UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A Amendment No. 1

(Mark One)

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

For the quarterly period ended: June 30, 2021

☐ 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: 001-38190

Panacea Life Sciences Holdings, Inc.

(Exact name of registrant as specified in its charter)

5910 S University Blvd, C18-193, Greenwood Village, CO 80121

(Address of principal executive offices, Zip Code)

800-985-0515

(Registrant’s telephone number, including area code)

Exactus, Inc. 80 NE 4th Avenue, Suite 28, Delray Beach, FL 33483

(Former Name, Former Address and Former Fiscal Year if Changed Since Last Report)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 14,073,708 shares of common stock, par value $0.0001 per share, outstanding as December 9, 2021.

Explanatory Note

This Amendment No. 1 on Form 10-Q/A (the “Amendment”) amends the Quarterly Report on Form 10-Q (the “Q2 2021 Form 10-Q”) of Panacea Life Sciences Holdings, Inc. (F/K/A Exactus, Inc.) (the “Company”) for the quarter ended June 30, 2021, as filed with the Securities and Exchange Commission (the “SEC”) on August 23, 2021. We are filing this Amendment to change certain disclosures in Part I. Item 1 – Financial Statements, and Part II. Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – of the Q2 2021 Form 10-Q following the completion of review by the Company’s independent registered public accounting firm. The Q2 2021 Form 10-Q was previously filed before the review was completed. The review required adjustments to be made to the revenue and costs of goods sold, lease liability section, Exactus options and warrant updates.

In addition, the Exhibit Index in Item 6 of Part II of the Q2 2021 Form 10-Q is hereby amended and restated in its entirety and currently dated certifications required under Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002 are filed as exhibits to this Amendment.

The Q2 2021 Form 10-Q/A Amendment No. 1 continues to speak as of its date, and we have not updated the disclosures contained therein to reflect any events which occurred at a date subsequent to the filing of the Q2 2021 Form 10-Q other than as expressly indicated in this Amendment. For additional details please refer to Note 11.

All share and per share numbers have been retroactively adjusted to give effect to a 1-for-28 reverse stock split effective October 25, 2021.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements.

Panacea Life Sciences Holdings, Inc and Subsidiary (f/k/a Exactus, Inc.)

Unaudited Condensed Consolidated Balance Sheets

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Panacea Life Sciences Holdings, Inc and Subsidiary (f/k/a Exactus, Inc.)

Unaudited Condensed Consolidated Statements of Operations

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Panacea Life Sciences Holdings, Inc and Subsidiary (f/k/a Exactus, Inc.)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

Panacea Life Sciences Holdings, Inc and Subsidiary (f/k/a Exactus, Inc.)

Unaudited Condensed Consolidated Statements of Cash Flows

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

PANACEA LIFE SCIENCES HOLDINGS, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2021

NOTE 1 - NATURE OF ORGANIZATION

Organization and Business Description

PANACEA LIFE SCIENCES HOLDINGS, Inc. (the “Company”, “Exactus”, “we”, “us”, “our”) was incorporated on January 18, 2008 in the State of Nevada. In January 2019, the Company added to the scope of its business activities, efforts to produce, market and sell products made from industrial hemp containing cannabidiol (“CBD”). On June 30, 2021 the Company entered into a Securities Exchange Agreement (the “Exchange Agreement”) with Panacea Life Sciences, Inc. (“Panacea”) a CBD company, and the stockholders of Panacea. Pursuant to the Exchange Agreement, the former Panacea stockholders assumed majority control of the Exactus and all operations are now operated by Panacea, which as a result of the share exchange became a wholly-owned subsidiary of the Exactus. (See Note 10 – Exchange Agreement).

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation and principles of consolidation

The Company’s unaudited condensed consolidated financial statements include the financial statements of Panacea, a wholly owned subsidiary acquired on June 30, 2021. The merger is accounted for as a reverse acquisition and recapitalization in accordance with the Financial Accounting Standards Board (ASC 805, Business Combinations). Management evaluated the guidance contained in ASC 805 with respect to the identification of the acquirer in the merger and concluded, based on a consideration of the pertinent facts and circumstances, that Panacea acquired Exactus for financial accounting purposes.

Pursuant to the Exchange Agreement, this merger was accounted for as a reverse merger and recapitalization under US GAAP. Under this method of accounting, Exactus is treated as the “acquired” company for financial reporting purposes (the “Merger”). This determination is primarily based on Panacea stockholders comprising a relative majority of the voting power of the Company and having the ability to nominate the members of the board of directors of Exactus after the Merger, Panacea’s operations prior to the Merger comprising the only ongoing operations of the Company following the Merger, and Panacea’s senior management prior to the Merger comprising a majority of the senior management of the Company following the Merger. Accordingly, for accounting purposes, the financial statements of the Company represent a continuation of the financial statements of Panacea with the Merger being treated as the equivalent of Panacea issuing stock for the net assets of Exactus, accompanied by a recapitalization whereby no goodwill or other intangible assets are recorded. Transactions and balances prior to the Merger are those of Panacea. The shares and net loss per share available to holders of Panacea’s common stock prior to the Merger have been retroactively restated as shares reflecting the exchange ratio established in the Exchange Agreement.

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America and the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) for interim financial information, which includes consolidated unaudited interim financial statements and present the consolidated unaudited interim financial statements of the Company and its wholly-owned subsidiary as of June 30, 2021. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America. All intercompany transactions and balances have been eliminated. In the opinion of management, all adjustments necessary to present fairly our financial position, results of operations, stockholders’ equity (deficit) and cash flows as of June 30, 2021, and 2020, and for the periods then ended, have been made. Those adjustments consist of normal and recurring adjustments. Operating results for the three and six months ended June 30, 2021 and 2020 are not necessarily indicative of the results that may be expected for any subsequent quarters or for the year ending December 31, 2021. Certain information and note disclosures normally included in our annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted.

All share and per share numbers have been retroactively adjusted to give effect to a 1-for-28 reverse stock split effective October 25, 2021.

Going concern

These unaudited condensed consolidated financial statements are presented on the basis that the Company will continue as a going concern. Panacea has merged with Exactus, so the below items reflect stand-alone historical results of Panacea through June 30, 2021 and the combined financial information thereafter. The going concern concept contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Since our inception in later 2017, we have generated losses from operations, except for some slight profits in a few quarters. As of June 30, 2021, our accumulated deficit was $11.6 million, and we had $6.1 million in cash and liquid stock. As of June 30, 2021 the shares of common stock we hold in 22^nd Century Group, Inc. (NASDAQ:XXII) (“XXII”) were valued at approximately $6.0 million. The XXII stock is pledged to secure a $4,062,713 promissory note in favor of Quintel-MC, Incorporated (“Quintel”) and a $1,685,685 promissory note in favor of Leslie Buttorff, CEO of the Company, but can be used in operations as the CEO determines. Quintel-MC, Inc. is wholly owned company of the CEO. These items are shown on the balance sheet as related party loans. The current plan with respect to the XXII stock is to hold this stock during the short-term pending XXII’s application for MRTP FDA approval. We also currently do not have sufficient cash flow to pay our ongoing financial obligations on a consistent basis. These factors raise doubt about the Company’s ability to continue as a going concern for a period of 12 months from the issuance date of this report. Management plans to raise additional capital to fund operations, until the Company achieves and maintains profitable operations and cash flows. Management cannot provide assurance that the issuance of any additional shares of common stock, preferred stock or convertible securities could be substantially dilutive to our shareholders. In addition, adequate additional funding may not be available to us on acceptable terms, or at all. These unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

COVID-19

The COVID-19 pandemic has resulted in a global slowdown of economic activity which is likely to continue to reduce the future demand for a broad variety of goods and services, while also disrupting sales channels, marketing activities and supply chains for an unknown period of time until the virus is fully contained. The Company’s business operations have been negatively impacted by the COVID-19 pandemic and related events and the Company expects this impact on its revenue and results of operations, the size and duration of which is currently difficult to predict. However, adverse consequences from COVID-19 and recent supply chain disruptions and delays may hinder our ability to continue our operations and generate revenue. The impact to date has included a decline in CBD product and sales demand. Further, in 2020, the Company (Panacea) invested in personal protective equipment (PPE) materials to sell hand sanitizers, testing kits and masks, and sales of PPE products, which constituted a significant portion of our revenue during the fiscal quarter ended June 30, 2021 and prior periods during the pandemic, have declined as vaccines continue to be administered and mask mandates and similar requirements have been lifted or reduced in many places. Although the Company is unable to predict the full impact and duration of COVID-19 on its business, the Company is actively managing its financial expenditures in response to the current uncertainty.

The impact of the COVID-19 pandemic and related events, including actions taken by various government authorities in response, have increased market volatility and make the estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes more difficult. As of the date of issuance of the financial statements, the Company is not aware of any specific event or circumstance that would require it to update its estimates, judgments or revise the carrying value of its assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and are recognized in the condensed consolidated financial statements as soon as they become known.

Marketable securities

The Company’s marketable securities consist of 1,297,017 shares of XXII which are classified as available-for-sale and included in current assets. (see Note 2 – Going Concern). Securities are valued based on market prices for identical assets using third party certified pricing sources. Available-for-sale securities are carried at fair value with unrealized and realized gains and losses reported as a component of income (loss). Realized gains and losses, if any, are calculated on the specific identification method and are included in other income in the condensed consolidated statements of operations.

Use of Estimates

The Unaudited Condensed Consolidated Financial Statements have been prepared in conformity with US GAAP and required management of the Company to make estimates and assumptions in preparation of these statements. Actual results may differ significantly from those estimates. Significant estimates made by management include but are not limited to the useful life of property and equipment, incremental borrowing rate used in the calculation of right of use asset and lease liability, reserves for inventory, allowance for doubtful accounts, revenue allocations, valuation allowance on deferred tax assets, assumptions used in assessing impairment of long-term assets, assumptions used in the calculation of net realizable value of inventory and fair value of non-cash equity transactions.

Fair Value Measurements

The Company adopted the provisions of Accounting Standard Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures”, which defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value, and expands disclosure of fair value measurements. The guidance prioritizes the inputs used in measuring fair value and establishes a three-tier value hierarchy that distinguishes among the following:

The following table shows, by level within the fair value hierarchy, the Company’s assets and liabilities at fair value on a recurring basis as of June 30, 2021 and December 31, 2020:

FAIR VALUE, ASSETS MEASURED ON RECURRING BASIS 

There were no transfers of marketable securities into or out of Level 1 during the six months ended June 30, 2021 or 2020.

SCHEDULE OF MARKETABLE SECURITIES

As of June 30, 2021, the Company has no liabilities that are re-measured at fair value.

Revenue Recognition

The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers.

The Company accounts for a contract when it has been approved and committed to, each party’s rights regarding the goods or services to be transferred have been identified, the payment terms have been identified, the contract has commercial substance, and collectability is probable. Revenue is generally recognized net of allowances for returns and any taxes collected from customers and subsequently remitted to governmental authorities. However, the Company’s sales are primarily through retail stores, purchase orders or ecommerce; thus, currently contract liabilities are negligible. The Company does not have any multiple-element arrangements.

Some of the Company’s contract liabilities consist of advance customer payments. Contract liability results from transactions in which the Company has been paid for products by customers, but for which all revenue recognition criteria have not yet been met. Once all revenue recognition criteria have been met, the contract liabilities are recognized. The company recorded $29,100 and $463,454 in advanced customer payments as of June 30, 2021 and December 31, 2020, respectively and these amounts are included in the balance sheet line item of accounts payable and accrued expenses.

SCHEDULE OF REVENUE FROM CONTRACT WITH CUSTOMER 

Revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration that an entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amount of revenue that is recorded reflects the consideration that the Company expects to receive in exchange for those goods. The Company applies the following five-step model in order to determine this amount: (i) identification of the promised goods in the contract; (ii) determination of whether the promised goods are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.

Revenue related to the sale of products is recognized once goods have been sold to the customer and the performance obligation has been completed. In both contracted purchase and retail sales, we offer consumer products through our online stores. Revenue is recognized when control of the goods is transferred to the customer. This generally occurs upon our delivery to a third-party carrier or, to the customer directly. Revenue from tolling services is recognized when the performance obligation, such as processing of the material, has been completed and output material has been transferred to the customer.

Revenue is generally recognized net of allowances for returns and any taxes collected from customers and subsequently remitted to governmental authorities. Some of the Company’s contract liabilities consist of advance customer payments. A contract liability results from transactions in which the Company has been paid for products by customers, but for which all revenue recognition criteria have not yet been met. Once all revenue recognition criteria have been met, the contract liabilities are recognized. However, the Company’s sales are primarily through retail stores, purchase orders or ecommerce; thus, currently contract liabilities are negligible. The Company does not have any multiple-element arrangements.

In 2020 the Company had significant revenues from new product lines created for COVID related requirements (49% of total revenue in 2020). We were able to use our same equipment used for CBD production for ethanol-based hand sanitizer products and our fulfillment center to distribute other products. We anticipate a marginal revenue stream with continue throughout 2021 and 2022, but it is not a long-term focus for the Company. For the three months and six months ending June 30, 2021, the Company reduced its inventory by transferring $4,693,397 of PPE materials to related party Quintel. Quintel had a previous outstanding note payable to the related party in the amount of $7,911,044 of principal, plus $1,819,627 of outstanding accrued interest. As a result of the purchase, the principal was reduced by $4,693,397.

Some of the Company’s contract liabilities consist of advance customer payments. Contract liability results from transactions in which the Company has been paid for products by customers, but for which all revenue recognition criteria have not yet been met. Once all revenue recognition criteria have been met, the contract liabilities are recognized.

Accounts Receivable

Accounts receivable are generally unsecured. The Company establishes an allowance for doubtful accounts receivable based on the age of outstanding invoices and management’s evaluation of collectability. Accounts are written off after all reasonable collection efforts have been exhausted and management concludes that likelihood of collection is remote. Any future recoveries are applied against the allowance for doubtful accounts. As of June 30, 2021 and December 31, 2020, we did not believe we needed to reserve for any doubtful accounts, respectively. The Company’s accounts receivable policy changed in 2020 to only provide larger, well established companies with Net 30 payment terms. For all other sales they are paid by credit card or wires received before the product is shipped to the customer.

Shipping and Handling Costs

The Company accounts for shipping and handling fees in accordance with ASC 606. The amounts charged to customers for shipping products are recognized as revenues and the related freight costs of shipping products are classified in general and administrative costs as incurred. Shipping costs are included as a component of general and administrative and were $8,825 and $29,131 for June 30, 2021 and June 30, 2020, respectively. The decrease is due to less PPE items being shipped out.

Segment Information

The Company follows the provisions of ASC 280-10 Segment Reporting. This standard requires that companies disclose operating segments based on the manner in which management disaggregates the Company in making internal operating decisions. Segment identification and selection is consistent with the management structure used by the Company’s chief operating decision maker to evaluate performance and make decisions regarding resource allocation, as well as the materiality of financial results consistent with that structure. Based on the Company’s management structure and method of internal reporting, the Company has one operating segment. The Company’s chief operating decision maker does not review operating results on a disaggregated basis; rather, the chief operating decision maker reviews operating results on an aggregate basis.

Earnings per Share

The Company computes basic and diluted earnings per share amounts in accordance with ASC Topic 260, “Earnings per Share”. Basic earnings per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per share reflects the potential dilution that could occur if preferred stock converted to common stock and warrants are exercised. Preferred stock and warrants are excluded from the diluted earnings per share calculation if their effect is anti-dilutive.

The Business Combination on June 30, 2021 was accounted for as a recapitalization of equity structure. Pursuant to GAAP, the Company retrospectively recasted the weighted-average shares included within its condensed consolidated statements of operations for the three and six months ended June 30, 2021 and June 30, 2020. The basic and diluted weighted-average Panacea ordinary shares are retroactively converted to shares of the Company’s common stock to conform to the recasted condensed consolidated statements of stockholders’ equity (deficit).

Since all dilutive instruments were issued as of June 30, 2021, there is zero effect for the weighted average of all such instruments.

SCHEDULE OF WEIGHTED AVERAGE SHARES

		2021				2020
		For the three months ended June 30,
			2021				2020
Restricted Stock			-				-
Options to purchase common stock			-				-
Warrants to purchase common stock			-				-
Series A Convertible Preferred			-				-
Series B-1 Convertible Preferred			-				-
Series B-2 Convertible Preferred			-				-
Series C Convertible Preferred			-				-
Series C-1 Convertible Preferred			-				-
Series D Convertible Preferred			-				-
Total			-				-

The following financial instruments were not included in the diluted loss per share calculation for the three and six months ending June 30, 2021 and 2020 because their effect was anti-dilutive:

SCHEDULE OF ANTI-DILUTIVE DILUTED LOSS PER SHARE

Recently Issued Accounting Standards

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40), Accounting for Convertible Instruments and Contract’s in an Entity’s Own Equity. The ASU simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU simplifies the diluted net income per share calculation in certain areas. The ASU is effective for annual and interim periods beginning after December 31, 2021, and early adoption is permitted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company is currently evaluating the impact that this new guidance will have on its consolidated financial statements.

In May 2021, the Financial Accounting Standards Board (“FASB”) issued ASU 2021-04 “Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation— Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815- 40) Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options” which clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. An entity should measure the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange as follows: i) for a modification or an exchange that is a part of or directly related to a modification or an exchange of an existing debt instrument or line-of-credit or revolving-debt arrangements (hereinafter, referred to as a “debt” or “debt instrument”), as the difference between the fair value of the modified or exchanged written call option and the fair value of that written call option immediately before it is modified or exchanged; ii) for all other modifications or exchanges, as the excess, if any, of the fair value of the modified or exchanged written call option over the fair value of that written call option immediately before it is modified or exchanged. The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. The Company is currently evaluating the impact of this standard on its consolidated financial statements.

The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.

Intangible Assets and Goodwill

The Company has intangible assets. Goodwill is comprised of the purchase price of business combinations in excess of the fair market value assigned at acquisition to the tangible and intangible assets acquired. Goodwill is not amortized. The Company tests goodwill for impairment on an annual basis. The Company performed its most recent goodwill impairment using a discounted cash flow analysis and found that the fair value exceeded the carrying value. It has $2.189 million of goodwill from the acquisition of the assets of Phoenix Life Sciences, Inc. in October 2017 and intangible assets of $0.092 million as of June 30, 2021 and $0.123 million for as of December 31, 2020. In the acquisition of Phoenix, the Company acquired product formulas which is classified as an intangible asset.

NOTE 3 – PROPERTY, EQUIPMENT, NET OF ACCUMULATED DEPRECIATION

Property and equipment, net including any major improvements, are recorded at historical cost. The cost of repairs and maintenance is charged against operations as incurred. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets, generally as follows:

SCHEDULE OF PROPERTY PLANT AND EQUIPMENT USEFUL LIVES

Property and equipment, net consists of the following:

SCHEDULE OF PROPERTY AND EQUIPMENT

The land and equipment decreased from December 31, 2020 to June 30, 2021 due to the partial sale of the farm land and equipment. See Note 10.

Depreciation expenses for the three and six month periods ending June 30, 2021 and 2020 were $460,316, $348,476, $887,838 and $647,253 respectively.

The asset under construction in 2020 was related to a deposit the Company made on an XL Novasep chromatography unit. The Company decided it did not have the proper equipment needed to house the unit, so it negotiated a settlement with Novasep to return the deposit less restocking and legal fees. The unit was never delivered to the Company. On May 24, 2021 $446,026 of the $743,377 deposit was returned and the asset under construction was retired and the loss on the asset was recorded.

NOTE 4 – INVENTORY

Inventory consists of the following components:

SCHEDULE OF INVENTORY

Inventories are stated at lower of cost or net realizable value using the standard costing method for its work in process and finished goods. For its raw materials, trading goods, and packaging supplies, the Company utilizes the moving average method for costing purposes and FIFO. At this time there are no inventory reserves required.

NOTE 5 –OPERATING LEASE RIGHT-OF-USE ASSETS AND OPERATING LEASE LIABILITIES – RELATED PARTY

Right of Use

The Company adopted Accounting Standards Update (“ASU”) No. 2016-02, “Leases” (“ASC 842”) on January 1, 2019, the start of our 2019 fiscal year. The Company has one lease arrangement with a related party entered into on December 22, 2018 for a 3-year term commencing January 1, 2019 for certain laboratory facilities with a nine year extension option. This lease was extended and now expires on December 31, 2030. At inception, the Company recognized a Right of Use Asset and a corresponding lease liability in the amount of $4,595,509. The Company’s lease arrangements may contain both lease and non-lease components. The Company has elected to combine and account for lease and non-lease components as a single lease component. The Company has incorporated residual value obligations in leases for which there is such occurrences. Regarding short-term leases, ASC 842-10-25-2 permits an entity to make a policy election not to apply the recognition requirements of ASC 842 to Short-term leases. The Company has elected not to apply the ASC 842 recognition criteria to any leases that qualify as Short-Term Leases.

The Company, as of January 1, 2019, leases a portion of the property (formerly the Environmental Protection Agency building) in Golden, CO from J&N Real Estate, owned by the CEO, a related party with a term expiring on December 31, 2030. The lease consists of all laboratory space including testing facilities, water treatment, extraction and production. The lease of the property is based on the fair market rent and triple net lease (NNN) values competitive in the marketplace for a cGMP facility. The Company also subleases some of its laboratory space to other CBD companies. This income is presented under the Other Income line items of the income statement. The leases vary from short-term monthly leases to 3-year leases, but are all cancellable.

SCHEDULE OF RIGHT OF USE ASSET AND LIABILITY

During the three and six months ended June 30, 2021, we recognized approximately $114,693 and $229,386, respectively in operating lease costs. Operating lease costs are included in operating expenses in our consolidated statement of operations.

Approximate future minimum lease payments for our right of use assets over the remaining lease periods as of June 30, 2021, are as follows:

SCHEDULE OF MATURITY OF OPERATING LEASE LIABILITIES

NOTE 6 – NOTES PAYABLE

The Company’s debt obligations are summarized as follows. The December 31, 2020, numbers reflect the pre-merger Panacea indebtedness, while the June 30, 2021, now include the Panacea indebtedness, as well as Exactus’ indebtedness.

U.S. Small Business Administration Loan

On May 28, 2020, the Company received a secured, 30-year, Economic Injury Disaster Loan in the amount of $99,100 from the U.S. Small Business Administration. The loan carries interest at a rate of 3.75% per year, requires monthly payments of principal and interest, and matures in 30 years. Installment payments, including principal and interest, of $483 monthly, will begin 12 months from the date of the promissory Note. The SBA loan is secured by a security interest in the Company’s tangible and intangible assets. The loan proceeds are to be used as working capital to alleviate economic injury caused by the Covid-19 disaster occurring in the month of January 31, 2020 and continuing thereafter. As of June 30, 2021 the current principal balance of this note amounted to $99,100 and accrued interest was approximately $2,047 total for the current and non-current total.

Paycheck Protection Program Funding

On May 22, 2020, the Exactus Company received federal funding in the amount of $236,410 through the Paycheck Protection Program (the “PPP”). PPP funds have certain restrictions on use of the funding proceeds, and generally must be repaid within two years at 1% interest. The PPP loan may, under circumstances, be forgiven. There shall be no payment due by the Company during the six months period beginning on the date of this note (“Deferral Period”). Commencing one month after the expiration of the Deferral Period, the Company shall pay the lender monthly payments of principal and interest, each in equal amount required to fully amortize by the maturity date. If a payment on this note is more than ten days late, the lender shall charge a late fee of up to 5% of the unpaid portion of the regularly scheduled payment. The full amount of the PPP loan and accrued interest was forgiven on May 20, 2021 and written off. It was recorded as a forgiveness of loan in the Company’s profit and loss statement as other income.

In April 2021, the Exactus Company borrowed a “second draw” loan of $236,410 under the PPP, as expanded pursuant to subsequent legislation, for which the Company expects to receive a forgiveness decision in the third quarter of the fiscal year ending December 31, 2021. The unforgiven portion, if any, will bear interest at a rate of 1% and mature on April 21, 2026. We expect this loan to be forgiven, so no interest has been calculated as it is de minimus.

Regarding Panacea Life Sciences, Inc.’s (PLS) Small Business Administration (SBA) loans, PLS received the PPP first draw loan in the amount of $273,300.00 on April 29, 2020. All funds were used to cover payroll expenses. The first draw loan, including any accrued interest, was officially forgiven by the SBA and the respective lending bank, FirstBank, on March 3, 2021. On January 28, 2021, PLS received the PPP second draw loan in the amount of $243,041.00; the second draw loan was forgiven on June 28, 2021.

PLS’s accounting treatment of the PPP loans and forgiveness follows best practice from the AICPA and accounted for the loan as a financial liability in accordance with FASB ASC 470 and accrue interest in accordance with the interest method under FASB ASC 835-30. The full amount of the PPP loan and accrued interest was forgiven on June 28, 2021 and written off. It was recorded as a forgiveness of loan in the Company’s statements of operations as other income.

Notes payable – related party and other liability

On June 30, 2021 Panacea received a loan from Quintel-MC Incorporated, an affiliate of the Company’s CEO, in exchange for a 12% demand promissory note for $4,062,714 (the “Quintel Note”). The Quintel Note was secured by a pledge of certain XXII common stock owned by Panacea (See Note 2 Going concern). On June 30, 2021, Panacea issued the Company’s CEO, Ms. Buttorff, a 10% promissory note in the amount of $1,624,000 (the “Buttorff Note”). The Buttorff Note was secured by a pledge of certain XXII common stock owned by Panacea (See Note 2 Going concern). This demand note replaced a prior working capital note that Panacea had issued on January 1, 2021. The Company has an additional line of credit note from Ms. Buttorff of $1,000,000 on July 1, 2021. The terms include an annual interest rate of 10% and a maturity date in 2022.

During October 2019, the Company issued a short-term promissory note to an officer of Exactus, for an aggregate principal amount of $55,556. The note originally became due and payable between October 18, 2019 and December 16, 2019 and bore interest at a rate of twelve 12% per annum prior to the maturity date, and 18% per annum if unpaid following the maturity date. The current interest rate is 18%. The note is an unsecured obligation of the Company. The notes carry a 10% original issue discount of $5,556 which has been amortized and recorded in interest expense on the accompanying condensed consolidated statements of operations. As of June 30, 2021, the principal balance under the note was $55,556. The Company will pay this note off in the 4^th Quarter 2021.

During February 2021, the Company entered into a short-term promissory note for principal amount of $20,000 with a stockholder of the Company. The note is payable on demand and bears interest at a rate of 8% per annum. The note is unsecured obligation of the Company. As of June 30, 2021, the principal balance of this note amounted to $20,000 and accrued interest was $533.

Notes payable is summarized as follows. The PPP loan was forgiven in the 3^rd Quarter, 2021. The SBA is a 30-year loan. The rest of the loans do not have a maturity date assigned to them and are payable upon demand.

The Company has recorded another liability which includes building leasehold improvements and SAP software and support fees. Refer to Note 9.

 SCHEDULE OF NOTES PAYABLE

NOTE 7 - STOCKHOLDERS’ EQUITY

Common stock

The Company’s authorized common stock consists of 650,000,000 shares with a par value of $0.0001 per share.

Common stock options

Stock Option Plan

On June 30, 2021 the Company’s Board approved the 2021 Equity Incentive Plan (the “2021 Plan”). The aggregate number of shares of common stock which may be issued pursuant to the Plan is 4,049,409. Unless sooner terminated, the Plan shall terminate in 10 years.

As part of the merger of Exactus, Panacea assumed the Exactus 2018 Equity Incentive Plan (the “2018 Plan”). The 2018 Plan provides for the issuance of incentive awards in the form of non-qualified and incentive stock options, stock appreciation rights, restricted stock awards, and restricted stock unit awards. The awards may be granted by the Company’s Board of Directors to its employees, directors and officers and to consultants, agents, advisors and independent contractors who provide services to the Company or to a subsidiary of the Company. The exercise price for stock options must not be less than the fair market value of the underlying shares on the date of grant. The incentive awards shall either be fully vested and exercisable from the date of grant or shall vest and become exercisable in such installments as the Board or Compensation Committee may specify. Stock options expire no later than ten years from the date of grant. The aggregate number of shares of common stock which may be issued pursuant to the Plan is 339,286. Unless sooner terminated, the Plan shall terminate in 10 years. This plan had 196,491 fully vested options outstanding at the time of the merger. There have been no options granted under this plan subsequent to the merger.

On January 22, 2021, Exactus had granted 392,857 two-year options exercisable at $0.70 per share to certain officers and directors, including 125,000 options to Larry Wert who remains a director. Subsequently, at a meeting on March 31, 2021 several directors reviewed the January grants to three of the insiders and sought to negate their 267,857 option awards in order to achieve two stated goals: to allow the directors to vote a sufficient number of shares required to approve a matter purportedly requiring additional votes to achieve a majority under Nevada law, and to correct an alleged mistake in the January action which was claimed to have unintentionally awarded options instead of shares of common stock. The directors present thereupon purported to grant four directors a total of 267,857 shares and directed the Company’s transfer agent to issue such shares. The effectiveness of the March 31, 2021 board action is currently under review and may ultimately be determined to have been ineffective as a matter of law. All related shares and options outstanding have been reported as if legally transacted.

Stock Options

A summary of the stock option activity is presented below:

 SCHEDULE OF STOCK OPTIONS

Stock Warrants

As a result of the Merger closing (see Note 10), as of June 30, 2021, the Company had outstanding warrants to purchase an aggregate of 56,377 (post split) shares of common stock (1,578,549 shares pre-split). The warrants were previously issued by Exactus, Inc. and assumed in the Merger. The Company’s outstanding warrants as of June 30, 2021 are summarized as follows, and all were exercisable at that date.

 SUMMARY OF STOCK WARRANTS