Use these links to rapidly review the documentTABLE OF CONTENTS Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2009ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
from                to


Commission File Number: 001-32563

GRAPHIC

ORCHIDS PAPER PRODUCTS COMPANY

A Delaware corporation(State or other jurisdiction of
incorporation or organization)

23-2956944(I.R.S. Employer Identification Number)


4826 Hunt Street
Pryor, Oklahoma 74361(Address of principal executive offices)

Registrant's
telephone number, including area code:(918) 825-0616

Securities
registered pursuant to Section 12(b) of the Act:

Title of each class

Name of each exchange on which registeredCommon Stock, $0.001 Par Value

NYSE Amex


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

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o    No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o    No ý

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 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 ý    No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted 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 and post such files). Yes o    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ý

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See definition of "accelerated filer", "large accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check One).

Large Accelerated Filer o

Accelerated Filer ý

Non-accelerated Filer o (Do not check if a
smaller reporting company)

Smaller Reporting Company o


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

The aggregate market value of the registrant's common equity held by non-affiliates was $134.0 million as of June 30, 2009.

As
of March 5, 2010, there were outstanding 7,393,874 shares of common stock, none of which are held in treasury.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Registrant's 2010 Annual Meeting of Stockholders are incorporated by reference into Part III of this
Form 10-K.



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TABLE OF CONTENTS



PagePart IItem 1.

Business


3Item 1A.

Risk Factors


12Item 1B.

Unresolved Staff Comments


20Item 2.

Properties


20Item 3.

Legal Proceedings


21Item 4.

RESERVED


21Part IIItem 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities


21Item 6.

Selected Financial Data


23Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations


25Item 7A.

Quantitative and Qualitative Disclosures About Market Risk


40Item 8.

Financial Statements and Supplementary Data


42Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure


63Item 9A.

Controls and Procedures


63Item 9B.

Other Information


63Part IIIItem 10.

Directors, Executive Officers and Corporate Governance


64Item 11.

Executive Compensation


64Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters


64Item 13.

Certain Relationships and Related Transactions, and Director Independence


65Item 14.

Principal Accountant Fees and Services


65Part IVItem 15.

Exhibits and Financial Statement Schedules


65Signatures


67


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PART I

Throughout this Form 10-K we "incorporate by reference" certain information from parts of other documents filed with
the Securities and Exchange Commission (the "SEC"). The SEC allows us to disclose important information by referring to it in that manner. Please refer to such information.

In
Item 1A., we discuss some of the business risks and factors that could cause actual results to differ materially from those stated in the forward-looking statements and from
our historical results.

Item 1.BUSINESS

Overview of Our Business

We are an integrated manufacturer of private label tissue products, including paper towels, bathroom tissue and paper napkins for the
consumer, or "at-home," market. We produce bulk tissue paper, known as parent rolls and convert parent rolls into finished products. We have tailored our operations to serve our core
customer base of dollar stores and other discount retailers. We focus on the dollar stores or value retailers and discount retail market because of their consistent order patterns and low number of
stock keeping units or SKUs in this market. By dollar stores, we mean retailers which offer a limited selection across a broad range of products at everyday low prices in a smaller store format. While
we have customers located throughout the United States, most of our products are distributed within an approximate 900-mile radius of our Oklahoma facility. However, our sales efforts are
focused on an area within approximately 500 miles of our facility in northeast Oklahoma, which includes Texas, Oklahoma, Kansas, Missouri, Arkansas, Nebraska and Iowa. Because we are one of the few
tissue paper manufacturers in this area, we typically have lower freight costs to our customers' distribution centers located in our target region. At-home tissue market growth has
historically been closely correlated to population growth and as such, performs well in a variety of economic conditions. Our target region has experienced strong population growth in the past five
years relative to the national average and these trends are expected to continue.

Our
products are sold primarily under our customers' private labels and, to a lesser extent, under our brand names such as Colortex®, My Size®,
Velvet®, Big Mopper®, Tackle® , and care®. All of our converted product revenue is derived pursuant to truck load purchase orders from our customers.
Parent roll revenue is derived from purchase orders that generally cover a one month time period. We do not have supply contracts with any of our customers. Revenue is recognized when title passes to
the customer. Because our product is a daily consumable item, the order stream from our customer base is fairly consistent with no significant seasonal fluctuations. Changes in the national economy,
in general, do not materially affect the market for our converted products.

Our
profitability depends on several key factors, including but not limited to:



In
2009, we generated revenue of $96.0 million, of which 90% came from the sale of converted products and 10% came from the sale of parent rolls. Our converted product sales
consisted of 60% from paper towels, 35% from bathroom tissue, and 5% from paper napkins. In 2009, 57% of our converted product revenue came from three value retailers. The balance of 2009 converted
product revenue came from other discount retailers, grocery stores, grocery wholesalers and cooperatives, and convenience stores.

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We
use recycled waste paper to manufacture bulk rolls of tissue paper, or "parent rolls," and convert them into a broad line of finished tissue products. Our paper mill consists of four
machines which have a total annual capacity of approximately 56,000 tons. Our ten converting lines have a total potential annual capacity of approximately 8.0 million cases of finished tissue
products. At present, our papermaking capacity exceeds our converting capacity and we sell the resulting surplus parent rolls into the open market, which generally carries lower margins than converted
products. We adjust our paper making production based on our internal converting need for parent rolls and the open market demand for parent rolls. We are in the process of installing a new converting
line which will increase our converting capacity by approximately 50%. See "Strategy" for a further discussion of this expansion project.

History

We were formed in April 1998 to acquire our present facilities located in Oklahoma out of a predecessor company's bankruptcy and
subsequently changed our name to Orchids Paper Products Company.

In
March 2004, Orchids Acquisition Group, Inc. acquired us for a price of $21.6 million. Orchids Acquisition Group, Inc. was formed exclusively for the purpose of
acquiring all of the outstanding shares of Orchids Paper Products Company, and was subsequently merged into us.

In
July 2005, we completed our initial public offering of 2,156,250 shares of common stock. Following the offering, 4,156,250 shares of common stock were outstanding. In July 2006, we
effected a 3-for-2 stock split resulting in outstanding shares of 6,234,346.

In
2009, we completed a follow-on offering of 962,500 shares of common stock at an offering price of $18.50 per share. We received net proceeds of approximately
$14.8 million from the offering, after deducting the underwriting discount and offering expenses. We intend to use the proceeds from the offering for the construction of a new warehouse, the
purchase and installation of a new converting line, and general corporate purposes.

Our Competitive Strengths



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Our Strategy

Our strategy is to expand our position as a low cost provider of private label tissue products to the growing discount retail channel
within our geographic area while leveraging our competitive advantages to increase our presence in other retail channels. This will be accomplished through our continued high service levels, increased
total manufacturing capacity and expansion of our high perceived value product offering.

With
our steady sales growth over the last eleven years, we have strategically expanded capacity to meet demand. Our strategy is to sell all of the parent rolls we manufacture as
converted products which generally carry higher margins than parent rolls. We are currently approaching full capacity utilization of our converting operations, of approximately 8.0 million
annual cases. We plan to increase our converting capacity by approximately 4.0 million cases annually with the installation of a new converting line. This new capacity will allow us to sell all
of our parent rolls as converted products and will result in a need to purchase parent rolls on the open market when the line reaches full operating capacity. These projects will be funded through a
variety of sources including the proceeds from our follow-on offering, cash from operations, additional borrowing under our existing credit facility and future funds from operations. This
additional capacity will enable us both to increase sales of existing products and to provide the flexibility to manufacture higher tier products for sales to our core customer base and into new
retail channels.

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We
intend to implement this strategy through our key initiatives set forth below:



Competitive Conditions

We believe the principal competitive factors in our market segments are price and service, and that our competitive strengths with
respect to other private label manufacturers include long-standing relationships with value retailers, a broad line of products and flexible converting capabilities, which enables us to
produce tissue products in a variety of sizes, packs and weights. This flexibility allows us to meet the particular demands of individual retailers.

Competition
in the value-end of the market is significantly affected by geographic location, as freight costs represent a material portion of end product costs. We believe it
is generally economically feasible to ship within an approximate 900-mile radius of the production site; however we focus on an approximate 500-mile radius. In Oklahoma and the
immediately surrounding area, we believe that

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Georgia-Pacific's
Muskogee, Oklahoma plant, Cascades' Memphis, Tennessee plant, and Pacific Paper's Memphis, Tennessee plant are the only competitors' plants in this region. In addition, Cellu Tissue
recently announced plans to construct a converting facility in Oklahoma City, Oklahoma. However, we face greater competition in the Southeast, Midwest and Southwest regions of the U.S. Georgia-Pacific
has additional plants in Georgia and Wisconsin, Cascades has plants in Pennsylvania, Wisconsin and Arizona, Royal Paper has a plant in Arizona and Clearwater Paper Corporation has plants in Idaho,
Illinois and Nevada.

We
believe the number of competitors in private label segments will not significantly increase in the near future because of the large capital expenditures required to establish a paper
mill and converting facility and difficulties in obtaining environmental and local permits for parent roll manufacturing facilities.

Product Overview

We offer our customers an array of private label products, including bathroom tissue, paper towels and paper napkins. In 2009, 60% of
our converted product case shipments were paper towels, 35% were bathroom tissue and 5% were paper napkins. Of our converted products sold in 2009, 78% were packaged as private label products in
accordance with our customers' specifications. The remaining 22% were packaged under our brands Velvet®, Colortex®, Ultra Valu®, Dri-Mop®,
Big
Mopper ®, Soft & Fluffy®, Tackle ®, My-Size®, Orchids® and care®. We do not actively promote our brand names
and do not believe our brand names have significant market recognition. Our branded products are primarily sold to smaller customers, who use them as their in-store labels. Our customers
include value retailers (dollar stores), discount retailers, grocery stores, grocery wholesalers and cooperatives, and convenience stores. Our recent growth has come from serving value retailers,
other discount retailers as well as grocery stores. We were among the first to focus on serving customers in the value retail channel and we have benefited from their increased emphasis on consumables
like tissue products as part of their merchandising strategies. By seeking to provide consistently low prices, superior customer service, and improved product quality, we believe we have
differentiated ourselves from our competitors and generated momentum with value retailers. In 2009, approximately 54% of our converted product revenue was derived from sales to the value retail
channel.

Our
ability to increase revenue depends significantly upon our ability to increase business with other discount retailers, increase business in the grocery chain market, take market
share from our competitors as well as growth of our largest customers. We are attempting to diversify our customers and reduce customer concentration by implementing private label programs with new
discount retailers and with several regional supermarket chains, but it is likely our business will remain concentrated among value retailers for the foreseeable future.

We
service the value retail channel primarily by supplying their distribution centers within our cost-effective shipping area. Freight is a significant cost component which
limits the competitive geography of a given manufacturing facility. We consider our current cost-effective shipping area to be within an approximate 900-mile radius of our
facility; however, we focus our sales efforts on customers within an approximate 500-mile radius of Pryor, Oklahoma. We supply private label products to over half of the value retail
distribution centers located within our cost-effective shipping area.

Our
largest retail customers are Dollar General, Family Dollar and Wal-Mart. Sales to these three customers represented 64% of our converted product sales in 2009.

The
following provides additional details regarding our relationships with our largest customers.

Dollar General.Dollar General is our largest customer, accounting for approximately 35% of our converted product sales in 2009. With
annual revenue
of $10.5 billion and more than 8,400 stores, Dollar General is the largest value retailer. We currently supply value private label towel products to

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over
half of Dollar General's nine distribution centers, value private label bathroom tissue products to four of their distribution centers and premium towel and napkins to two of their distribution
centers.

Family Dollar.Family Dollar is our second largest customer, accounting for approximately 17% of our converted product sales in 2009.
Family Dollar,
which celebrated its 50 year anniversary in 2009, has become one of the leading value retailers in the industry with more than 6,600 stores in 44 states. Family Dollar currently has nine
distribution centers. We currently supply substantially all of the value private label tissue products to three of the distribution centers and supply approximately half of the value private label
tissue products to two other distribution centers.

Wal-Mart.Wal-Mart is our third largest customer, accounting for approximately 12% of our converted product sales in 2009. We
currently serve 19 distribution centers with bathroom tissue and two with MIO "Made in Oklahoma" paper towels. Wal-Mart is the largest discount retailer in the United States.

Sales and Marketing Team

We have a Vice President of Sales and Marketing who leads an experienced sales staff. We also utilize an established network of
independent brokers. Our sales staff and broker network are instrumental in establishing and maintaining strong relationships with our customers.

The
sales staff directly services four customers representing approximately 34% of our sales in 2009. We also use a network of approximately 36 brokers. Our management team recognizes
that these brokers have relationships with many of our customers and we work with these brokers in an effort to increase our business with these accounts. Our sales and marketing organization seeks to
collaborate with our brokers to leverage these relationships. With each of our key customers, however, our senior
management team participates with the independent brokers in all critical customer meetings to establish and maintain direct customer relationships.

A
majority of our brokers provide marketing support to their retail accounts which includes shelf placement of products and in-store merchandising activities to support our
product distribution. We generally pay our brokers' commissions ranging from 1% to 3% of revenue. Total commissions paid in the years ended December 31, 2009 and 2008, were $1.3 million
and $1.1 million, respectively.

Manufacturing

We own and operate a paper mill and converting facility at our headquarters in Pryor, Oklahoma. Our two paper mill facilities, which
total 162,000 square feet, produce 100% recycled parent rolls that are then converted into tissue products at our adjacent converting facility or are sold to other converters. The paper mill
facilities include four paper machines that produce paper made entirely from preconsumer solid bleached sulfate paper, or "SBS paper."

The
mill operates 24 hours a day, generally 362 days a year, with a three-day annual planned maintenance shutdown. The following table sets forth our volume of
parent rolls manufactured, purchased and converted for each of the past five years:

2009

2008

2007

2006

2005(Tons)ManufacturedTotal


52,960


55,884


49,264


32,853


26,051Less Third Party Sales


(11,353
)

(14,865
)

(10,277
)

(1,191
)

Purchased Parent Rolls





335


1,442


6,970


12,153ConvertedTotal


41,607


41,354


40,429


38,632


38,204


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We
convert parent rolls into finished tissue products at our converting facility. The converting process, which varies slightly by product category, generally includes embossing,
laminating, and perforating or cutting the parent rolls as they are unrolled; pressing two or more plies together in the case of multiple-ply products; printing designs for certain
products and cutting into rolls or stacks; wrapping in polyethylene film; and packing in corrugated boxes or on display-ready pallets for shipment.

Our
300,000 square-foot converting facility has the potential capacity to produce approximately 8.0 million cases of at-home tissue products a year. We
operated the converting facility on a 24 hour a day, 363-day-a-year schedule in 2009 and produced approximately 7.2 million cases. We designed the ten
production lines in the plant to enhance capacity and maximize efficiency. Our converting operation utilizes relatively modern equipment and one of our towel lines is high speed and offers
four-color and process printing capabilities. We added significant automation equipment to certain converting processes during 2008 and 2009. One of the key advantages of our converting
plant is its flexible manufacturing capabilities, which enables us to provide our customers with a variety of package sizes and format options and enables our customers to fit products into particular
price categories. We believe our converting facility, together with our low direct labor costs and overhead, combine to produce relatively low overall operating costs. In addition, the previously
discussed automation project in the converting facility allowed us to lower our labor costs by replacing manual operations with automated processes. We began using a third-party warehouse late in the
first quarter of 2008 to increase our shipping capacity and to handle our increasing converting product shipments. The warehouse is leased on a month-to-month basis.

We
are in the process of expanding our converting operations through the addition of a new warehouse and the purchase and installation of a new converting line. Construction began on the
new 245,000 square foot warehouse, which is located adjacent to our existing converting facility in early October 2009. The warehouse project is expected to cost approximately $6.8 million with
occupancy of the first half of the facility available by May 2010 and complete occupancy by July 2010. Following completion of the warehouse, we will be able to consolidate all of our converted
product inventory and shipping into this location and eliminate third-party warehouse storage and product transfer costs which will allow us to improve our customer service and logistics performance
and reduce operating costs. Additionally, the project will allow us to free up the necessary space in our existing converting facility to house the new converting line. The new converting line, which
will be able to produce both paper towels and bathroom tissue, will provide higher quality products and broaden our product offering through increased packaging configurations, enhanced graphics and
improved embossing. The line is expected to provide additional capacity of approximately 4.0 million cases per year. The line is being built and we expect it to be in start-up mode
by the end of the second quarter of 2010, with full operating speeds expected to be achieved by the end of the third quarter of 2010. The new converting line is expected to cost approximately
$20.3 million.

Distribution

Our products are delivered to our customers in truck-load quantities. Most of our customers arrange for transportation of
our products to their distribution centers. We have established a drop-and-hook program where the customer returns its empty trailer to our warehouse and departs with a full,
preloaded trailer. Approximately 75% of our shipments are handled in this manner. This provides a means for several key customers to minimize freight costs. For our remaining customers, we arrange for
third-party freight companies to deliver the products.

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Raw Materials and Energy

The principal raw materials used to manufacture our parent rolls are recycled waste paper and water. Recycled waste paper accounts for
100% of the fiber requirement for our parent rolls. The de-inking process at the paper mill is currently configured to process a particular class of recycled waste paper known as SBS
paper. Prior to 2008, we sourced the majority of our SBS paper from two paper brokers. On February 20, 2008, we signed an exclusive supply agreement with Dixie Pulp and Paper, Inc. to
supply all of our waste paper needs. This agreement is effective beginning April 1, 2008 and carries a five-year term. We entered into the agreement to help ensure our
long-term supply of quality waste paper. Unless either party gives notice at least ninety days prior to the end of the term, the agreement automatically renews for one additional year. If
we were unable to purchase a sufficient quantity of SBS paper or if prices materially increased, we could reconfigure the de-inking process to process other forms of waste paper or use an
alternative type of waste paper with our existing de-inking process. Reconfiguring our de-inking plant would require additional capital expenditures, which could be
substantial. Alternative types of waste paper could result in higher costs. We also seek to assure adequate supplies of SBS paper by maintaining approximately a three-week inventory. The
agreement is for a term of five years ending on March 31, 2013.

Energy
is a key cost factor. We source our electricity from the Grand River Dam Authority. As part of our new paper machine project, we installed a natural gas fired boiler to supply our
own steam. We utilize a broker to purchase all of our natural gas requirements through a program established by our broker that utilizes a combination of fixed price contracts, options and spot
purchases. Effective April 1, 2009, we entered into a fixed price contract with our broker to supply approximately 60% of our
natural gas requirements at $7.50 per MMBTU through March 2011. In November 2009, we entered into an additional purchase agreement for approximately 60% of our requirements at a price of $6.50 per
MMBTU for the period April 2011 through March 2012. The remainder of our requirements for the April 2009 through March 2012 period will be purchased under a continuation of our current program.

Backlog

Our tissue products generally require short production times. Typically, we have a backlog of approximately two weeks of sales. As of
December 31, 2009, our backlog of customer orders was 174,241 cases of finished converted products and 1,062 tons of parent rolls or approximately $3.1 million. As of December 31,
2008, our backlog of customer orders was 348,000 cases of finished converted products and 1,300 tons of parent rolls or approximately $5.7 million. We believe the reduced backlog of converted
products is primarily the result of our major customers reducing their overall inventory levels around the end of the calendar year, primarily due to general economic condition, and a change in timing
of a major promotional campaign by one of our larger customers and is not an indication of a trend of lower shipments on an ongoing basis.

Trademarks and Trade Names

Our tissue products are sold under various brand names, including Colortex®, Velvet®, Ultra Valu®,
Dri-Mop®, Big Mopper®, Soft & Fluffy®, Tackle®, My-Size®, Orchids® and care®. We
intend to renew our registered trademarks prior to expiration. We do not believe these trademarks are significant corporate assets. Our branded products are primarily sold to smaller customers, who
use them as their in-store labels.

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Employee and Labor Relations

As of December 31, 2009, we had approximately 296 full time employees of whom 239 were union hourly employees and 57 were
non-union salaried employees. Of our employees, approximately 272 were engaged in manufacturing and production, 22 were engaged in sales, clerical and administration, and 2 were engaged in
engineering. Our hourly employees are represented under collective bargaining agreements with the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial & Service
Workers International Union Local 5-930 and Local 5-1480 at the mill and converting facilities, respectively. The current contract with our hourly employees at the mill
facility expires February 2, 2011, while the contract with our hourly employees at the converting facility expires June 25, 2012. We have not experienced a work stoppage in the last ten
years and no grievance proceedings, material arbitrations, labor disputes, strikes or labor disturbances are currently pending or threatened against us. We believe we have good relations with our
union employees at each of our facilities.

Environmental, Health and Safety Matters

Our operations are subject to various environmental, health and safety laws and regulations promulgated by federal, state and local
governments. These laws and regulations impose stringent standards on us regarding, among other things, air emissions, water discharges, use and handling of hazardous materials, use, handling and
disposal of waste, and remediation of environmental contamination. Since our products are made from SBS paper, we do not make extensive use of chemicals.

The
U.S. Environmental Protection Agency (the "EPA") requires that certain pulp and paper mills meet stringent air emissions and revised waste water discharge standards for toxic and
hazardous pollutants. These standards are commonly known as the "Cluster Rules." Our operations are not subject to further control as a result of the current "Cluster Rules" and, therefore, we do not
anticipate any need for related capital expenditures.

We
believe our manufacturing facilities are in compliance in all material respects with all existing federal, state and local environmental regulations, but we cannot predict whether
more stringent air, water and solid waste disposal requirements will be imposed by government authorities in the future. Pursuant to the requirements of applicable federal, state and local statutes
and regulations, we believe that we possess, either directly or through the Oklahoma Ordinance Works Authority ("OOWA"), all of the environmental permits and approvals necessary for the operation of
our facilities.

OOWA,
the operator of the industrial park in which we operate, holds the waste water permit that covers our facility and controls, among other things, the level of biological oxygen
demand ("BOD") and total suspended solids ("TSS") we are allowed to send to the OOWA following pre-treatment at our facility. The OOWA has reduced our BOD and TSS limits effective with a
permit issued August 1, 2007. In 2009, we completed the expansion of our pre-treatment facility to meet the lower limits required under the terms of the permit. This expansion
project cost approximately $4.3 million.

Executive Officers and Key Employees

Set forth below is the name, age as of March 5, 2010, position and a brief account of the business experience of each of our
executive officers.

Name

Age

PositionRobert A. Snyder


61

Chief Executive Officer and President, DirectorKeith R. Schroeder


54

Chief Financial Officer


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Robert A. Snyder, 61, Chief Executive Officer and President, Director

Mr. Snyder has been our Chief Executive Officer and President since August 2007. Prior to his current appointment,
Mr. Snyder was General Manager of KTG USA, an integrated paper manufacturer and a subsidiary of Kruger, Inc. He was responsible for a premium grade tissue mill from October 2005 to July
2007 and a newsprint mill, timberlands, and power company where he served as Vice-President and general manager from October 2002 to October 2005. Prior to his tenure at
Kruger, Inc., Mr. Snyder served in various capacities with, Great Northern Paper, Inc., Alliance Forest Products U.S. Corporation and Bear Island Paper Company, including as a
mill manager for most of 2002, a general manager of a paper business unit from 1999 to 2002, a Vice-President and general manager from 1992 to 1999 and a production manager from 1985 to
1992. Mr. Snyder holds a BS degree in Paper Science and Engineering from the State University of New York at Syracuse University.

Keith R. Schroeder, 54, Chief Financial Officer

Mr. Schroeder has been our Chief Financial Officer since January 2002. Prior to joining us, he served as Corporate Finance
Director for Kruger, Inc.'s tissue operations from October 2000 to December 2001 and as Vice President of Finance and Treasurer of Global Tissue from 1996 to October 2000. Global Tissue was
acquired by Kruger, Inc. in 1999. Prior to joining Global Tissue, Mr. Schroeder held a number of finance and accounting positions with Cummins Engine Company and Atlas Van Lines.
Mr. Schroeder is a certified public accountant and holds a BS degree in Business Administration with an accounting major from the University of Evansville.

Available Information

We file annual, quarterly and current reports and other information with the Securities and Exchange Commission (the "SEC"). You may
read and copy any document we file with the SEC at the SEC's public reference room at 100 F Street, NE, Washington, DC 20549. Please call the SEC at
1-800-SEC-0330 for information on the public reference room. The SEC maintains an internet site that contains annual, quarterly and current reports, proxy and
information statements and other information that issuers (including Orchids Paper Products Company) file electronically with the SEC. The SEC's internet site is www.sec.gov.

Item 1A.RISK FACTORS

We operate in a changing environment that involves numerous known and unknown risks and uncertainties that could materially affect our
operations. The risks, uncertainties and other factors set forth below may cause our actual results, performances or achievements to be materially different from those expressed or implied by our
forward-looking statements. If any of these risks or events occur, our business, financial condition or results of operations may be adversely affected. We may amend or supplement the risk factors
described below from time to time in other reports we file with the SEC in the future.

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Risks Related To Our Business

We face intense competition and if we cannot successfully compete in the marketplace, our business, financial condition and operating results may be materially adversely
affected.

The consumer market for private label tissue products is highly competitive. Many of our competitors have greater financial,
managerial, sales and marketing and capital resources than we do, which may allow them to respond more quickly to new opportunities or changes in customer requirements. These competitors may also be
larger in size or scope than us, which may allow them to achieve greater economies of scale or allow them to better withstand periods of declining prices and adverse operating conditions.

Our
ability to successfully compete depends upon a variety of factors, including:



Our
paper products are commodity products, and if we do not maintain competitive prices, we may lose significant market share. Our ability to keep our prices at competitive levels
depends in large part on our ability to control our costs. In addition, consolidation among retailers in the value retail channel may put additional pressure on us to reduce our prices in order to
maintain market share. If we are unable to effectively adjust our cost structure to address such increased competitive pressures, our sales level and profitability could be harmed and our operations
could be materially adversely affected.

A substantial percentage of our revenues are attributable to three large retail customers, which may decrease or cease purchases at any time.

Our largest customer, Dollar General, accounted for 35% of our converted product revenue in 2009. Family Dollar and
Wal-Mart, accounted for approximately 17% and 12%, respectively, of our converted product revenue in 2009. We expect that sales to a limited number of customers will continue to account
for a substantial portion of our revenues for the foreseeable future. Sales to these customers are made pursuant to purchase orders and not supply agreements. We may not be able to keep our key
customers or these customers may cancel purchase orders or reschedule or decrease their level of purchases from us. Any substantial decrease or delay in sales to one or more of our key customers would
harm our sales and financial results. In particular, the loss of sales to one or more distribution centers would result in a sudden and significant decrease in sales. If sales to current key customers
cease or are reduced, we may not obtain sufficient orders from other customers necessary to offset any such losses or reductions.

We exclusively use preconsumer solid bleached sulfate paper, or SBS paper, to produce parent rolls and any disruption in our supply or increase in the cost of preconsumer
SBS paper could disrupt our production and harm our ability to produce tissue at competitive prices.

We do not produce any of the waste paper we use to produce our parent rolls. We depend heavily on access to sufficient, reasonably
priced quantities of waste paper to manufacture our tissue products. Our paper mill is configured to convert waste paper, specifically SBS paper, into paper pulp for use in our paper production lines.
In 2009, we purchased approximately 64,900 tons of SBS paper at a total cost of $13.8 million compared to 70,300 tons of SBS paper at a total cost of $20.9 million in 2008.

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Effective
April 1, 2008, we entered into a five-year exclusive supply agreement with Dixie Pulp and Paper, Inc. to supply all of our waste paper supply. Prices for SBS paper
have fluctuated significantly in the past and will likely continue to fluctuate significantly in the future, principally due to market imbalances between supply and demand. In addition, the market
price of SBS waste paper can also be influenced by market swings in the price of virgin pulp and other waste paper grades. If either the available supply of SBS paper diminishes or the demand for SBS
paper increases, it could substantially increase the cost of SBS paper, require us to purchase alternate waste paper grades at increased costs, or cause a production slow-down or stoppage
until we are able to identify new sources of SBS paper or reconfigure our de-inking facilities to process other available forms of waste paper or other sources of paper fiber. We could
experience a material adverse effect on our business, financial condition and results of operations should the price or supply of SBS paper be disrupted.

Increased competition in our region may effect our business.

In 2009, two new competitors moved into our operating region. Pacific Paper added a new converting plant in Memphis, Tennessee and
Cellu Tissue has announced the opening of a converting plant in Oklahoma City, Oklahoma in June 2010. Both plants are in our focused 500 mile sales area. The increased presence of competition in our
focused region may reduce some of our competitive cost advantages which could result in the loss of business or force us to reduce prices which could have a material adverse effect on our business.

Changes in the policies of our retail trade customers and increasing dependence on key retailers in developed markets may adversely affect our business.

Our products are sold in a highly competitive marketplace, which is experiencing increased concentration and the growing presence of
large-format retailers and discounters. With the consolidation of retail trade, especially in developed markets, we are increasingly dependent on key retailers, and some of these retailers, including
the large-format retailers, may have greater bargaining power than we do. They may use this leverage to demand higher trade discounts or allowances which could lead to reduced profitability. We may
also be negatively affected by changes in the policies of its retail trade customers, such as inventory de-stocking, limitations on access to shelf space, and delisting of our products. If
we lose a significant customer or if sales of our products to a significant customer materially decrease, our business, financial condition and results of operations may be materially adversely
affected.

We have indebtedness which limits our free cash flow and subjects us to restrictive covenants relating to the operation of our business.

At December 31, 2009, we had $23.3 million of indebtedness. In 2010, we anticipate making principal payments of
approximately $3.7 million and interest payments of approximately $763,000. During 2010, we expect to borrow approximately $5.4 million of additional term loan debt to finance 80% of our
new warehouse. Operating with this amount of leverage requires us to direct a significant portion of our cash flow from operations to make payments on our debt, which reduces the funds otherwise
available for operations, capital expenditures, future business opportunities and other purposes. It also limits our flexibility in planning for or reacting to, changes in our business and our
industry and impairs our ability to obtain additional financing.

The
terms of our loan agreements require us to meet specified financial ratios and other financial and operating covenants which restrict our ability to incur additional debt or place
liens on our assets, make capital expenditures, effect mergers or acquisitions, dispose of assets or pay dividends in certain circumstances. If we fail to meet those financial ratios and covenants and
our lenders do not waive them, we will be required to pay fees and penalties and our lenders could also accelerate the maturity of our debt and proceed against any pledged collateral, which could
force us to seek alternative

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financing.
If this were to happen, we may be unable to obtain additional financing or it may not be available on terms acceptable to us.

The availability of and prices for energy will significantly impact our business.

We rely primarily on natural gas and electric energy. Prior to April 2009, all of the natural gas and electricity necessary to produce
our paper products was purchased on the open market. Beginning in April 2009 and continuing through March 2011, approximately 60% of our natural gas requirements will be fixed at a price of $7.50 per
MMBTU and the remainder of our natural gas requirements will be purchased on the open market. From April 2011 through March 2012, approximately 60% of our natural gas requirements will be fixed at a
price of $6.50 per MMBTU with the remainder purchased on the open market. The price and other terms of those purchases not under contract are subject to change based on factors such as worldwide
supply and demand and government regulation. In particular, natural gas prices are highly volatile, our average price per MMBTU decreased to $7.70 in 2009 from $9.10 in 2008. Our consumption of both
natural gas and electricity increased substantially following the start-up of our new paper machine in mid-2006. During the year ended December 31, 2009, we consumed
512,000 MMBTU of natural gas at a total cost of $4.0 million and 62.5 million kilowatt hours of electricity at a total cost of $3.4 million. If our energy costs increase, our cost
of sales will increase, and our operating results may be materially adversely affected. Furthermore, we may not be able to pass increased energy costs on to our customers if the market does not allow
us to raise the prices of our finished products. If price adjustments significantly trail the increase in energy costs or if we cannot effectively hedge against cost, our operating results may be
materially adversely affected.

Failure to purchase the contracted quantity of natural gas may result in financial exposure.

In October 2008, we entered into a contract to purchase 334,000 MMBTU per year of natural gas requirements at $7.50 per MMBTU for the
period from April 2009 through March 2011. This represents approximately 60% of our natural gas requirements based on our projected usage rates for 2009. From April 2011 through March 2012,
approximately 60% of our natural gas requirements will be fixed at a price of $6.50 per MMBTU with the remainder purchased on the open market. A significant interruption in our parent roll production
due to tornado, fire or other natural disaster, adverse market conditions or mechanical failure could reduce our natural gas requirements to a level below that of our contracted amount. If this
situation occurs and the market price for natural gas at that time is less than our contracted price, we could be required under the terms of our agreement to reimburse our gas supplier for their lost
revenue on the pricing difference on the amount of natural gas purchased under the contracted amount.

Our exposure to variable interest rates may affect our financial health.

Debt incurred under our existing revolving credit and term loan agreements accrues interest at a variable rate. During 2009, our
weighted average bank debt interest rate at year end decreased to 3.5% compared to a weighted average of 4.10% at year end 2008. Any
increase in the interest rates on our debt would result in a higher interest expense which would require us to dedicate more of our cash flow from operations to make payments on our debt and reduce
funds available to us for our operations and future business opportunities which could have a material adverse effect on our results of operations. For more information on our liquidity, see
"Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources."

We depend on our management team to operate the Company and execute our business plan.

We are highly dependent on the principal members of our management staff, in particular Robert Snyder, our Chief Executive
Officer, and Keith Schroeder, our Chief Financial Officer. We have entered into employment agreements with Robert Snyder and Keith Schroeder that expire in

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December 2011.
The loss of either of our executive officers or our inability to attract and retain other qualified personnel could harm our business and our ability to compete.

Labor interruptions would adversely affect our business.

All of our hourly paid employees are represented by the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied
Industrial & Service Workers International Union. The collective bargaining agreement with Local 5-930, which represents the paper mill workers, will expire in February 2011, and
the collective bargaining agreement with Local 5-1480, which represents the converting facility workers, will expire in June 2012. Negotiations of new collective bargaining agreements may
result in significant increases in the cost of labor or could breakdown and result in a strike or other disruption of our operations. If any of the preceding were to occur, it could impair our ability
to manufacture our products and result in increased costs and/or decreased operating results. In addition, some of our key customers and suppliers are also unionized. Disruption in their labor
relations could also have an adverse effect on our business.

Our paper mill may experience shutdowns due to unforeseen operational problems or maintenance outages which may cause significant lost production which would adversely
affect our financial position and results of operations.

We currently manufacture and process our paper at a single facility in Pryor, Oklahoma. Any natural disaster or other serious
disruption to this facility due to tornado, fire or any other calamity could damage our capital equipment or supporting infrastructure and materially impair our ability to manufacture and process
paper. Even a short-term disruption in our production output could damage relations with our customers, causing them to reduce or eliminate the amount of finished products they purchase
from us. Any such disruption could result in lost revenues, increased costs and reduced profits.

Three
of our four paper machines are approximately 50 years old. Unexpected production disruptions could cause us to shut down our paper mill. Those disruptions could occur due to
any number of circumstances, including shortages of raw materials, disruptions in the availability of transportation, labor disputes and mechanical or process failures.

If
our mill is shut down, it may experience a prolonged start up period, regardless of the reason for the shutdown. Those start up periods could range from several days to several
months, depending on the reason for the shutdown and other factors. The shutdown of our mill for a substantial period of time for any reason could have a material adverse effect on our financial
position and results of operations.

Our operations require substantial capital, and we may not have adequate capital resources to provide for all of our cash requirements.

Our operations require substantial capital. Expansion or replacement of existing facilities or equipment may require substantial
capital expenditures. For example, under new environmental standards we were required to build a water treatment facility costing approximately $4.3 million to reduce BOD and TSS from our
discharge water. In 2008, we spent $4.7 million to automate certain processes in our converting operation. Our current levels of business have resulted in the necessity to utilize a third-party
warehouse and we are currently building a new warehouse adjacent to our converting facility, which we estimate will cost approximately $6.8 million. In addition, we have ordered a new
converting line to consume the additional parent roll capacity from our new paper machine project. The cost of the new converting line is expected to be $20.3 million. If our capital resources
are inadequate to provide for our operating needs, capital expenditures and other cash requirements, this shortfall could have a material adverse effect on our business and liquidity.

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Our business is subject to extensive governmental regulations and any imposition of new regulations or failure to comply with existing regulations could involve significant
additional expense.

Our operations are subject to various environmental, health and safety laws and regulations promulgated by federal, state and local
governments. These laws and regulations impose stringent standards on us regarding, among other things, air emissions, water discharges, use and handling of hazardous materials, use, handling and
disposal of waste, and remediation of environmental contamination. Any failure to comply with applicable environmental laws, regulations or permit requirements may result in civil or criminal fines or
penalties or enforcement actions. These may include regulatory or judicial orders enjoining or curtailing operations or requiring corrective measures, installing pollution control equipment or
remedial actions, any of which could involve significant expenditures. Future development of such laws and regulations may require capital expenditures to ensure compliance. We may discover currently
unknown environmental problems or conditions in relation to our past or present operations, or we may face unforeseen environmental liabilities in the future. These conditions and liabilities may
require site remediation or other costs to maintain compliance or correct violations of environmental laws and regulations; or result in governmental or private claims for damage to person, property
or the environment, either of which could have a material adverse effect on our financial condition and results of operations. In addition, we may be subject to strict liability and, under specific
circumstances, joint and several liabilities for the investigation and remediation of the contamination of soil, surface and ground water, including contamination caused by other parties, at
properties that we own or operate and at properties where we or our predecessors arranged for the disposal of regulated materials.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud and, as a result, our
business could be harmed and current and potential stockholders could lose confidence in us, which could cause our stock price to fall.

We have completed an evaluation of our internal control systems to allow management to report on, and our independent registered public
accounting firm to attest to, our internal control over financial reporting in compliance with the management assessment and auditor attestation requirements of Section 404 of the
Sarbanes-Oxley Act of 2002. In our report under Section 404 which is included in Item 9A. of this report, we have concluded that our internal control over financial reporting is
effective.

A
material weakness or deficiency in internal control over financial reporting could materially affect our reported financial results and the market price of our stock could
significantly decline. Additionally, adverse publicity related to the disclosure of a material weakness or deficiency in internal controls could have a negative effect on our reputation, business and
stock price. Although management's assessment and auditor's attestation may provide some level of comfort to the investing public, even the best designed and executed systems of internal controls can
only provide reasonable assurance against misreported results and the prevention of fraud.

The parent roll market is a commodity market and subject to fluctuations in demand and pricing.

Following the start-up of our new paper machine in July 2006, our parent roll production exceeded the requirements of our
converting operation, which excess tonnage we sell as parent rolls. In addition, in the second quarter of 2007, due to relatively high parent roll prices, we began running all of our older machines on
a full-time basis, thereby increasing the amount of excess paper. The demand for parent rolls can fluctuate due to changes in converting demand, primarily in the
away-from-home market and due to new paper machine start-ups. A significant reduction in demand or increase in paper making capacity can result in an
over-supply situation if parent roll producers do not adjust capacity, which could negatively affect the market price for parent rolls. A significant reduction in

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parent
roll selling prices could reduce our revenues and decrease our profits and could cause us to shut down some of our excess paper making capacity.

Excess supply in the markets may reduce the prices we are able to charge for our products.

New paper machines or new converting equipment may be built or idle machines may be activated, which would add more capacity to our
value tissue market. Increased production capacity could cause an oversupply resulting in lower market prices for our products and increased competition, either of which could have a material adverse
effect on our business, financial condition and operating results.

If we are unable to continue to implement our business strategies, our financial conditions and operating results could be materially affected.

Our future operating results will depend, in part, on the extent to which we can successfully implement our business strategies in a
cost effective manner. However, our strategies are subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. If we are unable to
successfully implement our business strategies, our business, financial condition and operating results could be materially or adversely affected.

We may not be able to sell the capacity generated from our new converting line.

The addition of the new converting line will substantially increase our converted product production capacity and we may not be able to
sell enough of our products to fully utilize such capacity. We currently have excess parent roll production capacity and our strategy includes converting and selling more of our parent roll tonnage as
converted product. Converted products sell at a higher price per ton than parent rolls and typically carry a higher margin on a tonnage basis. If we are unable to increase our sales of converted
product we will not be able to utilize the increased capacity from our new converting line, resulting in lost opportunity for increased margins and the need to temporarily or permanently curtail the
production of one or more of our existing converting lines.

We may experience problems with our new converting line which could cause delayed or cancelled customer orders.

The completion of the new converting line could be delayed or the converting line may not provide the capacity, capability or
efficiency which we have projected. Our goal is to utilize the increased capacity from our new line as rapidly as possible. To that end, we have begun our sales efforts for the additional capacity
prior to completion of the line. If the converting line completion is delayed or if it has less capacity or efficiency, or the capabilities are not as expected, customer orders could be delayed or
canceled. Any such delays or cancellations could cause significant harm to the relationships we have with new or existing customers, and we may experience a material adverse effect on our business.

Risks Related To Our Common Stock

We do not pay cash dividends on our common stock.

Since January 2003, we have not paid cash dividends on our common stock. The declaration and payment of future dividends to holders of
our common stock will be at the discretion of our board of directors, and will depend upon many factors, including our financial condition, earnings, capital requirements of our businesses, legal
requirements, regulatory constraints, industry practice and other factors that the board of directors deems relevant. In addition, the terms of our credit facility prohibit us from declaring dividends
without the prior consent of our lenders.

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Our certificate of incorporation, bylaws and Delaware law contain provisions that could discourage a takeover.

Our certificate of incorporation, bylaws and Delaware law contain provisions that might enable our management to resist a takeover.
These provisions may:



Our future operating results may be below securities analysts' or investors' expectations, which could cause our stock price to decline.

Our revenue and income potential depends on expanding our production capacity and finding buyers for our additional production, and we
may be unable to generate significant revenues or grow at the rate expected by securities analysts or investors. In addition, our costs may be higher than we, securities analysts or investors expect.
If we fail to generate sufficient revenues or our costs are higher than we expect, our results of operations will suffer, which in turn could cause our stock price to decline. Our results of
operations will depend upon numerous factors, including:



Our
operating results in any particular period may not be a reliable indication of our future performance. In some future quarters, our operating results may be below the expectations of
securities analysts or investors. If this occurs, the price of our common stock will likely decline.

Our common stock has low average trading volume, and we expect that the price of our common stock could fluctuate substantially.

Since our follow-on offering in August 2009, the average daily trading volume of our common stock has been approximately
46,000 shares. The market price for our common stock is affected by a number of factors, including:



The
stock prices of many companies in the paper products industry have experienced wide fluctuations that have often been unrelated to the operating performance of these companies.
Because of the low trading volume, our stock price is subject to greater volatility. Following periods of volatility in the market price of a company's securities, stockholders have often instituted
class action securities litigation against those companies. Class action securities litigation, if instituted against us, could result in substantial costs and a diversion of our management resources,
which could significantly harm our business.

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Table of Contents

Our directors have limited personal liability and rights of indemnification from us for their actions as directors.

Our certificate of incorporation limits the liability of directors to the maximum extent permitted by Delaware law. Delaware law
provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except liability for:



This
limitation of liability does not apply to liabilities arising under the federal securities laws and does not affect the availability of equitable remedies such as injunctive relief
or rescission.

Our
certificate of incorporation and bylaws provide that we will indemnify our directors and executive officers and other officers and employees and agents to the fullest extent
permitted by law.

We
entered into separate indemnification agreements with each of our directors and officers which are broader than the specific indemnification provision under Delaware law. Under these
agreements, we are required to indemnify them against all expenses, judgments, fines, settlements and other amounts actually and reasonably incurred, in connection with any actual, or any threatened,
proceeding if any of them may be made a party because he or she is or was one of our directors or officers.

If
any litigation or proceeding were pursued against any of our directors, officers, employees or agents where indemnification is required or permitted, we could incur significant legal
expenses and be responsible for any resulting settlement or judgment.

Item 1B.UNRESOLVED STAFF COMMENTS

None.

Item 2.PROPERTIES

We own a 36-acre property in Pryor, Oklahoma and conduct all of our business from that location. Parent roll production is
housed in two facilities. The older facility comprises approximately 135,000 square feet and houses three paper machines and related processing equipment. The newer facility housing the new paper
machine comprises approximately 27,000 square feet. Adjacent to our paper mill, we have a converting facility which has ten lines of converting equipment and comprises approximately 300,000 square
feet. We are adding an eleventh converting line that we expect to be operational at the end of the second quarter of 2010. We began renting space totaling approximately 200,000 square feet at a
third-party warehouse beginning in the first quarter of 2008 to increase our shipping capacity and provide better customer service to handle our increasing converting product shipments. We are in the
process of constructing a new 245,000 square foot warehouse adjoining the converting facility. Once completed, we do not anticipate continuing to utilize the third party warehouse space.

Facility

Annual
Capacity

Sq. Ft.Paper makingthree machines


21,000 tons


135,000Paper makingnew machine


33,000 tons


27,000Converting


7,700,000 cases


300,000


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We
believe our facilities, including the rented warehouse space, are well maintained and adequate to serve our present and near term operating requirements.

Item 3.LEGAL PROCEEDINGS

From time to time, we are involved in litigation relating to claims arising out of our operations in the normal course of business. As
of the date of this report, we were not engaged in any legal proceedings which are expected, individually or in the aggregate, to have a material adverse effect on us.

Item 4.RESERVED

PART II

Item 5.MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Since July 15, 2005, our common stock has been traded, on the American Stock Exchange, which was renamed the NYSE Amex, under
the symbol "TIS". The following table sets forth the high and low closing prices of our common stock for the periods indicated and reported by the NYSE Amex.

HIGH

LOWYear Ended December 31, 2007:First Quarter

$
8.65

$
6.67Second Quarter

$
7.08

$
5.01Third Quarter

$
8.78

$
5.25Fourth Quarter

$
9.85

$
7.25Year Ended December 31, 2008:First Quarter

$
8.99

$
6.75Second Quarter

$
8.67

$
6.74Third Quarter

$
8.05

$
5.95Fourth Quarter

$
8.80

$
6.40Year Ended December 31, 2009:First Quarter

$
13.50

$
8.71Second Quarter

$
20.80

$
13.36Third Quarter

$
22.85

$
18.75Fourth Quarter

$
20.26

$
16.68


As
of March 5, 2010, there were approximately 3,433 beneficial owners of our common stock. On March 5, 2010, the last reported sale price of our common stock on the NYSE
Amex was $16.35.

Performance Graph

The following graph compares the cumulative total stockholder return on our common stock since the first day of trading following our
initial public offering on July 14, 2005, with the cumulative total return of the Standard & Poor's Small Cap Price Index, the Standard & Poor's Composite 600 Paper Products Index
and our selected peer group companies comprised of Clearwater Paper Products (formerly Potlatch), Wausau Paper, and Cascades. These comparisons assume the investment of $100 on July 15, 2005,
and the reinvestment of dividends. In prior years, we used the Standard and Poor's 1500 Paper and Paper Products Index. That index is no longer available and we have replaced it with the Standard and
Poor's Composite 600 Paper Products Index.

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These
indices are included only for comparative purposes as required by the SEC and do not necessarily reflect management's opinion that such indices are an appropriate measure of the
relative
performance of the common stock. They are not intended to forecast possible future performance of the common stock.

GRAPHIC

July 15,
2005

December 31,
2005

December 31,
2006

December 31,
2007

December 31,
2008

December 31,
2009Orchids Paper Products Company

$
100.00

$
120.59

$
150.53

$
160.59

$
154.41

$
353.29Peer Group

$
100.00

$
100.18

$
126.96

$
120.29

$
96.53

$
172.39S & P Small Cap

$
100.00

$
101.76

$
116.09

$
114.67

$
77.99

$
121.59S & P Composite 600 Paper Products

$
100.00

$
89.16

$
108.17

$
87.98

$
52.51

$
96.53


Common Stock Dilution

As of December 31, 2009, we had 7,393,874 shares of common stock outstanding. In February 2009, all of the remaining warrants
outstanding in connection with our 12% subordinated debentures which were redeemed in December 2007, were exercised, resulting in the issuance of an additional 117,544 shares of common stock. We have
outstanding options to purchase shares of our common stock, which once fully vested, represent approximately 8% of the outstanding shares. As of December 31, 2009, we had options outstanding to
purchase 576,000 shares of our common stock at an exercise price ranging from $5.18 to $17.60. The options expire on various dates from 2015 to 2019.

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Table of Contents

In
addition, we have warrants outstanding to purchase 150,150 shares of our common stock representing approximately 2% of our outstanding shares. These warrants were issued in connection
with our initial public offering to the underwriters of the offering, who received 225,000 shares at an exercise price of $6.40. These warrants expire on July 14, 2010.

Dividends

Since January 2003, we have not paid cash dividends on our common stock. The declaration and payment of future dividends to holders of
our common stock will be at the discretion of our board of directors, and will depend upon many factors, including our financial condition, earnings, capital requirements of our businesses, legal
requirements, regulatory constraints, industry practice and other factors that the board of directors deems relevant. In addition, the terms of our credit facility prohibit us from declaring dividends
without the prior consent of our lenders.

Recent Sales of Unregistered Securities

None.

Repurchase of Equity Securities

We do not have any programs to repurchase shares of our common stock and no such repurchases were made during the year ended
December 31, 2009.

Item 6.SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" following this section and our financial statements and related notes included in Item 8 of this Form 10-K. The following tables set forth selected
financial data as of and for the years ended December 31, 2009, 2008, 2007, 2006, and 2005. The selected financial data as of and for the years ended December 31, 2009, 2008, 2007, 2006,
and 2005 were derived from our audited financial statements. Our audited financial statements as of December 31, 2009 and 2008, and for each of the three years in the period ended
December 31,

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Table of Contents

2009,
are included below under Item 8 of this Form 10-K. The historical results are not necessarily indicative of the operating results to be expected in any future period.

Year Ended
December 31,
2009

Year Ended
December 31,
2008

Year Ended
December 31,
2007

Year Ended
December 31,
2006

Year Ended
December 31,
2005(in thousands, except Tons and per Ton data)Net Sales

$
95,963

$
90,202

$
74,648

$
60,190

$
57,700Cost of Sales


67,936


75,196


63,717


53,988
(1)

50,385
(1)Gross Profit


28,027


15,006


10,931


6,202
(1)

7,315
(1)Selling, General and Administrative Expenses


7,343


6,259


5,234


4,153
(1)

4,013
(1)Operating Income


20,684


8,747


5,697


2,049


3,302Interest Expense


692


1,361


2,828


1,980


1,213Other Income


(24
)

(10
)

(36
)

(99
)

(102
)Income Before Income Taxes


20,016


7,396


2,905


168


2,191Provision (Benefit) for Income Taxes


6,464


2,205


307


(564
)

799Net Income

$
13,552

$
5,191

$
2,598

$
732

$
1,392Operating DataTons Shipped


52,355


54,207


50,706


39,823


38,204Net Selling Price per Ton

$
1,833

$
1,664

$
1,472

$
1,511

$
1,510Total Paper UsageTons


41,618


40,581


40,429


38,632


38,204Total Paper Cost per Ton

$
689

$
795

$
753

$
788

$
822Total Paper Cost

$
36,497

$
44,184

$
38,181

$
31,381

$
31,420Cash Flow DataCash Flow Provided by (Used in):Operating Activities

$
20,872

$
8,508

$
8,382

$
2,607

$
2,644Investing Activities

$
(34,220
)
$
(6,926
)
$
(318
)
$
(18,133
)
$
(19,238
)Financing Activities

$
14,569

$
(1,574
)
$
(8,064
)
$
15,151

$
16,487


(1)Cost
of sales, Gross profit and SG&A have been restated to conform with the 2007 reclassification of certain costs from SG&A to Cost of sales.


As of December 31,2009

2008

2007

2006

2005Working Capital

$
24,195

$
3,453

$
1,714

$
5,025

$
4,514Net Property, Plant and Equipment

$
72,691

$
60,659

$
56,856

$
58,039

$
42,194Total Assets

$
107,899

$
74,482

$
68,303

$
71,028

$
53,710Long-Term Debt, net of current portion

$
19,533

$
21,067

$
23,264

$
31,575

$
17,002Total Stockholders' Equity

$
63,120

$
33,562

$
28,042

$
24,704

$
23,712


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Table of Contents

Item 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations in conjunction
with the audited financial statements and the notes to those statements included elsewhere in this Form 10-K. This discussion contains forward-looking statements that involve risks
and uncertainties. You should specifically consider the various risk factors identified in this filing that could cause actual results to differ materially from those anticipated in these
forward-looking statements.

Executive Overview

What were our key 2009 financial results?



What did we focus on in 2009?

In 2009, we focused on optimizing the performance of our converting assets and utilizing additional production from our converting
assets to pursue profitable sales growth. During 2009, our converting operations team built upon the efficiency improvements achieved in the latter half of 2008, resulting in increased production of
converted products to 7.2 million cases in the year ended December 31, 2009, compared to 6.3 million produced in the same period in 2008, an increase of 900,000 cases or 13%. The
converting operations team continued to identify and resolve the root causes of production inefficiencies. Additionally, we hired a new converting plant manager in mid 2009 with experience in
converting operations with a major tissue producer and who has first-hand experience installing and starting up state-of-the art converting equipment.

We
also improved our converting operations through several capital projects. A converting automation project was completed in March 2009. The project included the installation of case
packers, conveyors
and robotics to eliminate inefficient manual processes. We also completed a project to improve the flexibility of our towel lines by adding new wrappers to two lines and upgrading several key
components. As a result of the reduced labor requirements and increased overall production, our per unit direct labor costs were reduced by approximately 20% in 2009 compared to 2008.

We
were able to utilize our additional converting production to increase our converted product net sales by $11.7 million in 2009 or 16%, to $86.6 million compared to
$74.9 million of net sales in 2008. Total cases shipped in 2009 increased to 6.8 million cases or 10% compared to the prior year, while our net selling price per ton increased 11% in
2009 compared to 2008.

In
order to accelerate the timing of a $27 million expansion project, we completed a follow-on offering of 862,500 shares of our common stock in 2009. We intend to use
the proceeds of this follow-on offering to finance the purchase and installation of our new converting line and to partially finance the construction of our new warehouse.

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Due
to our strong financial results in 2009 and the success of the follow-on offering, we were able to accelerate the timetable of our expansion plan, which includes the
purchase and the installation of a new converting line and the construction of a new warehouse. Orders have been placed for the new equipment, which is expected to be ready for start up by the end of
the second quarter of 2010 and to be at full operating rate by the end of the third quarter of 2010. Construction of our new warehouse began in the fourth quarter of 2009 and the first half of the
facility is expected to be ready for occupancy by May 2010 with the remainder available by July 2010. The total project is expected to cost approximately $27.1 million.

What challenges and opportunities did our business face in 2009?

Waste paper prices provided first an opportunity then a challenge in 2009. Following a strong run-up in prices beginning in
2007 and continuing through the beginning of the fourth quarter of 2008, waste paper prices dropped significantly during the first half of 2009. Following a bottoming out in May 2009, waste paper
prices have risen each month since July 2009.

The
economic crisis that began in 2008 and continued into 2009 presented challenges in parent roll sales due to a softening of the parent roll market. Lower travel and lower employment
reduced the demand for tissue products in the away-from-home market, which in turn lowered demand and net selling prices for parent rolls.

What will we focus on in 2010?

In 2010, we will focus on completion of the construction of our new warehouse and the installation and successful start-up
of our new converting line. An on-time completion and successful start up of this project is important to meet customer commitments. Following the completion of the warehouse project, we
will consolidate all converted product storage at our Pryor facility, thereby eliminating the third-party costs of warehousing and product transfer.

Upon
completion, the new converting line will increase our total converting capacity by approximately 4 million cases per year, an increase of 50%. Our sales force is actively
pursuing profitable sales growth of the output from the new converting line as well as increased output from our existing equipment. We intend to focus this new capacity on strategic growth
opportunities with existing customers and opportunities with new customers. The enhanced product quality and product configurations that will be available on the new converting line provide the
opportunity to position these products into higher tier product offerings, which should carry higher operating margins. These higher tier products open up new markets to us that we have previously
been unable to penetrate.

We
will continue to focus on optimizing our existing operating assets in both converting and paper mill operations. Emphasis will continue to be placed on identifying root causes of
issues that impede productivity and to identify ways to improve our overall production costs. Several capital equipment projects to improve operations are planned for 2010, including a project to
improve the process to remove contaminants from our waste paper supply and a project to increase the production capacity of our new paper machine.

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Table of Contents

Business Overview

We are an integrated manufacturer of bulk tissue paper, known as parent rolls which we convert into a broad line of private label
tissue products, including paper towels, bathroom tissue and paper napkins, for the consumer, or "at-home," market. We have tailored our operations to serve our core customer base of
dollar stores or value retailers and other discount retailers. We focus on the dollar stores and discount retail market because of their consistent order patterns and low number of stock keeping units
or SKUs in this market. All of our converted product revenue is derived pursuant to truck load purchase orders from our customers. Parent roll revenue is derived from purchase orders that generally
cover a one-month time period. We do not have supply contracts with any of our customers. Revenue is recognized when title passes to the customer. Because our product is a daily consumable
item, the order stream from our customer base is fairly consistent with no significant seasonal fluctuations. Changes in the national economy, in general, do not materially affect the market for our
converted products.

Our
profitability depends on several key factors, including:



The
private label segment of the tissue industry is highly competitive, and discount retail customers are extremely price sensitive. As a result, it is difficult to effect price
increases. We expect these competitive conditions to continue.

With
our steady sales growth over the last eleven years, we have strategically expanded capacity to meet demand. Our strategy is to sell all of the parent rolls we manufacture as
converted products which generally carry higher margins than parent rolls. We are currently approaching full capacity utilization of our converting operations, of approximately 8.0 million
annual cases. We plan to increase our converting capacity by approximately 4.0 million cases annually with the installation of a new converting line. This new capacity will allow us to sell all
of our parent rolls as converted products and will result in a need to purchase parent rolls on the open market when the line reaches fully operating capacity. This additional capacity will enable us
to both increase sales of existing products and to provide the flexibility to manufacture higher tier products for sales to our core customer base and into new retail channels.

Comparative Years Ended December 31, 2009, 2008 and 2007

Net Sales

Years Ended December 31,2009

2008

2007(in thousands, except price
per ton and tons)Converted product net sales

$
86,645

$
74,927

$
65,383Parent roll net sales


9,318


15,275


9,265Total net sales

$
95,963

$
90,202

$
74,648Total tons shipped


52,355


54,207


50,706Average price per ton

$
1,833

$
1,664

$
1,472


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Net
sales for the year ended December 31, 2009 increased $5.8 million, or 6%, to $96.0 million compared to $90.2 million for the year ended
December 31, 2008. Sales figures include gross selling price, including freight, less discounts and sales promotions. Net sales of converted product increased $11.7 million in the year
ended December 31, 2009, or 16%, to $86.6 million compared to $74.9 million in 2008. Net sales of parent rolls decreased $6.0 million in the 2009 year, or 39%, to
$9.3 million when compared to the same period in 2008. The increase in converted product sales was due to an increase in the net selling price per ton of 11% over the prior year and a volume
increase of 6%. The increase in net selling price per ton of converted product was the result of price increases and product content changes that occurred during 2008 and early 2009. The increased
tonnage shipped was due to continued efficiency improvements in our converting lines which provided more products to sell in the marketplace. The decrease in parent roll sales was due to a 23%
decrease in tonnage shipped and a 21% decrease in net sales price per ton. Increased parent roll requirements in our converting operation as well as a soft parent roll market, primarily due to a soft
away-from-home market, where we sell a majority of our parent rolls, were reasons for the lower tonnage shipments. Net selling prices of parent rolls were affected by both the
soft parent roll market and lower waste paper costs.

Net
sales for the year ended December 31, 2008 increased $15.6 million, or 21%, to $90.2 million, compared to $74.6 million for the year ended
December 31, 2007. Net sales of converted product in 2008 increased $9.6 million, or 15%, to $74.9 million compared to $65.4 million in the same period of 2007, while net
sales of parent rolls increased $6.0 million or 65% in 2008 to $15.3 million, compared to $9.3 million in 2007. In the year ended December 31, 2008, the net selling price
per ton of converted product increased 17% compared to the same period of 2007 while tonnage shipped decreased slightly. The decrease in tonnage shipped is due to product content changes made during
2008. Net sales of parent rolls in the year ended December 31, 2008 increased due to a 43% increase in tonnage shipped and a 15% increase in selling prices compared to the 2007 period. The
increase in parent roll tonnage shipped was primarily the result of our increased parent roll production due to the full year effect of running all of our older paper machines on a full time basis.

Cost of Sales

Years Ended December 31,2009

2008

2007(in thousands, except gross
profit margin % and paper cost
per ton consumed)Cost of paper

$
36,497

$
44,184

$
38,181Non-paper materials, labor, supplies, etc.


27,756


27,890


22,535Sub-total

$
64,253

$
72,074

$
60,716Depreciation


3,683


3,122


3,001Cost of sales

$
67,936

$
75,196

$
63,717Gross Profit

$
28,027

$
15,006

$
10,931Gross Profit Margin %


29.2
%

16.6
%

14.6
%Total paper cost per ton consumed

$
689

$
795

$
753


Major
components of cost of sales are the cost of internally produced paper, parent rolls purchased from third parties, raw materials, direct labor and benefits, freight on products
shipped to customers, insurance, repairs and maintenance, energy, utilities and depreciation.

Cost
of sales for the year ended December 31, 2009 decreased $7.3 million, or 9.7%, to $67.9 million compared to $75.2 million in the year ended
December 31, 2008. Our cost of sales were positively affected by a decrease in waste paper and energy costs, as well as lower direct labor costs in converting and lower packaging costs. These
improvements were partially offset by higher converting

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overhead
costs and higher depreciation expense. Cost of sales as a percentage of net sales improved to 70.8% in the 2009 period compared to 83.4% in the 2008 period. Cost of sales as a percent of net
sales was favorably affected by higher net sales prices, lower paper production costs, lower converting direct labor costs and lower packaging costs.

Paper
production costs were $689 per ton in the year ended December 31, 2009, a decrease of $106 per ton compared to $795 per ton in the 2008 period. Paper production costs
decreased primarily due to lower waste paper prices and, to a lesser extent, lower natural gas costs. Waste paper prices decreased significantly in the first half of 2009 following a strong
run-up in prices beginning during 2007 and peaking in early fourth quarter of 2008. Beginning in July 2009, our cost of waste paper has increased on a monthly basis through March 2010. Our
cost of waste paper in the year ended December 31, 2009 decreased approximately 33% compared to our costs in 2008. As a result, our cost of waste paper decreased $6.9 million in 2009
compared to 2008.

Direct
labor costs in our converting operation in the year ended December 31, 2009 were lower than the same period in 2008 by 21% on a per unit basis due to both the reduced
headcount resulting from our automation project completed in the first quarter of 2009 and higher productivity. The lower labor costs contributed approximately $1.8 million to the increase in
gross profit. This cost reduction was partially offset by higher converting overhead costs. Converting overhead costs in the year ended December 31, 2009 increased by approximately
$1.3 million compared to the same period in 2008. The increase was primarily due to higher third-party warehousing costs and higher salaried labor costs being partially offset by the absence of
the productivity consultant expenses incurred in 2008 and lower
maintenance and repair costs. The costs of third-party warehousing increased by $880,000 due to a full-year of utilization in 2009 compared to a partial year in 2008 and due to higher
inventory levels. We began utilizing a third-party warehouse in the first quarter of 2008 to increase our shipping capacity and provide better customer service to handle our increasing converting
product shipments. Labor costs increased approximately $550,000 primarily due to additions to the operating team. In 2008, a productivity consultant was hired to assist our converting operations team
in improving production efficiencies at a cost of $345,000. Those costs were not repeated in 2009. Maintenance and repair costs were lower in 2009, compared to 2008, by approximately $150,000.
Depreciation expense increased primarily due to the converting automation project and the waste water treatment project assets being placed in service during 2009.

Cost
of sales for the year ended December 31, 2008 increased $11.5 million or 18%, to $75.2 million compared to $63.7 million in the year ended
December 31, 2007. Our cost of sales were negatively affected by an increase in waste paper and energy costs as well as higher converting costs. Cost of sales as a percentage of net sales
improved to 83.4% in 2008 compared to 85.4% in 2007. Cost of sales as a percent of net sales was favorably affected by higher net sales prices. Partially offsetting the net sales price improvement was
higher paper production costs and higher converting costs.

Paper
production costs were $795 per ton in the year ended December 31, 2008, an increase of $42 per ton compared to $753 per ton in the 2007 period. Paper production costs
increased primarily due to higher waste paper prices and the higher cost of natural gas. The prices we paid for waste paper increased approximately 20% in the year ended December 31, 2008,
compared to the same period in 2007. As a result, our cost of waste paper consumed increased approximately $3.0 million. Waste paper prices began to decrease in the latter part of the fourth
quarter of 2008 and had reduced by 20% in December 2008, compared to the prices paid in October 2008, which was the highest price point in 2008. Natural gas prices increased approximately 17% in the
year ended December 31, 2008 compared to the same period in 2007, resulting in increased costs of approximately $740,000.

Our
converting production costs increased primarily due to higher maintenance and repair costs, which includes parts and service technicians, the cost of a productivity consultant and
outside warehouse expense. Maintenance and repair costs increased approximately $1.0 million in the year

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ended
December 31, 2008 compared to the same period in 2007. Late in the second quarter of 2008 through the end of the third quarter, we engaged a productivity consultant at a cost of $345,000,
to assist our management team in their ongoing efforts to increase converting productivity. The project included the design and implementation of a management operating system and assistance for our
management team with the implementation of a new work schedule and work practices. The project ended late in the third quarter. As a result of these efforts, converting productivity from the beginning
of September through February 2009 increased 15% compared with the run rate experienced in the first eight months of 2008. We began leasing a third-party warehouse late in the first quarter of 2008,
at a cost of approximately $600,000 in 2008.Waste paper and natural gas costs began to abate somewhat during the fourth quarter of 2008. Waste paper prices decreased slightly in November and to a
greater extent in December. By the end of December 2008, waste paper prices had decreased approximately 20% from their highest point in October 2008.

Gross Profit

Gross profit increased by $13.0 million, or 87%, to $28.0 million in the year ended December 31, 2009, compared to
$15.0 million in the prior year. As a percentage of net sales, gross profit increased to 29.2% in 2009 compared to 16.6% in 2008. The gross profit increase was associated with lower paper
production costs mainly due to lower waste paper prices and, to a lesser extent, lower natural gas prices, lower converting direct labor, and lower packaging costs. Also, contributing to the increase
in gross profit was an increase in converted product tonnage shipped as well as increased net selling prices. As a result of our increased converting production, more tonnage was consumed in our
converting operation rather than being sold as parent rolls. This change in product mix positively affects our gross profit because sales of converted products typically carry a higher margin than
sales of parent rolls. Gross profit increased by $4.1 million, or 37%, to $15.0 million in the year ended December 31, 2008, compared to $10.9 million in the prior year. As
a percentage of net sales, gross profit increased to 16.6% in 2008 compared to 14.6% in 2007. Gross profit as a percentage of net sales improved primarily due to the increase in net selling prices
being partially offset by higher paper and converting costs cited above.

Selling, General and Administrative Expenses

Years Ended December 31,2009

2008

2007(in thousands, except SG&A
as a % of net sales)Commission expense

$
1,332

$
1,089

$
959Other S,G&A expenses


6,011


5,170


4,275Selling, General & Adm exp

$
7,343

$
6,259

$
5,234SG&A as a % of net sales


7.7
%

6.9
%

7.0
%Operating income

$
20,684

$
8,747

$
5,697


Selling,
general and administrative (SG&A) expenses include salaries, commissions to brokers and other miscellaneous expenses. Selling, general and administrative expenses increased
$1.1 million, or 17.3%, to $7.3 million in the year ended December 31, 2009 compared to $6.3 million in the comparable 2008 period. This increase was attributable to higher
accruals under our incentive bonus plan, increased stock option expense related to the rise in market price of our stock, and higher commission expense
due to the 16% increase in converted product sales. As a percentage of net sales, selling, general and administrative expenses increased to 7.7% in 2009 compared to 6.9% in 2008.

Selling,
general and administrative expenses increased $1.1 million, or 19.6%, to $6.3 million in the year ended December 31, 2008 compared to $5.2 million in
the comparable 2007 period. This increase

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was
attributable to additions to the senior management team in late 2007 and during 2008, accruals under our incentive bonus plan, higher commission expense and increased packaging costs related to
product content changes. As a percentage of net sales, selling, general and administrative expenses were basically flat at 6.9% in 2008 compared to 7.0% in 2007.

Operating Income

As a result of the foregoing factors, operating income for the years ended December 31, 2009, 2008 and 2007 was
$20.7 million, $8.7 million, and $5.7 million, respectively.

Interest and Other Expense

Years Ended December 31,2009

2008

2007(in thousands)Interest expense

$
692

$
1,361

$
2,828Other income

$
(24
)
$
(10
)
$
(36
)Income before income taxes

$
20,016

$
7,396

$
2,905


Interest
expense includes interest paid and accrued on all debt and amortization of both deferred debt issuance costs and of the discount on our subordinated debt related to warrants
issued with the debt. See "Liquidity and Capital Resources" below. Interest expense for the year ended December 31, 2009 was $692,000, a decrease of $700,000 compared to $1.4 million in
the same period in 2008. This decrease was primarily attributable to lower LIBOR rates and lower margins over LIBOR attributable to our improved financial performance.

Interest
expense for the year ended December 31, 2008 was $1.4 million a decrease of $1.4 million compared to the same period in 2007. This decrease was attributable
to lower LIBOR interest rates, lower margins over LIBOR reflecting the terms of our amended and restated credit agreement entered into in April 2007 and improved financial performance under our debt
covenants since that time, as well as, the absence of interest of $259,000 on our subordinated debentures, which we retired in December 2007, and decreased average outstanding bank borrowings.

Other
income was $24,000 in the year ended December 31, 2009, compared to $10,000 in the same period of 2008. The increase is due to interest income on the short term investments
purchased primarily with the proceeds of the follow-on stock offering in 2009.

Other
income was $10,000 in the year ended December 31, 2008, compared to $36,000 in the same period of 2007. The decrease reflects the absence of interest income in the 2008
period as a result of eliminating the restricted certificate of deposit after the bank refinancing in April 2007.

Income Before Income Taxes

As a result of the foregoing factors, income before income taxes increased $12.6 million to $20.0 million for the year
ended December 31, 2009 compared to $7.4 million for the year ended December 31, 2008. For the year ended December 31, 2008, income before income taxes increased
$4.5 million to $7.4 million compared to $2.9 million for the year ended December 31, 2007.

Income Tax Provision

For the year ended December 31, 2009, income tax expense amounted to $6.5 million resulting in an effective tax rate of
32.3%. In 2009, we consumed all of our Federal Net Operating Loss ("NOL") carryforward as well as our Federal Indian Employment Credit ("IEC") to reduce the 2009 tax liability. Our
Oklahoma tax obligation was satisfied by our Oklahoma Investment Tax Credits ("OITC")

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associated
with our 2006 investment in our new paper machine as well as other capital equipment investments. Our NOL carryforward for the state of Oklahoma is $2.5 million.

For
the year ended December 31, 2008, income tax expense amounted to $2.2 million resulting in an effective tax rate of 29.8%. Contributing to the reduced tax burden for
2008 was the OITC associated with our 2006 investment in our new paper machine. The IEC, which was extended in October 2008 through December 31, 2009, also contributed to the reduced tax
burden.

LIQUIDITY AND CAPITAL RESOURCES

Overview

Liquidity refers to the liquid financial assets available to fund our business operations and pay for near-term
obligations. These liquid financial assets consist of cash and short term investments. Our cash requirements have historically been satisfied through a combination of cash flows from operations and
debt financings.

On
July 20, 2005, we completed our initial public offering of 2,156,250 shares of common stock, which included the exercise in full of the underwriter's option to purchase 281,250
shares of common stock to cover overallotments. Net proceeds from the offering were $15.0 million. Following the offering, 4,156,250 shares of common stock, par value $.001 per share, were
outstanding. In July 2006, we effected a 3-for-2 stock split increasing the shares of common stock outstanding to 6,234,346 shares outstanding.

We
completed the public offering primarily to help implement our strategy to eliminate our need at that time to purchase paper from third-party suppliers through the purchase and
installation of a new paper machine. The funding from the public offering, additional bank financing and cash flow from operations funded the $34.6 million project.

As
of December 31, 2009, we had cash on hand of $1.2 million and $18.5 million in short term investments, compared to $11,000 and $0 as of December 31, 2008,
respectively. In the third quarter of 2009, we completed a follow-on stock offering that provided $14.8 million in net proceeds. The offering consisted of an initial sale of 750,000
shares of common stock on August 26, 2009 at an offering price of $18.50 per share. We received net proceeds of approximately $12.8 million from this portion of the offering, after
deducting the underwriting discount and offering expenses. On September 2, 2009, the underwriter exercised their over-allotment option and purchased an additional 112,500 shares of
common stock at a price of $18.50 per share. We received $2.0 million in net proceeds from this exercised option. Proceeds from the offering are intended primarily to fund a capital project
intended to expand our converting capacity. This project, which is estimated to cost $27.1 million, is comprised of the construction of a new $6.8 million warehouse and the purchase and
installation of a new $20.3 million converting line. Funding for the project will be provided by proceeds from the follow-on offering, cash from operations and a construction loan
on the warehouse portion of the project which will fund 80% of the construction costs.

The
proceeds from the follow-on offering of $14.8 million and cash generated from operations during the year ended December 31, 2009 of $20.9 million
allowed us to accelerate the implementation of our converting expansion project. During 2009, we made payments of approximately $7.9 million towards equipment purchases and construction costs
on our converting expansion project. No amounts were borrowed on the warehouse construction loan as of December 31, 2009. In 2009, we also generated sufficient cash to pay off the entire amount
outstanding on our revolving credit line of $1.5 million.

We
estimate the state of Oklahoma NOL carryforward at $2.5 million which is available to offset future state taxable income. In addition, we plan to claim $2.6 million in
OITC carryforward as of December 31, 2009, which is available to offset future Oklahoma income tax liability. The OITC

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carryforward
is expected to grow over the next three years as it is earned ratably over five years at two percent per year on qualified investments. We expect to claim $720,000 in OITC in each of the
next three years related to the new paper machine. We will generate additional OITC from our investment in capital equipment that is part of our $27 million expansion project, consisting of a
new converting line and new warehouse. The combination of accelerated depreciation deductions and the OITC will likely eliminate all Oklahoma income tax liability for the next few years.

Cash
increased slightly to $11,000 at December 31, 2008 compared to $3,000 at December 31, 2007. We were able to generate sufficient cash during 2008 to fund
$6.9 million in capital expenditures, including a $4.7 million converting automation project. In 2007, we generated sufficient cash during the first three quarters of 2007 to pay off all
amounts outstanding under our revolving credit agreement. We used a cash build-up in the fourth quarter and borrowings under our revolving credit line to retire all of our outstanding 12%
subordinated debentures in December 2007 totaling $2.15 million.

In
2010, our total capital expenditures are expected to be approximately $22.6 million. Capital expenditures related to the converting expansion project will be approximately
$19.2 million with the remainder going towards normal, recurring capital expenditures projects. We expect normal recurring capital expenditures of approximately $3.5 million per year.

The
following table summarizes key cash flow information for the years ended December 31, 2009, 2008 and 2007:

Years Ended December 31,2009

2008

2007(in thousands)Cash flow provided by (used in):Operating activities

$
20,872

$
8,508

$
8,382Investing activities

$
(34,220
)
$
(6,926
)
$
(318
)Financing activities

$
14,569

$
(1,574
)
$
(8,064
)


Cash
flows provided by operating activities increased $12.4 million to $20.9 million in 2009. An increase in cash earnings of $8.4 million and an increase in
deferred income tax expense were the main drivers.

Cash
flows used in investing activities increased $27.3 million in 2009, primarily due to $18.5 million in net purchases of investment securities and $15.7 million
invested in capital equipment projects. Investments in short-term securities was primarily the result of our follow-on offering and, to a lesser extent, cash generated from
operations. Capital project expenditures in 2009 were primarily comprised of $5.6 million in payments for the initial order of our new converting line, $4.2 million on the previously
announced waste water treatments project, which was completed in 2009, and $2.3 million in progress payments on the construction of our new warehouse.

Cash
flows provided by financing activities was $14.6 million in 2009, primarily attributable to the $14.8 million in proceeds from our follow-on offering and
to a lesser extent $3.8 million for borrowings under our construction loan to complete the waste water treatment project. These cash inflows were partially offset by $3.1 million in
normally scheduled principal payments on bank term loans as well as $1.5 million payoff of the revolving credit line.

Cash
flows from operating activities increased $126,000, to $8.5 million in 2008. An increase in cash earnings of approximately $4.2 million was mostly offset by working
capital changes in 2008, particularly, increased accounts receivable and inventory levels of approximately $2.5 million and the absence of the realization in 2007 of $1.2 million in
carryback claims for federal taxes paid in 2005 and 2004. Accounts receivable increased due to increased sales levels. Inventory increased due to higher levels of parent roll inventory and overall
increased sales levels.

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Cash flows used in investing activities increased $6.6 million in 2008, primarily due to increased expenditures on capital projects of $5.1 million.
Of the total expenditures in 2008, $4.3 million was related to the previously announced $4.7 million project to automate certain operations in our converting plant. This project was
completed in February 2009 and the remaining $400,000 of expenditures were incurred in the first quarter of 2009.

Cash
flows used in financing was $1.6 million in 2008, primarily attributable to $2.3 million in normally scheduled principal payments on our bank term loans which was
partially offset by an approximate $700,000 increase in our revolving credit facility.

Cash
flows from operating activities in the year ended December 31, 2007, increased by $5.8 million, to $8.4 million, more than three times the amount reported for
2006. Stronger earnings before non-cash charges for depreciation, deferred taxes and stock option expense was the primary reason for the increase. The realization of $1.2 million in
carryback claims for federal taxes paid in 2005 and 2004 also contributed to the increased cash flow. An increase in the level of business activity resulted in higher accounts payable and accrued
liabilities, partially offset by increases in inventory and accounts receivable.

Cash
flow used in investing activities in the year ended December 31, 2007 of $318,000 was for capital expenditures, mainly of maintenance projects. Offsetting these outflows was
the release of the
$1.5 million restricted certificate of deposit in connection with the April 2007 refinancing of our bank debt.

Cash
flows used in financing activities in the year ended December 31, 2007 was $8.1 million, primarily attributable to a $4.3 million reduction in amounts
outstanding under our revolving credit facility, $2.5 million in normally scheduled principal payments on our bank term loans and the retirement of all of our 12% subordinated debentures at a
cost of $2.15 million. Our April 2007 refinancing of our debt facility resulted in a net increase in funds of $634,000.

On
April 9, 2007, we re-financed our existing credit facility with the existing bank group. The facility was amended from time to time. Following the amendments, the
credit facility consists of the following at December 31, 2009:



All
loans are assessed at the same LIBOR margins, and include a 3.5% all-in interest rate floor. The interest rate is the higher of: (i) the LIBOR rate for the
applicable interest period plus the margin, or (ii) 3.5% per annum. The margin is set quarterly and based on the ratio of funded debt to EBITDA less income tax paid. The margins range from 200
to 450 basis points over LIBOR or daily floating LIBOR.

The
credit agreement contains covenants that, among other things, require us to maintain a specific funded-debt-to EBITDA ratio, debt service coverage ratio and an annual limit on
unfunded

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capital
expenditures. The amount available under the revolving credit line may be reduced in the event that our borrowing base, which is based upon our qualified receivables and qualified inventory,
is less than $8.0 million. As of December 31, 2009, our qualified receivables were $5.2 million and our qualified inventory was $3.3 million which yielded a total borrowing
base of $8.5 million and consequently the full $8.0 million revolving credit facility was available to us. Obligations under the credit agreement are secured by substantially all of our
assets. The credit agreement contains representations and warranties, and affirmative and negative covenants customary for financings of this type, including, but not limited to, a covenant
prohibiting us from declaring or paying dividends. The financial covenants in the agreement require us to maintain specific ratios of funded debt to EBITDA and debt service coverage which are tested
as of the end of each quarter and places a limit on the amount of annual non-financed capital expenditures. The maximum allowable funded debt to EBITDA ratio is
3.25-to-1.0 and the minimum allowable debt service coverage ratio is 1.25-to-1.0. The annual unfunded capital expenditures limit for 2010 will be
$11.0 million to allow for the completion of the converting expansion project and for years after 2010, the annual limit will be $3.5 million.

The
construction loan is intended to fund 80% of our warehouse expansion. The project is in the construction phase.

If
an event of default occurs, the agent may declare the banks' obligation to make loans terminated and all outstanding indebtedness, and all other amounts payable under the credit
agreement, due and payable.

Contractual Obligations

As of December 31, 2009, our contractual cash obligations were our long-term debt and associated interest, natural
gas contract, and expenditures related to the construction of our new warehouse and new converting line. We do not have any leasing
commitments or debt guarantees outstanding as of December 31, 2009. We do not have any defined benefit pension plans or any obligation to fund any postretirement benefit obligations for our
work force.

Maturities
of these contractual obligations consist of the following:

Payments Due by PeriodYearsTotal

1

2 and 3

4 and 5

after 5(in thousands)Contractual Cash ObligationsLong-term debt(1)

$
23,275

$
3,742

$
7,887

$
2,713

$
8,933Interest payments(2)(3)

$
2,961

$
763

$
914

$
610

$
674Natural gas contract(4)

$
5,405

$
2,530

$
2,875

$


$
Committed capital projects(5)

$
19,200

$
19,200

$


$


$
Total

$
50,841

$
26,235

$
11,676

$
3,323

$
9,607


(1)Under
our revolving credit and term loan agreements, the maturity of outstanding debt could be accelerated if we do not maintain certain financial
covenants. At December 31, 2009, we were in compliance with our loan covenants.(2)These
amounts assume interest payments at the year-end borrowing amount. The amount borrowed in future years is dependent on our free cash flow
from time-to-time.(3)Interest
payments on the term loans have been calculated based on the interest rate in effect as of December 31, 2009.


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(4)In
October 2008, we entered into a contract to purchase 334,000 MMBTU per year of natural gas requirements at $7.50 per MMBTU plus a $0.07 per MMBTU
management delivery fee for the period from April 2009 through March 2011. In November 2009, we extended the contract to purchase 334,207 MMBTU at $6.50 per MMBTU plus a $0.07 per MMBTU management
delivery fee for the period from April 2011 through March 2012. The amounts represent approximately 60% of our natural gas requirements based on usage rates for 2009. If we are unable to purchase the
contracted amounts and the market price at that time is less than the contracted price, we would be obligated under the terms of our agreement to reimburse an amount equal to the volume purchased that
was less than the contracted amount multiplied by the difference between our contract price and current spot price.(5)Amounts
committed to but not yet paid on the new converting line ($14.7 million) and new warehouse ($4.5 million) as of December 31,
2009.


Critical Accounting Policies and Estimates

The preparation of our financial statements and related disclosures in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and judgments that affect our reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. Management believes
that our estimates and assumptions are reasonable under the circumstances; however, actual results may vary from these estimates and assumptions under different future circumstances. We have
identified the following critical accounting policies that affect the more significant judgments and estimates used in the preparation of our financial statements:

Accounts Receivable.Accounts receivable consist of amounts due to us from normal business activities. Our management must make
estimates of accounts
receivable that will not be collected. We perform
ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer's creditworthiness as determined by our review of their current credit information. We
continuously monitor collections and payments from our customers and maintain a provision for estimated losses based on historical experience and specific customer collection issues that we have
identified. Trade receivables are written-off when all reasonable collection efforts have been exhausted, including, but not limited to, external third party collection efforts and
litigation. While such credit losses have historically been within management's expectations and the provisions established, there can be no assurance that we will continue to experience the same
credit loss rates as in the past. Accounts receivable balances that have been written-off, net of recoveries, in the years ended December 31, 2009, 2008, and 2007 were $38,000,
$11,000, and $0, respectively.

Inventory.Our inventory consists of converted finished goods, bulk paper rolls and raw materials and is based on standard cost,
specific
identification, or FIFO (first-in, first-out). Standard costs approximate actual costs on a first-in, first-out basis. Material, labor and factory
overhead necessary to produce the inventories are included in the standard cost. Our management regularly reviews inventory quantities on hand and records a provision for excess and obsolete inventory
based on the age of the inventory and forecasts of product demand. A significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. During the year
ended December 31, 2009, we decreased the inventory valuation reserve by $26,000. During 2008 we increased the reserve by $206,000. The decrease in reserve in 2009 was due to a lower number of
product content changes implemented in 2009 and in process as of December 31, 2009. The increase in the reserve in 2008 was due to the extensive changes in product content during the year and
its resultant effect on the usability of raw materials.

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New Accounting Pronouncements

In April 2009, the Financial Accounting Standards Board ("FASB") issued guidance that requires disclosures about fair value of
financial instruments in interim financial statements as well as in annual financial statements. These provisions were effective for interim and annual periods ending after June 15, 2009, with
early adoption permitted. We began providing the related disclosures starting with our second quarter 2009.

In
June 2009, the FASB issued authoritative guidance on the consolidation of variable interest entities, which will be effective for our first quarter of fiscal 2010. This new guidance
requires entities to perform a qualitative analysis to determine whether the enterprise's variable interest or interests give it
a controlling financial interest in a variable interest entity. The enterprise is required to assess, on an ongoing basis, whether it is a primary beneficiary or has an implicit responsibility to
ensure that a variable interest entity operates as designed. This guidance changes the previous quantitative approach for determining the primary beneficiary to a qualitative approach based on which
entity (a) has the power to direct activities of a variable interest entity that most significantly impact economic performance and (b) has the obligation to absorb losses or receive
benefits that could be significant to the variable interest entity. In addition, it requires enhanced disclosures that will provide investors with more transparent information about an enterprise's
involvement with a variable interest entity. At this time, we have no variable interest entities as defined by the standard.

In
June 2009, the FASB issued authoritative guidance which established the FASB Accounting Standards Codification ("ASC" or "Codification") as the source of authoritative GAAP recognized
by the FASB to be applied to nongovernmental entities, and rules and interpretive releases of the SEC as authoritative GAAP for SEC registrants. The Codification supersedes all the existing
non-SEC accounting and reporting standards upon its effective date and, subsequently, the FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging
Issues Task Force Abstracts. The guidance is not intended to change or alter existing GAAP. The guidance became effective for us in the fourth quarter of 2009. The guidance did not have an impact on
the Company's financial position, results of operations or cash flows. All references to previous numbering of FASB Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts have been
removed from the financial statements and accompanying footnotes.

Non-GAAP Discussion

In addition to our GAAP results, we also consider non-GAAP measures of our performance for a number of purposes.

We
use EBITDA as a supplemental measure of our performance that is not required by, or presented in accordance with GAAP. EBITDA should not be considered as an alternative to net income,
operating income or any other performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities or a measure of our liquidity.

EBITDA
represents net income before net interest expense, income tax expense, depreciation and amortization. We believe EBITDA facilitates operating performance comparisons from period
to period and company to company by eliminating potential differences caused by variations in capital structures (affecting relative interest expense), tax positions (such as the impact on periods or
companies of changes in effective tax rates or net operating losses) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense).

EBITDA
has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for any of our results as reported under GAAP. Some of these limitations
are:



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Because
of these limitations, EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business or to reduce our indebtedness. We
compensate for these limitations by relying primarily on our GAAP results and using EBITDA on a supplemental basis.

The
following table reconciles EBITDA to net income for the years ended December 31, 2009, 2008 and, 2007:

Years Ended December 31,2009

2008

2007(in thousands, except % of
net sales)Net income

$
13,552

$
5,191

$
2,598Plus: Interest expense


692


1,361


2,828Plus: Income tax expense


6,464


2,205


307Plus: Depreciation


3,684


3,122


3,001EBITDA

$
24,392

$
11,879

$
8,734% of net sales


25.4
%

13.2
%

11.7
%


EBITDA
increased $12.5 million to $24.4 million for the year ended December 31, 2009, compared to $11.9 million in the same period in 2008. EBITDA as a
percent of net sales increased from 13.2% in 2008 to 25.4% in 2009. The foregoing factors discussed in the net sales, cost of sales and selling, general and administrative expenses sections are the
reasons for the change.

EBITDA
increased $3.2 million to $11.9 million for the year ended December 31, 2008, compared to $8.7 million in the same period in 2007. EBITDA as a percent
of net sales increased from 11.7% in 2007 to 13.2% in 2008. The foregoing factors discussed in the net sales, cost of sales and selling, general and administrative expenses sections are the reasons
for the change.

We
use Net Debt as a supplemental measure of our leverage that is not required by, or presented in accordance with, GAAP. Net Debt should not be considered as an alternative to total
debt, total liabilities or any other performance measure derived in accordance with GAAP. Net Debt represents total debt reduced by cash and short term investments. We use this figure as a means to
evaluate our ability to repay our indebtedness and to measure the risk of our financial structure.

Net
Debt represents the amount that Cash and Cash Equivalents is less than total Debt of the Company. The amounts included in Net Debt calculation are derived from amounts included in
the historical Balance Sheets. We have reported Net Debt because we regularly review Net Debt as a measure of the Company's leverage. However, the Net Debt measure presented in this document may not
be comparable to similarly titled measures reported by other companies due to differences in the components of the calculation.

Net
Debt has decreased from $24.1 million on December 31, 2008, to $3.5 million on December 31, 2009 as a result of increases in our cash and short term
investments primarily due to

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cash
proceeds from our common stock offering of $14.8 million as well as $20.9 million in cash generated from operations.

The
following table presents Net Debt as of December 31, 2009 and December 31, 2008:

As ofDecember 31,
2009

December 31,
2008(in thousands)Current portion long term debt

$
3,742

$
2,998Long term debt


19,533


21,067Total debt

$
23,275

$
24,065Less cash


(1,232
)

(11
)Less short term investments


(18,509
)

Net debt

$
3,534

$
24,054


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-K, including the sections entitled "Business," "Risk Factors" and "Management's Discussion and Analysis
of Financial Condition and Results of
Operations," contains forward-looking statements. These statements relate to, among other things:



These
statements relate to future events or future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels
of activity, performance or achievement to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In
some cases, you can identify forward-looking statements by terminology such as "may," "should," "could," "expects," "plans," "intends," "anticipates," "believes," "estimates," "predicts," "potential"
or "continue" or the negative of such terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements. These statements are only predictions.

You
should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties, and other factors that are, in some cases, beyond our
control and that could materially affect actual results, levels of activity, performance or achievements. Factors that could materially affect our actual results, levels of activity, performance or
achievements include, without limitation, those detailed under the caption "Risk Factors" and the following items:



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You should read this Form 10-K completely and with the understanding that our actual results may be materially different from what we expect.
We undertake no duty to update these forward-looking statements after the date of this Form 10-K, even though our situation may change in the future. We qualify all of our
forward-looking statements by these cautionary statements.

Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Our market risks relate primarily to changes in interest rates. Our revolving line of credit and our term loans carry a variable
interest rate that is tied to market indices and, therefore, our statement of income and our cash flows will be exposed to changes in interest rates. As of December 31, 2009, we had
floating-rate borrowings of $23.3 million. The amounts outstanding under all loans bear interest at the same LIBOR margins, and include a 3.5% all-in interest rate
floor. The interest rate is the higher of: (i) the LIBOR rate for the applicable interest period plus the margin, or (ii) 3.5% per annum. The margin is set quarterly and
based on the ratio of funded debt to EBITDA less income tax paid. The margins range from 200 to 450 basis points over LIBOR or daily floating LIBOR.

We
considered the historical volatility of short-term interest rates and determined that it would be reasonably possible that an adverse change of 100 basis points could be
experienced in the near term. Based on the current borrowing, a 100 basis point increase in interest rates would result in a pre-tax $210,000 increase to our annual interest expense.

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Commodity Price Risk

We are subject to commodity price risk, the most significant of which relates to the price of waste paper. Selling prices of tissue
products are influenced by the market price of waste paper, which is determined by industry supply and demand. The effect of a waste paper price increase of $10.00 per ton would be approximately
$530,000 per year. As previously discussed under Item 1A, "Risk Factors," increases in waste paper prices could adversely affect earnings if selling prices are not adjusted or if such
adjustments trail the increase in pulp prices.

Natural Gas Price Risk

We are exposed to market risks for change in natural gas commodity pricing. We partially mitigate this risk through our natural gas
firm price contract that started in April 2009 and continues through March 2012, for 60% of our natural gas requirements for our manufacturing facilities. The effect of a $1.00/MMBTU increase on the
40% not under firm price contract would be approximately $223,000 a year.

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Item 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS



Report of Independent Registered Public Accounting Firm


43Balance Sheets as of December 31, 2009 and 2008


45Statements of Income for the Years ended December 31, 2009, 2008 and 2007


46Statements of Changes in Stockholders' Equity for the Years ended December 31, 2007, 2008 and
2009


47Statements of Cash Flows for the Years ended December 31, 2009, 2008 and 2007


48Notes to Financial Statements


49-62


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Board of Directors and Stockholders of
Orchids Paper Products Company

We
have audited the accompanying balance sheets of Orchids Paper Products Company as of December 31, 2009 and 2008, and the related statements of income, stockholders' equity and
cash flows for each of the years in the three-year period ended December 31, 2009. We also have audited Orchids Paper Products Company's internal control over financial reporting as
of December 31, 2009, based on criteria established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission. Orchids Paper Products Company's management is responsible for these financial statements, for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company's internal control over financial reporting based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our
opinions.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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In
our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Orchids Paper Products Company as of December 31,
2009 and 2008, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2009, in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, Orchids Paper Products Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established inInternal ControlIntegrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.

/s/
HOGANTAYLOR LLP

Tulsa,
Oklahoma
March 12, 2010

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ORCHIDS PAPER PRODUCTS COMPANY        BALANCE SHEETS        (Dollars in thousands, except share data)

As of December 31,2009

2008ASSETSCurrent assets:Cash

$
1,232

$
11Accounts receivable, net of allowance of $209 in 2009 and $187 in 2008


6,750


6,514Inventories, net


7,569


6,253Short term investments


18,509


Prepaid expenses


497


399Deferred income taxes


547


557Total current assets


35,104


13,734Property, plant and equipment


87,535


71,824Accumulated depreciation


(14,844
)

(11,165
)Net property, plant and equipment


72,691


60,659Deferred debt issuance costs, net of accumulated amortization of $632 in 2009 and $603 in 2008


104


89Total assets

$
107,899

$
74,482LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Accounts payable

$
4,049

$
4,699Accrued liabilities


3,118


2,584Current portion of long-term debt


3,742


2,998Total current liabilities


10,909


10,281Long-term debt, less current portion


19,533


21,067Deferred income taxes


14,337


9,572Stockholders' equity:Common stock, $.001 par value, 25,000,000 shares authorized, 7,393,874 and 6,328,986 shares issued and outstanding in 2009 and 2008,
respectively


7


6Additional paid-in capital


38,354


22,215Common stock warrants





134Retained earnings


24,759


11,207Total stockholders' equity


63,120


33,562Total liabilities and stockholders' equity

$
107,899

$
74,482


See
notes to financial statements

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ORCHIDS PAPER PRODUCTS COMPANY        STATEMENTS OF INCOME        Years ended December 31, 2009, 2008 and 2007        (Dollars in thousands, except
share and per share data)

2009

2008

2007Net sales

$
95,963

$
90,202

$
74,648Cost of sales


67,936


75,196


63,717Gross profit


28,027


15,006


10,931Selling, general and administrative expenses


7,343


6,259


5,234Operating income


20,684


8,747


5,697Interest expense


692


1,361


2,828Other income


(24
)

(10
)

(36
)Income before income taxes


20,016


7,396


2,905Provision for income taxes:Current


1,690


60


Deferred


4,774


2,145


3076,464


2,205


307Net income

$
13,552

$
5,191

$
2,598Net income per share:Basic

$
2.00

$
0.82

$
0.42Diluted

$
1.89

$
0.79

$
0.40Weighted average common shares used in calculating net income per share:Basic


6,771,189


6,328,460


6,255,877Diluted


7,176,534


6,541,509


6,464,863


See
notes to financial statements

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ORCHIDS PAPER PRODUCTS COMPANY        STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY        Years ended December 31, 2007, 2008 and 2009    
(Dollars in thousands, except share amounts)

Common Stock
WarrantsCommon StockAdditional
Paid-in
Capital

Retained
EarningsShares

Value

Shares

Value

TotalBalance at December 31, 2006


6,234,346

$
6

$
21,139


82,607

$
141

$
3,418

$
24,704Stock based compensation








402











402Net income

















2,598


2,598Purchase of Common Stock by former CEO


139,500





743











743Purchase by the Company of shares from former CEO


(51,198
)




(405
)










(405
)Balance at December 31, 2007


6,322,648

$
6

$
21,879


82,607

$
141

$
6,016

$
28,042Stock based compensation








313











313Net income

















5,191


5,191Warrants exercised


6,338





23


(6,338
)

(7
)




16Balance at December 31, 2008


6,328,986

$
6

$
22,215


76,269

$
134

$
11,207

$
33,562Follow on stock offering


862,500


1


14,847











14,848Stock based compensation








603











603Stock options exercised


36,500





269











269Net income

















13,552


13,552Warrants exercised


165,888





420


(76,269
)

(134
)




286Balance at December 31, 2009


7,393,874

$
7

$
38,354




$


$
24,759

$
63,120


See
notes to financial statements

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ORCHIDS PAPER PRODUCTS COMPANY        STATEMENTS OF CASH FLOWS        Years ended December 31, 2009, 2008 and 2007        (Dollars in thousands)

2009

2008

2007Cash Flows From Operating ActivitiesNet income

$
13,552

$
5,191

$
2,598Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


3,708


3,156


3,222Provision for doubtful accounts


60


87


Deferred income taxes


4,774


2,145


307Stock option plan expense


603


313


402Changes in cash due to changes in operating assets and liabilities:Accounts receivable


(296
)

(1,074
)

(438
)Inventories


(1,316
)

(1,379
)

(495
)Income taxes receivable





24


1,218Prepaid expenses


(98
)

(18
)

(75
)Accounts payable


(650
)

(61
)

988Accrued liabilities


535


124


655Net cash provided by operating activities


20,872


8,508


8,382Cash Flows From Investing ActivitiesProceeds from the sale of investment securities and restricted certificate of deposit


3,993





1,500Purchases of property, plant and equipment


(15,711
)

(6,926
)

(1,818
)Purchases of investment securities


(22,502
)




Net cash used in investing activities


(34,220
)

(6,926
)

(318
)Cash Flows From Financing ActivitiesIssuance of long-term debt








26,500Retirement of long-term debt








(25,866
)Proceeds from follow-on offering of common stock


14,847





Borrowings under construction loan


3,756





Principal payments on long-term debt


(3,059
)

(2,286
)

(2,472
)Retirement of subordinated debentures








(2,150
)Net borrowings (repayments) on revolving credit line


(1,487
)

696


(4,270
)Purchase of Common Stock by former CEO, pursuant to vested stock options








743Purchase by the Company of previously owned shares from former CEO








(405
)Deferred debt issuance costs


(43
)




(144
)Proceeds from the exercise of stock options


269





Proceeds from the exercise of warrants attached to subordinated debentures


286


16


Net cash provided by (used in) financing activities


14,569


(1,574
)

(8,064
)Net increase in cash


1,221


8


Cash, beginning


11


3


3Cash, ending

$
1,232

$
11

$
3Supplemental Disclosure:Interest paid

$
692

$
1,361

$
2,788Income taxes paid

$
1,735

$


$



See notes to financial statements

48

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Table of Contents



ORCHIDS PAPER PRODUCTS COMPANY        NOTES TO FINANCIAL STATEMENTS        December 31, 2009, 2008 and 2007

Note 1Summary of Significant Accounting Policies

Business

Orchids Paper Products Company ("Orchids" or the "Company") was formed in April 1998 to acquire and operate the paper manufacturing
facility, built in 1976, in Pryor, Oklahoma out of a predecessor company's bankruptcy. Orchids Acquisition Group, Inc. ("Orchids Acquisition") was established in November 2003 for the purpose
of acquiring the common stock of Orchids. The sale of equity and debt securities closed in March 2004 and Orchids Acquisition Group, Inc. acquired Orchids for a price of $21.6 million.
Orchids Acquisition was subsequently merged into Orchids.

In
July 2005, the Company completed its initial public offering of 2,156,250 shares of common stock. Following the offering, 4,156,250 shares of common stock were outstanding. In July
2006, the Company effected a 3-for-2 stock split resulting in outstanding shares of 6,234,346. The Company's stock trades on the NYSE Amex under the ticker symbol "TIS."

On
August 26, 2009, the Company closed a follow-on public offering of 750,000 shares of its common stock at an offering price of $18.50 per share. The Company received
net proceeds of approximately $12.8 million from the offering, after deducting the underwriting discount and offering expenses. On September 2, 2009, the underwriter exercised their
over-allotment option and purchased an additional 112,500 shares of common stock at a price of $18.50 per share. The Company received approximately $2.0 million in net proceeds from
this exercised option. The Company intends to use the proceeds from the offering for the construction of a new warehouse, the purchase and installation of a new converting line, and general corporate
purposes.

The
following table details common stock outstanding as of December 31, 2009.

March 2004 Orchids Acquisition Group, Inc. Shares


2,000,000July 2005 Initial Public Common Stock Offering


2,156,250July 2006 3 for 2 Stock Split


2,078,096August 2009 Common Stock Offering


862,500Stock Options and Warrants Exercised


297,0287,393,874


Orchids
operates a paper mill and converting plant used to produce tissue products for the consumer or "at-home" market. The mill produces bulk rolls of paper from recycled
paper stock. The bulk rolls are transferred to the converting plant for further processing. Tissue products produced in the converting plant include paper towels, bathroom tissue, and napkins, which
the Company primarily markets as private label products to domestic value retailers. Orchids' paper mill capacity exceeds its current converting capacity. Any excess paper mill production is sold on
the open market in bulk form. The Company is purchasing an additional converting line which, when fully operational, will result in the converting capacity paper consumption exceeding the paper mill
capacity, which will require the Company to purchase bulk rolls in the open market to meet those converting requirements. The new converting line is expected to begin operation in the second quarter
of 2010.

49

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Table of Contents

ORCHIDS PAPER PRODUCTS COMPANY

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2009, 2008 and 2007

Note 1Summary of Significant Accounting Policies (Continued)

Summary of Significant Accounting Policies

Fair value of financial instruments

The carrying value of the Company's long-term debt is estimated by management to approximate fair value based on the
obligations' characteristics, including floating interest rate, credit ratings, maturity and collateral.

Accounts receivable

Accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all
outstanding amounts. A trade receivable is considered to be past due if it is outstanding for more than five days past terms. Management determines the allowance for doubtful accounts by regularly
evaluating individual customer receivables and considering a customer's financial condition, credit history, and current economic conditions. Receivables are written-off when deemed
uncollectible. Recoveries of receivables previously written-off are recorded when received. The Company does not typically charge interest on trade receivables.

Inventories

Inventories are stated at the lower of cost or market. The Company's cost is based on standard cost, specific identification, or FIFO
(first-in, first-out). Standard costs approximate actual costs on a first-in, first-out basis. Material, labor, and factory overhead necessary to
produce the inventories are included in the standard cost.

Short term investments

Short term investments are valued at fair market value and consist of US Government backed money market funds, AAA rated money market
fund, and six and seven month certificate of deposits as of December 31, 2009.

Property, plant and equipment

Property, plant and equipment are stated at cost. Depreciation of property, plant and equipment is computed using the
straight-line method over the estimated useful lives of the assets. The Company expenses normal maintenance and repair costs as incurred.

Impairment of long-lived assets

The Company reviews its long-lived assets, primarily property, plant and equipment, for impairment whenever events or
changes in circumstances indicate that the carrying values may not be recoverable. Impairment evaluation is based on estimates of remaining useful lives and the current and expected future
profitability and cash flows. The Company had no impairment of long-lived assets during the years ended December 31, 2009, 2008, or 2007.

50

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Table of Contents

ORCHIDS PAPER PRODUCTS COMPANY

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2009, 2008 and 2007

Note 1Summary of Significant Accounting Policies (Continued)

Income taxes

Deferred income taxes are computed using the liability method and are provided on all temporary differences between the financial basis
and the tax basis of the Company's assets and liabilities. Future tax benefits are recognized to the extent that realization of those benefits is considered to be more likely than not. A valuation
allowance would be provided for deferred tax assets for which realization is not likely.

Deferred debt issuance costs

Costs incurred in obtaining debt funding are deferred and amortized on an effective interest method over the terms of the loans.
Amortization expense for 2009, 2008 and 2007 was $29,000, $33,000, and $222,000, respectively, and has been classified with interest expense in the income statement.

Stock option expense

Grant-date option costs are recognized on a straight-line basis over the vesting periods of the respective
options.

Revenue recognition

Revenues for products loaded on customer trailers are recognized when the customer has accepted custody and left the Company's dock.
Revenues for products shipped to customers are recognized when title passes upon shipment. Customer discounts and pricing allowances are included in net sales.

Shipping and handling costs

Costs incurred to ship raw materials to the Company's facilities are included in inventory and cost of sales. Costs incurred to ship
finished goods to customer locations of $3,458,000, $3,108,000, and $2,336,000 for the years ended December 31, 2009, 2008 and 2007, respectively, are included in cost of sales.

Advertising costs

Advertising costs totaling approximately $266,000, $218,000, and $134,000 for the years ended December 31, 2009, 2008 and 2007,
respectively, are expensed when incurred and included in selling, general and administrative expenses.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

51

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Table of Contents

ORCHIDS PAPER PRODUCTS COMPANY

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2009, 2008 and 2007

Note 1Summary of Significant Accounting Policies (Continued)

New accounting pronouncements

In April 2009, the Financial Accounting Standards Board ("FASB") issued guidance that requires disclosures about fair value of
financial instruments in interim financial statements as well as in annual financial statements. These provisions were effective for interim and annual periods ending after June 15, 2009, with
early adoption permitted. We began providing the related disclosures starting with our second quarter 2009 interim financial statements.

In
June 2009, the FASB issued authoritative guidance on the consolidation of variable interest entities, which will be effective for our first quarter of fiscal 2010. This new guidance
requires entities to perform a qualitative analysis to determine whether the enterprise's variable interest or interests give it a controlling financial interest in a variable interest entity. The
enterprise is required to assess, on an ongoing basis, whether it is a primary beneficiary or has an implicit responsibility to ensure that a variable interest entity operates as designed. This
guidance changes the previous quantitative approach for determining the primary beneficiary to a qualitative approach based on which entity (a) has the power to direct activities of a variable
interest entity that most significantly impact economic
performance and (b) has the obligation to absorb losses or receive benefits that could be significant to the variable interest entity. In addition, it requires enhanced disclosures that will
provide investors with more transparent information about an enterprise's involvement with a variable interest entity. At this time, Orchids has no variable interest entities as defined by the
standard.

In
June 2009, the FASB issued authoritative guidance which established the FASB Accounting Standards Codification ("ASC" or "Codification") as the source of authoritative GAAP recognized
by the FASB to be applied to nongovernmental entities, and rules and interpretive releases of the SEC as authoritative GAAP for SEC registrants. The Codification supersedes all the existing
non-SEC accounting and reporting standards upon its effective date and, subsequently, the FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging
Issues Task Force Abstracts. The guidance is not intended to change or alter existing GAAP. The guidance became effective for us in the fourth quarter of 2009. The guidance did not have an impact on
the Company's financial position, results of operations or cash flows. All references to previous numbering of FASB Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts have been
removed from the financial statements and accompanying footnotes.

Note 2Fair Value Measurements

The Company has previously adopted the Financial Accounting Standards Board ("FASB") Accounting Standards Codification (FASB ASC) 820-10-50 Fair Value
Measurements and Disclosures for assets and liabilities which are required to be measured at fair value. This standard establishes a framework for measuring fair value and related disclosures. The
standard has the following key elements:



52

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Table of Contents

ORCHIDS PAPER PRODUCTS COMPANY

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2009, 2008 and 2007

Note 2Fair Value Measurements (Continued)



The
valuation hierarchy considers the transparency of inputs used to value assets and liabilities as of the measurement date. The less transparent or observable the inputs used to value
assets and liabilities, the lower the classification of the assets and liabilities in the valuation hierarchy. A financial instrument's classification within the valuation hierarchy is based on the
lowest level of input that is significant to its fair value measurement. The three levels of the valuation hierarchy and the classification of the Company's financial assets and liabilities within the
hierarchy are as follows:



The
following table presents information about the Company's assets measured at fair value on a recurring basis as of December 31, 2009, and indicates the fair value hierarchy of
the valuation techniques utilized to determine such values. Short term investments are valued as Level 1 in the fair value hierarchy based on independent pricing services utilized by the
Company's investment custodians.

Fair Value Measurements at
December 31, 2009
Using Inputs Considered asLevel 1

Level 2

Level 3(in thousands)AssetsShort term investments

$
18,509

$


$



The
Company has no liabilities measured at fair value at December 31, 2009 and no assets or liabilities measured at fair value at December 31, 2008.

Note 3Commitments and Contingencies

The Company may be involved from time to time in litigation arising from the normal course of
business. In management's opinion, as of the date of this report, the Company is not engaged in legal proceedings which individually or in the aggregate are expected to have a materially adverse
effect on the Company's results of operations or financial condition.

In
October 2008, the Company entered into a contract to purchase 334,000 MMBTU per year of natural gas requirements at $7.50 per MMBTU plus a $0.07 per MMBTU management delivery fee for
the period from April 2009 through March 2011. The amounts represent approximately 60% of the Company's natural gas requirements based on usage rates for 2009. If the Company is unable to purchase the
contracted amounts and the market price at that time is less than the contracted price, the Company would be obligated under the terms of the agreement to reimburse an amount equal to the volume
purchased that was less than the contracted amount multiplied by the difference between

53

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Table of Contents

ORCHIDS PAPER PRODUCTS COMPANY

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2009, 2008 and 2007

Note 3Commitments and Contingencies (Continued)

the
contract price and current spot price. In November 2009, the agreement was extended for one year to March 2012 for 334,000 MMBTU per year at a price of $6.50 per MMBTU plus a $0.07 per MMBTU
management delivery fee.

In
July 2009, the Board of Directors authorized the Company to purchase and install a new converting line. The estimated cost of the project is $20.3 million. The project involves
the purchase of the new line, wrappers, winders, and a dust collection system. The new line is expected to be installed by the end of the second quarter of 2010 and is expected to be fully operational
by the end of the third quarter of 2010. As of December 31, 2009, committed capital expenditures not yet paid for in connection with this project totaled $13.8 million.

In
June 2009, the Board of Directors authorized the Company to build a new finished goods warehouse on land owned by the Company behind the converting plant. The new warehouse is
expected to cost $6.8 million. The warehouse will be completed in phases, with the first half available for occupancy in May 2010 and the second half expected to be complete in July 2010. As of
December 31, 2009, committed capital expenditures not yet paid for in connection with this projected totaled $4.4 million.

Note 4Inventories

Inventories at December 31 were:

2009

2008(in thousands)Raw materials

$
1,901

$
1,904Bulk paper rolls


908


1,460Converted finished goods


5,138


3,127Inventory valuation reserve


(378
)

(238
)$
7,569

$
6,253


Note 5Property, Plant and Equipment

The principal categories and estimated useful lives of property, plant and equipment at December 31 were:

2009

2008

Estimated
Useful
Lives(in thousands)Land

$
379

$
379


Buildings


10,991


10,903


40Machinery and equipment


63,386


51,268


5 to 30Vehicles


575


357


5Nondepreciable machinery and equipment (parts and spares)


3,306


2,676


Construction-in-process


8,898


6,241


$
87,535

$
71,824


54

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Table of Contents

ORCHIDS PAPER PRODUCTS COMPANY

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2009, 2008 and 2007

Note 6Long-Term Debt

Long-term debt at December 31 consists of:

2009

2008(in thousands)Revolving line of credit, maturing on April 9, 2011

$


$
1,487Term Loan A, maturing on April 9, 2017, due in monthly installments of $67,000, including interest

$
9,773

$
10,000Term Loan B, maturing on April 9, 2011, due in monthly installments of $265,000, including interest

$
9,746

$
12,578Waste water treatment project term loan, maturing on November 4, 2012, due in monthly installments of $58,000, including interest, beginning in
January 2010

$
3,756

$
23,275


24,065Less current portion


3,742


2,998$
19,533

$
21,067


The
annual maturities of long-term debt at December 31, 2009, are as follows:

Year

Annual
Payment
Amount(in thousands)2010


3,7422011


3,8752012


4,0122013


1,7292014


984after 2014


8,93323,275


The
Company's credit facility consists of the following at December 31, 2009:



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Table of Contents

ORCHIDS PAPER PRODUCTS COMPANY

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2009, 2008 and 2007

Note 6Long-Term Debt (Continued)



Under
the terms of the amended credit agreement dated December 7, 2009, amounts outstanding under all loans bear interest at Orchids' election at LIBOR or daily floating LIBOR,
plus a margin or 3.5%, whichever is greater (3.5% at December 31, 2009.) The margin is set quarterly and based on the ratio of funded debt to EBITDA less income tax paid. The margins range from
200 to 450 basis points over LIBOR or daily floating LIBOR. The weighted average interest rate was 3.5% at December 31, 2009.

The
amended credit agreement contains restrictive covenants that include requirements to maintain certain financial ratios, restricts capital expenditures and the payment of dividends.
The amount available under the revolving credit line may be reduced in the event that the Company's borrowing base, which is based upon the Company's qualified receivables and qualified inventory, is
less than $8.0 million. As of December 31, 2009, our qualified receivables were $5.2 million and our qualified inventory was $3.3 million which yielded a total borrowing
base of $8.5 million and consequently the full $8.0 million revolving credit facility was available to us. Obligations under the amended and restated credit agreement are secured by
substantially all Company assets. Under the credit agreement effective December 7, 2009, the Company is required to maintain a Funded
Debt-to-EBITDA ratio no greater than 3.25-to-1.0 and a Debt Service Coverage ratio of at least 1.25-to-1.0. The annual unfunded
capital expenditures limit is $11.0 million for 2010 and $3.5 million for years thereafter.

56

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Table of Contents

ORCHIDS PAPER PRODUCTS COMPANY

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2009, 2008 and 2007

Note 7Income Taxes

Significant components of the Company's deferred income tax assets and liabilities at December 31 were:

2009

2008(in thousands)Deferred income taxescurrentInventories

$
329

$
380Prepaid expenses


(113
)

(139
)Accounts receivable


38


38Accrued vacation


223


230Accrued freight


17


15Bad debt provision


53


33Deferred income tax assetscurrent

$
547

$
557Deferred income taxesnoncurrentPlant and equipment

$
(16,547
)
$
(14,040
)Federal NOL carryforward





1,043State NOL carryforward, net of federal tax effect


147


258State investment tax credit carryforward, net of federal tax effect


1,764


1,748Indian employment credit carryforward





1,100Alternative minimum tax credit carryforward





135Non-qualified stock option benefits


299


184Deferred income tax liabilitiesnoncurrent

$
(14,337
)
$
(9,572
)


The
Company consumed all of its federal net operating loss carryforwards as of December 31, 2009.

The
Company also has significant carryforwards for State of Oklahoma net operating losses of $2.5 million and for the Oklahoma Investment Tax Credit of $2.6 million, mostly
associated with the Company's $36 million investment in a new paper machine in 2006. The Company believes that its future state taxable income will be sufficient to allow realization within the
20 year carryforward period. Accordingly, deferred tax assets have been recognized, net of the federal tax effects of reduced deductions for state income taxes.

During
the year ended December 31, 2009, the Company consumed the Indian Employment Credit (IEC) carryforward as well as the estimated credit for 2009.

57

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Table of Contents

ORCHIDS PAPER PRODUCTS COMPANY

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2009, 2008 and 2007

Note 7Income Taxes (Continued)

The
following table summarizes the differences between the U.S. federal statutory rate and the Company's effective tax rate for financial statement purposes:

Year ended December 31,2009

2008

2007Statutory tax rate


34.0
%

34.0
%

34.0
%State income taxes, net of U.S. federal tax benefit


4.0
%

3.8
%

4.1
%Indian employment credits


(1.6
)%

(1.4
)%

(5.6
)%Employee and board stock compensation


0.4
%

0.5
%

(6.6
)%State investment tax credits


(4.1
)%

(7.6
)%

(16.4
)%Other


(0.4
)%

0.5
%

1.1
%32.3
%

29.8
%

10.6
%


Based
upon a review of its income tax filing positions, the Company believes that its positions would be sustained upon an audit and does not anticipate any adjustments that would result
in a material change to its financial position. Therefore, no reserves for uncertain income tax positions have been recorded. The Company recognizes interest related to income taxes as interest
expense and penalties as selling, general and administrative expenses.

Note 8Earnings per Share

The Company calculates and discloses a dual presentation of basic and diluted Earnings per Share ("EPS") on the face of the statements of operations and reconciles the numerator and
denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. In 2009, the Company completed a follow-on
offering of 862,500 shares of common stock, which increased the amount of shares outstanding. See Note 1 for a further description.

In
computing diluted EPS, only potential common shares that are dilutivethose that reduce earnings per share or increase loss per shareare included. Exercise of
options and warrants or conversion of convertible securities is not assumed if the result would be anti dilutive, such as when a loss from continuing operations is reported. The "control number" for
determining whether including potential common shares in the diluted EPS computation would be anti dilutive is income from continuing operations. As a result, if there is a loss from continuing
operations, diluted EPS would be computed in the same manner as basic EPS is computed, even if an entity has net income after adjusting for discontinued operations, an extraordinary item or the
cumulative effect of an accounting change.

58

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Table of Contents

ORCHIDS PAPER PRODUCTS COMPANY

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2009, 2008 and 2007

Note 8Earnings per Share (Continued)

The
computation of basic and diluted net income per share for the years ended December 31, 2009, 2008 and 2007, is as follows:

Year ended December 31,2009

2008

2007Net income ($ thousands)

$
13,552

$
5,191

$
2,598Weighted average shares outstanding


6,771,189


6,328,460


6,255,877Effect of stock options


312,497


99,215


98,475Effect of dilutive warrants


92,848


113,834


110,511Weighted average shares outstandingassuming dilution


7,176,534


6,541,509


6,464,863Net income per common share:Basic

$
2.00

$
0.82

$
0.42Diluted

$
1.89

$
0.79

$
0.40Stock options not considered above because they were anti dilutive


31,250


57,500


33,750


Note 9Stock Incentive Plan

The 2005 Stock Incentive Plan (the "Plan") provides for the granting of incentive stock options to employees selected by the board's compensation committee. The Plan authorizes up to
697,500 shares to be issued. In May 2008, the shareholders approved increasing the number of authorized shares under the Plan from 697,500 to 897,500.

In
connection with the approval of the Plan, the Company expenses the cost of options granted over the vesting period of the option based on the grant-date fair value of the
award. For the years ended December 31, 2009, 2008 and 2007, the Company recognized expenses of $603,000, $313,000, and $402,000, respectively.

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Table of Contents

ORCHIDS PAPER PRODUCTS COMPANY

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2009, 2008 and 2007

Note 9Stock Incentive Plan (Continued)

The
following table summarizes information concerning the Plan.

Weighted AverageNumber

Exercise
Price

Fair Value of
Options

Remaining
Contractual Life

Aggregate
Intrinsic
ValueBalance, December 31, 2006


423,000

$
5.53








Granted


272,500

$
6.73

$
3.08





Exercised


(139,500
)
$
5.33

$
2.39




$
360,000Forfeited


(96,000
)
$
5.33

$
2.39





Balance, December 31, 2007


460,000

$
6.35

$
2.87


8.60 years

$
1,265,000Granted


48,750

$
7.61

$
1.14


9.50 years

$
55,575Balance, December 31, 2008


508,750

$
6.47

$
2.28


9.07 years

$
1,159,950Granted


109,750

$
13.41

$
6.61


9.28 years

$
725,295Exercised


(36,500
)
$
7.39

$
12.00




$
437,871Forfeited


(6,000
)
$
8.04

$
9.74




$
58,440Balance, December 31, 2009


576,000

$
7.72

$
12.30


7.85 years

$
7,084,800Exercisable at December 31, 2009


407,200

$
7.17

$
12.85


6.64 years

$
5,231,469


The
following table details the options granted to certain members of the board of directors and management during 2007, 2008 and 2009 and the assumptions used in the Black-Scholes
option valuation model for those grants:

Grant
Date

Number
of Shares

Exercise
Price

Risk-Free
Interest Rate

Estimated
Volatility

Dividend
Yield

Forfeiture
Rate

Expected
LifeFeb-07


3,750

$
8.58


4.83
%

40
%
None


0
%
5 yearsJun-07


28,750

$
5.18


5.09
%

38
%
None


0
%
5 yearsAug-07


225,000

$
6.81


4.63
%

40
%
None


0
%
5-7 yearsOct-07


15,000

$
8.05


4.47
%

41
%
None


0
%
5-7 yearsMay-08


28,750

$
7.48


3.78
%

41
%
None


0
%
5 yearsJun-08


20,000

$
7.80


3.98
%

40
%
None


0
%
5-7 yearsJan-09


60,000

$
10.21


2.35
%

46
%
None


0
%
5-7 yearsMay-09


49,750

$
17.48


3.30
%

50
%
None


0
%
5-7 years


The
Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective assumptions including the expected stock price volatility.

As
of December 31, 2009, there was $550,000 of unrecognized compensation expense related to non-vested share-based compensation for the 2007, 2008 and 2009 management
grants. That cost is expected to be recognized on a straight-line basis over a period of 3.4 years.

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Table of Contents

ORCHIDS PAPER PRODUCTS COMPANY

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2009, 2008 and 2007

Note 10Warrants

The Company had warrants outstanding to purchase 225,000 shares of common stock representing approximately 3% of outstanding shares that were issued to the underwriters in conjunction
with the initial public offering of our common stock. The underwriters received 225,000 shares at an exercise price of $6.40, which expire on July 14, 2010. As of December 31, 2009,
150,150 underwriter warrants remain unexercised.

Note 11Major Customers and Concentration of Credit Risk

The Company sells primarily all of its paper production in the form of converted products; however, following the start-up of a new paper machine in the summer of 2006, the
Company had excess paper production which it began to sell in parent roll form. Revenues from converted product sales and parent roll sales in the year ended December 31, 2009, 2008 and 2007
were:

2009

2008

2007Converted product net sales

$
86,645

$
74,927

$
65,383Parent roll net sales


9,318


15,275


9,265Total net sales

$
95,963

$
90,202

$
74,648


Credit
risk for the Company is concentrated with three major converted product customers, each of whom operates discount retail stores located throughout the United States. For the year
ended December 31, 2009, net sales to the three significant customers accounted for approximately 57% of the Company's sales comprised of -31%, 15%, and 11%. Credit risk for the
Company in 2008 included the same three converted product customers and also included one customer who accounts for most of the Company's third-party sales of parent rolls. For the year ended
December 31, 2008, net sales to the four significant customers accounted for approximately 66% of the Company's sales comprised of 21%, 18%, 14% and 13%, individually. For the year ended
December 31, 2007, net sales to these four significant customers accounted for approximately 68% of the Company's sales comprised of 28%, 18%, 11% and 11%, individually.

At
December 31, 2009, the three significant customers accounted for approximately $3,764,000 (56%) of the Company's accounts receivable which comprised of $1,679,000 (25%),
$1,526,000 (23%) and $559,000 (8%). At December 31, 2008, the four significant customers accounted for approximately $4,451,000 (68%) of the Company's accounts receivable which comprised of
$1,230,000 (19%), $1,580,000 (24%), $782,000 (12%) and $859,000 (13%), individually. No other customers of the Company accounted for more than 10% of sales during these periods. The Company generally
does not require collateral from its customers and has not incurred any significant losses on uncollectible accounts receivable.

On
February 20, 2008, the Company signed an exclusive supply agreement with Dixie Pulp and Paper, Inc. to supply all of its waste paper needs. This agreement is effective
beginning April 1, 2008 and carries a five-year term. The Company entered into the agreement to help ensure its long-term supply of quality waste paper.

The
Company maintains several accounts, which are insured by the Federal Deposit Insurance Corporation ("FDIC") up to $250,000. Deposits at the institution in excess of the FDIC limit
totaled $1 million and $17,000 at December 31, 2009 and 2008, respectively.

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Table of Contents

ORCHIDS PAPER PRODUCTS COMPANY

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2009, 2008 and 2007

Note 12Employee Incentive Bonus and Retirement Plans

The Company sponsors three separate defined contribution plans covering substantially all employees. Company contributions are based on either a percentage of participant contributions
or as required by collective bargaining agreements. The participant vesting period varies across the three plans. Contributions to the plans by the Company were $391,000, $385,000, and $244,000 for
the years ended December 31, 2009, 2008 and 2007, respectively.

Note 13Related Party Transactions

In March 2004, the Company entered into a management services agreement with the founders of Orchids Acquisition. Under the agreement, these parties agreed to provide advisory and
management services to the Company in consideration of an annual management fee of $325,000 and additional fees, based on a formula if the Company engages in certain major transactions. In 2005, the
agreement was amended to reduce the annual fee to $125,000, in consideration of a $150,000 lump sum payment. During 2006 and 2005, the Company paid $125,000 and $375,000, respectively, under this
agreement. Pursuant to a resolution of the Company's Board of Directors, this agreement was terminated effective March 2, 2007.

In
February 2007, the Company entered into a management services arrangement with Jay Shuster, the chairman of its board of directors. The arrangement calls for a fee of $70,000 per
annum, payable monthly. The term of Mr. Shuster's contract is month to month.

Note 14Selected Quarterly Financial Data (Unaudited)

2009First Quarter

Second Quarter

Third Quarter

Fourth Quarter(in thousands, except per share data)Sales

$
23,640

$
24,131

$
24,557

$
23,635Gross Profit

$
6,432

$
7,828

$
7,429

$
6,338Operating Income

$
4,602

$
5,741

$
5,657

$
4,684Net Income

$
2,797

$
3,775

$
3,815

$
3,165Basic Earnings per share

$
0.44

$
0.58

$
0.56

$
0.42Diluted Earnings per share

$
0.42

$
0.55

$
0.52

$
0.40Price per common shareHigh

$
13.50

$
20.80

$
22.85

$
20.26Low

$
8.71

$
13.36

$
18.75

$
16.68




2008First Quarter

Second Quarter

Third Quarter

Fourth Quarter(in thousands, except per share data)Sales

$
20,275

$
22,315

$
23,312

$
24,300Gross Profit

$
2,689

$
3,122

$
3,794

$
5,401Operating Income

$
1,304

$
1,631

$
2,243

$
3,569Net Income

$
611

$
887

$
1,423

$
2,270Basic Earnings per share

$
0.10

$
0.14

$
0.22

$
0.36Diluted Earnings per share

$
0.09

$
0.14

$
0.22

$
0.35Price per common shareHigh

$
8.99

$
8.67

$
8.05

$
8.80Low

$
6.75

$
6.74

$
5.95

$
6.40


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Table of Contents

Item 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

Item 9A.CONTROLS AND PROCEDURES

(a)   Evaluation of Disclosure Controls and Procedures:

We maintain "disclosure controls and procedures," as such term is defined in Rule 13a-15(e) and Rule 15d-15(e) under the
Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed in reports we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is collected and communicated to management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures,
management recognized that no matter how well conceived and operated, disclosure controls and procedures can provide only reasonable, not absolute, assurance that the objectives of the disclosure
controls and procedures are met. Our disclosure controls and procedures have been designed, and management believes that they meet, reasonable assurance standards. Based on their evaluation as of the
end of the period covered by this Annual Report on Form 10-K, the Chief Executive Officer and the Chief Financial Officer have concluded that, subject to the limitations noted
above, our disclosure controls and procedures were effective.

(b)   Management's Report on Internal Control Over Financial Reporting

The management of Orchids Paper Products Company is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal
control system was designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements.

All
internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation.

Our
management assessed the effectiveness of our internal control over financial reporting as of December 31, 2009. In making this assessment, we used the criteria set forth in Internal ControlIntegrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our
assessment, we believe that, as of December 31, 2009, the Company's internal control over financial reporting was effective based on those criteria.

The
effectiveness of our internal control over financial reporting as of December 31, 2009 has been audited by HoganTaylor LLP, an independent registered public accounting
firm, as stated in their report which is included in this Form 10-K.

(c)   Changes in Internal Control Over Financial Reporting

As of the quarter ended December 31, 2009, there were no changes in our internal control over financial reporting (as defined in
Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.

Item 9B.OTHER INFORMATION

None.

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Table of Contents

PART III

Item 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information concerning our directors is contained in the our Proxy Statement to be issued in connection with the Annual Meeting of
Stockholders under the caption "ELECTION OF DIRECTORS," which information is incorporated herein by reference.

Information
concerning our executive officers is contained in this report under Item 1, "BUSINESSExecutive Officers and Key Employees," which information is
incorporated herein by reference.

The
information required by Item 405 of Regulation S-K is contained in our Proxy Statement to be issued in connection with the Annual Meeting of Stockholders
under the caption "Section 16(a) Beneficial Ownership Reporting Compliance."

Our
Board of Directors adopted a Business Conduct Policy for all of our directors, officers and employees effective June 22, 2005. We have posted our Business Conduct Policy on
our website (www.orchidspaper.com). In addition, stockholders may request a free copy of our Business Conduct Policy from our Chief Financial Officer as
follows:



To
the extent required by law or the rules of the NYSE Amex, any amendments to, or waivers from, any provision of the Business Conduct Policy will be promptly disclosed publicly. To the
extent permitted by such requirements, we intend to make such public disclosure by posting the relevant material on our website in accordance with SEC rules.

Item 11.EXECUTIVE COMPENSATION

Information concerning executive compensation is contained in our Proxy Statement to be issued in connection with the Annual Meeting of
Stockholders under the caption "EXECUTIVE COMPENSATION," which information is incorporated herein by reference.

Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information concerning security ownership of certain beneficial owners and management is contained in the Company's Proxy Statement
under the caption "ELECTION OF DIRECTORSInformation Relating to Directors, Nominees and Executive Officers" and "SECURITY OWNERSHIP

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Table of Contents

OF
CERTAIN BENEFICIAL OWNERS," which information is incorporated herein by reference.Securities Authorized for Issuance Under Equity Compensation Plan

Plan Category

Number of securities to
be issued upon exercise
of outstanding options
warrants and rights
(a)

Weighted-average
exercise price of
oustanding options,
warrants and rights
(b)

Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a)
(c)Equity compensation Plans approved by security holders


576,000

$
7.72


145,500Equity compensation plans not approved by security holders


225,000

$
6.40


Total


801,000





145,500


Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information concerning certain relationships and related transactions is contained in our Proxy Statement to be issued in connection
with the Annual Meeting of Stockholders under the caption "EXECUTIVE COMPENSATION," which information is incorporated herein by reference.

Item 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information concerning accountant fees and services is contained in our Proxy Statement to be issued in connection with the Annual
Meeting of Stockholders under the caption "FEES PAID TO INDEPENDENT AUDITORS," which information is incorporated herein by reference.

PART IV

Item 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1)    Financial
Statements

The
information required by this item is included in Item 8 of Part II of this report.

(a)(2)    Financial
Statement Schedules.

Schedule IIValuation
and Qualifying Accounts is included below. The rest of the schedules required by this item have been omitted as they are not required, not
applicable or are included in Item 8 of Part II of this report.

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Table of Contents

Orchids Paper Products Company  Schedule IIValuation and Qualifying Accounts  Years ended December 31, 2009, 2008 and 2007

Balance at
Beginning of
Period

Additions
Charged
(Credited) to
Costs and
Expenses

Deductions
Describe(1)(2)

Balance at End
of Period(in thousands)Accounts Receivable Reserve:Year ended December 31, 2009Bad Debt Reserve

$
187

$
60

$
38

$
209Year ended December 31, 2008Bad Debt Reserve

$
100

$
98

$
11

$
187Year ended December 31, 2007Bad Debt Reserve

$
100

$


$


$
100Inventory Valuation Reserve:Year ended December 31, 2009Inventory Valuation Reserve

$
238

$
216

$
241

$
213Year ended December 31, 2008Inventory Valuation Reserve

$
32

$
286

$
80

$
238Year ended December 31, 2007Inventory Valuation Reserve

$
25

$
33

$
26

$
32


(1)Write-off
of uncollectible accounts, net of recoveries(2)Write-off
of obsolete inventory and physical inventory adjustments


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Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

ORCHIDS PAPER PRODUCTS COMPANYBy:

/s/ ROBERT A. SNYDER Robert A. Snyder Chief Executive OfficerDate: March 12, 2010

By:

/s/ KEITH R. SCHROEDER Keith R. Schroeder Chief Financial Officer


POWER OF ATTORNEY

Each person whose signature appears below hereby constitutes and appoints Robert A. Snyder and Keith R. Schroeder, and each of them,
his or her true and lawful attorneys-in-fact and agents, with full power of substitution, to sign any amendments to this Annual Report on Form 10-K and to
file such amendments and any related documents with the Securities and Exchange Commission, and ratifies and confirms the actions that any such attorney-in-fact and agents, or
their substitutes, may lawfully do or cause to be done under this power of attorney.

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

Signatures

Title

Date/s/ JAY SHUSTER Jay Shuster

Chairman of the Board of Directors

March 12, 2010/s/ ROBERT A. SNYDER Robert A. Snyder

Chief Executive Officer (Principal
Executive Officer)

March 12, 2010/s/ GARY P. ARNOLD Gary P. Arnold

Director

March 12, 2010/s/ STEVEN BERLIN Steven Berlin

Director

March 12, 2010


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Table of Contents

Signatures

Title

Date/s/ JOHN G. GUTTILLA John G. Guttilla

Director

March 12, 2010/s/ DOUGLAS E. HAILEY Douglas E. Hailey

Director

March 12, 2010/s/ JEFF SCHOEN Jeff Schoen

Director

March 12, 2010/s/ KEITH R. SCHROEDER Keith R. Schroeder

Chief Financial Officer (Principal
Financial and Accounting Officer)

March 12, 2010


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Table of Contents

Exhibit Index

3.1

Amended and Restated Certificate of Incorporation of the Registrant dated April 14, 2005, incorporated by reference to Orchids Paper Products Company Form S-1 (File No. 333-124173) dated April 19,
2005.3.1.1

Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Registrant dated June 19, 2007, incorporated by reference to Orchids Paper Products Company Form 10-Q (File No. 001-32563)
 dated August 14, 2007.3.2

Amended and Restated Bylaws of the Registrant effective April 14, 2005, incorporated by reference to Orchids Paper Products Company Form S-1 (File No. 333-124173) dated April 19, 2005.4.1

Specimen Stock Certificate, incorporated by reference to Orchids Paper Products Company Form S-1 (File No. 333-124173) dated June 24, 2005.4.2

Form of Subordinated Debenture, incorporated by reference to Orchids Paper Products Company Form S-1 (File No. 333-124173) dated April 19, 2005.10.1
#
Form of Incentive Stock Option Agreement incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K (File No. 001-32563) dated January 20, 2009.10.2
#
2005 Stock Incentive Plan, incorporated by reference to Orchids Paper Products Company Form S-1 (File No. 333-124173) dated April 19, 2005.10.3
#
Employment Agreement dated March 1, 2004, between Keith R. Schroeder and the Registrant, incorporated by reference to Orchids Paper Products Company Form S-1 (File No. 333-124173) dated April 19,
2005.10.4
#
Employment Agreement dated February 27, 2009, between Keith R. Schroeder and the Registrant, incorporated by reference to Orchids Paper Products Company Form 8-K (File No. 001-32563) dated February 27,
2009.10.5
#
Employment Agreement dated August 20, 2007, between Robert A. Snyder and the Registrant, incorporated by reference to Orchids Paper Products Company Form 8-K (File No. 001-32563) dated August 20,
2007.10.6
#
Amendment to Executive Employment Agreement dated August 22, 2008, between Robert A. Snyder and the Registrant, incorporated by reference to Orchids Paper Products Company Form 10-Q (File No. 001-32563)
dated November 10, 2008.10.7
#
Form of Indemnification Agreement between Registrant and each of its Directors and Officers, incorporated by reference to Orchids Paper Products Company Form S-1/A (File No. 333-124173) dated June 1,
2005.10.8

Form of Warrant issued by Orchids Acquisition Group, Inc. in connection with the acquisition of Orchards Paper Products Company, incorporated by reference to Orchids Paper Products Company Form S-1 (File
No. 333-124173) dated April 19, 2005.10.9

Form of Warrant issuable to designees of the Underwriter, incorporated by reference to Orchids Paper Products Company Form S-1/A (File No. 333-124173) dated June 1, 2005.10.10

Second Amended and Restated Agented Credit Agreement, dated as of April 9, 2007, among the Registrant, Bank of Oklahoma, N.A., BancFirst and Commerce Bank, N.A., incorporated by reference to Orchids Paper Products
Company Form 8-K (File No. 000-32563) dated April 9, 2007.


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Table of Contents

10.11

Amendment One to Second Amended and Restated Agented Credit Agreement dated October 25, 2007 among the Registrant, Bank of Oklahoma, N.A., BancFirst and Commerce Bank, N.A., incorporated by reference to Orchids Paper
Products Company Form 10-Q (File No. 001-32563) dated November 1, 2007.10.12

Amendment Two to Second Amended and Restated Agented Credit Agreement dated March 6, 2008 among the Registrant, Bank of Oklahoma, N.A., BancFirst and Commerce Bank, N.A., incorporated by reference to Orchids Paper
Products Company Form 8-K (File No. 001-32563) dated March 6, 2008.10.13

Amendment Three to Second Amended and Restated Agented Credit Agreement, dated as of November 5, 2008, among the Registrant, Bank of Oklahoma, N.A., BancFirst and Commerce Bank, N.A., incorporated by reference to
Orchids Paper Products Company Form 10-Q (File No. 001-32563) dated November 10, 2008.10.14

Amendment Four to Second Amended and Restated Agented Credit Agreement dated July 31, 2009, incorporated by reference to Orchids Paper Products Company Form 8-K (File No. 001-32563) dated July 31,
2009.10.15

Substitute Amendment Four to Second Amended and Restated Credit Agreement, dated December 7, 2009 (effective as of July 31, 2009) incorporated by reference to Orchids Paper Products Company Form 8-K (File
No. 001-32563) dated December 7, 2009.10.16

Supplier Agreement dated February 20, 2008, between Dixie Pulp & Paper, Inc. and the Registrant, incorporated by reference to Orchids Paper Products Company Form 10-Q (File No. 001-32563)
dated May 2, 2008.21

Subsidiaries of the Company.23.1

Consent of Independent Registered Public Accounting FirmHoganTaylor LLP.31.1

Certification Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 for Robert A. Snyder31.2

Certification Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 for Keith R. Schroeder32

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Robert A. Snyder and Keith R. Schroeder


#Indicates
management contract or compensatory plan


70

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