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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010.

OR

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

FOR THE TRANSITION PERIOD FROM              TO             .

Commission File Number   0-18592

MERIT MEDICAL SYSTEMS, INC.

(Exact name of Registrant as specified in its charter)

1600 West Merit Parkway, South Jordan, UT, 84095

(Address of Principal Executive Offices, including Zip Code)

(801) 253-1600

(Registrant’s telephone number, including area code)

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

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

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

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

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

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MERIT MEDICAL SYSTEMS, INC.

INDEX TO FORM 10-Q

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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)

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MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

MARCH 31, 2010 AND DECEMBER 31, 2009

(In thousands - unaudited)

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MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009

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

See notes to consolidated financial statements.

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MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009

(In thousands - unaudited)

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MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009

(In thousands - unaudited)

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

During the three months ended March 31, 2009, 21,556 shares of the Company’s common stock, with a value of approximately $230,000 were surrendered in exchange for the exercise of stock options.

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MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.   Basis of Presentation. The interim consolidated financial statements of Merit Medical Systems, Inc. (“Merit,” “we” or “us”) for the three months ended March 31, 2010 and 2009 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. In the opinion of 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, 2010, and our results of operations and 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, 2010 are not necessarily indicative of the results for a full-year period.  These interim consolidated financial statements should be read in conjunction with the financial statements included in 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 of cost or market.  Inventories at March 31, 2010 and December 31, 2009 consisted of the following (in thousands):

3.   Comprehensive Income.  Comprehensive income for the three month periods ended March 31, 2010 and 2009 consisted of net income and foreign currency translation adjustments.  As of March 31, 2010 and December 31, 2009, the cumulative effect of such adjustments decreased stockholders’ equity by approximately $113,000 and $85,000, respectively.  Comprehensive income for the three month periods ended March 31, 2010 and 2009 has been computed as follows (in thousands):

4.   Stock-based Compensation.  Stock-based compensation expense for the three month periods ended March 31, 2010 and 2009 has been categorized as follows (in thousands):

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The excess income tax benefit created from the exercises of stock options was approximately $0 and $372,000 for the three month periods ended March 31, 2010 and 2009, respectively.  As of March 31, 2010, the total remaining unrecognized compensation cost related to non-vested stock options, net of expected forfeitures, was approximately $3.6 million and is expected to be recognized over a weighted average period of 3.1 years. We use the Black-Scholes methodology to value the stock-based compensation expense for options.

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

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

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

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With respect to the assets we acquired from Alveolus, we intend to amortize the developed technology and trademarks over 15 years and customer lists on an accelerated basis over seven years.  We intend to amortize the in-process research and development over 15 years, which will begin if the resulting product is successfully launched in the market.  The acquired trademarks are scheduled for renewal 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 estimate that we will generate cash flow from the acquired trademarks for a period of 15 years from the acquisition date.

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

On February 19, 2009, we entered into an asset purchase and supply agreement with Biosearch Medical Products, Inc., a wholly-owned subsidiary of Hydromer, Inc., a New Jersey corporation (“Biosearch”), to purchase a bipolar coagulation probe and grafted biliary stents.  We paid $1.1 million in February 2009 and paid an additional $500,000 in June 2009.  Our consolidated financial statements for the three month periods ended March 31, 2010 and 2009 reflect 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):

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

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

The following table summarizes our unaudited consolidated result of operations for the three months ended March 31, 2009, as well as the unaudited pro forma consolidated results of operations as though the Alveolus and Biosearch acquisitions had occurred on January 1, 2009:

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

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

In October 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-13, Revenue Recognition (Topic 605): Multiple Deliverable Revenue Arrangements — A Consensus of the FASB Emerging Issues Task Force.  This update provides application guidance on whether multiple deliverables exist, how the deliverables should be separated and how the consideration should be allocated to one or more units of accounting.  This update establishes a selling price hierarchy for determining the selling price of a deliverable.  The selling price used for each deliverable will be based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific or third-party evidence is available.  We will be required to apply this guidance prospectively for revenue arrangements entered into or materially modified after January 1, 2011; however, earlier application is permitted.  We do not expect the adoption of this guidance to have a material effect on our consolidated financial statements.

8.   Income Taxes.  Our overall effective tax rate for the three month periods 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 $2.5 million, respectively.  The decrease in the effective income tax rate for the first quarter of 2010, when compared to the first quarter of 2009, was primarily related to the increased profitability of our Irish operations which are taxed at a lower tax rate than our U.S. and other foreign operations.

9.   Fair Value Measurements.  The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Financial assets are marked to bid prices and financial liabilities are marked to offer prices.  Fair value measurements do not include transaction costs.  A fair value hierarchy is used to prioritize the quality

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and reliability of the information used to determine fair values.  Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.  The fair value hierarchy is defined into the following three categories:

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

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market

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

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

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

10.   Goodwill and Intangible Assets.  There were no changes in the carrying amount 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):

* In-process research and development was capitalized in connection with our acquisition of Alveolus assets.  Our in-process research and development intangible is currently not subject to amortization but amortization will commence upon the related product launch.

The aggregate amortization expense for the three months ended March 31, 2010 was approximately $670,000.

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

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

Disclosure Regarding Forward-Looking Statements

This Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  All statements in this Report, other than statements of historical fact, are forward-looking statements for purposes of these provisions, including any projections of earnings, revenues or other financial items, any statements of the plans and objectives of management for future operations, any statements concerning proposed new products or services, any statements regarding the integration, development or commercialization of the business or assets acquired from other parties, any statements regarding future economic conditions or performance, and any statements of assumptions underlying any of the foregoing.  All forward-looking statements included in this Report are made as of the date hereof and are based on information available to us as of such date.  We assume no obligation to update any forward-looking statement.   In some cases, forward-looking statements can 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 comparable terminology.  Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, there can be no assurance that any such expectation or any forward-looking statement will prove to be correct.  Our actual results will vary, and may vary materially, from those projected or assumed in the forward-looking statements.  Our financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties, including, healthcare policy changes which may have a material adverse effect on Merit’s operations or financial results; infringement of Merit's technology or the assertion that Merit's technology infringes the rights of other parties; national economic and industry changes and their effect on Merit's revenues, collections and supplier relations; termination or interruptions of supplier relationships, or failure of suppliers to perform; product recalls and product liability claims; inability to successfully manage growth, through acquisitions; delays in obtaining regulatory approvals, or the failure to maintain such approvals; failure to comply with governing regulations and laws; concentration of Merit's revenues among a few products and procedures; development of new products and technology that 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 and obsolescence of inventory; volatility of the market price of Merit's common stock; foreign currency fluctuations; changes in key personnel; work stoppage or transportation risks; modification or limitation of governmental or private insurance reimbursements; changes in health care markets related to health care reform initiatives; limits on reimbursement imposed by governmental programs; impact of force majeure events on Merit's business, including severe weather conditions; failure to comply with applicable environmental laws; and other factors referred to in Merit's Annual Report on Form 10-K for the year ended December 31, 2009, and other reports filed with the Securities and Exchange Commission.  All subsequent forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements.  Additional factors that may have a direct bearing on our operating results are discussed in Part I, Item 1A “Risk Factors” 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 three months ended March 31, 2009 of $58.4 million.

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Gross profit as a percentage of sales was down to 42.2% for the first quarter of 2010, compared to 42.5% for the first quarter of 2009. This decrease can be attributed primarily to higher average fixed overhead unit costs as the result of higher production costs and a decrease in productivity as fixed costs are shared over a decreased number of units produced and an increase in material costs, all of which were partially offset by an increase of 1.0% in gross margin improvement related primarily to the launch of our En Snare® device.

Net income decreased 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, a decrease of 19%.  When compared to the first quarter of 2009, net income for the quarter ended March 31, 2010 was primarily affected by lower gross margins, higher selling, general and administrative expenses and increased research and development expenses.

Results of Operations

The following table sets forth certain operational data as a percentage of sales for the three month periods ended March 31, 2010 and 2009:

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

The sales growth of 16% for the first quarter of 2010, when compared to the first quarter of 2009, was favorably affected by increased sales of stand-alone devices.  The increase was primarily related to the En Snare® device sales of $2.1 million, an increase in sales of custom kits and procedure trays, increased sales of catheters (particularly our Prelude® sheath product line, mini access catheter product line, and vessel sizing catheters,) and increased stent sales resulting from our acquisition of Alveolus in March of 2009.  These sales increases helped offset a decrease in sales of .35% related to the exchange rate between our foreign currencies (primarily the Euro) and the U.S. Dollar and a decrease in inflation device sales to an OEM customer of 30%.

Gross Profit. Gross profit as a percentage of sales decreased to 42.2% for the first quarter of 2010, compared to 42.5% of sales for the first quarter of 2009. This decrease can be attributed primarily to higher average fixed overhead unit costs, which results from higher production costs and a decrease in productivity as fixed costs are shared over a decreased number of units produced.  We also experienced an increase in material costs, which were partially offset by an increase of 1.0% in gross margin improvement related to the launch of our En Snare® device during the first quarter of 2010.

Operating Expenses.  Selling, general and administrative expenses increased to 28.2% of sales for the three months ended March 31, 2010, compared with 25.4% 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 three months ended March 31, 2010, when compared to the first three months of 2009, was due primarily to expenses associated with our acquisition and operation of the business and assets acquired from Alveolus, a one-time legal settlement of $477,000, and the hiring of additional domestic and international sales representatives. Research and development expenses were 4.5% of sales for the three months ended March 31, 2010, compared with 3.6% of sales for the three months ended March 31, 2009.  The increase in research and development expenses, when compared to the first three months of 2010, was due primarily to the development of projects for the Alveolus business we acquired, head count additions for regulatory support, and increases in research and development staff to support various new development projects.

Other Income (Expense).  Other expense for the first quarter of 2010 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, when compared to the comparable period in 2009, was primarily the result of a decrease in interest income attributable to lower average cash balances, when compared to the corresponding periods in 2009.

Income Taxes.  Our overall effective tax rate for the three months 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 $2.5 million, respectively.  The decrease in the effective income tax rate for the first quarter of 2010, when compared to the first quarter of 2009, was primarily related to the increased profitability of our Irish operations which are taxed at a lower tax rate than our U.S. and foreign 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 from operations for the quarter ended March 31, 2010 was primarily affected by lower gross margins, and higher selling, general and administrative expenses and higher research and development expenses.   These factors contributed to a lower net income of $4.5 million, a decrease of 19%, for the three months ended March 31, 2010, when compared to net income of $5.5 million for the corresponding period in 2009.

Liquidity and Capital Resources

Our working capital as of March 31, 2010 and December 31, 2009 was $60.4 million and $57.7 million, respectively.  The increase in working capital was primarily the result of an increase in accounts receivable related to record quarterly sales.   As of  March 31, 2010, we had a current ratio of 2.8 to 1.

On December 7, 2006, we entered into an unsecured loan agreement with Bank of America, N.A. (“Bank of America”), whereby Bank of America agreed to provide us a line of credit in the amount of $30 million.  Our outstanding borrowings on this loan as of March 31, 2010 and December 31, 2009 were $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 of credit as of March 31, 2010 and December 31, 2009 were $23.5 million and $23 million, respectively.

On December 8, 2006, we entered 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 $1 million.  The loan originally expired on December 1, 2009; but was extended for an additional three years to December 1, 2012.  We had $0 outstanding and $1.0 million available under this line of credit as of March 31, 2010 and December 31, 2009.

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

Critical Accounting Policies

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

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