PARADISE, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

On July 31, 2015, Paradise, Inc. renewed its revolving line of credit with SunTrust Banks through July 31, 2017. This renewal provides for a maximum limit of $12 million and a borrowing limit of 80% of the Company’s eligible receivables plus the lessor of $6,000,000 or 50% of the Company’s eligible inventory from January 1 to May 31 and 60% from June 1 to December 31 of each year. Within this agreement are letters of credit with a limit of $1,750,000. The agreement is secured by all of the assets of the Company and requires that certain conditions are met for the Company to continue borrowing, including debt service coverage and debt to equity ratios and other financial covenants including an agreement not to encumber a mortgage on the property without bank approval.  Interest is payable monthly at the bank’s LIBOR plus 1.75%.

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 65.8%68.3% of total net sales during the prior year ended December 31, 2014.2015. 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 First Six MonthsSecond Quarter

Paradise, Inc.’s fruit segment net sales for the first six months of 2015 increased 6.4%2016 totaled $1,254,658 compared to net sales of $1,307,129 from $1,228,597 for the similar reporting period of 2014.2015 representing a decrease of $52,471 or 4.0%. The fruit segment has two primary sales activitiesproducts for this segmentsale during the first six months of the year relateyear. The main product is glace’ fruit sold in bulk quantities and shipped to manufacturing bakeries and select supermarkets for the sale oftraditional Easter holiday season. Net sales orders received and shipped for bulk glace’ fruit to supermarkets and manufacturing bakeries; and tolling fees generated from the production of fresh strawberries on behalf of a local Plant City, Florida distributor. Forproducts during the first six months of 2015, net sales of glace’ fruit products totaled $808,7862016 were $799,642 compared to $887,859$808,786 for the similar reporting period of 2014. Sales2015, 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 products totaled $498,343items 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 $340,738$498,343 representing a decrease of $43,327 or 8.7% for the similar reporting period of 2014.six months ended June 30, 2015.

Paradise Plastics, Inc., a wholly owned companysubsidiary of Paradise, Inc., which accounted for 34.2%31.7% of total net sales to unaffiliated customers for the previous year, generated net sales of $3,863,755$3,811,559 for the six months ended June 30, 20152016 compared to $4,511,785$3,863,755 for the similar reporting period of 2014.2015. This represents a decrease in net sales of $648,030 which was first reported and disclosed in Paradise, Inc.’s first quarter 10Q filing is directly related$52,196 or 1.4%. The primary reason for this decrease relates to the decisiontiming of an existingsales orders received and shipped between reporting periods 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 are in line with mid-year 2015 levels, no forecast or trends can be given as to transfer productionhow much revenue will be generated for the next six months of custom molding2016. 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 by Paradise Plastics, Inc. to their facilities as of January 1, 2015.its customers.

Consolidated cost of sales as a percentage of overall net sales increased 10.3%decreased 10.4% for the first six months of 2016 compared to the similar reporting period of 2015. Two reasons represent this change. First, a greater percentage of plastics parts ordered and shipped during the first six months of 2016 compared to the 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 six months of 2015, compared toproduced 2.7 million lbs. of brined orange peel inventory during the similarfirst six months of 2016. As mentioned during previous interim reporting periodfilings, with more than an adequate amount of 2014. Thisbrined orange peel in the Company’s inventory as of January 1, 2015, brining operations for orange peel were postponed for 2015. Thus, the increase is two-fold;in seasonal peel production during first half of 2016 allocated over a delay in receiving raw fruit materialsrelatively fixed amount of factory overhead (i.e.: insurance, utilities, depreciation and taxes) had the impact of reducing cost of sales as of June 30, 2015 resulted in a lesser amount of raw materials processed into higher valued finish goods inventory2016 compared to June 30, 2014.2015. However, with capacity to processseasonal production cycles for various peels does not represent a trend or an increased amountestimate that can project the level of raw fruit materials into finish goods inventory during the third quarter of 2015, fruit segment cost of sales should returnfor 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 margins reported and disclosedunderstand that until a full year’s production cycle is completed, the Company will not be able to determine the change in the Company’s 2014 third quarter filing. Secondly, cost of sales within the plastics segment has increased as the margins generated from production transferred backand its relationship to an existing plastics customer, has been replaced with lower margin accounts during the second quarter of 2015.overall sales.

Selling, general and& administrative (S,G&A) expenses for the first six months of 2015 increased 9.15%2016 totaled $1,675,921 compared to the similar reporting period of 2014 as the Company’s sales force increased their attendance and participation at various trade shows during the first six months of 2015.

Inventory as of June 30, 2015 totaled $12,481,349 compared to $14,051,869 as of June 30, 2014. This$1,831,646 representing a decrease of $1,570,520$155,725 or 8.5% and is primarily related to the delay in receiptretirement of raw fruit inventory from one of the Company’s major suppliers. On June 30, 2015, $911,436 of fruit material was in transit compared to just $109,712 at June 30, 2014. As the Company utilizes existing letters of credit to finance the purchase of in transit raw fruit commodities, short term debt correspondingly increased to $1,155,588 as of June 30, 2015 from $496,465 as of June 30, 2014.

Accounts Receivable as of June 30, 2015 totaled $1,268,723 compared to $890,095 as of June 30, 2014. The increase is due to the timing of payments received from one of the Company’s long term plastics customers. On July 31, 2015, payments totaling $511,956 related to outstanding invoices at June 30, 2015 have been received and posted.three senior managers during late 2015.

Other Significant Items

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 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 June 30, 20152016 and December 31, 2014,2015, we had $3,356,979$3.2 million and $7,788,010,$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 June 30, 20152016 and December 31, 2014.2015. Within this agreement, there are letters of credit with a limit of $1,750,000, of which $1,155,588$820,589 was outstanding at June 30, 20152016 and $112,879$582,839 at December 31, 2014.2015. The line of credit agreement expires on July 31, 2017. Net cash used in operating activities decreased from $3,961,654

Summary

Paradise, Inc.’s consolidated net sales for the six months ended June 30, 20142016 totaled $5,066,217 compared to $4,917,970$5,170,884 for the similar reporting period 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 brined fruit production during the first six 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. 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 $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. The primary reason for this decrease was as follows; Accounts Payable and income tax payments made during the six months ended June 30, 2015 were $893,579 more than the similar reporting period of 2014. Net cash provided by financing activities increased to $985,553 for the six months ended June 30, 2015 compared to $439,309 for the six months ended June 30, 2014 due to timing of payments on letters of credit.

Summary

Paradise, Inc.’s consolidated net sales for the first six months of 2015 decreased $569,498 compared to the similar reporting period of 2014 as a major plastics customer decided to bring in-house production of several custom molding products. However, as mentioned and disclosed in all previous quarterly filings, interim filings, due to the highly seasonal nature of the Company’s primary product, glace’ fruit, which accounts for approximately 65% of consolidated annual revenue with more than 80% of this revenue earned during an eight to ten week period commencing in mid-September of each year noresults do not represent any meaningful financial analysis may be developed from Paradise, Inc.’s interim reporting results.trends or estimates. Only a full year’s accounting of revenuesales and expenses will provide a complete picture of the necessary information to determineconsolidated operations of the Company’s overall financial performance.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, 2014.2015. There have been no material changes to our critical accounting estimates during the six months ended June 30, 2015.2016.

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 evaluating the impact of these changes to the Company’s consolidated financial statements.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,Revenue from Contracts with Customers(Topic 606). The guidance in this update supersedes the revenue recognition requirements in Topic 605,Revenue Recognition,and most industry-specific guidance throughout Industry topics of the Codification.Additionally, thisUpdate supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition - Construction-Type and Production-Type Contracts.In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (for example, assets within the scope of Topic 360, Property, Plant, and Equipment, and intangible assets within the scope of Topic 350, Intangibles-Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this Update.Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. On April 1, 2015, the FASB voted for a one-year deferral of the effective date of the new revenue recognition standard, ASU No. 2014-09. If these proposed changes are finalized, this standard would require public entities to apply the amendments in ASU No. 2014-09 for annual reporting beginning after December 15, 2017. Early adoption would be permitted as of the original effective date in ASU No. 2014-09, which is for annual reporting periods beginning after December 15, 2016. We are currently evaluating the impact of adopting the guidance on our 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 June 30, 2015,2016, 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 six months ended June 30, 2015.2016.

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.