EDGAR 10-K Filing

Company CIK: 89140
Filing Year: 2023
Filename: 89140_10-K_2023_0001410578-23-000504.json

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ITEM 1. BUSINESS
Item 1.Business
General
Servotronics, Inc. and its subsidiaries (collectively the “Registrant” or the “Company”) design, manufacture and market advanced technology products consisting primarily of control components and consumer products consisting of knives and various types of cutlery and other edged products. The Company operates through two primary segments: the Advanced Technology Group (ATG) and the Consumer Products Group (CPG).
The Company was incorporated in New York in 1959. In 1972, the Company was merged into a wholly-owned subsidiary organized under the laws of the State of Delaware, thereby changing the Company’s state of incorporation from New York to Delaware.
The Company’s shares currently trade on the New York Stock Exchange (NYSE American) under the symbol SVT.
Products
Advanced Technology Products (ATG)
The Company designs, manufactures and markets a variety of servo-control components which convert an electrical current into a mechanical force or movement and other related products. The principal servo-control components produced include torque motors, electromagnetic actuators, hydraulic valves, pneumatic valves and similar devices, all of which perform the same general function. These are sold principally to the commercial aerospace, aircraft and government related industries, as well as medical and industrial markets.
To fill most of its orders for components, the Company must either modify a standard model or design a new product in order to satisfy the customer’s particular requirements. The Company also produces unique products based on specifications provided by its customers. The Company produces under long-term contracts and other types of orders.
The Company may from time to time produce metallic seals of various cross-sectional configurations. These seals fit between two surfaces, usually metal, to produce a more secure and leak-proof joint. The Company manufactures these seals to close tolerances from standard and special alloy steels. Ductile coatings are often applied to the seals in order to increase their effectiveness.
The Company has also produced other products of its own and/or of a given design to meet customers’ requirements.
Consumer Products (CPG)
The Company designs, manufactures and sells a variety of cutlery products. These products include a wide range of kitchen knives such as steak, carving, bread, butcher and paring knives for household use and for use in restaurants, institutions and private industry, as well as other types of knives for hunting, fishing and camping. The Company sells cutlery products to the U.S. Government, related agencies and allied foreign governments. These products include machetes, bayonets and other types of knives that are primarily for military use. The Company also produces and markets other cutlery items such as carving forks and various specialty tools such as putty knives, linoleum sheet cutters and field knives. The Company manufactures its cutlery products from stainless or high carbon steel in numerous styles, designs, models and sizes. Substantially all of the Company’s commercial cutlery related products are intended for the medium to premium priced markets.
Sales, Marketing and Distribution
Advanced Technology Products
The Company’s ATG products are marketed throughout the United States and in select foreign markets. Products are primarily non-seasonal in nature. These products are sold to commercial aviation manufacturers, government prime contractors, government subcontractors, and end-users. Sales are made primarily by the Company’s professional staff.
The Company’s prime contracts and subcontracts with United States Government subcontractors and commercial manufacturers are subject to termination at the convenience of the customer. In the event of such termination, the Company is ordinarily entitled to receive payment for its costs and profits on work done prior to termination. Since the inception of the Company’s business, less than 1% of its contracts have been terminated for convenience. The Company’s sales of advanced technology products are composed primarily of a small group of customers. The Company has a significant concentration of business with two major customers: Customer A and Customer B. Sales to Customer A accounted for 30.1% of consolidated sales in 2022 and 33.5% of consolidated sales in 2021. Sales to Customer B accounted for 18.9% of consolidated sales in 2022 and 19.1% of consolidated sales in 2021. In 2022 and 2021 we had a concentration of sales to Customer A and Customer B representing approximately 49.0% and 52.6% of our consolidated sales, respectively.
The ATG revenue increased approximately $3,500,000 or 11.0% in 2022 as compared to 2021. Customer A revenue decreased approximately $393,000 or (2.9)% in 2022 as compared to 2021. Customer B revenue increased approximately $503,000 or 6.5% in 2022 as compared to 2021.
The loss of either of these customers would have a significant impact on our revenue and earnings. See Note 1, Business Description and Summary of Significant Accounting Policies - Concentration of Credit Risks, of the accompanying consolidated financial statements for information related to sales concentrations.
Consumer Products
The Company’s consumer products are marketed throughout the United States and in select foreign markets. Consumer sales are seasonal. Sales are direct to consumer, through national and international distributors, and through retailers such as big box, hardware, supermarket, variety, department, discount, gift, drug, outdoors and sporting stores. The Company’s Consumer Products Group (CPG) also sells its knives and tools (principally machetes, bayonets, survival knives and kitchen knives) to various branches of the United States Government. Additionally, the Company provides OEM and white label product design and manufacturing services to a regional customer base across a wide range of consumer and commercial industries. No single customer of the CPG represented more than 10% of the Company’s consolidated revenues in 2022 or 2021. The Company sells its products and manufacturing services through its own sales resources, independent manufacturers’ representatives and electronic commerce.
Business Segments
Business segment information is presented in Note 10, Business Segments, of the accompanying consolidated financial statements.
Intellectual Properties
The Company has rights under certain copyrights, trademarks, patents, and registered domain names. In the view of management, the Company’s competitive position is not dependent on patent protection.
Research Activities
Research and development costs are expensed as incurred.
Environmental Compliance
The cost of compliance with current environmental laws has not been material and the Company does not anticipate that it will be in the future. The Company does not believe that existing or pending climate change legislation, regulation, or international treaties or accords are reasonably likely to have a material effect in the foreseeable future on the Company’s business, nor on its results of operations, capital expenditures or financial position.
Manufacturing
The Company manufactures its ATG products in Elma, New York and Franklinville, New York and its CPG products in Franklinville, New York.
Raw Materials and Other Supplies
The Company purchases raw materials and certain components for its products from outside vendors. The Company is generally not dependent upon a single source of supply for any raw material or component used in its operations. We believe the loss of any one supplier, although potentially disruptive in the short-term, would not materially affect our operations in the long-term. As a result of the COVID-19 pandemic and resulting economic and supply chain disruptions, the Company continues to face upward pricing pressure on certain parts and raw materials.
Competition
Although no reliable industry statistics are available to enable the Company to determine accurately its relative competitive position with respect to any of its products, the Company believes that it is a significant factor with respect to certain of its servo-control components within its competitive market. The Company’s share of the overall cutlery market is not significant.
The Company has many different competitors with respect to servo-control components because of the nature of that business and the fact that these products also face competition from other types of control components which, at times, can accomplish the desired result. Many of these competitors are substantially larger and have greater resources than the Company.
The Company encounters active competition with respect to its consumer products from numerous companies, many of which are larger in terms of manufacturing capacity, financial resources and marketing organization. Its principal competitors vary depending upon the customer and/or the products involved. The Company believes that it competes primarily with more than 20 companies with respect to its consumer products, in addition to foreign imports. To the Company’s knowledge, its principal competitors with regard to cutlery include Corelle Brands Holdings, Inc., Benchmade Knife Company, Inc., Tramontina, Inc., Dexter-Russell Inc., W. R. Case & Sons Cutlery Company, Lifetime Brands, Inc., Cutco Corporation and Gerber. The Company also competes with other regional manufacturing companies for its molded plastic and metal and plastic fabrication services. To the Company’s knowledge, its principal competitors with regard to manufacturing services include PM Plastics, Monarch Plastics and Ontario Plastics.
The Company markets most of its products throughout the United States and to a lesser extent in select foreign markets. The Company believes that it competes in marketing its servo-control products primarily on the basis of operating performance, adherence to rigid specifications, quality, price and delivery and its consumer products primarily on the basis of price, quality and delivery.
Employees
In order to continue supporting our customers, Servotronics remains committed to attracting and retaining top talent. We strive to make Servotronics a diverse, inclusive and safe workplace for all.
The Company, at December 31, 2022, had 309 employees of which 303 are full time and 6 part time employees at two locations in New York. Approximately 88% of its employees and contractors are engaged in production, engineering, inspection, packaging or shipping activities. The balance is engaged in executive, administrative, clerical or sales capacities. None are subject to a collective bargaining agreement.
Available Information
We file annual, quarterly and current reports, proxy statements and other information with the U.S. Securities and Exchange Commission (the SEC). The SEC maintains a website at www.sec.gov on which you may access our SEC filings. In addition, we make available free of charge at www.servotronics.com/investor-relations copies of materials we file with, or furnish to, the SEC as soon as reasonably practical after we electronically file or furnish these reports, as well as other important information that we disclose from time to time. Information contained on our website, or that can be accessed through our website, does not constitute a part of this Annual Report on Form 10-K. We have included our website address only as an inactive textual reference and do not intend it to be an active link to our website.
Our corporate headquarters are located at 1110 Maple Street, Elma, New York 14059 and the telephone number of this location is (716) 655-5990.

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ITEM 1A. RISK FACTORS
Item 1A.Risk Factors
The Company is a smaller reporting company by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B.Unresolved Staff Comments
Not applicable.

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ITEM 2. PROPERTIES
Item 2.Properties
The Company owns real property as set forth in the following table with no related encumbrances:
Number of
Principal
buildings and
Approx.
product
type of
floor area
Location
Description
manufactured
construction
(sq. feet)
Elma, New York
Corporate Headquarters and Manufacturing Facility
Advanced technology products
1-concrete block/ steel
83,000
Franklinville, New York
Office and Manufacturing Facility
Advanced technology products Cutlery products
1-tile/wood 1-concrete/metal
137,000
The Company believes that the properties are suitable and adequate to meet the Company’s current and foreseeable production needs. The properties are appropriately covered by insurance consistent with the advice of the Company’s insurance consultant.

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ITEM 3. LEGAL PROCEEDINGS
Item 3.Legal Proceedings
See Note 8, Litigation, for information regarding legal actions. There are no other legal proceedings currently pending by or against the Company other than ordinary routine litigation incidental to the business which is not expected to have a material adverse effect on the business or earnings of the Company.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4.Mine Safety Disclosures
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
(a)
Market Information:
The Company’s common stock is listed on the NYSE American Stock exchange and trades under the symbol SVT.
(b)
Approximate Number of Holders of Common Stock
Title of class
Approximate number of
record holders (as of
February 23, 2023)
Common Stock, $.20 par value per share
(c)
Dividends on Common Stock
The Company has not paid any cash dividends in the two-year period ended December 31, 2022. The Company has no plans to pay cash dividends as it plans to retain all cash from operations as a source of capital to finance working capital and growth in the business.
(d)
Company Purchases of Company’s Equity Securities
The Company’s Board of Directors authorized the purchase of up to 450,000 shares of its common stock in the open market or in privately negotiated transactions. As of December 31, 2022, the Company has purchased 360,615 shares and there remain 89,385 shares available to purchase under this program. There were no shares purchased by the Company in 2022.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6.[Reserved]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements and the notes related thereto. As noted under the heading “Forward-Looking and Cautionary Statements” of this Annual Report on Form 10-K, this discussion and analysis contains forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many known and unknown risks and uncertainties described elsewhere is this report.
All comparisons included within this Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, refer to results for the year ended December 31, 2022 compared to the year ended December 31, 2021, unless stated otherwise. Additionally, the information provided is expected to better allow investors to view the registrant from management’s perspective including using quarterly data supporting management’s discussion.
Business Overview
The aviation and aerospace industries as well as markets for the Company’s consumer products continually face evolving challenges on a global basis. The operations of the Company can be affected by the trends of the economy, including interest rates, income tax laws, government regulation, legislation, and other factors. In addition, uncertainties in today’s global economy, competition from expanding manufacturing capabilities and technical sophistication of low-cost developing countries and emerging markets, currency policies in relation to the U.S. dollar of some major foreign exporting countries, the effect of terrorism, difficulty in predicting defense and other government appropriations, the vitality of the commercial aviation industry and its ability to purchase new aircraft, the willingness and ability of the Company’s customers to fund long-term purchase programs, volatile market demand and the continued market acceptance of the Company’s advanced technology and cutlery products make it difficult to predict the impact on future financial results.
Both the ATG and CPG markets are sensitive to domestic and foreign economic conditions and policies, which may create volatility in operating results from period to period. For example, the airline industry is sensitive to fuel price increases and economic conditions. These factors directly impact the demand for aircraft production as well as the amount of repair and overhaul required on in-service aircraft.
The Company’s suppliers are also subject to all the pressures and volatility being generated by the current global economic conditions. Any interruption of the Company’s continuous flow of material and product parts that are required for the manufacture of the Company’s products could adversely impact the Company’s ability to meet the Company’s customers’ delivery requirements. Consistent with the evolving requirements of the aerospace industry, companies are increasingly being requested to operate under long-term agreements with their customers on the basis of fixed prices, targeted year to year price reductions and/or year to year price adjustments predicated on mutually agreed indices and/or a combination of some or all of the above described pricing arrangements and/or otherwise. Therefore, productivity improvements and cost containment strategies are continuously sought within the Company’s concept of continuous improvement. The Company’s products are labor intensive and as such productivity improvements are expected to have positive effects on the Company’s operating results. However, increased costs for raw material, purchased parts and/or labor will have the reverse effect.
If any adverse economic events reduce the number of airliners and/or aircraft being produced by the Company’s relevant prime contractors, the negative effects of that reduction will in turn flow down through the supply chain. Also, certain major manufacturers have successfully imposed extended payment terms to their suppliers. At times, these extended payment terms are not available to the Company when purchasing raw material such as aluminum, magnetic material, steel and/or other product support items and services. If the Company’s customers delay their payments until after the extended due date or fail to pay, it could adversely impact the Company’s operating results and cash flow. During 2022, inflation negatively impacted our input costs, primarily for labor and materials. Supply chain disruptions, labor shortages, and global inflation remain persistant.
Maximizing the Company’s operations and resources requires continued dedicated performances from the Company’s key and other personnel. In the Company’s markets and business arenas there is substantial competition for the services of the highest performing individuals. Any unplanned replacement of such personnel may require the hiring of new personnel on an expedited basis (provided they are available) and may temporarily interrupt the Company’s operations and efforts for continuous improvement.
On March 30, 2023, the Company announced that the Company’s Board of Directors has authorized the review of the strategic alternatives for the CPG with a goal of enhancing shareholder value. This review was authorized by the Board on February 28, 2023 and the company has engaged a financial advisor to evaluate potential alternatives. There is no set timetable for the strategic review process and there can be no assurance that such review will result in any transaction or other alternative.
Management Discussion
There was an increase in consolidated revenue in the twelve months ended December 31, 2022 from 2021 of approximately $3,263,000 or 8.0%. This is primarily due to an increase in the number of units shipped at the ATG of approximately $3,007,000 and to price increases at the ATG of approximately $1,699,000 and the CPG of approximately $300,000. This is partially offset by an unfavorable product mix shipped at the ATG of approximately $1,198,000 and at the CPG of approximately $427,000 and a decrease in the number of units shipped at the CPG of approximately $118,000. During the twelve months ended December 31, 2022 and 2021, approximately 80% and 78%, respectively, of the Company's consolidated revenues were derived from the ATG sale of product to a small base of customers. During the twelve months ended December 31, 2022 and 2021, approximately 20% and 22%, respectively, of the Company's consolidated revenues were derived from the CPG sale of product to a large base of retail customers.
Our commercial business is affected by such factors as uncertainties in today’s global economy, global competition, the vitality and ability of the commercial aviation industry to purchase new aircraft, the effects and threats of terrorism, and increasing market demand could impact our ability to produce and deliver product on time.
The ATG engages its business development efforts in its primary markets and is broadening its activities to include new domestic and foreign markets that are consistent with its core competencies. We believe our business remains particularly well positioned in the strong commercial aircraft market driven by the recovery of business with increased demand post COVID, the replacement of older aircraft with more fuel-efficient alternatives and the increasing demand for air travel in emerging markets. Although the ATG backlog continues to be strong, actual scheduled shipments may be delayed or changed as a function of our customers’ final delivery determinations.
See also Note 10, Business Segments, of the accompanying condensed consolidated financial statements for information concerning business segment operating results.
Results of Operations
The following table compares the Company’s consolidated statements of income data for the years ended December 31, 2022 and 2021 ($000’s omitted).
($000 omitted except for per share data)
Year Ended December 31,
2022 vs 2021
Dollar
% Favorable/
Dollars
% of Sales
Dollars
% of Sales
Change
(Unfavorable)
Revenue:
Advanced Technology
$
35,185
80.3
%
$
31,677
78.1
%
$
3,508
11.1
%
Consumer Products
8,636
19.7
%
8,881
21.9
%
(245)
(2.8)
%
43,821
100.0
%
40,558
100.0
%
3,263
8.0
%
Cost of goods sold, inclusive of dep. and amortization
(37,877)
86.4
%
(34,570)
85.2
%
(3,307)
(9.6)
%
Gross profit
5,944
13.6
%
5,988
14.8
%
(44)
(0.7)
%
Gross margin %
13.6
%
-
14.8
%
-
-
-
Operating expenses:
Selling, general and administrative
(8,427)
19.2
%
(9,423)
23.2
%
10.6
%
Legal settlement awards
-
-
(1,890)
4.7
%
1,890
-
Total selling, general and administrative
(8,427)
19.2
%
(11,313)
27.9
%
2,886
25.5
%
Total operating costs and expenses
(46,304)
105.7
%
(45,883)
113.1
%
(421)
(0.9)
%
Operating (loss)/income
(2,483)
(5.7)
%
(5,325)
(13.1)
%
2,842
53.4
%
Other (expense)/income:
Other income: employee retention credit (ERC)
-
-
5,622
13.9
%
(5,622)
-
Other income: Paycheck Protection Program loan forgiveness
-
-
4,000
9.9
%
(4,000)
-
Interest expense
(240)
(0.5)
%
(187)
(0.5)
%
(53)
(28.3)
%
Gain/(loss) on sale of equipment
0.1
%
(98)
(0.2)
%
137.8
%
Total other (expense)/income
(204)
(0.4)
%
9,337
23.3
%
(9,540)
(102.2)
%
(Loss)/income before income taxes
(2,687)
(6.1)
%
4,012
9.9
%
(6,698)
(167.0)
%
Income tax benefit
(1.3)
%
(0.1)
%
1,225.6
%
Net (loss)/ income
$
(2,117)
(4.8)
%
$
4,055
10.0
%
$
(6,171)
(152.2)
%
Revenue and Gross Profit
Servotronics, Inc.
Servotronics, Inc.
2022 Three months ended
2021 Three months ended
($000's omitted)
March 31,
June 30,
September 30,
December 31,
Total Year
March 31,
June 30,
September 30,
December 31,
Total Year
Revenues
$
11,168
$
11,230
$
10,991
$
10,432
$
43,821
$
9,060
$
10,028
$
10,915
$
10,555
$
40,558
Cost of goods sold
(8,530)
(10,062)
9,468
(9,817)
(37,877)
(8,067)
(8,156)
(9,143)
(9,204)
(34,570)
Gross profit
2,638
1,168
1,523
5,944
1,872
1,772
1,351
5,988
Gross margin %
23.6
%
10.4
%
13.9
%
5.9
%
13.6
%
11.0
%
18.7
%
16.2
%
12.8
%
14.8
%
ATG
ATG
2022 Three months ended
2021 Three months ended
March 31,
June 30,
September 30,
December 31,
Total Year
March 31,
June 30,
September 30,
December 31,
Total Year
Revenues
$
9,168
$
8,748
$
8,823
$
8,446
$
35,185
$
7,223
$
7,823
$
8,449
$
8,182
$
31,677
Cost of goods sold
(6,815)
(8,055)
(7,973)
(8,212)
(31,055)
(6,210)
(6,242)
(6,762)
(6,715)
25,929
Gross profit
2,353
4,130
1,013
1,581
1,687
1,467
5,748
Gross margin %
25.7
%
7.9
%
9.6
%
2.8
%
11.7
%
14.0
%
20.2
%
20.0
%
17.9
%
18.1
%
CPG
CPG
2022 Three months ended
2021 Three months ended
March 31,
June 30,
September 30,
December 31,
Total Year
March 31,
June 30,
September 30,
December 31,
Total Year
Revenues
$
2,000
$
2,482
$
2,168
$
1,986
$
8,636
$
1,837
$
2,205
$
2,466
$
2,373
$
8,881
Cost of goods sold
(1,715)
(2,007)
(1,495)
(1,605)
(6,822)
(1,857)
(1,914)
(2,381)
(2,489)
(8,641)
Gross profit (loss)
1,814
(20)
(116)
Gross margin %
14.3
%
19.1
%
31.0
%
19.2
%
21.0
%
(1.1)
%
13.2
%
3.4
%
(4.9)
%
2.7
%
Revenue
Consolidated revenues from operations decreased approximately $123,000 or (1.2)% for the three month period ended December 31, 2022 when compared to the same period in 2021. This benefited from price increases at the ATG of approximately $569,000. Although the ATG is experiencing an increase in volume due to the recovery of business within the commercial aircraft market it is partially offset by an unfavorable product mix of product shipped of approximately $305,000. Additionally, the CPG had an increase in prices of approximately $126,000 offset by by an unfavorable product mix of product shipped and a decrease in the number of units shipped amounting to approximately $513,000 as compared to the same three month period ended December 31, 2021.
Consolidated revenues from operations increased approximately $3,263,000 or 8.0% for the twelve month period ended December 31, 2022 when compared to the same period in 2021. Although the ATG is experiencing an increase in volume due to the recovery of business within the commercial aircraft market of approximately $3,007,000 it is partially offset by an unfavorable product mix of product shipped of approximately $1,198,000. The twelve month period benefited from price increases at the ATG of approximately $1,699,000. Additionally, the CPG had an increase in prices of approximately $300,000 offset by an unfavorable product mix of product shipped and a decrease in the number of units shipped amounting to approximately $545,000 as compared to the same twelve month period ended December 31, 2021.
Gross Profit
Consolidated gross profit from operations decreased approximately $736,000 for the three month period ended December 31, 2022 when compared to the same period in 2021. The gross profit decreased at the ATG by approximately $1,233,000 offset by an increase at the CPG of approximately $497,000.
Gross profit benefited in the three months period from the recovery of business within the commercial aircraft market with increased volume and price increases offset by an unfavorable product mix shipped at the ATG of a net decrease of approximately $270,000 and increased operating costs of approximately $963,000. The increase in operating costs is primarily due to increased compensation and benefits of approximately $906,000 and expendable tools and equipment of approximately $124,000, and a net increase of approximately $9,000 for all other operating expenses, offset by lower warranty expenses of approximately $76,000 as compared to the same period in 2021. The ATG has added staff during this period in anticipation of increasing production in 2023 to satisfy the increasing customer demand.
Additionally, gross profit increased in the three month period at the CPG due to an improvement in operating variances of approximately $255,000, and a decrease in operating costs of approximately $242,000. The decrease in operating costs is primarily due to an improvement in the utilization of production resources of approximately $235,000, a decrease in freight of approximately $54,000, offset by an increase in utilities of approximately $24,000 and a net increase of approximately $23,000 for all other expenses as compared to the same period in 2021.
Consolidated gross profit from operations decreased slightly by approximately $44,000 or (0.7)% for the twelve month period ended December 31, 2022 when compared to the same period in 2021. The gross profit decreased at the ATG by approximately $1,618,000 and increased at the CPG by approximately $1,574,000.
Gross profit benefited in the twelve months period from the recovery of business within the commercial aircraft market and price increases at the ATG of approximately $1,229,000. However, this was more than offset by an unfavorable product mix shipped and an increase in operating costs of approximately $2,847,000. This is primarily due to increased compensation and benefits of approximately $2,234,000, recruiting costs for the ramp-up of production of approximately $188,000, expendable tools and equipment of approximately $178,000, building and production equipment maintenance of approximately $125,000, travel and lodging of approximately $106,000 and a net increase of approximately $16,000 for all other operating expenses as compared to the same period in 2021. As previously noted, we have added staff during this period in the preparation for increased production in 2023 to satisfy customer demand. At the CPG, gross profit increased in the twelve month period due to price increases of approximately $300,000, a decrease in operating variances of approximately $348,000 and a decrease in operating costs of approximately $926,000. The decrease in operating costs is primarily due to an improvement in the utilization of production resources of approximately $417,000, a decrease in net freight costs of approximately $400,000, a decrease in compensation and benefits of approximately $58,000, a decrease in repair and maintenance expenses of approximately $48,000 and a net decrease of approximately $3,000 for all other operating expenses as compared to the same period in 2021.
Since mid-2020, both Segments have experienced the challenge of fully utilizing their production resources, increasing the cost per unit produced. In 2022, CPG experienced favorable production costs in the twelve months ended December 31, 2022. Additionally, both Segments have incurred increased costs for raw materials associated with the production of our products. The ATG has incurred the costs of ramping up staffing to support increased production planned for 2023. Despite the challenges, the consolidated gross profit has decreased only slightly from the same period in 2021.
Selling, General and Administrative Expenses and Operating Income (Loss)
Servotronics, Inc.
Servotronics, Inc.
($000's omitted)
2022 Three months ended
2021 Three months ended
March 31,
June 30,
September 30,
December 31,
Total Year
March 31,
June 30,
September 30,
December 31,
Total Year
SG&A:
Legal settlement
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
(1,890)
$
-
$
(1,890)
Selling, general & admin
(2,182)
(2,071)
(1,943)
(2,231)
(8,427)
(1,973)
(2,209)
(2,721)
(2,520)
(9,423)
Total SG&A
$
(2,182)
$
(2,071)
$
(1,943)
$
(2,231)
$
(8,427)
$
(1,973)
$
(2,209)
$
(4,611)
$
(2,520)
$
(11,313)
% SG&A to Revenues
19.5
%
18.4
%
17.7
%
21.4
%
19.2
%
21.8
%
22.0
%
42.2
%
23.9
%
27.9
%
Operating Income/(Loss)
$
$
(903)
$
(420)
$
(1,616)
$
(2,483)
$
(980)
$
(337)
$
(2,839)
$
(1,169)
$
(5,325)
Operating Inc/(Loss) %
4.1
%
(8.0)
%
(3.8)
%
(15.5)
%
(5.7)
%
(10.8)
%
(3.4)
%
(26.0)
%
(11.1)
%
(13.1)
%
ATG
ATG
($000's omitted)
2022 Three months ended
2021 Three months ended
March 31,
June 30,
September 30,
December 31,
Total Year
March 31,
June 30,
September 30,
December 31,
Total Year
SG&A:
Legal settlement
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
(1,800)
$
-
$
(1,800)
Selling, general & admin
(1,774)
(1,575)
(1,541)
(1,702)
(6,592)
(1,585)
(1,761)
(2,240)
(2,075)
(7,661)
Total SG&A
$
(1,774)
$
(1,575)
$
(1,541)
$
(1,702)
$
(6,592)
$
(1,585)
$
(1,761)
$
(4,040)
$
(2,075)
$
(9,461)
% SG&A to Revenues
19.3
%
18.0
%
17.5
%
20.2
%
18.7
%
21.9
%
22.5
%
47.8
%
25.4
%
29.9
%
Operating Income/(Loss)
$
$
(882)
$
(691)
$
(1,468)
$
(2,462)
$
(572)
$
(180)
$
(2,353)
$
(608)
$
(3,713)
Operating Inc/(Loss)%
6.3
%
(10.7)
%
(7.8)
%
(17.4)
%
(7.0)
%
(7.9)
%
(2.3)
%
(27.8)
%
(7.4)
%
(11.7)
%
CPG
CPG
($000's omitted)
2022 Three months ended
2021 Three months ended
March 31,
June 30,
September 30,
December 31,
Total Year
March 31,
June 30,
September 30,
December 31,
Total Year
SG&A:
Legal settlement
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
(90)
$
-
$
(90)
Selling, general & admin
(408)
(496)
(402)
(529)
(1,835)
(388)
(448)
(481)
(445)
(1,762)
Total SG&A
$
(408)
$
(496)
$
(402)
$
(529)
$
(1,835)
$
(388)
$
(448)
$
(571)
$
(445)
$
(1,852)
% SG&A to Revenues
20.4
%
20.0
%
18.5
%
26.6
%
21.2
%
21.1
%
20.3
%
23.2
%
18.8
%
20.9
%
Operating (Loss)/Income
$
(123)
$
(21)
$
$
(148)
$
(21)
$
(408)
$
(157)
$
(486)
$
(561)
$
(1,612)
Operating (Loss)/Inc %
(6.2)
%
(0.8)
%
12.5
%
(7.5)
%
(0.2)
%
(22.2)
%
(7.1)
%
(19.7)
%
(23.6)
%
(18.2)
%
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) decreased approximately $289,000 or 11.5% for the three month period ended December 31, 2022 when compared to the same period in 2021. Consolidated SG&A improved to 21.4% of revenue for the 2022 quarter compared with 23.9% in the 2021 quarter. SG&A expenses at the ATG decreased approximately $373,000 or 18.0%. The improvement at the ATG is driven by the lower legal fees of approximately $577,000 offset by increased compensation and benefits of approximately $160,000 due to additional headcount, and increased recruiting costs of approximately $44,000. However, SG&A expenses at the CPG increased approximately $84,000 or 18.9%. The increase is due to an increase in compensation and benefits of approximately $38,000 and outbound freight of approximately $50,000, offset by a net decrease of all other SG&A expenses of $4,000 as compared to the same period in 2021.
Selling, general and administrative (SG&A) decreased approximately $2,886,000 or 25.5% for the twelve month period ended December 31, 2022 when compared to the same period in 2021. Consolidated SG&A improved to 19.2% of revenue for 2022 compared with 27.9% in 2021. The improvement is due to a non-recurring legal settlements of approximately $1,890,000 in 2021, as previously disclosed; lower legal fees of approximately $1,255,000 offset by an increase in insurance expenses of approximately $88,000, Directors’ fees of approximately $54,000, recruiting fees of approximately $40,000 and sales tax expense of approximately $36,000. Additionally, there was a net increase of all other SG&A expenses of approximately $41,000 as compared to the same period in 2021.
In 2022, the ATG experienced a decrease in SG&A as a percentage of revenues. Management expects the ATG SG&A percentage to revenue to continue to drop in conjunction with the increase of revenue volume. The CPG SG&A percentage to revenue is not expected to improve significantly.
Operating Losses
Losses from operations increased approximately $447,000 or 38.2% when compared to the same three month period in 2021. Operating losses improved at the CPG by approximately $413,000 as compared to the three month period ended December 31, 2021. However, operating losses for the three months ended December 31, 2022 at the ATG increased by approximately $860,000 as compared to the same time period in 2021, for the reasons previously explanined including investments in staffing to support planned production increases in 2023.
Losses from operations decreased approximately $2,842,000 or (53.4%) when compared to the same twelve month period in 2021. Operating losses improved significantly at both the ATG and CPG by approximately $1,251,000 and $1,591,000, respectively, as compared to the twelve month period ended December 31, 2021.
The consolidated decrease in operating losses is primarily the result in the increases in revenue and decreases in SG&A expenditures, as discussed above.
Other Income/(Expense):
Servotronics, Inc.
Servotronics, Inc.
($000's omitted)
2022 Three months ended
2021 Three months ended
March 31,
June 30,
September 30,
December 31,
Total Year
March 31,
June 30,
September 30,
December 31,
Total Year
Other Income/(Expense):
ERC
$
-
$
-
$
-
$
-
$
-
$
1,730
$
1,914
$
1,978
$
-
$
5,622
PPP loan forgiveness
-
-
-
-
-
-
-
4,000
-
4,000
Interest expense
(70)
(74)
(50)
(46)
(240)
(61)
(66)
(5)
(55)
(187)
Gain/(Loss) sale of equipment
-
-
-
-
-
(98)
(98)
Total other (expense)/income, net
$
(44)
$
(74)
$
(50)
$
(36)
$
(204)
$
1,669
$
1,848
$
5,973
$
(153)
$
9,337
Income/(loss) before income tax provision (benefits)
$
$
(977)
$
(470)
$
(1,652)
$
(2,687)
$
$
1,511
$
3,134
$
(1,322)
$
4,012
EBIT%
3.7
%
(8.7)
%
(4.3)
%
(15.8)
%
(6.1)
%
7.6
%
15.1
%
28.7
%
(12.5)
%
9.9
%
ATG
ATG
($000's omitted)
2022 Three months ended
2021 Three months ended
March 31,
June 30,
September 30,
December 31,
Total Year
March 31,
June 30,
September 30,
December 31,
Total Year
Other Income/(Expense):
ERC
$
-
$
-
$
-
$
-
$
-
$
1,413
$
1,573
$
1,598
$
-
$
4,584
PPP loan forgiveness
-
-
-
-
-
-
-
4,000
-
4,000
Interest expense
(70)
(74)
(50)
(45)
(239)
(60)
(65)
(5)
(55)
(185)
Gain/(Loss) sale of equip
-
-
-
-
-
(98)
(98)
Total other (expense)/income, net
$
(44)
$
(74)
$
(50)
$
(35)
$
(203)
$
1,353
$
1,508
$
5,593
$
(153)
$
8,301
Income/(loss) before income tax provision (benefits)
$
$
(956)
$
(741)
$
(1,503)
$
(2,665)
$
$
1,328
$
3,240
$
(761)
$
4,588
EBIT%
5.8
%
(10.9)
%
(8.4)
%
(17.8)
%
(7.6)
%
10.8
%
17.0
%
38.3
%
(9.3)
%
14.5
%
CPG
CPG
($000's omitted)
2022 Three months ended
2021 Three months ended
March 31,
June 30,
September 30,
December 31,
Total Year
March 31,
June 30,
September 30,
December 31,
Total Year
Other Income/(Expense):
ERC
$
-
$
-
$
-
$
-
$
-
$
$
$
$
-
$
1,038
PPP loan forgiveness
-
-
-
-
-
-
-
-
-
-
Interest expense
-
-
-
(1)
(1)
(1)
(1)
-
-
(2)
Gain/(Loss) sale of equip
-
-
-
-
-
-
-
-
-
-
Total other (expense)/income, net
$
-
$
-
$
-
$
(1)
$
(1)
$
$
$
$
-
$
1,036
Income/(loss) before income tax provision (benefits)
$
(123)
$
(21)
$
$
(149)
$
(22)
$
(92)
$
$
(106)
$
(561)
$
(576)
EBIT%
(6.2)
%
(0.8)
%
12.5
%
(7.5)
%
(0.3)
%
(5.0)
%
8.3
%
(4.3)
%
(23.6)
%
(6.5)
%
ERC and PPP loan forgiveness
As discussed in our 2021 Annual Report on Form 10-K, the Company qualified for the Employee Retenetion Credit (ERC) for all quarters allowed under the federal government program. The Infrastructure Investment and Jobs Act of 2021, enacted November 15, 2021 terminated the employee retention credit for wages paid in the fourth quarter of 2021 for employers that are not recovery startup businesses. As a result, for the three month period ended December 31, 2021 and December 31, 2022, there was no recognition of an ERC. For the twelve month period ended December 31, 2022 there was no recognition of an ERC as compared to approximately $5,622,000 recognized in the twelve month period ended December 31, 2021.
Additionally, as discussed in our 2021 Annual Report on Form 10-K, the Company executed a promissory note under the Paycheck Protection Program (the “PPP” loan) in the amount of $4,000,000. During the third quarter of 2021, the entire loan in the amount of $4,000,000 and accrued interest of $57,000 was forgiven by the Small Business Association (SBA) and a gain of $4,057,000 was recorded in “Other (expense)/income” in the Company’s consolidated statement of operations.
Interest Expense
Interest expense decreased approximately $9,000 or (16.4%) primarily due to the reimbursement of the line of credit and equipment financing lease obligations at the ATG for the three month period ended December 31, 2022 compared to the same period in 2021. For the twelve month period ended December 31, 2022 interest expense increased approximately $53,000 or 28.3% primarily due to the increase in interest recognized for postretirement benefits offset by the elimination of the interest resulting from the pay down of our term loans as of December 31, 2021. See also Note 4, Long-Term Debt, of the accompanying consolidated financial statements for information on long-term debt.
(Loss)/Income before Income Taxes
Consolidated loss before income taxes for the three month period ended December 31, 2022 decreased approximately $330,000 (25.0%) when compare to the same period in 2021. The consolidated decrease is primarily the result of an increase in ATG revenue, improved operating performance at the CPG and lower SG&A expenses at the ATG offset by a decrease in CPG revenue, a decrease in operating performance at the ATG, investments in ATG production staffing to support 2023 volume demand and an increase in SG&A expenses at the CPG as discussed above.
The consolidated loss before income taxes for the twelve month period ended December 31, 2022 increased approximately $6,699,000 or 167.0% when compared to the same period ended in 2021. The consolidated loss increased primarily due to the elimination of the ERC credit and the one-time event of the PPP loan forgiveness offset by an increase in revenue at the ATG segment, an improvement in operating performance at the CPG, decreases in SG&A expenses at both segments and decreases for 2021 legal awards as discussed above.
Income Taxes
The Company’s effective tax rate for operations was 21.2% in 2022 and (1.1)% in 2021. The effective tax rate reflects federal and state income taxes, permanent non-deductible expenditures, 2021 non-taxable PPP loan foregiveness income, the 2021 deduction for foreign-derived intangible income (FDII) , and the federal tax credit for research and development expenditures. The increase in the effective tax rate between 2022 and 2021 is primarily a result of the non-taxable PPP loan forgiveness income recognized in 2021. See also Note 6, Income Taxes, of the accompanying consolidated financial statements for information concerning income taxes.
Liquidity and Capital Resources:
Twelve months ended December 31,
($000's omitted)
CASH FLOW DATA:
Net Cash Flows from:
Operating Activities
$
$
4,591
Investing Activities
$
(1,281)
$
Financing Activities
$
(4,525)
$
(983)
YEAR-END FINANCIAL POSITION:
Working Capital
$
27,045
$
34,067
Indebtedness
$
$
5,026
CAPITAL EXPENDITURES (1):
$
(1,281)
$
(1) NET OF PROCEEDS FROM SALE OF EQUIPMENT AND EQUIPMENT FINANCING
Operating Activities:
The Company generated approximately $264,000 in cash from operations during the twelve month period ended December 31, 2022 as compared to generating approximately $4,591,000 for the same period in 2021. At December 31, 2022, the Company had working capital of approximately $27,045,000 ($34,067,000 - December 2021) of which approximately $4,004,000 ($9,546,000 - December 2021) was comprised of cash.
The decrease in cash flow from operating activities of approximately $4,327,000 is primarily attributable to a decrease in net income of approximately $6,172,000 as explained previously. In addition, there was a decrease in cash flow due to an increase in accounts receivable, accrued employee compensation costs, and other accrued liabilities of approximately $4,020,000 and lower generation of cash through changes in inventory of approximately $1,680,000 offset by an increase in cash flow from the adjustments to reconcile net income of approximately $2,790,000, an increase accounts payable of approximately $3,398,000 and all other operating accounts of approximately $1,357,000.
Our cash flow from operations and available line of credit capacity provides us with the financial resources needed to run our operations and reinvest in our business. Our ability to maintain sufficient liquidity is highly dependent upon achieving expected operating results. Failure to achieve expected operating results could have a material adverse effect on the Company’s liquidity, our ability to obtain financing, and our operations in the future.
Investing Activities:
The Company used approximately $1,281,000 in cash from investing activities during the twelve month period ended December 31, 2022 as compared to generating cash of approximately $3,000 during the same period in 2021. The investing activities were primarily related to ATG projects and facilities improvements.
Financing Activities:
The Company’s primary usage of cash in its financing activities in the twelve-month period ended December 31, 2022 includes the repayment of our line of credit of approximately $4,250,000 and the principal payment on equipment financing obligations of approximately $275,000.
On January 11, 2022, the Company executed an amendment, which extended the line of credit (“LOC”) availability period from December 31, 2022 to December 31, 2023. The amended agreement suspended the Debt Service Coverage Ratio loan covenant up through and including the third quarter of 2022. A Quarterly Minimum Cash Flow measurement loan covenant replaced the Debt Service Coverage Ratio loan covenant. Minimum Cash Flow means net income, plus depreciation, depletion, and amortization expense, plus interest expense, plus non-cash expense related to the Servotronics, Inc. Employee Stock Ownership Plan, plus non-cash stock and stock option transactions. Also, the amended agreement required the Company to maintain a minimum liquidity, defined as cash on hand plus LOC availability, of at least $9,000,000.
As disclosed in the filing of our 2022 third quarter 10-Q, at that time we anticipated that we would fail to meet the Debt Service Coverage Ratio loan covenant up through and including the fourth quarter of 2022. As of December 31, 2022, we were not in compliance with this covenant under our loan agreement and, as a result, the availability of the LOC was temporarily frozen.
On March 30, 2023, we executed an amendment to the loan agreement (the “Amendment”), which provides a waiver of Debt Service Coverage Ratio defaults and other potential defaults at December 31, 2022 and through December 31, 2023, the expiration date of the agreement.
The Amendment also provides the following stipulations. The LOC loan was immediately converted to a borrowing base line of credit utilizing eligible accounts receivable (the “Borrowing Base”), with a maximum availability of the lesser of $5,000,000 or the Borrowing Base, which amounted to $6,400,000 as of the amendment date. As of June 29, 2023, the maximum availability under the Borrowing Base LOC will be reduced to the lesser of $3,900,000 or the Borrowing Base; and then as of August 1, 2023, it will be further reduced to the lesser of $1,000,000 or the Borrowing Base. The amended Borrowing Base LOC loan is secured by all equipment, receivables, inventory and real property of the Company and its wholly owned subsidiary, The Ontario Knife Company, with the exception of certain equipment that was purchased from proceeds of government grants. Interest on the Borrowing Base LOC is the Bloomberg Short-Term Bank Yield (“BSBY”) plus 4.00 percentage points, amounting to 8.88% as of March 30, 2023.
Pursuant to the Amendment, we paid in full the outstanding balance on our equipment loans, approximately $501,000 as of December 31, 2022. Additionally, we advanced $500,000 on the Borrowing Base LOC loan for a pledged deposit account with our lender to be used solely to pay interest.
We intend to refinance the LOC loan with a different lender by June 29, 2023. Failure to deliver a commitment letter to our current lender by June 1, 2023 and to refinance the LOC loan by June 29, 2023 will result in the imposition of additional fees to our current lender of up to $300,000.
Ongoing Liquidity Considerations
We incurred consolidated operating losses from continuing operations for the years ended December 31, 2022 and 2021. The losses incurred were predominantly driven by our decision to maintain our experienced and knowledgeable workforce during the pandemic years and hire ahead of the expected increased customer demand at the ATG. During 2021, our operating losses were funded by PPP loans and Employee Retention Credits provided by the U.S. government, which were not available in 2022. Our operating losses decreased year over year by 53%, demonstrating positive momentum. We had total shareholders’ equity of approximately $35,112,000 as of December 31, 2022. Also, as of that date, we had working capital excluding cash of approximately $23,041,000 and only $501,000 of bank financing.
The ATG has experienced growing customer demand since the middle of 2022, causing an increase in inventory purchases and the resulting usage of cash. This was further exacerbated by the hiring and training of staff to support increasing production in 2023. The temporary freezing of availability on our LOC raised initial doubt about our ability to continue as a going concern until we amended our loan agreement on March 30, 2023, alleviating that doubt. We believe that our operating cash flow and availability of our amended Borrowing Base LOC provides us with sufficient liquidity in the near term. Additionally, we are actively pursuing an alternate credit facility with a different lender to replace the Borrowing Base LOC loan from our current lender by June 29, 2023. We believe that the strength of our asset base and increasing customer demand make our ability to successfully refinance our LOC probable, providing us with sufficient liquidity for at least the next 12 months.
Off Balance Sheet Arrangements
Not applicable.
Critical Accounting Policies
The Company prepares its consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP). As such, the Company is required to make certain estimates, judgments and assumptions that the Company believes are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results could differ significantly from those estimates under different assumptions and conditions.
We have identified our critical accounting estimates. An accounting estimate is considered critical where (a) the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and (b) the impact of the estimate on financial condition or operating performance is material.
Inventories
Inventories are measured at lower of cost or net realizable value. Inventory costing requires complex calculations that include standard labor and material costs, assumptions for overhead absorption, scrap, and the determination of which costs may be capitalized. Analysis of actual labor cost to standard cost is performed and adjusted, if required, quarterly. Material costs are assessed and adjusted on an on-going basis. Daily cycle counts of raw material and finished goods are performed to ensure accuracy and legitimacy of its inventory balances. Quarterly, full physical counts are performed for WIP balances. The valuation of inventory requires us to review inventory each quarter for excess and slow-moving items and establish a reserve. As of December 31, 2022, we have $19,044 of inventory recorded on our consolidated balance sheet, representing approximately 42% of total assets.
Impairment
The Company tests for impairment of long-lived assets annually or whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable based on undiscounted future operating cash flow analyses. These calculations require the use of estimates, in particular in relation to the expected growth of sales, the expected hourly rate for labor, the expected productivity of the production labor and achievable gross margin rates.
Deferred Tax Valuation Allowance
The Company makes estimates and judgments in determining the provision for taxes for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, benefits, and deductions, and in the calculation of certain tax assets and liabilities that arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. We must assess the likelihood that we will be able to recover our deferred tax assets. Recovery of a deferred tax asset is based on the ability of the business to generate income. If recovery, is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. These calculations require the use of estimates, in particular in relation to the expected growth of sales, the expected hourly rate for labor, the expected productivity of the production labor and achievable gross margin rates.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
The Company is a smaller reporting company by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8.Financial Statements and Supplementary Data
The consolidated financial statements of the Company which are included in this Form 10-K Annual Report are described in the accompanying Index to Consolidated Financial Statements on Page.

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.

---

ITEM 9A. CONTROLS AND PROCEDURES
Item 9A.Controls and Procedures
(i) Disclosure Controls and Procedures
The Company carried out an evaluation under the supervision and with the participation of its management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) as of December 31, 2022. Based on that evaluation as of December 31, 2022, the Company’s disclosure controls and procedures were not effective as a result of a material weakness in internal controls over financial reporting.
(ii) Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal controls over financial reporting (as defined in Exchange Act Rule 13a-15(f)). Under the supervision and with the participation of management, including the CEO and CFO, the Company, conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013 (COSO). The Company’s management noted the following control deficiencies that, in the aggregate, constitute a material weakness in the Company’s internal controls over financial reporting as of December 31, 2022:
Ø Management’s assessment of the documentation of controls surrounding significant estimates.
o While management does have controls around the significant estimates, the documentation of such controls should be improved to substantiate such controls.
Ø Documentation related to the completeness and accuracy of system-generated reports utilized in process level controls.
o While management does have controls around the completeness and accuracy of system-generated reports used in process level controls, the documentation of such controls needs to be improved to substantiate such controls. Management should also improve the procedures performed to substantiate relevant data points from those reports that are relied upon.
Notwithstanding the existence of the above-mentioned material weakness, the Company believes that the consolidated financial statements in this filing fairly present, in all material respects, the Company’s financial position, results of operations and cash flows as of the dates, and for the periods presented, in conformity with U.S. generally accepted accounting principles and controls over financial reporting were ineffective as of December 31, 2022.
This annual report does not include an attestation report of the Corporation’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Corporation’s independent registered public accounting firm pursuant to rules of the SEC that permit the Corporation to provide only management’s report in this Annual Report on Form 10-K.
(iii) Changes in Internal Control Over Financial Reporting
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the financial statements will not be prevented or detected in a timely basis by the Company’s internal controls. Management previously identified material weaknesses in its internal control over financial reporting in connection with the 2020 Form 10-K/A and 2021 Form 10-K filings. Remediation efforts for the identified material weaknesses began in 2021 and concluded successfully in 2022 for the following:
Failure to complete the design and implement effective internal controls related to certain information technology (IT) general controls including: establishing written IT policies, performing a formal IT risk assessment, establishing offsite backup, and monitoring logical access and change management. Remediation efforts included:
● engaged a third party to perform a comprehensive information technology (IT) general controls assessment by:
o performing a formal IT risk assessment,
o performing file restores from backup at least annually,
o annual security awareness training and frequent phishing campaigns to test the knowledge of employees, and
o monitoring logical access and change management.
Management’s assessment of entity-level controls and certain control activities are not sufficiently performed and documented to support our conclusions and as a result, we concluded that management’s oversight of internal controls was not operating effectively. Remediation efforts included:
● engaged a third party to assist with enhanced internal control testing procedures and documentation standards aligned with the COSO components and principles, including entity-level controls.
In order to fully remediate the material weakness identified above that remains in 2022, we will continue to improve on our documentation to support our conclusions for critical estimates and enhance our documentation to validate the completeness and accuracy of system reports.
Except as set forth above, there were no changes in the Company’s internal controls over financial reporting during the fourth quarter of 2022 that have materially affected, or are reasonably likely to affect, the Company’s internal controls over financial reporting.

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ITEM 9B. OTHER INFORMATION
Item 9B.Other Information
On March 30, 2023, the Company executed an amendment (the “Amendment”) to the Loan Agreement with Bank of America, N.A. dated as of December 1, 2014 (together with any previous amendments, the “Loan Agreement”), which provides a waiver of a Debt Service Coverage Ratio default and other potential defaults under the Loan Agreement at December 31, 2022.
On and after the Amendment effective date, the line of credit loan is converted to a borrowing base line of credit with an advance rate of 75% on eligible accounts receivable, which generally excludes accounts receivable 90 days past invoice due date (the “Borrowing Base”). The maximum availability under the line of credit is reduced as of March 30, 2023 to the lesser of (i) $5,000,000 or (ii) the Borrowing Base (the “Reduced Revolving Commitment”). The Reduced Revolving Commitment is further reduced as of June 29, 2023 to the lesser of $3,900,000 or the Borrowing Base; and then is further reduced as of August 1, 2023 to the lesser of $1,000,000 or the Borrowing Base.
Pursuant to the Amendment, (1) the Debt Service Coverage Ratio is suspended between January 1, 2023 and the maturity date of December 31, 2023; (2) the Company paid in full all amounts due under the equipment loans, approximately $501,000 as of December 31, 2022; (3) on and after the Amendment effective date, the LOC loan expiration date will be December 31, 2023; (4) on and after the Amendment effective date, the interest rate on the LOC loan is set at Bloomberg Short-Term Bank Yield (“BSBY”) plus 4.00 percentage points, with no fee for unused portion; (5) the Company advanced $500,000 on the LOC loan and deposited such funds in a pledged deposit account with the lender (the “Interest Reserve”) to be used solely to pay interest accruing on the LOC loan; and (6) if at any time the aggregate amount of the Company’s cash on hand exceeds $1,000,000 (the “Excess Cash”) for a period of three (3) consecutive business days, then the Company will be required to prepay the principal balance of the LOC loan in an amount equal to such Excess Cash on the next consecutive business day. In addition, certain weekly and monthly reporting is required with the Lender.
The amended Borrowing Base LOC loan is secured by all equipment, receivables, inventory and real property of the Company and its wholly owned subsidiary, The Ontario Knife Company, with the exception of certain equipment that was purchased from proceeds of government grants.
The foregoing summary of the Amendment does not purport to be complete and is qualified in its entirety by the full text of the Amendment, a copy of which will be filed with the Company’s Quarterly Report on Form 10-Q for the quarter ending March 31, 2023.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10.Directors, Executive Officers and Corporate Governance
Information regarding directors and executive officers of the Company, compliance with Section 16(a) of the Securities Exchange Act and the Company’s Audit Committee, its members and the Audit Committee financial expert, is incorporated herein by reference to the information included in the Company’s definitive proxy statement if it is filed with the Commission within 120 days after the end of the Company’s 2022 fiscal year or such information will be included by amendment to this Form 10-K.
Code of Ethics
The Company has adopted a Code of Ethics and Business Conduct (the Code) that applies to all directors, officers and employees of the Company as required by the listing standards of the NYSE American. The Code is available on the Company’s website at www.servotronics.com and the Company intends to disclose on this website any amendment to the Code. Waivers under the Code, if any, will be disclosed under the rules of the SEC and the NYSE American.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11.Executive Compensation
Information regarding executive compensation is incorporated herein by reference to the information included in the Company’s definitive proxy statement if it is filed with the Commission within 120 days after the end of the Company’s 2022 fiscal year or such information will be included by amendment to this Form 10-K.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth the securities authorized for issuance under the Company’s equity compensation plans as of December 31, 2022:
Number of
Number of
securities
securities to be
remaining
issued upon
Weighted-average
available for
exercise of
exercise price of
future issuance
outstanding
outstanding
under
options,
options
equity
warrants and
warrants and
compensation
Plan category
rights
rights
plans
Equity compensation plans approved by security holders
-
-
174,109
Equity compensation plans not approved by security holders
-
-
-
Total
-
-
174,109
Information regarding security ownership of certain beneficial owners and management is incorporated herein by reference to the information included in the Company’s definitive proxy statement if it is filed with the Commission within 120 days after the end of the Company’s 2022 fiscal year or such information will be included by amendment to this Form 10-K.
Also incorporated by reference is the information in the table under the heading “Company Purchases of Company’s Equity Securities” included in Item 5 of this Form 10-K. See also Note 7, Shareholders’ Equity, of the accompanying consolidated financial statements for more information.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13.Certain Relationships and Related Transactions and Director Independence
Information regarding certain relationships and related transactions and director independence is incorporated herein by reference to the information included in the Company’s definitive proxy statement if it is filed with the Commission within 120 days after the end of the Company’s 2022 fiscal year or such information will be included by amendment to this Form 10-K.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14.Principal Accountant Fees and Services
Information regarding principal accountant fees and services is incorporated herein by reference to the information included in the Company’s definitive proxy statement if it is filed with the Commission within 120 days after the end of the Company’s 2022 fiscal year or such information will be included by amendment to this Form 10-K.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15.Exhibits and Financial Statement Schedules
3.1
Certificate of Incorporation of the Company (Incorporated by reference to Exhibit 3(A)(1) to the Company’s Form 10-KSB for the year ended December 31, 1996)
3.2
Amendments to Certificate of Incorporation dated August 27, 1984 (Incorporated by reference to Exhibit 3(A)(2) to the Company’s Form 10-KSB for the year ended December 31, 1996)
3.3
Amendments to Certificate of Incorporation dated June 30, 1998 (Incorporated by reference to Exhibit 3(A)(4) to the Company’s Form 10-KSB for the year ended December 31, 1998)
3.4
Certificate of designation creating Series I preferred stock (Incorporated by reference to Exhibit 4(A) to the Company’s Form 10-KSB for the year ended December 31, 1987)
3.5
By-laws of the Company (Incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed with the SEC on April 27, 2022)
4.4
Description of Capital Stock (Filed herewith)
Material Contracts (*Indicates management contract or compensatory plan or arrangement)
10.1
Form of Indemnification Agreement between the Registrant and each of its Directors and Officers (Incorporated by reference to Exhibit 10.7 for the year ended December 31, 2016)
10.2
Loan agreement between the Company and its employee stock ownership trust, as amended (Incorporated by reference to Exhibit 10(C)(1) to the Company’s Form 10-KSB for the year ended December 31, 1991)
10.3
Stock purchase agreement between the Company and its employee stock ownership trust (Incorporated by reference to Exhibit 10(D)(2) to the Company’s Form 10-KSB for the year ended December 31, 1988)
10.4*
Servotronics, Inc. Executive Change in Control Severance Plan (Incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q filed with the SEC on May 16, 2022)
10.5*
Participation Agreement for Executive Change in Control Severance Plan (Incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q filed with the SEC on May 16, 2022)
10.6*
Servotronics, Inc. 2022 Equity Incentive Plan (Incorporated by reference to Appendix A to the Company’s Proxy Statement for the 2022 Annual Meeting of Shareholders)
10.7
Loan Agreement dated as of December 1, 2014 between Servotronics, Inc. and Bank of America, N.A. (Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on December 4, 2014)
10.8*
Non-Employee Director Compensation Policy (Filed herewith)
10.9
Cooperation Agreement, dated as of February 15, 2023, by and between Servotronics, Inc. and Brent D. Baird (Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on February 15, 2023)
Subsidiaries of the Registrant (Filed herewith)
23.1
Consent of Freed Maxick CPAs, P.C. (Filed herewith)
Power of Attorney of Brent D. Baird (Filed herewith)
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith)
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith)
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Furnished herewith)
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Furnished herewith)
The following materials from Servotronics, Inc.’s Annual Report on Form 10-K for the period ended December 31, 2022, formatted in XBRL (eXtensible Business Reporting Language): (i) consolidated balance sheets, (ii) consolidated statements of income, (iii) consolidated statements of comprehensive income, (iv) consolidated statements of cash flows and (v) the notes to the consolidated financial statements.