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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended December 31, 2010
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 000-17861
UNILENS VISION INC.
(Exact name of registrant as specified in its charter)
Delaware | 27-2254517 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
10431 72nd Street North, Largo, Florida | 33777-1511 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (727) 544-2531
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. x 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 (§232.405 of this chapter) 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. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
As of February 14, 2010 there were 2,369,354 outstanding shares of common stock.
Table of Contents
FORM 10-Q
For the Quarterly Period Ended December 31, 2010
INDEX
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PART I FINANCIAL INFORMATION
Item 1 Unaudited Financial Statements
Unilens Vision Inc.
Condensed Consolidated Balance Sheets
December 31, 2010 (Unaudited) and June 30, 2010
December 31, 2010 | June 30, 2010 | |||||||
ASSETS |
||||||||
Current |
||||||||
Cash and cash equivalents |
$ | 418,412 | $ | 1,080,540 | ||||
Accounts receivable, net of allowance of $217,119 and $217,820 at December 31, 2010 and June 30, 2010, respectively |
862,871 | 876,033 | ||||||
Royalties and other receivables |
722,976 | 744,989 | ||||||
Inventories |
889,212 | 679,024 | ||||||
Prepaid expenses |
95,373 | 82,348 | ||||||
Income taxes receivable |
54,966 | | ||||||
Deferred loan costs current |
14,916 | | ||||||
Deferred tax asset current |
340,200 | 361,400 | ||||||
Total current assets |
3,398,926 | 3,824,334 | ||||||
Property, plant, and equipment, net of accumulated depreciation of $5,284,923 and $5,215,183 at December 31, 2010 and June 30, 2010, respectively |
309,922 | 248,578 | ||||||
Deferred loan costs |
47,843 | 67,826 | ||||||
Other assets |
153,593 | 123,300 | ||||||
Deferred tax asset |
188,873 | 203,300 | ||||||
Total assets |
$ | 4,099,157 | $ | 4,467,338 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current |
||||||||
Accounts payable |
$ | 494,791 | $ | 384,308 | ||||
Accrued wages and employee benefits |
155,351 | 371,649 | ||||||
Deferred income |
470,701 | 359,194 | ||||||
Income taxes payable |
| 115,697 | ||||||
Other accrued liabilities |
57,349 | 88,665 | ||||||
Note payable current |
1,200,000 | 1,200,000 | ||||||
Total current liabilities |
2,378,192 | 2,519,513 | ||||||
Accrued wages and employee benefits |
102,975 | | ||||||
Fair value interest rate swap |
36,601 | | ||||||
Note payable long-term |
3,700,000 | 4,300,000 | ||||||
Total liabilities |
6,217,768 | 6,819,513 | ||||||
Stockholders (deficit) equity |
||||||||
Capital stock |
||||||||
Preferred shares, par value $0.001 per share; 3,000,000 shares authorized; no shares issued and outstanding |
| | ||||||
Common shares, par value $0.001 per share; 30,000,000 shares authorized; shares issued and outstanding 2,369,354 |
2,369 | 2,369 | ||||||
Additional paid-in capital |
20,286,663 | 20,285,873 | ||||||
Accumulated other comprehensive loss, net of tax |
(22,828 | ) | | |||||
Deficit |
(22,384,815 | ) | (22,640,417 | ) | ||||
Total stockholders (deficit) equity |
(2,118,611 | ) | (2,352,175 | ) | ||||
Total liabilities and stockholders (deficit) equity |
$ | 4,099,157 | $ | 4,467,338 | ||||
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
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Unilens Vision Inc.
Condensed Consolidated Statements of Income and Changes in Accumulated Deficit
For Three Months and Six Months Ended December 31, 2010 and 2009
(Unaudited)
Three
Months Ended December 31, 2010 |
Three
Months Ended December 31, 2009 |
Six
Months Ended December 31, 2010 |
Six
Months Ended December 31, 2009 |
|||||||||||||
Revenues: |
||||||||||||||||
Sales |
$ | 1,393,094 | $ | 1,414,539 | $ | 2,922,668 | $ | 3,098,212 | ||||||||
Royalty income |
715,603 | 751,386 | 1,375,809 | 1,519,062 | ||||||||||||
Total revenues |
2,108,697 | 2,165,925 | 4,298,477 | 4,617,274 | ||||||||||||
Operating costs and expenses: |
||||||||||||||||
Cost of sales |
877,754 | 843,217 | 1,775,844 | 1,804,588 | ||||||||||||
Administration |
275,771 | 286,943 | 618,868 | 605,853 | ||||||||||||
Research and development |
18,028 | 18,912 | 36,204 | 38,272 | ||||||||||||
Sales and marketing |
347,257 | 367,134 | 712,803 | 732,073 | ||||||||||||
Total operating costs and expenses |
1,518,810 | 1,516,206 | 3,143,719 | 3,180,786 | ||||||||||||
Operating income |
589,887 | 649,719 | 1,154,758 | 1,436,488 | ||||||||||||
Other non-operating items: |
||||||||||||||||
Other income |
900 | 355 | 1,445 | 823 | ||||||||||||
Remeasurement income |
| 1,288 | | 1,823 | ||||||||||||
Interest (expense) income |
(71,128 | ) | 2,709 | (142,380 | ) | 5,667 | ||||||||||
Total other non-operating items: |
(70,228 | ) | 4,352 | (140,935 | ) | 8,313 | ||||||||||
Income before income tax expense |
519,659 | 654,071 | 1,013,823 | 1,444,801 | ||||||||||||
Net income tax expense |
169,422 | 228,763 | 331,737 | 525,405 | ||||||||||||
Net income for the period |
350,237 | 425,308 | 682,086 | 919,396 | ||||||||||||
Deficit, beginning of period |
(22,521,810 | ) | (22,858,678 | ) | (22,640,417 | ) | (22,943,202 | ) | ||||||||
Dividends paid |
(213,242 | ) | (409,564 | ) | (426,484 | ) | (819,128 | ) | ||||||||
Deficit, end of period |
$ | (22,384,815 | ) | $ | (22,842,934 | ) | $ | (22,384,815 | ) | $ | (22,842,934 | ) | ||||
Net income per common share: |
||||||||||||||||
Basic |
$ | 0.15 | $ | 0.09 | $ | 0.29 | $ | 0.20 | ||||||||
Diluted |
$ | 0.15 | $ | 0.09 | $ | 0.29 | $ | 0.20 | ||||||||
Weighted average number of common shares outstanding during the period: |
||||||||||||||||
Basic |
2,369,354 | 4,550,715 | 2,369,354 | 4,550,715 | ||||||||||||
Effect of dilutive options |
| 7,137 | | 6,254 | ||||||||||||
Diluted |
2,369,354 | 4,557,852 | 2,369,354 | 4,556,969 | ||||||||||||
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
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Unilens Vision Inc.
Condensed Consolidated Statements of Cash Flows
For Six Months Ended December 31, 2010 and 2009
(Unaudited)
Six
Months Ended December 31, 2010 |
Six
Months Ended December 31, 2009 |
|||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net income for the period |
$ | 682,086 | $ | 919,396 | ||||
Items not affecting cash: |
||||||||
Depreciation and amortization |
69,740 | 82,618 | ||||||
Deferred tax expense |
49,400 | 447,600 | ||||||
Remeasurement gain |
| (1,823 | ) | |||||
Stock based compensation |
790 | | ||||||
Change in working capital items |
(306,576 | ) | (36,136 | ) | ||||
Net cash provided by operating activities |
495,440 | 1,411,655 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Purchase of property, plant and equipment and other assets |
(131,084 | ) | (10,124 | ) | ||||
Redemption of certificates of deposit |
| 250,000 | ||||||
Net cash from (used) in investing activities |
(131,084 | ) | 239,876 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Repayment of borrowings under term loan |
(600,000 | ) | | |||||
Common stock dividends paid |
(426,484 | ) | (819,128 | ) | ||||
Net cash used in financing activities |
(1,026,484 | ) | (819,128 | ) | ||||
Change in cash and cash equivalents during the period |
(662,128 | ) | 832,403 | |||||
Effect of exchange rate changes on cash and cash equivalents |
| 1,823 | ||||||
Cash and cash equivalents, beginning of period |
1,080,540 | 1,178,626 | ||||||
Cash and cash equivalents, end of period |
$ | 418,412 | $ | 2,012,852 | ||||
Supplemental cash flow disclosure information: |
||||||||
Noncash investing and financing activities: |
||||||||
Change in fair value of interest rate swap |
$ | (36,601 | ) | $ | | |||
Cash paid during the period for interest |
$ | 133,243 | $ | | ||||
Cash paid during the period for income taxes |
$ | 453,000 | $ | 21,000 | ||||
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
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Unilens Vision Inc.
Notes to Condensed Consolidated Financial Statements
December 31, 2010
(Unaudited)
Note 1 Basis of Presentation and Consolidation
Basis of Presentation
Unilens Vision Inc. operates through our wholly-owned subsidiary, Unilens Corp. USA, located in Largo, Florida. The accompanying consolidated financial statements (the Financial Statements) for the interim periods ended December 31, 2010 and 2009 (the Interim Period) are i) prepared on the basis of accounting principles generally accepted in the United States, ii) conform in all material respects with accounting principles generally accepted in Canada, and iii) are unaudited, but in the opinion of management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the financial position, operations, and changes in financial results of the Interim Period. The Financial Statements are not necessarily indicative of the results to be expected for the full year. The Financial Statements do not contain the detail or footnote disclosure concerning accounting policies and other matters which would be included in full year financial statements, and therefore should be read in conjunction with the our audited financial statements for the year ended June 30, 2010. Additional information concerning us is contained in the Management Discussion and Analysis included in this quarterly report.
Basis of Consolidation
These consolidated financial statements include the accounts of Unilens Vision Inc. and its wholly-owned subsidiary, Unilens Corp. USA and its wholly-owned subsidiary, Unilens Vision Sciences Inc. All significant intercompany transactions and balances have been eliminated in consolidation.
Certain reclassifications have been made to prior year amounts to conform to the current year presentation. None of the reclassifications impacted our income for the year in any period.
Note 2 Stock-Based Compensation, Stock Options and Stock
Stock-based payments are recorded using the fair value method of accounting for stock options. Under this method, in addition to reflecting compensation expense for new share-based awards, expense is also recognized to reflect the remaining vesting period of awards that had been included in pro-forma disclosures in prior periods. There was no stock compensation expense attributable to stock options charged against income for the fiscal quarters ended December 30, 2009, since no options were granted during such periods and all options outstanding at the beginning of such period were fully vested. There was $790 of unrecognized stock compensation expense attributable to stock options previously issued that vest on January 1, 2011, charged against income during the second fiscal quarter ended December 31, 2010. There were no options granted during the six fiscal months ended December 31, 2010.
Stock Option Plan and Stock Options
We have adopted a stock option plan (the Stock Option Plan). The purpose of the Stock Option Plan is to advance the interests of the Company by providing directors, officers, employees and consultants with a financial incentive to continue to improve the performance of the Company and encourage them to remain with the Company. The term of any option granted under the Stock Option Plan may not exceed 10 years. The exercise price of each option must equal or exceed the market price of our stock as calculated on the date of grant. The maximum number of our common shares reserved for issuance under the Stock Option Plan cannot exceed 10% percent of our issued and outstanding common shares. Options, in general, vest immediately except options granted to consultants performing investor relations activities vest at a minimum over a period of at least 12 months, 25% at the end of each three-month period. No more than 5% of our issued and outstanding capital stock may be granted to any one individual in any twelve-month period and no more than 2% of our issued and outstanding capital stock may be granted to any one consultant in any twelve-month period.
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Unilens Vision Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
December 31, 2010
(Unaudited)
At the Annual General Meeting of Shareholders held on March 25, 2010, the shareholders approved the Unilens Incentive Stock Option Plan. The initial maximum number of shares available for option grants under the Stock Option Plan is 236,935.
The following table describes the number and the exercise price of options that have been granted, exercised, or cancelled under the Stock Option Plan approved on March 25, 2010 during the six month period ended December 31, 2010:
Number of Options |
Weighted Average Exercise Price |
Weighted Average Remaining Life |
||||||||||
Outstanding, beginning of year |
160,000 | $ | 4.83 | 9.67 Years | ||||||||
Exercised |
| |||||||||||
Granted |
||||||||||||
Directors/Employees |
| |||||||||||
Consultants |
| |||||||||||
Sub-total granted |
| |||||||||||
Expired/cancelled |
| |||||||||||
Outstanding, end of period |
160,000 | $ | 4.83 | 9.17 Years | ||||||||
Options exercisable, end of period |
155,000 | $ | 4.83 | 9.17 Years | ||||||||
As of December 31, 2010 we have 160,000 options outstanding and an additional 76,935 options available for future grants under the existing Incentive Stock Option Plan.
There was no cash proceeds, related to options exercised during the six months ended December 31, 2010, as no options were exercised.
The following table describes the number of options, exercise price, and expiry date of the options granted by the Company that were outstanding at December 31, 2010:
Number of Options |
Vested | Exercise Price |
Expiry Date | |||||||||
160,000 | 155,000 | $ | 4.83 | March 1, 2020 | ||||||||
We use the Black-Scholes pricing model to estimate the fair value of stock-based awards. The expected volatilities are based on the historical volatility of our stock price. Historical data is used to estimate option exercises and employee terminations within the valuation model. The expected term of options granted is based on historical exercise patterns of employees and represents the period of time that options granted are expected to be outstanding. The risk-free interest rate for periods within the contractual life of the option is based on the U S Treasury yield curve in effect at the time of the grant. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Based on historical experience of forfeitures, the Company estimated forfeitures at 0% for the period ended December 31, 2010.
As of December 31, 2010 the aggregate intrinsic value of options outstanding and options exercisable were both zero since the closing price of our common shares on that date of $4.35 was less then the exercise price.
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Unilens Vision Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
December 31, 2010
(Unaudited)
Note 3 Income per Common Share
Basic income per common share is calculated by dividing the income for the period by the weighted-average number of common shares outstanding during the period.
Diluted income per common share is calculated using the treasury stock method. Under the treasury stock method, the weighted average number of common shares outstanding used for the calculation of diluted income per share assumes that the proceeds to be received on the exercise of dilutive stock options and warrants are used to repurchase common shares at the average market price during the period.
In January 2010, we repurchased and retired 2,188,861 of our common stock from our then largest shareholder.
Note 4 Inventories
As at December 31, 2010 |
As at June 30, 2010 |
|||||||
Raw materials |
$ | 312,623 | $ | 270,388 | ||||
Work in progress |
22,977 | 26,685 | ||||||
Finished goods |
576,348 | 406,091 | ||||||
911,948 | 703,164 | |||||||
Less allowance for obsolescence |
22,736 | 24,140 | ||||||
$ | 889,212 | $ | 679,024 | |||||
Note 5 Supplemental Disclosure with Respect to Cash Flows
Six Months Ended December 31, 2010 |
Six Months Ended December 31, 2009 |
|||||||
Cash provided by (used in): |
||||||||
Accounts and royalties and other receivables |
$ | 35,175 | $ | 136,913 | ||||
Inventories |
(210,188 | ) | 71,725 | |||||
Prepaid expenses and other assets |
(38,251 | ) | (369,925 | ) | ||||
Accounts payable and accrued liabilities |
77,351 | 68,346 | ||||||
Income taxes payable |
(170,663 | ) | 56,805 | |||||
Change in working capital items |
$ | (306,576 | ) | $ | (36,136 | ) | ||
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Unilens Vision Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
December 31, 2010
(Unaudited)
Note 6 Revenue Information
All of our assets and operations are located in the United States in one business segment. Our revenues are derived from royalty income received from our exclusive agreement with Bausch & Lomb Incorporated (Bausch & Lomb), for the use of our patented multifocal designs and technology, and from sales from our specialty optical lens business, which manufactures and distributes optical products that use our proprietary design and manufacturing technology. Sales from our specialty optical lens business come from the following lens categories, for the three and six months ended December 31:
Three Months Ended December 31, 2010 |
Three Months Ended December 31, 2009 |
Six Months Ended December 31, 2010 |
Six Months Ended December 31, 2009 |
|||||||||||||
Disposable lenses |
$ | 844,449 | $ | 931,660 | $ | 1,821,192 | $ | 1,979,555 | ||||||||
Custom soft lenses |
282,994 | 203,586 | 566,639 | 502,379 | ||||||||||||
Gas permeable lenses |
97,685 | 100,008 | 209,637 | 242,486 | ||||||||||||
Replacement and other lenses |
167,966 | 179,285 | 325,200 | 373,792 | ||||||||||||
Total sales |
$ | 1,393,094 | $ | 1,414,539 | $ | 2,922,668 | $ | 3,098,212 | ||||||||
Note 7 Line of Credit and Interest Rate Swap
On November 1, 2009, our previous line of credit of $1,500,000 expired. This line of credit was collateralized by all assets of Unilens Corp. USA, excluding the Royalty Agreement with Bausch & Lomb.
On November 9, 2009, we closed on a $6,900,000, 5-year term loan facility and a new $1,500,000 line of credit with Regions Bank. The term loan facility, which had a six-month advance period, was entered into to fund the Stock Purchase Agreement and the new line of credit replaced the previous line of credit. The term loan is payable in 60 monthly principal payments of $100,000 plus accrued interest. Both the term loan and the new line of credit bear interest at a floating rate of 30-day LIBOR plus 3.25% or 3.75% depending on whether the ratio of our debt to EBITDA is less than 1-to-1or equal to or greater than 1-to-1, with a minimum interest rate of 4.75%. Under the new line of credit, at any time, maximum borrowings may not exceed the lesser of (i) $1,500,000 or (ii) a sum equal to 80% of Qualified Accounts plus 50% of Qualified Inventory. The line of credit expires in November 2011, but maybe extended for another one-year term.
The term loan and the new line of credit are secured by a security interest in favor of Regions Bank in our inventory, accounts receivable, general intangibles, cash and principal United States patent. Under both the term loan facility and the new line of credit, we are required to meet customary covenants regarding, among other things, the maintenance of specified cash flow leverage and fixed charge coverage ratios and the requirement of lender consent for significant transactions such as mergers, acquisitions, dispositions and other financings.
We were in compliance with all financial covenants and had an outstanding balance under the term loan of $4,900,000 and no outstanding balances under the line of credit during the six month period ended December 31, 2010.
On August 6, 2010, we entered into an interest rate swap agreement facilitated by Regions Bank to manage its cash flow exposure to interest rate changes with a notional amount of $5,300,000 which is scheduled to mature in January 2015. We do not enter into this type of financial instrument for trading or speculative purposes. The swap effectively converted our variable rate debt under the term loan of LIBOR plus 3.75% with a minimum interest rate of 4.75%, to a fixed rate of 5.16%, without exchanging the notional principal amount. This agreement was designed as a cash flow hedge and is reflected at fair value in our condensed consolidated balance sheet as a component of total liabilities, and the related gains or losses are deferred in stockholders equity as a component of accumulated other comprehensive income or loss.
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Unilens Vision Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
December 31, 2010
(Unaudited)
If in the future the interest rate swap agreement was determined to be ineffective or was terminated before the contractual termination date, or if it became probable that the hedged variable cash flows associated with the variable rate borrowing would stop, the Company would be required to reclassify into earnings all or a portion of the unrealized losses on cash flow hedges included in accumulated other comprehensive income (loss).
Note 8 Fair Value Disclosures
The authoritative guidance for fair value measurements establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The three levels of the fair value hierarchy under the guidance are described below:
Level 1 |
Valuations based on quoted prices in active markets for identical assets or liabilities that the entity has the ability to access. | |
Level 2 |
Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities. | |
Level 3 |
Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
In accordance with the fair value hierarchy described above, the following table shows the fair value of the Companys interest rate swap, which is included as a component of total liabilities in the condensed consolidated balance sheet. The fair value is based on the expected cash flows over the life of the swap from a pricing model using a specific market environment.
Total as of December 31, 2010 |
Level 1 | Level 2 | Level 3 | |||||||||||||
Interest rate swap |
$ | (36,601 | ) | $ | | $ | (36,601 | ) | $ | | ||||||
The following presents the balances and net changes in the accumulated other comprehensive loss related to the interest rate swap, net of income taxes.
Interest Rate Swap |
||||
Balance at the June 30, 2010 |
$ | | ||
Net change in fair value of interest rate swap, net of tax of $13,773 |
(22,828 | ) | ||
Balance December 31, 2010 |
$ | (22,828 | ) | |
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Unilens Vision Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
December 31, 2010
(Unaudited)
Note 9 Recent Accounting Standards
Recent codified pronouncements by the FASB are not believed by management to have a material impact on the Companys present or future financial statements.
Note 10 Subsequent Events
On February 1, 2011, our Board of Directors declared a quarterly cash dividend of $0.09 per common share, payable February 25, 2011 to stockholders of record at the close of business on February 11, 2011. This is the 18th consecutive quarterly cash dividend declared.
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Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Unilens Vision Inc.
Largo, Florida
We have reviewed the accompanying consolidated balance sheet of Unilens Vision Inc. as of December 31, 2010 and the related consolidated statements of income and changes in accumulated deficit, and cash flows for the three and six month periods ended December 31, 2010 and 2009. These consolidated financial statements are the responsibility of the management of Unilens Vision Inc.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the consolidated financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Unilens Vision Inc. as of June 30, 2010 and the related consolidated statements of income, stockholders equity, and cash flows for the year then ended (not presented herein); and in our report dated September 28, 2010, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of June 30, 2010 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ Pender Newkirk & Company LLP |
Pender Newkirk & Company LLP |
Certified Public Accountants |
Tampa, Florida |
February 14, 2011 |
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Item 2 Managements Discussion & Analysis of Financial Condition and Results of Operations
The following management discussion and analysis (MDA) provides information on the activities of Unilens Vision Inc. and should be read in conjunction with our quarterly condensed consolidated financial statements and notes thereto for the three and six months ended December 31, 2010 (the Financial Statements), as well as our Annual Report on Form 10-K for the fiscal year June 30, 2010, filed with the Securities and Exchange Commission. The Financial Statements have been prepared in United States dollars and in conformity with United States generally accepted accounting principles (US GAAP). Unless otherwise indicated, all dollar amounts disclosed in this MDA are expressed in United States Dollars.
Operating results are not necessarily indicative of results that may occur in future periods. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in the forward-looking statements as a result of many factors including, but not limited to, those set forth under Cautionary Statement About Forward-Looking Statements and Risk Factors in Item 1A. included in our Annual Report on Form 10-K. All forward-looking statements included in this document are based on the information available to us on the date of this document and we assume no obligation to update any forward-looking statements contained in this Quarterly Report on Form 10-Q.
Overview
We license, manufacture, distribute and market specialty optical lens products using our proprietary design and manufacturing technology. Our products are sold primarily in the United States solely to eye care professionals through in house sales representatives, independent sales brokers and a network of distributors. Our lens products are marketed as a family of specialty vision correction products that can serve the majority of the populations vision correction needs. Our specialty optical lens business is divided into four categories: (i) disposable lenses; (ii) custom soft lenses; (iii) gas permeable lenses; and (iv) replacement and other lenses. During the three months ended December 31, 2010 the Companys C-Vue disposable products accounted for approximately 61% of sales.
Sales of our specialty optical lens products accounted for the largest percentage of our total revenues, constituting approximately 66% while royalty income derived from our exclusive license of our patented multifocal design to Bausch & Lomb was approximately 34% during the three months ended December 31, 2010.
Economic conditions in the United States have restrained our growth. We are however optimistic about the long-tem outlook for the contact lens market and the specialty contact lens market, in particular.
Market demographics indicate that speciality contact lenses will continue to be the fastest growing segment of the contact lens market. Specialty contact lenses include toric, toric multifocal, and cosmetic lenses. We believe that our custom soft speciality lenses including our C-Vue multifocal for presbyopia, our C-Vue custom toric for correcting astigmatism and the C-Vue Advanced toric multifocal, will grow over time due to market demographics favoring specialty lenses.
We believe market demographics favoring specialty contact lenses will continue to drive our revenue and earnings. In January 2011, we launched our new C-VUE Advanced® HydraVUE line of silicone hydrogel custom contact lenses for monthly replacement. They are completely customizable, and feature a risk-free trial program, and exceptional deliverability.
A significant portion of our net income is derived from our exclusive license with Bausch & Lomb and such royalty income is a major component of our profitability, but there can be no assurance however, that such royalty income from Bausch & Lomb will grow or that Bausch & Lomb will continue to sell products in the future utilizing our technology.
The contact lens market is highly competitive. We compete with industry leaders, such as Vistakon, a unit of Johnson and Johnson, Bausch & Lomb, Ciba Vision Corporation, a division of Novartis AG, and Cooper Vision. Our ability to compete successfully is dependent in part on eye care professionals perceptions of product quality, product development, technical innovation, and price.
We have a supply agreement with one supplier for the manufacture of our molded C-Vue multifocal lens, which currently accounts for approximately 55% of our current quarterly sales. The agreement is renewable from year to year and is terminable pursuant to customary termination clauses. Although to date the supplier has met our requirements, there can be no assurances that it will continue to do so.
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Second Quarter Highlights
| Earnings per share increased 67% to $0.15 from $0.09 in the second quarter of fiscal 2010. |
| Paid our 17th consecutive quarterly dividend of $0.09 per share on November 26th, a dividend yield of 8.3% based on the quarter end closing price of $4.35. |
| Reduced operating expenses and had an expense ratio of 46.0% compared to 47.6% in the second quarter of fiscal 2010. |
Results of Operations
The following table sets forth, for the periods indicated, certain data derived from our Condensed Consolidated Statements of Income and Changes in Accumulated Deficit and certain of such data expressed as a percentage of total revenues:
Three Months Ended December 31 | Six Months Ended December 31 | |||||||||||||||||||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||||||||||
$ | % of Revenues |
$ | % of Revenues |
$ | % of Revenues |
$ | % of Revenues |
|||||||||||||||||||||||||
Revenues |
$ | 2,108,697 | 100.0 | 2,165,925 | 100.0 | 4,298,477 | 100.0 | 4,617,274 | 100.0 | |||||||||||||||||||||||
Operating costs and expenses |
$ | 1,518,810 | 72.0 | 1,516,206 | 70.0 | 3,143,719 | 73.1 | 3,180,786 | 68.9 | |||||||||||||||||||||||
Operating income |
$ | 589,887 | 28.0 | 649,719 | 30.0 | 1,154,758 | 26.9 | 1,436,488 | 31.1 | |||||||||||||||||||||||
Other non-operating items |
$ | (70,228 | ) | (3.3 | ) | 4,352 | 0.2 | (140,935 | ) | (3.3 | ) | 8,313 | 0.2 | |||||||||||||||||||
Income before income tax expense |
$ | 519,659 | 24.7 | 654,071 | 30.2 | 1,013,823 | 23.6 | 1,444,801 | 31.3 |
The following table sets forth, for the periods indicated, certain data derived from our Condensed Consolidated Statements of Income and Changes in Accumulated Deficit and certain of such data expressed as a percentage of sales:
Three Months Ended December 31 | Six Months Ended December 31 | |||||||||||||||||||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||||||||||
$ | % of Sales |
$ | % of Sales |
$ | % of Sales |
$ | % of Sales |
|||||||||||||||||||||||||
Sales |
$ | 1,393,094 | 100.0 | 1,414,539 | 100.0 | 2,922,668 | 100.0 | 3,098,212 | 100.0 | |||||||||||||||||||||||
Cost of sales |
$ | 877,754 | 63.0 | 843,217 | 59.6 | 1,775,844 | 60.8 | 1,804,588 | 58.2 | |||||||||||||||||||||||
Sales and marketing |
$ | 347,257 | 24.9 | 367,134 | 26.0 | 712,803 | 24.4 | 732,073 | 23.6 | |||||||||||||||||||||||
Administration |
$ | 275,771 | 19.8 | 286,943 | 20.3 | 618,868 | 21.2 | 605,853 | 19.6 | |||||||||||||||||||||||
Research and development |
$ | 18,028 | 1.3 | 18,912 | 1.3 | 36,204 | 1.2 | 38,272 | 1.2 |
Second Quarter
During the three months ended December 31, 2010 (the Current Quarter) we earned income before tax of $519,659 compared to income before tax of $654,071 for the three months ended December 31, 2009 (the Prior Quarter). The decrease in income before tax during the Current Quarter of $134,412 was from a decrease in royalty income from Bausch & Lomb of $35,783 to $715,603 in the Current Quarter as compared to $751,386 in the Prior Quarter, (ii) a decrease in gross margin of $55,982 from lower sales and gross profit (iii) excluding cost of sales, a decrease in expenses of $31,933 as described below, and (iv) an increase in other items primarily interest expense, and other income of $74,580. After recording income tax expense of $169,422, we had net income of $350,237 or $0.15 per diluted share for the Current Quarter. In comparison, in the Prior Quarter we had net income of $425,308 or $0.09 per diluted share after recording income tax expense of $228,763.
Sales during the Current Quarter were $1,393,094, a decrease of $21,445 (1.5%), as compared to sales of $1,414,539 during the Prior Quarter. The disposable lens category decreased by 9.4% as sales of our C-Vue disposable multifocal lenses continue to be affected by economic conditions in the U.S. as well as increased competition from competitor new product offerings and rebate programs. Our custom soft lens category increased 39.0%, as we continue to convert free trial lenses from our C-Vue Advanced Toric Multifocal launched last year, into revenue generating boxes of monthly replacement lenses. In the Current Quarter, our gas permeable lens category declined by 2.3%, primarily due to the continued overall decline in gas permeable fits in the contact lens industry. The replacement and other lens category decreased by 6.3% due to the expected decline in product lines that are nearing the end of their life cycle. Gross margin decreased 3.4% to 37.0% in the Current Quarter compared to 40.4% in the Prior Quarter due primarily to fewer sales and sales mix changes from higher margin products in our disposable lens category and the maturation of the C-VUE Advanced Toric Multifocal free trial program launched at the end of the first quarter last year.
During the Current Quarter, as compared to the Prior Quarter, expenses decreased $31,933. Administrative expenses decreased by $11,172 primarily due to the timing of legal and professional fees associated with annual report filings due to our migration from Canada to Delaware completed in the first quarter this year versus the second quarter last year. Sales and marketing expenses decreased $19,877 due to lower advertising and research and development expenses were flat during the Current Quarter, as compared to the Prior Quarter. During the Current Quarter, as a way to reduce expenses, we reorganized our sales and marketing department, and we should recognize the effects of this starting in the third quarter.
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During the Current Quarter we recorded income tax expense of $169,422 compared to income tax expense in the Prior Quarter of $228,763. We record income tax at the statutory rates, and previously only paid alternative minimum tax of approximately 2% due to the utilization of tax loss carry-forwards. During the second quarter of the 2010 fiscal year, utilization of tax loss carry-forwards were exhausted, and income taxes payable have been recorded since then. The effective tax rate for the Current Quarter was 32.6% compared to 35.0% in the Prior Quarter.
Six Months
During the six months ended December 31, 2010 (the Current Year) we earned income before tax of $1,013,823 compared to income before tax of $1,444,801 for the six months ended December 31, 2009 (the Prior Year). The decrease in income before tax during the Current Year of $430,978 was from a decrease in royalty income from Bausch & Lomb of $143,253 to $1,375,809 in the Current Year as compared to $1,519,062 in the Prior Year, (ii) a decrease in gross margin of $146,800 from lower sales and gross profit (iii) excluding cost of sales, a decrease in expenses of $8,323 as described below, and (iv) an increase in other items primarily interest expense, and other income of $149,248. After recording income tax expense of $331,737, we had net income of $682,086 or $0.29 per diluted share for the Current Year. In comparison, in the Prior Year we had net income of $919,396 or $0.20 per diluted share after recording income tax expense of $525,405.
Sales during the Current Year were $2,922,668, a decrease of $175,544 (5.7%), as compared to sales of $3,098,212 during the Prior Year. The disposable lens category decreased by 8.0% as sales of our C-Vue disposable multifocal were affected by economic conditions in the U.S. as well as increased competition from competitor new product offerings and rebate programs. Our custom soft lens category increased 12.8%. The launch last year of the new C-Vue Advanced Toric Multifocal with free trial lenses was slower then expected, but we are now seeing sales improvement in this category from the continued conversion of the free trial lenses into revenue generating boxes of monthly replacement lenses. In the Current Year, our gas permeable lens category declined by 13.5%, primarily due to the continued overall decline in gas permeable fits in the contact lens industry. The replacement and other lens category decreased by 13.0% due to the expected decline in product lines that are nearing the end of their life cycle. Gross margin decreased 2.6% to 39.2% in the Current Year compared to 41.8% in the Prior Year due primarily to fewer sales and sales mix changes from higher margin products in our disposable lens category and the maturation of the C-Vue Advanced Toric Multifocal free trial program launched at the end of the first quarter last year.
During the Current Year, as compared to the Prior Year, expenses decreased $8,323. Administrative expenses increased by $13,015 primarily due to the timing of legal and professional fees associated with annual report filings due to our migration from Canada to Delaware completed in the first quarter this year. Sales and marketing expenses decreased $19,270 due to lower advertising and research and development expenses were flat during the Current Year, as compared to the Prior Year.
During the Current Year we recorded income tax expense of $331,737 compared to income tax expense in the Prior year of $525,405. We record income tax at the statutory rates, and previously only paid alternative minimum tax of approximately 2% due to the utilization of tax loss carry-forwards. During the second quarter of the 2010 fiscal year, utilization of tax loss carry-forwards were exhausted, and income taxes payable have been recorded since then. The effective tax rate for the Current Year was 32.7% compared to 36.4% in the Prior Year.
Liquidity and Capital Resources
As of December 31, 2010, we had working capital of $1,020,734 representing a decrease of $284,087 from our working capital at June 30, 2010. The decrease in working capital was principally due to a decrease in cash offset by the increase in inventory.
During the six months ended December 31, 2010, we generated $495,440 positive cash from operations representing a decrease of $916,215 from $1,411,655 generated during the Prior Year. The decrease was due to lower net income and deferred tax expense and income taxes payable. Total capital additions and cash used during the Current Year for the purchase of capital additions was $131,084, primarily for manufacturing equipment and leasehold improvements at the head office, an increase of $120,960 from the Prior Year. Financing activities during the Current Year consisted of the repayment of $600,000 under our term loan facility and the payment of $426,484 of dividends to our shareholders compared to $819,128 of dividends paid in the Prior Year, a decrease of $392,644 due to less shares outstanding after our stock repurchase in January 2010. Cash income taxes paid during the Current Year was $453,000 compared to $21,000 in the Prior Year, due primarily to the exhaustion of the utilization of tax loss carry-forwards.
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In August 2010, we entered into an interest rate swap agreement which effectively converted our floating interest rate debt under the term loan of LIBOR plus 3.75% with a minimum interest rate of 4.75%, to a fixed rate of 5.16%.
Critical Accounting Policies & Estimates
This Managements Discussion and Analysis is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make certain estimates and apply judgment. We base our estimates and judgments on historical experience, current trends and other factors that management believes to be important at the time the consolidated financial statements are prepared. On a regular basis, we review our accounting policies and how they are applied and disclosed in our consolidated financial statements. While we believe the historical experience, current trends and other factors considered, support the preparation of our consolidated financial statements in conformity with generally accepted accounting principles, actual results could differ from our estimates, and such differences could be material.
There have been no changes to our critical accounting policies during the first six months of fiscal 2011.
For a further discussion of the judgments we make in applying our accounting policies, see Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations, in our 2010 Form 10-K.
Item 3 Quantitative and Qualitative Disclosures about Market Risk
Our market risks in the normal course of business are related to changes in interest rates, which at December 31, 2010 are similar to those disclosed in the 2010 Annual Report on Form 10-K.
Item 4 Controls and Procedures
In accordance with Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934 (the Exchange Act), our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(f) under the Exchange Act) as of the end of the period covered by this Quarterly Report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2010.
There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) that occurred during the period covered by this Quarterly Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting
None
There have been no material changes to the risk factors set forth under Part I, Item 1A of our 2010 Annual Report on Form 10-K.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3 Defaults Upon Senior Securities
None
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Item 4 Submission of Matters to a Vote of Security Holders
Reserved
None
Incorporated by Reference |
||||||||||||
Exhibit |
Exhibit Description |
Form |
SEC File No. |
Exhibit |
Filing Date |
Filed () or Furnished () Herewith (as indicated) | ||||||
3.1 | Memorandum, Certificate of Incorporation and Articles of Association of Unilens Vision Inc. (British, Columbia) | 20-F | 001-17861 | 3.1 | 07/03/1989 | |||||||
3.2 | Certificate of Incorporation Unilens Vision Inc. (Delaware) | 10-K | 001-17861 | 3.2 | 09/28/2010 | |||||||
3.3 | Unilens Vision Inc. By-Laws (Delaware) | 10-K | 001-17861 | 3.3 | 09/28/2010 | |||||||
31.1 | Certification of Michael J. Pecora pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | ||||||||||
31.2 | Certification of Leonard F. Barker pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | ||||||||||
32.1 | Certification of Michael J. Pecora pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | ||||||||||
32.2 | Certification of Leonard F. Barker pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
UNILENS VISION INC. (Registrant) | ||||
Date: February 14, 2011 | By | /s/ Michael J. Pecora | ||
Name: | Michael J. Pecora | |||
Title: | President and Chief Executive Officer | |||
(Principal Executive Officer) | ||||
Date: February 14, 2011 | By | /s/ Leonard F. Barker | ||
Name: | Leonard F. Barker | |||
Title: | Vice President, Chief Financial Officer | |||
(Principal Financial Officer and Principal Accounting Officer) |
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