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.

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.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and 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 December 31, 2016April 1, 2017 and the results of operations and cash flows for the three month periodand six-month periods ended December 31, 2016.April 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 month periodand six-month periods ended December 31, 2016April 1, 2017 are not necessarily indicative of the results to be expected for the full year.

Unless otherwise indicated, each reference to a “year” means the Company’s fiscal year, which ends on 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 FASBFinancial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”).  All material intercompany transactions have been eliminated.

For the Company's less than 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 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 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 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 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 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.

 

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

On January 26, 2016, the Company acquired Bassi which designs, manufactures and sells battery chargers for electric vehicles, power management and uninterrupted power source systems for industrial, medical and telecom applications, as well as electronic instrumentation for battery laboratories. This acquisition enables the Company to expand its addressable share of the high-growth electrification market and enhance earnings by adding an immediately accretive business. The total consideration for the transaction was approximately $19.1 million which consisted of approximately $10.8 million cash, $4.8 million value of the Company’s common stock and $3.5 million at fair value of assumed dividends payable to Bassi Holding, the former owner of Bassi. The Company acquired approximately $10.2 million of intangible assets, which primarily consisted of customer relationships, $6.4 million of goodwill and $2.5 million of other assets, net of liabilities. The Company is required to distribute approximately $3.5 million of assumed dividends in increments over a three-year period, post-closing.

The Company accounted for this acquisition as a business combination using the acquisition method of accounting. During the three monthand six-month periods ended December 31, 2016April 1, 2017 the Company recognized no expense for acquisition-related items. During the three and Januarysix-month periods ended April 2, 2016 the Company recognized expense for acquisition-related items, of $0$1,101,000 and $316,000,$1,417,000, respectively.

For more information on this acquisition, refer to Note 2 to the consolidated financial statements included in the Company’s 2016 10-K.

The unaudited consolidated pro forma results for the three monthand six-month periods ended December 31, 2016April 1, 2017 and JanuaryApril 2, 2016 are 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, 2015 and include amortization charges for the acquired intangibles and interest expense related to the Company’s borrowings to finance the acquisition. The unaudited January 2, 2016 pro forma results for the three and six-month periods ended April 2, 2016 were adjusted to include $266,000 and $535,000, respectively, of intangible assets amortization expense associated with the business combination and $127,000 and $253,000, respectively, of interest expense relating to the credit facility entered into in order to part-fundpartially fund the Bassi acquisition, and to exclude $316,000$1,101,000 and $1,417,000, respectively, of acquisition-related expense.

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, 2015.

Under the Company’s 1996 Equity Incentive Plan (the “Plan”) there were 326,56769,641 shares reserved and available for grant at December 31, 2016. During 2016 an additional 250,000 sharesApril 1, 2017. There were authorized for issuance under the Plan.  There have been no12,165 options exercised in 2017.

The Plan, which is shareholder-approved, permits the grant of restricted stock, restricted stock units, stock options and stock appreciation rights (“SARs”).SARs. SARs may be awarded either separately, or in relation to options granted, and for the grant of bonus shares. Options granted are exercisable at a price not less than fair market value on the date of grant.

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 at December 31, 2016,April 1, 2017, were as 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 values 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.$185,000 and is being recognized over the requisite service period of the award. The unvestedunrecognized compensation is being expensed over three years. The expense for these employee stock option grants was $14,424$14,394 and $2,658$28,818 for the three monthand six-month periods ended December 31,April 1, 2017, respectively. The expense for these employee stock option grants was $13,602 and $16,260 for the three and six-month periods ended April 2, 2016, respectively.

In February 2017, the Compensation Committee awarded performance-based equity compensation to five executives and January 2, 2016,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 grant, February 7, 2017, and the preceding four trading days. The 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 values 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 expensed over three years. The expense for these employee stock option grants was $1,010 for the three and six-month periods ended April 1, 2017, respectively.

 

A summary of performance basedperformance-based option activity under the share option planPlan as of December 31, 2016,April 1, 2017, and changes during the threesix 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 meetingachieving 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 unvestedunrecognized compensation is being expensed over three years.

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 values 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 arewere exercisable for three months, and all unvestedun-vested options expired. The expense for these restricted stock option grants was $30,584 and $0 forOn 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 December 31, 2016April 1, 2017 there was a reversal of expense of $9,694 and January 2, 2016, respectively.in the six months ended April 1, 2017 there was an expense of $20,890, in respect of these stock options grants.

 

A summary of time basedtime-based option activity under the share option planPlan as of December 31, 2016,April 1, 2017, and changes during the threesix months then ended, is presented below:

In February 2016, the Company granted 29,700 shares of restricted stock, representing 3,300 shares to nineeach of the non-employee directors and the then emeritus directors of the Company, 26,400 of which will vestvested on the day before the 2017 annual general meeting providing that the grantee remains a director of the Company, or as otherwise determined by the Compensation Committee.meeting. 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. SubsequentCompensation expense was recognized on a straight-line basis over the twelve-month period to February 2017.  The expense for these restricted stock grants was $43,208 and $108,020 for the three and six-month periods ended April 1, 2017, respectively. The expense for these restricted stock grants was $21,604 for the three and six-month periods ended April 2, 2016.

In February 2016 grant, 3,300 of these2017, the Company granted 145,000 shares of restricted stock were cancelledto eleven employees, which will vest one-third each year on the third business day after the announcement of the Company’s results for the first quarter of fiscal 2018, 2019 and returned to2020. The aggregate fair value of the Plan followingstock measured on the resignationdate of a director.the grant was $2,039,020 based on the closing sale price of the stock on the date of grant. Compensation expense is being expensedrecognized on a straight linestraight-line basis over the twelve month period during which the forfeiture conditions lapse. The expense for these restricted stock grants was $64,812 and $0$56,639 for the three monthand six-month periods ended December 31, 2016April 1, 2017.

In February 2017, the Company granted 24,800 shares of restricted stock, representing 3,100 shares to each of the non-employee directors and January 2, 2016, respectively.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 $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 $28,865 for the three and six-month periods ended April 1, 2017.

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 basedperformance-based awards and time-based awards, for the three monthsix-month period ended December 31, 2016,April 1, 2017, is as follows:

Stock-based compensation expense was $242,000$239,000 and $152,000$481,000 for the three monthand six-month periods ended December 31, 2016April 1, 2017, respectively.  Stock-based compensation expense was $206,000 and January$358,000 for the three and six-month periods ended April 2, 2016, respectively. At December 31, 2016,April 1, 2017, there was $327,348approximately $3,776,000 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 22.2 years.

Common stock dividends – The Board of Directors suspended common stock dividends to conserve cash during the global recession that began in 2009 and will consider whether to resume paying these dividends as conditions and the Company’s operating results improve.2009.

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 December 31, 2016 calculation 1,346,000of basic and diluted net loss per common share for the six-month period ended April 1, 2017, approximately 1,320,000 shares of common stock issuable on conversion of our Series A Convertible Preferred Stock, 81,000approximately 156,000 shares of unvestedun-vested restricted stock and 50,625approximately 48,000 outstanding stock options were not included in the computation of diluted earnings per share because itthat would have been anti-dilutive for the period presented.

For the calculation of basic and diluted net loss per common share for the three-month period ended April 1, 2017, approximately 1,294,000 shares of common stock issuable on conversion of our Series A Convertible Preferred Stock, approximately 186,000 shares of un-vested restricted stock and approximately 45,000 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 (loss) incomeloss per common share for the three monthand six-month periods ended December 31, 2016April 1, 2017 and JanuaryApril 2, 2016, is calculated as follows:

The significant accounting policies of the segments are the same as those described in Note 12 and in 2016 10-K Note 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 corporate expense, acquisition costs, income taxes,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 businessesthe reportable segments is as follows:

The cost of research and development programs is charged against income as incurred and amounted to $1,441,000$1,827,000 and $860,000$3,268,000 for the three monthand six-month periods December 31, 2016ended April 1, 2017, respectively, net of U.K. government grants received, “above the line” tax credits arising from U.K. government research and Januarydevelopment incentives as well as research and development expense associated with engineering services revenue recorded in cost of sales. The cost of research and development programs amounted to $1,347,000 and $2,207,000 for the three and six-month periods ended April 2, 2016, respectively, net of U.K. government grants received, “above the line” tax credits arising from U.K. government research and development incentives as well as research and development expense associated with engineering services revenue recorded in cost of sales.

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 $88, 000,$193,000, which was offset against the Company’s research and development expense on this project of $362,000,$844,000 for the three months ended December 31, 2016.April 1, 2017. The Company recorded grant income from this project of $30,000$281,000 which was offset against the Company’s research and development expense on this project of $165,000,$1,206,000, for the six months ended April 1, 2017. The Company recorded grant income from this project of $64,000 which was offset against the Company’s research and development expense on this project of $137,000, for the three months ended JanuaryApril 2, 2016. The Company recorded grant income from this project of $94,000 which was offset against the Company’s research and development expense on this project of $302,000, for the six months ended April 2, 2016

During 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 six months ended December 31, 2016April 1, 2017 the Company recorded $134,000$217,000 (three months ended JanuaryApril 2, 2016 - $0) and $351,000 (six months ended April 2, 2016 - $0), respectively, as a reduction in research and development expense in the unaudited consolidated statements of operations andoperations. The Company had an income tax receivable balance of $667,000$885,000 at December 31, 2016April 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 16.4%15.3% 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, and in addition the local statutory rate in certain countries in which the Company operates, notably the U.K. (20%(19%) and Italy, (24%) is lower than the U.S. statutory rate.

Sevcon 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 capacitorcapacitors 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 basedsalary-based award when they reach retirement age and leave the Company’s employment.employment at retirement age. This unfunded liability, which is unfunded, is recognizedrecorded in accrued expenses, and was $194,000$205,000 and $198,000 at December 31, 2016April 1, 2017 and September 30, 2016, 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.  The relatedThis unfunded liability, is recognizedrecorded in the consolidated balance sheet within “Otherother long-term liabilities”.  This liability, which is unfunded,liabilities, was $965,000$991,000 and $987,000 at December 31, 2016April 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 threesix- month period ended December 31, 2016:April 1, 2017:

Sevcon, Inc. contributed $50,000$100,000 to its frozen U.S. defined benefit plan in the threesix months ended December 31, 2016;April 1, 2017; it presently anticipates contributing a further $150,000an additional $100,000 to fund its U.S. plan induring the remainder of fiscal 2017. In addition, employer contributions to the frozen U.K. defined benefit plan were $93,000$279,000 in the first threesix months and are estimated to total $648,000$654,000 in 2017.

Inventories,Inventory, net of reserve, wereis comprised of:

The Company's financial instruments consist mainly of cash and cash equivalents, short-term investments, accounts receivable,trade receivables, accounts payable and debt. The carrying amount of these financial instruments, other than the debt, approximates their fair value as of December 31, 2016April 1, 2017 due to their short-term nature. The fair value of the Company’s long-term bank debt at December 31, 2016April 1, 2017 approximated $14,778,000$15,018,000 (the gross carrying value as of December 31, 2016April 1, 2017 before the offset of debt issuance costs) based on recent financial market pricing. The bank debt represents a Level 2 liability in accordance with the fair value hierarchy described in Note 10.11.

The analysis of accruedAccrued expenses, at December 31, 2016 and September 30, 2016 showing separately any items in excess of 5% of total current liabilities, wasare as follows: