UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2019

or

Commission File No. 000-03026

PARADISE, INC.

INCORPORATED IN FLORIDA

I.R.S. EMPLOYER IDENTIFICATION NO. 59-1007583

1200 W. DR. MARTIN LUTHER KING, JR. BLVD.,

PLANT CITY, FLORIDA 33563

(813) 752-1155

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.        Yes    x    No    ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).        Yes    x    No    ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)         Yes    ¨    No    x

Securities registered pursuant to Section 12(b) of the Act:  None.

The number of shares outstanding of each of the issuer’s classes of common stock as of August 19, 2019 was 519,600 shares.

PARADISE, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019

INDEX

PARADISE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See Accompanying Notes to these Consolidated Financial Statements (Unaudited)

PARADISE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

See Accompanying Notes to these Consolidated Financial Statements (Unaudited)

PARADISE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

See Accompanying Notes to these Consolidated Financial Statements (Unaudited)

PARADISE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

See Accompanying Notes to these Consolidated Financial Statements (Unaudited)

PARADISE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

See Accompanying Notes to these Consolidated Financial Statements (Unaudited)

PARADISE, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The accompanying unaudited consolidated financial statements of Paradise, Inc. and subsidiaries (collectively, the “Company”) have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements.

The information furnished herein reflects only the adjustments and accruals of a normal recurring nature management believes are necessary to fairly state the operating results for the respective periods. The notes to the unaudited consolidated financial statements should be read in conjunction with the notes to the consolidated financial statements contained in the Company’s Form 10-K for the year ended December 31, 2018. The Company’s management believes that the disclosures are sufficient for interim financial reporting purposes.

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. 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 adopted the new standard on January 1, 2019 on a modified retrospective basis. A right of use asset and respective liability were included in assets and liabilities as of January 1, 2019 in the amount of approximately $42,000. There was no material financial impact.

PARADISE, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

In June 2016, the FASB issued an ASU on the measurement of credit losses on financial instruments. This ASU requires entities to measure the impairment of certain financial instruments, including trade receivables, based on expected losses rather than incurred losses. This ASU is effective for fiscal years beginning after December 15, 2019, with early adoption permitted for financial statement periods beginning after December 15, 2018. We are currently assessing the guidance. This ASU is not expected to have a material impact 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.

Basic and diluted loss per common share is based on the weighted average number of shares outstanding and assumed to be outstanding of 519,600. There are no dilutive securities outstanding.

During the reporting period, the Company recognized revenue from the sale of candied fruit products which are sold to manufacturing bakers, institutional users and retailers. See Note 6 – Subsequent Events. The Company also recognizes revenue from the sale of molded plastics to unaffiliated customers. Revenue is recognized upon the shipment or delivery of goods depending on the agreed upon terms with the customer and is reported net of applicable provisions for discounts, returns, incentives and allowances.

The Company recognizes revenue when performance obligations are satisfied by transferring control of the goods to customers. Control is transferred upon shipment or delivery of the goods to the customer. At the time of delivery, the customer is invoiced with payment terms which are commensurate with the customer’s credit profile. Shipping and/or handling costs that occur before the customer obtains control of the goods are deemed to be fulfillment activities and are accounted for as fulfillment costs.

The Company assesses the goods and services promised in its customers’ purchase orders and identifies a performance obligation for each promise to transfer a good or service (or bundle of goods or services) that is distinct. To identify the performance obligations, the Company considers all the goods or services promised, whether explicitly stated or implied based on customary business practices.

PARADISE, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

During the reporting period, the Company’s operations were conducted through two business segments. These segments, and the primary operations of each, were as follows:

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.

On July 31, 2019, Paradise, Inc. (the “Company”) completed the sale of substantially all of the assets (the “Asset Sale”) of the Company engaged in the production, manufacture, sale and distribution of glacé fruit product (the “Fruit Business”) to Seneca Foods Corporation and its subsidiary (collectively, “Seneca”) in accordance with the terms of the Asset Purchase Agreement among such parties dated as of April 15, 2019 (the “Purchase Agreement”).

In accordance with the terms of the Purchase Agreement, the aggregate purchase price for the Fruit Business was approximately $13.7 million, consisting of cash consideration of approximately $13.4 million (as adjusted for the final inventory value calculated shortly following closing) and assumed liabilities of approximately $0.3 million. Approximately $0.4 million of the cash purchase price was used to repay the Company’s outstanding balance under its revolving credit facility, which terminated at closing, and $0.9 million of the cash purchase price is being held in escrow to satisfy indemnification obligations of the Company. There was no gain or loss to the Company based on the terms of the agreement.

PARADISE, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

On July 31, 2019, in connection with the Asset Sale and as contemplated by the Purchase Agreement, the Company entered into a Co-Pack Agreement with Seneca, pursuant to which the Company has agreed to process, manufacture and package the products of the Fruit Business for Seneca for the 2019 season using the equipment and inventory purchased by Seneca pursuant to the Purchase Agreement. Pursuant to the Co-Pack Agreement, Seneca will make weekly payments to the Company based on an agreed upon budget that includes a 10% profit, with a true-up payment by or to the Company to be made at the end of the season. 

In connection with the Purchase Agreement, Randy S. Gordon, Mark H. Gordon and Tracy W. Schulis entered into consulting agreements with Seneca. The description of such agreements is incorporated herein by reference to the section titled “Consulting Agreements” on page 43 of the Company’s definitive proxy statement on Schedule 14A filed on July 8, 2019.  Pursuant to his retention agreement with the Company, Jack  Laskowitz received a bonus in the amount of  $75,000 upon the closing of the Asset Sale.

Pursuant to their employment agreements with the Company, Randy S. Gordon, Mark H. Gordon, and Tracy W. Schulis are entitled to severance payments if terminated following either the consummation of the Asset Sale or the sale of substantially all of the assets of the Company in Liquidation. The payments are described in detail in the section titled “The Severance Payments Proposal” beginning on page 77 of the Company’s definitive proxy statement on Schedule 14A filed on July 8, 2019, which disclosure is incorporated herein by reference.

On July 29, 2019, the shareholders of the Company approved the Plan of Complete Liquidation and Dissolution (the “Liquidation Plan”), which gives the Company’s Board of Directors discretion to determine when and whether to proceed with the Liquidation Plan and which the Board envisions will lead to the sale of the Company’s remaining assets, including its plastics business and real estate.   See the section titled “Timing and Effect of Liquidation and Business Activities During Liquidation”  beginning on page 57 of the Company’s definitive proxy statement on Schedule 14A filed on July 8, 2019, which disclosure is incorporated herein by reference.  

The Company plans to terminate its registration under the Exchange Act and cease filing periodic reports with the SEC as soon as practicable. 

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, costs or other financial items, statements about our plans and objectives for future operations,   statements about the transactions contemplated by the Asset Purchase Agreement with Seneca Foods Corporation, statements about the plan of dissolution and liquidation, 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. Important factors that could cause actual results to differ from those expressed or implied by the forward-looking statements include the possibility that disruption from the pending dissolution may make it more difficult to maintain business and operational relationships for the Company; that the Company may not be successful in its attempt to sell the assets related to its plastics division and its real property located in Plant City, Florida on favorable terms, and that the other anticipated benefits from the sale of the Fruit Business or the Liquidation Plan will not be realized. Except as required by applicable law, we do not undertake to update any forward-looking statements.

Overview / Recent Developments

Paradise, Inc.’s main business segment, glacé fruit, a prime ingredient of fruitcakes and other holiday confections, represented 74% of total net sales during 2018. These products were sold to manufacturing bakers, institutional users, supermarkets and other retailers throughout the country. Consumer demand for glacé fruit product is traditionally strongest during the Thanksgiving and Christmas season. Almost 80% of glacé fruit product sales were ordinarily recorded during an eight to ten week period beginning in mid-September.

Since the majority of the Company’s customers required delivery of glacé candied fruit products during this relatively short period of time, Paradise, Inc. had to 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 had to 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, resulted in the generation of operating losses well into the third quarter of each year.

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, producing custom molding products, is not subject to the seasonality of the glacé 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.

Overview / Recent Developments (Continued)

On July 31, 2019, the Company completed the sale of substantially all of its assets (the “Asset Sale”) engaged in the production, manufacture, sale and distribution of glacé fruit product (the “Fruit Business”) to Seneca Foods Corporation and its subsidiary (collectively, “Seneca”) in accordance with the terms of the Asset Purchase Agreement among such parties dated as of April 15, 2019 (the “Purchase Agreement”).

In accordance with the terms of the Purchase Agreement, the aggregate purchase price for the Fruit Business was approximately $13.7 million, consisting of cash consideration of approximately $13.4 million (as adjusted for the final inventory value calculated shortly following closing) and assumed liabilities of approximately $0.3 million. Approximately $0.4 million of the cash purchase price was used to repay the Company’s outstanding balance under its revolving credit facility, which terminated at closing, and $0.9 million of the cash purchase price is being held in escrow to satisfy indemnification obligations of the Company.

On July 31, 2019, in connection with the Asset Sale and as contemplated by the Purchase Agreement, the Company entered into a Co-Pack Agreement with Seneca, pursuant to which the Company has agreed to process, manufacture and package the products of the Fruit Business for Seneca for the 2019 season using the equipment and inventory purchased by Seneca pursuant to the Purchase Agreement. Pursuant to the Co-Pack Agreement, Seneca will make weekly payments to the Company based on an agreed upon budget that includes a 10% profit, with a true-up payment by or to the Company to be made at the end of the season.

In connection with the Purchase Agreement, Randy S. Gordon, Mark H. Gordon and Tracy W. Schulis entered into consulting agreements with Seneca. The description of such agreements is incorporated herein by reference to the section titled “Consulting Agreements” on page 43 of the Company’s definitive proxy statement on Schedule 14A filed on July 8, 2019.  Pursuant to his retention agreement with the Company, Jack  Laskowitz received a bonus in the amount of  $75,000 upon the closing of the Asset Sale.

Pursuant to their employment agreements with the Company, Randy S. Gordon, Mark H. Gordon, and Tracy W. Schulis are entitled to severance payments if terminated following either the consummation of the Asset Sale or the sale of substantially all of the assets of the Company in Liquidation. The payments are described in detail in the section titled “The Severance Payments Proposal” beginning on page 77 of the Company’s definitive proxy statement on Schedule 14A filed on July 8, 2019, which disclosure is incorporated herein by reference.

On July 29, 2019, the shareholders of the Company approved the Plan of Complete Liquidation and Dissolution (the “Liquidation Plan”), which gives the Company’s Board of Directors discretion to determine when and whether to proceed with the Liquidation Plan and which the Board envisions will lead to the sale of the Company’s remaining assets, including its plastics business and real estate.   See the section titled “Timing and Effect of Liquidation and Business Activities During Liquidation”  beginning on page 57 of the Company’s definitive proxy statement on Schedule 14A filed on July 8, 2019, which disclosure is incorporated herein by reference.  

The Company plans to terminate its registration under the Exchange Act and cease filing periodic reports with the SEC as soon as practicable. 

As a result of the Company closing the Asset Sale and entering into the Co-Pack Agreement, the results of operations and financial condition discussed in this section are not indicative of the results of operations and financial condition the Company expects for the remainder of 2019.

The First Six Months

Paradise, Inc.’s consolidated net sales for the six months ended June 30, 2019 decreased $134,944 to $3,514,431 from $3,649,375 for the six months ended June 30, 2018. Cost of sales as a percentage of total sales increased 23% as the Company purchased finished brine inventory during the first six months instead of processing fruit through the Company’s in house brining facility as in the prior year. This increase in cost of sales combined with the impairment of the Plastics segment’s goodwill for $413,280 resulted in a loss from operations of $(2,426,786) for the first six months of 2019 compared to $(1,223,605) for the first six months of 2018.

The First Six Months (Continued)

Paradise, Inc.’s fruit segment net sales for the first six months of 2019 totaled $1,157,961 compared to net sales of $819,291 for the similar reporting period of 2018 representing an increase of $338,670. Products sold during the first six months of the year are primarily fruit ingredients produced in bulk quantities for industrial bakeries and supermarkets leading up and through the Easter holiday period along with the processing of fresh strawberries through its production facilities on behalf of a local Plant City, Florida distributor. Paradise, Inc., received a negotiated fee (tolling fee) based on the number of pounds processed through its plant for this distributor. The combination of net sales of bulk fruit ingredients along with the tolling fees accrued for the first six months of 2019 totaled $1,284,346 compared to $1,296,935 for the first six months of 2018. During the first six months of the year, management reviewed its provision for sales returns recorded as of December 31^st relating to retail products shipped to its customers during the previous year’s selling season, beginning in mid-September and running through the Thanksgiving and Christmas season. In addition, the Company reviewed its accrual of a certain percentage of expenses related to various customer incentive programs for media print advertising or in-store promotions during the previous holiday selling season. As a result of management improving upon and developing more conservative estimates for retail returns and customer incentive programs, there were minimal downward adjustments during the six month period ended June 30, 2019.

Paradise, Inc.’s molded plastics segment, which accounted for 26% of total net sales to unaffiliated customers for the previous year, generated net sales of $2,356,470 for the six months ended June 30, 2019 compared to $2,830,084 for the six months ended June 30, 2018. This decrease in net sales of $473,614 is due to a decrease in orders from a long term customer along with delays in the shipment of new custom molding orders completed during the first several months of 2019 into the second half of 2019.

Consolidated cost of sales as a percentage of net sales increased 23% for the first six months of 2019 compared to the first six months of 2018. The primary reason for this increase is that the Company’s Central Florida supplier of orange peel (peel) was unable to fulfill the Company’s 2019 estimated production needs. Thus, management contracted for the purchase of brined peel from an overseas supplier and expensed significant factory overhead. It should be noted that processing of fruit materials produced in finished goods inventory was less than 25% complete for the first six months of operations for 2019. Thus, until 100% of all raw fruit materials have been processed into finished goods inventory no reasonable estimate of the cost of sales can be determined from results reported as of June 30, 2019.

Selling, general & administrative (SG&A) expenses remained consistent for the first six months of 2019 as SG&A expenses totaled $1,592,418 compared to $1,556,857 for the first six months of 2019 as activities related to exploring strategic alternatives, which began in February 2018 continued beyond the end of the second quarter of 2019.

Other Significant Items

Short Term Debt as of June 30, 2019 totaled $382,210 and primarily consisted of letters of credit issued by the Company’s banking institution to Paradise, Inc.’s overseas supplier of certain raw fruit materials. The bank makes direct payments to the overseas supplier upon shipment and then charges Paradise, Inc. after receipt of these raw fruit materials with term extending to 180 days. As payment terms are consistent from period to period, the decrease in the liability as of June 30, 2019 to $382,210 compared to the liability of $543,310 as of June 30, 2018 relates to a decrease in the amount of product ordered from our overseas supplier for 2019.

The Company after completing a Phase 1 and Phase 2 environmental study of its real property has engaged the services of an environmental consulting & contracting firm to provide remedial services. The cost to provide these services approximate $60,000. This amount is included in other liabilities on the Company’s balance sheet as of June 30, 2019.

Other Income for the six months ended June 30, 2019 was $83,866 compared to $24,213 for the six months ended June 30, 2018. This increase is related to the increase in value of life insurance policies for two senior members of Company’s Board of Directors. Paradise, Inc. is a beneficiary on the two insurance policies for the amount of premiums paid to-date.

Liquidity and Capital Resources

We finance our ongoing operations primarily with cash provided by our operating activities. Historically, our principal sources of liquidity have been our cash flows provided by operating activities, our existing cash, and a line of credit facility. At June 30, 2019 and December 31, 2018, we had approximately $2.4 million and $8.0 million, respectively, in cash. The decrease in cash during the first six months of 2019 of $5.6 million is consistent with prior years as we generally have to use available cash reserves until we start to receive payments from our fruit customers after the start of our shipping season beginning in the fourth quarter of the year. Additionally, we had 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, 2019 and December 31, 2018. Within this agreement, there were letters of credit with a limit of $1,750,000, of which $382,210 was outstanding at June 30, 2019 and $284,016 at December 31, 2018. The line of credit agreement expired on July 31, 2019 and it was not renewed.

In connection with the Asset Sale described in the section entitled “Overview / Recent Developments” above, the Company received cash proceeds of approximately $13.0 million after repaying the outstanding balance under its revolving credit facility, with $0.9 million of such cash proceeds being held in escrow to satisfy indemnification obligations of the Company.

Following the closing of the Asset Sale on July 31, 2019 and continuing through the 2019 season, the Company is receiving weekly payments from Seneca based on an agreed upon budget that includes a 10% profit, with a true-up payment by or to the Company to be made at the end of the season, pursuant to the Co-Pack Agreement described in the section entitled “Overview / Recent Developments” above.

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, 2018. There have been no material changes to our critical accounting estimates during the six months ended June 30, 2019.

Impact of Recently Issued Accounting Pronouncements

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. 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 adopted the new standard on January 1, 2019 on a modified retrospective basis. A right of use asset and respective liability were included in assets and liabilities as of January 1, 2019 in the amount of approximately $42,000. There was no material financial impact.

In June 2016, the FASB issued an ASU on the measurement of credit losses on financial instruments. This ASU requires entities to measure the impairment of certain financial instruments, including trade receivables, based on expected losses rather than incurred losses. This ASU is effective for fiscal years beginning after December 15, 2019, with early adoption permitted for financial statement periods beginning after December 15, 2018. We are currently assessing the guidance. This ASU is not expected to have a material impact 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.

(a) Evaluation of Disclosure Controls and Procedures.

Pursuant to Rule 13a-15(b) under the Exchange Act, the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s President and Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report.

Disclosure controls and procedures mean controls and other procedures designed to ensure that information that the Company is required to disclose in the reports that it files with or submits to the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods required. Our controls and procedures include, without limitation, controls and procedures designed to ensure that all information required to be disclosed by us in the reports that we file with or submit to the Securities and Exchange Commission is accumulated and communicated to our management, including our principal executive and principal financial officers, to allow timely decisions regarding required 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.

Subsequent to the initial filing of the Company’s annual report on Form 10-K for the year ended December 31, 2017, management identified a material weakness in internal control relevant to the Company’s timeliness of the issuance and related year end accrual of credit memos for the customer returns, allowances, discounts and incentives that related to 2017 sales. This weakness in internal control resulted in a material misstatement of the financial statements and required restatement of the financial statements included in the Company’s Form 10-K for the year ended December 31, 2017 and in the Company’s Form 10-Q for the quarterly period ended March 31, 2018. These misstatements, which were not detected timely by management, were the result of inadequate design of controls pertaining to the Company’s review and ongoing monitoring of its procedures. The deficiency represents a material weakness in the Company’s internal control over financial reporting. 

As of June 30, 2019, Management has implemented and integrated additional procedures around the reporting and tracking of credit memos for returns, allowances, discounts and incentives to ensure that all amounts are properly recorded and remediate the material weakness identified above. As of June 30, 2019 and based upon its evaluation of the Company’s disclosure controls and procedures, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

(b) Changes in Internal Control over Financial Reporting.

Except as noted above, there were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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.