2018 Long-Term Incentive Plan. In June 2018, our Board of Directors adopted and our shareholders approved, the Merit Medical Systems, Inc. 2018 Long-Term Incentive Plan, which was subsequently amended effective December 14, 2018 (the “2018 Incentive Plan”) to supplement the Merit Medical Systems, Inc. 2006 Long-Term Incentive plan (the "2006 Incentive Plan"). The 2018 Incentive Plan provides for the granting of stock options, stock appreciation rights, restricted stock, stock units (including restricted stock units) and performance awards (including performance stock units). Options may be granted to directors, officers, outside consultants and key employees and may be granted upon such terms and such conditions as the Compensation Committee of our Board of Directors determines. Options typically vest on an annual basis over a three to five-year life with a contractual life of seven years. As of December 31, 2022, a total of 2,817,861 shares remained available to be issued under the 2018 Incentive Plan.

2006 Long-Term Incentive Plan. In May 2006, our Board of Directors adopted, and our shareholders approved, the 2006 Incentive Plan. As of December 31, 2022, the 2006 Incentive Plan was no longer being used for new equity award grants. However, as of December 31, 2022, options granted under this plan were still outstanding, vesting, and being exercised and will continue to be outstanding until the vesting periods end and the terms of the equity awards expire.

Employee Stock Purchase Plan. We have a non-qualified Employee Stock Purchase Plan (“ESPP”), which has an expiration date of June 30, 2026. As of December 31, 2022, the total number of shares of common stock that remained available to be issued under our non-qualified plan was 102,739 shares. ESPP participants purchase shares on a quarterly basis at a price equal to 95% of the market price of the common stock at the end of the applicable offering period.

Stock-Based Compensation Expense. The stock-based compensation expense before income tax expense for the years ended December 31, 2022, 2021 and 2020, consisted of the following (in thousands):

We recognize stock-based compensation expense (net of a forfeiture rate) for those awards which are expected to vest on a straight-line basis over the requisite service period. We estimate the forfeiture rate based on our historical experience and expectations about future forfeitures.

As of December 31, 2022, the total remaining unrecognized compensation cost related to non-vested stock options, net of expected forfeitures, was $20.4 million and is expected to be recognized over a weighted average period of 2.1 years.

In applying the Black-Scholes methodology to the option grants, the fair value of our stock-based awards granted was estimated using the following assumptions for the years ended December 31, 2022, 2021 and 2020:

The average risk-free interest rate is determined using the U.S. Treasury rate in effect as of the date of grant, based on the expected term of the stock option. We determine the expected term of the stock options using the historical exercise behavior of employees. The expected price volatility was determined based upon the historical volatility for our stock. We recognize compensation expense for options on a straight-line basis over the service period, which corresponds to the vesting period. During the years ended December 31, 2022, 2021 and 2020, approximately 251,000, 716,000 and 329,000 nonqualified stock option grants were made, respectively, for a total fair value of $6.3 million, $17.5 million and $4.5 million.

The table below presents information related to stock option activity for the years ended December 31, 2022, 2021 and 2020 (in thousands):

Changes in stock options for the year ended December 31, 2022, consisted of the following (shares and intrinsic value in thousands):

The weighted average grant-date fair value of options granted during the years ended December 31, 2022, 2021 and 2020 was $24.98, $24.38 and $13.70, respectively.

Stock-Settled Performance-Based Restricted Stock Units (“PSUs”) and Time-Vested Restricted Stock Units (“RSUs”)

Since 2020, we have granted PSUs to certain of our executive officers. Conversion of PSUs occurs at the end of one, two and three-year performance periods, or one year after the agreement date, whichever is later. The conversion ratio is based upon attaining targeted levels of free cash flow (“FCF”) and relative shareholder return as compared to the Russell 2000 Index (“rTSR”), as defined in the award agreements. In 2020, our Board of Directors amended PSUs granted in 2020 with a one-year performance period to adjust the performance targets and reduce the maximum FCF multiplier to 100% for the one-year awards, which lowered the potential shares of our common stock to be granted pursuant to the one-year awards by 25,415 shares. We accounted for this amendment in accordance with ASC 718 as a “Type I” modification.

The payout for each PSU is equal to one share of common stock multiplied by a FCF multiplier (between 50% and 100% in the case of the 2020 one-year awards, as amended, or 50% and 200% in the case of all other PSU awards) and a rTSR multiplier (between 75% and 125%). PSUs convey no shareholder rights unless and until shares are issued in settlement of the award. We use Monte-Carlo simulations to estimate the grant-date fair value of the PSUs linked to total shareholder return. Compensation expense is recognized using the grant-date fair value for the number of shares that are probable of being awarded based on the performance conditions. Each reporting period, this probability assessment is updated, and cumulative catchups are recorded based on the level of FCF that is expected to be achieved. At the end of the performance period, cumulative expense is calculated based on the actual level of FCF achieved.

We grant RSUs to our non-employee directors, which are subject to continued service through the vesting date, which is one year from the date of grant. The expense recognized for RSUs is equal to the closing stock price on the date of grant, which is recognized over the vesting period.

Changes in PSUs and RSUs for the year ended December 31, 2022, consisted of the following:

(1)

Based on the maximum payout, excluding the impact of the rTSR multiplier. The actual number of shares which vest is determined based on the satisfaction of performance conditions and the application of an rTSR multiplier between 75% and 125%.

(2)

Represents the application of an rTSR multiplier of 125% to awards vested in 2022 based on the performance of our common stock and the terms of the awards.

The following table summarizes PSUs and RSUs granted during the years ended December 31, 2022, 2021, and 2020 (units and shares in thousands):


	2022		2021		2020
PSUs
Target units granted		48		52		61
Maximum units granted ⁽¹⁾		97		103		102	⁽³⁾
Maximum potential shares⁽¹⁾⁽²⁾		121		129		127	⁽³⁾
Weighted average grant date fair value	$	64.54	$	61.39	$	43.63
RSUs
Units granted		31		26		34
Weighted average grant date fair value	$	59.02	$	61.77	$	42.98

(1)

Based on the maximum payout, excluding the impact of the rTSR multiplier.

(2)

Includes the impact of the maximum potential rTSR multiplier of 125%.

(3)

Includes the impact of the 2020 amendment which reduced the maximum FCF multiplier for one-year awards from 200% to 100%.

During the years ended December 31, 2022 and 2021, there were approximately 44,000 and 26,000 shares, respectively, that vested under PSUs, prior to the reduction of shares withheld to satisfy tax withholding obligations. Vested shares were calculated based upon achievement of the maximum performance multiplier, as amended, of 200% and 100% for 2022 and 2021, respectively, and an rTSR multiplier of 125%. There were no shares that vested under PSUs during the year ended December 31, 2020. During the years ended December 31, 2022 and 2021, there were approximately 26,000 and 34,000 shares, respectively, that vested under RSUs. There were no shares that vested under RSUs during the year ended December 31, 2020.

The fair value of each PSU was estimated as of the grant date using the following assumptions for awards granted in the years ended December 31, 2022 and 2021:


	2022	2021
Risk-free interest rate	1.6% - 2.7%	0.1% - 0.3%
Performance period	2.6 - 2.8 years	1.8 - 2.8 years
Expected dividend yield	—	—
Expected price volatility	38.5% - 42.6%	43.7% - 49.3%

The risk-free interest rate of return was determined using the U.S. Treasury rate at the time of grant with a remaining term equal to the expected term of the award. The expected volatility was based on a weighted average volatility of our stock

price and the average volatility of our compensation peer group's volatilities. The expected dividend yield was assumed to be zero because, at the time of the grant, we had no plans to declare a dividend.

As of December 31, 2022, the total remaining unrecognized compensation cost related to stock-settled performance stock units and restricted stock units, net of expected forfeitures, was $4.7 million and $0.7 million, respectively, which is expected to be recognized over a weighted average period of 1.6 years and 0.4 years, respectively.

Cash-Settled Performance-Based Share-Based Awards (“Liability Awards”)

During the years ended December 31, 2022, 2021 and 2020, we granted liability awards to certain executive officers. These awards entitle them to cash payments equal to a total target cash incentive of $1.0 million, $1.0 million, and $1.0 million, respectively, multiplied by rTSR and FCF multipliers, as defined in the award agreements. In 2020, our Board of Directors amended the liability awards with a one-year performance period. The potential maximum payout of these liability awards is 125% of the target cash incentive for the 2020 one-year award, as amended, and 250% of the target cash incentive for all other liability awards, resulting in a total potential maximum payout of $2.5 million and $2.5 million for liability awards granted during the years ended December 31, 2022 and 2021, respectively. Settlement generally occurs at the end of one, two and three-year performance periods based upon the same performance metrics and vesting period as our performance stock units.

These awards are classified as liabilities and reported in accrued expenses and other long-term liabilities within our consolidated balance sheet. The fair value of these awards is remeasured at each reporting period until the awards are settled. As of December 31, 2022, our recorded liabilities associated with these awards was $3.2 million, and we had remaining unrecognized compensation cost related to cash-settled performance-based share-based awards of $1.9 million, which is expected to be recognized over a weighted average period of 1.7 years. During 2022 and 2021, we paid $833,000 and $417,000, respectively, in connection with liability awards, and no awards were forfeited. There were no liability awards vested or forfeited in the year ended December 31, 2020.