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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, 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
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 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, 2008
  
 PagePART I. FINANCIAL INFORMATIONITEM 1. Financial StatementsBalance Sheets as of March 31, 2008 (Unaudited) and
December 31, 2007
    
    3Statements of Income for the three months ended March 31, 2008
and 2007 (Unaudited)
    
    4Statements of Cash Flows for the three months ended March 31, 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
    
    18ITEM 4. Controls and Procedures
    
    18PART 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
    
    19ITEM 4. Submission of Matters to a Vote of Security Holders
    
    19ITEM 5. Other Information
    
    19ITEM 6. Exhibits
    
    19Signatures
    
    20Supplier Agreement302 Certification of Chief Executive Officer302 Certification of Chief Financial Officer906 Certification of Chief Executive Officer906 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)
 March 31,
    
    
    December 31,2008
    
    
    2007(unaudited)ASSETSCurrent assets:Cash
    
    $
    3
    
    
    $
    3Accounts receivable, net of allowance of $118 in 2008 and
$100 in 2007
    
    
    6,837
    
    
    
    5,527Inventories, net
    
    
    5,559
    
    
    
    4,874Income taxes receivable
    
    
    30
    
    
    
    24Prepaid expenses
    
    
    434
    
    
    
    381Deferred income taxes
    
    
    516
    
    
    
    516Total current assets
    
    
    13,379
    
    
    
    11,325Property, plant and equipment
    
    
    65,258
    
    
    
    64,899Accumulated depreciation
    
    
    (8,797
    )
    
    
    (8,043
    )Net property, plant and equipment
    
    
    56,461
    
    
    
    56,856Deferred debt issuance costs, net of accumulated amortization
of $579 in 2008 and $570 in
2007
    
    
    113
    
    
    
    122Total assets
    
    $
    69,953
    
    
    $
    68,303LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,557
    
    
    $
    4,760Accrued liabilities
    
    
    2,694
    
    
    
    2,460Current portion of long-term debt
    
    
    2,442
    
    
    
    2,391Total current liabilities
    
    
    9,693
    
    
    
    9,611Long-term debt, less current portion
    
    
    23,872
    
    
    
    23,264Deferred income taxes
    
    
    7,669
    
    
    
    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
    
    
    21,952
    
    
    
    21,879Common stock warrants
    
    
    134
    
    
    
    141Retained earnings
    
    
    6,627
    
    
    
    6,016Total stockholders equity
    
    
    28,719
    
    
    
    28,042Total liabilities and stockholders equity
    
    $
    69,953
    
    
    $
    68,303
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ORCHIDS PAPER PRODUCTS COMPANY
 
 STATEMENTS OF INCOME
 Three Months Ended March 31,2008
    
    
    2007(unaudited)
    
    
    (unaudited)(Dollars in thousands, exceptshare and per share data)Net sales
    
    $
    20,275
    
    
    $
    16,637Cost of sales
    
    
    17,586
    
    
    
    14,905Gross profit
    
    
    2,689
    
    
    
    1,732Selling, general and administrative expenses
    
    
    1,385
    
    
    
    1,059Operating income
    
    
    1,304
    
    
    
    673Interest expense
    
    
    411
    
    
    
    873Other income, net
    
    
    (1
    )
    
    
    (20
    )Income (loss) before income taxes
    
    
    894
    
    
    
    (180
    )Provision (benefit) for income taxes:Deferred
    
    
    283
    
    
    
    (49
    )Net income (loss)
    
    $
    611
    
    
    $
    (131
    )Net income (loss) per share:Basic
    
    $
    0.10
    
    
    $
    (0.02
    )Diluted
    
    $
    0.09
    
    
    $
    (0.02
    )Shares used in calculating net income (loss) per share:Basic
    
    
    6,327,049
    
    
    
    6,234,346Diluted
    
    
    6,554,357
    
    
    
    6,234,346
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##### Table of Contents



ORCHIDS PAPER PRODUCTS COMPANY
 
 STATEMENTS OF CASH FLO WS
 Three Months Ended March 31,2008
    
    
    2007(unaudited)
    
    
    (unaudited)(Dollars in thousands)Cash Flows From Operating ActivitiesNet income (loss)
    
    $
    611
    
    
    $
    (131
    )Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:Depreciation and amortization
    
    
    763
    
    
    
    849Provision for doubtful accounts
    
    
    15
    
    
    
    15Deferred income taxes
    
    
    283
    
    
    
    (49
    )Stock option plan expense
    
    
    51
    
    
    
    60Changes in cash due to changes in operating assets and liabilities:Accounts receivable
    
    
    (1,325
    )
    
    
    (388
    )Inventories
    
    
    (685
    )
    
    
    (106
    )Income taxes receivable
    
    
    (6
    )
    
    
    Prepaid expenses
    
    
    (53
    )
    
    
    (10
    )Accounts payable
    
    
    (203
    )
    
    
    571Accrued liabilities
    
    
    234
    
    
    
    119Net cash provided by (used in) operating activities
    
    
    (315
    )
    
    
    930Cash Flows From Investing ActivitiesPurchases of property, plant and equipment
    
    
    (359
    )
    
    
    (77
    )Cash Flows From Financing ActivitiesPrincipal payments on long-term debt
    
    
    (413
    )
    
    
    (630
    )Net borrowings (repayments) on revolving credit line
    
    
    1,072
    
    
    
    (223
    )Proceeds from the exercise of warrants attached to subordinated debentures
    
    
    15
    
    
    
    Net cash provided by (used in) financing activities
    
    
    674
    
    
    
    (853
    )Net change in cash
    
    
    
    
    
    
    Cash, beginning
    
    
    3
    
    
    
    3Cash, ending
    
    $
    3
    
    
    $
    3Supplemental Disclosure:Interest paid
    
    $
    338
    
    
    $
    778Income 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  Credit Agreements
  
    
    The revolving line of credit facility was increased from $6.0 million to $8.0 million.
    
    The annual limit on unfinanced capital expenditures was increased from $1.5 million to
$6.25 million for fiscal year 2008. The limit reverts to $1.5 million for 2009 and
thereafter.
 Note 4  Earnings per Share
  Three Months Ended March 31,2008
    
    
    2007Net income (loss)  ($ thousands)
    
    $
    611
    
    
    $
    (131
    )Weighted average shares outstanding
    
    
    6,327,049
    
    
    
    6,234,346Effect of stock options
    
    
    99,642
    
    
    
    
    (1)Effect of dilutive warrants
    
    
    127,666
    
    
    
    
    (1)Weighted average shares
outstanding  assuming dilution
    
    
    6,554,357
    
    
    
    6,234,346Net income (loss) per share:Basic
    
    $
    0.10
    
    
    $
    (0.02
    )Diluted
    
    $
    0.09
    
    
    $
    (0.02
    ) (1)Stock options not considered above
because they were anti-dilutive
    
    
    33,750
    
    
    
    18,750
 
 (1)
    
    Due to net loss, option and warrant shares of 270,764 for the three months ended March
31, 2007 are anti-dilutive and thus not considered. Note 6  Stock Incentive Plan
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Note 6  Major Customers and Concentration of Credit Risk
  Note 7  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 converted product revenues are attributable to three large customers which may decrease or
cease purchases at any time;.
    
    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;
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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.
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Comparative Three-Month Periods Ended March 31, 2008 and 2007
 Net Sales
 Three Months Ended March 31,2008
    
    2007(in thousands, except averageprice per ton and tons)Net sales
    
    $
    20,275
    
    
    $
    16,637Total tons shipped
    
    
    12,962
    
    
    
    11,161Average price per ton
    
    $
    1,564
    
    
    $
    1,491
  Cost of Sales
 Three Months Ended March 31,2008
    
    
    2007(in thousands, exceptgross profit margin %and paper cost per ton)Cost of paper
    
    $
    10,604
    
    
    $
    8,672Non-paper materials, labor, supplies, etc.
    
    
    6,227
    
    
    
    5,484Sub-total
    
    $
    16,831
    
    
    
    14,156Depreciation
    
    
    755
    
    
    
    749Cost of sales
    
    $
    17,586
    
    
    $
    14,905Gross profit
    
    $
    2,689
    
    
    $
    1,732Gross profit margin %
    
    
    13.3
    %
    
    
    10.4
    %Total paper cost per ton consumed
    
    $
    818
    
    
    $
    777
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Gross Profit
  Selling, General and Administrative Expenses
 Three Months Ended March 31,2008
    
    
    2007(In thousands, except SG&Aas a % of net sales)Commission expense
    
    $
    242
    
    
    $
    222Other S,G&A expenses
    
    
    1,143
    
    
    
    837Selling, General & Adm exp
    
    $
    1,385
    
    
    $
    1,059SG&A as a % of net sales
    
    
    6.8
    %
    
    
    6.4
    %
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Operating Income
  Interest Expense and Other Income
 Three Months Ended March 31,2008
    
    2007(In thousands)Interest expense
    
    $
    411
    
    
    $
    873Other income, net
    
    $
    (1
    )
    
    $
    (20
    )
   Income (Loss) Before Income Taxes
  Income Tax Provision (Benefit)
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Liquidity and Capital Resources
    Three Months Ended March 31,2008
    
    2007(in thousands)Cash flow provided by (used in):Operating activities
    
    $
    (315
    )
    
    $
    930Investing activities
    
    $
    (359
    )
    
    $
    (77
    )Financing activities
    
    $
    674
    
    
    $
    (853
    )
     .
    
    a $8.0 million revolving credit facility with a three-year term;
($1.37 million outstanding at March 31, 2008). In addition, $489,000
of bank overdrafts are included with long-term debt at March 31, 2008.
The borrowing base for the revolving credit facility is determined by
adding qualified receivables and inventory. At March 31, 2008, the
borrowing base for the revolving credit facility was $7.5 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 March 31, 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 ($14.4 million
outstanding at March 31, 2008); and
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.
    
    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 March 31, 2008).
     Critical Accounting Policies and Estimates
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Accounts Receivable
 Inventory.
 New Accounting Pronouncements
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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 31,2008
    
    
    2007(In thousands, except % of net sales)Net income (loss)
    
    $
    611
    
    
    $
    (131
    )Plus: Interest expense, net
    
    
    411
    
    
    
    873Plus: Income tax expense (benefit)
    
    
    283
    
    
    
    (49
    )Plus: Depreciation
    
    
    754
    
    
    
    749EBITDA
    
    $
    2,059
    
    
    $
    1,442% of net sales
    
    
    10.2
    %
    
    
    8.7
    %
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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
  
 ITEM 4. Controls and Procedures
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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
  
 ITEM 5. Other Information
  
 ITEM 6. Exhibits
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SIGNATURES
  ORCHIDS PAPER PRODUCTS COMPANYDate: May 2, 2008
    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, 2005.3.1.1
    
    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*
    
    Supplier Agreement, dated February 20, 2008, between Dixie Pulp &
Paper, Inc. and the Registrant.10.2
    
    Amendment Two to Second Amended and Restated Agented Credit
Agreement, dated March 6, 2008, incorporated by reference to
Exhibit 10.1 to the Registrants Current Report on Form 8-K (File
No. 001-32563) filed with the Securities and Exchange Commission
on March 11, 2008.31.1
    
    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.*
    
    Confidential treatment has been requested with respect to certain
portions of this exhibit. Omitted portions have been filed
separately with the Securities and Exchange Commission.
 -21-