##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File Number 001-32563
 Orchids Paper Products Company
  Delaware
    
    23-2956944(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)
 4826 Hunt Street
Pryor, Oklahoma 74361
 (918) 825-0616
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o(Do not check if a smaller reporting company)
    
    Smaller reporting company þ
 o þ




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##### 



ORCHIDS PAPER PRODUCTS COMPANY
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED JUNE 30, 2008
 PagePART I. FINANCIAL INFORMATIONITEM 1. Financial StatementsBalance Sheets as of June 30, 2008 (Unaudited) and
December 31, 2007
    
    
    3Statements of Income for the three months ended June 30, 2008
and 2007 (Unaudited) and the six months ended June 30, 2008 and
2007 (Unaudited)
    
    
    4Statements of Cash Flows for the six months ended June 30, 2008
and 2007 (Unaudited)
    
    
    5Notes to Unaudited Interim Financial Statements
    
    
    6ITEM 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    9ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    22ITEM 4. Controls and Procedures
    
    
    22PART II. OTHER INFORMATIONITEM 1. Legal Proceedings
    
    
    23ITEM 1A. Risk Factors
    
    
    23ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    23ITEM 3. Defaults Upon Senior Securities
    
    
    23ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    23ITEM 5. Other Information
    
    
    24ITEM 6. Exhibits
    
    
    24Signatures
    
    
    25Exhibit 10.1Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
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PART I. FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
 ORCHIDS PAPER PRODUCTS COMPANY
 
 BALANCE SHEETS
 (Dollars in thousands, except share data)
 June 30,
    
    
    December 31,2008
    
    
    2007(unaudited)ASSETSCurrent assets:Cash
    
    $
    261
    
    
    $
    3Accounts receivable, net of allowance of
$131 in 2008 and $100 in 2007
    
    
    6,958
    
    
    
    5,527Inventories, net
    
    
    5,349
    
    
    
    4,874Income taxes receivable
    
    
    30
    
    
    
    24Prepaid expenses
    
    
    189
    
    
    
    381Deferred income taxes
    
    
    516
    
    
    
    516Total current assets
    
    
    13,303
    
    
    
    11,325Property, plant and equipment
    
    
    67,635
    
    
    
    64,899Accumulated depreciation
    
    
    (9,570
    )
    
    
    (8,043
    )Net property, plant and equipment
    
    
    58,065
    
    
    
    56,856Deferred debt issuance costs, net of accumulated
amortization of $587 in 2008 and $570 in 2007
    
    
    105
    
    
    
    122Total assets
    
    $
    71,473
    
    
    $
    68,303LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    5,868
    
    
    $
    4,760Accrued liabilities
    
    
    2,819
    
    
    
    2,460Current portion of long-term debt
    
    
    2,604
    
    
    
    2,391Total current liabilities
    
    
    11,291
    
    
    
    9,611Long-term debt, less current portion
    
    
    22,324
    
    
    
    23,264Deferred income taxes
    
    
    8,098
    
    
    
    7,386Stockholders equity:Common stock, $.001 par value, 25,000,000
shares authorized in 2008 and 2007, 6,328,986
and 6,322,648 shares issued and outstanding in
2008 and 2007, respectively
    
    
    6
    
    
    
    6Additional paid-in capital
    
    
    22,106
    
    
    
    21,879Common stock warrants
    
    
    134
    
    
    
    141Retained earnings
    
    
    7,514
    
    
    
    6,016Total stockholders equity
    
    
    29,760
    
    
    
    28,042Total liabilities and stockholders equity
    
    $
    71,473
    
    
    $
    68,303
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ORCHIDS PAPER PRODUCTS COMPANY
 
 STATEMENTS OF INCOME
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    

2007
    
    

2008
    
    

2007(unaudited)
    
    
    (unaudited)
    
    
    (unaudited)
    
    
    (unaudited)(Dollars in thousands, except share and per share data)Net sales
    
    $
    22,315
    
    
    $
    18,515
    
    
    $
    42,590
    
    
    $
    35,152Cost of sales
    
    
    19,193
    
    
    
    15,762
    
    
    
    36,779
    
    
    
    30,667Gross profit
    
    
    3,122
    
    
    
    2,753
    
    
    
    5,811
    
    
    
    4,485Selling, general and administrative expenses
    
    
    1,491
    
    
    
    1,170
    
    
    
    2,876
    
    
    
    2,229Operating income
    
    
    1,631
    
    
    
    1,583
    
    
    
    2,935
    
    
    
    2,256Interest expense
    
    
    320
    
    
    
    708
    
    
    
    731
    
    
    
    1,581Other income, net
    
    
    (5
    )
    
    
    (7
    )
    
    
    (6
    )
    
    
    (27
    )Income before income taxes
    
    
    1,316
    
    
    
    882
    
    
    
    2,210
    
    
    
    702Provision for income taxes:Deferred
    
    
    429
    
    
    
    139
    
    
    
    712
    
    
    
    90Net income
    
    $
    887
    
    
    $
    743
    
    
    $
    1,498
    
    
    $
    612Net income per share:Basic
    
    $
    0.14
    
    
    $
    0.12
    
    
    $
    0.24
    
    
    $
    0.10Diluted
    
    $
    0.14
    
    
    $
    0.12
    
    
    $
    0.23
    
    
    $
    0.10Shares used in calculating net income per share:Basic
    
    
    6,328,986
    
    
    
    6,234,346
    
    
    
    6,328,017
    
    
    
    6,234,346Diluted
    
    
    6,526,630
    
    
    
    6,344,260
    
    
    
    6,541,066
    
    
    
    6,427,130
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ORCHIDS PAPER PRODUCTS COMPANY
 
 STATEMENTS OF CASH FLOWS
 Six Months Ended June 30,2008
    
    

2007(unaudited)
    
    
    (unaudited)(Dollars in thousands)Cash Flows From Operating ActivitiesNet income
    
    $
    1,498
    
    
    $
    612Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    1,544
    
    
    
    1,641Provision for doubtful accounts
    
    
    30
    
    
    
    30Deferred income taxes
    
    
    712
    
    
    
    90Stock option plan expense
    
    
    205
    
    
    
    169Changes in cash due to changes in operating assets
and liabilities:Accounts receivable
    
    
    (1,461
    )
    
    
    (1,345
    )Inventories
    
    
    (475
    )
    
    
    78Income taxes receivable
    
    
    (6
    )
    
    
    Prepaid expenses
    
    
    192
    
    
    
    163Accounts payable
    
    
    1,108
    
    
    
    138Accrued liabilities
    
    
    359
    
    
    
    333Net cash provided by operating activities
    
    
    3,706
    
    
    
    1,909Cash Flows From Investing ActivitiesPurchases of property, plant and equipment
    
    
    (2,736
    )
    
    
    (220
    )Proceeds from the sale of restricted certificate of deposit
    
    
    
    
    
    
    1,500Net cash provided by (used in) investing activities
    
    
    (2,736
    )
    
    
    1,280Cash Flows From Financing ActivitiesNew borrowings on long-term debt
    
    
    
    
    
    
    26,500Retirement of borrowings on long-term debt
    
    
    
    
    
    
    (25,866
    )Principal payments on long-term debt
    
    
    (1,045
    )
    
    
    (1,186
    )Net borrowings (repayments) on revolving credit line
    
    
    318
    
    
    
    (2,492
    )Proceeds from the exercise of warrants attached to subordinated
debentures
    
    
    15
    
    
    
    Deferred debt issuance costs
    
    
    
    
    
    
    (144
    )Net cash used in financing activities
    
    
    (712
    )
    
    
    (3,188
    )Net change in cash
    
    
    258
    
    
    
    1Cash, beginning
    
    
    3
    
    
    
    3Cash, ending
    
    $
    261
    
    
    $
    4Supplemental Disclosure:Interest paid
    
    $
    661
    
    
    $
    1,486Income taxes paid
    
    $
    6
    
    
    $
    
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ORCHIDS PAPER PRODUCTS COMPANY
 
 NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
 Note 1  Basis of Presentation
     Note 2  Commitments and Contingencies
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Note 3  Earnings per Share
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income  ($ thousands)
    
    $
    887
    
    
    $
    743
    
    
    $
    1,498
    
    
    $
    612Weighted average shares outstanding
    
    
    6,328,986
    
    
    
    6,234,346
    
    
    
    6,328,017
    
    
    
    6,234,346Effect of stock options
    
    
    81,839
    
    
    
    37,211
    
    
    
    91,154
    
    
    
    93,673Effect of dilutive warrants
    
    
    115,805
    
    
    
    72,703
    
    
    
    121,895
    
    
    
    99,111Weighted average shares
outstanding  assuming dilution
    
    
    6,526,630
    
    
    
    6,344,260
    
    
    
    6,541,066
    
    
    
    6,427,130Earnings per common share:Basic
    
    $
    0.14
    
    
    $
    0.12
    
    
    $
    0.24
    
    
    $
    0.10Diluted
    
    $
    0.14
    
    
    $
    0.12
    
    
    $
    0.23
    
    
    $
    0.10
 Note 4  Stock Incentive Plan
   Grant
    
    Number
    
    Exercise
    
    Risk-Free
    
    Estimated
    
    Dividend
    
    ExpectedDate
    
    of Shares
    
    Price
    
    Interest Rate
    
    Volatility
    
    Yield
    
    LifeFeb-07
    
    3,750
    
    $8.58
    
    4.83%
    
    40%
    
    None
    
    5 yearsJun-07
    
    28,750
    
    $5.18
    
    5.09%
    
    38%
    
    None
    
    5 yearsMay-08
    
    28,750
    
    $7.48
    
    3.78%
    
    41%
    
    None
    
    5 yearsJun-08
    
    20,000
    
    $7.80
    
    3.98%
    
    40%
    
    None
    
    5 years
  -7-




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Note 5  Major Customers and Concentration of Credit Risk
  Note 6  New Accounting Standards
    -8-




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ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Information
  
  
    our business strategy;

    
    the market opportunity for our products, including expected demand for our products;

    
    our estimates regarding our capital requirements; and

    
    any of our other plans, objectives, and intentions contained in this report that are not
historical facts.
   

    
    we face intense competition in our market and our profitability
would be reduced if aggressive pricing by our competitors forces us to
decrease our prices;

    
    a substantial percentage of our converted product revenues are
attributable to three large customers which may decrease or cease
purchases at any time;

    
    the disruption in supply or cost of waste paper;

    
    we have significant indebtedness which limits our free cash flow and
subjects us to restrictive covenants relating to the operation of our
business;

    
    the availability of and prices for energy;

    
    our exposure to variable interest rates;

    
    the loss of key personnel;

    
    labor interruptions;
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

    
    natural disaster or other disruption to our facility;

    
    ability to finance the capital requirements of our business;

    
    cost to comply with government regulations; and

    
    failure to maintain an effective system of internal controls necessary
to accurately report our financial results and prevent fraud.
  Overview
   

    
    the market price of our product;

    
    the cost of recycled paper used in producing paper;

    
    the efficiency of operations in both our paper mill and converting operations; and

    
    energy costs.
   -10-




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Comparative Three-Month Periods Ended June 30, 2008 and 2007
 Net Sales
 Three Months Ended June 30,2008
    
    2007(in thousands, except averageprice per ton and tons)Net sales
    
    $
    22,315
    
    
    $
    18,515Total tons shipped
    
    
    14,226
    
    
    
    12,816Average price per ton
    
    $
    1,569
    
    
    $
    1,445
  -11-




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Cost of Sales
 Three Months Ended June 30,2008
    
    
    2007(in thousands, exceptgross profit margin %and paper cost per ton)Cost of paper
    
    $
    11,580
    
    
    $
    9,418Non-paper materials, labor, supplies, etc.
    
    
    6,841
    
    
    
    5,595Sub-total
    
    
    18,421
    
    
    
    15,013Depreciation
    
    
    772
    
    
    
    749Cost of sales
    
    $
    19,193
    
    
    $
    15,762Gross Profit
    
    $
    3,122
    
    
    $
    2,753Gross Profit Margin %
    
    
    14.0
    %
    
    
    14.9
    %Total paper cost per ton consumed
    
    $
    814
    
    
    $
    735
    Gross Profit
  -12-




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Selling, General and Administrative Expenses
 Three Months Ended June 30,2008
    
    
    2007(In thousands, exceptSG&A as a % of net sales)Commission expense
    
    $
    251
    
    
    $
    256Other S,G&A expenses
    
    
    1,240
    
    
    
    914Selling, General & Adm exp
    
    $
    1,491
    
    
    $
    1,170SG&A as a % of net sales
    
    
    6.7
    %
    
    
    6.3
    %
  Operating Income
  Interest Expense and Other Income
 Three Months Ended June 30,2008
    
    
    2007(In thousands)Interest expense
    
    $
    320
    
    
    $
    708Other (income) expense, net
    
    $
    (5
    )
    
    $
    (7
    )
  Income Before Income Taxes
  Income Tax Provision
  -13-




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Comparative Six-Month Periods Ended June 30, 2008 and 2007
 Net Sales
 Six Months Ended June 30,2008
    
    2007(in thousands, exceptprice per ton and tons)Net sales
    
    $
    42,590
    
    
    $
    35,152Total tons shipped
    
    
    27,188
    
    
    
    23,977Average price per ton
    
    $
    1,566
    
    
    $
    1,466
  -14-




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Cost of Sales
 Six Months Ended June 30,2008
    
    
    2007(in thousands, exceptgross profit margin %and paper cost per ton)Cost of paper
    
    $
    22,133
    
    
    $
    18,115Non-paper materials, labor, supplies, etc.
    
    
    13,120
    
    
    
    11,054Sub-total
    
    $
    35,253
    
    
    $
    29,169Depreciation
    
    
    1,526
    
    
    
    1,498Cost of sales
    
    $
    36,779
    
    
    $
    30,667Gross Profit
    
    $
    5,811
    
    
    $
    4,485Gross Profit Margin %
    
    
    13.6
    %
    
    
    12.8
    %Total paper cost per ton consumed
    
    $
    809
    
    
    $
    756
    Gross Profit
  -15-




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Selling, General and Administrative Expenses
 Six Months Ended June 30,2008
    
    
    2007(In thousands, exceptSG&A as a % of net sales)Commission expense
    
    $
    493
    
    
    $
    478Other S,G&A expenses
    
    
    2,383
    
    
    
    1,751Selling, General & Adm exp
    
    $
    2,876
    
    
    $
    2,229SG&A as a % of net sales
    
    
    6.8
    %
    
    
    6.3
    %
  Operating Income
  Interest Expense and Other Income
 Six Months Ended June 30,2008
    
    2007(In thousands)Interest expense
    
    $
    731
    
    
    $
    1,581Other (income) expense, net
    
    $
    (6
    )
    
    $
    (27
    )
  -16-




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Income Before Income Taxes
  Income Tax Provision
   Liquidity and Capital Resources
    Six Months Ended June 30,2008
    
    2007(in thousands)Cash flow provided by (used in):Operating activities
    
    $
    3,706
    
    
    $
    1,909Investing activities
    
    $
    (2,736
    )
    
    $
    1,280Financing activities
    
    $
    (712
    )
    
    $
    (3,188
    )
 -17-




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
    
    a $8.0 million revolving credit facility with a three-year term; ($1.11 million outstanding
at June 30, 2008). The borrowing base for the revolving credit facility is determined by
adding qualified receivables and inventory. At June 30, 2008, the borrowing
base for the revolving credit facility was $6.9 million;

    
    a $10.0 million term loan A with a ten-year term that
has no principal repayments for the first 24 months
of the loan and then will be amortized as if the loan
had an 18-year life ($10.0 million outstanding at
June 30, 2008);

    
    a $16.5 million term loan B with a four-year term
that is being amortized as if the loan had a six-year
life ($13.8 million outstanding at June 30, 2008);
and

    
    a $3.0 million capital expenditures facility with a
four-year term that will be amortized as if the loan
had a five-year life ($0 outstanding at June 30,
2008).
  -18-




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Critical Accounting Policies and Estimates
  -19-




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Accounts Receivable
 Inventory.
 New Accounting Pronouncements
    Non-GAAP Discussion
  -20-




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

    
    it does not reflect our cash expenditures for capital assets;

    
    it does not reflect changes in, or cash requirements for, our working capital requirements;

    
    it does not reflect the interest expense, or the cash requirements
necessary to service interest or principal payments on our
indebtedness;

    
    although depreciation and amortization are non-cash charges, the
assets being depreciated and amortized will often have to be replaced
in the future, and EBITDA does not reflect cash requirements for such
replacements; and

    
    other companies, including other companies in our industry, may
calculate these measures differently than we do, limiting their
usefulness as a comparative measure.
   Three Months Ended June 30,2008
    
    
    2007(In thousands,except % of net sales)Net income
    
    $
    887
    
    
    $
    743Plus: Interest expense
    
    
    320
    
    
    
    708Plus: Income tax expense
    
    
    429
    
    
    
    139Plus: Depreciation
    
    
    772
    
    
    
    749EBITDA
    
    $
    2,408
    
    
    $
    2,339% of net sales
    
    
    10.8
    %
    
    
    12.6
    %
  -21-




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Six Months Ended June 30,2008
    
    
    2007(In thousands,except % of net sales)Net income
    
    $
    1,498
    
    
    $
    612Plus: Interest expense
    
    
    731
    
    
    
    1,581Plus: Income tax expense
    
    
    712
    
    
    
    90Plus: Depreciation
    
    
    1,526
    
    
    
    1,498EBITDA
    
    $
    4,467
    
    
    $
    3,781% of net sales
    
    
    10.5
    %
    
    
    10.8
    %
  
 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
  
 ITEM 4. Controls and Procedures
   -22-




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PART II. OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
  
 ITEM 1A. Risk Factors
  
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
 (a) Unregistered Sales of Equity Securities
  (b) Initial Public Offering and Use of Proceeds from the Sale of Registered Securities
  (c) Repurchases of Equity Securities
  
 ITEM 3. Defaults Upon Senior Securities
  
 ITEM 4. Submission of Matters to a Vote of Security Holders
  (1)
    
    To elect seven directors for one-year terms expiring at the conclusion of the
Companys annual meeting in 2009. The vote with respect to each nominee was as follows:
 Nominee
    
    For
    
    WithheldGary P. Arnold
    
    
    5,956,992
    
    
    
    18,150Steven R. Berlin
    
    
    5,956,992
    
    
    
    18,150John C. Guttilla
    
    
    5,956,992
    
    
    
    18,150Douglas E. Hailey
    
    
    5,956,992
    
    
    
    18,150Jeffrey S. Schoen
    
    
    5,956,992
    
    
    
    18,150Jay Shuster
    
    
    5,956,992
    
    
    
    18,150Robert A. Snyder
    
    
    5,956,992
    
    
    
    18,150
 -23-




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(2)
    
    To ratify the appointment of Tullius Taylor Sartain & Sartain LLP as the Companys
independent registered public accounting firm for 2008:
 For
    
    Against
    
    Abstain5,955,467
    
    
    15,925
    
    
    
    3,750
 (3)
    
    To amend the Companys Stock Incentive Plan to increase the number of shares that may
be issued under the plan from 697,500 to 897,500:
 For
    
    Against
    
    Abstain3,391,633
    
    
    625,140
    
    
    
    6,861
  
 ITEM 5. Other Information
  
 ITEM 6. Exhibits
  -24-




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SIGNATURES
  ORCHIDS PAPER PRODUCTS COMPANY
 Date: August 4, 2008
    By:
    /s/ Keith R. SchroederKeith R. SchroederChief Financial Officer
(On behalf of the registrant and

as Chief Accounting Officer)




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Exhibit Index
 Exhibit
    
    Description3.1
    
    Amended and Restated Certificate of Incorporation of the
Registrant incorporated by reference to Exhibit 3.1 to the
Registrants Registration Statement on Form S-1 (File No.
333-124173) filed with the Securities and Exchange Commission on
April 19, 2005.3.1.1
    
    Amendment to the Amended and Restated Certificate of Incorporation
of the Registrant incorporated by reference to the Form 10-Q
filed with the Securities and Exchange Commission on August 14, 2007.3.2
    
    Amended and Restated Bylaws of the Registrant incorporated by
reference to Exhibit 3.2 to the Registrants Registration
Statement on Form S-1 (File No. 333-124173) filed with the
Securities and Exchange Commission on April 19, 2005.10.1
    
    2005 Stock Incentive Plan, as amended.31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302.31.2
    
    Certification of Chief Financial Officer Pursuant to Section 302.32.1
    
    Certification of Chief Executive Officer Pursuant to Section 906.32.2
    
    Certification of Chief Financial Officer Pursuant to Section 906.