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.

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 duringfor the priorprevious year ended December 31,of 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 anfor a period of eight to ten week periodweeks 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, resultsmay result 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. producingproduces 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 Second QuarterFirst Nine Months

Paradise, Inc.’s fruit segment net sales for the first sixnine months of 2016 totaled $1,254,658increased 2.8% to $8,643,663 compared to net sales of $1,307,129$8,409,947 for the similar nine month reporting period of 2015 representing a decrease2015. This increase is primarily due to timing differences in the receipt of $52,471 or 4.0%. The fruit segment has two primary productscustomers’ orders and the corresponding shipping dates for sale during the first six monthsdelivery of the year. The main product isCompany’s retail glace’ fruit soldproducts. Changes in bulk quantitiesdates of opening orders from customers between interim reporting periods will have a direct impact on net revenue comparisons. Paradise, Inc. recognizes net sales generally upon receipt of its products by its customers. Thus, as merchandise is shipped and shippedreceived by its customers during different interim reporting periods, timing differences in reported net revenue will occur. Management has consistently disclosed that interim filings are not reliable financial indicators of year-end performance. Only after a full year’s selling season is completed which takes into consideration factors such as the timing of initial orders, product placement on supermarket shelves and consumer demand for holiday fruitcake ingredients, will the Company have any ability to manufacturing bakeriesdetermine whether its sales and select supermarketsmarketing efforts for the traditional Easter holiday season. Net sales orders received and shipped for bulk glace’ fruit products during the first six months of 2016current year were $799,642 compared to $808,786 for the similar reporting period of 2015, representing a decrease of $9,144 or 1.1%. The other main product for sale in the first six months of each year is finished strawberry items produced exclusively for a local distributor during a short period of time beginning in 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, tolling fees received from this local distributor for the six months ending June 30, 2016 were $455,016 compared to $498,343 representing a decrease of $43,327 or 8.7% for the six months ended June 30, 2015.successful.

Paradise Plastics, Inc., a wholly owned subsidiarycompany of Paradise, Inc., which accounted for 31.7%38% of total net sales to unaffiliated customers for the previous year, generateddecreased by 5.6% to net sales of $3,811,559$5,306,706 for the sixnine months ended JuneSeptember 30, 2016 compared to $3,863,755$5,622,810 for the similar reporting period of 2015. This representsWhile sales to customers of vacuum forming plastics parts within the housing market increased by 5% for the current reporting period over the similar reporting period of 2015, it was not enough net revenue to offset a decrease of $52,196 or 1.4%. The primary reason for this decrease relates to the timing ofrecent decline in sales orders received and shipped between reporting periodsrelated to a long term plastics customer for heavy gauge vacuum forming parts used for their customers within the housing market. While management is pleased that plastics sales areCompany’s thermoforming operations. As mentioned in line with mid-year 2015 levels, no forecast or trends can be given as to how much revenue will be generated for the next six months of 2016. Plastics sales can only be determined for 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 confirmed when re-orders for these plastics parts are received and shipped byprevious filings, Paradise Plastics, Inc. toproduces various types of custom molded plastics for its customers which are then assembled into finished products by its customers. Thus, changes in demand for these finish products by the end user will have a direct impact on our sales. As of the date of filing, management is not able to predict whether the recent decline in sales will continue.

Consolidated cost of sales as a percentage of overall net sales decreased 10.4%6.0% for the first sixnine months of 2016 compared to the similar reporting period of 2015. Two reasons representThis is less than the 10.4% decrease in cost of sales reported during the June 30, 2016 filing, however, this change.decrease is still due to the following two reasons. First, a greater percentage of vacuum forming plastics parts ordered and shipped during the first sixnine months of 2016 compared to the similar reporting period ofvs. 2015 were of higher gross margins. Secondly, the fruit segment, after not commencing brining operations of orange peel during the first sixnine months of 2015, produced 2.72.9 million lbs. of brined orange peel inventory during the first sixnine months of 2016. As mentioned during previous interim reporting filings, withWith more than an adequate amount of brined orange peel in the Company’s inventory as of January 1, 2015, brining operations for orange peel were postponed for 2015. Thus, the increase in seasonalorange peel production during the first halfnine months of 2016 allocated over a relatively fixed amount of factory overhead (i.e.: insurance, utilities, depreciation and taxes) had the impact of reducing cost of sales as of JuneSeptember 30, 2016 compared to JuneSeptember 30, 2015. However, seasonal production cycles for various peels does not represent a trend or an estimate that can project the level of cost of sales for a full year. The Company typically starts processing all of its various brined fruit inventory into finished inventory as of June of each year. Thus, it is important to understand that until a full year’s production cycle is completed, the Company will not be able to determine to what extent the change inadditional production mentioned above will have on cost of sales and its relationshipas it relates to overall sales.

Inventory as of September 30, 2016 totaled $11,997,652 compared to $11,434,903 as of September 30, 2015 representing an increase of $562,749. This represents an increase of 4.9% and is attributable to the increased orange peel production discussed in the cost of sales section above.

Selling, general & administrative (S,G&A) expenses for the first sixnine months of 2016 totaled $1,675,921$2,774,766 compared to $1,831,646$2,979,115 representing a decrease of $155,725$204,349 or 8.5%6.9% and is primarily related to the retirement of three senior managers during late 2015.

Other Significant ItemsThe First Nine Months (Continued)

Other Income for the first six months of 2016 totaled $50,702 compared to $44,852 for the similar reporting period of 2015. Other income is periodic sales of recycled plastics materials 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 June 30, 2016 totaled $13,744,656 compared to $12,481,349 as of June 30, 2015 representing an increase of $1,263,307 or 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 six months of 2016 than the first six months of 2015. With several of the Company’s brined fruit commodities being shipped to Plant City, Florida from as far away as Southeast Asia, timing differences regarding levels of brined fruit will occur at various interim reporting periods.

Short Term Debt and Accounts Payable combined balances as of June 30, 2016 totaled $1,635,999 compared to $1,937,200 for the similar reporting period for 2015. This represents a decrease of $301,201 and is directly related to the earlier 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 its liability to these supplier’s in the second quarter of 2016 compared to the second quarter of 2015.

We finance our finances ongoing operations primarily with cash provided by our operating activities.activities which are seasonal in nature. Our principal sources of liquidity are our cash flows provided by operating activities, our existing cash, and a line of credit facility. At JuneSeptember 30, 2016 and December 31, 2015, we had $3.2 million$1,138,700 and $8.8 million,$8,791,938, 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%up to 60% 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 JuneSeptember 30, 2016 and $0 at December 31, 2015. Within this agreement, there are letters of credit with a limit of $1,750,000, of which $820,589$291,838 was outstanding at JuneSeptember 30, 2016 and $582,839 at December 31, 2015. The line of credit agreement expires onin July, 31, 2017. Net cash decreased by $7,653,238 for the nine months ended September 30, 2016 compared to $6,458,430 for the nine months ended September 30, 2015. The primary reason for this decrease in cash for the first nine months of 2016 compared to 2015 was the earlier repayment of short-term debt of just over $1.0 million as of September 30, 2016.

Summary

Paradise Inc.’s consolidated net sales decreased slightly to $13,950,369 for the sixfirst nine months ended June 30,of 2016 totaled $5,066,217 compared to $5,170,884$14,032,757 for the similar reporting periodfirst nine months of 2015 representing a decrease of $104,667. Cost of sales as a percentage of sales decreased by 10.4% as higher gross margins were received on these plastics parts. In addition, an increase in brinedthe earlier shipment of the Company’s holiday segment fruit productionsegments products was offset by a downturn in thermoforming plastics parts during the first six monthsthird quarter 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. Furthermore,2016. However, as mentioned above, selling, general and administrative expenses decreased by $155,725disclosed in all previous interim filings, due to the retirementhighly seasonal nature of three senior managers during 2015. The combination of this activity resulted in a net loss of $294,361 for the six months ended June 30, 2016 compared to a net loss of $702,695 for the six months ended June 30, 2015. However, as mentioned in all previous quarterly filings,Company’s primary revenue source, glace’ fruit sales, no meaningful financial analysis can be developed from Paradise, Inc.’s interim results do not represent any meaningful trends or estimates.reporting results. Only a full year’s accounting of salesrevenue and expenses will provide a complete picture of the consolidated operations ofnecessary information to determine the Company.

Company’s overall financial performance.

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 sixnine months ended JuneSeptember 30, 2016.

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.

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 evaluatingdoes not expect the adoption of this standard to have a material impact of these changes toon 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 JuneSeptember 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 significant changes in our internal control over financial reporting during the sixnine months ended JuneSeptember 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.