Employee Stock Purchase Plan, Stock Options and Warrants

12 Months Ended

Dec. 31, 2023

Share-based Payment Arrangement [Abstract]

Employee Stock Purchase Plan, Stock Options and Warrants

12.EMPLOYEE STOCK PURCHASE PLAN, STOCK OPTIONS AND WARRANTS

Our stock-based compensation primarily consists of the following plans:

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, 2023, a total of 1,709,391 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, 2023, the 2006 Incentive Plan was no longer being used for new equity award grants. However, as of December 31, 2023, 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, 2023, the total number of shares of common stock that remained available to be issued under our non-qualified plan was 87,673 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, 2023, 2022 and 2021, consisted of the following (in thousands):

	2023		2022		2021
Cost of sales
Nonqualified stock options	$	1,647	$	1,606	$	1,476
Research and development
Nonqualified stock options		1,739		1,789		1,343
Selling, general and administrative
Nonqualified stock options		7,542		7,305		6,678
Performance-based restricted stock units		6,344		3,509		3,525
Restricted stock units		1,771		1,836		1,557
Cash-settled performance-based share-based awards ("Liability Awards")		2,290		1,997		1,511
Total selling, general and administrative		17,947		14,647		13,271
Stock-based compensation expense before taxes	$	21,333	$	18,042	$	16,090

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. 

Nonqualified Stock Options

As of December 31, 2023, 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 2.2 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, 2023, 2022 and 2021:

	2023	2022	2021
Risk-free interest rate	3.6% - 4.8%	1.4% - 4.3%	0.5% - 1.1%
Expected option term	4.0 years	4.0 years	4.0 years
Expected dividend yield	—	—	—
Expected price volatility	39.6% - 47.1%	46.2% - 47.5%	46.1% - 46.7%

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, 2023, 2022 and 2021, approximately 444,000, 251,000 and 716,000 nonqualified stock option grants were made, respectively, for a total fair value of $13.1 million, $6.3 million and $17.5 million.

The table below presents information related to stock option activity for the years ended December 31, 2023, 2022 and 2021 (in thousands):

	2023		2022		2021
Total intrinsic value of stock options exercised	$	23,300	$	27,110	$	36,086
Cash received from stock option exercises		14,503		18,952		20,194
Excess tax benefit from the exercise of stock options		3,001		3,423		5,571

Changes in stock options for the year ended December 31, 2023, consisted of the following (shares and intrinsic value in thousands):

	Number	Weighted Average		Remaining Contractual	Intrinsic
	of Shares	Exercise Price		Term (in years)	Value
Beginning balance	3,077	$	49.62
Granted	444		72.36
Exercised	(606)		33.48
Forfeited/expired	(47)		60.08
Outstanding at December 31	2,868		56.39	3.44	$	56,333
Exercisable	1,714		50.73	2.40		43,234
Ending vested and expected to vest	2,868		56.39	3.44		56,333

The weighted average grant-date fair value of options granted during the years ended December 31, 2023, 2022 and 2021 was $29.58, $24.98 and $24.38, respectively.

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

Since 2020, we have granted PSUs which vest at the end of one, two and three-year performance periods, or one year after the agreement date, whichever is later. The number of shares delivered upon vesting at the end of the performance periods are based upon performance against specified financial performance metrics and relative total shareholder return as compared to the Russell 2000 Index (“rTSR”), as defined in the award agreements. 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 performance metrics that are expected to be achieved. At the end of the performance period, cumulative expense is calculated based on the actual financial performance metrics attained.

We have granted 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, 2023, consisted of the following:

	PSUs				RSUs
			Weighted Average			Weighted Average
	Stock Units		Grant Date		Stock Units	Grant Date
	(In Thousands)	(1)	Fair Value		(In Thousands)	Fair Value
Beginning nonvested balance	179		$	63.90	31	$	59.02
Granted	229			72.26	20		83.99
rTSR adjustment	8	(2)		70.58	—		—
Vested	(61)			70.58	(31)		59.02
Forfeited	—			—	—		—
Nonvested balance at December 31	355			71.15	20		83.99

(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 certain awards vested in 2023 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, 2023, 2022, and 2021 (units and shares in thousands):

	2023		2022		2021
PSUs
Target units granted		115		48		52
Maximum units granted (1)		229		97		103
Maximum potential shares (1)(2)		287		121		129
Weighted average grant date fair value	$	72.26	$	64.54	$	61.39
RSUs
Units granted		20		31		26
Weighted average grant date fair value	$	83.99	$	59.02	$	61.77

(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%.

During the years ended December 31, 2023, 2022 and 2021, there were approximately 61,000, 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 financial performance multipliers and market conditions related to the rTSR multiplier. During the years ended December 31, 2023, 2022 and 2021, there were approximately 31,000, 26,000 and 34,000 shares, respectively, that vested under RSUs.

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, 2023, 2022 and 2021:

	2023	2022	2021
Risk-free interest rate	3.9% - 4.6%	1.6% - 2.7%	0.1% - 0.3%
Performance period	2.8 years	2.6 - 2.8 years	1.8 - 2.8 years
Expected dividend yield	—	—	—
Expected price volatility	31.4% - 32.6%	38.5% - 46.2%	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, 2023, the total remaining unrecognized compensation cost related to stock-settled performance stock units and restricted stock units, net of expected forfeitures, was $10.5 million and $0.6 million, respectively, which is expected to be recognized over a weighted average period of 1.8 years and 0.4 years, respectively.

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

During the years ended December 31, 2023, 2022 and 2021, we granted liability awards to our Chief Executive Officer with total target cash incentives in the amount of $1.3 million, $1.0 million, and $1.0 million, respectively. These awards entitle him to a target cash payment based upon our relative shareholder return as compared to the rTSR and achievement of specified performance metrics, as defined in the award agreements.

During the years ended December 31, 2023, 2022 and 2021, we granted additional performance stock units to certain employees that provide for settlement in cash upon our achievement of specified financial metrics. The cash payable upon vesting at the end of the service period is based upon performance against specified financial performance metrics and relative total shareholder return as compared to the rTSR, as defined in the award agreements. Compensation expense is recognized for the cash payment probable of being awarded based on the performance metrics.

The potential maximum payout of these liability awards is 250% of the target cash incentive, resulting in a total potential maximum payout of $4.3 million, $2.5 million and $2.5 million for liability awards granted during the years ended December 31, 2023, 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 sheets. The fair value of these awards is remeasured at each reporting period until the awards are settled. As of December 31, 2023, our recorded liabilities associated with these awards was $3.4 million, and we had remaining unrecognized compensation cost related to cash-settled performance-based share-based awards of $3.1 million, which is expected to be recognized over a weighted average period of 1.8 years. During 2023, 2022 and 2021, we paid $1.7 million, $833,000 and $417,000, respectively, in connection with liability awards, and no awards were forfeited.