, the decrease in income fromoperations for the quarter ended March 31, 2010 was primarily affected bylower gross margins, and higher selling, general and administrative expensesand higher research and development expenses.  These factors contributed to a lower net income of $4.5 million, adecrease of 19%, for the three months ended March 31, 2010, when comparedto net income of $5.5 million for the corresponding period in 2009.

 

**Liquidityand Capital Resources**

** **

Our workingcapital as of March 31, 2010 and December 31, 2009 was $60.4 millionand $57.7 million, respectively.  Theincrease in working capital was primarily the result of an increase in accountsreceivable related to record quarterly sales.  As of  March 31, 2010, we hada current ratio of 2.8 to 1.

 

On December 7, 2006, weentered into an unsecured loan agreement with Bank of America, N.A. (“Bank ofAmerica”), whereby Bank of America agreed to provide us a line of credit in theamount of $30 million.  Our outstandingborrowings on this loan as of March 31, 2010 and December 31, 2009were $6.5 million and  $7.0 million,respectively.  Our interest rate as of March 31,2010 and December 31, 2009 was set at 1.0%.  Available borrowings under this line ofcredit as of March 31, 2010 and December 31, 2009 were $23.5 millionand $23 million, respectively.

 

On December 8, 2006, weentered into an unsecured loan agreement with Zions First National Bank (“Zions”),whereby Zions agreed to provide us a line of credit in the amount of $1million.  The loan originally expired on December 1,2009; but was extended for an additional three years to December 1, 2012.  Wehad $0 outstanding and $1.0 million available under this line of credit as of March 31,2010 and December 31, 2009.

 

Historically, we haveincurred significant expenses in connection with new facilities, productionautomation, product development and the introduction of new products.  During 2009, we spent a substantial amount ofcash, $46.2 million, in connection with our acquisition of certain assets andproduct lines.  In the event we pursueand complete similar transactions or acquisitions in the future, additionalfunds will likely be required to meet our strategic needs, which may require usto consider raising additional funds in the debt or equity markets.  We currently believe that our existing cashbalances, future cash flows from operations, sales of equity and existing linesof credit and committed debt financing will be adequate to fund our current andfuture planned operations for the next twelve months and the foreseeablefuture.

 

**Critical AccountingPolicies**

** **

The SEC has requested thatall registrants address their most critical accounting policies.  The SEChas indicated that a “critical accounting policy” is one which is bothimportant to the representation of the registrant’s financial 

 

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condition and results andrequires management’s most difficult, subjective or complex judgments, often asa result of the need to make estimates about the effect of matters that areinherently uncertain.  We base our estimates on past experience and onvarious other assumptions our management believes to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutcarrying values of assets and liabilities that are not readily apparent fromother sources.  Actual results will differ, and may differ materially fromthese estimates under different assumptions or conditions.  Additionally,changes in accounting estimates could occur in the future from period toperiod.  Our management has discussed the development and selection of ourmost critical financial estimates with the audit committee of our Board ofDirectors.  The following paragraphs identify our most critical accountingpolicies:

 

**InventoryObsolescence Reserve****. ** Our management reviews on a regular basisinventory quantities on hand for unmarketable and/or slow-moving products thatmay expire prior to being sold.  This review of inventory quantities forunmarketable and/or slow moving products is based on estimates of forecastedproduct demand prior to expiration lives.  If market conditions becomeless favorable than those projected by our management, additional inventorywrite-downs may be required.  We believe that the amount included in ourobsolescence reserve has been a historically accurate estimate of the unmarketableand/or slow moving products that may expire prior to being sold.

 

**Allowance for Doubtful Accounts****. ** A majority of our receivables are withhospitals which, over our history, have demonstrated favorable collectionrates.  Therefore, we have experienced relatively minimal bad debts fromhospital customers.  In limited circumstances, we have written off baddebts as the result of the termination of our business relationships withforeign distributors.  The most significant write-offs over our historyhave come from U.S. packers who bundle our products in surgical trays.

 

We maintain allowances fordoubtful accounts relating to estimated losses resulting from the inability ofour customers to make required payments.  The allowance is based uponhistorical experience and a review of individual customer balances.  Ifthe financial condition of our customers were to deteriorate, resulting in animpairment of their ability to make payments, additional allowances may berequired.

 

**Stock-Based Compensation.** ****We measure share-based compensationcost at the grant date based on the value of the award and recognize thecost as an expense over the term of the vestingperiod.  Judgment is required in estimating the fair value ofshare-based awards granted and their expected forfeiture rate.  If actualresults differ significantly from these estimates, stock-based compensationexpense and our results of operations could be materially impacted.

 

**Income Taxes.** Under our accounting policies, we initially recognize a tax position inour financial statements when it becomes more likely than not that the positionwill be sustained upon examination by the tax authorities.  Such tax positions are initially andsubsequently measured as the largest amount of tax benefit that has a greaterthan 50% likelihood of being realized upon ultimate settlement with the taxauthorities assuming full knowledge of the position and all relevantfacts.  Although we believe our provisions for unrecognized tax positionsare reasonable, we can make no assurance that the final tax outcome of thesematters will not be different from that which we have reflected in our incometax provisions and accruals.  The tax lawis subject to varied interpretations, and we have taken positions related tocertain matters where the law is subject to interpretation.  Suchdifferences could have a material impact on our income tax provisions andoperating results in the period(s) in which we make such determination.

 

**Goodwill and Intangible Assets Impairment. **We test our goodwill balances for impairment as ofJuly 1 of each year, or whenever impairment indicators arise.  We utilize several reporting units inevaluating goodwill for impairment.  Weassess the estimated fair value of reporting units based on discounted futurecash flows.  If the carrying amount of areporting unit exceeds the fair value of the reporting unit, an impairmentcharge is recognized in an amount equal to the excess of the carrying amount ofthe reporting unit goodwill over implied fair value of that goodwill.  This analysis requires significant judgments,including estimation of future cash flows and the length of time they willoccur, which is based on internal forecasts, and a determination of a discountrate based on our weighted average cost of capital.

 

We evaluate the recoverability of intangible assets whenever events orchanges in circumstances indicate that its carrying amount may not berecoverable.* *Thisanalysis requires similar significant judgments as those discussed aboveregarding goodwill, except that undiscounted cash flows are compared to thecarrying amount of intangible assets to determine if impairment exists.  All of our intangible assets are subject toamortization.

 

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** **

**ITEM 3**.**  QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

** **

Our principal market riskrelates to changes in the value of the Euro and Great Britain Pound (“GBP”)relative to the value of the U.S. Dollar.  We also have a limited marketrisk relating to the Swedish and Danish Kroner.    Our consolidated financial statements aredenominated in, and our principal currency is, the U.S. Dollar.  A portionof our revenues ($7.6 million, representing approximately 11.3% of aggregaterevenues), for the three months ended March 31, 2010 was attributable tosales that were denominated in foreign currencies.  All other international sales weredenominated in U.S. Dollars.  Certain of our expenses for the quarterended March 31, 2010 were also denominated in foreign currencies, whichpartially offset risks associated with fluctuations of exchanges rates betweenforeign currencies on the one hand, and the U.S. Dollar on the otherhand.   During the three months ended March 31, 2010, theexchange rate between our foreign currencies against the U.S. Dollar resultedin a decrease of our gross revenues of approximately $233,000 and a decrease of0.21% in gross profit.

 

On February 26, 2010, we forecasted a net exposure for March 31,2010 representing the difference between the GBP-denominated receivables andGBP-denominated payables of approximately 340,000.  In order to partiallyoffset such risks, on February 26, 2010 we entered into a 30-day forwardcontract for Euros and GBPs.  We generally enter into similar economictransactions at various times during the year to partially offset exchange raterisks we bear throughout the year.  During the quarter ended March 31,2010, we recorded a net loss of approximately $1,000 on foreign currencytransactions.  We do not purchase or holdderivative financial instruments for speculative or trading purposes.  Thefair value of our open positions at March 31, 2010 was not material to ourconsolidated financial statements.

 

As of March 31, 2010, we had no variable rate debt. As long as wedo not have variable rate debt, our interest expense would not be affected bychanges in interest rates.

 

**ITEM 4.  CONTROLS ANDPROCEDURES**

** **

**(a) Evaluationof Disclosure Controls and Procedures**

 

An evaluation of the effectiveness of our disclosure controls and procedures as of March 31, 2010 was performed under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer.  Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported as specified in the SEC’s rules and forms.

 

**(b) Changesin Internal Control over Financial Reporting**

 

There was no change in our internal control over financial reporting during the three months ended March 31, 2010 that materially affected, or that we believe is reasonably likely to materially affect, our internal control over financial reporting.

 

**PART II - OTHER INFORMATION**

** **

**ITEM 1.   LEGAL PROCEEDINGS**

** **

We are subject tocertain legal actions which we consider routine to our business activities. Asof  March 31, 2010, our managementconcluded, after consultation with legal counsel, that the ultimate outcome ofsuch legal matters is not likely to have a material adverse effect on ourfinancial position, liquidity or results of operations.

 

**ITEM 1A.   RISK FACTORS**

** **

Part I, Item1A, “Risk Factors,” of our Annual Report on Form 10-K for the Year EndedDecember 31, 2009 (the “Annual Report”) includes a detailed discussion ofrisks and uncertainties which could adversely affect our futureresults. In addition to the risk factors set forth in our Annual Report,the following risk factor modifies and supplements, and should be read inconjunction with, the risk factors disclosed in the Annual Report.

 

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**ITEM  6.  EXHIBITS**

 
| **Exhibit No.** | ** ** | **Description**                                                                                           |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------|
| 31.1                 |       | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 |
|                 |       |                                                                                                      |
| 31.2                 |       | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 |
|                 |       |                                                                                                      |
| 32.1                 |       | Certification of Chief  Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 |
|                 |       |                                                                                                      |
| 32.2                 |       | Certification of Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 |

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, asamended, the Registrant has duly caused this report to be signed on its behalfby the undersigned thereunto duly authorized.

 

 
| MERIT  MEDICAL SYSTEMS, INC. |              |                                   |
|-----------------------------------|-------------------|----------------------------------------|
| REGISTRANT                        |              |                                   |
|                              |              |                                   |
|                              |              |                                   |
| Date:                             | May 7,  2010 |                                   | /s/ Fred  P. Lampropoulos |
|                              |              | FRED  P. LAMPROPOULOS                  |
|                              |              | PRESIDENT  AND CHIEF EXECUTIVE OFFICER |
|                              |              |                                   |
|                              |              |                                   |
| Date:                             | May 7,  2010 |                                   | /s/ Kent  W. Stanger |
|                              |              | KENT  W. STANGER                       |
|                              |              | CHIEF  FINANCIAL OFFICER               |

 

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