UNITED STATES

INDEX

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PART I – FINANCIAL INFORMATION

Item 1 – Unaudited Financial Statements

Unilens Vision Inc.

Condensed Consolidated Balance Sheets

December 31, 2012 (Unaudited) and June 30, 2012

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

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The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

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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, 2012

(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, 2012 and 2011 (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 our audited financial statements for the year ended June 30, 2012. 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. 

Note 2 — Stock-Based Compensation, Stock Options and Stock

Stock-based payments are recorded using the fair value method of accounting for stock options. There was no   stock compensation expense attributable to stock options charged against income for the fiscal quarters ended December 31, 2012 and 2011, since no options were granted during such periods and all options outstanding at the beginning of such periods were fully vested.

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.

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.

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Unilens Vision Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
December 31, 2012

 (Unaudited)

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, 2012:

As of December 31, 2012 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, 2012, 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, 2012:

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.

As of December 31, 2012 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 $3.00 were less than the exercise price.

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.

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Unilens Vision Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
December 31, 2012

(Unaudited)

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Unilens Vision Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
December 31, 2012

(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, 2012 and 2011:

Note 7 — Term Loan, Line of Credit and Interest Rate Swap

On May 23, 2012, the Company closed on a new $3,500,000 5-year term loan facility and a $1,500,000 line of credit with Hancock Bank, which replaced the term loan facility and line of credit then in place with Regions Bank. Costs related to the Hancock Bank term loan facility and line of credit, were $59,265, which are amortized over the life of the 5-year term loan facility. The minimum monthly principal payments under the Hancock Bank term loan facility are $58,333, plus accrued interest. The Hancock Bank term loan and line of credit both bear interest at a floating rate of 30-day LIBOR plus 3.00%.

Monthly interest only payments are due under the Hancock Bank line of credit, with the maximum borrowings at any time not to exceed the lesser of (i) $1,500,000 or (ii) a sum equal to 85% of Eligible royalty receivables, plus 75% of Eligible Accounts Receivables plus 50% of Eligible Raw Material and Finished Goods Inventory. The maximum borrowing amount under this line of credit facility at December 31, 2012 was $1,046,000. The Company extended this line of credit which now expires on February 1, 2014.

The term loan and the line of credit are secured by a security interest in favor of Hancock Bank in our inventory, accounts receivable, general intangibles, cash and principal United States patent. Under the term loan facility and the line of credit, the Company is required to meet customary covenants regarding, among other things, tangible net worth, fixed charge coverage, dividend distributions and the requirement of lender consent for significant transactions such as mergers, acquisitions, dispositions and other financings.

The Company was in compliance with all financial covenants and had no outstanding balance on the Hancock Bank line of credit, and $3,091,667 outstanding on the term loan at December 31, 2012.

Note 8 — Recent Accounting Standards

Recent codified pronouncements by the FASB are not believed by management to have a material impact on the Company’s present or future financial statements.

Note 9 — Subsequent Event

On February 1, 2013, our Board of Directors declared our regular quarterly cash dividend, at the rate of $0.045 per common share, payable February 22, 2013, to stockholders of record at the close of business on February 12, 2013. This is the 26^th consecutive quarterly cash dividend declared.

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Report of Independent Registered Public Accounting Firm

Board of Directors

UnilensVision Inc.

Largo, Florida

We have reviewed the accompanying condensed consolidated balance sheet of Unilens Vision Inc. as of December 31, 2012 and the related condensed consolidated statements of income and changes in accumulated deficit for the three and six month periods ended December 31, 2012 and 2011 and the condensed consolidated statements of cash flows for the six month periods ended December 31, 2012 and 2011. These condensed 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, 2012 and the related consolidated statements of income, stockholders’ deficit, and cash flows for the year then ended (not presented herein); and in our report dated September 28, 2012, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of June 30, 2012 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 /s/ Warren Averett, LLC

Warren Averett, LLC

Tampa, Florida 

February14, 2013

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Item 2 – Management’s 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, 2012 (the “Financial Statements”), as well as our Annual Report on Form 10-K for the fiscal year June 30, 2012, 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 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 population’s 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 and six months ended December 31, 2012 the Company’s C-Vue disposable products accounted for approximately 53 % and 54% of sales.

Sales of our specialty optical lens products accounted for the largest percentage of our total revenues, constituting approximately 71% and 73% while royalty income derived from our exclusive license of our patented multifocal design to Bausch + Lomb was approximately 29% and 27% during the three and six months ended December 31, 2012.

Economic conditions in the United States have restrained our growth. We are however optimistic about the long-term 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 lens for presbyopia, our C-Vue custom toric lens for correcting astigmatism and the C-Vue Advanced toric multifocal lens,will grow over time due to market demographics favoring specialty lenses and our patented multifocal technology.

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 sales have grown steadily during the 2012 fiscal year and into the first half of the 2013 fiscal year.

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. However, there can be no assurance, 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, Inc. a unit of Johnson and Johnson Vision Care, Inc., Bausch + Lomb, Alcon Laboratories, Inc., a division of Novartis AG, and Cooper Vision, Inc., a unit of Cooper Vision Companies, Inc.  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 46% of our 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

·         Sales for the second quarter of fiscal 2013 were $1.4 million or 2.1% less than the second quarter of fiscal 2012. Custom soft lens sales increased 11.0% while the disposable lens category declined 7.6%.

·         Royalty income declined 10.9% compared to the second quarter of fiscal 2012, resulting in a decline in total revenue of 4.8% to $2.0 million.

·         Operating expenses decreased 0.9% compared to the second quarter of fiscal 2012.

·         Interest expense was 58% less when compared to the second quarter of fiscal 2012, due to lower debt levels and the Hancock bank refinancing in May, 2012.

·         Net income decreased 9.8% compared to the second quarter of fiscal 2012.

·         Earnings per share were $0.11 compared to $0.12 in the second quarter of fiscal 2012.

·         Paid our 25^th consecutive quarterly dividend, at $0.045 per share in November 2012.On February 1, 2013 we declared our 26^th consecutive quarterly dividend, at an annual rate of $0.18 per share or $0.045 per share quarterly, a dividend yield of 5.6% based on the January month end closing price of $3.24.

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:

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:

Second Quarter

During the three months ended December 31, 2012 (the “Current Quarter”) we earned income before tax of $378,841 compared to income before tax of $414,861 for the three months ended December 31, 2011 (the “Prior Quarter”).  The decrease in income before tax during the Current Quarter of $36,020 was primarily from the decrease in royalty income from Bausch + Lomb of $71,320 to $582,574 in the Current Quarter as compared to $653,894 in the Prior Quarter, (ii) an decrease in gross margin of $12,741 from lower sales (iii) excluding cost of sales, a decrease in expenses of $6,328 as described below, and (iv) a decrease in other items primarily interest expense, and other income of $41,713. After recording income tax expense of $124,906, we had net income of $253,935 or $0.11 per diluted share for the Current Quarter. In comparison, in the Prior Quarter we had net income of $281,626 or $0.12 per diluted share after recording income tax expense of $133,235.

Sales during the Current Quarter were $1,429,475, a decrease of $29,936 (2.1%), as compared to sales of $1,459,411 during the Prior Quarter. The disposable lens category decreased by 7.6% as sales of our C-Vue disposable multifocal lenses continue to be affected by competition from competitor product offerings and promotional programs. Our custom soft lens category increased by 11.0%, primarily due to increased demand of our new C-Vue Advanced^® HydraVUE™ line of silicone hydrogel custom contact lenses for monthly replacement, launched over a year ago in January of 2011. Our gas permeable lens category decreased 0.2% primarily due to the continued overall decline in gas permeable fits in the contact lens industry.The replacement and other lens category decreased as expected by 8.7% due to the expected decline in product lines that are nearing the end of their life cycle,offset some by sales increases for Unilens replacement products due to the discontinuation of replacement lens products from several of our competitors.

Gross margin was flat at 37.1% in the Current Quarter compared to 37.2% in the Prior Quarter, due primarily to manufacturing improvements implemented during the first quarter offset by lower margins.

During the Current Quarter, as compared to the Prior Quarter, expenses decreased 0.9% or $6,328. Administrative expenses increased $2,707 primarily due to increases in supply expenses offset by decreases in repairs and maintenance and corporate governance expenses. Sales and marketing expenses decreased $7,535 primarily due to lower current product advertising and promotional expenses, offset by higher payroll and related costs, while research and development expenses decreased $1,500 during the Current Quarter, as compared to the Prior Quarter.

We record income tax and income taxes payable at the statutory rates. During the Current Quarter and the Prior Quarter we recorded income tax expense of $124,906 and $133,235, respectively. The effective tax rate for the Current Quarter and Prior Quarter was 33.0% and 32.1%, respectively

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Six Months

During the six months ended December 31, 2012 (the “Current Year”) we earned income before tax of $760,622 compared to income before tax of $897,297 for the six months ended December 31, 2011 (the “Prior Year”).  The decrease in income before tax during the Current Year of $136,675 was primarily from the decrease in royalty income from Bausch + Lomb of $173,563 to $1,111,531 in the Current Year as compared to $1,285,094 in the Prior Year, (ii) an decrease in gross margin of $40,318 from lower sales (iii) excluding cost of sales, an increase in expenses of $4,844 as described below, and (iv) a decrease in other items primarily interest expense, and other income of $82,050. After recording income tax expense of $251,683, we had net income of $508,939 or $0.21 per diluted share for the Current Year. In comparison, in the Prior Year we had net income of $605,080 or $0.26 per diluted share after recording income tax expense of $292,217.

Sales during the Current Year were $2,939,129, a decrease of $96,812 (3.2%), as compared to sales of $3,035,941 during the Prior Year. The disposable lens category decreased by 8.2% as sales of our C-Vue disposable multifocal lenses continue to be affected during the six months by competition from competitor product offerings and promotional programs. Our custom soft lens category increased by 13.3%, primarily due to increased demand of our new C-Vue Advanced^® HydraVUE™ line of silicone hydrogel custom contact lenses for monthly replacement. Our gas permeable lens category decreased 8.8% primarily due to the continued overall decline in gas permeable fits in the contact lens industry.The replacement and other lens category decreased as expected by 15.2% due to the expected decline in product lines that are nearing the end of their life cycle,offset some by sales increases for Unilens replacement products due to the discontinuation of replacement lens products from several of our competitors.

Gross margin was flat at 39.1% in the Current Year compared to 39.2% in the Prior Year, due primarily to manufacturing improvements implemented during the first quarter offset by lower margins.

During the Current Year, as compared to the Prior Year, expenses increased 0.3% or $4,844. Administrative expenses increased $5,090 primarily due to increases in supply expenses and payroll and related expenses, offset by decreases in repair and maintenance and corporate governance expenses. Sales and marketing expenses increased $2,198 primarily due to increases in payroll and related expenses and costs associated with a new corporate logo and future new product launches offset by lower current product advertising and promotional expenses, while research and development expenses decreased $2,444 during the Current Year, as compared to the Prior Year.

We record income tax and income taxes payable at the statutory rates. During the Current Year and the Prior Year we recorded income tax expense of $251,683 and $292,217, respectively. The effective tax rate for the Current Year and Prior Year was 33.1% and 32.6%, respectively

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Liquidity and Capital Resources

Cash and cash equivalents were $265,952 at December 31, 2012 compared to $ 374,977 at June 30, 2012.  The following is a summary of the change in our cash and cash equivalents:

As of December 31, 2012, we had working capital of $801,688 representing a decrease of $52,997 from our working capital at June 30, 2012. The decrease in working capital was primarily due to decreases in cash, accounts receivable, royalty and other receivables and an increase in accounts payable, offset by increases in inventory, prepaid expenses, accrued expenses and the payoff of the line of credit.

During the six months ended December 31, 2012, we generated $628,302 positive cash from operations representing a decrease of $312,122 from $940,424 generated during the Prior Year. The decrease was primarily from lower royalty and other receivables in the Current Year, compared to the Prior Year which included the payment of the one-time price correction recorded in the fourth quarter of fiscal year 2011, and increases in inventory and other assets, offset by increases in accounts payable and accrued expenses.

Investing activities for the Current Year were for the purchase of capital additions. Cash used for these capital additions were $92,644 a decrease of $296,514 from $389,158 cash capital additions in the Prior Year. Total capital additions in the current year are for manufacturing equipment, capitalized process improvement and leasehold improvements. The total capital additions in the Prior Year were $461,847, which was primarily for the purchase of manufacturing equipment and the web site shopping cart project.

Financing activities during the Current Year consisted primarily of principal repayments of $350,000 on the term loan facility and the payoff of the outstanding balance of $81,441 on the line of credit, compared to term loan repayments of $464,286 and the repayment of a capital lease facility of $279,998 in the Prior Year. In addition financing activities in both the Current and Prior Years included the payment of $213,242 of dividends to our shareholders. The Current Year term loan principal repayments are from the May 23, 2012, Hancock Bank refinancing of our term loan and line of credit facilities with a new five-year term loan and line of credit, which increased our term loan principal payments to $58,333 per month from $54,762, while at the same time extending the term of the loan and reducing the interest rate to a floating rate of 30-day LIBOR plus 3.00%.Cash income taxes paid during the Current Year were $236,000 compared to $171,000 paid in the Prior Year.

Critical Accounting Policies & Estimates

This Management’s 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 six months of fiscal 2013.

For a further discussion of the judgments we make in applying our accounting policies, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our 2012 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, 2012 are similar to those disclosed in the 2012 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, 2012.

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.