PARADISE, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

Forward–Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact should be considered “forward-looking statements” for the purpose of these provisions, including statements that include projections of, or expectations about, earnings, revenues or other financial items, statements about our plans and objectives for future operations, statements concerning proposed new products or services  , statements regarding future economic conditions or performance, statements concerning our expectations regarding the attraction and retention of customers, statements about market risk and statements underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of such terminology as “may”, “will”, “expects”, “potential”, or “continue”, or the negative thereof or other similar words. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we can give no assurance that such expectations or any of our forward-looking statements will prove to be correct. Actual results and developments are likely to be different from, and may be materially different from, those expressed or implied by our forward-looking statements. Forward-looking statements are subject to inherent risks and uncertainties.

Overview

Paradise, Inc.’s main business segment, glace’ fruit, a prime ingredient of fruitcakes and other holiday confections, represented 67.7%65.6 % of total net sales for the previous year of 2012.during 2013. These products are sold to manufacturing bakers, institutional users, supermarkets and other retailers throughout the country. Consumer demand for glace’ fruit product is traditionally strongest during the Thanksgiving and Christmas season. Almost 80% of glace’ fruit product sales are recorded from theduring an eight to ten weeksweek period beginning in mid September.

Since the majority of the Company’s customers require delivery of glace’ candied fruit products during this relatively short period of time, Paradise, Inc. must operate at consistent levels of production from as early as January through the middle of November of each year in order to meet peak demands. Furthermore, the Company must make substantial borrowings of short-term working capital to cover the cost of raw materials, factory overhead and labor expense associated with production for inventory. This combination of building and financing inventories during the year, without the opportunity to record any significant fruit product income, results in the generation of operating losses well into the third quarter of each year. Therefore, it is the opinion of management that meaningful forecasts of annual net sales or profit levels require analysis of a full year’s operations.

In addition, comparison of current quarterly results to the preceding quarter produces an incomplete picture on the Company’s performance due to year-to-year changes in production schedules, seasonal harvests and availability of raw materials, and in the timing of customer orders and shipments. Thus, the discussion of information presented within this report is focused on the review of the Company’s current year-to-date results as compared to the similar period last year.

Paradise, Inc.’s other business segment, Paradise Plastics, Inc., a wholly owned subsidiary of Paradise, Inc. producesproducing custom molding products, is not subject to the seasonality of the glace’ fruit business. This segment represents all injection molding and thermoforming operations, including the packaging for the Company’s fruit products. Only sales to unaffiliated customers are reported.

The First Nine MonthsQuarter

Paradise, Inc.’s fruit segment net sales of $818,613 for the first nine monthsquarter of 2013 decreased 5.7% to $9,099,865 compared to $9,646,744 for the similar nine months reporting period of 2012. This decrease is due to timing differences in the receipt of customers’ orders and the corresponding shipping dates for delivery of the Company’s retail glace’ fruit products. Specifically, several major customers have delayed their orders into October of 2013 as compared to September of 2012. Paradise, Inc.’s management has consistently disclosed that interim filings are not reliable financial indicators of year-end performance. Only a full year’s accounting which removes the timing issue from the seasonal sale of glace’ fruit will provide the necessary financial information to determine the Company’s overall success. 

Paradise Plastics, Inc.’s gross sales to unaffiliated customers for the first quarter of 2014 were $2,282,142 compared to $2,236,867 for the similar reporting period of 2013, representing a 2.0% increase. Additional demand from existing long-term customers within the commercial and home construction industry continued to offsetincrease, offsetting a decline in injection molding customer orders received and shipped during the salesfirst quarter of custom molding injection orders. As mentioned in the second quarter filing of this year, the Company is assisting one of its long term customers in transitioning into a new custom mold in order to comply with the changing requirements of one of their clients. While Paradise and its customer continue to work together in developing and testing of a prototype mold that will meet the requirements of their client, no estimated date of completion can be stated as of the date of this filing.

Inventory as of March 31, 2014 was $10,597,962 compared to $10,830,423 representing a decrease of $223,461 as shipments from suppliers of raw fruit commodities, which may fluctuate based upon many factors common to agricultural products, were received in lesser quantity during the first quarter of 2014 compared to the similar period of 2012. Secondly, certain raw fruit material received from one of the Company’s suppliers, subject to specific size and quality requirements before being processed and placed into inventory, had a higher rejection rate than in the previous year. This reduction in the amount of raw fruit materials processed resulted in a higher percentage of cost of sales. 

Other Significant Items (Continued)

Short Term Debt and Accounts Payable combined balances as of March 31, 2014 totaled $1,418,965 compared to $2,124,022 for the nine months ended September 30, 2013 was $322,227 compared to $34,894similar reporting period for the nine months ended September 30, 2012. As mentioned in previous filings, during 2012, Paradise, Inc. filed a claim with the Deepwater Horizon Economic and Property Program (the “Settlement Program”) arising out of damages suffered as a result of the Deepwater Horizon Incident. Upon review by the claims administrator of the Settlement Program and after a 30 day period in which BP Exploration & Production, Inc. could file a protest contesting this amount, a settlement check for $277,546 was awarded to Paradise, Inc. Funds were received on August 30, 2013 and this amount is reflected in Other Income on the Company’s consolidated Statements of Operations. 

We finance our ongoing operations primarily with cash provided by our operating activities which are seasonal in nature.activities. Our principal sources of liquidity are our cash flows provided by operating activities, our existing cash, and a line of credit facility. At September 30, 2013March 31, 2014 and December 31, 2012,2013, we had $301,648$5.4 million and $6,384,087,$5.9 million, respectively, in cash. Additionally, we have a revolving line of credit with a maximum limit of $12 million and a borrowing limit of 80% of the Company’s eligible receivables plus up to 50% of the Company’s eligible inventory from January 1 to May 31 and 60% from June 1 to December 31 of the Company’s eligible inventory,each year, of which $2,602,601$0 was outstanding at September 30, 2013March 31, 2014 and $0 at December 31, 2012.2013. Within this agreement, there are letters of credit with a limit of $1,200,000, of which $69,992$359,545 was outstanding at September 30, 2013March 31, 2014 and $515,866$0 at December 31, 2012.2013. The line of credit agreement expires inon June 23, 2015. Net cash used in operating activities decreased to $7,921,226from $1,697,966 for the nine monthsquarter ended September 30,March 31, 2013 compared to $9,436,892$830,537 for the nine monthsquarter ended September 30, 2012.March 31, 2014. The primary reasonsreason for this decrease are as follows; income taxis due to Accounts Receivable payments madereceived from Paradise, Inc.’s customers during the first nine months for 2013quarter of 2014 were $319,983 less$751,675 more than the first nine monthssimilar reporting period of 2012 as well as payments2013. Lastly, net cash provided by financing activities increased from $283,920 for the purchasequarter ended March 31, 2013 to $359,545 for the quarter ended March 31, 2014 due to timing of inventory decreased $1,684,843. 

Summary

Paradise, Inc.’s consolidated net sales decreased $533,203 representing a decline of 3.4% for the first ninethree months of 2013ended March 31, 2014 totaled $3,100,755 compared to $3,061,604 for the similar reporting period of 2012. This decrease is primarily timing in nature as several existing glace’ fruit customers deferred their orders to the beginning2013, representing an increase of the fourth quarter of 2013 compared to the third quarter of 2012. 

Critical Accounting Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make assessments, estimates and assumptions that affect the amounts reported in the consolidated financial statements. We evaluate the accounting policies and estimates used to prepare the consolidated financial statements on an ongoing basis. Critical accounting estimates are those that require management’s most difficult, complex, or subjective judgments and have the most potential to impact our financial position and operating results. For a detailed discussion of our critical accounting estimates, see our Annual Report on Form 10-K for the year ended December 31, 2012.2013. There have been no material changes to our critical accounting estimates during the ninethree months ended September 30, 2013.March 31, 2014.