The foregoing numbers are subject to the review of the Company's auditors; after completion of the review, the Company will file an amended form 10-Q/A.

Business Overview

The Company is a Nevada corporation organized in 2008. The Company has pursued opportunities in Cannabidiol, which we refer to as "CBD", since December 2018 when we expanded our focus to pursue opportunities in hemp-derived CBD. We expect to change our name to Panacea Life Sciences Holdings, Inc. subject to regulatory compliance. To that end, on September 30, 2021 we entered into the Exchange Agreement with Panacea and the Panacea stockholders and as a result became a seed-to-sale CBD company. The former Panacea stockholders have assumed majority control of the Company, and all our operations are now operated through Panacea which because of the share exchange became a wholly owned subsidiary of the Company. Leslie Buttorff, who became the Company's Chief Executive Officer and a director upon the closing of the share exchange, also became our principal stockholder through common stock and Convertible Preferred Stock issued to her and entities she controls.

Panacea, which was founded by Leslie Buttorff in 2017 as a woman-owned business, attracted a $14 million investment from 22nd Century Group, Inc., or XXII, a plant biotechnology company which also has a focus on CBD products and technology, during 2019. XXII has retained a 15% stake in the Company following the share exchange. Through Panacea, we are dedicated to developing and producing the highest-quality, most medically relevant, legal, hemp-derived cannabinoid products for consumers and pets. Beginning at a farm Panacea owns a parcel of located at Needle Rock, Colorado and leases laboratory space within a 51,000 square foot, state-of-the-art, cGMP, extraction, manufacturing, testing and fulfillment center located in Golden, Colorado, Panacea operates in every segment of the CBD product value chain. From cultivation to finished goods, Panacea ensures its products with stringent testing protocols employed at every stage of the supply chain. Panacea endeavors to offer pure natural remedies within product lines for every aspect of life: PANA Health®, PANA Beauty®, PANA Sport™, PANA Pet®, PANA Pure® and PANA Life™.


In the third quarter of fiscal year 2021 we obtained additional registration on two more of our six brands and our mark. Panacea engaged Karsh Hagan, an independent, multi-disciplined marketing, design and technology company in Denver, Colorado to assist with brand development and roll out strategies.

Currently Panacea sells over 60 different product SKUs of CBD and CBG products. In addition, we offer "white label" licensing to retail businesses and contract manufacturing services to smaller CBD companies. In the sales area we were able to close a significant transaction with a national convenience store and we shipped out our first purchase order of products in August, 2021.

We were also engaged by a third-party company to develop various formulations for pet products and human products. We plan to manufacture their products for sale in the 4th quarter.

Our Industrial Hemp Supply

Panacea's 2021 crop is being grown in NeedleRock Farms in Crawford CO. XXII is the grower and is using organic practices for the crop. XXII will provide Panacea $500,000 of hemp. Panacea will also be engaged by XXII to assist with XXII's ingredient extraction and purification processes. Working with Panacea and other companies in the industry, XXII has secured strategic partnerships to maximize and support each of the key segments of its cannabinoid value chain: plant profiling (CannaMetrix), plant biotechnology (KeyGene), plant breeding, commercial-scale plant cultivation, and ingredient extraction/purification (Sawatch Agriculture, Folium Botanical, Aurora Cannabis, Needle Rock Farms, and Panacea. We also continue to complete tolling deals with various farmer which include both CBD and CBG strains.

Partnership with Universities

The grand opening of the Panacea Life Sciences Cannabinoid Research Center at CSU was held on October 19, 2021. The first studies at the center are underway for isolation of rare cannabinoids, examining cannabidiol's effects on Inflammatory Bowel Disease (IBS), as well as supporting research into dementia and chronic pelvic pain. We have also signed an agreement with the Colorado School of Mines in the area of developing hemp based sustainability products.

Company Information Technology Infrastructure

The ERPCannabis system is based on an SAP architecture and was used to develop the base installation. All financial, human resource, payroll, procurement, production planning and materials management business processes are represented in this system. In addition, the system is linked to our e-Commerce website This system allows us to update product costing and determine inventory levels which will be critical as the company expands. In addition, sophisticated financial and payroll processing are inherent in the solution; thus, offering investors detailed accounting results related to company investments. We plan to expand on the use of this infrastructure for acquisitions and service offerings.

Results of Operations

Set forth below is the discussion of the results of operations of the Company for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The information which follows relates to the operations of Panacea which under applicable accounting rules are treated as the operation of the Company.


Three Months Ended September 30, 2021 and 2020

Net Revenues

The Company is principally engaged in the business of producing and selling products made from industrial hemp. Revenue consists of sales of our six category of brand products, white label and contract manufacturing sales to other CBD companies, raw material sales (distillate and isolate), tolling products, and leasing space. During the three months ended September 30, 2021, the Company generated $0.588 million in revenue compared to $1.343 million in the three months ended September 30, 2020. The decrease in sales is attributed to less PPE items being sold in 2021. A large proportion of our revenue for the 2020 period was attributable to sales of PPE products that we procured and produced during the COVID-19 pandemic. The Company does not intend to continue with these PPE products once they are all sold.

Cost of Sales

The primary components of cost of sales include the cost of manufacturing the CBD products. For the three months ended September 30, 2021, the Company's cost of sales amounted to $0.305 million and $2.906 million in 2020. The decrease in costs from 2020 to 2021 are attributed to the PPE materials. Due to COVID-19 the Company did and continues to experience delays from raw materials purchased from Asia and China. There also continues to be lack of port space in the Long Beach, CA area.

Operating Expenses

Production related operating expenses were $1.319 million during the three months ended September 30, 2021 compared to $1.307 million during the three months ended September 30, 2020. Currently, production related salaries are included in operating expenses.

General and administrative expenses (G&A) were $0.290 million for the three months ended September 30, 2021 compared to $0.483 million during the three months ended September 30, 2020.

Nine Months Ended September 30, 2021 and 2020

Net Revenues

During the nine months ended September 30, 2021, the Company generated $1.414 million in revenue. In the nine months ended September 30, 2020, the revenue totaled $8.305 million. The decrease in revenues is due to PPE sales that occurred in 2020, but in 2021 the PPE sales were used to offset loans made from Quintel. A sale of PPE was made to Quintel, a related party, for $4.6 million of inventory, however, due to accounting opinions this transaction was not treated as revenue, but was treated as a reduction in inventory and a reduction in the Quintel loan. Also, COVID and the conflicting messages from the FDA concerning CBD continue to hamper retail expansion activities.

Also, the rental income received of $0.221 million and $0.212 million for 2021 and 2020 was treated as Other Income.

Cost of Sales

The primary components of cost of sales include the cost of the CBD product. For the nine months ended September 30, 2021, the Company's cost of sales amounted to $0.884 million and $6.286 million in 2020. The decrease in costs from 2020 to 2021 are attributed to the PPE materials and the decrease in CBD related revenues.

Operating Expenses

Production related expenses were $3.475 million during the nine months ended September 30, 2021 compared to $3.012 million during the nine months ended September 30, 2020. Currently, salaries are included in production related expenses.

General and administrative expenses were $0.911 million for the nine months ended September 30, 2021 compared to $2.551 million during the nine months ended September 30, 2020.


Summary of Cash Flows

Cash flows from operating activities

The largest source of operating cash is from our customers. A large majority of our customers purchase CBD on-line, so credit card payments are collected and paid within 1-2 business days. Other white label and contract manufacturing customers pay before the products are released. Some larger customers have either net 10, 2% or 30 day net terms. Net cash used in operating activities was ($2,383,703) million and ($5,992,778) million for nine months ended September 30, for 2021 and 2020, respectively.

Cash flows from investing activities

Cash received from Exactus via the share exchange, proceeds from the sales of XXII stock and cash received from disposal of assets comprised this category and were $0.505 million for the nine months ended September 30, 2021 and ($3,776,122) million for September 30, 2020.

Cash flows from financing activities

Net cash provided by financing activities for the nine months ended September 30, 2021 was $1.809 million. For the same period in 2020 the financing was $1.514 million. In both years the primary financing was cash provided by Company's CEO. In 2021, there was a cash payment received of $0.243 from the paycheck loan program.

Liquidity and Capital Resources

On September 30, 2021, we had approximately $3,631,970 million in cash and liquid stock of XXII. The Chief Executive Officer of the Company holds the XXII shares pursuant to the pledge agreement and has the power at any time to permit the Company to sell the shares to provide working capital. In August 70,000 shares were sold for working capital. Panacea has borrowed substantial sums from Leslie Buttorff, our Chief Executive Officer, to meet its working capital obligations. On September 30, 2021 Panacea issued an affiliate of Ms. Buttorff a 12% demand promissory note for $4.063 million and issued Ms. Buttorff a 10% demand promissory note for $1.624 million secured by a pledge of certain XXII common stock owned by Panacea. Additionally, the Company has a line of credit with Ms. Buttorff through which it may borrow up to $1 million at a 10% annual interest rate. To date $392,201 of the line of credit has been consumed.

We may not have sufficient cash resources to sustain our operations for the next 12 months, particularly if the large sales agreements and purchase orders we have do not result in the revenue anticipated. We may be dependent on obtaining financing from one or more debt or equity offerings or further loans from Ms. Buttorff assuming she agrees to advance further funds. On November 18, 2021, the Company and an institutional investor closed in escrow a $1.1 million original issue discount convertible note (the "Note") financing in which the investor is paying $1 million in gross proceeds of which $900,000 will go to the Company.

These unaudited condensed consolidated financial statements are presented on the basis that the Company will continue as a going concern. The going concern concept contemplates the realization of assets and satisfaction of liabilities in the normal course of business. No adjustment has been made to the carrying amount and classification of the Company's assets and the carrying amount of its liabilities based on the going concern uncertainty. These factors raise substantial 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 cannot provide assurance that the Company will ultimately achieve profitable operations or become cash flow positive or raise additional debt and/or equity capital. In addition, due to insufficient revenue, we will need to obtain further funding through public or private equity offerings, debt financing, collaboration arrangements or other sources in order to maintain active business operations. We currently do not have sufficient cash flow to pay our ongoing financial obligations on a consistent basis. The issuance of any additional shares of common stock, preferred stock or convertible securities could be substantially dilutive to our stockholders. In addition, adequate additional funding may not be available to us on acceptable terms, or at all. If we are unable to raise capital, we will be forced to borrow additional sums from our Chief Executive Officer or delay, reduce or eliminate our research and development programs, we may not be able to continue as a going concern, and we may be forced to discontinue operations. 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.

Off Balance Sheet Arrangements

As of September 30, 2021, we had no material off-balance sheet arrangements.


Potential Impacts of the COVID-19 Pandemic on Our Business Operations

As disclosed in Note 2, the COVID-19 pandemic has had a notable impact on general economic conditions, including but not limited to the temporary closures of many businesses, "shelter in place" and other governmental regulations, reduced business and consumer spending due to both job losses and reduced investing activity, among many other effects attributable to the COVID-19 pandemic, and there continue to be many unknowns. During 2020, COVID-19 had a significant impact on Panacea's CBD operations. Recognizing the sudden need for personal protective equipment, Panacea shifted its business to importing and selling PPE hand sanitizers and masks.

The Delta variant which is having a significant impact in August 2019 may extend the period of recovery into 2022.

Potential Impacts of Certain Current and Proposed Regulations on Our Business and Operations

Recently, a bill titled the Cannabis Administration and Opportunity Act, put forward by Senate Majority leader Chuck Schumer, D-NY, would amend the definition of a dietary supplement to remove the prohibition on marketing CBD as a dietary supplement. Management sees the bill, if enacted, as an opportunity for the FDA to accelerate their decision to classify CBD products as a dietary supplement. This would be a significant step for hemp/CBD companies as it would open the door to new selling opportunities, such as getting into retail stores, who have largely been hesitant to welcome CBD in their doors without a clear position from the FDA.

Many people are increasingly turning to CBD products for several reasons: CBD is non-psychoactive, so it does not produce a "high" like THC, there are few known contraindications, the properties of different cannabinoids can positively affect a wide range of ailments, and cannabinoids work directly and indirectly with the body's endocannabinoid system to create balance known as homeostasis. As demand increases, we believe the FDA must provide more clarity about CBD's legalization, and this bill is a promising first step.

For now, many companies that produce hemp-derived CBD products including Panacea undertake to abide by the same regulations as any other dietary supplements like ingredient filings, good manufacturing practices (GMP), and labeling and marketing provisions. Panacea will continue to sell CBD and other hemp-derived products while still awaiting a clear path from the FDA about how CBD products can be marketed and used.

           Cautionary Statement Regarding Forward-Looking Statements

This quarterly report on Form 10-Q (this "Report") contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about our new operations in the hemp industry through Panacea, our expected revenue growth, our future plans and developments with respect to PPE products and the COVID-19 pandemic, our human resources following our recent acquisition of Panacea, proposed federal legislation and its potential impact on the CBD industry, our business relationship with XXII, our plans to raise capital, and our liquidity. Words such as "expects," "anticipates," "plans," "believes," "seeks," "estimates," "could," "would," "may," "intends," "targets" and similar expressions or variations of such words are intended to identify forward-looking statements but are not the exclusive means of identifying forward-looking statements in this Report. The identification of certain statements as "forward-looking" is not intended to mean that other statements not specifically identified are not forward-looking. All statements other than statements about historical facts are statements that could be deemed forward-looking statements, including, but not limited to, statements that relate to our future revenue, product development, customer demand, market acceptance, growth rate, competitiveness, gross margins, and expenditures.

Although forward-looking statements in this Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties discussed under the heading "Risk Factors" within Part I, Item 1A of the Report for the three and nine months ended June 30, 2021, and other documents we file from time-to-time with the SEC. Such risks, uncertainties and changes in condition, significance, value, and effect could cause our actual results to differ materially from those expressed herein and in ways not readily foreseeable. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report and are based on information currently and reasonably known to us. We undertake no obligation to revise or update any forward-looking statements to reflect any event or circumstance that may arise after the date of this Report, other than as required by law. Readers are urged to carefully review and consider the various disclosures made in this Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.


Critical Accounting Estimates and New Accounting Pronouncements

New Accounting Pronouncements

See Note 2, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES to the unaudited condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Critical Accounting Estimates

The discussion and analysis of the Company's financial condition and results of operations is based upon the Company's condensed consolidated financial statements, which have been prepared in accordance with US GAAP. The preparation of the Company's condensed consolidated financial statements requires its management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures. The Company's management bases its estimates, assumptions and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Different assumptions and judgments would change the estimates used in the preparation of the Company's condensed consolidated financial statements which, in turn, could change the results from those reported. In addition, actual results may differ from these estimates and such differences could be material to the Company's financial position and results of operations.

Critical accounting estimates are those that the Company's management considers the most important to the portrayal of the Company's financial condition and results of operations because they require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company's critical accounting estimates in relation to its condensed consolidated financial statements include those related to:

  ? Goodwill and intangible assets
  ? Fair value of marketable securities
  ? Incremental Borrowing Rate used Right of Use Asset Calculations
  ? Business combinations

Goodwill and Indefinite-Lived Intangibles

We allocate the cost of acquired companies to the identifiable tangible and intangible assets acquired and liabilities assumed, with the remaining amount classified as goodwill. The identification and valuation of these intangible assets and the determination of the estimated useful lives at the time of acquisition, as well as the completion of impairment tests, require significant management judgments and estimates. These estimates are made based on, among other factors, review of projected future operating results and business plans, economic projections, anticipated highest and best use of future cash flows and the cost of capital. The use of alternative estimates and assumptions could increase or decrease the estimated fair value of goodwill and other intangible assets, and potentially result in a different impact to our results of operations. Further, changes in business strategy and/or market conditions may significantly impact these judgments and thereby impact the fair value of these assets, which could result in an impairment of the goodwill or intangible assets.

Goodwill is not amortized but is tested for impairment annually and whenever events or circumstances change that indicate impairment may have occurred. We tested goodwill for impairment and determined there was no impairment and found not impairment charge based on the excess of a reporting unit's carrying amount over our fair value.


Fair value of marketable securities

Marketable securities are recorded at fair value using the quoted market prices and changes in fair value are recorded as net realized gains or losses in comprehensive income. We monitor these investments for impairment and make appropriate reductions in carrying values as necessary.

Incremental Borrowing Rate used Right of Use Asset Calculations

We determine if a contract is a lease or contains a lease at the inception of the contract and reassess that conclusion if the contract is modified. All leases are assessed for classification as an operating lease or a finance lease. Operating lease right-of-use, or ROU, assets are included in non-current other assets on our consolidated balance sheet. Operating lease liabilities are separated into a current portion, included within other accrued liabilities on our consolidated balance sheet, and a non-current portion, included within other long-term liabilities on our consolidated balance sheet. We do not have any finance lease ROU assets or liabilities. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. We do not obtain and control the right to use the identified asset until the lease commencement date.

Our lease liabilities are recognized at the applicable lease commencement date based on the present value of the lease payments required to be paid over the lease term. Because the interest rate implicit in the lease is not readily determinable, we generally use our incremental borrowing rate to discount the lease payments to present value. The estimated incremental borrowing rate is derived from information available at the lease commencement date. We factor in publicly available data for instruments with similar characteristics when calculating our incremental borrowing rates. Our ROU assets are also recognized at the applicable lease commencement date. The ROU asset equals the carrying amount of the related lease liability, adjusted for any lease payments made prior to lease commencement and lease incentives provided by the lessor. Variable lease payments are expensed as incurred and do not factor into the measurement of the applicable ROU asset or lease liability.

Business Combinations

We have applied significant estimates and judgments in order to determine the fair value of the identified assets acquired, liabilities assumed and goodwill recognized in connection with our business combinations to ensure the value of the assets and liabilities acquired are recognized at fair value as of the acquisition date. In measuring the fair value, we utilize valuation techniques consistent with the market approach, income approach, or cost approach.

The valuation of the identifiable assets and liabilities includes assumptions made in performing the valuation, such as projected revenue, weighted average cost of capital, discount rates, estimated useful lives, and other relevant assessments. These assessments can be significantly affected by our estimates, judgments, and assumptions. If actual results are not consistent with our estimates, judgments, or assumptions, or if additional or new information arises in the future that affects our fair value estimates, then adjustments to our initial fair value estimates may have a material impact to our purchase accounting or our results of operations. If actual results are not consistent with our estimates, judgments, or assumptions, or if additional or new information arises in the future, beyond our one-year measurement period, that affects our fair value estimates, then adjustments to our initial fair value estimates may have a material impact to our results of operations.

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