PARADISE, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

The Company does not prepare operating profit or loss information on a segment basis for internal use, until the end of each year. Due to the seasonal nature of the fruit segment, management believes that it is not practical to prepare this information for interim reporting purposes. Therefore, reporting is not required by accounting principles generally accepted in the United States of America.

PARADISE, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

Identifiable assets by segment are those assets that are principally used in the operations of each segment. General corporate assets are principally cash, prepaid expenses, other current assets, land and income tax assets.

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 68.3% of total net sales during the prior year ended December 31, 2015. 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 during an eight to ten week 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. producing 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 FirstSecond Quarter

Paradise, Inc.’s fruit segment net sales for the first quartersix months of 2016 totaled $853,280$1,254,658 compared to net sales of $1,004,288$1,307,129 for the similar reporting period of 2015 representing a decrease of $151,008$52,471 or 15.0%4.0%. The fruit segment has two primary products for sale during the first quartersix months of the year. The main product is glace’ fruit sold in bulk quantities and shipped to manufacturing bakeries and select supermarkets for the traditional Easter holiday season. Net sales orders received and shipped for bulk glace’ fruit products during the first threesix months of 2016 were $482,589$799,642 compared to $508,223$808,786 for the similar reporting period of 2015, representing a decrease of $25,634$9,144 or 5.0%1.1%. The other main product for sale in the first quartersix months of each year is finished strawberry items produced exclusively for a local distributor during a short period of time beginning in early March and running through mid April of each year. As in previous years, Paradise, Inc., based on a negotiated price (i.e. tolling fee) will receive and process fresh strawberries through its production facilities on behalf of this distributor. With weather conditions not as favorable as in past years, net salestolling fees received from this local distributor for the threesix months ending March 31,June 30, 2016 were $370,691$455,016 compared to $496,065$498,343 representing a decrease of $125,374$43,327 or 8.7% for the threesix months ending March 31,ended June 30, 2015.

Paradise Plastics, Inc., a wholly owned companysubsidiary of Paradise, Inc., which accounted for 31.7% of total net sales to unaffiliated customers for the previous year, generated net sales of $2,109,676$3,811,559 for the threesix months ended March 31,June 30, 2016 compared to $1,687,469$3,863,755 for the similar reporting period of 2015. This represents an increasea decrease of $422,207$52,196 or 25.0%1.4%. The primary reason for this increasedecrease relates to a greater amountthe timing of sales orders received and shipped between reporting periods to a long term plastics customer for higher priced heavy gauge vacuum forming parts used for their customers within the housing market. While encouragedmanagement is pleased that plastics sales are in line with increased sales orders received and shipped during the first quarter of 2016 along with higher profit margins than for the similar reporting period for the three months ending March 31,mid-year 2015 levels, no determinationforecast or trends can be madegiven as to how much additional revenue if any, will be generated in future reporting periods for the next six months of 2016. As to most plasticsPlastics sales orders, commitmentscan only be determined for parts are usually for a short term period of up to 90 days as many if not all Paradise Plastics, Inc.’s re-orders range between 30 and 90 days. Future revenue can only be determinedconfirmed when re-orders for these plastics parts are received and shipped by Paradise Plastics, Inc. to its customers.

Consolidated cost of sales as a percentage of overall net sales decreased 12.0%10.4% for the first quartersix months of 2016 compared to the similar reporting period of 2015. Two reasons represent this change. First, the increase ina greater percentage of plastics parts ordered and shipped during the first six months of 2016 compared to a long term plastics customer included higher sales prices and thereforethe similar reporting period of 2015 were of higher gross margins. Secondly, the fruit segment after not commencing brining operations of orange peel during the first quartersix months of 2016, the Company’s fruit segment commenced production of its in house brining operations producing of 1.62015, produced 2.7 million lbs. of binnedbrined orange peel inventory. Withinventory during the first six months of 2016. As mentioned during previous interim reporting filings, with more than an adequate amount of brined orange peel in the Company’s inventory as of January 1, 2015, brining operations for the first quarter of 2015orange peel were postponed.postponed for 2015. Thus, the increase in seasonal peel production during first half of brined fruit2016 allocated over a relatively fixed amount of factory overhead (i.e.: insurance, utilities, depreciation and taxes) had anthe impact of reducing cost of sales as of March 31,June 30, 2016 compared to March 31,June 30, 2015. However, seasonal production cycles for various peels does not represent a trend or an estimate that can be projectedproject the level of cost of sales for the remainder of 2016.a full year. The Company typically starts processing all of its various brined fruit inventory into finished inventory at the beginningas of June forof each year. Thus, it is important to understand that until thisa full year’s production period, which will run from June through Octobercycle is completed, the Company will not be able to determine the change in cost of sales and its relationship to overall sales.

Selling, general & administrative (S,G&A) expenses for the first threesix months of 2016 totaled $933,355$1,675,921 compared to $1,831,646 representing a decrease of $155,725 or 8.5% and were consistent with S,G&A expenses foris primarily related to the firstretirement of three months of 2015 which totaled $933,060.senior managers during late 2015.

Other Significant Items

Other Income for the first quartersix months of 2016 totaled $1,743$50,702 compared to $18,313$44,852 for the similar reporting period of 2015. Other income is periodic sales of recycled plastics materials from time to time along with changes in the cash surrender value of two insurance policies owned by the Company on behalf of two senior executives.

Inventory as of March 31,June 30, 2016 was $10,292,846totaled $13,744,656 compared to $9,028,334$12,481,349 as of March 31,June 30, 2015 representing an increase of $1,264,512$1,263,307 or 14.0%10.1% as shipments from suppliers of brined fruit commodities such as pineapple, papaya and ginger, which may fluctuate based upon many factors common to agricultural products, were received in greater quantities during the first quartersix months of 2016 than the first quartersix months of 2015. With several of the Company’s brined fruit commodities being shipped to its processing facility located in Plant City, Florida from as far away as Southeast Asia, timing differences regarding levels of on hand brined fruit will occur at various interim reporting periods. Management’s primary goal at the end of the first quarter of its fiscal year, is to determine if inventory levels are sufficient for the upcoming selling season. For the period in review, this goal has been met.

Short Term Debt and Accounts Payable combined balances as of March 31,June 30, 2016 totaled $1,651,185$1,635,999 compared to $1,007,847$1,937,200 for the similar reporting period for 2015. These two accounts areThis represents a decrease of $301,201 and is directly related to the increasedearlier receipt of severed brined fruit commodities mentioned above. As the suppliers and payment terms are consistent with the previous year, Paradise, Inc.’s satisfied a greater amount of inventory on hand at March 31, 2016 as referencedits liability to these supplier’s in the preceding paragraph.second quarter of 2016 compared to the second quarter of 2015.

We finance our ongoing operations primarily with cash provided by our operating activities. Our principal sources of liquidity are our cash flows provided by operating activities, our existing cash, and a line of credit facility. At March 31,June 30, 2016 and December 31, 2015, we had $6.8$3.2 million and $8.8 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 50% of the Company’s eligible inventory from January 1 to May 31 and 60% from June 1 to December 31 of each year, of which $0 was outstanding at March 31,June 30, 2016 and December 31, 2015. Within this agreement, there are letters of credit with a limit of $1,750,000, of which $702,801$820,589 was outstanding at March 31,June 30, 2016 and $582,839 at December 31, 2015. The line of credit agreement expires on July 31, 2017.

Summary

Paradise, Inc.’s consolidated net sales for the threesix months ended March 31,June 30, 2016 totaled $2,962,956$5,066,217 compared to $2,691,757$5,170,884 for the similar reporting period of 2015, representing an increasea decrease of 10.1%. This increase is specifically attributable to the plastics segment as increased sales orders were received and shipped related to parts that are needed by a long term customer within the housing market.$104,667. Cost of sales as a percentage of sales decreased by 12.0%10.4% as higher gross margins were realizedreceived on these plastics parts. In addition, an increase in brined fruit production during the first quartersix months of 2016 also impacted a decrease in the cost of sales as a greater amount of production was allocated over a relatively fixed level of factory overhead. Overall,Furthermore, as mentioned above, selling, general and administrative expenses decreased by $155,725 due to the retirement of three senior managers during 2015. The combination of this activity resulted in a net loss of $207,033$294,361 for the threesix months ended March 31,June 30, 2016 compared to a net loss of $431,480$702,695 for the threesix months ended March 31,June 30, 2015. However, as mentioned in all previous quarterly filings, interim results do not represent any meaningful trends or estimates in annual performance.estimates. Only a full year’s accounting of sales and expenses will provide a complete picture of the consolidated operations of the Company.

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, 2015. There have been no material changes to our critical accounting estimates during the threesix months ended March 31,June 30, 2016.

Impact of Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09,Revenue from Contracts with Customers,which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard will be effective for the Company on January 1, 2018, which is the effective date for public companies. Early application is permitted as of January 1, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU No. 2014-09 will have on its financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its consolidated financial statements.

In July 2015, the FASB issued ASU No. 2015-11,Simplifying the Measurement of Inventory, which amends FASB ASU Topic 330,Inventory. This ASU requires entities to measure inventory at the lower of cost or net realizable value and eliminates the option that currently exists for measuring inventory at market value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonable predictable costs of completion, disposal, and transportation. This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. This ASU should be applied prospectively with earlier application permitted. The Company does not anticipate the adoption of this ASU to have a material impact on the Company’s financial position or results of operations.

In November 2015, the FASB issued ASU No. 2015-17,Income Taxes (Topic 740) Balance Sheet Classification of Deferred Taxes,which simplifies the presentation of deferred income taxes. The ASU provides presentation requirements to classify deferred tax assets and liabilities as noncurrent in a classified balance sheet. The standard is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for any interim and annual financial statements that have not yet been issued. The new guidance may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company does not expect the adoption of this standard to have a material impact on the Company’s consolidated financial statements.

Impact of Recently Issued Accounting Pronouncements (Continued)

In February 2016, the FASB issued ASU No. 2016-02,Leases (Topic 842)(ASU 2016-02). Under ASU No. 2016-2, an entity will be required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU No. 2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. For public companies, ASU No. 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. The Company is currently evaluating the impact of these changes to the Company’s consolidated financial statements.

Except as noted above, the Company’s management does not believe that recent codified pronouncements by the Financial Accounting Standards Board (“FASB”) (including its EITF), the AICPA or the Securities and Exchange Commission will have a material impact on the Company’s current or future consolidated financial statements.

As of March 31,June 30, 2016, our Chief Executive Officer and Chief Financial Officer have evaluated the Company’s disclosure controls and procedures, and they have concluded that we maintain effective disclosure controls and procedures. There were no changes in our internal control over financial reporting during the quartersix months ended March 31,June 30, 2016.

Disclosure controls and procedures mean the methods designed to ensure that information that the Company is required to disclose in the reports that it files with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods required. Our controls and procedures are designed to ensure that all information required to be disclosed is accumulated and communicated to our management to allow timely decisions regarding disclosure. Our controls and procedures are also designed to provide reasonable assurance of the reliability of our financial reporting and accurate recording of our financial transactions.

A control system, however well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. There are inherent limitations in all control systems, and no evaluation of controls can provide absolute assurance that all control gaps or instances of fraud have been detected. These inherent limitations include the realities that the judgments in decision-making can be faulty, and that simple errors or mistakes can occur.

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.