Condensed Consolidated Balance Sheets

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Unilens Vision Inc.

Condensed Consolidated Statements of Income and Changes in Accumulated Deficit

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Unilens Vision Inc.

Condensed Consolidated Statements of Cash Flows

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Unilens Vision Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2011

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Unilens Vision Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
September 30, 2011

 (Unaudited)

At the Annual General Meeting of Shareholders held on March 25, 2010, the shareholders approved the Unilens’ Incentive Stock Option Plan. The initial maximum number of shares available for option grants under the Stock Option Plan is 236,935.

The following table describes the number and the exercise price of options that have been granted, exercised, or cancelled under the Stock Option Plan approved on March 25, 2010 during the three month period ended September 30, 2011:

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Unilens Vision Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
September 30, 2011

(Unaudited)

Note 3 — Income per Common Share

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

Diluted income per common share is calculated using the treasury stock method.  Under the treasury stock method, the weighted average number of common shares outstanding used for the calculation of diluted income per share assumes that the proceeds to be received on the exercise of dilutive stock options and warrants are used to repurchase common shares at the average market price during the period.

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)
September 30, 2011

(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 months ended September 30:

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

On November 9, 2009, the Company closed on a $6,900,000 5-year term loan facility and a new $1,500,000 line of credit with Regions Bank. The term loan facility, which had a six-month advance period, was entered into to fund the Stock Purchase Agreement in January 2010 and the new line of credit replaced the previous line of credit.

On March 31, 2011, the Company entered into an amendment to the term loan facility, which reduced the minimum monthly principal payment from $100,000 to $54,762, plus accrued interest and retained the January 2015 expiration date, at which time a final balloon payment will be due. In addition, quarterly principal payments are payable to the extent the cash flow is in excess of certain specified amounts. The amendment, also redefined certain financial covenants and restrictions on the amount of cash dividend payments. The term loan bears interest at a floating rate of 30-day LIBOR plus 4.25% or 3.75% depending on whether the Company’s fixed charge coverage ratio is less than 1.75-to-1 or equal to or greater than 1.75-to-1, with a minimum interest rate of 4.75%.

The line of credit bears interest at a floating rate of 30-day LIBOR plus 3.25% or 3.75% depending on whether the ratio of the Company’s funded debt to its EBITDA is less than 1-to-1 or equal to or greater than 1-to-1, with a minimum interest rate of 4.75%. The maximum borrowings at any time, may not exceed the lesser of (i) $1,500,000 or (ii) a sum equal to 80% of Qualified Accounts Receivables plus 50% of Qualified Inventory. The line of credit expired in November 2010, and was extended to November 2011, using one of the two one-year term extension options. The Company expects to extend the line of credit again in November 2012.

On April 15, 2011, the Company entered into a seven-year capital equipment credit facility for up to $500,000. The capital equipment credit facility bears interest at a floating rate of 30-day LIBOR plus 3.85%. The Company will pay interest only for the initial 8 months from closing, then principal plus accrued interest on a 76 month amortization schedule. This capital equipment financing was put in place for the purchase of manufacturing equipment for additional production capacity and efficiencies. On April 19, 2011 the Company funded the purchase of manufacturing equipment with a draw of $279,998 under the equipment credit facility.

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Unilens Vision Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
September 30, 2011

(Unaudited)

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

The Company was in compliance with all financial covenants and had outstanding balances on the term loan and the capital equipment facility of $4,271,428, and $279,998, respectively and no outstanding balance on the line of credit at September 30, 2011. On October 21, 2011 in accordance with the term loan financial covenants for cash flow in excess of certain specified amounts, the Company made a principal payment of $135,714.

On August 6, 2010, the Company entered into an interest rate swap agreement facilitated by Regions Bank to manage cash flow exposure to interest rate changes with a notional amount of $5,300,000 which is scheduled to mature in January 2015. The Company does not enter into this type of financial instrument for trading or speculative purposes. The swap effectively converts the variable rate debt under the term loan as amended on March 31, 2011 of LIBOR plus 4.25% (previously 3.75%) with a minimum interest rate of 4.75%, to a fixed rate of 5.66% (previously 5.16%), without exchanging the notional principal amount. This agreement was designed as a cash flow hedge and is reflected at fair value in the condensed consolidated balance sheet as a component of total liabilities, and the related gains or losses are deferred in stockholders’ equity as a component of accumulated other comprehensive income or loss.

If in the future the interest rate swap agreement is determined to be ineffective or is terminated before the contractual termination date, or if it becomes probable that the hedged variable cash flows associated with the variable rate borrowing would stop, the Company would be required to reclassify into earnings all or a portion of the unrealized losses on cash flow hedges included in accumulated other comprehensive income (loss).

 Note 8 — Fair Value Disclosures

The authoritative guidance for fair value measurements establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The three levels of the fair value hierarchy under the guidance are described below:

In accordance with the fair value hierarchy described above, the following table shows the fair value of the Company’s interest rate swap, which is included as a component of total liabilities in the condensed consolidated balance sheet. The fair value is based on the expected cash flows over the life of the swap from a pricing model using a specific market environment.

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Unilens Vision Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
September 30, 2011

(Unaudited)

The following presents the balances and net changes in the accumulated other comprehensive loss related to the interest rate swap, net of income taxes.

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 November 1, 2011, our Board of Directors declared our regular quarterly cash dividend, at the rate of $0.045 per common share, payable November 25, 2011, to stockholders of record at the close of business on November 11, 2011. This is the 21^st consecutive quarterly cash dividend declared.

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Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

Unilens Vision Inc.

Largo, Florida

We have reviewed the accompanying condensed consolidated balance sheet of Unilens Vision Inc. as of September 30, 2011 and the related condensed consolidated statements of income and changes in accumulated deficit, and cash flows for the three month periods ended September 30, 2011 and 2010. These condensed consolidated financial statements are the responsibility of the management of Unilens Vision Inc.  

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the consolidated financial statements taken as a whole.  Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with auditing standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Unilens Vision Inc. as of June 30, 2011 and the related consolidated statements of income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated September 28, 2011, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of June 30, 2011 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Pender Newkirk & Company LLP

Pender Newkirk & Company LLP

Certified Public Accountants

Tampa, Florida  

November 14, 2011

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

The following management discussion and analysis (“MDA”) provides information on the activities of Unilens Vision Inc. and should be read in conjunction with our quarterly condensed consolidated financial statements and notes thereto for the three months ended September 30, 2011 (the “Financial Statements”), as well as our Annual Report on Form 10-K for the fiscal year June 30, 2011, filed with the Securities and Exchange Commission.  The Financial Statements have been prepared in United States dollars and in conformity with United States generally accepted accounting principles (“US GAAP”). Unless otherwise indicated, all dollar amounts disclosed in this MDA are expressed in United States Dollars.

Operating results are not necessarily indicative of results that may occur in future periods. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in the forward-looking statements as a result of many factors including, but not limited to, those set forth under “Cautionary Statement About Forward-Looking Statements” and “Risk Factors” in Item 1A. included in our Annual Report on Form 10-K. All forward-looking statements included in this document are based on the information available to us on the date of this document and we assume no obligation to update any forward-looking statements contained in this Quarterly Report on Form 10-Q.

Overview

We license, manufacture, distribute and market specialty optical lens products using our proprietary design and manufacturing technology. Our products are sold primarily in the United States solely to eye care professionals through in house sales representatives and a network of distributors. Our lens products are marketed as a family of specialty vision correction products that can serve the majority of the population’s vision correction needs. Our specialty optical lens business is divided into four categories: (i) disposable lenses; (ii) custom soft lenses; (iii) gas permeable lenses; and (iv) replacement and other lenses. During the three months ended September 30, 2011 the Company’s C-Vue disposable products accounted for approximately 57% of sales.

Sales of our specialty optical lens products accounted for the largest percentage of our total revenues, constituting approximately 71% while royalty income derived from our exclusive license of our patented multifocal design to Bausch & Lomb was approximately 29% during the three months ended September 30, 2011.

Economic conditions in the United States have restrained our growth. We are however optimistic about the long-term outlook for the contact lens market and the specialty contact lens market, in particular.

Market demographics indicate that speciality contact lenses will continue to be the fastest growing segment of the contact lens market. Specialty contact lenses include toric, toric multifocal, and cosmetic lenses. We believe that our custom soft speciality lenses including our C-Vue multifocal for presbyopia, our C-Vue custom toric for correcting astigmatism and the C-Vue Advanced toric multifocal lens, will grow over time due to market demographics favoring specialty lenses.

We believe market demographics favoring specialty contact lenses will continue to drive our revenue and earnings. In January 2011, we launched our new C-VUE Advanced^® HydraVUE™ line of silicone hydrogel custom contact lenses for monthly replacement. They are completely customizable, and feature a risk-free trial program.

A significant portion of our net income is derived from our exclusive license with Bausch & Lomb and such royalty income is a major component of our profitability. However, there can be no assurance, that such royalty income from Bausch & Lomb will grow or that Bausch & Lomb will continue to sell products in the future utilizing our technology.

The contact lens market is highly competitive.  We compete with industry leaders, such as Vistakon, a unit of Johnson and Johnson, Bausch & Lomb, Ciba Vision Corporation, a division of Novartis AG, and Cooper Vision, Inc. a unit of Cooper Vision Companies, Inc.  Our ability to compete successfully is dependent in part on eye care professionals’ perceptions of product quality, product development, technical innovation, and price.  

We have a supply agreement with one supplier for the manufacture of our molded C-Vue multifocal lens, which currently accounts for approximately 49% of our quarterly sales.  The agreement is renewable from year to year and is terminable pursuant to customary termination clauses. Although to date the supplier has met our requirements, there can be no assurances that it will continue to do so.

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First Quarter Highlights

·

Sales and total revenue for the first quarter of fiscal 2012 increased 3.1% and 0.8% compared to the first quarter of fiscal 2011.

·

Flat operating expenses and an expense ratio of 46.0% for the first quarter of fiscal 2012 compared to 47.5% in the first quarter of fiscal 2011.

·

Earnings per share were $0.14 compared to $0.14 in the first quarter of fiscal 2011.

·

Paid our 20^th consecutive quarterly dividend, at $0.045 per share in August 2011. On November 1, 2011 we declared our 21^st consecutive quarterly dividend, at an annual rate of $0.18 per share or $0.045 per share quarterly, a dividend yield of 5.9% based on the October month end closing price of $3.05.

Results of Operations

The following table sets forth, for the periods indicated, certain data derived from our Condensed Consolidated Statements of Income and Changes in Accumulated Deficit and certain of such data expressed as a percentage of total revenues:

The following table sets forth, for the periods indicated, certain data derived from our Condensed Consolidated Statements of Income and Changes in Accumulated Deficit and certain of such data expressed as a percentage of sales:

During the three months ended September 30, 2011 (the “Current Quarter”) we earned income before tax of $482,436 compared to income before tax of $494,164 for the three months ended September 30, 2010 (the “Prior Quarter”).  The decrease in income before tax during the Current Quarter of $11,728 was from a decrease in royalty income from Bausch & Lomb of  $29,006 to $631,200 in the Current Quarter as compared to $660,206  in the Prior Quarter, (ii) a increase in gross margin of $14,981 from higher sales (iii) excluding cost of sales, a decrease in expenses of  $1,354 as described below, and (iv) a decrease in other items primarily interest expense, and other income of $943. After recording income tax expense of $158,982, we had net income of $323,454 or $0.14 per diluted share, for the Current Quarter. In comparison, in the Prior Quarter we had net income of $331,849 or $0.14 per diluted share after recording income tax expense of $162,315.

Sales during the Current Quarter were $1,576,530, an increase of $46,956 (3.1%), as compared to sales of $1,529,574 during the Prior Quarter. The disposable lens category decreased by 7.9% as sales of our C-Vue disposable multifocal lenses continue to be affected by economic conditions in the U.S. as well as competition from competitor product offerings and promotional programs. Our custom soft lens category increased by 43.9%, primarily due to increased demand of our new C-Vue Advanced^® HydraVUE™ line of silicone hydrogel custom contact lenses for monthly replacement, launched in January of 2011. Our gas permeable lens category decreased 12.2% primarily due to the continued overall decline in gas permeable fits in the contact lens industry. The replacement and other lens category increased by 8.5% due primarily to sales increases of Unilens replacement products due to the discontinuation of replacement lens products from several of our competitors.

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Gross margin decreased 0.3% to 41.0% in the Current Quarter compared to 41.3% in the Prior Quarter due primarily to sales mix changes from higher margin products and the maturation of the C-VUE Advanced Toric Multifocal free trial program.

During the Current Quarter, as compared to the Prior Quarter, expenses decreased $1,354. Administrative expenses were flat, sales and marketing expenses decreased $4,324 due to flat advertising and slightly lower payroll and related expenses and research and development expenses increased $2,782 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 $158,982 and $162,315, respectively. The effective tax rate for the Current Quarter was 32.9% compared to 32.8% in the Prior Quarter.

Liquidity and Capital Resources

Cash and cash equivalents were $698,584 at September 30, 2011 compared to $ 601,360 at June 30, 2011.  The following is a summary of the change in our cash and cash equivalents:

As of September 30, 2011, we had working capital of $1,173,783 representing a decrease of $241,485 from our working capital at June 30, 2011. The decrease in working capital was principally due to a decrease in royalty and other receivables, offset by an increase in cash.

During the three months ended September 30, 2011, we generated $718,324 positive cash from operations representing an increase of $262,015 from $456,309 generated during the Prior Quarter. The increase was due primarily to the reduction of royalty and other receivables, due to the payment received, for the one-time price correction receivable recorded in the fourth quarter of fiscal year 2011, offset by reductions in accounts payable and accrued expenses. Investing activities for the Current Quarter were for the purchase of capital additions. Cash used for these capital additions was $350,193, primarily for manufacturing equipment, an increase of $240,275 from the Prior Quarter. Financing activities during the Current Quarter consisted primarily of principal repayments under our term loan facility of $164,286 compared to $300,000 in the Prior Quarter, and the payment of $106,621 of dividends to our shareholders compared to $213,242 of dividends in the Prior Quarter. The lower principal and dividend payments in the Current Quarter are related to the amendment to our term loan facility in March 2011, which improved our cash flow by decreasing our monthly principal payments from $100,000 to $54,762 and reducing our quarterly dividend payments by 50% from $0.09 to $0.045 per common share. In October, per the redefined financial covenants of our amended term loan facility, we made an additional principal payment of $135,714. There were no required cash income taxes paid during the Current Quarter compared to $131,000 paid in the Prior Quarter.

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 three months of fiscal 2012.

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 2011 Form 10-K.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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