PART I

ITEM 1.Business

Our gas permeable lens line of products consist of the Unilens GP™, a multifocal contact lens intended for patients with astigmatism who need low to moderate presbyopic correction; the Unilens GP Plus™, designed to accommodate wearers requiring higher presbyopic correction; the C-Vue GP, a front aspheric design incorporating the C-Vue design technology and the C-Ray GP utilizing our recently patented design technology, featuring an on eye ray traced power profile over an elliptical base.

Our replacement and other lenses line of products primarily consists of the Unilens™, an aspheric multifocal contact lens; the SoftSite™, a highadd multifocal contact lens; the SimulVue™, a simultaneous vision bifocal contact lens with the capabilities for correcting advanced presbyopia; the Unilens EMA, a visibility tinted multifocal contact lens available in planned replacement modality; the LifeStyle brand of toric multifocal, toric and spherical daily, and extended wear lenses and the Sof-Form single vision lenses marketed under the Lombart brand; the UniVision, an aspheric low vision lens; and the, Aquaflex and SoftCon spherical daily and extended wear brand of lenses acquired from CIBA Vision.

Customers, Sales & Suppliers

We currently market and distribute our products exclusively to qualified practitioners through a combination of authorized independent distributors, authorized manufactures’ representatives, and in house sales representatives.

In October 2001, we licensed the exclusive worldwide rights to our multifocal soft contact lens design to Bausch + Lomb Incorporated (“Bausch + Lomb”). In April 2013 we extended this licensing agreement and granted Bausch + Lomb an exclusive worldwide license to use Unilens’ new multifocal technology. Under the agreement, Bausch + Lomb manufactures and markets cast-molded multifocal soft contact lenses using our technologies.  We receive a royalty ranging from two to five percent of Bausch + Lomb’s worldwide net sales of these products for as long as it manufactures and sells them. During the fiscal years ended June 30, 2013, 2012, and 2011 we recorded $2,089,013, $2,539,696, and $2,702,324, respectively, in royalty income. There can be no assurance, however, that Bausch + Lomb will continue to sell products utilizing our technologies in the future.

Our sales are not substantially subject to seasonality, except that sales during the quarter ending December 31 are normally lower than other quarters due to a decrease in patient visits to eye care professionals during the Christmas holiday season.

We rely on several suppliers, for most of the raw materials used in the production of our soft contact lenses. During fiscal 2011, we began purchasing silicone hydrogel raw material, which we did not previously have access to, from Contamac US. Shortly thereafter in January 2011, we launched the C-Vue Advanced HydraVue family of silicone hydrogel custom contact lenses.  Except for silicone hydrogel, our raw materials are readily available in our industry and alternate vendors have been identified as potential suppliers with competitive pricing and quality.  Over the past three fiscal years, we have not experienced any volatility in the price of raw materials.

We have a supply agreement with one supplier for the manufacture of our molded C-Vue multifocal lens. This agreement was amended in February 2013 to include silicone hydrogel multifocal lenses such as our new C-Vue HydraVue multifocal lens. Currently, sales of these multifocal lenses account for approximately 46% of our annual 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.

Backlog is not a material factor in our business.

Competition

We operate within the highly competitive contact lens market.  We compete with industry leaders, such as Vistakon, Inc. a unit of Johnson and Johnson Vision Care, Inc., Bausch + Lomb, a unit of Valeant Pharmaceuticals International Inc., Alcon Laboratories, Inc., a division of Novartis AG, and Cooper Vision, Inc. a unit of Cooper 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 market our products worldwide.  For the fiscal years ending June 30, 2013, 2012, and 2011, approximately 1% in each year was from revenue derived from sales outside the United States, primarily from sales in Canada, Brazil, England and Germany.

The conventional soft multifocal contact lens business has been affected by the introduction of molding manufacturing technology, allowing for the mass production of most lens types at a fraction of the cost to lathe lenses. The entry of these molded lenses into the marketplace has created significant price competition. The reduced cost of the molded lens allows for liberal amounts of trial lenses to be provided to eye care professionals for a more productive fitting session and immediate dispensing of lenses.  Furthermore, lower manufacturing costs led to the introduction of frequent replacement and disposable lenses, a modality preferred by many consumers.  Recognizing this trend, we signed an agreement with a third party in 2002 for the supply of disposal multifocal molded soft contact lenses (C-Vue) utilizing our patented design. The C-Vue brand was launched to eye care professionals in the United States during September 2002. In  February 2013, we amended this agreement to include silicone hydrogel lenses and announced the launch of our new silicone hydrogel disposable C-Vue^® HydraVUE™ Multifocal contact lens for monthly replacement. In February 2006, we announced the launch of the first aspheric, single vision daily wear, frequent replacement disposable soft contact lens available under the C-Vue brand. The C-Vue Aspheric single vision lens is manufactured by a third party utilizing, Wavefront inspired technology. In May 2008, we launched the all-new C-Vue 1 Day ASV, which is the first aspheric daily disposable contact lens sold under the C-Vue brand. The cast molded C-Vue 1 Day ASV lens is manufactured for us by a third party utilizing Wavefront inspired technology, and is marketed to eye care professionals in blister-packs of 30 and 90 lenses. During fiscal 2013, our C-Vue disposable products accounted for approximately 54% of sales. We expect that sales of our disposal category which includes the C-Vue brand multifocal and silicone hydrogel multifocal, the C-Vue Aspheric single vision and the C-Vue 1 Day ASV lenses in total will start to make up a greater percentage of our future sales as sales of our C-Vue HydraVue multifocal grow and anticipated new products are launched. We also expect sales of our custom soft lenses will continue to grow and make up a greater percentage of our future sales.

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 lenses 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.

Our C-Vue Advanced HydraVue family of silicone hydrogel custom contact lenses are part of our increased emphasis on silicone hydrogel products in our soft custom lens business. The contact lens market has experienced a shift in recent years towards molded and lathe cut lenses manufactured with silicone hydrogel materials. In addition to our new C-Vue HydraVue multifocal lens, we anticipate the launch of a new silicone hydrogel disposable multifocal lens within the next twelve months.

We regularly compete with a number of other companies in the contact lens industry that have substantially greater financial resources than we do.  Our ability to compete is based upon marketing quality products to eye care professionals utilizing our patented technology.

Government Regulation

Contact lenses are regulated as medical devices in the U.S., the EU and other countries.  In the U.S., all non-exempt devices must receive pre-market approval by the FDA. There are two review procedures to gain this pre-market approval depending on the amount of risk posed by the device: a Premarket Approval Application (“PMA”) procedure and a Section 510(k) submission.  Under a PMA, the manufacturer must submit to the FDA supporting evidence sufficient to prove the safety and effectiveness of the device. The FDA has 180 days to review a PMA. Certain products, however, may qualify for a submission authorized by Section 510(k).  Under this procedure, the manufacturer gives the FDA a pre-market notification that it intends to commence marketing the product, and that it has established that the product is substantially equivalent to another product already on the market.  The FDA has 90 days to review a Section 510(k) submission.  In the EU, the "CE" mark is required for all medical devices sold.  We hold a CE mark for the classes of contact lenses that we sell.  The CE mark allows us to market products upon signing a declaration of conformity with the EU's Medical Device Directive requirements, which we do for each product sold.  In addition, medical device sales in the EU require auditing by a Notified Body to ensure that the manufacturer's quality systems are in compliance with the requirements of the ISO 9000 standards. We have a Notified Body, which routinely audits our quality systems.  See "Item 1A --"Risk Factors" – Our manufacturing facility located in the U.S. and our products sold in the U.S. are subject to stringent regulation by the Food and Drug Administration. See "Item 1A --"Risk Factors". Our products are subject to stringent regulation by various foreign jurisdictions in which our products are sold. The cost of compliance with U.S. and foreign regulatory requirements is significant and, particularly when we introduce new products, may from time to time be material to our business. 

Research and Development

We have ongoing research and development activities relating to different contact lens products, other applications of our technology and component materials. Research and development expenditures for fiscal years ending June 30, 2013 and 2012 were $85,332 and $85,404, respectively.  Future new product development may involve additional costs including the cost of obtaining FDA approval, which may take a significant amount of time.

Patents and Technology

We are materially dependent on our software and lens design technology.  Our technology allows us to license and manufacture high quality reproducible lenses.  We have been granted U.S. Patent No. 5,754,270 for our key technology, which is a unique aspheric design that may be configured in a soft multifocal, toric, rigid gas permeable lens, or intraocular lens. In November 2010 we were granted U.S. Patent No. 7,828,435 BI, which features a unique ray traced power profile, currently incorporated into our C-Ray gas permeable lens.

Employees

We have 45 full time employees located in the Tampa – St. Petersburg Florida area, primarily in our Largo, Florida facility. 

Reports to Security Holders

We are subject to the informational requirements of the Securities Exchange Act of 1934. Accordingly, we file annual, quarterly and other reports and information with the Securities and Exchange Commission. You may read and copy these reports and other information we file at the Securities and Exchange Commission's public reference rooms in Washington, D.C., at 100 F Street, NE., Washington, DC 20549, on official business days during the hours of 10 a.m. to 3p.m.  The public may obtain information on the operation of the public reference room by calling the Securities and Exchange Commission at 1-800-SEC-0330. Our filings are also available to the public from commercial document retrieval services and the Internet worldwide website maintained by the Securities and Exchange Commission at www.sec.gov. You may also request copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") free of charge as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC by requesting copies of such reports in writing. Such written requests shall be made to our corporate secretary and sent to our executive offices at the address set forth on the cover page of this Form 10-K.  Additional information relating to us is on the SEDAR website at www.sedar.com. 

ITEM 1A.             RISK FACTORS

In October 2001, we entered into an exclusive worldwide license on one of our patented multi-focal design technologies with Bausch + Lomb, which generates a significant portion of our net income. In April 2013 we extended this licensing agreement to include a worldwide license to use Unilens’ new multifocal technology. We collect royalties based on Bausch + Lomb's worldwide net sales of products utilizing our technologies. There can be no assurance, however, that Bausch + Lomb will continue to sell products in the future utilizing our technologies at the same levels as it currently does or at all .

We rely on one supplier for our molded contact lenses and one supplier for our silicone hydrogel raw material used in the production of our soft lathe-cut contact lenses. 

In June 2002, we entered into a supply agreement with one of our suppliers for the manufacture of our Molded C-Vue multifocal lens. This agreement was amended in February 2013 to include silicone hydrogel multifocal lenses such as our new C-Vue HydraVue multifocal lens. Together these lenses account for a significant portion of our sales (approximately 46% during the 2013 fiscal year). 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 assurance that it will continue to meet its obligations under our agreement or as to any renewal of our supply agreement.  The supplier is not under any obligation to supply products utilizing other materials or manufacturing processes, or to meet our possible future requirements for design or material changes and enhancements. While alternate suppliers for the manufacture of specialty molded or partially molded contact lenses have been identified, should the need arise,  there can be no assurance that an alternate supplier can successfully manufacture lenses to our specifications or material requirements on acceptable terms, or within the constraints of our exclusive license agreement with Bausch + Lomb.

The raw materials used for the production of most of our lathe-cut soft contact lenses are purchased from several suppliers. Over the past three years we have not experienced any interruption in the supply of these raw materials. While alternate vendors have been identified, should the need arise, there can be no assurance that an alternate supplier can provide the raw materials in accordance with our specifications or on acceptable terms. We did not have access to the silicone hydrogel raw material used in our advanced soft lathe–cut contact lenses prior to the 2011 fiscal year and we currently obtain it from only one supplier, Contamac US. 

We face intense competition, and our failure to compete effectively could have a material adverse effect on our profitability and results of operations.

The market for soft contact lenses is intensely competitive and many competing products have lower prices than do ours. Our ability to increase U.S. market penetration is dependent on persuading eye care professionals to recommend our products to consumers, as well as persuading consumers of competing products to switch to our products, on the basis of quality, features and value. Our products compete with similar products offered by a number of larger companies, including Vistakon, Inc., a unit of Johnson and Johnson Vision Care, Inc., Bausch + Lomb, a unit of Valeant Pharmaceuticals International Inc., Alcon Laboratories, Inc., a division of Novartis AG, and Cooper Vision, Inc., a unit of Cooper Companies, Inc. Many of our competitors have substantially greater financial, marketing and technical resources, greater market penetration and larger manufacturing capacities and volumes.  Among other things, these advantages may afford our competitors greater ability to manufacture large volumes of lenses, reduce product prices and influence customer buying decisions. We believe that certain of our competitors are expanding, or are planning to expand, their manufacturing capacity, and are implementing automated manufacturing processes, in order to support anticipated increases in volume.  Because many of the costs incurred in producing contact lenses are relatively fixed, a manufacturer that can increase its volume can generally reduce its per unit costs and thereby increase its flexibility to reduce prices.  Our competitors could also reduce prices to increase sales volumes, so as to utilize their production capacity, or for other reasons.  Price reductions by competitors could make our products less competitive, and we cannot assure you that we would be able to either match a competitor's pricing plan or reduce our prices in response.  Our ability to respond to competitive pressures by decreasing our prices without adversely affecting our gross margins and operating results will depend on our ability to decrease our costs per lens.  Any significant decrease in our costs per lens will depend, in part, on our ability to increase sales volume and production capacity, of which there can be no assurance. Our failure to respond to competitive pressures and particularly price competition in a timely manner could have a material adverse effect on our business, financial condition and results of operations.

We believe that certain of our competitors are planning to introduce new multifocal or other specialty lens designs in the near future. Competition from products utilizing new lens designs may have a material adverse effect on our business, financial condition and results of operations.

The contact lens market has experienced a shift in recent years towards lenses manufactured with silicone hydrogel materials, which feature higher oxygen permeability. Many of our competitors have had access to higher oxygen permeable silicone hydrogel materials for some time. During the first half of calendar 2011, we began purchasing this material from one supplier.  Shortly thereafter, we launched our new C-Vue Advanced HydraVue family of silicone hydrogel custom contact lenses. In March 2013, we obtained access to molded silicone hydrogel products and launched our new C-Vue HydraVue multifocal lens. We are now be able to compete on a small scale with our competitors based on our patented lens design technology, our silicon hydrogel lathe cut custom contact lenses and with our new silicon hydrogel molded C-Vue HydraVue multifocal lens. There can be no assurance that we will be successful in competing with similar products offered by a number of larger companies who have substantially greater financial, marketing and technical resources, greater market penetration and larger manufacturing capacities and volumes.

We also encounter competition from manufacturers of eyeglasses and from alternative technologies, such as surgical refractive procedures (including new refractive laser procedures such as PRK, or photo refractive keratectomy, and LASIK, or laser in situ keratomileusis).  If surgical refractive procedures become increasingly accepted as an effective and safe technique for permanent vision correction, they could substantially reduce the demand for contact lenses by enabling patients to avoid the ongoing cost and inconvenience of contact lenses.  Accordingly, we cannot assure you that these procedures, or other alternative technologies that may be developed in the future, will not cause a substantial decline in the number of contact lens wearers and thus have a material adverse effect on our business, financial condition and results of operations.

We depend upon certain key management and technical personnel.

Our future success will depend in part upon our ability to attract and retain highly qualified personnel. We compete for such personnel with other companies, academic institutions, government entities and other organizations.  We cannot assure you that we will be successful in retaining or hiring qualified personnel.  The loss of any of our senior management or other key research, clinical, regulatory, or sales and marketing personnel, particularly to competitors, could have a material adverse effect on our business, financial condition and results of operations.

We are a holding company.  Our only source of cash, other than from debt or equity financings, is from distributions from our subsidiaries and interest earnings on cash invested.

We are a holding company with essentially no operations of our own and conduct substantially all of our business operations through our subsidiary, Unilens Corp. USA and its subsidiary Unilens Vision Sciences, Inc.  Our only significant asset is the outstanding capital stock of such subsidiaries.  We are wholly dependent, other than from debt or equity financings, on the cash flow of such subsidiaries and dividends and distributions from such subsidiaries in order to service any current and future indebtedness obligations we may have.

Our common shares are traded in the U.S. only on the OTC Markets Group, so the liquidity of our common shares in the U.S. may be limited.

Our common shares trade in Canada on the TSX Venture Exchange and in the United States on the OTC Markets Group - OTCQB.  Stocks in the OTC Markets Group market ordinarily have much lower trading volume than in other markets, such as The NASDAQ Global, Global Select and Capital Markets.  Very few market makers take interest in shares traded over-the-counter and, accordingly, the markets for such shares are less orderly than is usual for NASDAQ stocks.  As a result of the low trading volumes ordinarily obtained in the OTC Markets Group market, sales of our common shares in any significant amount could not be absorbed without a dramatic reduction in price.  Moreover, thinly-traded shares in the OTC Markets Group market are more susceptible to trading manipulations than is ordinarily the case for more actively traded shares.

“Penny stock” rules may make buying or selling our common shares difficult, severely limiting the market price of our common shares and the liquidity of our shares in the U.S.

Trading in our common shares is subject to the “penny stock” regulations adopted by the U.S. Securities and Exchange Commission. These regulations generally define a “penny stock” to be any equity security that does not meet certain listing standards.  These rules require that any broker-dealer who recommends our securities to persons other than prior customers and accredited investors, must, prior to the sale, make a special written suitability determination for the purchaser and receive the purchaser’s written agreement to execute the transaction. Unless an exception is available, the regulations require delivery, prior to any transaction involving a “penny stock,” of a disclosure schedule explaining the penny stock market and the risks associated with trading in the penny stock market.  In addition, broker-dealers must disclose commissions payable to both the broker-dealer and registered representative and current quotations for the securities they offer.  The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in our stock, which could severely limit their market price and the liquidity of our stock.

The price of our common shares in the U.S. and Canada continues to be highly volatile.

The market price of our common shares in the U.S. and Canada is, and is likely to continue to be, volatile and may be significantly affected by factors such as: actual or anticipated fluctuations in our operating results or those of our competitors; competitive factors; trade practice litigation; new products offered by us or our competitors; developments with respect to patents or proprietary rights; conditions and trends in our industry and other related industries; regulatory actions; adoption of new accounting standards; changes in financial estimates by securities analysts; general market conditions; and other factors. 

Dividends to holders of our common shares cannot be assured. 

We have paid special and quarterly dividends only since August 2006. For the fiscal year ending June 30, 2014, the Company has so far paid quarterly cash dividends totaling $0.045 per common share. The amount of future dividends will depend on earnings, cash flow, and other aspects of our business as determined and declared by the Board of Directors. There can be no assurance that we can generate sufficient earnings and cash flow to continue paying quarterly dividends.

Our manufacturing facility located in the U.S. and our products sold in the U.S. are subject to stringent regulation by the Food and Drug Administration.

Under the Food, Drug and Cosmetic Act (the "FDC Act") and implementing regulations, the Food and Drug Administration (the "FDA") regulates the testing, manufacturing, labeling, distribution, and promotion of medical devices such as contact lenses. Noncompliance with applicable requirements can result in, among other things, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of product distribution, failure of the government to grant premarket clearance or approval for devices, withdrawal of marketing clearances or approvals, and criminal prosecution.  The FDA also has the authority to request the recall, repair, replacement or refund of the cost of any device manufactured or distributed by us.

Before a new device can be introduced into the U.S. market, it must receive FDA premarket notification clearance under Section 510(k) of the FDC Act ("Section 510(k)") or premarket approval pursuant to the more costly and time-consuming PMA procedure. For devices that are cleared through the Section 510(k) process, modifications or enhancements that could significantly affect safety or effectiveness, or constitute a major change in the intended use of the device, will require new Section 510(k) submissions. While less expensive, and less time-consuming than obtaining PMA clearance, securing Section 510(k) clearance may involve the submission of a substantive review of six months or more.  Any products manufactured or distributed pursuant to Section 510(k) clearance are subject to pervasive and continuing regulation by the FDA, including record keeping requirements and reporting of adverse experience with the use of the device.

We are seeking Section 510(k) clearances for all of the new products we intend to manufacture and market in the U.S.  New products may require clinical studies to support a Section 510(k) clearance or PMA.  There is no certainty that clinical studies involving new products will be completed in a timely manner or that the data and information obtained will be sufficient to support the filing of a PMA or Section 510(k) clearance.  We may not be able to obtain necessary clearances and approvals to market new devices or any other products under development on a timely basis, if at all, and delays in receipt or failure to receive such clearances or approvals, the loss of previously received clearances, or failure to comply with existing or future regulatory requirements could have a material adverse effect on our business, financial condition and results of operations. 

As a manufacturer of medical devices, we are required to register with the FDA and comply with the FDA's Code of Federal Regulations quality system requirements.  If the FDA believes that we may not be operating in compliance with applicable laws and regulations, it can record its observations on a Form FDA 483; place us under observation and re-inspect the facilities; institute proceedings to issue a warning letter apprising of violative conduct; detain or seize products; mandate a recall; enjoin future violations; and assess civil and criminal penalties against us, our officers or our employees.  In addition, in appropriate circumstances, the FDA could withdraw clearances or approvals. Failure to comply with regulatory requirements or any adverse regulatory action could have a material adverse effect on us.

Manufacturers of medical devices for marketing in the U.S. also must comply with the medical device reporting ("MDR") requirements of the FDA, that require companies report to the FDA any incident in which its product may have caused or contributed to a death or serious injury, or in which its product malfunctioned and, if the malfunction were to recur, it would be likely to cause or contribute to a death or serious injury.  Labeling and promotional activities are subject to scrutiny by the FDA.  Current FDA enforcement policy prohibits the marketing of approved medical devices for unapproved uses.  We are subject to routine inspection by the FDA for compliance with quality systems requirements, MDR requirements, and other applicable regulations.  We cannot assure you that we will not incur significant costs to comply with laws and regulations in the future or that laws and regulations will not have a material adverse effect upon our business, financial condition or results of operation.

We face an inherent risk of exposure to product liability claims in the event that the use of the products we manufacture or sell results in personal injury.

We face an inherent risk of exposure to product liability claims in the event that the use of the products we manufacture and/or sell results in personal injury.  Although we have not experienced any losses due to product liability claims, we cannot assure you that we will not experience such losses in the future.  We maintain insurance against product liability claims, but we cannot be certain that such coverage will be adequate to cover any liabilities that we may incur, or that such insurance will continue to be available on terms acceptable to us.  A successful claim brought against us in excess of available insurance coverage, or any claim that results in significant adverse publicity against us, could harm our business.

All of our manufacturing operations are conducted at a single facility.

We conduct all of our manufacturing operations at a single facility in Largo, Florida.  As a result, any prolonged disruption in the operations of our manufacturing facility, whether due to technical or labor difficulties, destruction of or damage to the facility or other reasons, could have a material adverse effect on our business, financial condition and results of operations.  In this regard, because our principal manufacturing facility is located in Largo, Florida, such facility is exposed to the risks of damage from certain weather conditions including, without limitation: hurricanes, windstorms, and floods.  If our facility were to be out of production for an extended period, our business, financial condition and results of operation would be materially adversely affected. 

Our manufacturing capacity may not be adequate to meet the demands of our business.

Our products are manufactured in quantities sufficient to satisfy our current level of product sales.  If we experience increases in sales, we may need to increase our production beyond our present manufacturing capacity.  The process for transferring the manufacture of our products to new facilities is lengthy and requires regulatory approval, and our manufacturing and related costs could increase as a result of the transaction.  Any prolonged disruption in the operation of our manufacturing facilities or those of our third-party manufacturers, or any significant increase in associated costs, could materially harm our business, financial condition and results of operations.

If we are unable to protect our intellectual property rights, our business and prospects may be harmed.

Our ability to compete effectively is dependent upon the proprietary nature of the designs, processes, technologies and materials owned by, used by or licensed to us.  Although we attempt to protect our proprietary property, technologies and processes both in the U.S. and in foreign countries through a combination of patent law, trade secrets and non-disclosure agreements, these may be insufficient.  In addition, because of the differences in foreign patent and other laws concerning proprietary rights, our products may not receive the same degree of protection in foreign countries as they would in the U.S.

ITEM 1B.             UNRESOLVED STAFF COMMENTS

ITEM 2.properties

ITEM 3.legal proceedings

ITEM 4.            MINE SAFETY DISCLOSURES  

ITEM 5.                MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Holders

As of September 25, 2013, there were 398 stockholders of record, which includes shares held by brokerage and clearing houses, holding a total of 2,369,354  of our common shares. 

Dividends

Since November 1, 2006, our Board of Directors has declared cash dividends for each of our fiscal quarters.  The table below shows all Company dividends paid for each of the last two fiscal years.

On August 1, 2013 the Board of Directors declared a 2014 fiscal year first quarter cash dividend of $0.045 per share paid August 23, 2013 to stockholders of record on August 12, 2013.

The amount and frequency of future dividends declared by our Board of Directors will depend on earnings, cash flow, and other aspects of our business as determined by our Board of Directors, as well as dividend payment restrictions under our term loan facility with Hancock Bank (as described below in Item 7). 

Securities authorized for issuance under equity compensation plans

The following table sets forth, as of June 30, 2013, outstanding awards and shares remaining available for future issuance under our Incentive Stock Option Plan, which was approved by our stockholders in March 2010 and is our only compensation plan under which equity securities are authorized for issuance.

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. In April 2013, we announced that, we had extended our license agreement with Bausch + Lomb. The amended agreement continues to cover the exclusive worldwide license for our multifocal technology and in addition grants Bausch + Lomb an exclusive worldwide license for our new multifocal technology. Under the terms of the arrangement, existing royalty rates will remain in effect and will apply for both technologies. Bausch + Lomb recently introduced the PureVision® 2 for Presbyopia in certain European markets. The new addition to the PureVision portfolio incorporates Bausch + Lomb’s own innovative lens technology, using certain licensed elements of our next generation technology. We expect that this new contact lens offering by Bausch + Lomb will help grow our future royalty income. 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, a unit of Valeant Pharmaceuticals International Inc., 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. This agreement was amended in February 2013 to include silicone hydrogel multifocal lenses.Together these lenses account for a significant portion of our sales (approximately 46% during the 2013 fiscal year). 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 assurance that it will continue to meet its obligations under our agreement or as to any renewal of our supply agreement.

2013 Fiscal Year Highlights

•          Sales for fiscal year 2013 decreased by 2.2% over 2012 to $6.0 million, due primarily to a 7% decline in disposable multifocal lens sales offset in part by an 11% increase in custom soft lens sales.

•          Royalty income for 2013 declined by 18% to $2.1 million, compared to fiscal 2012, resulting in a decline in total revenue of 7%.

•          Operating expenses increased 2.3% to $3.0 million for 2013 compared to fiscal year 2012, primarily due to new product launch expenses.  

•          Interest expense was 62% less when compared to fiscal 2012, due to lower debt levels and the Hancock Bank refinancing in May, 2012.

•          Net income decreased 27% to $0.8 million compared to $1.1 million in fiscal 2012.

•          Earnings per share also decreased 27% to $0.35 compared to earnings per share of $0.48 in fiscal 2012, due to several factors discussed below.

•          We paid annual dividends of $0.4 million or $0.18 per share, a dividend yield of 4.9% based on the year-end closing price of $3.67. In August 2013, we declared our 28th consecutive quarterly dividend, at the same annual rate of $0.18 per share.

•          During the year we reduced our borrowings with Hancock Bank by $0.7 million.

Results of Operations

The following table sets forth, for the fiscal years ended June 30, 2013, 2012 and 2011, certain data derived from our Consolidated Statements of Income and certain of such data expressed as a percentage of total revenues:

(1) Other non-operating items includes, $105,000 of one-time charges related to the Hancock Bank refinancing in May 2012.

(2) Cost of sales includes a one-time favorable price correction of $261,000 covering mostly FY 2011, and some prior year purchases from one of our vendors.

Fiscal 2013 Compared to Fiscal 2012

During the fiscal year ended June 30, 2013 (the “Current Year”), we earned income before tax of $1,264,358 compared to income before tax of $1,654,520 in the fiscal year ended June 30, 2012 (the “2012 Year”).  The decrease in income before tax during the Current Year of $390,162 was due to (i) a decrease in royalty income received from Bausch + Lomb of  $450,683 to $2,089,013 in the Current Year as compared to $2,539,696 in the 2012 Year, (ii) a decrease in gross margin of $115,268 from lower sales, (iii) excluding cost of sales, an increase in expenses of  $68,759 (as described below) and (iv) a decrease in other items primarily interest expense, and other expenses of $244,548, due primarily to lower interest costs and lower debt balances, related to the Hancock Bank borrowings. After recording income tax expense of $431,732, we had net income of $832,626 or $0.35 per diluted share for the Current Year.  In comparison, in the 2012 Year we had net income of $1,143,938, or $0.48 per diluted share after recording income tax expense of $510,582.

Sales during the Current Year were $6,042,743, a decrease of $138,706 (2.2%), as compared to sales of $6,181,449 during the 2012 Year.  The disposable lens category decreased by 5.8%, as sales of our C-Vue disposable multifocal lenses continue to be affected by competition from competitor product offerings and promotional programs. The decrease was offset slightly by the launch of our new silicone hydrogel disposable C-Vue HydraVUE lens at the end of February 2013. Our custom soft lens category increased by 10.7%, primarily due to increased demand for our C-Vue Advanced® HydraVUE™ line of silicone hydrogel custom contact lenses for monthly replacement.  Our gas permeable lens category decreased by 6.3%, 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 15.7% from the 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 down 1.0% to 38.0% in the Current Year compared to 39.0% in the 2012 Year. The decrease was primarily due to higher one-time annual purchasing cost adjustments during the third quarter offset some by manufacturing improvements implemented during the first quarter.

During the Current Year, as compared to the 2012 Year, our operating expenses (excluding cost of sales) increased 2.3% or $68,759 primarily due to increases in sales and marketing expenses. Expenses as a percentage of sales increased 2.3% to 49.9%.compared to 47.6% in the 2012 Year. Sales and marketing expenses increased 5.9% or $91,240 primarily due to increases in payroll and related expenses, costs associated with the product launch of our new silicone hydrogel disposable C-Vue HydraVUE lens and corporate rebranding. Administrative expenses decreased 1.7% or $22,409 primarily due to lower repairs and maintenance and corporate governance expenses offset some by increases in payroll and related expenses. Research and development expenses were flat at $85,332 during the Current Year compared to the 2012 Year.

In the Current Year and the 2012 Year we recorded net income tax expense of $431,732 and $510,582, respectively. We record income tax at the statutory rates, and previous to the 2010 fiscal year only paid alternative minimum tax of approximately 2% due to the utilization of tax loss carry-forwards. The effective tax rate for the Current Year was 34.1% compared to 30.9% in the 2012 Year. The effective tax rate in the current year was 3.2% higher, due primarily to the non-recurrence of a refund received from prior year state tax return examinations, in the 2012 Year.

We estimate that capital expenditures for property, plant and equipment and other assets will approximate $250,000 in fiscal year 2014, primarily for manufacturing equipment upgrades and automation.

The following is a summary of the change in our cash and cash equivalents:

Operating Activities  

Cash provided by operations is the principal source of funds for expansion, acquisitions, capital expenditures, income taxes and dividends to stockholders.  Current Year net cash provided by operating activities decreased $952,642 to $1,043,939 compared to $1,996,581 in the 2012 Year.  The decrease is primarily attributable to changes in working capital items, the purchase of fitting sets and cabinets to promotionally support disposable lens sales and a decrease in earnings.  In the Current Year, we had positive cash flow of $170,941 from working capital items, primarily from increases in accounts payable and decreases in customer receivables offset by increases in inventory and other assets as noted above. In the 2012 Year, working capital provided by operating activities increased $489,838 to $1,996,581 compared to $1,506,743 in the 2011 Year.  The increase is primarily attributable to changes in working capital items, primarily from decreases in receivables from higher collections and from tight inventory management, offset by a decrease in accounts payable from more timely payments and a decrease in earnings.

Cash income taxes paid during the Current Year were $407,000 compared to $318,000 in the 2012 Year. The increase in cash taxes paid in the Current Year and decrease in the 2012 Year is due primarily from full depreciation for tax purposes, of equipment additions in the 2012 Year.

Investing Activities

Net cash used in investing activities in the Current Year decreased $373,803 to $170,808, compared to $544,611 in the 2012 Year. Net cash used in the Current Year was for the purchase of capital additions, primarily manufacturing and inspection process improvements and equipment. In the 2012 Year, net cash used in investing activities increased $387,024 to $544,611, compared to $157,587 in the 2011 Year. Net cash used in the 2012 Year was for the purchase of capital additions, which was primarily for manufacturing equipment and capitalized process improvement and web site shopping cart projects.

Financing Activities

Current Year net cash used in financing activities decreased $570,427 to $1,107,926 compared to $1,678,353 in the 2012Year. Financing activities during the Current Year consisted primarily of repayments of $700,000 under our Hancock Bank term loan facility, net new borrowings of $18,559 from our Hancock Bank line of credit and payments of $426,485 for dividends to our stockholders. In the 2012 Year, net cash used in financing activities decreased $149,983 to $1,678,353 compared to $1,828,336 in the 2011 Year. In May, 2012, we refinanced our Regions Bank term loan and line of credit facilities with a new five-year term loan and line of credit with Hancock Bank, keeping our term loan principal payments about the same at $58,333 per month 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%. 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. Additionally, our interest rate swap with Regions Bank and the related agreement were terminated. Financing activities during the 2012 Year consisted primarily of new borrowings from Hancock Bank of $3,781,441 and repayments under both term loan facilities of $4,974,045, a net debt reduction of $1,192,604 compared to $1,064,286 in the 2011 Year and payments of $426,484 for dividends to our stockholders in the 2012 Year compared to $746,346 of dividends paid in the 2011 Year.

The decrease in dividend payments in the 2012 Year was due to a dividend limitation called for in the March 2011 amendment to the term loan facility with Regions Bank and continued in the Hancock Bank term loan facility.

In April 2011, we borrowed $279,998 under a seven-year $500,000 capital equipment credit facility, for the purchase of manufacturing equipment. On December 30, 2011 the $279,998 draw under this facility was repaid with cash from operations, and the capital equipment credit facility was closed.

In March 2011, we entered into an amendment to our term loan facility with Regions Bank, which improved our cash flow by reducing our minimum monthly principal payment from $100,000 to $54,762, and reduced our quarterly dividend payment from $0.09 to $0.045 per common share.

In August 2010, we entered into an interest rate swap agreement which effectively converted our floating interest rate debt under the Regions Bank term loan of LIBOR plus 3.75% with a minimum interest rate of 4.75%, to a fixed rate of 5.16% which was 5.66% after the March 2011 term loan facility amendment (See Note 6, Term Loan, Line of Credit and Interest Rate Swap, to our Consolidated Financial Statements included in this Annual Report).  

In January 2010, Unilens Corp. USA obtained a $6.9 million 5-year term loan facility and a $1.5 million line of credit from Regions Bank, which was used to finance the repurchase of approximately 48% of our outstanding shares, from our then largest stockholder for an aggregate purchase price of $6,894,912 or $3.15 per share. The loan facility and line of credit had a floating interest rate consisting of a premium over LIBOR with a minimum interest rate of 4.75%, and was secured by certain assets of our subsidiaries. 

At the end of the Current Year we had a stockholders’ deficit of $482,362, representing an improvement of $406,141 compared to a deficit of $ 888,503 and an improvement of $717,454 at the end of the 2012 Year.  The improvement in stockholders’ deficit in the Current Year was primarily due to lower income before income taxes of $1,264,358 (primarily from lower royalty income in the Current Year, offset by lower income tax expense of $431,732, and cash dividend payments totaling $426,485.

During the Current Year we paid a total of $426,485 in regular quarterly common stock dividends.  The Company funded the 2010 share repurchase with a draw of $6 million against the previous Regions term loan facility and after the Hancock Bank refinancing, as of the end of the Current Year has been paid down to $2.8 million.

Off Balance Sheet Arrangements and Other

None.

Contractual Obligations

The following table contains a summary of our obligations and commitments to make future payments under contracts, including debt, lease and purchase agreements as of June 30, 2013.  Amounts set forth below are expressed in U.S. dollars.

Our significant accounting policies are discussed in Note 2 to our consolidated financial statements. We believe the following accounting policies include a higher degree of judgment and/or complexity and, thus, are considered to be critical accounting policies.

Inventory

Our inventories are carried at the lower of cost or market.  Cost is determined on a first-in, first-out basis. Inventory is stated at average cost, which is determined by applying the current average cost to the ending inventory.  In addition, we reduce the value of our ending inventory for estimated inventory obsolescence. A continuous cycle count process is the primary procedure used to validate the inventory balances on hand to ensure that the amounts reflected in the accompanying consolidated financial statements are properly stated.

The accounting for inventory contains uncertainty since we must use judgment to estimate inventory obsolescence. When estimating these losses, we consider a number of factors, which include, but are not limited to, historical usage, shelf life remaining and manufactured date of current physical inventory.

Our total reserve for estimated inventory obsolescence covered by this critical accounting policy was $14,207 as of June 30, 2013. Although we believe we have sufficient current and historical information available to us to record reasonable estimates for estimated inventory obsolescence, it is possible that actual results could differ.

We have not made any material changes in the accounting methodology used to establish our inventory obsolescence and loss reserves during the past three years. Although we believe that the estimates discussed above are reasonable and the related calculations conform to generally accepted accounting principles, actual results could differ from our estimates, and such differences could be material.

Allowance for Doubtful Accounts and Returns

We record an allowance for doubtful accounts to allow for any amounts that may not be recoverable. This is based on an analysis of our prior collection experience, customer credit worthiness, and current economic trends.  Also included with this allowance is an amount for product returns. This is based on an analysis of our history of credit memos issued. Our total allowance for doubtful accounts and product returns covered by this critical accounting policy was $71,979 as of June 30, 2013. Although we believe we have sufficient current and historical information available to us to record reasonable estimates for allowance for doubtful accounts and product returns, it is possible that actual results could differ.

We have not made any material changes to the method of estimating our allowance for doubtful accounts and product returns during the last three years.  Based on current knowledge, we do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to determine the allowance.

iTEM 8.             CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

Board of Directors

Unilens Vision Inc.

Largo, Florida

We have audited the accompanying consolidated balance sheet of Unilens Vision Inc. as of
June 30, 2013 and the related consolidated statements of income, stockholders’ (deficit) equity, and cash flows for the year ended June 30, 2013.  These consolidated financial statements are the responsibility of the management of Unilens Vision Inc.  Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  The Company is not required at this time, to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Unilens Vision Inc. as of June 30, 2013 and the results of its operations and its cash flows for the year ended June 30, 2013 in conformity with accounting principles generally accepted in the United States of America.

/s/ Warren Averett, LLC

Warren Averett, LLC

Tampa, Florida 

September 30, 2013

Report of Independent Registered Public Accounting Firm

Board of Directors

Unilens Vision Inc.

Largo, Florida

We have audited the accompanying consolidated balance sheet of Unilens Vision Inc. as of
June 30, 2012 and the related consolidated statements of income, stockholders’ (deficit) equity, and cash flows for the years ended June 30, 2012 and 2011.  These consolidated financial statements are the responsibility of the management of Unilens Vision Inc.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  The Company is not required at this time, to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Unilens Vision Inc. as of June 30, 2012 and the results of its operations and its cash flows for each of the two years in the period ended June 30, 2012 in conformity with accounting principles generally accepted in the United States of America.

/s/ Pender Newkirk & Company LLP

Pender Newkirk & Company LLP

Certified Public Accountants

Tampa, Florida 

September 28, 2012

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

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

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

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

1.             NATURE OF BUSINESS

The business of Unilens Vision Inc. and subsidiaries (the “Company”) is to develop, license and sell optical products using proprietary design and manufacturing technology.  The Company’s products are being sold primarily in the United States through a network of national distributors and in house sales personnel.  The Company also licenses through one of its subsidiaries, one of its patented multifocal designs on an exclusive basis to Bausch and Lomb Inc. (“Bausch + Lomb”) (Note 5).

2.             SIGNIFICANT ACCOUNTING POLICIES

These consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) and in United States dollars.

The significant accounting policies adopted by the Company are as follows:

                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 inter-company accounts and transactions have been eliminated.

Use of estimates

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the period.  Actual results could differ from these estimates.

Currency

These financial statements are expressed in the Company’s functional currency which is United States dollars, as the Company and all its operations are based in the United States. On and effective April 1, 2010 the Company announced the change in domicile and the continuance of its corporate existence from British Columbia, Canada to the State of Delaware.

                Fair value of financial instruments

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, royalties and other receivables, accounts payable, notes payable, line of credit borrowings and accrued liabilities.  Unless otherwise noted, it is management’s opinion that the Company is not exposed except for variable rates on notes payable and line of credit borrowings to significant interest, currency or credit risks arising from these financial instruments. On August 6, 2010, the Company entered into an interest rate swap agreement to fix the rates on its then term note. On May 23, 2012, the Company unraveled the interest rate swap and terminated the interest rate swap agreement as part of the Hancock Bank refinancing. Under the terminated interest rate swap agreement for the term note, we received or made payments on a monthly basis, based on the differential between 5.66% and LIBOR plus 4.25% (Note 6).

Due to their short maturities, the fair value of these financial instruments approximates their carrying values, unless otherwise noted. The carrying amount and estimated fair value of long-term notes payable was $2,041,667 and $2,041,667, respectively as of June 30, 2013. The fair value of long-term notes payable was estimated based on rates currently offered to the Company for debt with similar terms and maturities. There were no outstanding investments in derivative financial instruments as of June 30, 2013 and 2012.

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The Company offers our customers advanced sales commitments on certain of our optical products. The Company invoices the customer when the sale commitment is made and defers the revenue until the optical product is shipped.

                Royalty income

The Company recognizes royalty income at the end of each quarter based on the net sales of licensed products sold during the quarter, which is provided by the licensee, times the royalty rate. 

                Shipping and handling

The Company records amounts billed to customers for shipping and handling costs as sales revenue.  Costs incurred by the Company for shipping and handling are included in cost of sales.

Advertising costs

The Company expenses advertising costs when incurred. Advertising expense was $315,440, $295,032 and $247,740 for the years ended June 30, 2013, 2012 and 2011, respectively; there were no advertising costs that met the criteria for capitalization.

Research and development costs

Research and development costs are expensed as incurred. The amounts charged to operations during the years ended June 30, 2013, 2012 and 2011 were $85,332, $85,404 and $75,934, respectively.

                Income per common share

Basic income per common share is calculated by dividing the income for the year by the weighted-average number of common shares outstanding during the year.

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 year. As of June 30, 2013 the Company has 140,000 options outstanding that are all anti-dilutive.

                Stock-based compensation and stock options

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 $0, $0 and $790 of stock compensation expense attributable to stock options charged against income for the years ended June 30, 2013, 2012 and 2011, respectively. There was no compensation expense attributable to stock options charged against income for the year ended June 30, 2013 since no options were granted during the year, and all options outstanding at the beginning of the year were fully vested.

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Income taxes

Taxes on income are provided in accordance with US GAAP. Deferred income tax assets and liabilities are recognized for the expected future tax consequences of events that have been reflected in the consolidated financial statements. Deferred tax assets and liabilities are determined based on the differences between the book values and the tax basis of particular assets and liabilities, in addition to the tax effects of net operating loss and capital loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rate is recognized as income or expense in the period that included the enactment date. A valuation

allowance is provided to offset the net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

Accounting for uncertainty in income taxes is determined based on US GAAP, which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements and provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. US GAAP also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. As of June 30, 2013, the Company had no uncertain tax positions that require disclosure or accrual. The tax returns for the 2009 through 2012 tax years are still open for examination by the Internal Revenue Service.

Recent accounting pronouncements adopted

Recent pronouncements issued by the FASB, the AICPA, and the SEC did not or are not believed by management to have a material impact on the Company’s present or future financial statements.

3.             INVENTORIES

                All inventories are pledged as collateral on loans (Note 6)

4.             PROPERTY, PLANT AND EQUIPMENT

Depreciation expense of property, plant and equipment was $207,414, $170,700 and $136,690 during 2013, 2012 and 2011, respectively.  All property, plant and equipment are pledged as collateral on loans (Note 6).

5.             ROYALTY AGREEMENT

On October 26, 2001, we licensed the exclusive worldwide rights to our multi-focal soft contact lens design to Bausch + Lomb.  In April 2013 we extended this licensing agreement and granted Bausch + Lomb an exclusive worldwide license to use Unilens’ new multifocal technology. Under the terms of the agreement, Bausch + Lomb manufactures and markets cast-molded multi-focal soft contact lenses using the Company’s technologies.  For this, Bausch + Lomb pays the Company an existing royalty ranging from two to five percent of the product’s worldwide net sales for as long as they manufacture and sell products utilizing these technologies.  During the years ended June 30, 2013, 2012 and 2011, the Company recorded $2,089,013, $2,539,696 and $2,702,324, respectively, in Bausch + Lomb royalty revenues. The principal United States patent related to this license is pledged as collateral on loans (Note 6).

6.           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 entered into with Regions Bank, for the January 20, 2010, Company common stock repurchase of 2,188,861 shares from its then largest stockholder for $3.15 per share.

Costs related to the Hancock Bank term loan facility and line of credit, were $59,265, which is being 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%. As part of the Hancock Bank refinancing, the Company expensed $51,638 of loan costs associated with the previous Regions Bank term loan facility and line of credit which is included in other expense in the June 30, 2012 year.

Also as part of the Hancock Bank refinancing the previous interest rate swap with Regions Bank was unraveled and the interest rate swap agreement was terminated. The Company was required to pay a swap breakage fee of $54,195 which is included in interest expense in the June 30, 2012 year. In addition, the Company reclassified into earnings in the June 30, 2012 year, all of the unrealized losses on the cash flow hedge included in accumulated other comprehensive loss.

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 June 30, 2013 was $1,061,000. The Company expects to extend this line of credit which 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 except the Minimum Tangible Net Worth covenant. In August 2013 the Company received a waiver for this financial covenant non-compliance. The Company had outstanding balances on the Hancock Bank term loan and line of credit of $2,741,667, and $100,000, respectively at June 30, 2013.

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