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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 March 31, 2007
 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 
Incorporation or Organization)
    
    (I.R.S. Employer
Identification No.)
 4826 Hunt Street
Pryor, Oklahoma 74361
 (918) 825-0616
 o þ
  o o þ
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ORCHIDS PAPER PRODUCTS COMPANY
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2007
 PagePART I. FINANCIAL INFORMATIONITEM 1. Financial StatementsBalance Sheets as of March 31, 2007 (Unaudited) and December 31, 2006
    
    
    3Statements of Income for the three months ended March 31, 2007 and
2006 (Unaudited)
    
    
    4Statements of Cash Flows for the three months ended March 31, 2007
and 2006 (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
    
    
    19ITEM 4. Controls and Procedures
    
    
    19ITEM 4T. Controls and Procedures
    
    
    19PART II. OTHER INFORMATIONITEM 1. Legal Proceedings
    
    
    19ITEM 1A. Risk Factors
    
    
    19ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    19ITEM 3. Defaults Upon Senior Securities
    
    
    20ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    20ITEM 5. Other Information
    
    
    20ITEM 6. Exhibits
    
    
    20Signatures
    
    
    20302 Certification of Chief Executive Officer and President302 Certification of Chief Financial Officer906 Certification of Chief Executive Officer and President906 Certification of Chief Financial Officer
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PART I  FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
 ORCHIDS PAPER PRODUCTS COMPANY
 
 BALANCE SHEETS
 (Dollars in thousands, except share data)
 As ofMarch 31,
    
    
    December 31,2007
    
    
    2006(unaudited)ASSETSCurrent assets:Cash
    
    $
    3
    
    
    $
    3Accounts receivable, net of allowance of
$122 in 2007 and $100 in 2006
    
    
    5,462
    
    
    
    5,089Inventories, net
    
    
    4,485
    
    
    
    4,379Restricted certificate of deposit
    
    
    1,500
    
    
    
    1,500Income taxes receivable
    
    
    1,242
    
    
    
    1,242Prepaid expenses
    
    
    316
    
    
    
    306Deferred income taxes
    
    
    346
    
    
    
    346Total current assets
    
    
    13,354
    
    
    
    12,865Property, plant and equipment
    
    
    63,158
    
    
    
    63,081Accumulated depreciation
    
    
    (5,791
    )
    
    
    (5,042
    )Net property, plant and equipment
    
    
    57,367
    
    
    
    58,039Deferred debt issuance costs, net of accumulated
amortization of $516 in 2007 and $424 in 2006
    
    
    32
    
    
    
    124Total assets
    
    $
    70,753
    
    
    $
    71,028LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,343
    
    
    $
    3,772Accrued liabilities
    
    
    1,924
    
    
    
    1,805Current portion of long-term debt
    
    
    2,203
    
    
    
    2,263Total current liabilities
    
    
    8,470
    
    
    
    7,840Long-term debt, net of unamortized discount of $82
in 2007 and $74 in 2006
    
    
    30,790
    
    
    
    31,575Deferred income taxes
    
    
    6,860
    
    
    
    6,909Stockholders equity:Common stock, $.001 par value, 10,000,000 shares
authorized, 6,234,346 shares issued and outstanding
in 2007 and 2006
    
    
    6
    
    
    
    6Additional paid-in capital
    
    
    21,199
    
    
    
    21,139Common stock warrants
    
    
    141
    
    
    
    141Retained earnings
    
    
    3,287
    
    
    
    3,418Total stockholders equity
    
    
    24,633
    
    
    
    24,704Total liabilities and stockholders equity
    
    $
    70,753
    
    
    $
    71,028
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ORCHIDS PAPER PRODUCTS COMPANY
 
 STATEMENTS OF INCOME
 Three Months Ended March 31,2007
    
    
    2006(unaudited)
    
    
    (unaudited)(Dollars in thousands, exceptshare and per share data)Net sales
    
    $
    16,637
    
    
    $
    14,099Cost of sales
    
    
    14,767
    
    
    
    12,536Gross profit
    
    
    1,870
    
    
    
    1,563Selling, general and administrative expenses
    
    
    1,197
    
    
    
    1,248Operating income
    
    
    673
    
    
    
    315Interest expense
    
    
    873
    
    
    
    47Other (income) expense, net
    
    
    (20
    )
    
    
    (12
    )Income (loss) before income taxes
    
    
    (180
    )
    
    
    280Provision (benefit) for income taxes:Current
    
    
    
    
    
    
    74Deferred
    
    
    (49
    )
    
    
    24(49
    )
    
    
    98Net income (loss)
    
    $
    (131
    )
    
    $
    182Net income (loss) per share:Basic
    
    ($
    0.02
    )
    
    $
    0.03Diluted
    
    ($
    0.02
    )
    
    $
    0.03Shares used in calculating net income per share:Basic
    
    
    6,234,346
    
    
    
    6,234,346Diluted
    
    
    6,234,346
    
    
    
    6,477,048
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ORCHIDS PAPER PRODUCTS COMPANY
 
 STATEMENTS OF CASH FLOWS
 Three Months Ended March 31,2007
    
    
    2006(unaudited)
    
    
    (unaudited)(Dollars in thousands)Cash Flows From Operating ActivitiesNet income (loss)
    
    $
    (131
    )
    
    $
    182Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    849
    
    
    
    440Provision for doubtful accounts
    
    
    15
    
    
    
    15Deferred income taxes
    
    
    (49
    )
    
    
    24Stock option plan expense
    
    
    60
    
    
    
    59Foreign currency transaction loss
    
    
    
    
    
    
    18Unrealized gain on foreign exchange contracts
    
    
    
    
    
    
    (13
    )Changes in cash due to changes in operating assets
and liabilities:Accounts receivable
    
    
    (388
    )
    
    
    446Inventories
    
    
    (106
    )
    
    
    (1,729
    )Prepaid expenses
    
    
    (10
    )
    
    
    134Income taxes receivable
    
    
    
    
    
    
    29Accounts payable
    
    
    571
    
    
    
    386Accrued liabilities
    
    
    119
    
    
    
    46Net cash provided by operating activities
    
    
    930
    
    
    
    37Cash Flows From Investing ActivitiesPurchases of property, plant and equipment
    
    
    (77
    )
    
    
    (8,776
    )Net cash used in investing activities
    
    
    (77
    )
    
    
    (8,776
    )Cash Flows From Financing ActivitiesPrincipal payments on long-term debt
    
    
    (630
    )
    
    
    (380
    )Net borrowings on revolving credit line
    
    
    (223
    )
    
    
    610Borrowings under construction loan
    
    
    
    
    
    
    8,135Net cash provided by (used in) financing activities
    
    
    (853
    )
    
    
    8,365Net decrease in cash
    
    
    
    
    
    
    (374
    )Cash, beginning
    
    
    3
    
    
    
    378Cash, ending
    
    $
    3
    
    
    $
    4Supplemental Disclosure:Interest paid
    
    $
    778
    
    
    $
    417Income taxes paid
    
    $
    
    
    
    $
    45Supplemental Disclosure of Non-Cash Investing and Financing Activities:Contractual obligation for purchase of paper machine
    
    $
    
    
    
    $
    698
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ORCHIDS PAPER PRODUCTS COMPANY
 
 NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
 Note 1
 Basis of Presentation
    Note 2
 Stock Split
  Note 3  Purchase Commitment and Foreign Currency Derivatives
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Note 4
 Capitalized Interest
  Note 5
 Earnings per Share
  Three Months Ended March 31,2007
    
    
    2006Net income (loss) ($ thousands)
    
    $
    (131
    )
    
    $
    182Weighted average shares outstanding
    
    
    6,234,346
    
    
    
    6,234,346Effect of stock options
    
    
    
    
    
    
    121,035Effect of dilutive warrants
    
    
    
    
    
    
    121,667Weighted average shares outstanding  assuming dilution
    
    
    6,234,346
    
    
    
    6,477,048Earnings per common share:Basic
    
    $
    (0.02
    )
    
    $
    0.03
    (2)Diluted
    
    $
    (0.02
    )(1)
    
    $
    0.03
    (2)
 
 (1)
    
    Due to net loss, option and warrant shares in the amount of 136,804 and 133,960, respectively,
are anti-dilutive, thus not considered.(2)
    
    Restated to reflect 3-for-2 stock split effected July 2006. Note 6
 Stock Incentive Plan
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Note 7
 Major Customers and Concentration of Credit Risk
  Note 8  Subsequent Event
  .
    
    a $6.0 million revolving credit facility with a 3-year term;.
    
    a $10.0 million term loan A with a ten-year term that has no amortization for 24 months and
is then amortized as if the loan had a eighteen-year life;.
    
    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; 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.
   Note 9
 New Accounting Standards
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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 revenues are attributable to three large customers which may
decrease or cease purchases at any time;
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.
    
    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 could significantly affect our business;.
    
    our exposure to variable interest rates may affect our financial health;.
    
    the disruption in supply or cost of waste paper;.
    
    the loss of key personnel;.
    
    labor interruptions;.
    
    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 plant; and.
    
    energy costs.
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Comparative Three-Month Periods Ended March 31, 2007 and 2006
 Net Sales
 Three Months Ended March 31,2007
    
    2006(in thousands, except average price per ton and tons)Net sales
    
    $
    16,637
    
    
    $
    14,099Total Tons Shipped
    
    
    11,161
    
    
    
    9,218Average Price per ton
    
    $
    1,491
    
    
    $
    1,530
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Cost of Sales
 Three Months Ended March 31,2007
    
    
    2006(in thousands, except gross profit margin %)Cost of paper
    
    $
    8,672
    
    
    $
    7,915Non-paper materials, labor, supplies, etc.
    
    
    5,346
    
    
    
    4,228Sub-total
    
    
    14,018
    
    
    
    12,143Depreciation
    
    
    749
    
    
    
    393Cost of sales
    
    $
    14,767
    
    
    $
    12,536Gross Profit
    
    $
    1,870
    
    
    $
    1,563Gross Profit Margin %
    
    
    11.2
    %
    
    
    11.1
    %
   Three Months Ended March 31,2007
    
    
    2006Paper usage (tons)Converted-internal
    
    
    9,301
    
    
    
    5,875Converted-purchased
    
    
    321
    
    
    
    3,343Total converted
    
    
    9,622
    
    
    
    9,218Third-party parent roll sales
    
    
    1,539
    
    
    
    Paper costs per tonCost per ton produced internally
    
    $
    766
    
    
    $
    760Cost per ton purchased from third parties
    
    $
    1,149
    
    
    $
    1,032Total cost per ton consumed
    
    $
    777
    
    
    $
    859Total paper costs (in thousands)Cost of internally produced paper
    
    $
    8,303
    
    
    $
    4,465Cost of paper purchased from third parties
    
    
    369
    
    
    
    3,450Total paper costs
    
    $
    8,672
    
    
    $
    7,915
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Gross Profit
  Selling, General and Administrative Expenses
 Three Months Ended March 31,2007
    
    
    2006(In thousands, except SG&A as a % of net sales)Commission expense
    
    $
    222
    
    
    $
    199Other S,G&A expenses
    
    
    975
    
    
    
    1,049Selling, General & Adm exp
    
    $
    1,197
    
    
    $
    1,248SG&A as a % of net sales
    
    
    7.2
    %
    
    
    8.9
    %
  Operating Income
  Interest and Other Expense
 Three Months Ended March 31,2007
    
    2006(In thousands)Interest expense
    
    $
    873
    
    
    $
    47Other (income) expense, net
    
    $
    (20
    )
    
    $
    (12
    )
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Income (Loss) Before Income Taxes
  Income Tax Provision (Benefit)
  Liquidity and Capital Resources
    Three Months Ended March 31,2007
    
    2006(in thousands)Cash flow provided by (used in):Operating activities
    
    $
    930
    
    
    $
    37Investing activities
    
    $
    (77
    )
    
    $
    (8,776
    )Financing activities
    
    $
    (853
    )
    
    $
    8,365
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.
    
    a $6.0 million revolving credit facility with a 3-year term;.
    
    a $10.0 million term loan A with a ten-year term that has no amortization for 24 months and
is then amortized as if the loan had a eighteen-year life;.
    
    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; 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.
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Critical Accounting Policies and Estimates
  -16-




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Accounts Receivable
 Inventory.
 New Accounting Pronouncements
    -17-




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Non-GAAP Discussion
    .
    
    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 March 31,2007
    
    2006(In thousands, except % of net sales)Net income (loss)
    
    $
    (131
    )
    
    $
    182Plus: Interest expense, net
    
    
    873
    
    
    
    47Plus: Income tax expense (benefit)
    
    
    (49
    )
    
    
    98Plus: Depreciation
    
    
    749
    
    
    
    393EBITDA
    
    $
    1,442
    
    
    $
    720% of net sales
    
    
    8.7
    %
    
    
    5.1
    %
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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
  
 ITEM 4. Controls and Procedures
  
 ITEM 4T. Controls and Procedures
  
 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.
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ITEM 3. Defaults Upon Senior Securities
  
 ITEM 4. Submission of Matters to a Vote of Security Holders
  
 ITEM 5. Other Information
  
 ITEM 6. Exhibits
  
 SIGNATURES
  ORCHIDS PAPER PRODUCTS COMPANYDate: May 4, 2007
    
    By:
    /s/ Keith R. SchroederKeith R. SchroederChief Financial Officer

(On behalf of the registrant and as Chief Accounting Officer) -20-




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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, 2005.3.2
    
    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, 2005.31.1
    
    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.
 21