- Quarterly Report (10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________

FORM 10-Q

__________

(Mark One)
x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission File Number: 000-53896

PANELTECH INTERNATIONAL HOLDINGS, INC.

(Exact name of registrant as specified in its charter)


Delaware		20-4748555
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

2999 John Stevens Way

Hoquiam, WA 98550

(Address of Principal Executive Offices, Including ZIP Code)

(360) 538-1480

(Registrant’s Telephone Number, Including Area Code)

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 x 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

(Do not check if a smaller reporting company)

Smaller reporting company x

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

As of November 10, 2010, the Registrant had 54,481,022 shares of common stock outstanding.

Table of Contents

PANELTECH INTERNATIONAL HOLDINGS, INC.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements	3

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31

Item 4.	Controls and Procedures	31

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	33

Item 1A.	Risk Factors	33

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33

Item 3.	Defaults Upon Senior Securities	33

Item 5.	Other Information	33

Item 6.	Exhibits	33

Signatures		34

Index to Exhibits

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Item 1. Financial Statements

PANELTECH INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS
	September 30		December 31
	2010		2009
	(Unaudited)
CURRENT ASSETS
Cash	$	158,634	$	4,121
Accounts receivable, net		1,011,644		782,951
Inventories		1,743,650		1,733,453
Prepaid expenses and other current assets		45,234		37,774

Total Current Assets		2,959,162		2,558,299

PROPERTY AND EQUIPMENT, Net		1,835,355		2,048,963

OTHER ASSETS
Deferred loan costs		30,301		31,149
Intangible assets, net		193,500		213,750

Total Other Assets		223,801		244,899

TOTAL ASSETS	$	5,018,318	$	4,852,161

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements

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PANELTECH INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS




LIABILITIES AND STOCKHOLDERS' DEFICIENCY
	September 30			December 31
	2010			2009
	(Unaudited)
CURRENT LIABILITIES
Line of credit	$	552,221		$	232,852
Note payable -shareholder		--			375,000
Accounts payable		1,038,999			651,629
Accrued expenses and other current liabilities		405,430			289,513
Current maturities of long-term debt		403,306			330,829
Due to shareholders-current		450,961			313,301
Capital lease obligations		17,825			16,769

Total Current Liabilities		2,868,742			2,209,893

OTHER LIABILITIES
Long-term debt, less current maturities		1,698,308			1,813,174
Note payable - shareholder		375,000			137,660
Derivative obligation -warrants		164,644			99,974
Capital lease obligations, less current portion		11,089			24,597
Deferred tax liability		--			217,000

Total Other Liabilities		2,249,041			2,292,405

TOTAL LIABILITIES		5,117,783			4,502,298

REDEEMABLE CONVERTIBLE PREFERRED STOCK
Series A convertible preferred stock, $0.0001 par
value , 5,453,100 shares designated, 3,271,860
issued and outstanding, liquidation preference
of $3,600,000.		1,997,444			1,505,917

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' DEFICIENCY
Common Stock, $0.0001 par value, 500,000,000
shares authorized, 54,481,022 and 68,253,572 shares
issued and outstanding respectively		5,448			6,825
Additional paid-in capital		(872,685	)		(114,975	)
Accumulated deficit		(1,229,672	)		(297,904	)
Treasury stock, at cost, 0 and 13,772,550 shares
outstanding respectively		--			(750,000	)

TOTAL STOCKHOLDERS DEFICIENCY		(2,096,909	)		(1,156,054	)

TOTAL LIABILITIES AND EQUITY	$	5,018,318		$	4,852,161

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements

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PANELTECH INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	For the Three Months						For the Nine Months
	Ended September 30						Ended September 30

	2010			2009			2010			2009
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)

NET SALES	$	2,108,837		$	2,339,504		$	6,458,034		$	6,979,912

COST OF SALES		1,538,971			1,747,006			4,839,402			5,416,963

GROSS PROFIT		569,866			592,498			1,618,632			1,562,949

OPERATING EXPENSES		493,538			743,243			2,095,418			2,203,584

OPERATING INCOME (LOSS)		76,328			(150,745	)		(476,786	)		(640,635	)

OTHER INCOME (EXPENSE)
Interest Expense		(65,085	)		(50,816	)		(173,667	)		(142,427	)

NET INCOME (LOSS)
BEFORE INCOME TAXES		11,243			(201,561	)		(650,453	)		(783,062	)

Income Tax Benefit		--			--			217,000			--

NET INCOME (LOSS)		11,243			(201,561	)		(433,453	)		(783,062	)

Preferred Stock Dividends		(50,192	)		--			(156,789	)		--
Preferred Stock Accretion		(125,281	)		--			(341,527	)		--

NET LOSS AVAILABLE TO
COMMON STOCKHOLDERS	$	(164,230	)	$	(201,561	)	$	(931,769	)	$	(783,062	)

Net loss per share to common
stockholders - basic and diluted	$	(0.00	)	$	(0.00	)	$	(0.02	)	$	(0.01	)

Weighted average shares outstanding
- basic and diluted		54,481,022			61,759,852			54,481,022			61,759,852

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements

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PANELTECH INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Nine Months
	Ended September 30
	2010			2009
	(Unaudited)			(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss	$	(433,453	)	$	(783,062	)
Adjustments to reconcile net loss to net cash
cash used in operating activities:
Gain on disposal of property and equipment		(70,846	)		--
Depreciation expense		207,189			289,642
Amortization expense		25,945			27,611
Provision for doubtful accounts		--			24,323
Stock based compensation		55,583			--
Income taxes		(217,000	)		--
Changes in operating assets and liabilities:
Accounts receivable		(228,693	)		399,817
Inventories		(10,197	)		313,940
Prepaid expenses and other current assets		(7,460	)		13,279
Other Assets		--			(85,983	)
Accounts payable		387,371			(395,156	)
Accrued expenses and other current liabilities		(40,872	)		23,172

TOTAL ADJUSTMENTS		101,020			610,645

NET CASH USED IN
OPERATING ACTIVITIES		(332,433	)		(172,417	)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment		(179,195	)		(60,668	)
Proceeds from sale of property and equipment		256,460			--

NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES	$	77,265		$	(60,668	)

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements

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PANELTECH INTERNATIONAL HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued


	For the Nine Months
	Ended September 30
	2010			2009
	(Unaudited)			(Unaudited)
CAS H FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under line of credit	$	319,369		$	83,184
Net (repayment) borrowings of notes payable		(47,236	)		159,796
Payments on capital lease obligations		(12,452	)		(11,479	)
Net Proceeds from sale of preferred stock		150,000			--

NET CASH PROVIDED BY
FINANCING ACTIVITIES		409,681			231,501

NET INCREASE (DECREASE) IN CASH		154,513			(1,584	)

CASH - Beginning		4,121			3,914

CASH - Ending	$	158,634		$	2,330


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the years for:

Interest	$	142,323		$	142,976
Taxes	$	--		$	--

Non-cash investing and financing activities:

Dividends on redeemable convertible
preferred stock	$	156,789		$	--

Preferred stock accretion	$	341,527		$	--

Retirement of Treasury Stock	$	750,000		$	--

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements

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PANELTECH INTERNATIONAL HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - Organization

Organization and Principal Business Activity

On December 23, 2009, Paneltech Products, Inc. (“Paneltech Products”), a Delaware corporation and wholly-owned subsidiary of the Paneltech International Holdings, Inc. (“Company”), completed a reverse merger (the “Merger”) with Paneltech International, LLC (“Paneltech LLC”) a Washington limited liability company. Following the Merger, the Company, then known as Charleston Basics, Inc. (“Charleston”), sold all of its pre-Merger assets relating to its pre-Merger business to the former CEO and shareholder of Charleston for a nominal value. Prior to consummating the Merger, the Company’s principal business was the sale of outdoor camping goods and tactical gear. Under the terms of the Merger, Paneltech LLC merged with and into Paneltech Products, to become the Company’s principal operating business. Charleston subsequently changed its name to Paneltech International Holdings, Inc.

Immediately following the Merger, the business of Paneltech LLC became the principal operating business of the Company. The Company now manufactures solid surface phenolic resin paper composite products under the brands Paperstone, Rainstone and Stonekast; manufactures overlays; provides ballistics web prepreg, branded as Fortrex; and provides transport services for the timber industry. The Company services customers worldwide and operates as one business segment. The Company was incorporated on April 4, 2006 under the laws of the State of Delaware.

As a result of the Merger, all of the membership units of Paneltech LLC were exchanged for 61,759,852 shares of Charleston common stock. The former members of Paneltech LLC therefore became the controlling stockholders of Charleston and accordingly, the Merger is a reverse merger that has been accounted for as a recapitalization of Paneltech LLC, which is deemed to be the accounting acquirer. As of the date of the Merger, the Company had 6,543,720 shares of common stock issued and outstanding.

Following consummation of the Merger, the Company entered into Securities Purchase Agreements (the “Offering”) with three investors and raised an aggregate of $1.65 million in an offering of the Company’s preferred stock and warrants. Of the $1.65 million of proceeds raised, $375,000 was used as a partial payment to repurchase certain shares held by a former member of Paneltech LLC.

On April 7, 2010, the Company entered into a Securities Purchase Agreement with another investor and raised $150,000 in an offering of the Company’s Series A Convertible Preferred Stock and warrants to purchase Common Stock (the “April Offering”). The Company issued to the investor 272,655 shares of Preferred Stock and granted 454,425 Warrants. The terms of the April Offering, were substantially the same as the terms of the Offering described above.

NOTE 2 - Liquidity and Financial Condition

The Company has traditionally financed its working capital needs with cash flows from operations and borrowings under a line of credit for which borrowings are based on a portion of eligible accounts receivable and inventory. On September 30, 2010, the Company had a line of credit with Shorebank Pacific (“Shorebank”) which expired on October 1, 2010 (the “Shorebank Facility”). As described below in Note 2, the Company entered into a new line of credit with Anchor Mutual Savings Bank (“Anchor Bank”) on November 9, 2010, which will expire on October 15, 2011.

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PANELTECH INTERNATIONAL HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2 - Liquidity and Financial Condition , continued

The Shorebank Facility consisted of a line of credit that, as a result of various change in terms agreements, was as of September 30, 2010, in the amount of $700,000 with an interest rate of 10.5%. The advances under the Shorebank Facility were determined based on rate of 75% of eligible accounts receivable and 25% of eligible inventory. The Shorebank Facility, which expired October 1, 2010, was secured by accounts receivable, inventory, and equipment and guaranteed by certain officers of the Company. The balance outstanding on the Shorebank Facility at September 30, 2010 and December 31, 2009 was $552,221 and $232,852, respectively. On November 10, 2010, the balance of the Shorebank Facility was paid off using funds available under the Anchor Facility. After September 30, 2010 and before November 10, 2010, the Company financed its working capital needs with cash flows from operations.

The Shorebank Facility contained certain restrictions and covenants under which the Company needed to maintain certain levels of working capital and net worth and maintain certain financial ratios (current ratio, minimum working capital, earnings, and debt to net worth). At October 31, 2009, the Company was not in compliance with various covenants under the terms of the Shorebank Facility line of credit agreement, which constituted an event of default. On November 30, 2009, the Company received a waiver of these defaults and entered into a forbearance agreement that extended the Shorebank Facility until February 28, 2010. In connection with the extension of the Shorebank Facility until March 26, 2010, Shorebank also entered into a forbearance agreement to waive the defaults and modified the terms of the various covenant requirements.

On March 3, 2010, the Company received a Notice of Default from Shorebank stating that Paneltech LLC (now Paneltech Products) did not satisfy the requirements of the Net Worth and Debt to Net Worth covenants required by the November 30 extension (the “March Default”). On March 26, 2010, Shorebank and the Company entered into a Default and Forbearance Agreement, pursuant to which Shorebank (a) waived the Net Worth, Debt to Net Worth, and Debt Service Coverage covenant violations, and (b) a Change in Terms Agreement was entered into between Shorebank and Paneltech Products (the “March 26 CIT Agreement”). The March 26 CIT Agreement: (a) extended the maturity date of the line of credit until April 30, 2010, (b) reset certain covenants and (c) decreased the interest rate of the Shorebank Facility from 16.5% to 10.5%.

The March 26 CIT Agreement included a reset of the covenants that were calculated by Shorebank based on a plan submitted by the Company. After the March 26 CIT Agreement was signed and put into effect, it was noted that the calculations for the covenants included therein were in error. This resulted in the Company violating the current ratio covenant, the working capital minimum covenant and the debt to net worth covenant on March 31, 2010. On May 5, 2010, Shorebank issued a Notice of Default & Covenant Waiver Agreement notifying the Company that it was in default because it had violated the covenants and that Shorebank had elected to waive its remedies to these defaults (the “May Default”). The Company was in compliance with the reset covenants for the months of May, 2010 through September, 2010.

The Anchor Facility, which was entered into on November 9, 2010, is in the amount of $1,000,000 with an initial interest rate of 7% and expires on October 15, 2011. Under the Anchor Facility, borrowing at any point in time is limited to 75% of eligible accounts receivable and 50% of inventory subject to an inventory borrowing sublimit of $400,000. The Anchor Facility is secured by accounts receivable, inventory, and equipment and guaranteed by the Company’s subsidiary, Paneltech Products, and certain officers of the Company.

The Company has traditionally financed capital equipment with term loans and from working capital. On November 18, 2008, Anchor Bank granted the Company a construction loan for $1,819,000 for the purpose of plant expansion (the “Anchor Loan”). The Anchor Loan was funded as expenditures were made for the expansion. As of September 30, 2010, the Company had borrowed $736,601 under the Anchor Loan facility to acquire some of the equipment required for the plant expansion and other capital projects. Because expected product demand has not materialized in 2010, the expansion project has been postponed until additional demand is developed. On October 1, 2010 the loan was closed to additional borrowing and regular monthly amortization payments began on November 1, 2010. Pursuant to a Change of Terms Agreement dated June 30, 2010, which extended to conversion date for the Anchor Loan from July 15, 2010, to October 1, 2010, the Anchor Loan, was converted to a term loan on October 1, 2010.

On April 7, 2010, the Company entered into a Securities Purchase Agreement with an investor and raised $150,000 in an offering of the Company’s Series A Preferred Stock and warrants to purchase Common Stock (the “April Offering”). The terms of the April Offering, which is now closed, were substantially the same as the terms of the Offering that closed on January 22, 2010.

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PANELTECH INTERNATIONAL HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2 - Liquidity and Financial Condition , continued

The Securities Purchase Agreement entered into in connection with the April Offering was in substantially the same form as the Securities Purchase Agreements entered into in connection with the Offering, and the Warrants issued in connection with the April Offering were the same as the Warrants issued in connection with the Offering. Under the terms of the April Offering’s Securities Purchase Agreement, the Company issued 272,655 shares of Series A Preferred Stock and granted 454,425 Warrants for a purchase price of $150,000. Under the conversion ratio in effect at the closing of the April Offering, each share of Preferred Stock is convertible into five shares of Common Stock. Each Warrant has an initial exercise price of $0.12 per share of Common Stock. The Warrants may be redeemed under certain circumstances.

Based on the Company’s progress in the execution of its business plan as well as obtaining the new Anchor Facility, the Company believes cash balances on hand, borrowings under the line of credit agreement, and cash flows from operations will be sufficient to fund the Company’s net cash requirements over the next twelve months. In March 2010, the Company began taking certain cost cutting measures and increased the selling price of overlay products. In the event that market conditions are weaker than expected, or the Company is not able to borrow sufficient funds under its line of credit, further cost cutting measures may be necessary.

NOTE 3 – Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company’s wholly owned subsidiary, Paneltech Products (including Paneltech Rainscreen, LLC). All significant intercompany balances and transactions have been eliminated in consolidation.

Accounting Standards Codification

The Accounting Standards Codification (“ASC”) has become the source of authoritative U.S. GAAP. The ASC only changes the referencing of financial accounting standards and does not change or alter existing U.S. GAAP.

Revenue Recognition

The Company applies the revenue recognition principles in accordance with ASC 605, "Revenue Recognition," with respect to recognizing its revenue. Accordingly, the Company records revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the seller’s price to the buyer is fixed or determinable, and (iv) collectability is reasonably assured.

Intangible Assets

The Company accounts for intangible assets in accordance with ASC 350 “Intangibles - Goodwill and Other”. ASC 350 requires that goodwill and other intangibles with indefinite lives should be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value.

The Company’s amortizable intangible asset consists of a trade name. The asset is being amortized using the straight-line method over its estimated useful life of ten years.

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PANELTECH INTERNATIONAL HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Impairment of Long-Lived Assets

Intangible assets with finite lives are amortized over their estimated useful lives and reviewed for impairment whenever an impairment indicator exists. The Company continually monitors events and changes in circumstances that could indicate carrying amounts of the long-lived assets, including intangible assets may not be recoverable. When such events or changes in circumstances occur, the Company assesses recoverability by determining whether the carrying value of such assets will be recovered through the undiscounted expected future cash flows. If the future undiscounted cash flows are less than the carrying amount of these assets, an impairment loss is recognized based on the excess of the carrying amount over the fair value of the assets. The Company did not recognize any long lived asset impairment charges in the nine months ended September 30, 2010.

Use of Estimates in the Financial Statements

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These estimates and assumptions include valuing equity securities and derivative financial instruments issued in financing transactions, accounts receivable reserves, inventory reserves, deferred taxes and related valuation allowances, and estimating the fair values of long lived assets to assess whether impairment charges may be necessary. The Company intends to re-evaluate all of its accounting estimates at least quarterly and record adjustments, when necessary.

Fair Value of Financial Instruments

The carrying amounts reported in the balance sheet for cash, lines of credit and other liabilities approximate fair value based on the short-term maturity of these instruments. The carrying amounts reported in the balance sheet for long-term obligations approximate fair value as such instruments feature contractual interest rates that are consistent with current market rates of interest or have effective yields that are consistent with instruments of similar risk.

Effective January 1, 2008, the Company adopted ASC Topic 820, “Fair Value Measurements and Disclosures.” ASC Topic 820 clarifies that fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, ASC Topic 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2: Other inputs that are directly or indirectly observable in the marketplace.

Level 3: Unobservable inputs supported by little or no market activity.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The adoption of this pronouncement did not have any material impact on the Company’s financial position, results of operations and cash flows.

In February 2007, the FASB issued ASC Topic 825, “Fair Value Option“, which is effective for fiscal years beginning after November 15, 2007. ASC Topic 825 permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings.

Concentration of Credit Risk

Financial instruments that potentially expose the Company to concentrations of credit risk consist principally of cash and cash equivalents. The Company maintains our cash accounts at high quality financial institutions with balances, at times, in excess of federally insured limits. As of September 30, 2010, we had no deposits in excess of federally insured limits. The Company believes that the financial institutions that hold our deposits are financially secure and therefore pose minimal credit risk.

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PANELTECH INTERNATIONAL HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 - Summary of Significant Accounting Policies, continued

Preferred Stock/Convertible Instruments

The Company applies the guidance enumerated in ASC 480 “Distinguishing Liabilities from Equity” when determining the classification and measurement of preferred stock. Preferred shares subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair value. The Company classifies conditionally redeemable preferred shares (if any), which includes preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within our control, as temporary equity.

The Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with ASC Topic 815, “Derivatives and Hedging.”

ASC Topic 815 generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments in accordance with ASC Topic 815. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not remeasured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument subject to the requirements of ASC Topic 815. ASC Topic 815 also provides an exception to this rule when the host instrument is deemed to be conventional (as that term is described in the implementation guidance to ASC Topic 815).

Net Loss Per Share

Basic net loss per share is computed by dividing net loss per share available to common stockholders by the weighted average shares of common stock outstanding for the period and excludes any potentially dilutive securities. Diluted earnings per share reflect the potential dilution that would occur upon the exercise or conversion of all dilutive securities into common stock. The computation of loss per share for the three months ended September 30, 2010 and 2009 excludes potentially dilutive securities, including outstanding warrants of 8,232,182 and convertible preferred stock of 16,359,300 (equivalent common shares as of September 30, 2010) because their inclusion would be anti-dilutive.

Derivative Financial Instruments

The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks. The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. For stock-based derivative financial instruments, the Company uses the Black-Scholes option pricing model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on the term of the underlying derivative instrument.

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PANELTECH INTERNATIONAL HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 - Summary of Significant Accounting Policies, continued

Recent Accounting Pronouncements

In August 2009, FASB issued Accounting Standards Update 2009-05 which includes amendments to Subtopic 820-10, “Fair Value Measurements and Disclosure--Overall.” The update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the techniques provided for in this update. The amendments in this update clarify that a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability and also clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. The adoption of this standard did not have a material impact on the Company’s financial position, results of operations and cash flows.

In March 2010, the FASB issued Accounting Standards Update 2010-11 (ASU 2010-11), Derivatives and Hedging (Topic 815): Scope Exception Related to Embedded Credit Derivatives . The amendments in this Update are effective for each reporting entity at the beginning of its first fiscal quarter beginning after June 15, 2010. Early adoption is permitted at the beginning of each entity’s first fiscal quarter beginning after issuance of this Update. The Company does not expect the provisions of ASU 2010-11 to have a material effect on the financial position, results of operations or cash flows of the Company.

Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.

NOTE 4 - Accounts Receivable

Accounts receivable consist of the following:

	September 30, 2010 (Unaudited)			December 31, 2009
Trade receivables	$	1,027,814		$	885,146
Allowance for doubtful accounts		(16,170	)		(102,195	)

Accounts Receivable	$	1,011,644		$	782,951

The Company performs ongoing credit evaluations of its customers' financial conditions but does not require collateral to support customer receivables. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.

NOTE 5 - Inventories

Inventories consist of the following:

	September 30, 2010 (Unaudited)		December 31, 2009
Raw materials	$	968,207	$	988,580
Finished goods		775,443		744,873

	$	1,743,650	$	1,733,453

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PANELTECH INTERNATIONAL HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 6 - Property and Equipment

Property and equipment consists of the following:

	September 30, 2010 (Unaudited)			December 31, 2009
Manufacturing equipment	$	4,438,546		$	4,259,752
Furniture and fixtures		95,450			95,050
Mobile equipment		306,606			984,073
		4,840,602			5,338,875
Less: accumulated depreciation and amortization		(3,005,247	)		(3,289,912	)

	$	1,835,355		$	2,048,963

Property and equipment, at September 30, 2010 and December 31, 2009, includes $80,450 of assets acquired under capital lease obligations. Depreciation and amortization expense for the three months ended September 30, 2010 and 2009 amounted to $60,460 and $94,026, respectively, and $207,189 and $289,642 for the nine months ended September 30, 2010 and 2009 respectively.

NOTE 7 - Intangible Assets

Below is a summary of intangible assets at September 30, 2010 and December 31, 2009:

	September 30, 2010 (Unaudited)							December 31, 2009
	Cost		Accumulated Amortization			Net		Cost		Accumulated Amortization			Net

Trade name
(10 year life)	$	270,000	$	(76,500	)	$	193,500	$	270,000	$	(56,250	)	$	213,750

Total amortization expense was $6,750 and $6,750 for the three months ended September 30, 2010 and 2009, respectively, and $20,250 and $20,250 for the nine months ended September 30, 2010 and 2009 respectively.

NOTE 8 - Line of Credit

The Shorebank Facility, which as a result of various changes in terms agreements, was as of September 30, 2010, in the amount of $700,000 with an interest rate of 10.5%. The Shorebank Facility expired on October 1, 2010. The Shorebank Facility was to expire on February 28, 2010, but was extended until March 26, 2010. In connection with the extension to March 26, 2010, the Shorebank Facility was reduced from $1,500,000 to $900,000 and the interest rate was increased from 9.5% to 16.5%. On March 26, 2010, Shorebank extended the expiration date of the Shorebank Facility to April 30, 2010 and decreased the interest rate to 10.5%. On April 30, 2010 the Shorebank Facility was further extended to May 14, 2010 with the same terms and conditions. On May 14, 2010 the Shorebank Facility was further extended to August 1, 2010, with the same terms and conditions, except the covenants were reset. On August 1, 2010 the Shorebank Facility was further extended to October 1, 2010 under the same terms and conditions, except the loan amount was reduced to $700,000. The Shorebank Facility is secured by accounts receivable, inventory, and equipment and guaranteed by certain officers of the Company. The balance outstanding at September 30, 2010 and December 31, 2009 was $522,221 and $232,852, respectively.

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PANELTECH INTERNATIONAL HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 8 - Line of Credit - continued

The Shorebank Facility contained certain restrictions and covenants that have changed under the various change in terms agreements, which included minimum levels of working capital and net worth and minimum financial ratios such as current ratio, minimum working capital, earnings, and debt to net worth. At October 31, 2009, the Company was not in compliance with various covenants under the terms of the Shorebank Facility line of credit agreement, which constituted an event of default. On November 30, 2009, the Company received a waiver of these defaults and entered into a forbearance agreement that extended the Shorebank Facility until February 28, 2010. In connection with the extension of the Shorebank Facility until March 26, 2010, Shorebank also entered into a forbearance agreement to waive the defaults and modified the terms of the various covenant requirements.

The March 26 CIT Agreement included a reset of the covenants that were calculated by Shorebank based on a plan submitted by the Company. After the March 26 CIT Agreement was signed and put into effect, it was noted that the calculations for the covenants included therein were in error. This resulted in the Company violating the current ratio covenant, the working capital minimum covenant and the debt to net worth covenant on March 31, 2010. On May 5, 2010, Shorebank issued a Notice of Default & Covenant Waiver Agreement notifying the Company that it was in default because it had violated the covenants and that Shorebank had elected to waive its remedies to these defaults (the “May Default”). The May 14, 2010 Change in Terms Agreement included a reset of the covenants, elimination of the Cash Flow Coverage covenant, and the addition of an Earnings Covenant. The Company was in compliance with the reset covenants for the months of May, 2010 through September, 2010.

Interest expense on the line of credit was $11,435 and $14,889 for the three months ended September 30, 2010 and 2009, respectively and $40,479 and $39,361 for the nine months ended September 30, 2010 and 2009 respectively.

NOTE 9 - Notes Payable-Shareholder

On December 23, 2009 the Company issued a promissory note (the “Collins Note”) in the amount of $375,000 in connection with the repurchase of shares of the Company from a former member of Paneltech LLC. Prior to amendment on August 31, 2010, the Collins Note interest accrued at prime per annum (3.25% at December 31, 2009) and, prior to amendment on July 26, 2010, was due on or before July 31, 2010 with an outside maturity date of August 1, 2010. On July 26, 2010, Collins and the Company amended the terms of the Collins Note to extend the due date to August 30, 2010 and the outside maturity date to August 31, 2010. The Collins Note was again amended on September 16, 2010, at which time the terms of the Collins Note were amended to (a) extend the due date to December 31, 2011 and the outside maturity date to January 1, 2012; (b) change the interest rate to 7% effective as of July 1, 2010, require monthly minimum payments equal to the monthly interest starting in January, 2011; (c) grant Collins a security interest in the assets of the Company pursuant to a security agreement subordinate to existing bank loans or a new line of credit not exceeding $1,000,000; and (d) require principle repayments equal to $187,500 in the case of a funding or asset sale event of less than $1,500,000 or $375,000 in the case of a funding or asset sale event of $1,500,000 or greater. The security agreement contemplated by the September 16, 2010, amendment was entered into on November 12, 2010. Under the terms of the Collins Note, as amended, if the unpaid principal and accrued interest is not paid on or before December 31, 2011, the outstanding principal and accrued interest will be adjusted (as a penalty) to cause the principal amount of the note to be equal to $625,000 due and payable on January 1, 2012. Prior to most recent amendment, if the unpaid principal and accrued interest was not paid on or before August 30, 2010, the outstanding principal and accrued interest would have been adjusted (as a penalty) to cause the principal amount of the note to be equal to $625,000 due and payable on August 31, 2010.

Interest expense on the Collins Note was $6,616 and $0 for the three months ended September 30, 2010 and 2009, respectively and $12,961 and $0 for the nine months ended September 30, 2010 and 2009 respectively.

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PANELTECH INTERNATIONAL HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 10 - Due to Shareholder

On December 18, 2009, Paneltech LLC issued promissory notes (the “Member Notes”) to six of its members in the aggregate of $450,961 in consideration for certain membership distributions that were owed to the members. The Member Notes bear interest at 12% per annum and are due on February 23, 2011. The Member Notes are payable in twelve monthly installments including interest beginning March 23, 2010. Management has elected to delay payments on these notes until the results of operations have improved enough to afford repayment.

	September 30, 2010 (Unaudited)			December 31, 2009
Due to shareholder	$	450,961		$	450,961

Less: current portion		(450,961	)		(313,301	)

Long-Term Portion		--		$	137,660

Interest expense on the Member Notes was $13,529 and $0 for the three months ended September 30, 2010 and 2009, respectively and $28,095 and $0 for the nine months ended September 30, 2010 and 2009 respectively.

NOTE 11 - Long Term Debt

	September 30, 2010 (Unaudited)		December 31, 2009
Note payable, due in monthly installments of $20,545, including interest at prime (3.25% at September 30, 2010), plus 1.5%, through May 2015.	$	988,584	$	1,182,803

Note payable for capital improvements, due in monthly installments of $902, including interest at 7.50% and matures October 2010.		305		8,550

Note payable, due in monthly installments of $4,010, including interest at prime (3.25% at September 30, 2010), plus 1.25%, and is secured by equipment. Matures February 10, 2016.

180,971

222,372

Note payable, due in monthly installments of $1,237, including interest at 8.00%, secured by inventory, equipment, and accounts receivable. Matures February 2012.

18,092

28,973

Note payable due in monthly installments of $8,089 with an imputed interest rate of 9.00%. Matures September 2012.		177,061			235,690

Note payable – Equipment Loan, due in monthly installments of $11,258, including interest at 6.75% July 2017.		736,601			465,615

		2,101,614			2,144,003
Less: current portion		(403,306	)		(330,829	)

Long-Term Portion	$	1,698,308		$	1,813,174

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PANELTECH INTERNATIONAL HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 11 - Long Term Debt, continued

Future maturities of Notes Payable are as follows:

For the Period Ending September 30,	Amount
2011	$	403,306
2012		429,518
2013		355,432
2014		379,683
2015		293,213
Thereafter		240,462
Total	$	2,101,614

Interest expense for long term debt for the three months ended September 30, 2010 and 2009 was $31,652 and $33,853, respectively, and $86,728 and $97,576 for the nine months ended September 30, 2010 and 2009 respectively.

Note Payable - Equipment Loan

The Company entered into a financing arrangement with Anchor Bank in November 2008 to borrow funds totaling $1,819,000 for the purpose of expanding plant capacity, which arrangement is referred to in this Quarterly Report on Form 10-Q as the Anchor Loan. The Anchor Loan was funded as expenditures were made for the expansion. As of September 30, 2010, the Company had borrowed $736,601 under the Anchor Loan facility to acquire some of the equipment required for the plant expansion and other capital projects. The Anchor Loan is collateralized by a security interest in the new equipment purchased by this loan. Because expected product demand has not materialized in 2010, the expansion project has been postponed until additional demand is developed. On October 1, 2010 the loan was closed to additional borrowing and regular monthly amortization payments began on November 1, 2010. Pursuant to a Change of Terms Agreement dated June 30, 2010, which extended to conversion date for the Anchor Loan from July 15, 2010 to October 1, 2010, the Anchor Loan, was converted to a term loan on October 1, 2010. Prior to conversion, the Company paid interest only on the loan at the rate of 6.5%. After conversion to term, the Anchor Loan interest rate is fixed at 6.75% for 81 months. The Anchor Loan matures on July 15, 2017. The Company is required to pay $11,258 principle and interest per month over the next 81 months. Interest paid for the three months ended September 30, 2010 and 2009 was $9,875 and $4,347, respectively and $26,590 and $16,330 for the nine months ended September 30, 2010 and 2009 respectively. The balance outstanding at September 30, 2010 and December 31, 2009 was $736,601 and $465,615, respectively.

NOTE 12 - Capital Lease Obligations

On May 2, 2007, the Company entered into an equipment lease agreement with a leasing company for monthly installments of $1,628, with an annual interest rate of 8.77% secured by the related equipment . The lease matures May 2012.

Future minimum lease payments under capital leases are as follows:

For the Periods Ending September 30,	Amount
2011	$	19,534
2012		11,394
Total minimum lease payments		30,928
Less amount representing interest		(2,014	)

Present value of minimum lease payments	$	28,914

NOTE 13 - Redeemable Preferred Stock

Series A Convertible Preferred Stock

The Company is authorized to issue 20,000,000 shares of preferred stock, par value $0.0001 per share, of which 5,453,100 shares have been designated Series A Convertible Preferred Stock ( “Series A Preferred Stock”).

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PANELTECH INTERNATIONAL HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 13 – Redeemable Preferred Stock, continued

On December 23, 2009, December 30, 2009, and April 7, 2010, the Company entered into Securities Purchase Agreements with accredited investors and sold 3,271,860 shares of Series A Preferred Stock for net proceeds of $1,655,917 (gross proceeds of $1,800,000 less offering costs of $144,083). The offering of the Company’s securities pursuant to Securities Purchase Agreements entered into on December 23, 2009 and December 30, 2009 is referred to in this Quarterly Report on Form 10-Q as the “Offering,” and the offering of securities pursuant to the Securities Purchase Agreement entered into on April 7, 2010 is referred to as the “April Offering”. The Series A Preferred Stock is convertible into shares of the Company’s Common Stock at a conversion rate that is subject to adjustment, which initially provides for each share of Series A Preferred Stock being convertible into 5 shares of Common Stock. Proceeds from the sale of Series A Preferred Stock were used for working capital purposes and $375,000 was used to repurchase certain shares held by a former member of Paneltech LLC.

As the Company did not have any preferred stock issued and outstanding prior to closing on the Offering, the Series A Preferred Stock is the Company’s most senior equity security. As of September 30, 2010, there were 3,271,860 shares of Series A Preferred Stock issued and outstanding.

Each share of Series A Preferred Stock accrues dividends at the rate of 12% per annum of the original issue price. Dividends are to be paid quarterly at the discretion of the Board, in either cash or stock. Each share of Series A Preferred Stock receives treatment preferential to the common stock in the case of dividends or any liquidation event, which includes any voluntary or involuntary liquidation, dissolution or winding up of the Company or any significant subsidiary of the Company that results in the termination of the Company’s business. Certain other transactions are also deemed to be a liquidation event. The holders of the Series A Preferred Stock also have the right to elect one director, which right is further governed by the Investor Rights Agreement. The Series A Preferred Stock can be redeemed by the holder at any time after their three year anniversary date.

The Series A Preferred Stock is also subject to certain anti-dilution adjustments and carries first refusal rights. The conversion price of the Series A Preferred Stock is adjustable under certain circumstances, whereby when certain earnings targets are not met the conversion price for the Series A Preferred Stock is reset. Under this reset adjustment, if the Company fails to achieve or is otherwise unable to report either or both of the minimum performance thresholds set for forth in the Certificate of Designations, Preferences and Other Rights and Qualifications of Series A Convertible Preferred Stock for fiscal years 2010 and 2011, which are also set forth below, then the then applicable conversion price will reset lower by the percentage difference by which the Company’s earnings before interest, taxes, depreciation and non-cash expense related to financings (“Earnings”) are below the applicable performance threshold. The performance thresholds for fiscal years 2010 and 2011 are:

Fiscal Year 2010 Earnings Performance Threshold: $5,000,000; and

Fiscal Year 2011 Earnings Performance Threshold: $14,000,000.

By way of example, and for illustrative purposes only, in the event the Company reports 2010 fiscal earnings of $4,500,000, the conversion price will be reset at 10% below the then applicable conversion price. Should the Company then report 2011 fiscal earnings of $13,000,000, then the conversion price will be reset to 7% below the then applicable conversion price. Resetting to lower conversion prices will result in more Common Stock being issued to the holders of Series A Preferred upon conversion, which would dilute the current holders of Common Stock.

Subject to the rights of, and the approval of, the holders of Series A Preferred Stock, the Board of Directors has the right, without stockholder approval, to issue preferred shares with rights superior to the rights of the holders of shares of common stock.

The holders of the Series A Preferred stock are (i) entitled to vote, separately as a class (with no other stockholders voting) to approve all matters that affect the rights, value, or ranking of the Series A Preferred Stock, and, (ii) subject to the limitations set forth in the Certificate of Designations (including a 4.99% and 9.99% beneficial ownership limitation that limits conversion and voting rights), cast such number of votes in respect of such shares of Series A Preferred Stock as will equal the largest whole number of shares of Common Stock into which such shares of Series A Preferred Stock are then convertible pursuant to the Certificate of Designations, all matters on which holders of Common Stock are entitled to vote, voting together as one class with, and in the same manner and with the same effect as, such holders of Common Stock. The Company recorded accretion of $125,281 for the three months ended September 30, 2010 and $341,527 for the nine months ended September 30, 2010.

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PANELTECH INTERNATIONAL HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 13 - Redeemable Preferred Stock, continued

Accordingly, the Company has classified conditionally redeemable preferred stock, which includes redemption rights, within the control of the holder (solely on the passage of time), as temporary equity. Accordingly, the Company accretes the changes in redemption value of Series A Preferred Stock over the period from the date of issuance to the earliest redemption date of the instrument which is three (3) years using the effective interest method. No accretion was recorded during 2009 as the amount was de minimis.

Warrants Issued with Series A Convertible Preferred Stock

In connection with the Offering and the April Offering, the Company issued an aggregate of 5,453,100 warrants to purchase common stock at an exercise price of $0.12 per share.

The warrants have an expiration date of seven (7) years. Since the warrants contain certain price protection features, whereby the exercise price may be lowered under certain circumstances, the Company recorded the fair value of these financial instruments as a derivative liability. The fair value of these liabilities shall be re-measured at the end of each reporting period with the change in value reported in the statements of operations. The fair value of the warrants of $109,061 was determined using the Black-Scholes pricing model.

NOTE 14 – Warrants Issued to Related Parties

On January 23, 2010, the Company granted 694,770 warrants to purchase Common Stock to an individual for nominal consideration and in consideration for future services. On May 14, 2010, the Company granted an aggregate 2,084,312 warrants to purchase Common Stock to two Directors in consideration of service as directors of the Company. The terms of the warrants are substantially the same as the warrants issued in connection with the Offering and the April Offering, except they do not include the adjustment for failure to meet certain performance thresholds.

The warrants have an expiration date of seven (7) years. Since the warrants contain certain price protection features, whereby the exercise price may be lowered under certain circumstances, the Company recorded the fair value of these financial instruments as a derivative liability. The fair value of these liabilities shall be re-measured at the end of each reporting period with the change in value reported in the statements of operations. The fair value of the warrants of $55,583 was determined using the Black-Scholes pricing model.

NOTE 15 - Stockholders’ Equity

Common Stock

The Company is authorized to issue 700,000,000 shares of common stock, par value $0.0001. Each holder of shares of our common stock is entitled to one vote for each share held of record on all matters submitted to the vote of stockholders, including the election of directors. The holders of shares of common stock have no preemptive, conversion, subscription or cumulative voting rights.

Treasury Shares

Following consummation of the Merger, the Company bought back 13,772,550 common stock shares held by a former member of Paneltech LLC with the combination of $375,000 cash and a note payable for $375,000 for a total of $750,000. These shares were cancelled during the three months ended March 31, 2010.

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PANELTECH INTERNATIONAL HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 16 - Fair Value Measurement

The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of September 30, 2010:

			Fair Value Measurements at September 30, 2010
	Total Carrying Value at September 30, 2010		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Derivative liabilities	$	164,644	$	--	$	--	$	164,644

The derivative liabilities are measured at fair value using quoted market prices and estimated volatility factors based on historical quoted market prices for the Company’s common stock, and are classified within Level 3 of the valuation hierarchy.

The following table sets forth a summary of the changes in the fair value of our Level 3 financial liabilities that are measured at fair value on a recurring basis:

		September 30, 2010 (unaudited)				December 31, 2009
Beginning Balance		$	(99,974	)		$	--

Net unrealized gain/loss on derivative financial Instruments		--			--
New derivative liabilities issued		(64,670	)		(99,974	)

Ending Balance	$	(164,644	)	$	(99,974	)

NOTE 17 - Related-Party Transactions

In October 2009, the Company entered into a consulting arrangement with a stockholder of the Company to generate national and international sales. The arrangement, which originally provided for monthly compensation of $16,666, was revised on April 1, 2010, providing monthly compensation of $5,000 and expenses, plus commission calculated on a percentage of direct margin earned. On September 1, 2010, the arrangement was revised providing monthly compensation of $1,250 and expenses, plus commission calculated on a percentage of direct margin earned. The agreement extends from month to month. The Company recorded expense in the amount of $35,508 and $0, for the three months ended September 30, 2010 and 2009, respectively and $159,151 and $0 for the nine months ended September 30, 2010 and 2009, respectively, which are included in operating expenses in the consolidated statements of operations.

NOTE 18 – Income Taxes

Due to accumulated losses since the Merger on December 23, 2009, no income tax expense has been accrued to date including for the three months ended September 30, 2010. Company has not recorded an income tax benefit because of uncertainty as to the Company’s ability to use the tax benefit in the future.

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PANELTECH INTERNATIONAL HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 19 - Commitments

Legal Proceedings

A lawsuit was filed February 6, 2009 at the Superior Court of California, County of Siskiyou on behalf of an unrelated individual. The claim alleges that on February 12, 2007, the individual was injured while working with a Paneltech leased railcar due to defective equipment. The venue was later moved to the United States District Court for the Eastern District of California. The total of the claim is $1,756,338. The defense of this matter is being managed by Liberty Mutual, Paneltech’s liability carrier at the time of the incident. The general liability policy coverage is $1,000,000 per incident. Excess coverage of $5,000,000 was also provided by Liberty Mutual at that time. A jury trial for this matter is set for January 24, 2012. Although the Company believes they will be successful in their defense, any negative outcome of this matter will be covered by insurance.

The Company has also recently settled various environmental claims with the U.S. Environmental Protection Agency (the “EPA”) and other governmental agencies. In 2005, the Company accidentally released phenol into the ground at one of its facilities. The cleanup of this phenol spill was completed in 2006 and the last test well was closed on October 8, 2010. There were no material costs incurred or expected to be incurred in connection with this matter.

Operating Leases

The Company leases certain buildings and equipment under long-term leases. The Company's leases include month-to-month operating leases, as well as leases which expire at various intervals over the next five years.

During the three months ended September 30, 2010 and 2009, rental expenses under long-term lease obligations were $187,285 and $213,200 respectively. During the nine months ended September 30, 2010 and 2009, rental expenses under long-term lease obligations were $611,084 and $864,059 respectively. Future obligations over the terms of the Company's long-term leases as of September 30, 2010 are as follows:

For the Periods Ending September 30,	Facility		Equipment		Total
2011	$	198,334	$	386,617	$	584,951
2012		82,637		282,730		365,367
2013		76,380		5,324		81,704
2014		76,380		0		76,380
2015		38,190		0		38,190

Total	$	471,921	$	674,671	$	1,146,592

Leasing Activities

The Company leases railcars to customers under operating leases. These leases expire over the next three years. Currently, there are 111 log cars on lease, with rents ranging between $460 to $525 per car per month. Equipment under operating leases was $75,382 and $498,110 at September 30, 2010 and December 31, 2009, respectively, and is included in property and equipment in the accompanying consolidated balance sheet. Accumulated depreciation on equipment operating leases was $58,019 and $299,114 at September 30, 2010 and December 31, 2009, respectively.

Rent income received for the three months September 30, 2010 and 2009 was $163,635 and $237,958, respectively. Rent income received for the nine months ended September 30, 2010 and 2009 was $488,501 and $911,092, respectively. Minimum future rental income is as follows:

For the Periods Ending September 30,	Amount
2011		633,000
2012		592,050

Total	$	1,225,050

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PANELTECH INTERNATIONAL HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 19 - Commitments, continued

Concentration

During the three months ended September 30, 2010, the Company had sales to one customer in the amount of $221,074 at 10.48% of total sales. During the nine months ended September 30, 2010, the Company had sales to one customer in the amount of $634,649 at 9.83% of total sales. As of September 30, 2010, accounts receivable from the customer were $145,714.

During the three months ended September 30, 2009, the Company had sales to one customer in the amount of $273,782 at 11.70% of total sales. As of September 30, 2009, accounts receivable from the customer was $266,566. During the nine months ended September 30, 2009, the Company had sales to one customer in the amount of $1,495,225 at 21.42% of total sales. As of September 30, 2009, accounts receivable from the customer was $328,009.

NOTE 20 - Subsequent Events

On November 9, 2010, the Company entered into a new line of credit with Anchor Bank, in the amount of $1,000,000 with an initial interest rate of 7%. This line of credit, which expires on October 15, 2011, is referred to in this Quarterly Report on Form 10-Q as the “Anchor Facility.” The Anchor Facility is secured by accounts receivable, inventory, and equipment and guaranteed by the Company’s subsidiary, Paneltech Products, and certain officers of the Company. Borrowing at any point in time is limited to 75% of the Company’s eligible accounts receivable and 50% of inventory subject to an inventory borrowing sublimit of $400,000.

On November 10, 2010, the balance of the Shorebank Facility was paid off using funds made available under the Anchor Facility.

On November 12, 2010, the Company and Collins entered into the security agreement contemplated by the September 16, 2010 amendment to the Collins Note.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion is intended to further the reader’s understanding of the consolidated financial statements, financial condition, and results of operations of Paneltech International Holdings, Inc. (the “Company”) and its subsidiaries. This discussion should be read in conjunction with the consolidated financial statements, notes and tables which are included in Item 1 of this Quarterly Report on Form 10-Q (this “Quarterly Report”). This discussion includes forward-looking statements that involve risk and uncertainties. As a result of many factors actual results may differ materially from those anticipated in these forward-looking statements.

Recent Events

Merger

On December 23, 2009, Paneltech LLC merged with and into Paneltech Products, a wholly owned subsidiary of the Company (the “Merger”), to become the Company’s principal operating business, which business is referred to in this Quarterly Report as the “Paneltech Business.” In order to better reflect the Company’s new principal business, the Company changed its name from Charleston Basics, Inc. to Paneltech International Holdings, Inc. Prior to the Merger, the Company’s principal operating business was the sale of outdoor camping goods, survival products and tactical gear, referred to in this Quarterly Report as the “Pre-Merger Business.” Immediately following the Merger, the Company sold all of its assets relating to this Pre-Merger Business to Cambridge, an entity controlled by Mr. Lieber, a former CEO and current shareholder of the Company.

In connection with the Merger, the former members of Paneltech LLC exchanged their Paneltech LLC membership interests for Common Stock of the Company. As a result of this exchange the former Paneltech LLC members owned approximately 88% of the Company’s outstanding Common Stock following the exchange, before adjusting for any conversion or exercise of any Series A Preferred Stock or the Warrants into Common Stock of the Company. In connection with the Merger, the Company was deemed to be the acquired company for accounting and financial reporting purposes and Paneltech LLC was deemed the acquirer. As such, Paneltech LLC’s historical financial statements became the Company’s historical financial statements.

Securities Purchase Agreements

Following consummation of the Merger, the Company entered into securities purchase agreements (the “Securities Purchase Agreements”) with three investors and raised an aggregate of $1.65 Million in an offering of the Company’s Series A Preferred Stock and Warrants, referred to throughout this Quarterly Report as the “Offering”. The Offering closed on January 22, 2010, and the sale of Series A Preferred Stock pursuant to the Securities Purchase Agreements closed on December 23, 2009 and December 30, 2009. Under the conversion ratio at the closing of the Offering, each share of Series A Preferred Stock is convertible into five shares of Common Stock. Each Warrant has an exercise price of $0.12 per share of Common Stock which is subject to adjustment. The Warrants may be redeemed under certain circumstances. Of the $1.65 million of proceeds raised, $375,000 was used to repurchase 13,772,550 of Common Stock held by Collins Timber Company LLC (“Collins”), a former member of Paneltech LLC (the “Collins Repurchase”, or, the “Repurchase Agreement”). In order to repurchase the 13,772,550 shares of Common Stock from the former Paneltech LLC member, the Company also issued a promissory note (the “Collins Note”) in the amount of $375,000. The Collins Note bears interest at the prime rate from time to time in effect as published in the Wall Street Journal. Under certain circumstances set forth in the Collins Note, the principal amount of the Collins Note will be adjusted to equal $625,000, less the aggregate principal amount previously paid on the Collins Note. Under the terms of the Repurchase Agreement, Collins is entitled to have a representative selected by Collins elected to and serving on the Company’s Board of Directors until the Collins Note is paid in full.

On April 7, 2010, the Company entered into a Securities Purchase Agreement with an investor and raised $150,000 in an offering of the Company’s Series A Convertible Preferred Stock and warrants to purchase Common Stock (the “April Offering”). The Company issued to the investor 272,655 shares of Preferred Stock and granted 454,425 Warrants. The terms of the April Offering, which is now closed, were substantially the same as the terms of the Offering described above.

Sale of Certain Logistics Assets

In March, May, and June, 2010, consistent with the Company’s strategy and plans to focus on its manufactured product lines, the Company sold its idle wood log carrying railcars and log loader for approximately $256,460. These pieces of equipment have been idle since April 2009 following the downturn in the lumber market. The Company’s railcar leases will continue to provide 111 wood log carrying railcars to three customers until 2012.

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New Line of Credit

On November 9, 2010, the Company entered into a new line of credit with Anchor Bank, in the amount of $1,000,000 with an initial interest rate of 7% (the Anchor Facility). The Anchor Facility, which expires on October 15, 2011, is secured by accounts receivable, inventory, and equipment and guaranteed by the Company’s subsidiary, Paneltech Products, certain officers of the Company. Borrowing at any point in time is limited to 75% of the Company’s eligible accounts receivable and 50% of inventory subject to an inventory borrowing sublimit of $400,000. On November 10, 2010, the balance of the Shorebank Facility was paid off using funds made available under the Anchor Facility.

Company Overview

The Company was incorporated under the laws of the State of Delaware on April 4, 2006, primarily for the purpose of engaging in the Pre-Merger Business. Upon consummation of the Merger between the Company’s Paneltech Products subsidiary and Paneltech LLC, an emerging “green” composite producer and ballistic fabric coater founded in 1996, the Paneltech Business became the Company’s principal operating business. As a vertically-integrated manufacturer of innovative “green” building materials, the Company now aims to develop economically feasible and environmentally-friendly manufacturing processes that allow the production of innovative products that are competitively affordable and globally accessible. The Paneltech Business is comprised of four core business units:

Paperstone – Includes the Company’s principal hard surface products, made from recycled paper and petroleum-free resin for architectural use and other applications.

Fortrex – The life protection “Prepreg” (pre-impregnated composite fibers) division of the Company engages in the production of specialized phenolic resins for use in “ballistics” webs such as woven Kevlar and fiberglass mats and other life protection materials used as vehicle armor and blast resistant building panels.

Overlays – Production of resin/paper composites that enhance structural plywood panel surfaces for the end use of concrete forming and miscellaneous other uses.

Logistics – Rail car leasing. The long term plan for the Company is to focus on the business units discussed above and phase out of the logistics unit as the leases for the railcars are terminated.

Results of Operations for the three months ended September 30, 2010 compared to the three months ended September 30, 2009

Revenues for the three months ended September 30, 2010 were $2,108,837, representing a decrease of $231,000, or 10%, compared to the same period in 2009. Fortrex sales for the three months ended September 30, 2010 were $231,019 compared to sales of $240,905 for sales for 2009, representing a decline of $10,000, or 4%, from the comparable period in 2009. Paperstone revenue declined to $766,939 in three months ended September 30, 2010 from $1,023,935 for 2009, representing a decline of 25% from the comparable period in 2009. While the Company filled orders for new cutting board products, domestic demand for PaperStone surfaces was very sluggish related to low U.S. housing demand and foreign demand suffering from unfavorable exchange rates, which increased the cost of PaperStone in Europe during the three months ended 2010. Revenue from the Overlays unit grew to $869,792 for the three months ended September 30, 2010 compared to revenue of $837,150 for 2009, representing an increase of $33,000, or 4%, from the comparable period in 2009. The Company increased its share of the market in 2010 through the addition of a sales agent who increased the amount of assistance provided to customers in their use of the Company’s products and the addition of more competitive products.

Gross profit decreased to $569,866 for the three months ended September 30, 2010 from $592,498 for the same period in 2009, representing a decline of $23,000, or 4%. The decrease was due to lower sales for the three months offset in part by increased labor efficiency and raw material costs for the three months ended September 30, 2010. Gross profit percent for the three months ended September 30, 2010 was 27% and for the comparable period in 2009 was 25%.

Operating expenses for the three months ended September 30, 2010 decreased by $250,000, or 34%, to $493,538, compared to $743,243 for the same period in 2009. Wages and salaries were lower for the three months ended September 30, 2010 by $119,000 than the comparable period in 2009 due to salary reductions and reduced headcount. Product development cost was lower for the three months ended September 30, 2010 by $62,000 than the comparable period in 2009 due to the reduction of Fortrex product development because of the need to reduce expenses. Accounting expense was lower for the three months ended September 30, 2010 by $58,000 than the comparable period in 2009 because the prior two year audit was performed in 2009 to qualify for the 2009 merger. Depreciation expense were lower for the three months ended September 30, 2010 by $33,000 than the comparable period in 2009 due to ten year life assets which were added in 2000 becoming fully depreciated in 2010 and due to the sale of the railcars and related assets earlier in 2010.

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As of September 30, 2010, the Company’s line of credit maximum limit under the Shorebank Facility (defined below) was $700,000 and was further limited to the eligible accounts receivable and inventory. As of September 30, 2010, the amount available to the Company, over the amount borrowed, was $147,779.

The accounts receivable balance was $1,011,644 on September 30, 2010 and $782,951 on December 31, 2009.

During the three months ended September 30, 2010, the Company had sales to one customer in the amount of $221,074 at 10.48% of total sales. As of September 30, 2010, accounts receivable from the customer were $145,714. The sales for the third largest customer for the three months ended September 30, 2010 were $173,530. On September 13, 2010, the Company entered into a payment plan for $156,892 with this customer as a result of unpaid past due invoices. Since entering into this agreement, the customer has reduced the amount due on past due invoices to $141,892 as of September 30, 2010. As of September 30, 2010, current and past due amounts from the customer amounted to $235,762.

The inventory balance was $1,743,650 on September 30, 2010 and $1,733,453 on December 31, 2009.

Results of Operations for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009

Revenues for the nine months ended September 30, 2010 were $6,458,034, representing a decline of $522,000, or 7%, compared to the same period in 2009. Fortrex sales for the nine months ended September 30, 2010 were $352,586 compared to sales of $1,494,537 for the nine months ended September 30, 2009, representing a decline of $1,142,000, or 76%, from the comparable period in 2009. This decline was primarily due to the fact that in early 2009, the Company was finishing a large Fortrex contract and has since received only smaller contracts. Paperstone revenue grew to $2,685,452 in the nine months ended September 30, 2010 from $2,674,865 for 2009, representing growth of $11,000, or .4%, from the comparable period in 2009. The Company benefited from an increase in orders in the second quarter of 2010 as economic activity increased to some extent, partially due to stimulus programs. Revenue from the Overlays unit grew to $2,804,181 for the nine months ended September 30, 2010 compared to revenue of $1,791,407 for 2009, representing an increase of $1,013,000, or 57%, from the comparable period in 2009. This increase in Overlays revenue was due to the introduction of new products, the addition of an experienced customer service and sales agent who has established new customers, and a surge of orders in the second quarter of 2010 related to the national stimulus.

Gross profit improved to $1,618,632 for the nine months ended September 30, 2010 from $1,562,949 for the same period in 2009, representing an increase of $56,000, or 4%. The improvement was due to improved labor efficiency and lower raw material costs. Gross profit percent for the nine months ended September 30, 2010 was 25% and for the comparable period in 2009 was 22%.

Operating expenses for the nine months ended September 30, 2010 decreased by $108,000, or 5%, to $2,095,418, compared to $2,203,584 for the same period in 2009. Legal, consulting, and accounting fees relating to the Merger including SEC reporting and filing obligations following the Merger, the 2009 Annual Report on Form 10-K (the “Annual Report”), and the Quarterly Reports on Form 10-Q for the periods ended March 31, 2010 and June 30, 2010, resulted in a $401,000 increase in expenses for the nine months ended September 30, 2010. Wages and salaries were lower for the nine months ended September 30, 2010 by $286,000 than the comparable period in 2009 due to salary reductions. Product development was lower for the nine months ended September 30, 2010 by $203,000 than the comparable period in 2009 due to the reduction of Fortrex product development because of reduced activity to reduce expenses. Samples and travel expenses increased by $85,000 for the nine months ended September 30, 2010 over the comparable period in 2009 due to increased effort to improve sales. Depreciation expense were lower for the nine months ended September 30, 2010 by $82,000 than the comparable period in 2009 due to ten year life assets which were added in 2000 becoming fully depreciated in 2010 and due to the sale of the railcars and related assets earlier in 2010.

Current Operating Plans and Trends

Although the Company achieved some improvement in operating results for the first nine months of 2010 when compared to the first nine months of 2009, the improvement was driven by reductions in operating expenses rather than from the sales increases that management expected. A number of factors presented difficulties to realizing the Company’s business plans, including the falling Euro compared to the dollar during the first half of 2010, which increased Paperstone cost to Europe thereby reducing export sales; the lack of Fortrex opportunities coming from the defense industry; and the continued slump in new housing starts, which depressed demand for Paperstone countertops and Overlays. The Company remains committed to increasing revenue from its Paperstone product line by improving the efficiency and lowering the costs of the supply chains and leverage alternative uses of Paperstone such as gourmet kitchen utensils and cutting boards. The Company is also seeking to win contracts for its Fortrex product line by bidding on available opportunities and adding new customers that serve new ballistics market segments.

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As noted in the Results of Operations, the Company has reduced its spending for product development and other overhead in order to conserve working capital. The Company will be moving forward with new product development only for carefully considered projects the Company believes are low risk and are likely to offer better returns.

Liquidity and Capital Resources

The Company has traditionally financed its working capital needs with cash flows from operations and borrowings under a line of credit for which borrowings are based on a portion of eligible accounts receivable and inventory. On September 30, 2010, the Company had a line of credit with Shorebank which expired on October 1, 2010 (the Shorebank Facility). On November 9, 2010, the Company entered into a new line of credit with Anchor Bank, which expires on October 15, 2011 (the Anchor Facility).

The advances under the Shorebank Facility were determined based on rate of 75% of eligible accounts receivable and 25% of eligible inventory. The Shorebank Facility was to expire on February 28, 2010, but was extended until March 26, 2010. In connection with the extension to March 26, 2010, the Shorebank Facility was reduced from $1,500,000 to $900,000 and the interest rate was increased from 9.5% to 16.5%. On March 26, 2010, Shorebank extended the expiration date of the Shorebank Facility to April 30, 2010 and decreased the interest rate to 10.5%. On April 30, 2010 the Shorebank Facility was further extended to May 14, 2010 with the same terms and conditions. On May 14, 2010 the Shorebank Facility was further extended to August 1, 2010 under the same terms and conditions, except the covenants were reset. On August 1, 2010 the Shorebank Facility was further extended to October 1, 2010 under the same terms and conditions, except the loan amount was reduced to $700,000.

The Shorebank Facility, which as a result of various change in terms agreements, was as of September 30, 2010, in the amount of $700,000 with an interest rate of 10.5%. The Shorebank Facility was secured by accounts receivable, inventory, and equipment and guaranteed by certain officers of the Company. The balance outstanding on the Shorebank Facility at September 30, 2010 and December 31, 2009 was $552,221 and $232,852, respectively. The Shorebank Facility expired October 1, 2010. After the Company entered into the Anchor Facility on November 9, 2010, the balance of the Shorebank Facility was paid off on November 10, 2010, with funds made available under the Anchor Facility. After September 30, 2010 and before November 10, 2010, the Company financed its working capital needs with cash flows from operations.

The Shorebank Facility contained certain restrictions and covenants under which the Company must maintain certain levels of working capital and net worth and maintain certain financial ratios (current ratio, minimum working capital, earnings, and debt to net worth). At October 31, 2009, the Company was not in compliance with various covenants under the terms of the Shorebank Facility line of credit agreement, which constituted an event of default. On November 30, 2009, the Company received a waiver of these defaults and entered into a forbearance agreement that extended the Shorebank Facility until February 28, 2010. In connection with the extension of the Shorebank Facility until March 26, 2010, Shorebank also entered into a forbearance agreement to waive the defaults and modified the terms of the various covenant requirements.

The March 26 CIT Agreement included a reset of the covenants that were calculated by Shorebank based on a plan submitted by the Company. After the March 26 CIT Agreement was signed and put into effect, it was noted that the calculations for the covenants included therein were in error. This resulted in the Company violating the current ratio covenant, the working capital minimum covenant and the debt to net worth covenant on March 31, 2010. On May 5, 2010, Shorebank issued a Notice of Default & Covenant Waiver Agreement notifying the Company that it was in default because it had violated the covenants and that Shorebank had elected to waive its remedies to these defaults (the “May Default”). The Company has been in compliance with the reset covenants as of September 30, 2010.

The Anchor Facility, entered into on November 9, 2010, is in the amount of $1,000,000 with an initial interest rate of 7%. Borrowing at any point in time is limited to 75% of eligible accounts receivable and 50% of inventory subject to an inventory borrowing sublimit of $400,000. The Anchor Facility is secured by accounts receivable, inventory, and equipment and guaranteed by the Company’s subsidiary, Paneltech Products, and certain officers of the Company.

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The Company also has the following additional loan agreements with Anchor Bank:

1.	Loan Agreement entered into on January 22, 2007, having an original principal balance of $61,000. As of September 30, 2010, the outstanding principal balance was $18,092. Interest accrues at a rate of 8.0% per annum.

2.	Loan Agreement entered into on February 2, 2006, having an original principal balance of $320,000. As of September 30, 2010, the outstanding principal balance was $180,971. Interest accrues at a rate per annum of 1.25% above the prime rate.

3.	Loan Agreement entered into on October 4, 2005, having an original principal balance of $45,000. As of September 30, 2010, the outstanding principal balance was $305. Interest accrues at a rate of 7.5% per annum.

4.	Loan Agreement entered into on April 22, 2005, having an original principal balance of $1,750,000. As of September 30, 2010, the outstanding principal balance was $988,584. Interest accrues at a rate per annum of 1.5% above the prime rate.

On March 24, 2010, Paneltech Products entered into a Change in Terms Agreement (the “March 24 CIT Agreement”) with Anchor Bank in connection with the Anchor Note, which revised the wording of the Anchor Note reclassifying the Anchor Note a long term liability. Prior to entering into the March 24 CIT Agreement, the original wording of the Anchor Note required that the Anchor Note be classified as a current liability.

On December 23, 2009 the Company issued the Collins Note in the amount of $375,000 to repurchase of shares of the Company from a former member of Paneltech LLC. The Collins Note bears interest at prime per annum (3.25% at December 31, 2009) and was due on or before July 31, 2010. On July 26, 2010, the Company and Collins amended the Collins Note to extend the due date on the Collins Note to August 30, 2010 and the outside maturity date to August 31, 2010. The Collins Note was again amended on September 16, 2010, at which time the terms of the Collins Note were amended to (a) extend the due date to December 31, 2011 and the outside maturity date to January 1, 2012; (b) change the interest rate to 7% effective as of July 1, 2010, require monthly minimum payments equal to the monthly interest starting in January, 2011; (c) grant Collins a security interest in the assets of the Company pursuant to a security agreement subordinate to existing bank loans or a new line of credit not exceeding $1,000,000; and (d) require principle repayments equal to $187,500 in the case of a funding or asset sale event of less than $1,500,000 or $375,000 in the case of a funding or asset sale event of $1,500,000 or greater. The security agreement contemplated by the September amendment was entered into on November 12, 2010. Under the terms of the Collins Note, as amended, if the unpaid principal and accrued interest is not paid on or before December 31, 2011, the outstanding principal and accrued interest will be adjusted (as a penalty) to cause the principal amount of the note to be equal to $625,000 due and payable on January 1, 2012. Prior to most recent amendment, if the unpaid principal and accrued interest was not paid on or before August 30, 2010, the outstanding principal and accrued interest would have been adjusted (as a penalty) to cause the principal amount of the note to be equal to $625,000 due and payable on August 31, 2010.

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In connection with certain tax distributions owed to Paneltech LLC members, certain promissory notes were issued to those members that as a result of the Merger have become obligations of Paneltech Products (the “Member Notes”). The Member Notes are in the following amounts:

L.D. Nott Company	$	206,347
Collins Timber Company LLC	$	160,292
SORB Management Corporation	$	45,115
Ron Iff	$	34,301
Andrew R.G. Wilson	$	4,028
Chris Wentworth	$	878

The L.D. Nott Company is an entity controlled by Leroy Nott, the Company’s President and CEO. The SORB Management Corporation is an entity controlled by Scott Olmstead, the Company’s CFO and Secretary. Ron Iff and Chris Wentworth are employees of the Company. Andrew R.G. Wilson is currently engaged as a consultant for Paneltech Products. Such promissory notes are payable in 12 monthly installments commencing March 23, 2010, and as of that date, have begun accruing interest at 12% per annum. As of November 10, 2010, no payments have been made on the Member Notes as payments have been deferred until liquidity improves.

The Company received $1,650,000 in connection with the Offering and $150,000 in connection with the April Offering. The Company may seek to sell additional securities in 2010. There are currently no commitments or understandings with regard to such possible future offerings of securities by the Company. The Company’s ability to engage in additional financings in the future is subject to the approval of the holders of a majority of the Series A Preferred Stock, which approval must include the Lead Investor.

Uncertainties

The Company has experienced slower than expected sales to date for 2010, which will likely continue through the end of 2010. The Company is anticipating increases in Paperstone, Overlays, and Fortrex revenue in 2011. As there are no existing purchase commitments or other assurances regarding increases in Paperstone, Overlays, and Fortrex revenue, there is no certainty that the anticipated sales increases will occur. The Company recently submitted a quote and sample materials for numerous projects but cannot be assured of being successful in obtaining the corresponding purchase orders. If revenue does not increase over the three months ending September 30, 2010 levels, the Company may need to acquire additional funding and/or further reduce costs.

The Company is uncertain about the general direction of economic or political trends that may affect the Company’s growth plans. The Company’s Overlays and Logistics business units are heavily dependent on construction trends. Because the Company anticipates that construction trends will remain weak for the remainder of 2010, the sales for these units are unlikely to improve during 2010. The Company’s Paperstone product is a specialty product that has many applications outside of construction. As Paperstone has a very small market share of the solid surfaces market, the Company believes a successful marketing effort could lead to increased sales, even in a depressed economy. Fortrex revenue can be impacted by military purchasing trends, which could be directed towards other armor solutions that the Company does not currently participate in or could be impacted by political trends, which are beyond the control of the Company.

Due to losses in 2009 and early 2010, the amount available under the Company’s Shorebank Facility was reduced to $700,000, the interest rate was increased and certain covenants were reset. On October 1, 2010, the Shorebank Facility expired and was replaced by the $1,000,000 Anchor Facility on November 9, 2010. If there is increased demand for Paperstone and Fortrex, the Company may require a larger line of credit than is currently available and the Company cannot be certain that Anchor will increase the amount available under the Anchor Facility or extend it beyond its current expiration date of October 15, 2011.

Off-Balance Sheet Arrangements.

With the exception of operating leases, the Company is not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on the Company’s financial condition, results of operations or cash flows. The Company enters into operating leases for both equipment and property. See the notes to the consolidated financial statements for additional information on the Company’s operating leases.

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Critical Accounting Policies and Estimates

The preparation of financial statements and related notes requires us to make judgments, estimates, and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities.

An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements.

Financial Reporting Release No. 60 requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. There are no critical policies or decisions that rely on judgments that are based on assumptions about matters that are highly uncertain at the time the estimate is made. Note 3 to the financial statements, included elsewhere in this Report on Form 10Q, includes a summary of the significant accounting policies and methods used in the preparation of our financial statements.

Impairment of Long-Lived Assets

Intangible assets with finite lives are amortized over their estimated useful lives and reviewed for impairment whenever an impairment indicator exists. The Company continually monitors events and changes in circumstances that could indicate carrying amounts of the long-lived assets, including intangible assets may not be recoverable. When such events or changes in circumstances occur, the Company assesses recoverability by determining whether the carrying value of such assets will be recovered through the undiscounted expected future cash flows. If the future undiscounted cash flows are less than the carrying amount of these assets, an impairment loss is recognized based on the excess of the carrying amount over the fair value of the assets. The Company did not recognize any intangible asset impairment charges in the three months ended September 30, 2010.

Use of Estimates in the Financial Statements

Fair Value of Financial Instruments

Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2: Other inputs that are directly or indirectly observable in the marketplace.

Level 3: Unobservable inputs supported by little or no market activity.

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Concentration of Credit Risk

Preferred Stock/Convertible Instruments

The Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with ASC Topic 815, “Derivatives and Hedging.”

Net Loss Per Share

Derivative Financial Instruments

Recent Accounting Pronouncements

See Note 3 of the Notes to Condensed Consolidated Financial Statements for a full description of recent accounting pronouncements, including the anticipated dates of adoption and the effect on the Company’s Condensed Consolidated Financial Position ad Results of Operations.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This Quarterly Report includes statements regarding the Company’s plans, goals, strategies, intent, beliefs or current expectations. These statements are expressed in good faith and based upon a reasonable basis when made, but there can be no assurance that these expectations will be achieved or accomplished. To the extent that any statements made in this Quarterly Report contain information that is not historical, these statements are essentially forward-looking. Forward-looking statements may be identified by the use of terms and phrases such as “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect,” and the like, and/or future-tense or conditional constructions (“will,” “may,” “could,” “should,” etc.). Statements contemplating or making assumptions about, actual or potential future sales, market size, collaborations, and trends or operating results also constitute such forward-looking statements. Although we believe that the expectations reflected in these forward-looking statements are reasonable and achievable, these statements are subject to a number of risks and uncertainties discussed under the headings “Risk Factors” in our Annual Report on Form 10-K filed in connection with our most recently completed fiscal year and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report. All forward-looking statements attributable to us are expressly qualified by these and other factors. We cannot assure you that actual results will be consistent with these forward-looking statements.

Information regarding market and industry statistics contained in this Quarterly Report is included based on information available to us that we believe is accurate. Forecasts and other forward-looking information obtained from this available information is subject to the same qualifications and the additional uncertainties accompanying any estimates of future market size, revenue and market acceptance of products and services. The forward-looking statements made in this Quarterly Report relate only to events as of the date on which the statements are made. We do not undertake any obligation to publicly update any forward-looking statements. As a result, you should not place undue reliance on these forward-looking statements. Readers are urged to carefully review and consider the various disclosures made by us in our reports filed with the Securities and Exchange Commission (the “SEC”) which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operation and cash flows. If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect, our actual results may vary materially from those expected or projected.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Management, with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our “disclosure controls and procedures” (as defined in the Exchange Act) Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report on Form 10-Q (the “Evaluation Date”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures are not effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Notwithstanding the conclusion that our disclosure controls and procedures were not effective as of the end of the period covered by this Quarterly Report, the Chief Executive Officer and the Chief Financial Officer believe that the condensed consolidated financial statements and other information contained in this Quarterly Report present fairly, in all material respects, our business, financial condition and results of operations.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

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In connection with the audit of our fiscal 2009 consolidated financial statements, our independent auditors identified certain significant deficiencies that together constitute a material weakness in our disclosure controls and procedures. These significant deficiencies primarily relate to our lack of formalized written policies and procedures in the financial accounting area, our lack of appropriate resources to handle the accounting for complex equity and other transactions, our lack of sophisticated financial reporting systems, due in part to the small size of our Company prior to the Merger, and our lack of a formalized disaster recovery plan in the information technology area. These significant deficiencies together constitute a material weakness in our disclosure controls and procedures.

Although we have taken steps to remedy some of these issues with our disclosure controls and procedures, we still have additional work to do to bring our disclosure controls and procedures up to public-company standards so as to allow management to report on our disclosure controls and procedures. As discussed below, because the Merger occurred in the fourth quarter of 2009 and because Paneltech LLC was a small privately-held company, we were unable to upgrade our disclosure controls and procedures to the level required of a public company prior to the end of the period covered by this quarterly report. Nevertheless, we are initiating the remediation steps to rectify the identified significant deficiencies that together constitute a material weakness in our disclosure controls and procedures. Because these remediation steps have not yet been completed, we have performed additional analyses and other post-closing procedures to ensure that our consolidated financial statements contained in this Quarterly Report were prepared in accordance with U.S. GAAP and applicable SEC regulations. Our planned remediation includes formalizing written policies and procedures, determining the appropriate resources to handle complex transactions as they arise in the future, upgrade our financial reporting systems, and develop and document a formalized IT disaster recovery plan for the Company.

Changes in Internal Control over Financial Reporting

Notwithstanding our remedial actions and integration of our financial reporting systems, there was no change in our internal control over financial reporting that occurred during the third quarter of 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II

Item 1. Legal Proceedings

Item 1A. Risk Factors

Not Applicable.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

See discussion of defaults under the heading Liquidity and Capital Resources in Item 2 of this Quarterly Report.

Item 5. Other Information

On August 1, 2010, Paneltech Products entered into a Change in Terms Agreement with Shorebank that further extended the Shorebank Facility to October 1, 2010 under the same terms and conditions, except the loan amount was reduced to $700,000. This note expired on October 1, 2010.

On November 9, 2010, the Company entered into a new line of credit with Anchor Bank, in the amount of $1,000,000 with an initial interest rate of 7% (the Anchor Facility). The Anchor Facility, which expires on October 15, 2011, is secured by accounts receivable, inventory, and equipment and guaranteed by certain officers of the Company. Borrowing at any point in time is limited to 75% of the Company’s eligible accounts receivable and 50% of inventory subject to an inventory borrowing sublimit of $400,000. On November 10, 2010, the balance of the Shorebank Facility was paid off using funds made available under the Anchor Facility. On November 8, 2010, the holders of all issued and outstanding shares of the Series A Convertible Preferred Stock of the Company, acting by unanimous written consent without a meeting, adopted separate resolutions approving the Anchor Facility.

On November 12, 2010, the Company entered into a Security Agreement with Collins Timber Company LLC, pursuant to which the Company granted Collins Timber Company LLC a subordinated security interest in all personal property of the Company.

Item 6. Exhibits

See list of exhibits below.

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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.

PANELTECH INTERNATIONAL HOLDINGS, INC.

By:	/s/ Leroy D. Nott
	Name:	Leroy D. Nott
	Title:	Chief Executive Officer
	Date:	November 15, 2010

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.

Signature	Title	Date

/s/ Leroy D. Nott	Chief Executive Officer, President and Director	November 15, 2010
Leroy D. Nott	(Principal Executive Officer)

/s/ Scott D. Olmstead	Chief Financial Officer, Secretary and Director	November 15, 2010
Scott D. Olmstead	(Principal Financial Officer and Principal Accounting Officer)

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Exhibits

Exhibit No.		Description

10.1*		Business Loan Agreement, dated November 9, 2010, between the Company and Anchor Mutual Savings Bank.
10.2*		Security Agreement, dated November 12, 2010, between the Company and Collins Timber Company LLC.
10.3		Amendment No. 2 to Non-Negotiable Promissory Note, dated September 16, 2010, between the Company and Collins Timber Company LLC. Incorporated herein by reference to Exhibit 10.1 of Current Report on Form 8-K, filed September 20, 2010.
10.4		Amendment No. 2 to Stock Repurchase Agreement, dated September 16, 2010, between the Company and Collins Timber Company LLC. Incorporated herein by reference to Exhibit 10.2 of Current Report on Form 8-K, filed September 20, 2010.
10.5		Change in Terms Agreement, dated August 1, 2010, between the Company and Shorebank. Incorporated herein by reference to Exhibit 10.2 of Quarterly Report on Form 10-Q, filed August 13, 2010.
31.1*		Certification of Principal Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Principal Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

* Filed herewith.

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