Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and ~~“smaller reporting~~“emerging growth company” in Rule 12b-2 of ~~the~~ Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Sevcon, Inc. (or the “Company”) is a Delaware corporation organized on December 22, 1987 to carry on the electronic controls business previously performed by Tech/Ops, Inc. (Tech/Ops). Through wholly-owned subsidiaries locatedThe accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ~~England, France, South Korea~~of America (U.S. GAAP) for interim financial information and ~~Japan~~with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position of Sevcon, Inc. ( the “Company”) and subsidiaries as of July 1, 2017 and the results of operations and cash flows for the three and nine-month periods ended July 1, 2017. The accompanying unaudited consolidated financial statements should be read in conjunction with the 2016 annual consolidated financial statements and related notes included in the 2016 Sevcon, Inc. Annual Report filed on Form 10-K (“2016 10-K”). The results of operations for the three and nine-month periods ended July 1, 2017 are not necessarily indicative of the results to be expected for the full year.

During the nine-month period ended July 1, 2017 the Company experienced an operating loss of $8,028,000 and a ~~50% owned joint venture located~~decrease in ~~China,~~cash of $11,809,000 from $14,127,000 at September 30, 2016 to $2,318,000 at July 1, 2017. This negative performance largely reflected difficult conditions in the Company’s traditional controls markets and ~~through an international dealer network,~~continuing investment in research and development expense associated with the delivery of the engineering phase of the Company’s new project pipeline. At July 1, 2017 the Company ~~designs and sells, under the Sevcon name, motor controllers for zero emission electric and hybrid vehicles (EVs). The controls are used to vary the speed and movement~~had net current assets of ~~vehicles, to integrate specialized functions and to optimize the energy consumption~~$18,028,000 including cash of $2,318,000. Against this background, management has conducted a review of the ~~vehicle's power source. Through a wholly-owned subsidiary in Italy acquired in January 2016,~~Company’s cash requirements for the next twelve months taking into account existing cash resources, forecasted cash from future operations and existing borrowing facilities. In addition, the Company ~~also designs, manufactures~~has explored its options to secure further financing. Based on this assessment of the Company’s cash requirements and ~~sells battery chargers~~the financing it believes is available, management believes that the group has sufficient funds available for ~~electric vehicles and power management and uninterrupted power source systems~~the next twelve months for ~~industrial, medical and telecom applications, as well as electronic instrumentation for battery laboratories. Sevcon's customers are manufacturers of~~its activities under execution.

Unless otherwise indicated, each reference to a “year” means the Company’s fiscal year, which ends on and off-road vehicles, including cars, trucks, buses, motorcycles, fork lift trucks, aerial lifts, mining vehicles, airport tractors, sweepers and other electrically powered vehicles. Through another subsidiary located in the United Kingdom, Sevcon, Inc. manufactures special metalized film capacitors that are used as components in the power electronics, signaling and audio equipment markets.September 30.

The accompanying unaudited consolidated financial statements include the accounts of the Company’s wholly-owned subsidiaries; Sevcon USA, Inc., Sevcon Ltd, Industrial Capacitors (Wrexham) Ltd., Sevcon Asia Limited, Sevcon Japan KK, Sevcon Security Corp., Sevcon S.A.S., Sevcon S.r.l. ~~and~~, Bassi S.r.l., Sevcon Canada Inc. and Sevcon GmbH in accordance with the provisions required by the Consolidation Topic 810 of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). All material intercompany transactions have been eliminated.

For the Company's less than ~~wholly owned joint venture~~wholly-owned subsidiary, Sevcon New Energy Technology (Hubei) Company Limited in China, the Company first analyzes whether this joint venture subsidiary is a variable interest entity (a “VIE”) in accordance with ASC 810 and if so, whether the Company is the primary beneficiary requiring consolidation. A VIE is an entity that has (i) insufficient equity to permit it to finance its activities without additional subordinated financial support or (ii) equity holders that lack the characteristics of a controlling financial interest. VIEs are consolidated by the primary beneficiary, which is the entity that has both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity that potentially could be significant to the entity. Variable interests in a VIE are contractual, ownership, or other financial interests in a VIE that change with changes in the fair value of the VIE’s net assets. The Company continuously re-assesses ~~(i) whether~~at each level of the joint venture whether the entity is (i) a VIE, and (ii) if the Company is the primary beneficiary of the VIE. If it is determined that the ~~joint venture~~entity in which the Company holds its interest qualifies as a VIE and the Company is the primary beneficiary, it is consolidated.

Based on the Company's analysis ~~for this~~of its 50% owned joint venture, the Company has determined that it is a VIE and that the Company is the primary beneficiary. While the Company owns 50% of the equity interest in ~~the joint venture,~~this subsidiary, the other 50% is owned by a local unrelated third party, and the joint venture agreement with that third party provides the Company with greater voting rights. Accordingly, the Company consolidates its joint venture under the VIE rules and reflects the third party’s 50% interest in the consolidated financial statements as a non-controlling interest. The Company records this non-controlling interest at its initial fair value, adjusting the basis prospectively for ~~the third party’s~~their share of the respective consolidated investments’ net income or loss or equity contributions and distributions. This non-controlling interest is not redeemable by the equity holders and is presented as part of permanent equity. Income and losses are allocated to the non-controlling interest holder based on its economic ownership percentage.

Effective July 13, 2017, the Company acquired the remaining 50% of Sevcon New Energy Technology (Hubei) Company Limited for a purchase price of $5,000,000. In doing so, the Company agreed to terminate its equity joint venture with Xuchang Fuhua Glass Co. Ltd (“Fuhua Glass”), a Chinese limited liability company. The ~~results of operations~~Company also agreed to reimburse Fuhua Glass for the ~~three~~taxes paid by it in relation to the equity transfer in an amount not to exceed $1,173,675, as well as certain ancillary fees. Upon the consummation of the acquisition, Sevcon New Energy Technology (Hubei) Company Limited became a “wholly foreign-owned enterprise” under Chinese law. As of July 1, 2017, the closing conditions had not been satisfied and ~~nine month periods~~as such Sevcon New Energy Technology (Hubei) Company Limited was accounted for as a joint-venture subsidiary during the period ended July ~~2, 2016 are not necessarily indicative of the results to be expected for the full year.~~1, 2017.

On July 14, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with BorgWarner Inc., a Delaware corporation (“BorgWarner”), and BorgWarner’s wholly-owned subsidiary, Slade Merger Sub Inc., a Delaware corporation (“Merger Sub”), providing for the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly-owned subsidiary of BorgWarner. Pursuant to the Merger Agreement, at the effective time of the Merger, (i) each share of common stock, par value $0.10 per share of the Company issued and outstanding immediately prior to the effective time of the Merger (each, a “Common Share”) (other than (A) any Common Shares owned by BorgWarner, Merger Sub or the Company, or by any subsidiary of BorgWarner, Merger Sub or the Company, in each case except to the extent held by any such person on behalf of a third party and (B) any shares that are owned by stockholders who have perfected and not withdrawn a demand for appraisal rights pursuant to Delaware law) will be cancelled and converted into the right to receive cash in an amount, without interest, equal to $22.00, and (ii) if the Charter Amendment (as described below) becomes effective, each share of Series A Convertible Preferred Stock, par value $0.10 per share of the Company issued and outstanding immediately prior to the effective time of the Merger (each of which is convertible into three Common Shares) (each, a “Preferred Share”) (other than (A) any Preferred Shares owned by BorgWarner, Merger Sub or the Company, or by any subsidiary of BorgWarner, Merger Sub or the Company, in each case except to the extent held by any such person on behalf of a third party and (B) any shares that are owned by stockholders who have perfected and not withdrawn a demand for appraisal rights pursuant to Delaware law), will be cancelled and converted into the right to receive cash in an amount, without interest, equal to $66.00. Immediately prior to the effective time of the Merger, the board of directors of the Company intends to declare and pay a special dividend on the Preferred Shares representing the amount of the accrued and unpaid dividends on the Preferred Shares.

Consummation of the Merger is subject to the satisfaction or waiver of specified closing conditions, including (i) the approval of the Merger by the holders of a majority of the outstanding Common Shares, (ii) the approval of an amendment to the Company’s amended and restated certificate of incorporation to provide that, at the effective time of the Merger, each holder of Preferred Shares will be entitled to receive the consideration provided for in the Merger Agreement for each Preferred Share owned by such holder (the “Charter Amendment”), by the holders of a majority of the outstanding Common Shares and a majority of the outstanding Preferred Shares, voting as separate classes, (ii) the receipt of the approval of the Austrian Federal Competition Authority, (iii) the receipt from each holder of outstanding warrants to purchase Common Shares of an agreement with the Company in a form attached to the Merger Agreement agreeing to cancel such warrants in exchange for an amount equal to the product of the per Common Share merger consideration ($22.00) and the number of shares issuable upon exercise of such warrants, less the aggregate exercise price for such warrants, (iv) no more than 10% of the Common Shares and Preferred Shares (on an as if converted to common stock basis) having exercised appraisal rights and (v) other customary closing conditions, including (a) the accuracy of each party’s representations and warranties (subject to customary materiality qualifiers), (b) each party’s compliance with its agreements and covenants contained in the Merger Agreement and (c) the absence of any law, ordinance, rule, regulation, order, judgment or decree being in effect that restrains or enjoins, or otherwise prohibits or makes illegal, the consummation of the Merger or the Charter Amendment.

The Merger Agreement includes customary representations, warranties and covenants of the Company, BorgWarner, and Merger Sub. The Company has agreed to operate its business in all material respects in the ordinary course of business consistent with past practice until the completion of the Merger. The Company has also agreed not to solicit, initiate or knowingly encourage, or knowingly induce or facilitate, proposals regarding alternative transactions and to certain restrictions on its ability to respond to any such proposals. BorgWarner and Merger Sub have agreed to use reasonable best efforts to obtain approval of the proposed transactions under any applicable Antitrust Laws (as defined in the Merger Agreement), as more fully set forth in and subject to the terms and conditions of the Merger Agreement.

The Company may terminate the Merger Agreement prior to the approval of the Merger by the common stock holders should the Company receive a “Superior Proposal”, being an unsolicited alternative acquisition proposal from a third party that the board of directors of the Company has determined is superior to the Merger. In certain circumstances, the Company has agreed to pay to BorgWarner a termination fee in connection with the termination of the Merger Agreement. The Company must pay BorgWarner the termination fee in the event that the Merger Agreement is terminated by BorgWarner following a change of recommendation by the board of directors of the Company or if the Company terminates the Merger Agreement to enter into a Superior Proposal, in each case, as is described in further detail in the Merger Agreement. Under certain additional circumstances described in the Merger Agreement, the Company must also pay BorgWarner the termination fee if the Merger Agreement is terminated and, within twelve months following such termination, (i) the Company enters into a definitive agreement for, or consummates, a transaction of the type described in the relevant provisions of the Merger Agreement, or (ii) the Company’s board of directors recommends to stockholders an alternative acquisition proposal for a transaction of the type described in the relevant provisions of the Merger Agreement and, subsequent to making such recommendation, consummates the proposal so recommended to Company stockholders. In addition, under certain circumstances described in the Merger Agreement, the Company must also pay BorgWarner the expense reimbursement amount if the Merger Agreement is terminated. The termination fee is $1,600,000 if it becomes payable in connection with a Superior Proposal on or prior to 11:59 p.m., Chicago Time, on August 31, 2017 (and in certain other limited circumstances described in the Merger Agreement), and, otherwise, the termination fee is $4,800,000. The expense reimbursement amount is $2,400,000.

The parties to the Merger Agreement are also entitled to an injunction or injunctions to prevent breaches of the Merger Agreement, and to enforce specifically the terms of the Merger Agreement.

In addition, concurrently with the execution of the Merger Agreement, Company stockholders Meson Capital LP, Meson Constructive Capital LP and Ryan J. Morris (which we refer to collectively as Meson Capital) and Bassi Holding S.r.l. entered into separate voting and support agreements with BorgWarner. Under the voting and support agreements, Meson Capital and Bassi Holding S.r.l agreed, on the terms and subject to the conditions set forth in the voting and support agreements, to vote all Company shares owned by them in favor of the adoption of the Merger Agreement and the Charter Amendment and the approval of the transactions contemplated by the Merger Agreement, including the Merger, and any other matter to be approved by the stockholders of the Company to facilitate such transactions. In addition, they agreed not to vote in favor of any alternative transactions, and to be subject to the restrictions on the solicitation or initiation of other acquisition proposals and on engaging in discussions regarding such proposals as are applicable to the Company’s representatives pursuant to the Merger Agreement, and certain restrictions on the transfer of shares of our Common Shares or Preferred Shares. Also, each of our directors (other than Ryan J. Morris, who executed a voting and support agreement in his capacity as a principal of Meson Capital) and our director emeritus entered into separate support agreements with BorgWarner, in which they agreed, on the terms and subject to the conditions set forth in the support agreements, to be subject to the restrictions on the solicitation or initiation of other acquisition proposals and on engaging in discussions regarding such proposals as are applicable to the Company’s representatives pursuant to the merger agreement, and certain restrictions on the transfer of our Common Shares or Preferred Shares. Each of the voting and support agreements and the support agreements automatically terminates upon the termination of the Merger Agreement.

The board of directors of the Company unanimously (i) approved and declared advisable the Merger Agreement and the transactions contemplated by the Merger Agreement, including the Merger, upon the terms and subject to the conditions set forth therein, and the Charter Amendment, (ii) determined that the Merger Agreement, the Charter Amendment and the transactions contemplated by the Merger Agreement, including the Merger, are fair to, and in the best interests of, the Company and its stockholders and (iii) adopted a resolution recommending that the Merger Agreement and the Charter Amendment be adopted by the stockholders of the Company in accordance with the provisions of the Delaware General Corporation Law.

There have been no changes since the end of ~~2015~~2016 to the significant accounting policies followed by Sevcon, Inc. and subsidiaries.

On January 26, 2016, the Company ~~and its wholly-owned indirect subsidiary, Sevcon S.r.l., (“Sevcon Italy”) entered into a Quota Sale and Purchase Agreement with~~acquired Bassi Holding S.r.l., (“Bassi Holding”) an Italian limited liability company, and the quota owners of Bassi Holding, to acquire all the outstanding quotas of Bassi, a limited liability company located in Lugo, Italy. Bassiwhich designs, manufactures and sells battery chargers for electric vehicles, ~~and~~ power management and uninterrupted power source systems for industrial, medical and telecom applications, as well as electronic instrumentation for battery laboratories. ~~The principal reasons for the~~This acquisition ~~were to enable~~enables the Company to expand its addressable share of the high-growth electrification market and enhance earnings by adding an immediately accretive business.

The Company accounted for this acquisition as a business combination using the acquisition method of accounting. During the ~~nine months~~three and nine-month periods ended July 1, 2017 the Company recognized no expense for acquisition-related items. During the three and nine-month periods ended July 2, 2016 the Company ~~incurred $1.4 million in costs~~recognized expense for acquisition-related items, of $8,000 and ~~expenses related~~$1,425,000 respectively.

For more information on this acquisition, refer to Note 2 to the ~~Company’s acquisition of Bassi that are included in the~~ consolidated ~~statement of operations.~~

The unaudited consolidated pro forma results for the ~~nine month~~three and nine-month periods ended July 1, 2017 and July 2, 2016 ~~and July 4, 2015~~ are ~~set out in the table~~shown below. The pro forma consolidated results combine the results of operations of the Company and Bassi as though Bassi had been acquired on October 1, ~~2014~~2015 and include amortization charges for the acquired intangibles and interest expense related to the Company’s borrowings to finance the acquisition. The ~~2016~~unaudited pro forma results for the three and nine-month periods ended July 2, 2016 were adjusted to include $279,000 and $814,000 respectively, of intangible assets amortization expense associated with the business combination and $129,000 and $382,000, respectively, of interest expense relating to the credit facility entered into in order to partially fund the Bassi acquisition, and to exclude $8,000 and $1,425,000, respectively, of acquisition-related expense. The unaudited pro forma results for the three and nine-month periods ended July 1, 2017 were adjusted to exclude ~~$1,425,000~~$1,100,000 of ~~acquisition costs to date related to Bassi and $257,000 of non-recurring expense relating to the fair value adjustments to acquisition date inventory and property and equipment.~~ transaction costs.

The unaudited pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place on October 1, ~~2014.~~2015.

Under the Company’s 1996 Equity Incentive Plan (the “Plan”) there were ~~336,990~~69,641 shares reserved and available for grant at July ~~2, 2016.~~1, 2017. There were ~~139,578 shares reserved and available for grant at September 30, 2015.~~12,165 options exercised in 2017.

The Plan, which is shareholder-approved, permits the grant of ~~Restricted Stock, Restricted Stock Units, Options~~restricted stock, restricted stock units, stock options and ~~Stock Appreciation Rights~~stock appreciation rights (“SARs”). SARs may be awarded either separately, or in relation to options granted, and for the grant of bonus shares. ~~The Company believes that such awards better align the interests of the employees with those of its shareholders.~~ Options granted are exercisable at a price not less than fair market value on the date of grant. ~~Recipients of grants of options must execute a standard form of non-competition agreement.~~

The Company estimated the fair values of its stock options using the Black-Scholes-Merton option-pricing model, which was developed for use in estimating the fair values of stock options. Option valuation models, including the Black-Scholes-Merton option-pricing model, require the input of assumptions, including stock price volatility. Changes in the input assumptions can materially affect the fair value estimates and ultimately how much the Company recognizes as stock-based compensation expense. The fair values of the Company’s stock options were estimated at the grant dates.

The weighted average input assumptions used and resulting fair values of stock options previously issued at July 1, 2017, were as ~~follows for fiscal 2016:~~follows:

The expected term represents the period of time that options are expected to be outstanding. As the Company does not have sufficient historical evidence for determining the expected term of the stock option awards granted, the expected life assumption has been determined using the simplified method, which is an average of the contractual term of the option and its ordinary vesting period.

The Company bases the risk-free interest rate assumption on zero-coupon U.S. treasury instruments appropriate for the expected term of the stock option grants.

The expected stock price volatility for the Company’s common stock is estimated based on the historic volatility of the Company’s common stock for a period equivalent to the expected term of the stock option grants.

The Company bases the expected dividend yield assumption on the fact that there is no present intention to pay cash dividends. Therefore an expected dividend yield of zero has been used.

In December 2015, the Compensation Committee awarded performance-based equity compensation to nine executives and managers, including the principal executive officer and principal financial officer, consisting of 38,460 shares in the form of stock options. The performance options have an exercise price of $9.94 per share, representing the average of the highest intraday bid and ask quotes for the Company’s common stock on the date of grant, December 16, 2015, and the preceding four trading days. The performance options will vest subject to the Company meeting an earnings per share target applicable to fiscal year 2018 set by the Compensation Committee so long as the employee is then employed by the Company. The Company estimated the fair value of its stock options using the Black-Scholes-Merton option-pricing model. The estimated fair value of the stock options on the date of the grant was $185,000 ~~based on~~and is being recognized over the ~~fair market value~~requisite service period of the award. The unrecognized compensation is being expensed over three years. The expense for these employee stock option grants was $14,844 and $43,663 for the three and nine-month periods ended July 1, 2017, respectively. The expense for these employee stock option grants was $13,505 and $29,766 for the three and nine-month periods ended July 2, 2016, respectively.

In February 2017, the Compensation Committee awarded performance-based equity compensation to five executives and managers, consisting of 2,800 shares in the form of stock options. The performance options have an exercise price of $11.86 per share, representing the average of the highest intraday bid and ask quotes for the Company’s common stock on the date of ~~issue.~~grant, February 7, 2017, and the preceding four trading days. The ~~unvested~~performance options will vest on the later of the third anniversary of the grant date or the date the Compensation Committee determines that the Company has met the earnings per share target for fiscal year 2018. The Company estimated the fair value of its stock options using the Black-Scholes-Merton option-pricing model. The estimated fair value of the stock options on the date of the grant was $7,000 and is being recognized over the requisite service period of the award. The unrecognized compensation is being ~~charged to income~~expensed over three years. The ~~charge to income~~expense for ~~this~~these employee stock option ~~grant will be approximately $14,000 on a quarterly basis.~~grants was $1,762 and $2,772 for the three and nine-month periods ended July 1, 2017, respectively.

A summary of performance-based option activity under the ~~employee share option plan~~Plan as of July ~~2, 2016,~~1, 2017, and changes during the nine months then ended, is presented below:

In December 2015, the Company granted 11,540 shares of restricted stock to four employees which will vest subject to the Company ~~meeting~~achieving the same earnings per share target applicable to fiscal year 2018 as for the stock options disclosed above, so long as the employee is then employed by the Company. The estimated fair value of the stock on the date of the grant was $116,000 based on the fair market value of stock on the date of issue. The ~~unvested~~unrecognized compensation is being ~~charged to income~~expensed over three years. ~~The charge to income for this employee stock option grant was $8,000 and $18,000 for the three and nine months ended July 2, 2016 and will be approximately $8,000 on a quarterly basis.~~

In March 2017, the Company granted 80,000 shares of restricted stock to ~~income~~two executives, which will vest subject to the Company achieving one or both financial targets for the 2017, 2018 and 2019 fiscal years. The shares of restricted stock shall be divided into six equal tranches (two per year). The estimated fair value of the stock on the date of the grant was $1,106,534 based on the fair market value of stock on the date of issue. The unrecognized compensation is being expensed over three years. Management has assessed the performance criteria relating to these grants and concluded they are likely to be met. Accordingly, the relevant portion of the expense has been recorded through July 1, 2017. The expense for these restricted stock grants was $202,332 and $259,391 for the three and nine-month periods ended July 1, 2017, respectively.

In August 2016, the Board of Directors awarded the Executive Chairman equity compensation consisting of stock options to purchase 56,700 shares. The options were granted in two tranches. The first tranche, consisting of 36,496 options with an exercise price of $10.93 per share, would vest in twelve substantially equal monthly installments beginning September 2016, and the second tranche, consisting of 20,204 options with an exercise price of $12.35 per share, would vest in twelve substantially equal monthly installments beginning September 2017, in each case so long as the director is in the position of Executive Chairman. The Company estimated the fair value of its stock options using the Black-Scholes-Merton option-pricing model. The estimated fair value of the stock options on the date of the grant was $211,000. The Executive Chairman position was terminated on December 6, 2016, as a result of which 12,165 vested options were exercisable for three months, and all un-vested options expired. On February 7, 2017 the director exercised 12,165 options via a cashless exercise in which 8,474 shares were surrendered to pay the exercise price. In the three months ended July 1, 2017 there was a reversal of expense of $9,694 and in the nine months ended July ~~2, 2016.~~1, 2017 there was an expense of $20,890, in respect of these stock options grants.

~~Time-based awards~~A summary of time-based option activity under the Plan as of July 1, 2017, and changes during the nine months then ended, is presented below:

In February 2016, the Company granted 29,700 shares of restricted stock, representing 3,300 shares to ~~nine~~each of the non-employee directors ~~which will vest on~~and the ~~day before the 2017 annual general meeting providing that the grantee remains a director~~then emeritus directors of the Company, ~~or as otherwise determined by the Compensation Committee.~~26,400 of which vested on February 6, 2017. The aggregate fair value of the stock measured on the date of the grant was $292,000 based on the closing sale price of the stock on the date of grant. ~~Subsequent to this, 3,300 of these granted shares of restricted stock were cancelled and returned to the Plan following the resignation of a director.~~ Compensation expense ~~is being charged to income~~was recognized on a ~~straight line~~straight-line basis over the ~~twelve month~~twelve-month period ~~during which the forfeiture conditions lapse.~~to February 2017. The ~~charge to income~~expense for these restricted stock grants inwas $0 and $108,020 for the ~~nine months to~~three and nine-month periods ended July 1, 2017, respectively. The expense for these restricted stock grants was $64,812 and $86,416 for the three and nine-month periods ended July 2, 2016, ~~was $65,000 and the subsequent charge will be approximately $65,000 on a quarterly basis.~~respectively.

In February ~~2015,~~2017, the Company granted ~~30,600~~145,000 shares of restricted stock to ~~nine non-employee directors,~~eleven employees, which ~~vested~~will vest one-third each year on the third business day ~~before~~after the ~~2016 annual meeting.~~announcement of the Company’s results for the first quarter of fiscal 2018, 2019 and 2020. The aggregate fair value of the stock measured on the date of the grant was ~~$225,000,~~$2,039,020 based on the closing sale price of the stock on the date of grant. Compensation expense ~~was charged to income~~is being recognized on a ~~straight line~~straight-line basis over the ~~twelve month requisite service~~ period during which the forfeiture conditions ~~lapsed.~~lapse. The ~~charge to income~~expense for these restricted stock grants ~~in 2015~~ was ~~$131,000~~$169,918 and $226,558 for the three and nine-month periods ended July 1, 2017, respectively.

In February 2017, the Company granted 24,800 shares of restricted stock, representing 3,100 shares to each of the non-employee directors and the ~~charge in~~emeritus director of the ~~nine months~~Company, which will vest on the day before the 2018 annual general meeting providing that the grantee remains a director or an emeritus director of the Company, or as otherwise determined by the Compensation Committee. The aggregate fair value of the stock measured on the date of the grant was $344,244 based on the closing sale price of the stock on the date of grant. Compensation expense is being recognized on a straight-line basis over the twelve-month period during which the forfeiture conditions lapse. The expense for these restricted stock grants was $86,056 and $114,741 for the three and nine-month periods ended July 1, 2017, respectively.

In March 2017, the Company granted 12,800 shares of restricted stock representing 1,600 shares to each of the non-employee directors and the emeritus director of the Company, which will vest on the day before the 2018 annual general meeting providing that the grantee remains a director or an emeritus director of the Company, or as otherwise determined by the Compensation Committee. The aggregate fair value of the stock measured on the date of the grant was $192,000 based on the closing sale price of the stock on the date of grant. Compensation expense is being recognized on a straight-line basis over the twelve-month period during which the forfeiture conditions lapse. The expense for these restricted stock grants was $48,000 and $64,000 for the three and nine-month periods ended July ~~2, 2016 was $94,000.~~1, 2017, respectively.

For the purposes of calculating average issued shares for basic earnings per share, these shares are only considered to be outstanding when the forfeiture conditions lapse and the shares vest.

A summary of restricted stock and stock option activity, including both ~~performance based~~performance-based awards and time-based awards, for the ~~nine months~~nine-month period ended July ~~2, 2016~~1, 2017, is as follows:

Stock-based compensation expense was $555,000 and $1,037,000 for the three and nine-month periods ended July 1, 2017, respectively. Stock-based compensation expense was $169,000 and $527,000 for the three and ~~nine month~~nine-month periods ended July 2, 2016, ~~and $147,000 and $406,000 for the three and nine months ended July 4, 2015~~ respectively. At July ~~2, 2016,~~1, 2017, there was ~~$679,000~~approximately $3,237,000 of unrecognized compensation expense related to restricted stock ~~and stock options~~ granted under the Plan. The Company expects to recognize that cost over a weighted average period of ~~1.9~~2 years.

Under the merger agreement with BorgWarner, at the effective time of the merger, each share of restricted stock and each stock option will be cancelled and converted into the right to receive (a) for each share of restricted stock, $22.00, and (b) for each share subject to an option, an amount equal to the excess of $22.00 over the applicable per share exercise price of the option, in each case less any applicable withholding taxes. Payment of the foregoing amounts will be made (a) for options and restricted stock that would have vested in accordance with their terms at the effective time of the merger or on or before December 31, 2018 (assuming the holder’s continued employment or service and achievement of any applicable performance-based vesting conditions), the payment will be made promptly following the effective time of the merger, and (b) for options and restricted stock that, in accordance with their terms, would not vest at the effective time of the merger and would have vested on or after January 1, 2019 (assuming the holder’s continued employment or service through the date on which the options are scheduled to become vested and the achievement of any applicable performance based vesting conditions), the payment will vest and become payable in accordance with the vesting schedule applicable to the original award, except that any performance-based vesting conditions applicable to such award will no longer apply and the award will be treated as subject to service-based vesting only, with vesting occurring at the time the original performance vesting condition could have been satisfied. Accordingly, payment will be made promptly following the effective time of the merger with respect to approximately 71% of the shares subject to outstanding stock options and restricted stock awards, and payment will be deferred consistently with the existing vesting provisions with respect to approximately 29% of the shares subject to outstanding stock options and restricted stock awards. With respect to the options and restricted stock awards for which payment will be deferred, pro rata option payments may be made in connection with certain qualifying terminations of employment.

Sevcon entered into a Securities Purchase Agreement with certain institutional and accredited investors on July 6, 2016 in which the Company sold and issued 1,124,000 units at $9.12 per unit. Each unit consists of 1 share of common stock and 0.5 warrant to purchase 1 share of common stock for $10.00 exercise price per warrant share. The closing date of this transaction was July 8, 2016, which resulted in the Company receiving $10,250,880 of gross proceeds. The investors received 1,124,000 shares of common stock and warrants to purchase 562,000 shares of common stock.

The Company has analyzed the warrants under FASB Accounting Standards Codification Topic 480, Distinguishing Liabilities From Equity and other relevant literature, and determined that the warrants meet the criteria for classification as equity instruments. The Company estimated the fair value of the warrants using the Black-Scholes-Merton option-pricing model and recorded them in stockholders’ equity with an offset to additional paid in capital recorded from the sale of the units.

In February 2017, a warrant holder exercised the right to purchase 2,741 shares of common stock of the Company at the exercise price of $10.00 per share. Accordingly, the Company issued 2,741 shares of common stock for cash proceeds of $27,410.

Common stock dividends

Preferred Stock dividends

Basic earnings per share is computed by dividing the net income or loss for the period by the weighted average number of shares of common stock outstanding during the period. The computation of diluted earnings per share is similar to the computation of basic earnings per share, except that the denominator is increased for the assumed exercise of dilutive options and other potentially dilutive securities, including convertible preferred stock, using the treasury stock method unless the effect is anti-dilutive.

For the calculation of basic and diluted net loss per common share for the three-month period ended July 1, 2017, approximately 1,267,000 shares of common stock issuable on conversion of our Series A Convertible Preferred Stock, approximately 315,000 shares of un-vested restricted stock and approximately 41,000 outstanding stock options were not included in the computation of diluted earnings per share because that would have been anti-dilutive for the period presented.

For the calculation of basic and diluted net loss per common share for the nine-month period ended July 1, 2017, approximately 1,302,000 shares of common stock issuable on conversion of our Series A Convertible Preferred Stock, approximately 209,000 shares of un-vested restricted stock and approximately 46,000 outstanding stock options were not included in the computation of diluted earnings per share because that would have been anti-dilutive for the period presented.

Basic and diluted net ~~income~~loss per common share for the three and ~~nine month~~nine-month periods ended July 1, 2017 and July 2, 2016, ~~and July 4, 2015 were~~is calculated as follows:

The significant accounting policies of the segments are the same as those described ~~above~~in Note 3 and in 2016 10-K Note ~~1 to the Notes to Consolidated Financial Statements in the 2015 10-K.~~1. Inter-segment revenues are accounted for at current market prices. The Company evaluates the performance of each segment principally based on operating income. The Company does not allocate ~~income taxes,~~corporate expense, acquisition expenses, interest ~~income and~~ expense, or foreign currency translation ~~gains and~~ gain/losses, interest income or income taxes to segments.

Information concerning operations of ~~these businesses~~the reportable segments is as follows:

The cost of research and development programs is charged against income as incurred and ~~was~~amounted to $2,465,000 and $5,733,000 for the three and nine-month periods ended July 1, 2017, respectively, net of U.K. government grants received, “above the line” tax credits arising from U.K. government research and development incentives as ~~follows:~~

In 2015 the Company was awarded a grant of approximately $625,000 by the U.K. Regional Growth Fund, a U.K. government body. The grant is to develop an innovative range of low voltage motor controls which are designed to serve the emerging needs for on-road, automotive electrification. The grant includes a commitment to create or safeguard a total of twenty jobs at the Company’s U.K. facility over the period of the project. The Company recorded grant income from this project of ~~$115,000 in the nine month period ended July 2, 2016 associated with~~$0 and incurred research and development expense on this project of ~~$392,000 in~~$0 for the ~~period.~~three months ended July 1, 2017. The Company recorded grant income from this project of ~~$27,000 in~~$281,000, which was offset against the ~~nine month period ended July 4, 2015, associated with~~Company’s research and development expense on this project of ~~$149,000 in~~$1,206,000, for the ~~same period.~~

InDuring 2015 through 2017, the Company participated in a U.K. government research and development arrangement which allows U.K. companies to receive an additional available tax credit subject to meeting certain qualifying conditions. The credit is a percentage, which currently ranges from 11% to 14.5% depending on circumstances, of qualifying research and development expenditure in the period. The credit discharges income tax the Company would have to pay or allows companies without an income tax liability to receive a refund payment from the U.K. government. For the three and nine ~~month periods~~months ended July 1, 2017 the Company recorded $264,000 (three months ended July 2, 2016 ~~the Company recorded refundable tax credits of $315,000 related to certain~~- $0) and $615,000 (nine months ended July 2, 2016 - $0), respectively, as a reduction in research and development ~~incentives~~expense in the ~~U.K. These amounts have been recorded in operating~~unaudited consolidated statements of operations. The Company had an income ~~as they are refunded without regard to actual~~ tax ~~liability.~~receivable balance of $1,211,000 at July 1, 2017 from this initiative (September 30, 2016 - $985,000), which is included within prepaid expenses and other current assets on the unaudited consolidated balance sheets.

The Company’s effective tax rate of 4%12.8% is significantly lower than the U.S. statutory rate of 34%, primarily due to the fact that certain current year operating losses in the U.K. have been foregone in exchange for a cash ~~refund. As mentioned~~refund, and in ~~Note 8, this benefit~~addition the local statutory rate in certain countries in which the Company operates, notably the U.K. (19%) and Italy, (24%), is ~~recorded~~lower than the U.S. statutory rate.

During the nine-month period ended July 1, 2017, the Company’s deferred tax assets increased by $1,427,000. The Company continues to assess the need for a valuation allowance against these assets. In assessing the continuing need for a valuation allowance the Company has assessed the available means of recovering its deferred tax assets, including the ability to carryback net operating losses, the existence of reversing temporary differences, the availability of tax planning strategies, and available sources of future taxable income, including a revised estimate of future sources of pre-tax income. The Company has historically had profitable operations. The Company’s current projections reflect future profitable operations. Since the majority of the Company’s deferred tax assets relate to operations in countries where net operating losses have unlimited carry forwards, the Company has concluded that no valuation allowance is required on these deferred tax assets.

During the second quarter of 2017, the U.S. Internal Revenue Service initiated an audit of the Company’s U.S. federal income ~~as such amounts are refundable without regard to actual~~ tax ~~liability.~~return for the period ended September 30, 2015. This audit was completed during the third quarter of 2017, resulting in a small assessment of tax payable by the Company.

Sevcon ~~Inc.~~ has defined contribution plans covering the majority of its U.S. and U.K. employees in the controls business. There is also a small defined contribution plan covering senior managers in the ~~capacitor~~capacitors business. The Company has frozen U.K. and U.S. defined benefit plans for which no future benefits are being earned by employees. The Company uses a September 30 measurement date for its defined benefit pension plans.

The Company’s French subsidiary, Sevcon S.A.S., has a liability to pay its employees a service and ~~salary based~~salary-based award when they ~~reach retirement age and~~ leave the Company’s ~~employment.~~employment at retirement age. This unfunded liability, ~~which is unfunded, is recognized~~recorded in accrued expenses, was $227,000 and ~~was $161,000 and $152,000~~$198,000 at July 2,1, 2017 and September 30, 2016, ~~and July 4, 2015,~~ respectively. The obligation to pay this award is a French legal ~~requirement and is only payable if the employee is employed by the Company when they retire; if they leave the Company prior to that time the award is no longer payable.~~requirement.

The Company’s Italian subsidiary, Bassi S.r.l., has a liability to pay its employees a severance indemnity, ‘Trattamento di fine Rapporto’ (“TFR”) when they leave the Company’s employment. TFR, which is mandatory for Italian companies, is deferred compensation and is based on the employees’ years of service and the compensation earned by the employee during the service period. ~~TFR is considered a “Defined Benefit Plan”~~This unfunded liability, recorded in other long-term liabilities, was $1,075,000 and ~~the related liability is recognized in the consolidated balance sheet within “Liability for pension benefits”. This liability, which is unfunded, was $1,245,000~~$987,000 at July ~~2, 2016.~~1, 2017 and September 30, 2016, respectively.

The following table sets forth the movement in the liability for pension benefits, all of which is non-current, in the ~~nine month periods~~nine-month period ended July ~~2, 2016 and July 4, 2015, respectively:~~1, 2017:

Sevcon, Inc. contributed $150,000 to its frozen U.S. defined benefit plan in the nine months ended July ~~2, 2016;~~1, 2017; it presently anticipates contributing ~~a further~~an additional $50,000 to fund its U.S. plan induring the remainder of fiscal ~~2016.~~2017. In addition, employer contributions to the frozen U.K. defined benefit plan were ~~$327,000~~$471,000 in the first nine months and are estimated to total ~~$426,000~~$666,000 in ~~2016.~~2017.

The ~~table~~tables below ~~presents~~present information about the Company’s pension plan assets measured and recorded at fair value as of July 2,1, 2017 and September 30, 2016, and ~~indicates~~indicate the fair value hierarchy of the inputs utilized by the Company to determine the fair values.

~~Inventories,~~Inventory, net of reserve, ~~were~~is comprised of:

The Company's financial instruments consist mainly of cash and cash equivalents, short-term investments, trade receivables, accounts ~~receivable~~payable and ~~accounts payable.~~debt. The carrying amount of these financial instruments, other than the debt, approximates their fair value as of July ~~2, 2016 approximates fair value~~1, 2017 due to ~~the~~their short-term ~~nature of these instruments.~~nature. The fair value of the Company’s long-term bank debt at July ~~2, 2016~~1, 2017 approximated ~~$15,448,000~~$15,994,000 (the gross carrying value onas of July 1, 2017 before the ~~consolidated balance sheet at July 2, 2016)~~offset of debt issuance costs) based on recent financial market pricing. The ~~current portion of long-term~~bank debt ~~represented~~represents a Level 2 liability in accordance with the fair value hierarchy described in Note ~~10.~~12.

~~Set out below is an analysis of other accrued~~Accrued expenses, ~~at July 2, 2016 and September 30, 2015, which shows separately any items~~ in excess of 5% of total current ~~liabilities:~~liabilities, are as follows:

The Company’s U.K. controls and ~~capacitor~~capacitors subsidiaries each have multi-currency overdraft facilities which together total ~~$1,200,000~~$1,100,000 and ~~which~~ are secured ~~against~~by real estate owned by those companies. In July ~~2016,~~2017, the Company’s U.K. bank renewed these facilities for a ~~twelve month~~twelve-month period, although they can be withdrawn on demand by the bank. The facilities were unused at July ~~2, 2016~~1, 2017 and at September 30, ~~2015.~~2016.

The Company entered into a €14,000,000 ($~~15,448,000~~15,994,000 at July ~~2, 2016)~~1, 2017) credit facility with Banca Monte dei Paschi di Siena S.p.A. (“MPS Bank”) on January 27, 2016. The loan and security agreement will expire on January 27, 2021 when all outstanding principal and unpaid interest will be due and payable in full. The facility may be paid before maturity in whole or in part at the option of the Company, on or after the ~~six-month~~nine-month anniversary of the funding date, without penalty or premium. A change of control (including the closing under the BorgWarner Merger Agreement) would constitute an event of default, triggering acceleration of the repayment obligation. Interest on the loan is payable quarterly at a margin of 3% over EuroLIBOR, with a minimum EuroLIBOR rate of 0.0%. The loan interest rate at July 1, 2017 was 3%. Under the facility, the Company must maintain, on an annual basis, a net debt to EBITDA ratio defined as the ratio of consolidation indebtedness of the Company and its subsidiaries, minus cash and marketable securities, to EBITDA of the Company and its subsidiaries, measured on a fiscal year basis, plus (under a December 2016 amendment) the net cash proceeds received by the Company from the issuance and sale of equity securities during such twelve-month period, of no more than 3.5:1 for fiscal years 2016 and 2017 and a net debt to EBITDA ratio of no more than 3.0:1 thereafter. Upon entering into the credit facility, the Company drew down €14,000,000 ($~~15,448,000)~~15,994,000), which was the total amount outstanding at July ~~2, 2016.~~1, 2017. This amount is shown in the accompanying consolidated balance ~~sheet~~sheets under long-term debt. ~~The carrying value of the debt approximated to fair value based on current interest rates.~~

Annual principal payments on ~~long term~~ bank debt, net of debt issuance costs, and converted to U.S. dollars at the July ~~2, 2016~~1, 2017 exchange rate of ~~$0.906~~$1.1424 Euros per U.S. dollar, are as follows (in thousands of dollars):

17On May 22, 2017, the Company entered into a loan agreement with FrontFour Capital Group, LLC (“FrontFour“), pursuant to which FrontFour made a commitment to the Company to provide an unsecured term loan in the principal amount of $10,000,000 (the “Term Loan”). The period of FrontFour’s commitment under the loan agreement began on the date the Company entered into the loan agreement, and terminates on (i) August 22, 2017, or (ii) if the Company chooses to request an extension, November 22, 2017. The Company paid a commitment fee to FrontFour of $450,000. The commitment fee plus $34,000 of associated legal fees have been accounted for as deferred financing costs and are being amortized over the life of the loan agreement. If the Company elects to extend the commitment period, it will be required to pay FrontFour an additional $150,000 extension fee. The interest rate on amounts borrowed under the loan agreement is 10% per annum.

Subsequent to the end of the period, on July 3, 2017, the Company drew down $7,500,000 under the FrontFour loan agreement. The Term Loan, which is pari-passu with the Company’s existing senior credit facility with MPS Bank, will mature and be repayable in full on July 3, 2018; provided that maturity would accelerate upon an event of default, a change of control (including the closing under the BorgWarner Merger Agreement), or the Company’s repayment of all amounts due under the MPS Bank credit facility. The loan agreement provides for mandatory prepayment in the event that the Company receives net cash proceeds from an equity issuance, in an amount equal to such net cash proceeds. The loan agreement also provides for voluntary prepayment at any time without penalty.

~~Index~~

The loan agreement imposes customary limitations on the Company’s ability to, among other things, dispose of certain assets other than the sale of inventory in the ordinary course, incur liens, incur additional indebtedness, and engage in transactions with affiliates. The loan agreement also provides for events of default customary for credit facilities of this type, including, but not limited to, bankruptcy, non-payment, breach of covenants, and insolvency. Upon an event of default, the interest rate would be increased and FrontFour may elect a number of remedies including, but not limited to declaring all obligations (including principal, interest and expenses) immediately due and payable.

~~(16)~~(19)

Commitments and Contingencies

Sevcon, Inc. isand subsidiaries are involved in various legal proceedings in the ordinary course of business but the Company believes that it is remote that the outcome will be material to operations.

The Company maintains a directors' retirement plan which provides for certain retirement benefits to non-employee directors. Effective January 1997 the plan was frozen and no further benefits are being accrued. While the cost of the plan has been ~~fully charged to expense,~~expensed, the plan is not separately funded. The estimated ~~maximum~~ liability which has been recorded based on the cost of buying deferred annuities at July ~~2, 2016~~1, 2017 and September 30, ~~2015~~2016 was $136,000 and $144,000, respectively.

On March 24, 2017 the company entered into a 15-year operating lease for land and ~~$153,000, respectively.~~buildings at a total commitment of £4,185,000 (approximately $5,435,000). The company is entitled to a rent-free period of 6 months and a further 24 months at half-rent.

Minimum rental commitments under all non-cancelable leases ~~are as follows~~ for the years ended September 30 ~~2016 - $604,000;~~are as follows: 2017 - ~~$580,000;~~$271,000; 2018 - ~~$536,000;~~$1,041,000; 2019 - ~~$492,000;~~$998,000; 2020 - ~~$492,000~~$896,000; 2021 - $865,000 and ~~$2,237,000~~$6,002,000 thereafter.

The U.K. subsidiaries of the Company have given to ~~a bank~~RBS NatWest Bank a security interest in certain leasehold and freehold property assets as security for overdraft facilities of ~~$1,200,000. There were no amounts outstanding on the overdraft facilities at July 2, 2016 and at September 30, 2015.~~$1,100,000 as mentioned in Note 18.

Index

~~(17)~~(20)

Changes in Other Comprehensive Loss

The following table illustrates changes in the balances of each component of accumulated other comprehensive loss in ~~2016~~fiscal 2017 and ~~2015:~~2016:

(in thousands of dollars)

Foreign Currency
Items

Defined Benefit
Pension Plans

Accumulated Other
Comprehensive Loss

Balance September 30, 2014 (956 ) (7,873 ) (8,829 )
Other comprehensive loss for the period (318 ) (1,857 ) (2,175 )
Balance September 30, 2015 (1,274 ) (9,730 ) (11,004 )
Other comprehensive income (loss) for the period (160 )
203

43

Balance July 2, 2016 (1,434 ) (9,527 ) (10,961 )

(in thousands of dollars)

	Foreign Currency Items			Defined Benefit Pension Plans			Accumulated Other Comprehensive Loss
Balance September 30, 2015		(1,274	)		(9,730	)		(11,004	)
Other comprehensive loss		(996	)		(1,420	)		(2,416	)
Balance September 30, 2016		(2,270	)		(11,150	)		(13,420	)
Other comprehensive loss		1,095			204			1,299
Balance July 1, 2017		(1,175	)		(10,946	)		(12,121	)

~~(18)~~(21)

Related Parties

Bassi Holding (see Note 3)4) is considered a related party as a stockholder of the Company.

As atof July 2,1, 2017 and September 30, 2016 there was a net payable balance of ~~$2,478,000 payable by the Company~~$1,626,000 and $1,858,000, respectively, due to Bassi ~~Holding included in Debt to related parties.~~Holding. This debt mainly relates to the dividends payable to Bassi Holding as a result of the acquisition on January 29, ~~2016.~~2016 and it excludes rent payable, which is shown below.

During the three and nine ~~month periods~~months ended July ~~2, 2016~~1, 2017 the Company ~~also~~ paid rent to Bassi Holding in the ~~amounts~~amount of $81,000 and $262,000 respectively. During the three and nine months ended July 2, 2016 the Company paid rent to Bassi Holding in the amount of $83,000 and $138,000 respectively. ~~No rent was paid in~~As of July 1, 2017 and September 30, 2016 the ~~three~~Company owed $56,000 and ~~nine month periods ended July 4, 2015.~~$84,000, respectively, to Bassi Holding for rent.

~~On August 2, 2016, Ryan Morris, a member~~During the quarter ended April 1, 2017, the Company’s U.K. subsidiary made short-term loans in amounts ranging from £2,820 to £39,274 to nine employees of that subsidiary to cover the employees’ income tax withholding obligations arising from the vesting of restricted stock. The amounts due to the Company are included in prepaid expenses and other current assets at July 1, 2017. The loans were not approved by the Company’s Board of Directors. They included loans of £39,274 and £28,829 ($49,632 and $36,019 at the contemporary exchange rate), respectively, to the chief executive officer and chief financial officer. The loans to the chief executive officer and chief financial officer were repaid in full, with interest at the Inland Revenue-prescribed market rate of 3% per annum, promptly after they were disclosed to the Board of Directors in connection with the preparation of the ~~Board, was elected Executive Chairman of~~Company’s consolidated financial statements for the ~~Board. Mr. Morris is considered a related party as he is President of Meson Capital Partners LLC, a shareholder of the Company~~quarter ended April 1, 2017.

~~(19)~~(22)

Subsequent events

In preparing these interim consolidated financial statements, the Company has evaluated, for potential recognition or disclosure, events or transactions subsequent to the end of the most recent quarterly period, the issuance date of these financial statements.

As outlined in Note 1 above, effective July ~~6, 2016,~~13, 2017, the Company acquired Fuhua Glass’s entire 50% equity interest in Sevcon New Energy Technology (Hubei) Co., Ltd and terminated its equity joint venture with Fuhua Glass

As outlined in Note 2 above, on July 14, 2017, the Company entered into a ~~Securities Purchase~~Definitive Agreement with ~~certain institutional~~BorgWarner Inc. and ~~accredited investors, under which it agreed to sell 1,124,000 units, each consisting~~its wholly-owned subsidiary, Slade Merger Sub Inc., providing for the merger of ~~one share of common stock, $0.10 par value,~~Slade Merger Sub Inc. with and ~~half a warrant to purchase one share of common stock, at a price of $9.12 per unit, for total gross proceeds of $10,250,880. The participating investors include funds affiliated~~into the Company with the ~~principal institutional stockholders~~Company surviving the merger as a wholly-owned subsidiary of Borg Warner Inc. Consummation of the ~~Company and funds managed by two~~Merger is subject to the satisfaction or waiver of specified closing conditions, including the approval of the ~~Company’s directors.~~Merger by the holders of a majority of the outstanding Common Shares.

No ~~further~~other material subsequent events were identified that require recognition or disclosure in these financial statements.

1822

Index

(23)	Recent Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09: “Revenue from Contracts with Customers (Topic 606)”, comprehensive new revenue recognition guidance which will supersede almost all existing revenue recognition guidance. It affects any entity that enters into contracts with customers for the transfer of goods or services. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, in August 2015, the FASB issued ASU No. 2015-14: “Revenue from Contracts with Customers (Topic 606)”. This update was issued to defer the effective date of ASU No. 2014-09 by one year. Therefore, the effective date of ASU No. 2014-09 for public business entities is the annual reporting period beginning after December 15, 2017 including interim reporting periods within that reporting period. The Company is evaluating the impact of the adoption of this standard on our consolidated financial statements. This guidance will be effective for the Company in fiscal year 2019.

In August 2014, the FASB issued ASU No. 2014-15, Preparation of Financial Statements – Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern which states that under U.S. GAAP, continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent. If and when an entity’s liquidation becomes imminent, financial statements should be prepared under the liquidation basis of accounting. Even when an entity’s liquidation is not imminent, there may be conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. In those situations, financial statements should continue to be prepared under the going concern basis of accounting, but the amendments in this ASU should be followed to determine whether to disclose information about the relevant conditions and events. The new guidance is effective for the Company’s annual reporting for fiscal 2017, and for annual periods and interim periods thereafter. Early adoption is permitted. The Company is assessing the impact of this ASU on its consolidated financial statements and plans to adopt it in the fourth quarter of fiscal year 2017.

In July 2015, the FASB issued ASU No. 2015-11: “Inventory (Topic 330): Simplifying the Measurement of Inventory” which requires inventory within the scope of this standard to be measured at the lower of cost and net realizable value. For public business entities, the guidance is effective for annual periods beginning after December 15, 2016. The Company is evaluating the impact of the adoption of this standard on our consolidated financial statements. This guidance will be effective for the Company in fiscal year 2018.

In September 2015, the FASB issued ASU No. 2015-16: “Business Combinations (Topic 805)” which amends existing guidance related to measurement period adjustments associated with a business combination. The new standard requires the Company to recognize measurement period adjustments in the reporting period in which the adjustments are determined. The amendment removes the requirement to adjust prior period financial statements for these measurement period adjustments. The guidance is effective for annual periods beginning after December 15, 2015. The Company adopted the provisions of ASU, 2015-16 in fiscal year 2017, the implementation of which did not have any impact on our consolidated financial statements.

In February 2016, the FASB issued FASB ASU No. 2016-02: “Leases (Topic 842)” in which the core principle is that a lessee should recognize the assets and liabilities that arise from leases. For operating leases, a lessee is required to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the balance sheet. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. The accounting applied by a lessor is largely unchanged from that applied under current U.S. GAAP. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within that reporting period. The Company is evaluating the impact of the adoption of this standard on our consolidated financial statements. This guidance will be effective for the Company in fiscal year 2020.

In March 2016, the FASB issued ASU No. 2016-09: “Compensation - Stock Compensation (Topic 718)” simplifies several aspects of the accounting for employee share-based payment award transactions. The guidance is effective for fiscal years beginning after December 15, 2016 including interim periods within those fiscal years. The Company is evaluating the impact of the adoption of this standard on our consolidated financial statements. This guidance will be effective for the Company in fiscal year 2018.

Index

In August 2016, the FASB issued ASU 2016-15: “Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments” which addresses eight specific statement of cash flow issues with the objective of reducing diversity in practice. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company is evaluating the impact of the adoption of this standard on our consolidated financial statements. This guidance will be effective for the Company in fiscal year 2019.

In October 2016, the FASB issued ASU 2016-16: “Income Taxes (Topic 740) Intra-Entity Transfers of Assets Other Than Inventory” which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset (excluding inventory) when the transfer occurs instead of when the asset is sold to an outside party. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company is evaluating the impact of the adoption of this standard on our consolidated financial statements. This guidance will be effective for the Company in fiscal year 2019.

In January 2017, the FASB issued ASU 2017-04: “Intangibles – Goodwill and Other (Topic 740)” which simplifies the test for goodwill impairment. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that reporting period. The Company is evaluating the impact of the adoption of this standard on our consolidated financial statements. This guidance will be effective for the Company in fiscal year 2021.

In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718), which provides additional guidance on which changes to the terms and conditions of a share-based payment award require an entity to apply modification accounting. This ASU is effective for reporting periods beginning after December 15, 2017. The Company is evaluating the potential impact the adoption of this standard on our consolidated financial statements. This guidance will be effective for the Company in fiscal year 2019.

Index

Item 2

Management's Discussion and Analysis of Financial Condition and Results of Operations.

FORWARD LOOKING STATEMENTS

Statements in this discussion and analysis about the Company’s anticipated financial results and growth, as well as those about the development of its products and markets, including without limitation statements about the benefits that may be obtained from certain customer contracts, are forward-looking statements that are based on management’s present expectations and involve risks and uncertainties that could cause actual results to differ materially from those projected. Important factors that could cause these statements not to be realized are set forth in the following discussion and also include the risks discussed under “Risk Factors” below and elsewhere in this report.

CRITICAL ACCOUNTING ESTIMATES

As of July ~~2, 2016,~~1, 2017, there have been no material changes to the critical accounting estimates described in the Company’s ~~2015~~2016 10-K. However, if the business and economic realities vary from those assumed in these judgments and estimates, actual operating results may differ materially from the amounts derived from these judgments and estimates. In addition, if the continuing worldwide economic troubles continue to have a negative effect on our business, estimates used in future periods may vary materially from those included in the Company’s previous disclosures.

For example:

(i)	if the financial condition of any of the Company's customers deteriorates as a result of further business declines, the Company may be required to increase its estimated allowance for bad debts;

(ii)	if actual future demand is less than previously projected, inventory write-downs may be required; or

(iii)

significant negative industry or economic trends that adversely affect our future revenues and profits, or a reduction of our market capitalization relative to net book value, among other factors, may change the estimated future cash flows or other factors that we use to determine whether or not goodwill has been impaired and lead us to conclude that an impairment charge is required.

(iv)

if the allocation of the total consideration for Bassi, to the fair values of the tangible and intangible assets acquired, differs from the management estimates and judgments, the Company may be required to write-down the values of certain tangible or intangible assets or conclude that an impairment charge is required.

All of these factors, and others resulting from the current economic situation, may have a material adverse impact on the Company’s results.

Material Development

On July 14, 2017, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with BorgWarner Inc. ("BorgWarner") pursuant to which BorgWarner has agreed to acquire Sevcon for $22.00 per share in an all-cash transaction expected to have an enterprise value at closing of approximately $200 million. The transaction is expected to close in the fourth quarter of calendar 2017, subject to certain conditions, including regulatory, shareholder and other related approvals. Further details are provided in Note 2 to the financial statements included with this Quarterly Report on Form 10-Q, as well as in our filings with the Securities and Exchange Commission. We may incur transaction-related costs of approximately $6,500,000 during 2017 as a result of the Merger Agreement.

1925

Index

OVERVIEW OF THIRD QUARTER ~~AND FIRST NINE MONTHS~~

Results of Operations

Three months ended July ~~2, 2016~~1, 2017 and July ~~4, 2015~~2, 2016

The following table compares the results by segment for the three months ended July ~~2, 2016~~1, 2017 with the same period in the prior year. ~~The table shows the effect of currency and volume changes in percentage terms:~~

Three months ended Favorable (unfavorable) % change due to:

July 2,
2016

July 4,
2015

Total

Currency

Volume

Sales:
Controls - to external customers $ 8,462 $ 9,820 (13.8 ) (7.8 ) (6.0 )
Capacitors - to external customers 405 526 (23.0 ) (5.6 ) (17.4 )
Capacitors - inter-segment - - - - -
Capacitors – total 405 526 (23.0 ) (5.6 ) (17.4 )
Chargers - to external customers 5,046 - 100.0 - 100.0
Total sales to external customers 13,913 10,346 34.5 (7.7 ) 42.2
Gross Profit:
Controls 3,204 3,626 (11.6 ) (9.1 ) (2.5 )
Capacitors 172 230 (25.3 ) (5.7 ) (19.6 )
Chargers 1,376 - 100.0 - 100.0
Total 4,752 3,856 23.2 (8.9 ) 32.1
Selling, research and development, acquisition costs and administrative expenses:
Controls (3,715 ) (3,283 ) (13.2 ) 3.5 (16.7 )
Capacitors (177 ) (226 ) 21.7 4.2 17.5
Chargers (1,633 ) - (100.0 ) - (100.0 )
Unallocated corporate income (expense) and acquisition costs (158 ) (86 ) (82.6 )
-
(82.6 )
Total (5,683 ) (3,595 ) (58.0 ) 3.5 (61.5 )
Operating (loss) income:
Controls (511 ) 342 (249.4 ) (63.4 ) (186.0 )
Capacitors (5 ) 5 (200.0 ) (60.1 ) (139.3 )
Chargers (257 ) - (100.0 ) - (100.0 )
Unallocated corporate income (expense) and acquisition costs (158 ) (86 ) (82.6 )
-
(82.6 )
Total (931 ) 261 (458.1 ) (84.7 ) (373.4 )
Other income and expense (658 ) 101 (751.4 ) 33.3 (784.7 )
(Loss) income before income tax (1,589 ) 362 (539.0 ) (51.5 ) (487.5 )
Income tax benefit (provision) 60 (83 ) 172.4 50.9 76.9
Net (loss) income $ (1,529 ) $ 279 (648.0 ) (51.6 ) (596.4 )
Net loss attributable to non-controlling interests
84

2

4,100.0

-

4,100.0

Net (loss) income attributable to Sevcon, Inc. and subsidiaries (1,445 ) 281 (614.2 ) (51.2 ) (563.0 )
Preferred share dividends (93 ) (110 ) (15.5 ) - (15.5 )
Net (loss) income attributable to common stockholders $ (1,538 ) $ 171 (999.4 ) (84.2 ) (915.2 )

	(in thousands of dollars)
	Three months ended
	July 1, 2017			July 2, 2016			Favorable (unfavorable) Change
Sales:
Controls	$	9,822		$	8,462		$	1,360
Capacitors		500			405			95
Chargers		8,234			5,046			3,188
Total Sales		18,556			13,913			4,643
Gross Profit:
Controls		3,145			3,204			(59	)
Capacitors		221			172			49
Chargers		1,266			1,376			(110	)
Total Gross Profit		4,632			4,752			(120	)
Operating, Research & Development (R&D) and acquisition expenses:
Controls		(5,642	)		(3,715	)		(1,927	)
Capacitors		(157	)		(177	)		20
Chargers		(746	)		(1,633	)		887
Unallocated corporate expense and acquisition expenses		(1,375	)		(158	)		(1,217	)
Total operating, R&D and acquisition expenses		(7,920	)		(5,683	)		(2,237	)
Operating loss:
Controls		(2,497	)		(511	)		(1,986	)
Capacitors		64			(5	)		69
Chargers		520			(257	)		777
Unallocated corporate expense and acquisition expenses		(1,375	)		(158	)		(1,217	)
Total operating loss		(3,288	)		(931	)		(2,357	)
Interest expense		(216	)		(140	)		(76	)
Interest and other income		13			4			9
Foreign currency gain (loss)		317			(522	)		839
Loss before income tax		(3,174	)		(1,589	)		(1,585	)
Income tax benefit		269			60			209
Net loss		(2,905	)		(1,529	)		(1,376	)
Net loss attributable to non-controlling interests		14			84			(70	)
Net loss attributable to Sevcon, Inc. and subsidiaries		(2,891	)		(1,445	)		(1,446	)
Preferred share dividends		(102	)		(93	)		(9	)
Net loss attributable to common stockholders	$	(2,993	)	$	(1,538	)	$	(1,455	)

2026

Index

On January 29, 2016 the Company closed the acquisition of Bassi S.r.l. (Bassi), a company which makes battery chargers for a range of Electric Vehicle (“EV”) applications. The operating performance of Bassi is included for the first time in the consolidated accounts in this fiscal year. We record the performance of Bassi as the chargers segment in our financial reporting.

~~Revenues~~Reported revenues in the third quarter of ~~2016~~2017 were ~~$13,913,000~~$18,556,000 compared to ~~$10,346,000~~$13,913,000 in the same quarter last year, a ~~34%~~33.4% increase ~~year-on-year that reflected~~year-on-year. Revenue from the ~~acquisition of Bassi. Bassi revenues were $5,046,000~~chargers business was $8,234,000 for the third quarter ~~and~~of 2017 compared to $5,046,000 in the same fiscal quarter last year, an increase of 63.2% in the segment revenues year-on-year. Revenues in the controls and capacitors businesses combined were ~~$8,867,000~~$10,322,000 compared to ~~$10,346,000~~$8,867,000 in the same fiscal quarter last year, ~~a reduction~~an increase of ~~14.3%~~16.4%. Foreign currency fluctuations decreased reported sales by $792,000, or 7.7%, mainly due to a stronger U.S. dollar compared with both the British pound and the euro, than in the same fiscal period last year. Excluding the impact of the chargers segment and foreign currency fluctuations, sales would have been 6.6% lower than the prior-year period.

~~The weak demand conditions experienced in~~In the ~~first half year in~~controls segment, our industrial off-road markets ~~continued~~revenue grew 3% compared with the third quarter of 2016, driven largely by a 15% increase in sales to manufacturers of what we term “other electric vehicles”, which includes a wide range of applications. This growth was partly offset by lower sales to the traditional industrial sectors of fork lift truck, aerial work platforms and airport ground support equipment which collectively reduced by 5% from the same period last year. In the on-road controls segment, sales in the third quarter of ~~2016. Aerial work platform, fork-lift truck~~2017 were up 60% in the two-wheel and ~~mining markets were all down by double-digits. While~~four-wheel sectors combined, compared to the ~~performance~~same period last year, due mainly to improved product shipments in ~~these sectors is not where~~North America and Asia. In Asia, and in our former joint-venture in China in particular, we ~~would like it~~are starting to ~~be, there are signs of improvement, particularly~~see significant growth in sales to ~~fork-lift truck manufacturers.~~manufacturers of on-road electric and hybrid passenger vehicles as OEM’s we have been developing products with in recent years move to volume manufacture. We expect this business to continue to fluctuate from quarter to quarter due to the timing of orders as manufacturers ramp up production.

InOur capacitors business saw double digit revenue improvement in the ~~on-road sector, sales for two-wheel applications were up 27%~~third quarter of 2017 compared with the same period in the prior year, driven largely by improved customer demand from railway signaling customers.

Our Bassi acquisition continues to perform above our expectations with 63.2% revenue growth in the third quarter compared to the same fiscal quarter in the prior year, driven mainly by sales in North America and we anticipate that success to continue into the fourth quarter of 2017.

In terms of geography, revenues were 30% higher in Asia, due mainly to the startup of automotive production in China offset by slower industrial sales in the Far East. In North America, sales were 45% higher than in the same period in 2016, of which ~~largely reflects~~increase approximately one third came from the controls segment and two thirds from increased sales to ~~an electric motorcycle manufacturer~~North American chargers customers. Sales in Europe were 15% higher in the ~~USA. In the four-wheel, on-road, sector, sales decreased 16%~~third quarter of 2017 compared to the same period in 2015. This was largely due a significant customer, which uses our controllers for an all-electric drivetrain designed for the Chinese market, deciding to move drivetrain production to China, causing a pause in demand from us. We expect demandlast year, reflecting growing sales in the ~~four-wheel, on-road sector~~chargers segment partially offset by a single digit decline in sales to ~~improve~~industrial customers in the ~~fourth fiscal quarter of 2016 and to continue into 2017~~controls segment.

In the second quarter of 2016 we were awarded a multiyear, contract by a manufacturer of performance cars. This is one among several contracts of its type we are currently working on, which are described in more detail in the discussion of engineeringEngineering services below. The contract is for the development of the controller to allow electrification of the drive system. The contract covers engineering time and materials and is likely to last four years. The customer has provided a follow-on, non-binding production forecast that contemplates up to $41 million in product purchases over a five-year period following successful completion of the development phase, i.e., expected to commence in 2020. Whether or not the manufacturer purchases any product from us, let alone in such amounts, will depend on a number of factors that cannot be assured, including without limitation our successfully completing the development of the controller, the manufacturer’s deciding to commence production of the car, which will be in its sole discretion, and whether or not the market for the car develops as the manufacturer hopes. In addition to this program we also continued to make progress on the electrification project with a large German manufacturer of trucks, buses, engines and transportation solutions.

~~The Company’s joint venture in China~~ continues to make progress; in the third quarter we received a contract from a supplier of electric motors for the development of a controller for on road applications. We expect to ship prototypes of these controllers in the fourth quarter. We are able to achieve these challenging timescales because of the work we have already completed on our generic Gen5 product. In other projects, we have had another quarter of testing with one substantial Chinese OEM and we expect to begin production shipments by the end of calendar 2016. In general, with the Chinese JV we are initially targeting electric and hybrid vehicle applications in what is becoming the world’s largest market for two- and four-wheel electric vehicles.

In the controls business segment, sales in North America were down 18% compared with the same period last year due to continued softness in demand from both industrial and on road customers. There was some improvement compared to the second quarter of 2016, but comparing demand with the third quarter last year, industrial markets were mainly lower due to weakness in the construction sector and also the reduction caused by the customer which moved drivetrain production to China, referred to above. Sales in the quarter in Asia were down 58% due mainly tobe an ~~aerial work platform customer in the region who last year provided us with a large stocking order prior to moving to an indirect sales channel.~~

Sales in Europe increased by 16% year-over-year. We have seen recent signs of some improvement across Western Europe which rose 23%, as controller shipments to customers, including Polaris, drove on-road performance in that market. This improvement in Europe in controller sales was offset by lower sales in our capacitor segment for railway signaling projects in the region.

~~Index~~

The new project wins described above are examples of the opportunities we have been pursuing recently and were part of the pipeline we have discussed in previous quarters. We continue to have an expanding pipeline of projects related to the global desire for electrification. Most important for the long term, the Company is gaining a reputation as an electrification solution provider and technology partner. The electrification project award in our second quarter is a good example of the type of project in the pipeline. However, we cannot predict the timing or the magnitude of any potential resulting improvements in our revenues or margin from these projects and opportunities.

An increasingly important element of our revenue in our controls ~~segment comes from engineering services, which represented 4% of sales in the quarter.~~segment. Many new customers, mainly on-road vehicle manufacturers, require a bespoke product to meet their specific needs. They pay us to engineer existing Sevcon products to provide them with a reliable solution. This process results in a shorter time to market and lower development costs for our customer. We believe that our experience allows us to complete projects faster than the competition, and with known system performance. We generally account for engineering services under the “percentage of completion” accounting method. As a result, our revenue for engineering services is a function of the number of hours worked by individuals on a project at specified rates as a proportion of an agreed program of work. Our cost to deliver the project is a function of labor cost and overhead recovery. Reported progress on projects is the achievement of project milestones. The number and timing of milestones differs from project to project, in general, however, achievement of a milestone brings the prospect of production ever nearer.

We are currently conducting engineering services work on several projects, all of which are expected to go into production in ~~2019~~2017-2018, and beyond. A multi-year project is generally very intense in terms of hours worked for the first 12twelve months as we develop the ~~product.~~product and software. Subsequent time is spent on the refinement of the initial development, product testing, the validation of the product to safety standards and product certification. WeThe customer is not obligated to purchase the product that is developed, but we believe our progress in milestones on an engineering services contract is a good way to assess the likelihood that a production program will commence at some point in the future. In the quarter we added two other contracts to the pipeline of product development and started shipments to one customer of a new Gen5 controller.

Gross profit of ~~$4,752,000~~$4,632,000 was ~~34.2%~~25% of sales in the third quarter, compared to ~~$3,856,000~~$4,752,000 or ~~37.3%~~34.2% of sales in the same quarter last year. The reduction in the gross profit percentage reflects a higher proportion of sales attributable to the lower margin chargers business in 2017 and also an increasing proportion of engineering services revenue, which is generally at a lower gross profit percentage than product sales. Gross profit in the ~~Charger~~chargers business was ~~$1,376,000 (27.2%~~$1,266,000 (15.4% of sales) for the third ~~quarter.~~

quarter of 2017, compared to $1,376,000 (27.3% of sales) in the same fiscal quarter last year. Gross profit for the controls and capacitors segments combined, was ~~$3,377,000 (38.1%~~$3,366,000 (32.6% of sales) in the third quarter, compared to ~~$3,856,000 (37.3%~~$3,376,000 (38.1% of sales) in the same quarter last year.

~~Selling,~~

Index

Operating, research and development and ~~general and administrative~~acquisition expenses ~~including Bassi acquisition costs in the third quarter,~~ were ~~$5,683,000, including $1,633,000 of charger business costs,~~$7,920,000, compared to ~~$3,595,000~~$5,683,000 in the same quarter last ~~year when there were no charger business costs.~~year. Included in the ~~charger business~~chargers segment operating expense ~~in the quarter of $1,633,000, we recorded $687,000~~was $279,000 of non-cash expense from the amortization of intangible assets and fair value adjustments arising from the business combination with ~~Bassi.~~Bassi, compared with $687,000 of such cost in the same period last year. Operating expenses in the controls and capacitors ~~business combines~~businesses combined, excluding unallocated corporate expense, were ~~$3,893,000~~$5,799,000, compared to ~~$3,509,000~~$3,892,000 in the prior year period. The increase of $1,907,000 largely reflects the increased investment in engineering and research and development expense, including new hires, associated with the delivery of the engineering phase of the Company’s new project pipeline. Unallocated corporate expense in the quarter of $1,375,000 included approximately $1,100,000 relating to professional fees and other associated costs connected with the potential merger with BorgWarner Inc. outlined in Note 2 to the financial statements included with this Form 10-Q.

There was an operating loss for the third quarter of ~~$931,000~~$3,288,000 compared with ~~income~~an operating loss of ~~$261,000~~$931,000 in the same period last year. ~~Acquisition costs increased operating loss by $8,000.~~

Excluding acquisition costs and unallocated corporate expense of $157,000, the operating loss for the controls and capacitors businesses combined, was $516,000 for the third quarter, compared to operating income of $347,000 in the same period last year. The main reason for the operating loss in the controls and capacitors business were lower sales to our industrial customers and higher operating costs associated with the pipeline of new projects.

~~The table on page 21 shows the favorable and unfavorable percentage change for each income statement line item due to the impact of foreign currency exchange rate movements and volume impacts.~~

Included in other income and expense for the quarter was a foreign currency ~~loss~~gain of ~~$522,000~~$317,000, compared with a foreign currency loss of ~~$21,000~~$522,000 in the third quarter of last year. The ~~significant loss~~gain in the quarter largely reflects the impact of the ~~weakening~~strengthening of the British pound ~~following~~and the ~~referendum on~~Euro against the ~~U.K’s membership in~~U.S. Dollar compared to the ~~European Union, which advised for the exit of the U. K. from the European Union (“Brexit”).~~prior period. During the third quarter, we recorded a charge of ~~$116,000~~$216,000 for interest ~~due to~~which was largely interest payable on the MPS Bank ~~on the~~ credit facility partly used to finance the Bassi ~~acquisition.~~acquisition in January last year.

The Company recorded a loss before income taxes of ~~$1,589,000~~$3,174,000 in the third quarter of ~~2016,~~2017, compared to ~~income~~a loss before income taxes of ~~$362,000~~$1,589,000 in the same period last year. There was an income tax benefit of ~~$60,000~~$269,000 in the period compared with ~~an income tax provision~~a benefit of ~~$83,000,~~$60,000 in the same period last year. The ~~low effective~~income tax ~~rate~~benefit of 8.5% in the third quarter ~~is largely a result~~ of ~~our U.K. business representing a higher proportion~~2017 was lower than the statutory Federal income tax rate of 34% for several reasons. The main items which reduced the ~~pre-tax result in Q3 2016 than in the prior year. In the U.K. we benefit from a very low~~ effective tax rate ~~due to~~were foreign tax rate differentials and the ~~favorable tax treatment~~surrender of ~~the R&D activity that we conduct there.~~U.K. trading losses for cash research incentives.

~~Index~~

After adjusting for a ~~$84,000~~$14,000 net loss relating to the Company’s non-controlling interest in the Chinese joint venture and recording a ~~preference~~preferred share dividend of ~~$93,000,~~$102,000, there was a net loss attributable to the stockholders of ~~Sevcon, Inc. of $1,538,000~~$2,993,000 or ~~a loss of~~ ($~~0.38)~~0.56) per diluted share, compared to a net ~~income~~loss of ~~$171,000,~~$1,538,000 or ~~$0.04~~($0.38) per diluted share in the same quarter last year after recording a ~~preference~~preferred share dividend of ~~$110,000.~~$93,000.

Index

Nine months ended July ~~2, 2016~~1, 2017 and July ~~4, 2015~~2, 2016

The following table compares the results by segment for the nine months ended July ~~2, 2016~~1, 2017 with the same period in the prior year. ~~The table shows the effect of currency and volume changes in percentage terms.~~

Nine months ended Favorable (unfavorable) % change due to:

July 2,
2016

July 4,
2015

Total

Currency

Volume

Sales:
Controls - to external customers $ 25,968 $ 29,000 (10.5 ) (4.5 ) (6.0 )
Capacitors - to external customers 1,215 1,619 (25.0 ) (4.0 ) (21.0 )
Capacitors - inter-segment - 3 (100.0 ) - (100.0 )
Capacitors – total 1,215 1,622 (25.1 ) (4.0 ) (21.1 )
Chargers - to external customers 9,026 - 100.0 - 100.0
Total sales to external customers 36,209 30,619 18.3 (4.4 ) 22.7
Gross Profit:
Controls 10,242 10,897 (6.0 ) (4.5 ) (1.5 )
Capacitors 482 746 (35.4 ) (3.5 ) (31.9 )
Chargers 2,266 - 100.0 - 100.0
Total 12,990 11,643 11.6 (4.5 ) 16.0
Selling, research and development, acquisition costs and administrative expenses:
Controls (10,691 ) (9,833 ) (8.7 ) 3.7 (12.5 )
Capacitors (543 ) (625 ) 13.1 4.2 8.9
Chargers (2,257 ) - (100.0 ) - (100.0 )
Unallocated corporate income (expense) and acquisition costs (1,921 ) (32 )
NM

-

NM

Total (15,412 ) (10,426 ) (47.8 ) 3.8 (51.6 )
Operating (loss) income:
Controls (449 ) 1,064 (142.2 ) (11.7 ) (130.5 )
Capacitors (61 ) 121 (150.7 ) 0.2 (150.9 )
Chargers 9 - (100.0 ) - (100.0 )
Unallocated corporate income (expense) and acquisition costs (1,921 )
32

NM

-

NM

Total (2,422 ) 1,217 (299.0 ) (10.2 ) (288.8 )
Other income and expense (742 ) 156 (572.3 ) (12.5 ) (559.8 )
(Loss) income before income tax (3,164 ) 1,373 (330.3 ) (10.5 ) (319.8 )
Income tax benefit (provision) 139 (188 ) 173.9 16.8 157.1
Net (loss) income $ (3,025 ) $ 1,185 (355.0 ) (9.5 ) (345.5 )
Net loss attributable to non-controlling Interests
131

31

322.6

-

322.6

Net (loss) income attributable to Sevcon, Inc. and subsidiaries (2,894 ) 1,216 (338.0 ) (9.3 ) (328.7 )
Preferred share dividends (327 ) (335 ) 2.4 - 2.4
Net (loss) income attributable to common stockholders $ (3,221 ) $ 881 (465.6 ) (12.8 ) (452.8 )

	(in thousands of dollars)
	Nine months ended
	July 1, 2017				July 2, 2016			Favorable (unfavorable) Change
Sales:
Controls	$	25,043			$	25,968		$	(925	)
Capacitors		1,193				1,215			(22	)
Chargers		20,535				9,026			11,509
Total Sales		46,771				36,209			10,562
Gross Profit:
Controls		7,734				10,242			(2,508	)
Capacitors		537				482			55
Chargers		2,882				2,266			616
Total Gross Profit		11,153				12,990			(1,837	)
Operating, Research & Development (R&D) and acquisition expenses:
Controls		(14,375	)			(10,691	)		(3,684	)
Capacitors		(451	)			(543	)		92
Chargers		(2,174	)			(2,257	)		83
Unallocated corporate expense and acquisition expenses		(2,181	)			(1,921	)		(260	)
Total operating, R&D and acquisition expenses		(19,181	)			(15,412	)		(3,769	)
Operating income (loss):
Controls		(6,641	)			(449	)		(6,192	)
Capacitors		86				(61	)		147
Chargers		708				9			699
Unallocated corporate expense and acquisition expenses		(2,181	)			(1,921	)		(260	)
Total operating loss		(8,028	)			(2,422	)		(5,606	)
Interest expense		(496	)	��		(271	)		(225	)
Interest and other income		49				16			33
Foreign currency gain (loss)		(301	)			(487	)		186
Loss before income tax		(8,776	)			(3,164	)		(5,612	)
Income tax benefit		1,126				139			987
Net loss		(7,650	)			(3,025	)		(4,625	)
Net loss attributable to non-controlling interests		147				131			16
Net loss attributable to Sevcon, Inc. and subsidiaries		(7,503	)			(2,894	)		(4,609	)
Preferred share dividends		(299	)			(327	)		28
Net loss attributable to common stockholders	$	(7,802	)		$	(3,221	)	$	(4,581	)

2329

Index

~~Sales~~Reported revenues in the nine months ended July ~~2, 2016~~1, 2017 were ~~$36,209,000,~~$46,771,000, an increase of ~~$5,590,000~~$10,562,000 or ~~18.3%~~29.2%, compared to the same period last year, which reflected the acquisition of ~~Bassi. Sales~~Bassi in January 2016. Revenue in the ~~charger~~chargers business for the ~~five~~nine months ended July ~~2, 2016,~~1, 2017 were ~~$9,026,000. Sales~~$20,535,000 compared to $9,026,000 in the five month period post-acquisition last year, an increase of $11,509,000. Revenues in the controls and ~~capacitor~~capacitors businesses combined for the nine months ended July ~~2, 2016~~1, 2017 were ~~$27,183,000~~$26,326,000 compared to ~~$30,619,000~~$27,183,000 in the same period last year, a decrease of ~~11%~~3.4%. Foreign currency fluctuations decreased reported ~~sales~~revenues in the first nine months of the year by ~~$1,357,000,~~$1,570,000 or 4%4.3%, mainly due to a stronger U.S. Dollar compared to both the British pound and the euro, than in the prior year period. ~~Excluding the impact of the chargers segment and foreign currency fluctuations, sales would have been 7% lower than the prior-year period.~~

In the controls ~~business~~ segment, sales in the nine month period to July 1, 2017 were ~~flat in Europe, 13% lower~~53% higher in North America and ~~25% down~~20% higher in Europe but 33% lower in Asia compared to the same period last year. ~~Revenues~~The reduction in Asia year-on-year is largely due to lower demand from the Company’s traditional industrial markets, ~~including~~principally aerial work platform, airport ground support, fork lift truck, aftermarket and mining ~~applications, were 13% lower than the first nine months of 2015.~~applications. This reduction in reported sales in the Company’s traditional markets was largely driven by global macro-economic factors. ~~In addition, several customers reported that they~~Revenues in the on-road sector were ~~reducing inventories which had built up during~~26% higher in the first ~~half~~nine months of ~~our fiscal~~2017 compared to the same period last year. This increase largely reflected increased sales to electric and hybrid vehicle manufacturers in North America and the startup of volume manufacture and shipments to four-wheel customers in Asia as well as revenues from engineering services associated with electrification projects. Sales to customers in the two and four-wheel sector were 34% and 22% higher in the nine month period to July 1, 2017, compared to the same period in 2016, respectively.

Volumes shipped in the capacitors business were largely flat compared to the same period last year which reflected general macro-economic factors reducing sales to industrial customers offset by increased orders from railway signaling customers. In the chargers segment, the growth in revenues year-on-year is largely due to a significant increase in shipments to a North American battery manufacturer.

Gross profit of $11,153,000 was 23.8% of sales in the nine month period ended July 1, 2017 compared to $12,990,000, or 35.9%, of sales, in the comparable period in 2016. The ~~demand from mining customers~~reduction in the gross profit percentage reflects the inclusion of the lower margin chargers business in 2017 and also an increasing proportion of engineering services revenue, which is generally at a lower gross profit percentage than product sales. Gross profit in the chargers business in the nine month period ended July 1, 2017 was ~~61% lower than~~$2,882,000 or 14% of sales compared to $2,266,000 or 25.1% of sales in the same period last year, reflecting the difficult conditions in mining worldwide. Revenues in the four-wheel sector, which were largely flat year-on-year, included revenues from engineering services associated with electrification projects, including the project started in the second quarter of 2016, to electrify drive trains for automotive OEMs. The two-wheel sector was down marginally year-on-year reflecting the lumpy nature of demand in this sector.

Volumes shipped in the capacitor business were 21% lower than in the same period last year. A combination of factors reduced sales in the capacitor business including general macro-economic factors and a reduction from the railway signalingadverse customer ~~base.~~

Gross profit of $12,990,000 was 35.9% of sales in the period compared to $11,643,000 or 38.0%, in the comparable period in 2015. Gross profit in the chargers business was $2,266,000 or 25.1% of sales.mix. Gross profit in the controls and capacitors businesses combined in the nine month period ended July 1, 2017, was ~~$10,724,000 (39.5%~~$8,271,000 (31.5% of sales) compared to ~~$11,643,000 (38.0%~~$10,724,000 (39.5% of sales) in the same period last ~~year.~~year, reflecting the higher proportion of lower margin engineering services revenue and also adverse customer mix.

~~Selling,~~Operating, research and development and ~~administrative~~acquisition expenses ~~including acquisition costs,~~were $19,181,000 in the first nine months of the year, ~~were $15,412,000,~~ an increase of ~~$4,986,000 on~~$3,765,000 compared with the same period last ~~year.~~year, which included expenses of $1,425,000 associated with the acquisition of the Bassi chargers business. Operating ~~costs~~expense in the chargers business ~~were $2,257,000~~was $2,174,000 during the period ~~and~~compared to $2,257,000 in the prior period which also included the acquisition ~~costs were~~expenses of $1,425,000. ~~Excluding~~The increase in the charger ~~business~~segment operating expense year-on-year reflects increased investment in engineering resource in 2017 and ~~acquisition costs, operating costs~~also that 2016 represented only five months of expenses post-acquisition.

Operating expense in the ~~business were $11,730,000~~controls and capacitors businesses combined, excluding unallocated corporate expense, was $14,826,000 compared to ~~$10,426,000~~$11,234,000 in the same period last ~~year.~~year, reflecting the continuing investment in engineering and research and development expense, including new hires, associated with the delivery of the engineering phase of the Company’s new project pipeline. The increase in expense of $3,592,000 includes approximately $1,100,000 of professional fees and other costs associated with the proposed merger with BorgWarner Inc and also $230,000 in relation to a contested director election which occurred in the second quarter of 2017.

Research and development expense increased by ~~$623,000~~$2,314,000 compared to the first nine months of last year. This increase year-on-year reflects our ~~on-going~~ongoing commitment to product development and improvement and the additional resources invested in converting our pipeline of opportunities into projects.

The Company recorded an operating loss for the first nine months of ~~2016~~2017 of ~~$2,422,000~~$8,028,000 compared with ~~operating income~~a loss of ~~$1,217,000~~$2,422,000 in the same period last year. The ~~table on page 24 shows the favorable and unfavorable percentage change for each income statement line item due to the impact of foreign currency exchange rate movements and volume impacts. The~~ operating income for the ~~charger~~chargers business for the ~~five month~~nine-month period ~~since the acquisition in January 2016,~~ was ~~$9,000~~$708,000 after recording a non-cash expense of ~~$989,000~~$759,000 from the amortization of intangible assets and fair value adjustments arising from the business combination. There ~~were~~was an operating ~~losses~~loss in the controls ~~and capacitor businesses~~business of ~~$449,000 and $61,000, respectively. The main reasons for~~$6,641,000 while the ~~reduction in~~capacitors business recorded operating income ~~are a volume reduction in revenue in the controls and capacitor businesses as well as higher operating costs associated with our investment in engineering and sales and marketing expense.~~of $86,000.

Index

Included in ~~Other~~other income and expense for first half year was a foreign currency ~~gain~~loss of ~~$13,000 and~~$301,000 compared with a loss of $487,000 for the same period last year. There was a net interest expense of ~~$119,000,~~$447,000, compared with a net interest expense of $255,000 for the same period last year, which ~~$90,000~~mainly related to the ~~MPS Bank~~ credit ~~facility.~~facility partly used to finance the Bassi acquisition in January last year.

In the first nine months of ~~2016~~2017 the Company recorded an income tax benefit of ~~$139,000,~~$1,126,000, or ~~4.4%~~12.8% of the loss before income tax, compared to an income tax ~~charge~~benefit of ~~$188,000,~~$139,000, or ~~13.7%~~4.6 % of income before income tax in the same period in ~~2015.~~2016. The income tax benefit recorded of 12.8% in 2017 and 4.6% in 2016 are lower than ~~usual effective~~the statutory Federal income tax rate of 34% for several reasons; the main items being foreign tax rate differentials and the surrender of U.K. trading losses for cash research incentives. In addition, in the prior period, ~~is largely a result~~there were acquisition expenses of ~~the acquisition costs of $1,425,000~~$1,417,000 which are not ~~being~~ a deductible expense for income tax purposes, and, in the current period, approximately $1,100,000 of costs to date associated with the proposed merger with BorgWarner Inc., which have also been treated as non-deductible for income tax purposes.

After adjusting for a ~~$131,000~~$147,000 net loss relating to the Company’s non-controlling interest in the Chinese joint venture, there was a net loss attributable to the stockholders of ~~Sevcon, Inc. of $2,894,000~~$7,802,000 or a loss of ($~~0.84)~~1.47) per diluted share, compared to a net ~~income~~loss of ~~$1,216,000,~~$3,221,000, or ~~$0.25~~($0.84) per diluted share, in the same period last year. The Company recorded a ~~preference~~preferred share dividend of ~~$327,000~~$299,000 for the first nine months of ~~2016~~2017 compared with ~~$335,000~~$327,000 for the same period last year.

24As discussed in Note 23 to the financial statements included with this Quarterly Report on Form 10-Q, we are evaluating a number of recent accounting pronouncements, any of which could have a material impact on our results of operations.

~~Index~~

Financial Condition

~~Cash balances at~~During the ~~end~~nine-month period ended July 1, 2017 the Company experienced an operating loss of ~~the third quarter of 2016 were $4,273,000, compared to $8,048,000 at September 30, 2015,~~$8,028,000 and a decrease in cash of ~~$3,775,000~~$11,809,000 from $14,127,000 at September 30, 2016 to $2,318,000 at July 1, 2017. This negative performance largely reflected difficult conditions in the ~~first nine months~~Company’s traditional controls markets and continuing investment in research and development expense associated with the delivery of ~~2016. On July 6, 2016,~~the engineering phase of the Company’s new project pipeline, as well as professional fees and other costs associated with the proposed merger of the Company ~~entered into~~with BorgWarner Inc and a ~~Securities Purchase Agreement with certain institutional and accredited investors, under~~contested director election which ~~it agreed to sell 1,124,000 units, each consisting~~occurred in the second quarter. At July 1, 2017 the Company had net current assets of ~~one share~~$18,028,000 including cash of ~~common stock, $0.10 par value, and half a warrant to purchase one share of common stock, at a price of $9.12 per unit, for total gross proceeds of $10,250,880.~~$2,318,000.

~~In the first nine months of 2016, operating activities used $7,641,000 of cash.~~ Excluding the impact of currency fluctuations, trade and other receivables ~~decreased~~increased by ~~$822,000~~$4,044,000 in the period, which ~~increased cash. Inventories~~decreased cash, and inventories and prepaid expenses and other current assets increased by a combined ~~$6,107,000,~~$4,623,000, which also reduced cash during the ~~period and accounts~~period. Accounts payable, accrued expenses and accrued taxes ~~decreased~~increased by a combined ~~$1,242,000,~~$6,250,000, which ~~also reduced~~increased cash during the period. The number of days sales in receivables ~~increased~~decreased by ~~seven days~~one day from 6172 days sales at September 30, ~~2015~~2016 to 6871 days sales at July ~~2, 2016.~~1, 2017, reflecting the lower proportion of receivables in the U.K., which generally has longer receivables days than in the rest of Europe and North America. Capital expenditures in the first nine months were ~~$1,043,000.~~$1,792,000, including leasehold improvement expenditure on a new U.K. research and development and office facility. Exchange rate changes ~~decreased~~increased reported cash by ~~$5,000~~$596,000 in the first nine months of ~~2016.~~2017.

The Company’s U.K. controls and ~~capacitor~~capacitors subsidiaries each have multi-currency overdraft facilities, which together total ~~$1,200,000~~$1,100,000 and which are secured by real estate owned by those companies. In July ~~2016,~~2017, the Company’s U.K. Bank renewed these facilities for a ~~twelve month~~twelve-month period although, in line with normal practice in Europe, they can be withdrawn on demand by the bank. The facilities were unused at July ~~2, 2016~~1, 2017 and at September 30, ~~2015.~~2016. Management believes that, if these facilities were withdrawn, adequate alternative credit resources would be available. However, this would depend on the Company’s situation and the economic environment at the time. Accordingly, management does not rely on their availability in projecting the adequacy of the Company’s capital resources.

The Company entered into a €14,000,000 (approximately ~~$15,448,000~~$15,994,000 at July ~~2, 2016)~~1, 2017) credit facility with MPS Bank on January 27, 2016. The loan and security agreement will expire on January 27, 2021 when all outstanding principal and unpaid interest will be due and payable in full. The facility may be paid before maturity in whole or in part at the option of the Company, on or after the ~~six-month~~nine-month anniversary of the funding date, without penalty or premium. Interest on the loan is payable quarterly at a margin of 3% over EuroLIBOR, with a minimum EuroLIBOR rate of 0.0%. Under the facility, the Company must maintain, on an annual basis, a net debt to EBITDA ratio defined as the ratio of consolidation indebtedness of the Company and its subsidiaries, minus cash and marketable securities, to EBITDA of the Company and its subsidiaries, measured on a fiscal year basis, plus (under a December 2016 amendment) the net cash proceeds received by the Company from the issuance and sale of equity securities during such twelve-month period, of no more than 3.5:1 for fiscal years 2016 and 2017 and a net debt to EBITDA ratio of no more than 3.0:1 thereafter. The Company would consider raising additional equity capital if necessary to ensure compliance with this covenant at year-end. Upon entering into the credit facility, the Company drew down €14,000,000 (approximately ~~$15,448,000 at July 2, 2016)~~$15,994,000), which was the total amount outstanding at July ~~2, 2016.~~1, 2017. This amount is shown in the accompanying consolidated balance sheet under long-term debt. The carrying value of the debt approximated to fair value based on current interest rates.

~~There~~On May 22, 2017, the Company entered into a loan agreement with FrontFour Capital Group, LLC (“FrontFour“), pursuant to which FrontFour made a commitment to the Company to provide an unsecured term loan in the principal amount of $10,000,000 (the “Term Loan”). The period of FrontFour’s commitment under the loan agreement began on the date the Company entered into the loan agreement, and terminates on (i) August 22, 2017, or (ii) if the Company chooses to request an extension, November 22, 2017. The Company paid a commitment fee to FrontFour of $450,000. The commitment fee plus $34,000 of associated legal fees have been accounted for as deferred financing costs and are being amortized over the life of the loan agreement. If the Company elects to extend the commitment period, it will be required to pay FrontFour an additional $150,000 extension fee. The interest rate on amounts borrowed under the loan agreement is 10% per annum. Subsequent to the end of the period, on July 3, 2017, the Company drew down $7,500,000 under the FrontFour loan agreement and it is anticipated that the Company will draw down the remaining $2,500,000 under the facility in the fourth quarter of 2017.

The Company entered into a fifteen year lease for a U.K. facility in the second quarter of 2017 and is in the process of relocating staff to that refurbished leasehold facility. The facility will be the Company’s principal U.K. location for research and development activity and support services. The refurbishment and fit-out expense for that facility, both incurred to and including the third quarter of 2017, and committed to, amounts to approximately $1,500,000. Other than this U.K. facility cost, there were no significant capital expenditure commitments at July ~~2, 2016.~~ 1, 2017.

It is estimated that the Company will make contributions to its U.K. and U.S. defined benefit pension plans of approximately ~~$626,000~~$866,000 in fiscal ~~2016;~~2017; should the Company suffer a material reduction in revenues in ~~2016~~2017 this commitment could adversely impact the Company’s financial position.

The Merger Agreement with BorgWarner includes customary covenants requiring us to operate our business in all material respects in the ordinary course of business consistent with past practice until the completion of the merger. In addition, without BorgWarner’s prior approval, we may not take, authorize, agree or commit to do certain actions outside of the ordinary course of business, including incurring capital expenditures above a specified threshold, incurring additional debt and issuing additional equity. We do not believe these restrictions will prevent us from meeting our ongoing costs of operations, working capital needs, or capital expenditure requirements before the completion of the merger.

The outlook continues to remain uncertain given the continuing worldwide economic situation and in particular the low economic growth environment in Europe and North America, the turmoil caused by the U.K.’s Brexit referendum, and the continuing austerity measures in certain parts of Europe. Against this background, management has conducted a review of the Company’s cash requirements for the next twelve months taking into account existing cash resources, forecasted cash from future operations and existing borrowing facilities. In addition, the Company has explored its options to secure further financing. Based on this assessment of the Company’s cash requirements and the financing it believes is available, in the opinion of management, the Company’s requirements for working capital to meet projected operational and capital spending at ~~status quo~~forecast levels in both the short and ~~long term~~long-term can be met by a combination of existing cash resources, ~~future earnings and~~cash from operations, existing borrowing facilities in ~~Europe.~~Europe and the availability of further financing. Any material reduction in revenues will have a materially adverse impact on the Company’s financial position, which would be exacerbated if any of the Company’s lenders withdraws or reduces available credit. If the Company is unable to generate sufficient cash from operations and if the bank overdraft facilities are withdrawn, the Company would need to raise additional debt or equity capital from other sources to avoid significantly curtailing its business and materially adversely affecting its results.

However, management has said that in order to further increase the rate of growth and improve shareholder value we would need to continue to increase our investment in engineering and other technical resources. We may do this organically, through the acquisition of other businesses, or both. In either case, we may need to raise additional debt or equity capital. Such capital may not be available to us at a reasonable cost, or at all.

As a smaller reporting company, the Company is not required to respond to this ~~item. However,~~item however we are providing the following information about our foreign currency and interest rate risks to supplement the ~~disclosures~~disclosure in Item 2.

The Company sells to customers throughout the industrialized world. The majority of the Company’s products are manufactured in, or sourced from, the ~~United Kingdom.~~U.K. In the first nine months of ~~2016,~~2017, approximately ~~42%~~60% of the Company’s sales were made in Euros, 33% in U.S. Dollars ~~13% were made~~and 7% in British ~~Pounds and 45% were made in Euros.~~Pounds. Approximately ~~88%~~87% of the Company’s cost of sales was incurred in British Pounds and Euros. This resulted in the Company’s sales and margins being exposed to fluctuations due to the change in the exchange rates of the U.S. Dollar, the British Pound and the Euro. The Company has trade accounts receivable and accounts payable denominated in both British Pounds and Euros that are exposed to exchange fluctuations.

In addition, the translation of the sales and income of foreign subsidiaries into U.S. Dollars is also subject to fluctuations in foreign currency exchange rates.

The following table provides information about the Company’s foreign currency accounts receivable, accounts payable and firmly committed sales contracts outstanding as of July ~~2, 2016.~~1, 2017. The information is provided in U.S. Dollar amounts, as presented in the Company’s consolidated financial statements. The table presents the amounts at which the Company’s foreign currency accounts receivable, accounts payable and firmly committed sales contracts as of July ~~2, 2016~~1, 2017 are expected to mature based on the exchange rate of the relevant foreign currency to U.S. Dollars at July ~~2, 2016:~~1, 2017:

Under the Company’s credit facility with MPS Bank interest is payable quarterly at a margin of 3% over EuroLIBOR, with a minimum EuroLIBOR rate of 0.0%. The interest rate as of July 1, 2017 was 3.0%. The Company’s ~~policy~~credit facility with FrontFour bears interest at a fixed rate of 10.0% per annum and interest is ~~to invest~~payable monthly in arrears.

The Company invests surplus funds in instruments with maturities of less than 12 months at both fixed and floating interest rates. This investment portfolio is generally subject to general credit, liquidity, counterparty, market and interest rate risks that may be exacerbated by the current global financial crisis. If the banking system or the fixed income or credit markets continue to deteriorate or remain volatile, the values and liquidity of these investments could be adversely affected. The Company did not have any surplus funds invested as of July 2, 2016.

Our principal executive officer and principal financial officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rule 13a-15(e)), have concluded that, as of July ~~2, 2016,~~1, 2017, these disclosure controls and procedures were ~~not effective due to certain deficiencies in internal control over financial reporting.~~effective.

~~Also, as previously disclosed, at~~During the ~~end of~~period covered by this Quarterly Report on Form 10-Q, we provided the ~~first quarter of 2016, an auditor-proposed adjustment~~employee training to ~~revenue was required because a necessary control was missing, which we identified as a material weakness. We recorded~~complete the adjustment in our first quarter financial statements and have added a control to our revenue recognition processes to remedy the deficiency. Our remediation plan also includes the implementation of enhanced internal auditing procedures around the testing of revenue.

The Company believes that the following represent the most significant risk factors related to its business, the occurrence of any of which could have a material adverse effect on our financial condition, results of operations and share price:

Whether or not the Merger is completed, the fact that it is pending may disrupt the current plans and operations of the Company, which could have an adverse effect on our business and financial results. The pendency of the Merger may also divert management’s attention and our resources from ongoing business and operations and our employees and other key personnel may have uncertainties about the effect of the pending Merger and those uncertainties may impact our ability to retain, recruit and hire key personnel while the Merger is pending or if it fails to close. We may incur significant costs, charges or expenses relating to the Merger, regardless of whether or not it is completed.

Furthermore, we cannot predict how our suppliers, customers and others with whom we do business will view or react to the pending Merger in the future. If we are unable to maintain our normal relationships as a result of the pending Merger, our financial results may be adversely affected.

While the Merger Agreement is in effect, we are subject to restrictions on our business activities and must generally operate our business in the ordinary course (subject to certain exceptions). These restrictions could prevent us from pursuing attractive business opportunities that arise prior to the completion of the Merger, could result in our inability to respond effectively to competitive pressures and industry developments and may otherwise have a material adverse effect on our future results of operations or financial condition.

It is also possible that one or more lawsuits could be brought challenging the Merger. If dismissals are not obtained or settlements are not reached, such lawsuits could prevent or delay completion of the Merger and/or result in substantial costs to us.

There is no assurance that the closing of the Merger will occur. Consummation of the Merger is subject to various conditions, including, among other things, the approval of the Merger Agreement by the holders of our outstanding shares of common stock, and certain other customary conditions. We cannot predict with certainty whether and when any of these conditions will be satisfied. If the Merger is not consummated, our stock price will likely decline as our stock has recently traded based on the proposed per share price for the ~~Company:~~Merger. We will have incurred significant costs, including, among other things, the diversion of management resources, for which we will have received little or no benefit if the closing of the Merger does not occur. A failed transaction may result in negative publicity and a negative impression of us in the investment community. The occurrence of any of these events individually or in combination could have a material adverse effect on our results of operations and the market price of our common stock.

We have experienced operating losses during the last two fiscal quarters as well as our last fiscal year, as well as declines in cash flows from operating activities. This negative performance was largely due to difficult conditions in our traditional controls markets and continuing investment in research and development expense associated with the delivery of the engineering phase of our project pipeline, both of which conditions are expected to continue. We anticipate that we may need to raise additional capital to fund our operations, including to support our existing and anticipated new research and development activities. The level of our cash needs will depend on numerous factors, principally our ability to grow revenues. If additional funds were raised through the issuance of equity securities or convertible debt securities, it would be dilutive to our stockholders and could result in a decrease in our stock price. If we are unable to secure such additional financing, it will have a material adverse effect on our business and we may have to limit operations.

Our acquisition of Bassi S.r.l. was a significant transaction for us. If we fail to successfully integrate and manage its business, or if the acquisition does not further our business strategy as we expect, our operating results will be adversely affected. Among the risks are the following:

The Company’s traditional customers are mainly manufacturers of capital goods such as fork lift trucks, aerial lifts and railway signaling equipment. These markets are cyclical and depend heavily on worldwide transportation, shipping and other economic activity. They experienced a significant decline in demand during the recent global recession. Further, as our business has expanded globally, we have become increasingly subject to the risks arising from adverse changes in global economic conditions. ~~While market~~Market conditions ~~have appeared to improve since 2010,~~fluctuate, and there is considerable economic instability, ~~remains,~~ particularly in the Eurozone. As a result, current or potential customers may be unable to fund purchases or manufacturing of products, which could cause them to delay, decrease or cancel purchases of our products or not to pay the Company or to delay paying for previously purchased products. In addition, continuing instability in the European credit markets may cause the Company to lose its current overdraft facilities and be unable otherwise to obtain financing for operations as needed.

The Company is increasingly involved in developing products for the on-road electric vehicle market. We have relationships with ~~several~~ customers that incorporate or plan to incorporate our products into their EVelectric vehicle (“EV”) products. Our competitors and others are also developing products for other entrants in the EV market, with similar and competing technologies. If our development projects do not convert to product sales, our customers’ products or technology are not successful commercially, or if worldwide demand for EVs fails to grow as much as we hope, we may not realize the anticipated demand for our products in the EV market, which may have a material adverse effect on our results of operations.

Ten customers accounted for ~~42%~~49% of the Company’s revenues infor the ~~first~~ nine months ~~of 2016~~ended July 1, 2017 and the largest customer accounted for 7%18% of revenues. Although we have had business relationships with some of these customers for many years, our relationships with on-road EV customers are newer and, in any event, there are no long-term contractual supply agreements in place with any customer. Accordingly our performance could be adversely affected by the loss of one or more of these key customers.

A significant portion of our operations is located, and a significant portion of our business comes from, outside the ~~United States.~~U.S. Accordingly, our performance could be adversely affected by economic downturns in Europe or the Far East as well as in the ~~United States.~~U.S. A consequence of significant international business is that a large percentage of our revenues and expenses are denominated in foreign currencies that fluctuate in value versus the U.S. ~~Dollar.~~dollar. Significant fluctuations in foreign exchange rates can and do have a material impact on our financial results, which are reported in U.S. ~~Dollars.~~dollars. Other risks associated with international business include: changing regulatory practices and tariffs; staffing and managing international operations, including complying with local employment laws; longer collection cycles in certain areas; and changes in tax and other laws.

~~The Company has a joint venture to market product in China.~~ The Chinese market is volatile and is susceptible to additional volatility based on the promotion or absence of government support. Should the Chinese government change its support for environmental improvement, it may adversely affect the sales of hybrid and pure electric vehicles and our ability to grow as quickly as the Company envisages.

There continues to be significant uncertainty about the stability of global credit and financial markets in light of the continuing debt crisis in certain European countries. A default or a withdrawal from the Eurozone by any of the countries involved, or the uncertainty alone, could cause the value of the Euro to deteriorate. This, or a change to a local currency, would reduce the purchasing power of affected European customers. We are unable to predict the likelihood of any of these events but, if any occurs, our business, financial position and results of operations could be materially and adversely affected.

In certain markets in which the Company operates, and in particular in the Company’s new market sectors, non-recurring engineering development programs may take several years to complete, and programs can be cancelled by the customer at short notice. Cancellation of an engineering development program would potentially result in the Company not being able to sell the expected products.

In some new markets the Company’s customer is responsible for ensuring that all of the components of their vehicle, working in unison, comply with local governmental regulations in order to achieve the necessary certification to proceed to volume production. Even though the Company’s product performs to specification in all respects, the customer’s vehicle may fail to satisfy overall the local governmental regulations due to the failure of one or more components supplied by other suppliers resulting in a project not proceeding to volume production.

It is estimated that the Company will make contributions to its frozen U.K. and U.S. defined benefit pension plans of approximately ~~$626,000~~$866,000 in ~~2016~~2017 and at a similar level in subsequent years. Should the Company suffer a material reduction in revenues this commitment could adversely impact the Company’s financial position.

The Company relies on single, or a small number of, suppliers and sub-contractors for its requirements for most components, sub-assemblies and finished products. In the event that such suppliers and sub-contractors are unable or unwilling to continue supplying the Company, or to meet the Company’s cost and quality targets or needs for timely delivery, there is no certainty that the Company would be able to establish alternative sources of supply in time to meet customer demand.

In the ~~electronic~~ controls segment, the majority of the Company’s finished product is produced in ~~three~~two separate plants in Poland ~~Mexico~~ and ~~China;~~Malaysia; these plants are owned by sub-contractors. The ~~capacitor~~capacitors business is located in a single plant in ~~Wales.~~Wales and the chargers business is located in a single plant in Italy. In the event that any of these plants was to be damaged or destroyed, there is no certainty that the Company would be able to establish alternative facilities in time to meet customer demand. The Company does carry property damage and business interruption insurance but this may not cover certain lost business due to the long-term nature of the relationships with many customers.

Management uses its judgment and market information to assess levels of reserve required in certain areas including inventory and warranty. If actual future demand or market conditions are less favorable than those projected by management, or if product designs change more quickly than forecast, additional inventory reserves may be required. ~~Should~~If actual product failure rates and repair or replacement costs differ from management estimates, revisions to the estimated warranty reserve may be required and the Company’s results may be materially adversely affected.

The Company ~~entered into, on January 27, 2016,~~has a five year credit facility with MPS Bank under which it has drawn €14,000,000 ~~(approximately $15,448,000 at~~($15,994,000 as of July ~~2, 2016)~~1, 2017). While the credit facility is outstanding, the Company together with its subsidiaries must maintain a leverage ratio, defined as the ratio of consolidated indebtedness of the Company and its subsidiaries, minus cash and marketable securities, to EBITDA of the Company and its subsidiaries, measured on a fiscal year-end basis, plus (under a December 2016 amendment) the net cash proceeds received by the Company from the issuance and sale of equity securities during such twelve-month period, of not greater than 3.5:~~1.00~~1 through September 30, 2017, and thereafter not greater than 3.0:~~1.00.~~1. Breach of this covenant would constitute an event of default, after which the interest rate would be increased and the Bank could elect a number of remedies including, but not limited to declaring all obligations (including principal, interest and expenses) immediately due and payable, that would have a material adverse impact on the Company’s ability to continue ~~operation.~~operations.

Section 13(k) of the Securities Exchange Act of 1934 (Section 402 of the Sarbanes-Oxley Act) provides that it is unlawful for a company that has a class of securities registered under Section 12 of the Exchange Act to, directly or indirectly, including through any subsidiary, extend or maintain credit in the form of a personal loan to or for any director or executive officer of the company. We overlooked this prohibition and inadvertently made loans to our chief executive and chief financial officers in February 2017 that may have violated Section 13(k). The loans were repaid in April 2017 as soon as they came to the attention of our Board of Directors. Issuers who are found to have violated Section 13(k) may be subject to civil sanctions, including injunctive remedies and monetary penalties, as well as criminal sanctions. The imposition of any of such sanctions on the Company could have a material adverse effect on our business, financial position, results of operations or cash flows.

In the event that the Company discovers a product defect that impacts the safety or operation of its products, then a product recall may be necessary which could involve the Company in a substantial unanticipated expense significantly in excess of any reserve that had been made.

The Company’s products are technically complex and are installed and used by third parties. Defects in their design, installation, use or manufacturing may result in product liability claims against the Company. Such claims may result in significant damage awards, and the cost of any such litigation could be material.

We ~~are considering~~recently made a significant acquisition of a new business, and we regularly consider supplementing our growth by acquiring new businesses. If we do that, but we fail to successfully integrate and manage the businesses we acquire, or if an acquisition does not further our business strategy as we expected, our operating results and financial condition may be materially adversely affected. Business combinations also involve a number of risks and uncertainties that can have an adverse impact, including that:

The ~~announcement~~result of the referendum on the ~~United Kingdom’s (or the~~ U.K.)’s membership in the European Union (E.U.) (referred to as Brexit), ~~advising for~~voting in favor of the exit of the ~~United Kingdom~~U.K. from the European Union, has caused and could continue to cause disruptions to and have an adverse effect on our business, financial results and operations. Any agreements the U.K. makes to retain access to E.U. markets could potentially disrupt the markets we serve and the tax jurisdictions in which we operate and adversely change tax benefits or liabilities in these or other jurisdictions, and may cause us to lose customers, suppliers, and employees. In addition, ~~Brexit~~the referendum result could lead to legal uncertainty and potentially divergent national laws and regulations that could, at a minimum, increase our costs.

The announcement of Brexit caused significant volatility in global stock markets and currency exchange rate fluctuations that resulted in the strengthening of the U.S. dollar against foreign currencies in which we conduct business. The strengthening of the U.S. dollar relative to other currencies has and may continue to adversely affect our results of operations, in a number of ways, including:

The announcement of Brexit has also and may continue to create global economic uncertainty, which may cause our customers to closely monitor their costs and reduce their spending budget on our products and services.

Any of these effects of Brexit, among others, could materially adversely affect our business, business opportunities, results of operations, financial condition and cash flows.

The following are certain important additional risks related to an investment in our securities:

We are required to establish and maintain adequate internal control over financial reporting, which are processes designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. We are also required to comply with Section 404 of the Sarbanes-Oxley Act of 2002, which requires public companies to conduct an annual review and evaluation of their internal control over financial reporting. If we cannot favorably assess the effectiveness of our internal control over financial reporting in the future, our stock price could be materially adversely affected.

Our directors, executive officers and our stockholders who each own greater than 5% of our outstanding common stock and their affiliates, in the aggregate, beneficially own a majority of the outstanding shares of our common stock. As a result, these stockholders may be able to influence or control matters requiring approval by our stockholders, including the election of directors and the approval of mergers, acquisitions or other extraordinary transactions. They may also have interests that differ from those of other stockholders and may vote in a way which may be adverse to the interests of other stockholders. This concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately adversely affect the market price of our common stock.

See Exhibit Index immediately preceding the exhibits.

Agreement and Plan of Merger by and among the registrant, BorgWarner Inc., and Slade Merger Sub Inc. dated as of July 14, 2017 (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed on July 17, 2017).^§

Equity Transfer Agreement dated June 3, 2017, between the registrant and Xuchang Fuhua Glass Co. Ltd. (filed herewith).^§

*Indicates exhibit previously filed and incorporated by reference. Exhibits filed with periodic reports were filed under File No. 1-9789.

Delaware		04-2985631
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

	Large accelerated filer ☐		Accelerated filer ☐		Non-accelerated filer ☐		Smaller reporting company ☒		Emerging growth company ☐
					(Do not check if a smaller reporting company)

Class		Outstanding at August ~~12, 2016~~11, 2017
Common stock, par value $.10	~~5,343,257~~	5,693,408

	PAGE
PART I - FINANCIAL INFORMATION	2

Item 1 Financial Statements	2
Consolidated Balance Sheets	2
Consolidated Statements of Operations	3
Consolidated Statements of Comprehensive ~~Income (Loss)~~Loss	3
Consolidated Statements of Cash Flows	4
Notes to Consolidated Financial Statements	5
Item 2Management’s Discussion and Analysis of Financial Condition and Results of Operations	1925
Item 3Quantitative and Qualitative Disclosures about Market Risk	2633
Item 4Controls and Procedures	2734

PART II - OTHER INFORMATION	28

Item 1 1Legal Proceedings	2834
Item 1A Risk Factors	2834
Item 22 Unregistered Sales of Equity Securities and Use of Proceeds	3240
Item 3 3Defaults upon Senior Securities	3240
Item 44 Mine Safety Disclosures	3240
Item 5 5Other Information	3240
Item 6 Exhibits	3240

SIGNATURES	3340

INDEX OF EXHIBITS	3341

(in thousands of dollars except share and per share data)	(in thousands of dollars except share and per share data)							(in thousands of dollars except share and per share data)
		July 2, 2016			September 30, 2015				July 1, 2017			September 30, 2016
		(unaudited)			(derived from audited statements)
ASSETS
Current assets:
Cash and cash equivalents		$	4,273		$	8,048			$	2,318		$	14,127
Trade receivables, net of allowances for doubtful accounts of $200 at July 2, 2016 and $37 at September 30, 2015			10,995			8,995
Trade receivables, net of allowances for doubtful accounts of $247 at July 1, 2017 and $243 at September 30, 2016										15,243			11,499
Other receivables			1,230			467				1,213			694
Inventories			14,148			6,790				17,072			13,666
Deferred taxes			459			1,244
Prepaid expenses and other current assets			3,010			2,337				4,723			3,602
Total current assets			34,115		$	27,881				40,569			43,588
Property, plant and equipment, at cost:
Land and improvements			19			21
Buildings and improvements			613			693
Equipment			12,032			11,485
			12,664			12,199
Less: accumulated depreciation			(9,713	)		(9,574	)
Net property, plant and equipment			2,951			2,625
Property, plant and equipment, net										4,996			3,843
Long-term deferred tax assets			3,683			3,232				5,716			4,289
Intangible assets, net			10,372			-				8,971			9,185
Goodwill			8,604			1,435				8,142			7,794
Other long-term assets			497			443				392			274
Total assets		$	60,222		$	35,616			$	68,786		$	68,973

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Bank overdraft		$	109		$	-
Accounts payable			8,699			6,184			$	15,223		$	10,604
Accrued expenses			3,689			1,973				6,243			4,931
Accrued and deferred taxes on income			65			-
Accrued income taxes										275			66
Dividends payable			-			200				-			216
Debt to related parties			971			-				-			300
Short-term bank debt										800			-
Total current liabilities			13,533			8,357				22,541			16,117

Long-term bank debt, net			15,216			-				15,013			15,512
Liability for pension benefits			10,527			10,963
Long-term related party debt										1,626			1,558
Long-term pension benefit liablilities										10,702			11,511
Long-term deferred tax liabilities			1,794			500				1,553			1,517
Long-term debt to related parties			1,507			-
Other long-term liabilities										1,075			987
Total liabilities		$	42,577		$	19,820				52,510			47,202

Commitments and Contingencies (Note 16)
Commitments and contingencies (Note 19)

Stockholders’ equity:
Preferred stock, par value $.10 per share - authorized - 1,000,000 shares; Outstanding, 449,011 shares at July 2, 2016 and 452,124 at September 30, 2015			45			45
Common stock, par value $.10 per share - authorized 20,000,000; outstanding, 4,218,339 shares at July 2, 2016 and 3,694,872 at September 30, 2015			422			369
Premium paid in on common stock			11,711			6,637
Premium paid in on preferred stock			8,995			9,058
Retained earnings			7,480			10,607
Stockholders' equity:
Convertible preferred stock, par value $.10 per share - 1,000,000 shares authorized; 422,433 and 448,705 shares issued and outstanding at July 1, 2017 and September 30, 2016, respectively										42			45
Common stock, par value $.10 per share - 20,000,000 shares authorized; 5,689,361 and 5,341,513 shares issued and outstanding at July 1, 2017 and September 30, 2016, respectively										569			534
Common stock warrants										2,085			2,095
Additional paid in capital, common stock										20,716			19,151
Additional paid in capital, preferred stock										8,466			8,990
Retained earnings (accumulated deficit)										(3,366	)		4,344
Accumulated other comprehensive loss			(10,961	)		(11,004	)			(12,121	)		(13,420	)
Total Sevcon, Inc. and subsidiaries stockholders’ equity			17,692			15,712
Total parent stockholders' equity										16,391			21,739
Non-controlling interest			(47	)		84				(115	)		32
Total stockholders’ equity			17,645			15,796				16,276			21,771
Total liabilities and stockholders’ equity		$	60,222		$	35,616			$	68,786		$	68,973

	(in thousands of dollars except per share data)
	Three months ended						Nine months ended
	July 2, 2016			July 4, 2015			July 2, 2016			July 4, 2015
Net sales	$	13,913		$	10,346		$	36,209		$	30,619
Cost of sales		(9,161	)		(6,490	)		(23,219	)		(18,976	)
Gross profit		4,752			3,856			12,990			11,643
Selling, general and administrative expenses		(4,463	)		(2,551	)		(10,568	)		(7,630	)
Research and development expenses		(1,212	)		(1,044	)		(3,419	)		(2,796	)
Acquisition costs		(8	)		-			(1,425	)		-
Operating (loss) income		(931	)		261			(2,422	)		1,217
Interest expense		(140	)		(14	)		(271	)		(54	)
Interest income		4			4			16			20
Foreign currency (loss) gain		(522	)		(21	)		(487	)		258
Change in fair value of foreign exchange contracts		-			132			-			(68	)
(Loss) income before income tax		(1,589	)		362			(3,164	)		1,373
Income tax benefit (provision)		60			(83	)		139			(188	)
Net (loss) income		(1,529	)		279			(3,025	)		1,185
Net loss attributable to non-controlling interests		84			2			131			31
Net (loss) income attributable to Sevcon, Inc. and subsidiaries		(1,445	)		281			(2,894	)		1,216
Preferred share dividends		(93	)		(110	)		(327	)		(335	)
Net (loss) income attributable to common stockholders	$	(1,538	)	$	171		$	(3,221	)	$	881
Net income per ordinary share – basic	$	(0.38	)	$	0.04		$	(0.84	)	$	0.25
Net income per ordinary share – diluted	$	(0.38	)	$	0.04		$	(0.84	)	$	0.25
Weighted average shares used in computation of earnings per share:
Basic		4,070			3,486			3,828			3,459
Diluted		4,070			3,577			3,828			4,913

	(in thousands except per share data)
	Three Months Ended						Nine Months Ended
	July 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016
Net sales	$	18,556		$	13,913		$	46,771		$	36,209
Cost of sales		(13,924	)		(9,161	)		(35,618	)		(23,219	)
Gross profit		4,632			4,752			11,153			12,990
Selling, general and administrative expenses		(5,455	)		(4,463	)		(13,448	)		(10,568	)
Research and development expenses		(2,465	)		(1,212	)		(5,733	)		(3,419	)
Acquisition expenses		-			(8	)		-			(1,425	)
Operating loss		(3,288	)		(931	)		(8,028	)		(2,422	)
Interest expense		(216	)		(140	)		(496	)		(271	)
Interest and other income		13			4			49			16
Foreign currency gain (loss)		317			(522	)		(301	)		(487	)
Loss before income tax		(3,174	)		(1,589	)		(8,776	)		(3,164	)
Income tax benefit		269			60			1,126			139
Net loss		(2,905	)		(1,529	)		(7,650	)		(3,025	)
Net loss attributable to non-controlling interests		14			84			147			131
Net loss attributable to Sevcon, Inc. and subsidiaries		(2,891	)		(1,445	)		(7,503	)		(2,894	)
Preferred share dividends		(102	)		(93	)		(299	)		(327	)
Net loss attributable to common stockholders	$	(2,993	)	$	(1,538	)	$	(7,802	)	$	(3,221	)
Net loss per ordinary share - basic	$	(0.56	)	$	(0.38	)	$	(1.47	)	$	(0.84	)
Net loss per ordinary share - diluted	$	(0.56	)	$	(0.38	)	$	(1.47	)	$	(0.84	)
Weighted average shares used in computation of earnings per share:
Basic		5,366			4,070			5,291			3,828
Diluted		5,366			4,070			5,291			3,828

	(in thousands of dollars) January 29, 2016
Consideration
Cash				$	10,832

Common stock (500,000 shares of Sevcon, Inc.)					4,760

Fair value of pre-acquisition dividends payable to Bassi Holding					3,503

Fair value of total consideration				$	19,095

Recognized amounts of identifiable assets acquired and liabilities assumed:

Cash	$	1,577
Accounts receivable		3,318
Inventory		4,183
Property and equipment		923
Other assets		715
Accounts payable		(3,513	)
Accrued and other current liabilities		(2,020	)
Deferred tax liabilities		(1,947	)
Other long-term liabilities	$	(1,360	)	$	1,876

Estimated fair value of identifiable intangible assets acquired:

Developed technologies		325
Customer relationships		8,774
Trade name		758
Order backlog		325			10,182

Fair value of total consideration, excluding goodwill					12,058

Goodwill					7,037

Fair value of total consideration				$	19,095

	Amount Assigned		Amortization Period (in years)
Definite-lived intangible assets:
Developed technologies	$	325		7.0
Customer relationships		8,774		10.0
Trade name		758		10.0
Order backlog		325		1.0
Total intangible assets acquired	$	10,182

				July 1, 2017

Performance based stock options:

Expected life (in years)		4.0			4.0
Risk-free interest rate		1.55	%		1.64	%
Volatility		61.43	%		62.16	%
Dividend yield		0.00	%		0.00	%
Weighted-average fair value per share	$	4.81		$	8.38

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value		Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value

Outstanding as of September 30, 2015		-	$	-		-	$	-
Outstanding as of September 30, 2016										38,460	$	9.94		4.21	$	-
Granted		38,460	$	9.94		5.00	$	11,153		2,800		11.86		2.86		-
Exercised		-		-		-		-		-		-		-		-
Forfeited or Expired		-		-		-		-		-		-		-		-
Outstanding at July 2, 2016		38,460	$	9.94		4.46	$	nil
Outstanding at July 1, 2017										41,260	$	10.07		3.54	$	-
Exercisable		-		-		-		-		-		-		-		-
Vested and expected to vest		34,737	$	9.94		4.46	$	nil		38,693	$	10.07		3.54	$	-

	Number of shares of Restricted Stock			Weighted Average Grant-Date Fair Value		Number of shares of Restricted Stock			Weighted Average Grant-Date Fair Value
Non-vested balance as of September 30, 2014		168,600		$	5.27
Non-vested balance as of September 30, 2016							138,940		$	6.50
Granted		92,600		$	7.49		262,600		$	15.03
Vested		(64,600	)	$	6.32		(86,400	)	$	7.44
Non-vested balance as of September 30, 2015		196,600		$	5.97
Granted		41,240		$	9.89
Cancelled		(3,300	)	$	9.82
Vested		(91,600	)	$	6.72
Non-vested balance as of July 2, 2016		142,940		$	6.53
Non-vested balance as of July 1, 2017							315,140		$	13.35

	Number of shares of Stock Options		Weighted Average Grant-Date Fair Value
Non-vested balance as of September 30, 2015		-	$	-
Granted		38,460	$	4.81
Vested		-	$	-
Non-vested balance as of July 2, 2016		38,460	$	4.81

	Number of shares subject to Stock Options			Weighted Average Grant-Date Fair Value
Non-vested balance as of September 30, 2016		50,625		$	4.67
Granted		2,800		$	2.65
Exercised		(12,165	)	$	4.39
Non-vested balance as of July 1, 2017		41,260		$	4.62

				(in thousands of dollars)															(in thousands of dollars)
																			Three months ended July 1, 2017
				Three months ended July 2, 2016												Controls			Capacitors		Chargers		Corporate			Total
	Controls			Capacitors			Chargers			Corporate			Total
Sales to external customers		8,462			405			5,046			-			13,913
Inter-segment revenues		-			-			-			-			-
Sales																	9,822			500		8,234		-			18,556
Operating income (loss)		(511	)		(5	)		(257	)		(158	)		(931	)		(2,497	)		64		520		(1,375	)		(3,288	)
Identifiable assets, excluding goodwill		38,149			901			8,715			3,853			51,618			34,561			962		23,449		1,672			60,644
Goodwill		1,435			-			7,169			-			8,604			1,435			-		6,707		-			8,142

			Three months ended July 4, 2015
	Controls		Capacitors		Chargers		Corporate			Total
Sales to external customers		9,820		526		-		-			10,346
Inter-segment revenues		-		-		-		-			-
Operating income		342		5		-		(86	)		261
Identifiable assets, excluding goodwill		24,033		1,248		-		7,150			32,431
Goodwill		1,435		-		-		-			1,435

				Nine months ended July 2, 2016
	Controls			Capacitors			Chargers		Corporate			Total
Sales to external customers		25,968			1,215			9,026		-			36,209
Inter-segment revenues		-			-			-		-			-
Operating income (loss)		(449	)		(61	)		9		(1,921	)		(2,422	)
Identifiable assets, excluding goodwill		38,149			901			8,715		3,853			51,618
Goodwill		1,435			-			7,169		-			8,604

			Nine months ended July 4, 2015
	Controls		Capacitors		Chargers		Corporate		Total
Sales to external customers		29,000		1,619		-		-		30,619
Inter-segment revenues		-		3		-		-		3
Operating income		1,064		121		-		32		1,217
Identifiable assets, excluding goodwill		24,033		1,248		-		7,150		32,431
Goodwill		1,435		-		-		-		1,435

				(in thousands of dollars)
				Nine months ended July 1, 2017
	Controls			Capacitors		Chargers		Corporate			Total
Sales		25,043			1,193		20,535		-			46,771
Operating income (loss)		(6,641	)		86		708		(2,181	)		(8,028	)
Identifiable assets, excluding goodwill		34,561			962		23,449		1,672			60,644
Goodwill		1,435			-		6,707		-			8,142

	(in thousands of dollars)
	July 1, 2017		September 30, 2016
U.S. long-term assets:	$	2,490	$	2,224
Foreign long-term assets:
U.K.		7,919		5,891
Italy		16,934		16,580
France		374		302
Korea, Japan, China		461		388
Canada		39		-
Total foreign long-term assets		25,727		23,161
Total long-term assets	$	28,217	$	25,385

	(in thousands of dollars)

July 2, 2016	Level 1* (Quoted prices in active markets)		Level 2** (Significant observable inputs)		Level 3*** (Unobservable inputs)
Adept Strategy 9 Fund (a sub-fund of Adept Investment Management plc)		-		12,011		-
Schroder Matching Plus Nominal and Index Linked Liability Driven Investment Swap Funds (funds managed by Schroder Investment Management Limited)		-		4,869		-
U.S. Mutual Funds and Fixed Income Funds		1,176		-		-
U.S. Equity Funds		1,970		-		-
Other Types of Investments
Cash		1,159		-		-
Total		4,305		16,880		-

	(in thousands of dollars)
September 30, 2015	Level 1* (Quoted prices in active markets)		Level 2** (Significant observable inputs)		Level 3*** (Unobservable inputs)
Adept Strategy 9 Fund (a sub-fund of Adept Investment Management plc)		-		13,044		-
Schroder Matching Plus Nominal and Index Linked Liability Driven Investment Swap Funds (funds managed by Schroder Investment Management Limited)		-		3,845		-
U.S. Mutual Funds and Fixed Income Funds		2,557		-		-
U.S. Equity Funds		350		-		-
Other Types of Investments
Cash		331		-		-
Total		3,238		16,889		-

	(in thousands of dollars)
September 30, 2016	Level 1* (Quoted prices in active markets)		Level 2** (Significant observable inputs)		Level 3*** (Unobservable inputs)
Adept Strategy 9 Fund (a sub-fund of Adept Investment Management plc)	$	-	$	13,268	$	-
Schroder Matching Plus Nominal and Index Linked Liability Driven Investment Swap Funds (funds managed by Schroder Investment Management Limited)		-		5,335		-
U.S. Mutual Funds and Fixed Income Funds		2,837		-		-
U.S. Equity Funds		400		-		-
Other Types of Investments		-		-		-
Cash		439		-		-
Total Pension Plan Assets – Fair Value	$	3,676	$	18,603	$	-

	(in thousands of dollars)		(in thousands of dollars)
2016	$	426
2017		514	$	470
2018		532		488
2019		540		494
2020		550		502
2021 – 2025	$	2,958
2021				499
2022 – 2026			$	2,722

2018	$	1,159
2018 – short-term				$	800
2018 – long-term					400
2019		1,545			1,599
2020		1,545			1,599
2021		11,199			11,596
		15,448			15,994
Less: debt issuance costs		(232	)		(181	)
Total	$	15,216		$	15,813

	Three months ended						Favorable (unfavorable) % change due to:
	July 2, 2016			July 4, 2015			Total			Currency			Volume
Sales:
Controls - to external customers	$	8,462		$	9,820			(13.8	)		(7.8	)		(6.0	)
Capacitors - to external customers		405			526			(23.0	)		(5.6	)		(17.4	)
Capacitors - inter-segment		-			-			-			-			-
Capacitors – total		405			526			(23.0	)		(5.6	)		(17.4	)
Chargers - to external customers		5,046			-			100.0			-			100.0
Total sales to external customers		13,913			10,346			34.5			(7.7	)		42.2
Gross Profit:
Controls		3,204			3,626			(11.6	)		(9.1	)		(2.5	)
Capacitors		172			230			(25.3	)		(5.7	)		(19.6	)
Chargers		1,376			-			100.0			-			100.0
Total		4,752			3,856			23.2			(8.9	)		32.1
Selling, research and development, acquisition costs and administrative expenses:
Controls		(3,715	)		(3,283	)		(13.2	)		3.5			(16.7	)
Capacitors		(177	)		(226	)		21.7			4.2			17.5
Chargers		(1,633	)		-			(100.0	)		-			(100.0	)
Unallocated corporate income (expense) and acquisition costs		(158	)		(86	)		(82.6	)		-			(82.6	)
Total		(5,683	)		(3,595	)		(58.0	)		3.5			(61.5	)
Operating (loss) income:
Controls		(511	)		342			(249.4	)		(63.4	)		(186.0	)
Capacitors		(5	)		5			(200.0	)		(60.1	)		(139.3	)
Chargers		(257	)		-			(100.0	)		-			(100.0	)
Unallocated corporate income (expense) and acquisition costs		(158	)		(86	)		(82.6	)		-			(82.6	)
Total		(931	)		261			(458.1	)		(84.7	)		(373.4	)
Other income and expense		(658	)		101			(751.4	)		33.3			(784.7	)
(Loss) income before income tax		(1,589	)		362			(539.0	)		(51.5	)		(487.5	)
Income tax benefit (provision)		60			(83	)		172.4			50.9			76.9
Net (loss) income	$	(1,529	)	$	279			(648.0	)		(51.6	)		(596.4	)
Net loss attributable to non-controlling interests		84			2			4,100.0			-			4,100.0
Net (loss) income attributable to Sevcon, Inc. and subsidiaries		(1,445	)		281			(614.2	)		(51.2	)		(563.0	)
Preferred share dividends		(93	)		(110	)		(15.5	)		-			(15.5	)
Net (loss) income attributable to common stockholders	$	(1,538	)	$	171			(999.4	)		(84.2	)		(915.2	)

	(in thousands of dollars)				(in thousands of dollars)
	Expected maturity or transaction date				Expected maturity or transaction date
	Fiscal 2016		Fair Value		Fiscal 2017		Fair Value
On balance sheet financial instruments:
In $ U.S. Functional Currency
Accounts receivable in British Pounds		1,113		1,113		1,214		1,214
Accounts receivable in Euros		6,882		6,882		9,131		9,131
Accounts payable in British Pounds		2,010		2,101		872		872
Accounts payable in Euros		7,252		7,252		9,331		9,331
Anticipated Transactions
In $ U.S. Functional Currency
Firmly committed sales contracts
In British Pounds		493		493		696		696
In Euros		5,499		5,499		6,511		6,511

	SEVCON, INC.

Date:	August ~~12, 2016~~14, 2017	By: /s/ Paul N. Farquhar
	Paul N. Farquhar
	Chief Financial Officer (Principal Financial Officer)

Exhibit		Description

~~3.1~~*(2.1)		Agreement and Plan of Merger by and among the registrant, BorgWarner Inc., and Slade Merger Sub Inc. dated as of July 14, 2017 (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed on July 17, 2017).^§

(2.2)		Equity Transfer Agreement dated June 3, 2017, between the registrant and Xuchang Fuhua Glass Co. Ltd. (filed herewith).^§

*(3)(a)		Restated Certificate of Incorporation of the registrant (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on February 3, 2015).

~~3.2~~*(3)(b)		Amended and Restated By-laws of the registrant (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed on February 3, 2015).

~~4.1~~*(4)		Forms of warrant to purchase common stock issued July 8, 2016 (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed on July 11, 2016).

~~31.1~~(10.1)		Loan Agreement dated May 22, 2017, between the registrant and FrontFour Capital Group, LLC. (filed herewith).

(31.1)		Certification of Principal Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

~~31.2~~(31.2)		Certification of Principal Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

~~32.1~~(32.1)		Certification of Principal Executive Officer and Principal Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

~~101~~(101)		The following materials formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Statements of Operations (ii) Consolidated Statements of Comprehensive Income (Loss) (iii) Consolidated Balance Sheets (iv) Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements. These materials are furnished and not “filed” herewith.