XML 33 R22.htm IDEA: XBRL DOCUMENT

Fair Value Measurements

9 Months Ended

Sep. 30, 2023

Fair Value Disclosures [Abstract]

Fair Value Measurements

14. Fair Value Measurements.

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

Our financial assets and (liabilities) carried at fair value and measured on a recurring basis as of September 30, 2023 and December 31, 2022 consisted of the following (in thousands):


					Fair Value Measurements Using
		Total Fair			Quoted prices in			Significant other			Significant
		Value at			active markets			observable inputs			unobservable inputs
		September 30, 2023			(Level 1)			(Level 2)			(Level 3)
Marketable securities ⁽¹⁾		$	73		$	73		$	—		$	—
Interest rate contract asset, current ⁽²⁾		$	2,320		$	—		$	2,320		$	—
Foreign currency contract assets, current and long-term ⁽³⁾		$	6,035		$	—		$	6,035		$	—
Foreign currency contract liabilities, current and long-term ⁽⁴⁾		$	(2,980)		$	—		$	(2,980)		$	—
Contingent consideration liabilities		$	(4,022)		$	—		$	—		$	(4,022)


					Fair Value Measurements Using
		Total Fair			Quoted prices in			Significant other			Significant
		Value at			active markets			observable inputs			unobservable inputs
		December 31, 2022			(Level 1)			(Level 2)			(Level 3)
Marketable securities ⁽¹⁾		$	138		$	138		$	—			—
Interest rate contract asset, long-term ⁽²⁾		$	3,444		$	—		$	3,444		$	—
Foreign currency contract assets, current and long-term ⁽³⁾		$	4,783		$	—		$	4,783		$	—
Foreign currency contract liabilities, current and long-term ⁽⁴⁾		$	(3,986)		$	—		$	(3,986)		$	—
Contingent consideration liabilities		$	(18,073)		$	—		$	—		$	(18,073)

(1)	Our marketable securities, which consist entirely of available-for-sale equity securities, are valued using market prices in active markets. Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets.

(2)	The fair value of the interest rate contract is determined using Level 2 fair value inputs and is reported within prepaid expenses and other current assets as of September 30, 2023 and other long-term assets as of December 31, 2022 in the consolidated balance sheets.

(3)

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

(4)

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

Certain of our past business combinations involve the potential for the payment of future contingent consideration, generally based on a percentage of future product sales or upon attaining specified future revenue or other milestones. The contingent consideration liability is re-measured at the estimated fair value at the end of each reporting period with the change in fair value recognized within operating expenses in the accompanying consolidated statements of income for such period. We measure the initial liability and re-measure the liability on a recurring basis using Level 3 inputs as defined under authoritative guidance for fair value measurements. Changes in the fair value of our contingent consideration liabilities during the three and nine-month periods ended September 30, 2023 and 2022 consisted of the following (in thousands):


		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2023			2022			2023			2022
Beginning balance		$	3,581		$	17,426		$	18,073		$	48,234
Contingent consideration expense			563			915			2,177			4,702
Contingent payments made			(122)			(91)			(16,228)			(34,676)
Effect of foreign exchange			—			—			—			(10)
Ending balance		$	4,022		$	18,250		$	4,022		$	18,250

As of September 30, 2023, $3.6 million in contingent consideration liability was included in other long-term obligations and $0.4 million in contingent consideration liability was included in accrued expenses in our consolidated balance sheet. As of December 31, 2022, $2.3 million in contingent consideration liability was included in other long-term obligations and $15.8 million in contingent consideration liability was included in accrued expenses in our consolidated balance sheet.

Payments related to the settlement of the contingent consideration liability recognized at fair value as of the applicable acquisition date of $3.5 million and $32.9 million for the nine-month periods ended September 30, 2023 and 2022, respectively, have been reflected as a cash outflow from financing activities in the accompanying consolidated statements of cash flows. Payments related to increases in the contingent consideration liability subsequent to the date of acquisition of $12.7 million and $1.8 million for the nine-month period ended September 30, 2023 and 2022, respectively, are reflected as operating cash flows.

The recurring Level 3 measurement of our contingent consideration liabilities included the following significant unobservable inputs at September 30, 2023 and December 31, 2022 (amounts in thousands):


		Fair value at
		September 30,			Valuation						Weighted
Contingent consideration liability		2023			technique		Unobservable inputs		Range		Average⁽¹⁾
Revenue-based royalty payments contingent liability		$	3,534		Discounted cash flow		Discount rate		12% - 16%		14.9%
							Projected year of payments		2023-2034		2028

Revenue milestones contingent liability		$	88		Monte Carlo simulation		Discount rate		13.0%
							Projected year of payments		2023-2039		2039

Regulatory approval contingent liability		$	400		Scenario-based method		Discount rate		5.7%
							Probability of milestone payment		50.0%
							Projected year of payment		2023-2030		2030


		Fair value at
		December 31,			Valuation						Weighted
Contingent consideration liability		2022			technique		Unobservable inputs		Range		Average⁽¹⁾
Revenue-based royalty payments contingent liability		$	2,097		Discounted cash flow		Discount rate		14% - 17%		15.7%
							Projected year of payments		2023-2034		2026

Revenue milestones contingent liability		$	13,064		Monte Carlo simulation		Discount rate		5.1% - 14.0%		5.2%
							Projected year of payments		2023-2033		2023

Regulatory approval contingent liability		$	2,912		Scenario-based method		Discount rate		5.7%
							Probability of milestone payment		90%
							Projected year of payment		2023-2030		2024

(1)	Unobservable inputs were weighted by the relative fair value of the instruments. No weighted average is reported for contingent consideration liabilities without a range of unobservable inputs.

The contingent consideration liability is re-measured to fair value each reporting period. Significant increases or decreases in projected revenues, based on our most recent internal operational budgets and long-range strategic plans, discount rates or the time until payment is made would have resulted in a significantly lower or higher fair value measurement. Our determination of the fair value of the contingent consideration liability could change in future periods based upon our ongoing evaluation of these significant unobservable inputs. We intend to record any such change in fair value to operating expenses in our consolidated statements of income.

Contingent Payments to Related Parties

As a former shareholder of Cianna Medical Inc. (“Cianna Medical”), a former Merit director was eligible for payments for the achievement of sales milestones specified in our merger agreement with Cianna Medical completed in 2018. The terms of the acquisition, including contingent consideration payments, were determined prior to the appointment of the former Cianna Medical shareholder as a Merit director. During the nine-month period ended September 30, 2023, we made the final contingent payment to Cianna Medical shareholders, including $0.9 million paid to the former Merit director who is a former Cianna Medical shareholder. During the nine-month period ended September 30, 2022, we made aggregate contingent payments of $1.6 million to the former Merit director as a former shareholder of Cianna Medical.

Fair Value of Other Assets (Liabilities)

The carrying amount of cash and cash equivalents, receivables, and trade payables approximate fair value because of the immediate, short-term maturity of these financial instruments. Our long-term debt re-prices frequently due to variable rates and entails no significant changes in credit risk and, as a result, we believe the fair value of long-term debt approximates carrying value. The fair value of assets and liabilities whose carrying value approximates fair value is determined using Level 2 inputs, with the exception of cash and cash equivalents, which use Level 1 inputs.

We analyze our investments in privately-held companies to determine if they should be accounted for using the equity method based on our ability to exercise significant influence over operating and financial policies of the company in which we have invested. Investments not accounted for under the equity method of accounting are accounted for at cost minus impairment, if applicable, plus or minus changes in valuation resulting from observable transactions for identical or similar investments.

Impairment Charges

We recognize or disclose the fair value of certain assets, such as non-financial assets, primarily property and equipment, right-of-use operating lease assets, equity investments, intangible assets and goodwill in connection with impairment evaluations. Such assets are reported at carrying value and are not subject to recurring fair value measurements. We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Fair value is generally determined based on discounted future cash flow. All our nonrecurring valuations use significant unobservable inputs and therefore fall under Level 3 of the fair value hierarchy.

Equity Investments. During the nine-month period ended September 30, 2023, we recorded impairment charges of $270,000 associated with our previously-held equity investment in Bluegrass in connection with the Bluegrass asset acquisition completed on May 4, 2023 (see Note 4).

Intangible Assets. During the nine-month period ended September 30, 2023, we had no losses related to acquired intangible assets. During the nine-month period ended September 30, 2022, we recorded an impairment charge of $1.7 million related to the acquired intangible assets from our August 2019 acquisition of STD Pharmaceutical (see Note 6). In addition to the intangible asset impairment, during the three-month period ended June 30, 2022, we recorded a loss within other expense – net of $1.3 million primarily associated with the transfer of net assets of the divested entity including approximately $1.0 million of cash and $1.2 million of inventory, partially offset by a gain of $1.0 million from reclassification of foreign currency translation gains.

Current Expected Credit Losses

Our outstanding long-term notes receivable, including accrued interest and an allowance for current expected credit losses, were $2.4 million and $2.4 million as of September 30, 2023 and December 31, 2022, respectively. As of September 30, 2023 and December 31, 2022, we had an allowance for current expected credit losses of $328,000 and $281,000, respectively, associated with these notes receivable. We assess the allowance for current expected credit losses on an individual security basis, due to the limited number of securities, using a probability of default model, which is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the expected collectability of securities, and other security specific factors.

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


		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2023			2022			2023			2022
Beginning balance		$	296		$	192		$	281		$	199
Provision for credit loss expense			32			(6)			47			(13)
Ending balance		$	328		$	186		$	328		$	186

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details