INDEX

PART I – FINANCIAL INFORMATION

Item 1 – Unaudited Financial Statements

Condensed Consolidated Balance Sheets

Table of Contents

Unilens Vision Inc.

Condensed Consolidated Statements of Income and Changes in Accumulated Deficit

Table of Contents

Unilens Vision Inc.

Condensed Consolidated Statements of Cash Flows

Unilens Vision Inc.
Notes to Condensed Consolidated Financial Statements
December 31, 2013

Unilens Vision Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
December 31, 2013

 (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, 2013:

As of December 31, 2013 we have 140,000 options outstanding and an additional 96,935 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, 2013, as no options were exercised.

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, 2013 the aggregate intrinsic value of options outstanding and options exercisable were both zero since the closing price of our common shares on the closest date to December 31, 2013 of $4.75 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.

Unilens Vision Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
December 31, 2013

(Unaudited)

Note 4 — Inventories 

Note 5 — Supplemental Disclosure with Respect to Cash Flows

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Unilens Vision Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
December 31, 2013

(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, 2013 and 2012:

Note 7 — Term Loan and Line of Credit

On May 23, 2012, the Company closed on a $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, on January 20, 2010, for the common stock repurchase of 2,188,861 shares of common stock at $3.15 per share from its then largest stockholder.

On October 4, 2013, the Company repurchased 618,522 shares of its common stock, representing approximately 26% of its total shares outstanding, from its largest outside stockholder, Baker Street Capital L.P. The aggregate purchase price was approximately $3.1 million, or $4.97 per share.  The repurchased shares were returned to the Company’s treasury and subsequently cancelled, leaving 1,750,832 shares outstanding.

The Company funded the 618,522 common stock share repurchase through a $3,300,000 expansion and modification of the existing term loan and line of credit provided by Hancock Bank. The term loan facility is amortized over a longer seven-year period, and the line of credit is reduced to a maximum of $750,000. Both the term loan and line of credit bear interest at a floating rate of 30-day LIBOR plus 3.5%.

Additional costs related to the expansion of the Hancock Bank term loan facility and line of credit, were $55,535, this, along with remaining unamortized loan costs are being amortized over the life of the amended 7-year term loan facility. The minimum existing monthly principal payments under the Hancock Bank term loan facility are $68,075, plus accrued interest. In addition to monthly principal payments, there is an Excess Earnings Recapture Covenant which could require principal term loan principal prepayments by an amount equal to fifty percent of excess cash flow after taxes and dividends based on a Debt Service Coverage Ratio of 1.50 to 1.00.

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) $750,000 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, 2013 was $750,000. The line of credit is renewed annually and matures on February 1, 2015.

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, debt service coverage ratio, 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, there were no additional term loan principal prepayments due, and there was an outstanding balance of $99,964 on the Hancock Bank line of credit, and $5,649,308 outstanding on the term loan at December 31, 2013.

Unilens Vision Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
December 31, 2013

(Unaudited)

Note 8 — Other Assets

The Company provides optometric practitioners with in-office trial lenses to use in marketing programs to facilitate efficient and convenient fitting of contact lenses on their patients. These lenses are provided in fitting sets with our C-Vue trial lenses stored in a sturdy cabinet with the Unilens logo on it. We record the costs associated with the original fitting sets and cabinets to other long-term assets on our Condensed Consolidated Balance Sheet. We amortize such costs over their estimated useful lives to selling, general and administrative expense on our Condensed Consolidated Statements of Income and Changes in Accumulated Deficit. At December 31, 2013 unamortized costs associated with the original fitting sets and cabinets, included in other long-term assets was $381,971.

Note 9 — 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 10 — Subsequent Events

On February 4, 2014, our Board of Directors declared our regular quarterly cash dividend, at the rate of $0.045 per common share, payable February 28, 2014, to stockholders of record at the close of business on February 14, 2014. This is the 30^th consecutive quarterly cash dividend declared.

Item 2 – Management’s Discussion & Analysis of Financial Condition and Results of Operations

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 2014 second quarter). 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.

Second Quarter Highlights

·         Sales for the second quarter of fiscal 2014 were $1.4 million, flat when compared to the second quarter of fiscal 2013. Disposal lens sales increased 1.0% while the custom soft lens sales category increased 8.4%.

·         Royalty revenue improved for the first time in the last six quarters, showing a modest increase 0.7% compared to the second quarter of fiscal 2013, resulting in a total revenue increase of 0.2% to $2.0 million.

·         Operating expenses increased 2.5% compared to the second quarter of fiscal 2013, primarily due to increases in administration expenses from expense timing differences.

·         Interest expense doubled when compared to the second quarter of fiscal 2013, due to higher debt levels from the stock repurchase in early October 2013.

·         Operating income decreased 8.0% compared to the second quarter of fiscal 2013.

·         Earnings per share were $0.12 compared to $0.11 in the second quarter of fiscal 2013 on lesser shares due to the stock repurchase.

·         Paid our 29^th consecutive quarterly dividend, at $0.045 per share in November 2013. On February 4, 2014 we declared our 30^th consecutive quarterly dividend, at an annual rate of $0.18 per share or $0.045 per share quarterly, a dividend yield of 3.4% based on the January month end closing price of $5.32.

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:

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Second Quarter

During the three months ended December 31, 2013 (the “Current Quarter”) we earned income before tax of $318,649 compared to income before tax of $378,841 for the three months ended December 31, 2012 (the “Prior Quarter”).  The decrease in income before tax during the Current Quarter of $60,192 was primarily from, (i) a decrease in gross margin of $18,585, primarily from one-time manufacturing repairs during the quarter  (ii) excluding cost of sales, an increase in expenses of $17,946 as described below, (iii) an increase in other items primarily interest expense, and other income of $27,747 and (iv)a slight increase in royalty income from Bausch + Lomb of $4,086 to $586,660 in the Current Quarter as compared to $582,574 in the Prior Quarter, the first quarterly increase in the last year and a half.

After recording income tax expense of $111,230, we had net income of $207,419 or $0.12 per diluted share for the Current Quarter. In comparison, in the Prior Quarter we had net income of $253,935 or $0.11 per diluted share after recording income tax expense of $124,906. The number of diluted shares for the Current Quarter, after the 618,522 common stock repurchase was 1,777,724 compared to 2,369,354 in the Prior Quarter.

Sales during the Current Quarter were $1,430,042 an increase of $567, as compared to sales of $1,429,475 during the Prior Quarter. The disposable lens category increased by 1.0% as sales of our of our new silicone hydrogel disposable C-Vue HydraVUE lens launched at the end of February 2013, helped stabilize the category, offsetting the decrease in our older C-Vue disposable multifocal lenses which continue to be affected by competition from newer competitor product offerings and promotional programs. Our custom soft lens category increased by 8.4%, primarily due to increased demand for our C-Vue Advanced^® HydraVUE™ line of silicone hydrogel custom contact lenses for monthly replacement, launched almost two years ago in January of 2011. Our  gas permeable lens category decreased l5.2% primarily due to the continued overall decline in gas permeable fits in the contact lens industry. The replacement and other lens category decreased 25.0% due to the expected decline in product lines that are nearing the end of their life cycle. 

Gross margin was down 1.3% at 35.8% in the Current Quarter compared to 37.1% in the Prior Quarter due primarily to a one-time manufacturing repair costs, offset some by manufacturing improvements implemented a year ago, and product mix.

During the Current Quarter, as compared to the Prior Quarter, expenses increased 2.5% or $17,946. As a percentage of sales, expenses increased 1.2%, to 50.6% compared to 49.4% in the Prior Quarter. Administrative expenses increased $23,727 primarily from the timing of tax accounting fees in the second quarter this year which occurred in the third quarter last year, and from increases in consulting and legal fees offset by lower rental expense. Sales and marketing expenses decreased $8,071 primarily due to decreases in payroll mainly sales commissions paid and related expenses, while research and development expenses increased $2,290 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 $111,230 and $124,906, respectively. The effective tax rate for the Current Quarter and Prior Quarter was 34.9% and 33.0%, respectively

Six Months

During the six months ended December 31, 2013 (the “Current Year”) we earned income before tax of $628,257 compared to income before tax of $760,622 for the six months ended December 31, 2012 (the “Prior Year”).  The decrease in income before tax during the Current Year of $132,365 was from the decrease in royalty income from Bausch + Lomb of $45,257 to $1,066,274 in the Current Year as compared to $1,111,531 in the Prior Year, (ii) a decrease in gross margin of $29,287 from one-time manufacturing repair costs during the second quarter (iii) excluding cost of sales, an increase in expenses of $36,790 as described below, and (iv) a increase in other items primarily interest expense, and other income of $21,031. After recording income tax expense of $206,277, we had net income of $421,980 or $0.20 per diluted share for the Current Year. In comparison, in the Prior Year we had net income of $508,939 or $0.21 per diluted share after recording income tax expense of $251,683. The number of diluted shares for the Current Year, after the 618,522 common stock repurchase was 2,073,539 compared to 2,369,354 in the Prior Year.

Sales during the Current Year were $3,009,247, an increase of $70,118 (2.4%), as compared to sales of $2,939,129 during the Prior Year. The disposable lens category increased 1.7% as sales of our of our new silicone hydrogel disposable C-Vue HydraVUE lens continue to help stabilize the category, offsetting the decrease in our older C-Vue disposable multifocal lenses which continue to be affected by competition from newer competitor product offerings and promotional programs. Our custom soft lens category increased by 10.6%, 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 8.0% 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 15.8% 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 down 1.9% at 37.2% in the Current Quarter compared to 39.1% in the Prior Quarter due primarily to the second quarter one-time manufacturing repair cost, offset some by manufacturing improvements implemented a year ago and product mix.

During the Current Year, as compared to the Prior Year, expenses increased 2.6% or $36,790. Administrative expenses increased $35,844, primarily from the timing of tax accounting fees in the second quarter this year which occurred in the third quarter last year, and from increases in consulting and legal fees offset by lower rental expense. Sales and marketing expenses decreased $2,752 primarily due to decreases in payroll mainly sales commissions paid and related expenses, while research and development expenses increased $3,698 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 $206,277 and $251,683, respectively. The effective tax rate for the Current Year and Prior Year was 32.8% and 33.1%, respectively

Liquidity and Capital Resources

Cash and cash equivalents were $30,809 at December 31, 2013 compared to $ 140,182 at June 30, 2013.  The following is a summary of the change in our cash and cash equivalents:

As of December 31, 2013, we had working capital of $252,082 representing a decrease of $114,039 from our working capital at June 30, 2013. The decrease in working capital were primarily due to decreases in accounts receivable and income taxes receivables, and additional current borrowings from the amended term loan, offset by increases in prepaid expenses and inventory.

During the six months ended December 31, 2013, we generated $464,198 positive cash from operations representing a decrease of $164,104 from $628,302 generated during the Prior Year. The decrease was primarily from decreases in accounts payable and accrued expenses and a smaller decrease in accounts receivable offset by smaller increases in inventory and other assets and the income tax refund received.

Investing activities for the Current Year were for the purchase of capital additions. Cash used for these capital additions was $82,163 a decrease of $10,481 from $92,644 cash capital additions in the Prior Year. Total capital additions in the Current Year, including non-cash additions of $42,335 are for manufacturing equipment, the web site shopping cart project and capitalized process improvement and leasehold improvements. The total capital additions in the Prior Year were primarily for manufacturing equipment and capitalized process improvement and leasehold improvements.

Financing activities during the Current Year consisted of the October 4, 2013 funding of the 618,522 common stock share repurchase with a $3,300,000 expansion and modification of the existing term loan provided by Hancock Bank. The expanded term loan facility now has monthly principal payments of $68,075, amortizes over a longer seven-year period, bears interest at a floating rate of 30-day LIBOR plus 3.5% and continues to be secured by certain assets of the Company. During the Current Year principal repayments were $311,150 on the term loan facility and $36 on the line of credit, compared to term loan and line of credit repayments of $350,000 and $81,441 in the Prior Year. In addition financing activities in the Current Year and Prior Year include payments of $185,409 and 213,242, respectively for dividends to our stockholders. There was $209,000 cash income taxes paid during the Current Year compared to $236,000 paid in the Prior Year. An addition, an income tax refund was received in the Current Quarter for $214,963.

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 2014.

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 2013 Form 10-K.

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

Part II. Other Information

Item 1 – Legal Proceedings

Item 1A – Risk Factors

Item 2 –  Unregistered Sales of Equity Securities and Use of Proceeds

Item 3 – Defaults Upon Senior Securities

Item 4 – Mine Safety Disclosures

Table of Contents

Item 5 – Other Information

Item 6 – Exhibits 

SIGNATURES