UTAH MEDICAL PRODUCTS INC 10-K

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Currency amounts are in thousands except per-share amounts and where noted. TABLE OF CONTENTS Management’s Report on Internal Control Over Financial Reporting 36 Report of Independent Registered Public Accounting Firm (Haynie) on Financial Statements and the Company’s Internal Control Over Financial Reporting 37 Report of Independent Registered Public Accounting Firm (Nortons) on Financial Statements and the Company’s Internal Control Over Financial Reporting 38 Consolidated Balance Sheets 39 Consolidated Statements of Income and Comprehensive Income 40 Consolidated Statements of Cash Flow 41 Consolidated Statements of Stockholders’ Equity 42 Notes to Consolidated Financial Statements 43 35 Table of Contents MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The Company's internal control over financial reporting includes those policies and procedures that · pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; · provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and · provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The Company’s management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2021. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013) . Based on its assessment and those criteria, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2021. By: /s/ Kevin L. Cornwell Kevin L. Cornwell Chief Executive Officer By: /s/ Brian L. Koopman Brian L. Koopman Principal Financial Officer 36 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Utah Medical Products, Inc. Opinion on the Financial Statements We have audited the accompanying balance sheets of Utah Medical Products, Inc. (the Company) as of December 31, 2021 and 2020, and the related statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2021 and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. We did not audit portions of the consolidated financial statements for Femcare Group Limited, a wholly owned subsidiary. The portions not audited by us include assets of $26,752,000 and $28,666,000 as of December 31, 2021 and 2020, respectively and total revenues of $4,419,000 and $4,871,000 for the years ended December 31, 2021 and 2020, respectively. Those portions of the consolidated financial statements were audited by other auditors whose reports have been furnished to us, and our opinions, insofar as they relate to the amounts included for Femcare Group Limited is based solely on the reports of the other auditors. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Evaluation of income taxes Description of the Matter: As discussed in Note 1 to the consolidated financial statements, the Company operates in many parts in the world through its’ subsidiaries. The Company or one of its’ subsidiaries will file a tax return in the U.S. federal jurisdiction, in the United Kingdom, in Australia, in Ireland, and in Canada. Due to the complexity with dealing in multiple currencies/countries, along with the various tax laws and significant management judgment, we believe the account to be a critical audit matter. How We Addressed the Matter in Our Audit: We evaluated the appropriateness and consistency of management's methods and assumptions used in the identification, recognition, measurement, and disclosures of its' taxes. We read and evaluated management's documentation, including relevant accounting policies and information obtained by management from the outside tax specialists engaged to assist with their taxes. /s/ Haynie & Company Haynie & Company Salt Lake City, Utah March 25, 2022 Firm ID: 457 We have served as the Company’s auditor since 2018. 37 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Utah Medical Products, Inc . Opinion on the Financial Statements We have audited the consolidated balance sheets of Femcare Group Limited (the Company), including its subsidiaries, as of December 31, 2021 and 2020, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2021, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. The accounting policy in respect of revenue is that revenue is recognised to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured. Revenue is measured as the fair value of the consideration received or receivable, excluding discounts, rebates, value added tax and other sales taxes. We identified the assessment of the revenue as a critical audit matter due to its inherent risk of understatement. The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s process for dispatching goods and raising invoices to customers. We tested a sample of orders during the year to establish that these were dispatched and invoiced. We evaluated the Company’s determination of the recoverability of any unpaid receivables at 31 December 2021. We also identified the assessment of the valuation of intangible assets as a critical audit matter. Intangible assets are valued at cost and amortised using the straight-line method over the useful economic life of the asset. Goodwill is carried at cost and tested for impairment annually. We identified the valuation of intangible assets and goodwill as a critical audit matter due to their materiality to the financial statements. We reviewed and tested the Company’s calculations in respect of amortisation and evaluated the Company’s determination of the carrying value as at 31 December 2021. NORTONS ASSURANCE LIMITED We have served as the Company’s auditor since 2011. Reading, United Kingdom March 25, 2022 38 Table of Contents UTAH MEDICAL PRODUCTS, INC. CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2021 AND 2020 (In thousands) 2021 2020 ASSETS Current assets: Cash $ 60,974 $ 51,590 Accounts & other receivables, net (note 2) 5,132 4,104 Inventories (note 2) 6,596 6,222 Prepaid expenses and other current assets 456 346 Total current assets 73,158 62,262 Property and equipment, net (notes 4 and 10) 11,067 11,326 Goodwill 14,098 14,164 Other intangible assets (note 2) 55,865 56,159 Other intangible assets - accumulated amortization ( 38,552 ) ( 32,166 ) Other intangible assets, net (note 2) 17,313 23,993 Total assets $ 115,636 $ 111,745 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 761 $ 788 Accrued expenses (note 2) 2,984 3,003 Total current liabilities 3,745 3,791 Long term lease liability 396 335 Long term income tax payable (REPAT tax) (note 7) 1,675 1,995 Deferred tax liability - intangible assets 2,105 2,151 Deferred income taxes (note 7) 577 651 Total liabilities 8,498 8,923 Commitments and contingencies (notes 6 and 12) 0 0 Stockholders' equity: Common stock, $ 0.01 par value; 50,000 shares authorized, 3,655 shares issued and outstanding in 2021 and 3,643 shares in 2020 37 36 Accumulated other comprehensive loss ( 9,054 ) ( 8,281 ) Additional paid-in capital 841 115 Retained earnings 115,314 110,952 Total stockholders' equity 107,138 102,822 Total liabilities and stockholders' equity $ 115,636 $ 111,745 S ee accompanying notes to financial statements. 39 Table of Contents UTAH MEDICAL PRODUCTS, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019 (In thousands, except per share amounts) 2021 2020 2019 Sales, net (notes 1, 3, 9 and 11) $ 49,054 $ 42,178 $ 46,904 Cost of goods sold 18,137 16,630 17,438 Gross profit 30,917 25,548 29,466 Operating expense: Sales and marketing 1,414 1,554 1,738 Research and development 526 486 483 General and administrative 10,097 9,800 9,613 Operating income 18,880 13,708 17,632 Other income (expense): Dividend and interest income 166 112 254 Royalty income (note 12) 15 20 6 Other, net - - ( 8 ) Income before provision for income taxes 19,061 13,840 17,884 Provision for income taxes (note 7) 4,273 3,042 3,157 Net income $ 14,788 $ 10,798 $ 14,727 Earnings per common share (basic) (note 1) $ 4.05 $ 2.95 $ 3.96 Earnings per common share (diluted) (note 1) $ 4.04 $ 2.94 $ 3.94 Other comprehensive income (loss): Foreign currency translation net of taxes of $ 0 in all periods $ ( 773 ) $ 1,502 $ 1,507 Total comprehensive income $ 14,015 $ 12,300 $ 16,234 S ee accompanying notes to financial statements. 40 Table of Contents UTAH MEDICAL PRODUCTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019 (In thousands) 2021 2020 2019 Cash flows from operating activities: Net income $ 14,788 $ 10,798 $ 14,727 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 636 655 700 Amortization 6,645 6,515 6,144 Provision for losses on accounts receivable 24 ( 5 ) 14 Amortization of operating lease assets 3 39 38 Loss/(Gain) on disposal of assets - 1 16 Deferred income taxes ( 92 ) ( 26 ) ( 396 ) Stock-based compensation expense 166 160 113 Tax benefit attributable to exercise of stock options 39 7 23 (Increase) decrease in: Accounts receivable ( 1,088 ) 617 ( 738 ) Other receivables ( 42 ) 45 ( 16 ) Inventories ( 485 ) 924 ( 1,686 ) Prepaid expenses and other current assets ( 81 ) 108 ( 16 ) Increase (decrease) in: Accounts payable ( 23 ) ( 308 ) 114 Accrued expenses 713 607 ( 1,651 ) Long-term repatriation tax payable - - ( 330 ) Net cash provided by operating activities 21,203 20,137 17,056 Cash flows from investing activities: Capital expenditures for: Property and equipment ( 552 ) ( 860 ) ( 540 ) Intangible assets - - ( 21,000 ) Net cash (used in) investing activities ( 552 ) ( 860 ) ( 21,540 ) Cash flows from financing activities: Proceeds from issuance of common stock - options 560 358 283 Common stock purchased and retired - ( 6,976 ) ( 398 ) Dividends paid ( 11,465 ) ( 4,116 ) ( 4,112 ) Net cash (used in) financing activities ( 10,905 ) ( 10,734 ) ( 4,227 ) Effect of exchange rate changes on cash ( 362 ) 260 386 Net increase (decrease) in cash and cash equivalents 9,384 8,803 ( 8,325 ) Cash at beginning of year 51,590 42,787 51,112 Cash at end of year $ 60,974 $ 51,590 $ 42,787 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for income taxes $ 4,617 $ 3,186 $ 5,304 Cash paid during the period for interest - - - S ee accompanying notes to financial statements. 41 Table of Contents UTAH MEDICAL PRODUCTS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019 (In thousands) Accumulated Additional Other Total Common Stock Paid-in Comprehensive Retained Stockholders' Shares Amount Capital Income Earnings Equity Balance at December 31, 2018 3,720 $ 37 $ 122 $ ( 11,290 ) $ 100,123 $ 88,992 Shares issued upon exercise of employee stock options for cash 7 - 290 - - 290 Shares received and retired upon exercise of stock options - - ( 7 ) - - ( 7 ) Stock option compensation expense - - 113 - - 113 Common stock purchased and retired ( 5 ) - ( 499 ) - 101 ( 398 ) Foreign currency translation adjustment - - - 1,507 - 1,507 Common stock dividends - - - - ( 4,132 ) ( 4,132 ) Net income - - - - 14,727 14,727 Balance at December 31, 2019 3,722 $ 37 $ 18 $ ( 9,782 ) $ 110,820 $ 101,093 Shares issued upon exercise of employee stock options for cash 8 - 358 - - 358 Stock option compensation expense - - 160 - - 160 Common stock purchased and retired ( 87 ) ( 1 ) ( 421 ) - ( 6,555 ) ( 6,976 ) Foreign currency translation adjustment - - - 1,502 - 1,502 Common stock dividends - - - - ( 4,112 ) ( 4,112 ) Net income - - - - 10,798 10,798 Balance at December 31, 2020 3,643 $ 36 $ 115 $ ( 8,280 ) $ 110,951 $ 102,822 Shares issued upon exercise of employee stock options for cash 14 - 787 - - 787 Shares received and retired upon exercise of stock options ( 2 ) - ( 227 ) - - ( 227 ) Stock option compensation expense - - 166 - - 166 Foreign currency translation adjustment - - - ( 773 ) - ( 773 ) Common stock dividends - - - - ( 10,425 ) ( 10,425 ) Net income - - - - 14,788 14,788 Balance at December 31, 2021 3,655 $ 36 $ 842 $ ( 9,053 ) $ 115,314 $ 107,138 S ee accompanying notes to financial statements. 42 Table of Contents Utah Medical Products, Inc. Notes to Consolidated Financial Statements Years Ended December 31, 2021, 2020 and 2019 Currency amounts are in thousands except per-share amounts and where noted. Note 1 – Summary of Significant Accounting Policies Organization Utah Medical Products, Inc. with headquarters in Midvale, Utah and its wholly-owned operating subsidiaries, Femcare Limited located in Romsey, Hampshire, England, Femcare Australia Pty Ltd located in Castle Hill, NSW, Australia, Utah Medical Products Canada, Inc. (dba Femcare Canada) located in Mississauga, Ontario, Canada and Utah Medical Products Ltd., which operates a manufacturing facility in Athlone, Ireland, (in the aggregate, the Company) are in the primary business of developing, manufacturing and globally distributing specialized medical devices for the healthcare industry. The Company’s broad range of products includes those used in critical care areas and the labor and delivery departments of hospitals, as well as outpatient clinics and physicians’ offices. Products are sold directly to end-user facilities in the U.S., Ireland, UK, Canada, France and Australia, and through third party distributors in other outside the U.S. (OUS) markets. Domestically, until February 1, 2019, Femcare had an exclusive U.S. distribution relationship with CooperSurgical, Inc. (CSI) for the Filshie Clip System. UTMD also sells subcontract manufactured components and finished products to over 150 companies in the U.S. for their medical and non-medical products. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although actual results could differ from those estimates, management believes it has considered and disclosed all relevant information in making its estimates that materially affect reported performance and current values. Principles of Consolidation The consolidated financial statements include those of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Cash and Cash Equivalents For purposes of the consolidated statement of cash flows, the Company considers cash on deposit and short-term investments with original maturities of three months or less to be cash and cash equivalents. Concentration of Credit Risk The primary concentration of credit risk consists of trade receivables. In the normal course of business, the Company provides credit terms to its customers. Accordingly, the Company performs ongoing credit evaluations of its customers and maintains allowances for possible losses which, when realized, have been within the range of management's expectations as reflected by its reserves. The Company's customer base consists of hospitals, medical device distributors, physician practices and others directly related to healthcare providers, as well as other manufacturing companies. Although the Company is affected by the well-being of the global healthcare industry, management does not believe significant trade receivable credit risk exists at December 31, 2021 except under an extreme global financial crisis. 43 Table of Contents The Company maintains its cash in bank deposit accounts in addition to Fidelity Investment money market accounts. The Company has not experienced any losses in such accounts and believes it is not exposed to a significant credit risk on cash and cash equivalent balances. Accounts Receivable Accounts receivable are amounts due on product sales and are unsecured. Accounts receivable are carried at their estimated collectible amounts. Credit is generally extended on a short-term basis; thus, accounts receivable do not bear interest although a late charge may be applied to such receivables that are past the due date. Accounts receivable are periodically evaluated for collectability based on past credit history of customers and current market conditions. Provisions for losses on accounts receivable are determined on the basis of loss experience, known and inherent risk in the account balance and current economic conditions (see note 2). Inventories Finished products, work-in-process, raw materials and supplies inventories are stated at the lower of cost and net realizable value (NRV) computed on a first-in, first-out method. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation (see note 2). Property and Equipment Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over estimated useful lives as follows: Building and improvements 15 - 40 years Furniture, equipment and tooling 3 - 10 years Long-Lived Assets The Company evaluates its long-lived assets in accordance with Accounting Standards Codification (ASC) 360, “Accounting for the Impairment of Long-Lived Assets.” Long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets and is recorded in the period in which the determination was made. Intangible Assets Costs associated with the acquisition of patents, trademarks, trade names, customer relationships, regulatory approvals & product certifications, license rights and non-compete agreements are capitalized, and are being amortized using the straight-line method over periods ranging from 5 to 20 years. UTMD’s goodwill is tested for impairment annually, in the fourth quarter of each year, in accordance with ASC 350. UTMD also performs impairment tests contemporaneously, if circumstances change that would more than likely reduce the fair value of goodwill below its net book value. If UTMD determines that its goodwill is impaired, a second step is completed to measure the amount of the impairment loss. UTMD does not expect its goodwill to become impaired in the foreseeable future. Estimated future amortization expenses on intangible assets held as of December 31, 2021, using the 2021 year-end 1.3536 USD/GBP and 0.7268 USD/AUD currency exchange rates, is about $ 6,542 in 2022, $ 5,805 in 2023, $ 2,121 in 2024, $ 2,121 in 2025, and $ 463 in 2026 (see note 2). In 2019, $ 21,000 in intangible assets were acquired from CSI. The future amortization expenses on those assets are estimated to be $ 4,421 per year in 2022, and $ 3,684 in 2023 (see note 15). 44 Table of Contents Stock-Based Compensation At December 31, 2021, the Company has stock-based employee compensation plans, which are described more fully in note 8. The Company accounts for stock compensation under ASC 718, Share-Based Payment . This statement requires the Company to recognize compensation cost based on the grant date fair value of options granted to employees and directors. In 2021, the Company recognized $ 166 in stock-based compensation cost compared to $ 160 in 2020 and $ 113 in 2019. Revenue Recognition The Company recognizes revenue at the time of product shipment as UTMD meets its contractual performance obligations to the customer at the time of shipment. Revenue recognized by UTMD is based upon the consideration to which UTMD is entitled from its customers as a result of shipping a physical product, in accordance with the documented arrangements and fixed contracts in which the selling price was fixed prior to the Company’s acceptance of an order. Revenue from service sales, which are immaterial to UTMD, is generally recognized when the service is completed and invoiced. As demonstrated by decades of experience in successful and consistent collections, there is very minor and insignificant uncertainty regarding the collectability of invoiced amounts reasonably within the terms of the Company’s contracts. There are circumstances under which insignificant revenue may be recognized when product is not shipped, which meet the criteria of ASC 606: the Company provides engineering services, for example, design and production of manufacturing tooling that may be used in subsequent UTMD manufacturing of custom components for other companies. This revenue is recognized when UTMD’s performance obligations have been completed according to a fixed contractual agreement. UTMD includes handling fees charged to customers in revenues. Income Taxes The Company accounts for income taxes under ASC 740, “Accounting for Income Taxes,” whereby deferred taxes are computed under the asset and liability method. The Company accounts for deferred taxes under ASC 740, “Accounting for Income Taxes,” which requires that all deferred income taxes are classified as noncurrent in a classified statement of financial position. The TCJA contains a deemed repatriation transition tax (REPAT tax) on accumulated earnings and profits of the Company’s non-U.S. subsidiaries that have not been subject to U.S. tax. The Company has elected to pay its net REPAT tax over eight years. The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, in Utah, in the United Kingdom, in Australia, in Ireland and in Canada. The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and any related penalties in income taxes. The Company did not recognize any tax-related interest expense or have any tax penalties in 2019 or 2021. In 2020 the Company paid tax penalties of $ 4 . Legal Costs The Company has been involved in lawsuits which are an expected consequence of its operations and in the ordinary course of business. The Company maintains a reserve for legal costs which are probable and estimated based on previous experience and known risk. The reserve for legal costs at December 31, 2021 and 2020 was $ 96 and $ 113 , respectively (see note 2). Earnings per Share The computation of basic earnings per common share is based on the weighted average number of shares outstanding during each year. The computation of earnings per common share assuming dilution is based on the weighted average number of shares outstanding during the year plus the weighted average common stock equivalents which would arise from the exercise of stock options outstanding using the treasury stock method and the average market price per share during the year. The shares (in thousands) used in the computation of the Company’s basic and diluted earnings per share are reconciled as follows: 2021 2020 2019 Weighted average number of shares outstanding – basic 3,647 3,658 3,721 Dilutive effect of stock options 13 14 18 Weighted average number of shares outstanding, assuming dilution 3,660 3,672 3,739 Presentation of Sales and Similar Taxes Sales tax on revenue-producing transactions is recorded as a liability when the sale occurs. UTMD is not required to withhold sales tax on OUS sales, and at least 90% of domestic 2021 sales were to customers who are tax exempt or who are in jurisdictions where UTMD is not required to withhold sales tax. Translation of Foreign Currencies Assets and liabilities of the Company’s foreign subsidiaries are translated into U.S. dollars at the applicable exchange rates at year-end. Net gains or losses resulting from the translation of the Company’s assets and liabilities are reflected as a separate component of stockholders’ equity. A negative translation impact on stockholders’ equity reflects a current relative U.S. Dollar value higher than at the point in time that assets were actually acquired in a foreign currency. A positive translation impact would result from a U.S. dollar weaker in value than at the point in time foreign assets were acquired. Year-end translation gains or losses of non-functional currency bank account balances, e.g. EUR and AUD balances held by the UK subsidiary, are recognized as non-operating income or expense, as applicable. Income and expense items are translated at the weighted average rate of exchange (based on when transactions actually occurred) during the year. 45 Table of Contents Note 2 – Detail of Certain Balance Sheet Accounts December 31, 2021 2020 Accounts and other receivables: Accounts receivable $ 5,287 $ 4,224 Accrued interest and other 39 14 Less allowance for doubtful accounts ( 156 ) ( 134 ) Total accounts and other receivables $ 5,170 $ 4,104 Inventories: . Finished products $ 1,468 $ 1,363 Work-in-process 1,398 1,375 Raw materials 3,730 3,484 Total inventories $ 6,596 $ 6,222 Goodwill: Balance as of January 1 $ 14,164 $ 13,961 Effect of foreign exchange ( 66 ) 203 Subtractions as a result of impairment - - Total Goodwill as of December 31 $ 14,098 $ 14,164 Other identifiable intangible assets: Patents $ 2,212 $ 2,201 Non-compete agreements 135 137 Trademarks & trade names 9,930 10,021 Customer relationships 9,678 9,769 Distribution agreements 21,000 21,000 Regulatory approvals & product certifications 12,910 13,031 Total Other Identifiable Intangible Assets 55,865 56,159 Accumulated amortization ( 38,552 ) ( 32,166 ) Other Identifiable Intangible Assets, Net $ 17,313 $ 23,993 Accrued expenses: Income taxes payable $ 36 $ 3 Payroll and payroll taxes 1,225 946 Reserve for litigation costs 96 113 Other 1,627 1,941 Total accrued expenses $ 2,984 $ 3,003 Note 3 – Quarterly Results of Operations (Unaudited) Unaudited Quarterly Data for 2021 First Quarter Second Quarter Third Quarter Fourth Quarter Net Sales $ 10,964 $ 12,604 $ 12,572 $ 12,914 Gross Profit 6,947 7,785 8,073 8,112 Net Income 3,024 3,426 4,206 4,131 Earnings Per Common Share (Diluted) 0.83 0.94 1.15 1.13 Unaudited Quarterly Data for 2020 First Quarter Second Quarter Third Quarter Fourth Quarter Net Sales $ 10,902 $ 8,787 $ 10,479 $ 12,010 Gross Profit 6,836 4,950 6,497 7,265 Net Income 3,140 1,313 2,933 3,412 Earnings Per Common Share (Diluted) 0.84 0.36 0.80 0.94 Unaudited Quarterly Data for 2019 First Quarter Second Quarter Third Quarter Fourth Quarter Net Sales $ 10,732 $ 11,846 $ 12,494 $ 11,831 Gross Profit 6,773 7,500 7,379 7,814 Net Income 3,139 3,525 3,705 4,359 Earnings Per Common Share (Diluted) 0.84 0.94 0.99 1.17 Note 4 – Property and Equipment Property and equipment consists of the following: December 31, 2021 2020 Land $ 1,690 $ 1,725 Buildings and improvements 14,172 14,531 Furniture, equipment and tooling 16,660 16,750 Right-of-Use Asset 449 377 Construction-in-progress 898 527 Total 33,869 33,910 Accumulated depreciation ( 22,802 ) ( 22,584 ) Property and equipment, net $ 11,067 $ 11,326 Included in the Company’s consolidated balance sheet are the assets of its manufacturing and administrative facilities in Utah, Canada, England, Australia and Ireland. Property and equipment, by geographic area, are as follows: December 31, 2021 U.S. & Canada England & Australia Ireland Total Land $ 621 $ 678 $ 391 $ 1,690 Buildings and improvements 6,541 3,384 4,247 14,172 Furniture, equipment and tooling 14,608 752 1,300 16,660 Right-of-Use Asset 411 - 38 449 Construction-in-progress 412 2 484 898 Total 22,593 4,816 6,460 33,869 Accumulated depreciation ( 18,168 ) ( 1,164 ) ( 3,470 ) ( 22,802 ) Property and equipment, net $ 4,425 $ 3,652 $ 2,990 $ 11,067 December 31, 2020 U.S. & Canada England & Australia Ireland Total Land $ 621 $ 684 $ 420 $ 1,725 Buildings and improvements 6,523 3,443 4,565 14,531 Furniture, equipment and tooling 14,632 761 1,357 16,750 Right-of-Use Asset 361 - 16 377 Construction-in-progress 36 - 491 527 Total 22,173 4,888 6,849 33,910 Accumulated depreciation ( 17,934 ) ( 974 ) ( 3,676 ) ( 22,584 ) Property and equipment, net $ 4,239 $ 3,914 $ 3,173 $ 11,326 46 Table of Contents Note 5 – Long-term Debt None in 2020 and 2021. Note 6 – Commitments and Contingencies Purchase Obligations The Company has obligations to purchase raw materials for use in its manufacturing operations. The Company has the right to make changes in, among other things, purchase quantities, delivery schedules and order acceptance. Product Liability The Company is self-insured for product liability risk. “Product liability” is an insurance industry term for the cost of legal defense and possible damages awarded as a result of use of a company’s product during a procedure which results in an injury of a patient. The Company maintains a reserve for product liability litigation and damages consistent with its previous long-term experience. Actual product liability litigation costs and damages during the last three reporting years have been immaterial, which is consistent with the Company’s overall history. The Company absorbs the costs of clinical training and trouble-shooting in its on-going operating expenses. Warranty Reserve The Company’s published warranty is: “UTMD warrants its products to conform in all material respects to all published product specifications in effect on the date of shipment, and to be free from defects in material and workmanship for a period of thirty (30) days for supplies, or twenty-four (24) months for equipment, from date of shipment. During the warranty period UTMD shall, at its option, replace any products shown to UTMD's reasonable satisfaction to be defective at no expense to the Purchaser or refund the purchase price.” UTMD maintains a warranty reserve to provide for estimated costs which are likely to occur. The amount of this reserve is adjusted, as required, to reflect its actual experience. Based on its analysis of historical warranty claims and its estimate that existing warranty obligations are immaterial, no warranty reserve was made at December 31, 2021 or December 31, 2020. Litigation The Company has been involved in lawsuits which are an expected consequence of its operations and in the ordinary course of business. Presently, there is no litigation or threatened litigation for which the Company believes the outcome may be material to its financial results. The Company applies its accounting policy to accrue legal costs that can be reasonably estimated. 47 Table of Contents Note 7 – Income Taxes Deferred tax assets (liabilities) consist of the following temporary differences: December 31, 2021 2020 2019 Inventory write-downs and differences due to UNICAP $ 88 $ 86 $ 84 Allowance for doubtful accounts 31 32 33 Accrued liabilities and reserves 58 68 55 Depreciation and amortization ( 2,925 ) ( 3,034 ) ( 2,933 ) Deferred income taxes, net $ ( 2,748 ) $ ( 2,848 ) $ ( 2,761 ) The components of income tax expense are as follows: Years ended December 31, 2021 2020 2019 Current $ 3,983 $ 3,253 $ 3,467 Deferred 290 ( 211 ) ( 310 ) Total $ 4,273 $ 3,042 $ 3,157 Income tax expense differed from amounts computed by applying the statutory federal rate to pretax income as follows: Years ended December 31, 2021 2020 2019 Federal income tax expense at the statutory rate $ 2,520 $ 1,915 $ 2,512 State income taxes 448 369 ( 124 ) Foreign income taxes (blended rate) 1,010 550 985 ETI, manufacturing deduction and tax credits ( 6 ) ( 7 ) ( 9 ) Deemed repatriation transition tax - 263 ( 266 ) US Taxes on foreign income ( 99 ) ( 35 ) 59 Change in Rate 391 - - Other 9 ( 13 ) - Total $ 4,273 $ 3,042 $ 3,157 The domestic and foreign components of income before income tax expense were as follows: Years ended December 31, 2021 2020 2019 Domestic $ 12,004 $ 9,031 $ 11,549 Foreign 7,057 4,809 6,335 Total $ 19,061 $ 13,840 $ 17,884 48 Table of Contents Note 8 – Options The Company has stock option plans which authorize the grant of stock options to eligible employees, directors and other individuals to purchase up to an aggregate of 461 thousand shares of common stock, of which 52 thousand are outstanding as of December 31, 2020. All options granted under the plans are granted at current market value at the date of grant, and may be exercised between six months and ten years following the date of grant. The plans are intended to advance the interest of the Company by attracting and ensuring retention of competent directors, employees and executive personnel, and to provide incentives to those individuals to devote their utmost efforts to the advancement of stockholder value. Changes in stock options were as follows: Shares (000’s) Price Range Per Share 2021 Granted - $ - - - Expired or canceled 3 74.64 - 77.05 Exercised 14 26.52 - 77.05 Total outstanding at December 31 52 33.30 - 77.05 Total exercisable at December 31 34 33.30 - 77.05 Shares (000’s) Price Range Per Share 2020 Granted 26 $ 77.05 - 77.05 Expired or canceled 1 58.50 - 77.05 Exercised 8 26.52 - 74.64 Total outstanding at December 31 69 26.52 - 77.05 Total exercisable at December 31 33 26.52 - 74.64 Shares (000’s) Price Range Per Share 2019 Granted - $ - - - Expired or canceled 2 58.50 - 74.64 Exercised 7 24.00 - 58.50 Total outstanding at December 31 52 26.52 - 74.64 Total exercisable at December 31 33 26.52 - 74.64 For the years ended December 31, 2021, 2020 and 2019, the Company reduced current income taxes payable by $ 39 , $ 7 and $ 23 , respectively, for the income tax benefit attributable to sale by optionees of common stock received upon the exercise of stock options. Stock-Based Compensation In 2021, the Company recognized $ 166 in equity compensation cost, compared to $ 160 in 2020 and $ 113 in 2019. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: Years ended December 31, 2021 2020 2019 Expected dividend amount per quarter $ - $ 0.2943 $ - Expected stock price volatility - 27.5 % - Risk-free interest rate - 0.56 % - Expected life of options - 5.3 years - The per share weighted average fair value of options granted during 2020 is $ 16.17 . No options were granted in 2021 or 2019. 49 Table of Contents All UTMD options vest over a four-year service period. At December 31, 2021 there was $ 286 total unrecognized compensation expense related to non-vested stock options under the plans. A $ 172 portion of the cost is expected to be recognized over the next twelve months , and the remaining $ 114 recognized over the next 2 years. Expected dividend amounts were estimated based on the actual cash dividend rate at the time the options were granted and an estimate of future dividends based on past dividend rate changes as well as management’s expectations of future dividend rates over the expected holding period of the options. Expected volatility is based on UTMD’s historical volatility over recent periods of time and trends in that volatility, giving weight to more recent periods. Risk free interest rates were estimated based on actual U.S. Treasury Securities Interest rates as reported by the Federal Reserve Bank for periods of time equivalent to the holding periods estimated for the options on the dates the options were granted. Expected term of options were estimated based on historical holding periods for similar options previously granted by UTMD to employees and directors. The following table summarizes information about stock options outstanding at December 31, 2021: Options Outstanding Options Exercisable Range of Exercise Prices Number Outstanding Weighted Average Remaining Contractual Life (Years) Weighted Average Exercise Price Number Exercisable Weighted Average Exercise Price $ 33.30 - 58.50 15,024 3.44 $ 52.37 15,024 $ 52.37 74.64 - 77.05 36,834 7.74 76.12 19,263 75.82 $ 33.30 - 77.05 51,858 6.49 $ 69.24 34,287 $ 65.55 2021 2020 2019 Intrinsic Value of Stock Options Exercised $ 591 $ 371 $ 354 Intrinsic Value of Stock Options Outstanding $ 1,595 $ 1,178 $ 2,553 Note 9 – Geographic Information The Company had sales in the following geographic areas based on the customer’s country of domicile: 2021 2020 2019 United States $ 30,659 $ 25,866 $ 27,493 Europe 7,434 6,399 8,906 Other 10,961 9,913 10,505 Note 10 – Long-lived Assets by Geographic Area The Company’s long-lived assets by geographic area were as follows: 2021 2020 2019 United States $ 19,104 $ 23,327 $ 27,605 England 19,339 21,871 23,548 Ireland 2,990 3,173 2,639 Australia 392 440 423 Canada 653 672 686 50 Table of Contents Note 11 – Revenues by Product Category and Geographic Region Global revenues by product category: 2021 2020 2019 Obstetrics $ 4,675 $ 4,523 $ 5,000 Gynecology/ Electrosurgery/ Urology 21,973 20,552 25,354 Neonatal 6,691 5,870 6,066 Blood Pressure Monitoring and Accessories 15,715 11,233 10,484 Total: $ 49,054 $ 42,178 $ 46,904 Included in the Global revenues (above) were OUS revenues by product category: 2021 2020 2019 Obstetrics $ 735 $ 846 $ 947 Gynecology/ Electrosurgery/ Urology 11,053 9,934 13,731 Neonatal 1,347 1,490 1,412 Blood Pressure Monitoring and Accessories 5,260 4,042 3,321 Total: $ 18,395 $ 16,312 $ 19,411 Note 12 - Product Sale and Purchase Commitments The Company has had license agreements for the rights to develop and market certain products or technologies owned by unrelated parties. The confidential terms of such agreements are unique and varied, depending on many factors relating to the value and stage of development of the technology licensed. Royalties on future product sales are a normal component of such agreements and are included in the Company’s cost of goods sold on an ongoing basis. In 2021, 2020 and 2019, UTMD received royalties of $ 15 , $ 20 and $ 6 , respectively, for the use of intellectual property. UTMD had $ 4,891 in operating lease and purchase commitments as of December 31, 2021. Note 13 – Employee Benefit Plans The Company sponsors a contributory 401(k) savings plan for U.S. employees, and contributory retirement plans for Ireland, UK, Australia and Canada employees. The Company’s matching contribution is determined annually by the board of directors. Company contributions were approximately $ 165 , $ 167 and $ 171 for the years ended December 31, 2021, 2020 and 2019, respectively. 51 Table of Contents Note 14 – Leases UTMD has operating leases for a portion of its parking lot at its Midvale facility and an automobile at its Ireland facility. The remaining lease term on the parking lot is 10 years and on the automobile it is 30 months. There are no options to extend or terminate the leases. The parking lot lease contains a provision that requires an adjustment every five years to the lease payment based on the change in the Consumer Price Index. This adjustment occurred in 2021 requiring an increase of $ 87 to the value of the right-of-use asset and lease liabilities. UTMD has no other leases yet to commence. As neither lease contains implicit rates, UTMD’s incremental borrowing rate, based on information available at adoption date, was used to determine the present value of the leases. Operating lease costs for the years ended December 31, 2021, 2020, and 2019 were $ 63 , $ 61 , and $ 60 , respectively. Supplemental balance sheet information related to operating leases was as follows ( in thousands ): As of December 31, 2021 Operating lease right-of-use assets $ 449 Operating lease liabilities – current (included in Accrued Expenses) 52 Operating lease liabilities – long term 396 Total operating lease liabilities $ 449 Maturities of operating lease liabilities at December 31, 2021 were as follows ( in thousands ): As of December 31, 2021 2022 $ 66 2023 66 2024 57 2025 49 2026 49 Thereafter 227 Total lease payments $ 514 Less: imputed interest ( 65 ) Total lease liabilities $ 449 The following table provides information on the lease terms and discount rates: As of December 31, 2021 Weighted average remaining lease term (in years) 9.1 years Weighted average discount rate 3.6 % Note 15 – Distribution Agreement Purchase UTMD completed the purchase of exclusive U.S. distribution rights for the Filshie Clip System from CooperSurgical, Inc. (CSI) on February 1, 2019, after which CSI will no longer sell the FILSHIE Clip System and UTMD will distribute the FILSHIE Clip System directly to clinical facilities in the U.S. The $ 21,000 purchase price represents an identifiable intangible asset which will be straight-line amortized and recognized as part of G&A expenses over the 4.75 year remaining life of the prior CSI distribution agreement with Femcare. As part of the agreement, UTMD also purchased the remaining CSI inventory for approximately $2,100. 52 Table of Contents Note 16 – Earnings Per Share Basic earnings per share is calculated by dividing net income attributable to the common stockholders of the company by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by assuming the exercise of stock options at the closing price of stock at the end of 2021. The following table reconciles the numerator and the denominator used to calculate basic and diluted earnings per share: 2021 2020 2019 Numerator (in thousands) Net income 14,788 10,798 14,727 Denominator Weighted average shares, basic 3,647 3,658 3,721 Dilutive effect of stock options 13 14 18 Diluted shares 3,660 3,672 3,739 Earnings per share, basic 4.05 2.95 3.96 Earnings per share, diluted 4.04 2.94 3.94 Note 17 – Recent Accounting Pronouncements The Company has determined that other recently issued accounting standards will either have no material impact on its consolidated financial position, results of operations or cash flows, or will not apply to its operations. Note 18 – Subsequent Events The Company evaluated its December 31, 2021 financial statements for subsequent events through the date the financial statements were issued. The Company is not aware of any subsequent events which would require recognition or disclosure in the financial statements. 53 Table of Contents ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.