U. S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q

|x | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------
|  |                                                                                        
|  | For the quarterly period ended March 31, 2014.                                         



|£ | 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

333-173215



CannaVEST Corp.

(Exact name of registrant as specified
in its charter)



|DELAWARE                                                       | 80-0944970                       
|-------------------------------------------------------------- | ---------------------------------
|(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.)



2688 South Rainbow Avenue, Suite B

Las Vegas, Nevada 89146

(Address of principal executive offices,
Zip Code)



866-290-2157

(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 x



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.



|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



Indicate the number
of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of May 15, 2014,
the issuer had 33,614,166shares of issued and outstanding common stock, par value $.0001.














TABLE OF CONTENTS



|                                                                                                                          | Page
|------------------------------------------------------------------------------------------------------------------------- | ----
|PART I. FINANCIAL INFORMATION                                                                                             |     
|                                                                                                                          |     
|Item 1. Financial Statements                                                                                              | 3   
|                                                                                                                          |     
|Condensed Consolidated Balance Sheets as of March 31, 2014 (unaudited) and December 31, 2013 (audited)                    | 3   
|                                                                                                                          |     
|Condensed Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31, 2014 and 2013            | 4   
|                                                                                                                          |     
|Condensed Consolidated Statement of Changes in Stockholders’ Equity (unaudited) for the three months ended March 31, 2014 | 5   
|                                                                                                                          |     
|Condensed Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2014 and 2013            | 6   
|                                                                                                                          |     
|Notes to Condensed Consolidated Financial Statements (unaudited)                                                          | 7   
|                                                                                                                          |     
|Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations                             | 14  
|                                                                                                                          |     
|Item 3. Quantitative And Qualitative Disclosures About Market Risk                                                        | 18  
|                                                                                                                          |     
|Item 4. Controls and Procedures                                                                                           | 19  
|                                                                                                                          |     
|PART II. OTHER INFORMATION                                                                                                |     
|                                                                                                                          |     
|Item 1. Legal Proceedings                                                                                                 | 20  
|                                                                                                                          |     
|Item 1A. Risk Factors                                                                                                     | 20  
|                                                                                                                          |     
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                                                       | 20  
|                                                                                                                          |     
|Item 3. Defaults Upon Senior Securities                                                                                   | 20  
|                                                                                                                          |     
|Item 4. Mine Safety Disclosures                                                                                           | 20  
|                                                                                                                          |     
|Item 5. Other Information                                                                                                 | 20  
|                                                                                                                          |     
|Item 6. Exhibits                                                                                                          | 21  
|                                                                                                                          |     
|SIGNATURES                                                                                                                | 22  





2







PART I. FINANCIAL INFORMATION



Item 1: Financial
Statements



CANNAVEST CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                 |  | March 31, 2014 |            |   | December 31, 2013 |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ---------- | - | ----------------- | -
|                                                                                                                                                                                 |  | (unaudited)    |            |   | (audited)         |  
|Assets                                                                                                                                                                           |  |                |            |   |                   |  
|Current assets                                                                                                                                                                   |  |                |            |   |                   |  
|Cash                                                                                                                                                                             |  | $              | 8,372,181  |   |                   | $
|Accounts receivable (net)                                                                                                                                                        |  |                | 1,965,729  |   |                   |  
|Note receivable, current portion (Note 5)                                                                                                                                        |  |                | 292,644    |   |                   |  
|Prepaid inventory                                                                                                                                                                |  |                | 2,520,947  |   |                   |  
|Inventory (Note 3)                                                                                                                                                               |  |                | 2,391,990  |   |                   |  
|Prepaid expenses and other current assets                                                                                                                                        |  |                | 288,830    |   |                   |  
|Total current assets                                                                                                                                                             |  |                | 15,832,321 |   |                   |  
|                                                                                                                                                                                 |  |                |            |   |                   |  
|Property & equipment (net)                                                                                                                                                       |  |                | 211,617    |   |                   |  
|Intangibles (net) (Note 4)                                                                                                                                                       |  |                | 3,151,000  |   |                   |  
|Goodwill                                                                                                                                                                         |  |                | 1,855,512  |   |                   |  
|Accounts receivable, net of current portion (Note 2)                                                                                                                             |  |                | –          |   |                   |  
|Note receivable, non-current portion (Note 5)                                                                                                                                    |  |                | 260,056    |   |                   |  
|Investment in KannaLife Sciences                                                                                                                                                 |  |                | 400,694    |   |                   |  
|Total assets                                                                                                                                                                     |  | $              | 21,711,200 |   |                   | $
|                                                                                                                                                                                 |  |                |            |   |                   |  
|Liabilities and stockholders’ equity                                                                                                                                             |  |                |            |   |                   |  
|Current liabilities                                                                                                                                                              |  |                |            |   |                   |  
|Accounts payable                                                                                                                                                                 |  | $              | 134,418    |   |                   | $
|Accrued expenses                                                                                                                                                                 |  |                | 135,565    |   |                   |  
|Common stock to be issued (Note 6)                                                                                                                                               |  |                | –          |   |                   |  
|Amount due to related party                                                                                                                                                      |  |                | –          |   |                   |  
|Total current liabilities                                                                                                                                                        |  |                | 269,983    |   |                   |  
|                                                                                                                                                                                 |  |                |            |   |                   |  
|Non-current liabilities                                                                                                                                                          |  |                |            |   |                   |  
|Line of credit - Roen Ventures, LLC, net of debt discount (Note 5)                                                                                                               |  |                | –          |   |                   |  
|Total liabilities                                                                                                                                                                |  |                | 269,983    |   |                   |  
|                                                                                                                                                                                 |  |                |            |   |                   |  
|Commitments and contingencies (Notes 7 and 8)                                                                                                                                    |  |                |            |   |                   |  
|                                                                                                                                                                                 |  |                |            |   |                   |  
|Stockholders’ equity (Note 6)                                                                                                                                                    |  |                |            |   |                   |  
|Preferred stock, par value $0.0001; 10,000,000 shares authorized; no shares issued and outstanding                                                                               |  |                | –          |   |                   |  
|Common stock, par value $0.0001; 190,000,000 shares authorized; 32,832,500 and 15,580,000 shares issued and outstanding as of March 31, 2014 and December 31, 2013, respectively |  |                | 3,283      |   |                   |  
|Additional paid-in capital                                                                                                                                                       |  |                | 24,000,762 |   |                   |  
|Accumulated deficit                                                                                                                                                              |  |                | (2,562,828 | ) |                   |  
|Total stockholders’ equity                                                                                                                                                       |  |                | 21,441,217 |   |                   |  
|Total liabilities and stockholders’ equity                                                                                                                                       |  | $              | 21,711,200 |   |                   | $



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





3







CANNAVEST CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Unaudited



|                                                    |  | For the three months ended |           
|--------------------------------------------------- |  | -------------------------- | ----------
|                                                    |  | March 31,                  |           
|                                                    |  | 2014                       |           
|Product Sales                                       |  | $                          | 2,631,869 
|Cost of Goods Sold                                  |  |                            | 1,021,003 
|Gross Profit                                        |  |                            | 1,610,866 
|                                                    |  |                            |           
|Operating Expenses:                                 |  |                            |           
|Selling, general and administrative                 |  |                            | 924,365   
|Research and development                            |  |                            | 151,021   
|Total operating expenses                            |  |                            | 1,075,386 
|Operating income                                    |  |                            | 535,480   
|                                                    |  |                            |           
|                                                    |  |                            |           
|Other expenses:                                     |  |                            |           
|Interest expense (net)                              |  |                            | (615,344  
|Loss on equity investment                           |  |                            | (38,552   
|Income (Loss) before income taxes                   |  |                            | (118,416  
|Provision for income taxes                          |  |                            | –         
|NET INCOME (LOSS)                                   |  | $                          | (118,416  
|                                                    |  |                            |           
|Earnings (loss) per Share                           |  | $                          | (0.00     
|Weighted Average Number of Shares – Basic & Diluted |  |                            | 26,343,641



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





4







CANNAVEST CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS’ EQUITY

For the three months ended March 31, 2014



|                                                                      |  | Common Stock |            |  | AdditionalPaid-In |   |       | Accumulated |  |   |            | 
|--------------------------------------------------------------------- |  | ------------ | ---------- |  | ----------------- | - | ----- | ----------- |  | - | ---------- | 
|                                                                      |  | Shares       |            |  | Amount            |   |       | Capital     |  |   | Deficit    | 
|Balance, December 31, 2013 (audited)                                  |  |              | 15,580,000 |  |                   | $ | 1,558 |             |  | $ | 10,749,662 | 
|Shares issued for cash (net of expenses) (Note 6)                     |  |              | 7,250,000  |  |                   |   | 725   |             |  |   | 7,249,275  | 
|Shares issued for conversion of note from Roen Ventures, LLC (Note 5) |  |              | 10,000,000 |  |                   |   | 1,000 |             |  |   | 5,999,000  | 
|Shares issued pursuant to employment agreement                        |  |              | 2,500      |  |                   |   | –     |             |  |   | 2,825      | 
|Net loss                                                              |  |              | –          |  |                   |   | –     |             |  |   | –          | 
|Balance, March 31, 2014 (unaudited)                                   |  |              | 32,832,500 |  |                   | $ | 3,283 |             |  | $ | 24,000,762 | 



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





5







CANNAVEST CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS

UNAUDITED



|                                                                                           |  | For the three months ended
                                                                  March 31, |          
|------------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------ | ---------
|                                                                                           |  | 2014                                                                                                   |          
|OPERATING ACTIVITIES                                                                       |  |                                                                                                        |          
|Net income (loss)                                                                          |  | $                                                                                                      | (118,416 
|Adjustments to reconcile net income (loss) to net cash flows used in operating activities: |  |                                                                                                        |          
|Depreciation and amortization                                                              |  |                                                                                                        | 217,306  
|Amortization of debt discount                                                              |  |                                                                                                        | 589,474  
|Loss on equity investment                                                                  |  |                                                                                                        | 38,552   
|Stock issued pursuant to employment agreement                                              |  |                                                                                                        | 2,825    
|Change in operating assets and liabilities:                                                |  |                                                                                                        |          
|Prepaid expenses and other current assets                                                  |  |                                                                                                        | (114,513 
|Prepaid inventory                                                                          |  |                                                                                                        | (786,116 
|Inventory                                                                                  |  |                                                                                                        | 81,332   
|Accounts receivable                                                                        |  |                                                                                                        | (825,227 
|Accounts payable and accrued expenses                                                      |  |                                                                                                        | 22,658   
|Net cash used in operating activities                                                      |  |                                                                                                        | (892,125 
|                                                                                           |  |                                                                                                        |          
|INVESTING ACTIVITIES                                                                       |  |                                                                                                        |          
|Cash received on acquisition                                                               |  |                                                                                                        | –        
|Purchase of equipment                                                                      |  |                                                                                                        | (9,295   
|Repayment of principal on note receivable                                                  |  |                                                                                                        | 47,300   
|Investment in KannaLife Sciences                                                           |  |                                                                                                        | –        
|Net cash flows from (used in) investing activities                                         |  |                                                                                                        | 38,005   
|                                                                                           |  |                                                                                                        |          
|FINANCING ACTIVITIES                                                                       |  |                                                                                                        |          
|Common stock issued for cash                                                               |  |                                                                                                        | 7,075,000
|Proceeds from (payment of) loan from Roen Ventures                                         |  |                                                                                                        | (92,069  
|Repayment of loan from related party                                                       |  |                                                                                                        | (300     
|Net cash flows from financing activities                                                   |  |                                                                                                        | 6,982,631
|                                                                                           |  |                                                                                                        |          
|Net increase in cash                                                                       |  |                                                                                                        | 6,128,511
|Cash, beginning of period                                                                  |  |                                                                                                        | 2,243,670
|Cash, end of period                                                                        |  | $                                                                                                      | 8,372,181
|                                                                                           |  |                                                                                                        |          
|Supplemental disclosures of non-cash transactions:                                         |  |                                                                                                        |          
|                                                                                           |  |                                                                                                        |          
|Accounts receivable assumed from acquisition                                               |  | $                                                                                                      | –        
|Inventory assumed from acquisition                                                         |  |                                                                                                        | –        
|Prepaid inventory assumed from acquisition                                                 |  |                                                                                                        | –        
|Property and equipment assumed from acquisition                                            |  |                                                                                                        | –        
|Goodwill                                                                                   |  |                                                                                                        | –        
|Intangible assets acquired from acquisition                                                |  |                                                                                                        | –        
|Amount due to PhytoSPHERE Agreement                                                        |  |                                                                                                        | –        
|Common shares issued for acquisition                                                       |  |                                                                                                        | –        
|Conversion of line of credit – Roen Ventures, LLC to common stock                          |  |                                                                                                        | 6,000,000
|Conversion of accounts receivable to note receivable                                       |  |                                                                                                        | (600,000 
|Common stock to be issued                                                                  |  |                                                                                                        | (175,000 
|                                                                                           |  |                                                                                                        |          
|Supplemental cash flow disclosures:                                                        |  |                                                                                                        |          
|Interest paid                                                                              |  | $                                                                                                      | 187,453  
|Taxes paid                                                                                 |  |                                                                                                        | 33,361   



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





6







CANNAVEST CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)



1. ORGANIZATION AND BUSINESS



CannaVEST Corp. (formerly Foreclosure
Solutions, Inc.) (the “Company”, “we” or “us”) was incorporated on December 9, 2010, in the
state of Texas, to provide information on pre-foreclosure and foreclosed residential properties to homebuyers and real estate professionals
on its website. However, the Company was not able to secure financing for this business plan and on November 16, 2012 the shareholders
owning 6,979,900 of the outstanding shares sold their shares in private transactions to four buyers. Commensurate with this transaction
the former officer and director resigned and control of the Company changed. In addition, the Company’s business offices
moved from Dallas, Texas to Las Vegas, Nevada. On January 29, 2013, the Company amended its Certificate of Formation to change
its name to CannaVEST Corp. and on March 14, 2013, the Company increased the size of its board of directors and elected three directors.
On July 26, 2013 the Company reincorporated in the state of Delaware.



On December 31, 2012, the Company
entered into an Agreement for Purchase and Sale of Assets (the “PhytoSPHERE Agreement”) with PhytoSPHERE Systems, LLC
(“PhytoSPHERE”) whereby upon the closing of the transaction the Company acquired certain assets of PhytoSPHERE (the
“Transaction”) The closing of the Transaction occurred on January 29, 2013. Throughout the year ended December 31,
2013, the Company issued 5,825,000 shares of common stock and paid cash in the amount of $950,000 as payment for the assets acquired
in the Transaction.



On May 23, 2013, the Company
incorporated two subsidiaries in the State of Nevada, US Hemp Oil, LLC and Phytosphere Systems, LLC. The Company is the sole member
of both entities.



The Company’s business
is that of developing, producing, marketing and selling end consumer products to the nutriceutical industry containing hemp plant
extract, Cannabidoil (CBD) and reselling to third parties raw product acquired by the Company pursuant to its supply relationships
in Europe.



2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES



Basis of Presentation



The accompanying unaudited condensed
consolidated interim financial statements include the accounts of the Company and its wholly-owned subsidiaries US Hemp Oil LLC
(“USHO”) and Phytosphere Systems LLC. The statements have been prepared in conformity with accounting principles generally
accepted in the United States of America (“GAAP”). All references to GAAP are in accordance with the Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and the Hierarchy of Generally Accepted
Accounting Principles. All intercompany accounts and transactions have been eliminated in consolidation.



The unaudited condensed interim
financial statements have been prepared by the Company pursuant to the rules and regulations of the U.S. Securities and Exchange
Commission (the “SEC”). The information furnished herein reflects all adjustments (consisting of normal recurring accruals
and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective
periods. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with
GAAP have been omitted pursuant to such rules and regulations. These unaudited condensed consolidated financial statements should
be read in conjunction with the audited financial statements and notes for the year ended December 31, 2013, filed with the SEC
on the Company’s Annual Report on Form 10-K filed on March 28, 2014. The results for the three months ended March 31, 2014,
are not necessarily indicative of the results to be expected for the full year ending December 31, 2014.





7







Use of Estimates



The Company’s condensed
consolidated financial statements have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial
statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosures of contingent assets and liabilities. We evaluate our estimates, including those related to contingencies,
on an ongoing basis. We base our estimates on historical experience and on various other assumptions 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. Actual results may differ from these estimates under different assumptions or
conditions. Significant estimates include the valuation of intangible assets, the amortization lives of intangible assets and the
allowance for doubtful accounts. It is at least reasonably possible that a change in the estimates will occur in the near term.



Investments



The Company has a 24.97% interest
in KannaLife Sciences, Inc. (“KannaLife”), a phyto-medical company specializing in the research and development of
pharmacological products derived from plants. This investment has been accounted for under the equity method of accounting. The
Company’s financial results for the three months ended March 31, 2014 include a loss of $38,552 representing its share of
KannaLife’s net loss for the period.



Cash and Cash Equivalents



For purposes of the statements
of cash flows, the Company considers amounts held by financial institutions and short-term investments with an original maturity
of three months or less when purchased to be cash and cash equivalents. At each of March 31, 2014 and December 31, 2013, the Company
had no cash equivalents.



Concentration of Credit Risk



As of March 31, 2014, the Federal
Deposit Insurance Corporation (“FDIC”) provided insurance coverage of up to $250,000 per depositor per bank. The Company
has not experienced any losses in such accounts and does not believe that the Company is exposed to significant risks from excess
deposits.



Accounts Receivable



Accounts receivable consists
of trade accounts arising in the normal course of business. No interest is charged on past due accounts. Accounts for which no
payments have been received after 30 days are considered delinquent and customary collection efforts are initiated. Accounts receivable
are carried at original invoice amount less a reserve made for doubtful receivables based on a review of all outstanding amounts
on a monthly basis.



Management determines the allowance
for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition
and credit history, and current economic conditions. There was an allowance for doubtful accounts of $400,000 at March
31, 2014 and December 31, 2013.



Revenue Recognition



The Company recognizes revenue
in accordance with the ASC Topic 605, Revenue Recognition which requires persuasive evidence of an arrangement, delivery
of a product or service, a fixed or determinable price and assurance of collection within a reasonable period of time. The Company
records revenue when goods are delivered to customers and the rights of ownership have transferred from the Company to the customer.





8







Inventory



Inventory is stated at lower
of cost or market, with cost being determined on average cost basis. There was no reserve for inventory as of March 31, 2014 or
December 31, 2013.



Amounts paid to suppliers for
inventory not received is classified as prepaid inventory. Once received, the cost of inventory received is reclassified to inventory.



Property & Equipment



Equipment is stated at cost less
accumulated depreciation. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its
existing use. Depreciation is provided on a straight-line basis over the assets’ estimated useful lives ranging from three
to five years. Maintenance or repairs are charged to expense as incurred. Upon sale or disposition, the historically-recorded asset
cost and accumulated depreciation are removed from the accounts and the net amount less proceeds from disposal is charged or credited
to other income / expense.



Research & Development
Expense



Research and development costs
are charged to expense as incurred and include, but are not limited to, employee salaries and benefits, cost of inventory used
in product development, consulting service fees, the cost of renting and maintaining our laboratory facility and depreciation of
laboratory equipment.



Fair Value of Financial Instruments



In accordance with ASC Topic
825, Financial Instruments, the Company calculates the fair value of its assets and liabilities which qualify as financial
instruments and includes this additional information in the notes to its financial statements when the fair value is different
than the carrying value of those financial instruments. The estimated fair value of the Company’s current assets and current
liabilities approximates their carrying amount due to their readily available nature and short maturity.



Goodwill and Intangible Assets



The Company evaluates the carrying
value of goodwill during the fourth quarter of each year and between annual evaluations if events occur or circumstances change
that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could
include, but are not limited to (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition,
or (3) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired, the Company compares the fair
value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill.
The fair value of the reporting unit is estimated using a combination of the income, or discounted cash flows, approach and the
market approach, which utilizes comparable companies’ data. If the carrying amount of a reporting unit exceeds its fair value,
then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair
value of reporting unit goodwill to its carrying amount. In calculating the implied fair value of reporting unit goodwill, the
fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values.
The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair
value of goodwill.



We make critical assumptions
and estimates in completing impairment assessments of goodwill and other intangible assets. Our cash flow projections look several
years into the future and include assumptions on variables such as future sales and operating margin growth rates, economic conditions,
market competition, inflation and discount rates.



We amortize the cost of other
intangible assets over their estimated useful lives, which range up to five years, unless such lives are deemed indefinite. Intangible
assets with indefinite lives are tested in the fourth quarter of each fiscal year for impairment, or more often if indicators warrant.





9







Earnings (Loss) per Share



The Company calculates earning
or loss per share (“EPS”) in accordance with ASC Topic 260, Earnings per Share, which requires the computation
and disclosure of two EPS amounts, basic and diluted. Basic EPS is computed based on the weighted average number of shares of common
stock outstanding during the period. Diluted EPS is computed based on the weighted average number of shares of common stock outstanding
plus all potentially dilutive shares of common stock outstanding during the period. The Company had no dilutive shares outstanding
at March 31, 2014 and 2013.



Income Taxes



Income taxes are accounted for
under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the
years in which the related temporary differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized when the rate change is enacted. Valuation allowances are recorded to reduce
deferred tax assets to the amount that will more likely than not be realized. In accordance with ASC Topic 740, Income Taxes,
the Company recognizes the effect of uncertain income tax positions only if the positions are more likely than not of being sustained
in an audit, based on the technical merits of the position. Recognized uncertain income tax positions are measured at the largest
amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in
which those changes in judgment occur.



Recent Issued and Newly Adopted
Accounting Pronouncements



In February 2013, the FASB issued
Accounting Standards Update No. 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements
for Which the Total Amount of the Obligation Is Fixed at the Reporting Date(“ASU No.
2013-04”). The amendments in ASU No. 2013-04 provide guidance for the recognition, measurement, and disclosure of obligations
resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of ASU No.
2013-04 is fixed at the reporting date, except for obligations addressed within existing guidance in GAAP. The guidance requires
an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement
among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance
in ASU No. 2013-04 also requires an entity to disclose the nature and amount of the obligation as well as other information about
those obligations. The amendment in this standard is effective retrospectively for fiscal years, and interim periods within those
years, beginning after December 15, 2013. We are evaluating the effect, if any, adoption of ASU No. 2013-04 will have on our condensed
consolidated financial statements.



Other recent accounting pronouncements
issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the
SEC did not, or are not believed by management to have a material impact on the Company’s present or future financial statements.



3. INVENTORY



Inventory is comprised of the following:



|                |  | March 31, 2014 |           |  | December 31, 2013 |  
|--------------- |  | -------------- | --------- |  | ----------------- | -
|Raw materials   |  | $              | 1,593,552 |  |                   | $
|Work in process |  |                | 479,981   |  |                   |  
|Finished goods  |  |                | 318,457   |  |                   |  
|                |  | $              | 2,391,990 |  |                   | $





10







4. INTANGIBLE ASSETS



Intangible assets consisted of the following at March
31, 2014:



|Description          |  | Original Fair Market Value |           |  | Accumulated Amortization |   |         | Net | 
|-------------------- |  | -------------------------- | --------- |  | ------------------------ | - | ------- | --- | 
|Vendor relationships |  | $                          | 1,170,000 |  |                          | $ | 273,000 |     | 
|Trade name           |  |                            | 230,000   |  |                          |   | 53,667  |     | 
|Noncompete agreement |  |                            | 2,710,000 |  |                          |   | 632,333 |     | 
|                     |  | $                          | 4,110,000 |  |                          | $ | 959,000 |     | 



Intangible assets consisted of the following at December
31, 2013:



|Description          |  | Original Fair Market Value |           |  | Accumulated Amortization |   |         | Net | 
|-------------------- |  | -------------------------- | --------- |  | ------------------------ | - | ------- | --- | 
|Vendor relationships |  | $                          | 1,170,000 |  |                          | $ | 214,500 |     | 
|Trade name           |  |                            | 230,000   |  |                          |   | 42,167  |     | 
|Noncompete agreement |  |                            | 2,710,000 |  |                          |   | 496,833 |     | 
|                     |  | $                          | 4,110,000 |  |                          | $ | 753,500 |     | 



Amortization expense for the
three months ended March 31, 2014 and 2013 is $205,500 and $137,000, respectively.



5. RELATED PARTY TRANSACTIONS



On March 1, 2013, the Company
issued a Promissory Note (the “Note”) to Roen Ventures, LLC, a Nevada limited liability company (“Roen Ventures”),
in exchange for loans provided and to be provided in the future in an amount of up to $2,000,000, subsequently increased to $6,000,000.
As of December 31, 2013, the principal balance of the Note was $6,092,069. On January 27, 2014, the Company converted $6,000,000
of the Note balance into 10,000,000 shares of common stock of the Company pursuant to the terms of the Note, as amended. On January
28, 2014, the Company repaid Roen Ventures accrued interest on the Note in the amount of $187,453 and principal under the Note
in the amount of $92,069.



The Company had determined that
the conversion feature is considered a beneficial conversion feature and determined its value on July 25, 2013, the date of the
amendment increasing the principal amount of the Note to $6,000,000, to be $800,000. The Company calculated the beneficial conversion
feature at its intrinsic value. Accordingly, the beneficial conversion feature was accounted for as a debt discount to the Note
and was to be amortized using the effective interest method as interest expense over the remaining life of the Note or upon conversion,
if sooner. Upon conversion of the Note, the remaining balance of the debt discount totaling $589,474 was amortized to interest
expense in the accompanying condensed consolidated financial statements.



At March 31, 2014 and December
31, 2013, 100% of the Company’s accounts receivable totaling $1,965,729 and $1,430,202, respectively, were from affiliates
of Medical Marijuana, Inc. (“MJNA”), a stockholder of the Company. For the three months ended March 31, 2014, the Company
recognized revenues of $2,631,869. 100% of those revenues related to sales to affiliates of MJNA.



On January 10, 2014, MJNA agreed
to assume $725,000 of the Dixie Botanicals accounts receivable and write-off $11,496. MJNA paid the Company $125,000 on January
17, 2014 towards this balance. The remaining $600,000 is subject to a promissory note issued by MJNA to the Company, whereby MJNA
will make monthly payments to the Company, including interest at 7% per annum, over a two-year period. This note is secured by
the shares of common stock of the Company owned indirectly by MJNA through MJNA’s subsidiary, PhytoSPHERE Systems, LLC, which
is valued at two times the principal amount of the note based on the five-day average closing price of the Company’s common
stock at the time of determination. Such determination shall occur every 60 days, at which time the number of shares pledged shall
be increased or decreased, accordingly. At March 31, 2014, $292,644 of the note was classified as a current asset and $260,056
of the note was classified as a non-current asset.





11







6. STOCKHOLDERS’ EQUITY



Common Stock



The Company is authorized to
issue up to 190,000,000 shares of common stock (par value $0.0001). As of March 31, 2014 and December 31, 2013, the Company had
32,832,500 and 15,580,000 shares of common stock issued and outstanding, respectively. During the three months ended March 31,
2014, the Company issued 7,250,000 shares of its common stock pursuant to a private placement offering. The Company had received
payment of $175,000 toward the purchase of these shares at December 31, 2013. In addition, 10,000,000 shares of the Company’s
common stock were issued for a debt conversion (Note 5). During April 2014, the Company sold 781,666 shares of common stock for
total proceeds of $1,172,500.



Preferred Stock



The Company is authorized to
issue up to 10,000,000 shares of $.0001 par value preferred stock with designations, rights and preferences to be determined from
time to time by the Board of Directors of the Company. Each such series or class shall have voting powers, if any, and such preferences
and/or other special rights, with such qualifications, limitations or restrictions of such preferences and/or rights as shall be
stated in the resolution or resolutions providing for the issuance of such series or class of shares of preferred stock.



Options/Warrants



On July 25, 2013, the shareholders
approved the Company’s 2013 Equity Incentive Plan (the “Plan”) which reserves 1,000,000 shares of the Company’s
common stock for issuance under the Plan. As of March 31, 2014 and December 31, 2013, there were no outstanding options or warrants
for the purchase of the Company’s common stock.



7. COMMITMENTS AND CONTINGENCIES



Commitments



The Company leases its office
space pursuant to a month-to-month lease agreement dated April 1, 2013, which provides for a monthly rent of $1,500. The landlord
is a limited liability company of which a former director of the Company is the sole member.



On March 18, 2013, the Company
entered into a purchasing contract with a third party supplier of CBD to provide up to a maximum of 1,000 kg of product. In addition,
the Company entered into a consulting agreement with the third party supplier to provide consulting oversight for the growth and
production of the product from the period beginning March 1, 2013 through August 30, 2014. Approximately $2.3 million is due by
the Company pursuant to the terms of these agreements by October 2014.



On December 19, 2013, the Company
entered into a purchasing contract with a third party supplier of CBD to provide up to a maximum of 1 million kilograms of raw
product to the Company. There is approximately $1.7 million remaining to be paid by the Company under the contract.



On August 13, 2013, the Company
entered into a lease for approximately 2,400 square feet laboratory space in San Diego, California. The monthly base rent was approximately
$4,200 per month for a term of 12 months. On April 1, 2014 the Company entered into an amendment to the lease for laboratory space,
which increased the amount of laboratory space under the lease and extended the term of the lease for one additional year through
August 2015. This amendment increased the amount of lab space under lease to 3,276 and added storage space for an additional 887
square feet. The monthly base rent under the lease was increased to approximately $6,320 per month.





12







On March 27, 2014, the Company
entered into a lease for 5,325 square feet of office space in San Diego, California for a term of 39 months. The monthly base rent
under the lease is approximately $12,250, subject to an increase of 3% annually. The lease allows for rent abatement allowing one
month free rent following each 12 month period of paid rent during the term of the lease. The lease commenced on May 7, 2014, the
date the Company took possession of the new space.



Contingencies



On March 8, 2008, Far West Industries
(“Far West”) sued Michael J. Mona, Jr, President and Chief Executive Officer of the Company and others for damages
resulting from fraud arising out of a land transaction in California (the “California Action”). On February 23, 2012,
a judgment was entered in the California Action in favor of Far West against Mr. Mona and others in the amount of $17,777,562.
On October 18, 2012, the judgment in the California Action was domesticated in Nevada and enforcement proceedings commenced including,
but not limited to an examination of Mr. Mona as a judgment debtor, and garnishments of various accounts belonging to Mr. Mona.
During the period, Mr. Mona loaned $3,000,000 to Roen Ventures, which was subsequently loaned to the Company. The suit alleges
that the loan transactions were intended to prejudice creditors like Far West by concealing and wasting assets that would otherwise
be available to satisfy the judgment that Far West has against Mr. Mona. Pursuant to a Second Amendment Complaint filed by Far
West Industries on February 20, 2014, the Company was added as a defendant to the suit. On March 17, 2014, the Company was served
with a complaint from Far West Industries. In summary, Far West alleges that the Company is in possession of funds as a result
of an allegedly fraudulent transfer between Mr. Mona, Roen Ventures, LLC, and the Company. On May 13, 2014, a motion to dismiss
filed by the Company was granted and thus, the Company will no longer be a defendant in the lawsuit.



On April 23, 2014, a stockholder
filed a purported class action complaint alleging securities fraud and related claims against the Company and certain officers
and directors. The Company has not yet answered the complaint and management intends to vigorously defend the allegations.



8. SUBSEQUENT EVENTS



On April 9, 2014, the Company
formed a new wholly-owned subsidiary, Global Hemp Source, LLC, a Nevada limited liability company.





13







Item 2: MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Forward-Looking Statements



The following information
specifies certain forward-looking statements of the management of CannaVEST Corp. (the “Company”, “we”
or “us”). Forward-looking statements are statements that estimate the likelihood of occurrence of future events and
are not based on historical fact. Forward-looking statements may be identified by the use of forward-looking terminology, such
as “may”, “shall”, “could”, “expect”, “estimate”, “anticipate”,
“predict”, “probable”, “possible”, “should”, “continue”, or similar
terms, variations of those terms or the negative of those terms. The forward-looking statements specified in the following information
have been compiled by our management on the basis of assumptions made by management and considered by management to be reasonable.
Our future operating results, however, are impossible to predict, and no representation, guaranty, or warranty is to be inferred
from those forward-looking statements.



Forward-looking
statements include, but are not limited to, the following:



| | · | Statements relating to our future business and financial performance;   
| | - | ------------------------------------------------------------------------
| | · | The anticipated launch of our products; and                             
| | · | Other material future developments that you may take into consideration.



You are cautioned
not to place undue reliance on these forward-looking statements. The assumptions used for purposes of the forward-looking statements
represent estimates of future events and are subject to uncertainty as to possible changes in economic, legislative, industry,
and other circumstances. As a result, the identification and interpretation of data and other information and their use in developing
and selecting assumptions from and among reasonable alternatives require the exercise of judgment. To the extent that the assumed
events do not occur, the outcome may vary substantially from anticipated or projected results, and, accordingly, no opinion is
expressed on the achievability of those forward-looking statements. We cannot guaranty that any of the assumptions relating to
the forward-looking statements specified in the following information are accurate, and we assume no obligation to update any such
forward-looking statement.

The following information should be read in conjunction with the information contained in the unaudited Condensed Consolidated
Financial Statements included within this Quarterly Report on Form 10-Q for the period ended March 31, 2014 (this “Report”),
and the Notes thereto, which form an integral part of this Report.



Executive Summary of Our Business



We are in the business of developing, producing,
marketing and selling end consumer products to the nutriceutical industry containing the hemp plant extract, Cannabidoil (“CBD”),
and reselling to third parties raw product acquired by us pursuant to our supply relationships in Europe. We seek to take advantage
of an emerging worldwide trend to re-energize the production of industrial hemp and to foster its many uses for consumers. CBD
is derived from hemp stalk and seed.



Our operations initially consisted of supplying
our raw product to third parties, however in the third quarter of 2013, we launched our first consumer products which are available
to consumers through our distributor, HempMeds PX, LLC. We sell raw CBD which we have branded Real Scientific Hemp Oil (“RSHO”).
In addition we sell tinctures under our Cibadex brand, and beauty products under our Cibaderm brand. We expect to continue to add
new products to our portfolio going forward to enhance our line of CBD and hemp-related consumer products.



In order to accomplish our business plan,
we will continue to make refinements to our current products and continue the development of additional products. We have implemented
marketing and sales program designed to establish brand awareness and consumer acceptance of our products and will continue to
increase our efforts in this area. To date, we received working capital of $6,000,000 pursuant to a promissory note (the “Note”)
issued by the Company to Roen Ventures, LLC (“Roen Ventures”), as discussed in Note 5 of the Notes to our Condensed
Consolidated Financial Statements included herewith, and an additional $10,000,000 through the issuance of shares of common stock
of the Company through a private placement offering. During the quarter ended March 31, 2014, Roen Ventures converted the Note
into 10,000,000 shares of the Company’s common stock, as discussed in Note 5 of the Notes to our Condensed Consolidated Financial
Statements included herewith. Since inception we have received approximately $2.6 million in cash through sales of our products.



We expect to realize revenue to fund our
working capital needs through the sale of raw and finished products to third parties. However, we cannot be assured that our working
capital needs to develop, launch, market and sell our products will be met through the sale of raw and finished products to third
parties. If not, we may not be able to maintain profitable operations. If we are unable to maintain profitable operations sufficient
to fund our business, we would need to raise additional capital through either the issuance of equity, acquisition of debt or sale
of a segment of our operations in the future. In the event we are unable to maintain profitable operations or raise sufficient
additional capital, our ability to continue as a going concern would be in jeopardy and investors could lose all of their investment
in the Company.





14







Plan of Operations



Our Planned Operating Segments



We plan to diversify our business primarily
into four operating segments:



| | · | Securing and supplying raw hemp product for sale to third parties;                                            
| | - | --------------------------------------------------------------------------------------------------------------
| | · | Developing, producing, marketing and selling consumer products to the nutriceutical industry containing CBD;  
| | · | Establishing and helping others to establish farming operations centered on the growth of industrial hemp; and
| | · | Investing in companies in our industry.                                                                       



Investment Selection



We are committed to a value-oriented investment
philosophy that seeks to minimize the risk of capital loss without foregoing potential capital appreciation. We are developing
criteria that we believe are important in identifying and investing in prospective acquisition or financing targets. These criteria
provide general guidelines for our investment and acquisition decisions.



Results of Operations



The following discussion of our results
of operations should be read in conjunction with our financial statements included herewith. This discussion should not be construed
to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will
necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment
of our management.



Results for the three months ended March
31, 2014 and 2013



Revenues, Cost of Goods Sold and Gross
Profit



For the three months ended March 31, 2014,
the Company realized revenues of $2,631,869 and resulting gross profit of $1,610,866 related to the sale of consumer products and
RSHO through our distributor HempMeds PX, LLC. The Company realized revenues of $1,082,375 and gross profit of $876,925 for the
three months ended March 31, 2013. The increase in revenues is due to increased sales of both consumer products and RSHO during
2014. During 2013, the Company sold RSHO to affiliated companies, however the general market for the Company’s products and
oil was not yet established. Increased sales for the three months ended March 31, 2014 was attributable to increased demand for
our RSHO from our distributor HempMeds PX, LLC. The increase in gross profit is a result of a different pricing structure for products
sold during the three months ended March 31, 2014 compared with the three months ended March 31, 2013, partially offset by a higher
initial cost of goods sold for the three months ended March 31, 2013 as compared with the three months ended March 31, 2014.



Selling, General and Administrative
Expenses



For the three months ended March 31, 2014
the Company incurred selling, general and administrative expenses in the amount of $924,365 compared with $194,392 for the three
months ended March 31, 2013. This increase is related to the continued growth of the operations of the Company, additional personnel
related to farming operations, web development and increased marketing and legal costs. This amount also includes $205,500 and
$137,000 of amortization expense of vendor relationships and non-compete agreements acquired through the Agreement for Purchase
and Sale of Assets (the “PhytoSPHERE Agreement”) entered into by the Company with PhytoSPHERE Systems, LLC (“PhytoSPHERE”)
for the three months ended March 31, 2014 and 2013, respectively.



Research and Development Expenses



For the three months ended March 31, 2014,
the Company incurred research and development expenses of $151,021. The Company did not incur any research and development expenses
for the three months ended March 31, 2013. These expenses are related to the cost of process development, rental of our laboratory
facility, payroll expenses, laboratory supplies, product development and testing, and outsourced research personnel for the period.



Interest expense



For the three months ended March 31, 2014,
the Company recognized interest expenses of $615,344. This included interest accrued under the Roen Ventures Notes in the amount
of $25,870, amortization of the debt discount on the Note in the amount of $42,105 up until the date the Note was converted to
shares of the Company’s common stock, and $547,369 representing the amortization of the remaining debt discount at the date
of conversion.





15







Loss on Equity Investment



For the three months ended March 31, 2014,
the Company recognized a loss of $38,552, representing its pro rata share (24.97%) of the loss of KannaLife Sciences for the period.
The Company did not recognize any gain or loss from investment for the three months ended March 31, 2013 as the Company did not
own a sufficient amount of KannaLife Sciences stock to require recognition of any gain or loss for the period.



Ongoing Sources and Uses of Cash



Changes in cash flows



During the three months ended March 31,
2014, cash increased by $6,128,511 to $8,372,181. At December 31, 2013, the Company had $2,243,670 in cash. The increase in cash
is primarily attributable to the issuance of shares of the Company’s common stock for cash offset by operating activities,
and partial repayment of the Roen Ventures Note.



Net cash used in operating activities



During the three months ended March 31,
2013, the Company used $892,125 in operating activities compared to using $681,060 for the three months ended March 31, 2013. The
increase in cash used of $211,065 is primarily a result of an increase of accounts payable and accrued expenses of $22,658, an
increase in prepaid expenses of $114,513, and an increase of accounts receivable in the amount of $825,227 for the three months
ended March 31, 2014 compared to an increase in accounts payable and accrued expenses of $280,538 and increase in accounts receivable
of $1,082,375 for the three months ended March 31, 2013. These three items resulted in a reduction of cash of $917,082 for the
three months ended March 31, 2014 compared to $801,837 for the three months ended March 31, 2013.



Net income (loss), net of non-cash expense
items was $729,741 and $819,533 for the three months ended March 31, 2014 and 2013, respectively.



The Company used cash of $704,784 and $698,756
related to increases in inventory and prepaid inventory for the three months ended March 31, 2014 and 2013, respectively.



Net cash from (used in) investing activities



For the three months ended March 31, 2014,
$38,005 was provided by investing activities. This included cash received from a note receivable of $47,300, partially offset by
$9,295 used for the purchase of equipment. For the three months ended March 31, 2013, $199,225 was used in investing activities.
This included $250,000 paid for a portion of investment in KannaLife Sciences, Inc. (“KannaLife”), partially offset
by $50,775 received through the purchase of the assets pursuant to the PhytoSPHERE Agreement, as discussed in Note 1 to the Company’s
Notes to Condensed Consolidated Financial Statements included herewith.



Net cash flows from financing activities



For the three months ended March 31, 2014,
$6,982,631 was provided by financing activities compared to $1,080,000 for the three months ended March 31, 2013. For the three
months ended March 31, 2014, the Company received $7,075,000 in cash for the issuance of common stock pursuant to the private placement
offering, partially offset by a $92,069 repayment under the Roen Ventures Note and $300 repaid for a related party loan. For the
three months ended March 31, 2013, the Company received proceeds of $1,080,500 from the loan from Roen Ventures, LLC, which was
partially offset by payment of $500 due pursuant to a related party loan.



Liquidity and Capital Resources



As of March 31, 2014, the Company had a
cash balance of $8,372,181. This includes a total of $10,000,000 in capital raised through the issuance of common stock through
a private placement offering from December 2013 through March 2014. A total of $7,075,000 was raised during the three months ended
March 31, 2014 through the private placement offering.





16







The Company is a party to a contract for
the growth and processing of 1,000 kilograms of product currently being delivered and scheduled to be delivered through August
31, 2014. The total amount left to be paid under this contract is approximately $2.3 million through October 2014. The Company
is party to a second purchasing contract to provide up to 1 million kilograms of raw product to the Company. There is approximately
$1.7 million remaining to be paid under this contract. We also have additional contracts in place for the growth and processing
of hemp oil for delivery through October 2018. We anticipate the cost of those contracts will remain consistent with current year
prices.



Our common stock currently trades on the
OTCBB under the symbol “CANV.”



We have generated revenues since our inception;
we have sold and shipped raw product to third parties for which we have received payments totaling approximately $2.6 million.
Our revenues are currently sufficient to pay our operating expenses, however due to the concentration of our customer base, we
are unsure if we can maintain a level of revenues sufficient to cover our operating expenses, which would affect our ability to
continue as a going concern and make us dependent upon our ability to obtain the necessary financing to meet our obligations and
repay our current and future liabilities when they become due until such time, if ever, that we are able to generate sufficient
revenues to attain profitable operations. Prior to the current quarter, we experienced losses and negative cash flows from operations
since inception. If we are unable to maintain profitable operations or obtain the financing necessary to support our operations,
we may be unable to continue as a going concern. In that event, we may be forced to cease operations and our shareholders could
lose their entire investment in the Company.



Off-Balance Sheet Arrangements



The Company has a supply agreement in place
with a third party supplier to provide for growth and supply of raw materials. The agreement provides for supplies in excess of
1,000 kilograms of product over the next three years. As of March 31, 2014, the Company owed approximately $2.3 million to the
supplier under this agreement.



The Company has a second supply agreement
in place with a second third party supplier to provide for supply of up to 1 million kilograms of raw product. There is approximately
$1.7 million remaining to be paid by the Company under this agreement. We have contracts in place for the growth and processing
of hemp oil for delivery through October 2018. We anticipate the cost of those contracts will remain consistent with current year
price.



We have no other significant off-balance
sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in
our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that
are material to our stockholders.



Critical Accounting Policies



The preparation of these financial statements
in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities
at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. On an
ongoing basis management evaluates its critical accounting policies and estimates.



A “critical accounting policy”
is one which is both important to the understanding of the financial condition and results of operations of the Company and requires
management’s most difficult, subjective, or complex judgments, and often requires management to make estimates about the
effect of matters that are inherently uncertain. Management believes the following accounting policies fit this definition:



Investments

The Company has a 24.97% interest in KannaLife,
a phyto-medical company specializing in the research and development of pharmacological products derived from plants. This investment
has been accounted for under the equity method of accounting.





17







Accounts receivable

Accounts receivable consists of trade accounts
arising in the normal course of business. No interest is charged on past due accounts. Accounts for which no payments have been
received after 30 days are considered delinquent and customary collection efforts are initiated. Accounts receivable are carried
at original invoice amount less a reserve made for doubtful receivables based on a review of all outstanding amounts on a quarterly
basis.



Management has determined the allowance
for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition
and credit history, and current economic conditions.



Inventory

Inventory is stated at lower of cost or
market, with cost being determined on average cost basis.



Amounts paid to suppliers for inventory
not received is classified as prepaid inventory. Once received, the cost of inventory received is reclassified to inventory.



Revenue Recognition

Our revenue recognition policy is consistent
with the criteria set forth in Staff Accounting Bulletin 104— Revenue Recognition (“SAB 104”) for determining
when revenue is realized or realizable and earned. We recognize revenue in accordance with the requirements of SAB 104 that:





| | · | persuasive evidence of an arrangement exists including a signed purchase order;
| | - | -------------------------------------------------------------------------------
| | · | delivery has occurred;                                                         
| | · | the seller’s price to the buyer is fixed or determinable; and                  
| | · | collectability is reasonably assured.                                          



The Company recognizes
revenue in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic
605, Revenue Recognition, which requires persuasive evidence of an arrangement, delivery of a product or service, a fixed
or determinable price and assurance of collection within a reasonable period of time. The Company records revenue when goods are
delivered to customers and the rights of ownership have transferred from the Company to the customer.



Recent Issued and Newly Adopted Accounting
Pronouncements



In February 2013, the FASB issued Accounting
Standards Update No. 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for
Which the Total Amount of the Obligation Is Fixed at the Reporting Date (“ASU No.2013-04”). The amendments in ASU
2013-04 provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability
arrangements for which the total amount of the obligation within the scope of ASU No. 2013-04 is fixed at the reporting date, except
for obligations addressed within existing guidance in GAAP. The guidance requires an entity to measure those obligations as the
sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount
the reporting entity expects to pay on behalf of its co-obligors. The guidance in ASU No. 2013-04 also requires an entity to disclose
the nature and amount of the obligation as well as other information about those obligations. The amendment in this standard is
effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. We are evaluating
the effect, if any, adoption of ASU No. 2013-04 will have on our condensed consolidated financial statements.



Other recent accounting pronouncements
issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the
U.S. Securities and Exchange Commission (“SEC”) did not, or are not believed by management to have a material impact
on the Company’s present or future financial statements.



Item 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK



Not applicable to a “smaller reporting
company” as defined in Item 10(f)(1) of Regulation S-K.





18







Item 4. CONTROLS AND PROCEDURES



DISCLOSURE CONTROLS AND PROCEDURES



Our management, which is comprised of one
person holding the office of principal executive officer and one person holding the office of principal financial officer, evaluated
the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end
of the period covered by this report (the “Evaluation Date”). Based on such evaluation, our management concluded that
our disclosure controls and procedures were not effective, at a reasonable assurance level, as of the Evaluation Date, to ensure
that information required to be disclosed in reports that we file or submit under that Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the SEC rules and forms and to ensure that information required to be disclosed
in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management in a manner that
allows timely decisions regarding required disclosures.



An evaluation was performed under the supervision
and with the participation of the Company’s management of the effectiveness of the design and operation of the Company’s
procedures and internal control over financial reporting as of March 31, 2014. In making this assessment, the Company used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework. Based on that evaluation, the Company’s management concluded that the Company’s internal controls over financial
reporting were not effective in that there was a material weakness as of March 31, 2014.



A material weakness is a deficiency or
combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by the Company’s
internal controls.



The Company’s management has identified
a material weakness in the effectiveness of internal control over financial reporting related to a shortage of resources in the
accounting department required to assure appropriate segregation of duties with employees having appropriate accounting qualifications
related to the Company’s unique industry accounting and disclosure rules.



Management is aware that there is a lack
of proper internal controls related to the inventory purchase cycle. Specifically, there is a lack of control functions and segregation
of duties involved with purchasing and receiving inventory. This constitutes a deficiency in internal controls. The Company is
in the process of implementing proper controls and adding additional employees to the process to improve the segregation of duties.



CHANGES IN INTERNAL CONTROL OVER FINANCIAL
REPORTING



There was no change in our internal control
over financial reporting identified in connection with our evaluation that occurred during our the fiscal quarter ended March 31,
2014, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.





19







PART II. OTHER INFORMATION



Item 1: LEGAL PROCEEDINGS



On March 8, 2008, Far West Industries (“Far
West”) sued Michael J. Mona, Jr, President and Chief Executive Officer of the Company and others for damages resulting from
fraud arising out of a land transaction in California. On February 23, 2012, a judgment was entered in the California Action in
favor of Far West against Mona and others in the amount of $17,777,562. On October 18, 2012, the judgment in the California Action
was domesticated in Nevada and enforcement proceedings commenced including, but not limited to an examination of Mr. Mona as a
judgment debtor, and garnishments of various accounts belonging to Mr. Mona. During the period, Mr. Mona loaned $3,000,000 to Roen
Ventures, which was subsequently loaned to the Company. The suit alleges that the loan transactions were intended to prejudice
creditors like Far West by concealing and wasting assets that would otherwise be available to satisfy the judgment that Far West
has against Mr. Mona. Pursuant to a Second Amendment Complaint filed by Far West Industries on February 20, 2014, the Company was
added as a defendant to the suit. On March 17, 2014, the Company was served with a complaint from Far West Industries. In summary,
Far West alleges that the Company is in possession of funds as a result of an allegedly fraudulent transfer between Mr. Mona, Roen
Ventures, LLC, and the Company.



Subsequent to the end of the period covered
by this Report, on May 13, 2014, Judge Gonzalez in Clark County District Court GRANTED a motion to dismiss
filed by the Company and thus the Company will no longer be a defendant in the lawsuit. Judge Gonzalez specifically ruled that
Far West has not provided any evidence to support a fraudulent transfer or alter ego theory against the Company. While Judge Gonzalez
rejected a request by Far West that it be permitted to amend its lawsuit in order to maintain claims against the Company, she did
rule that the dismissal is “without prejudice” and that Far West may seek leave of court to bring the Company back
into the case at a later date if it uncovers evidence to support a fraudulent transfer or alter ego theory.



Subsequent to the end of the period covered
by this Report, on April 23, 2014, Tanya Sallustro filed a purported class action complaint alleging securities
fraud and related claims against the Company and certain officers and directors. Ms. Sallustro alleges that between March 18-31,
2014, she purchased 325 shares of the Company’s common stock for a total investment of $15,791.00. The Complaint refers to
Current Reports on Form 8-K and Current Reports on Form 8-K/A filings made by the Company on April 3, 2014 and April 14, 2014,
in which the Company amended previously disclosed sales (sales originally stated at $1,275,000 were restated to $1,082,375 - reduction
of $192,625) and restated goodwill as $1,855,512 (previously reported at net zero). Additionally, the complaint states after the
filing of the Company’s Current Report on Form 8-K on April 3, 2014 and the following press release, the Company’s
stock price “fell $7.30 per share, or more than 20%, to close at $25.30 per share.”



The Company has not yet answered the complaint
and management intends to vigorously defend the allegations.



Item 1A: RISK FACTORS



Not required for “smaller reporting
companies.”



Item 2: UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS



None.



Item 3: DEFAULTS UPON SENIOR SECURITIES



None.



Item 4: MINE SAFETY DISCLOSURES



Not applicable.



Item 5: OTHER INFORMATION



None.





20







Item 6: EXHIBITS:



|Exhibit No. |  | Description of Exhibit                                                                                                                                    
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1(1)      |  | Agreement and Plan of Merger, dated as of July 25, 2013, by and between CannaVEST Corp., a Texas corporation, and CannaVEST Corp., a Delaware corporation.
|3.1(1)      |  | Certificate of Incorporation of CannaVEST Corp., as filed on January 26, 2013.                                                                            
|3.2(1)      |  | Bylaws of CannaVEST Corp., dated as of January 26, 2013.                                                                                                  
|4.1(2)      |  | CannaVEST Corp. Specimen Stock Certificate.                                                                                                               
|10.1(2)     |  | CannaVEST Corp. 2013 Equity Incentive Plan.                                                                                                               
|10.2***     |  | Non-Exclusive License and Distribution Agreement by and between the Company and HempMedsPX, LLC, dated August 9, 2013 and effective as of July 1, 2013.   
|31.1*       |  | Certification of the Chief Executive Officer pursuant to
    Section 302(a) of the Sarbanes-Oxley Act of 2002.                                            
|31.2*       |  | Certification of the Chief Financial Officer pursuant to
    Section 302(a) of the Sarbanes-Oxley Act of 2002.                                            
|32.1*       |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.        
|32.2*       |  | Certification of  Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.       
|99.1*       |  | Temporary Hardship Exemption Provided by Rule 201                                                                                                         
|            |  |                                                                                                                                                           
|101 INS**   |  | XBRL Instance Document                                                                                                                                    
|101 SCH**   |  | XBRL Schema Document                                                                                                                                      
|101 CAL**   |  | XBRL Calculation Linkbase Document                                                                                                                        
|101 LAB**   |  | XBRL Labels Linkbase Document                                                                                                                             
|101 PRE**   |  | XBRL Presentation Linkbase Document                                                                                                                       
|101 DEF**   |  | XBRL Definition Linkbase Document                                                                                                                         

* Filed herewith.



** To be filed by amendment per Rule 201
of Regulation S-T.

***Portions of this exhibit have been omitted
pursuant to a request for confidential treatment and the non-public information will be filed separately with the Commission.



|(1) | Incorporated by reference from an exhibit to our Current Report on Form 10-Q filed on August 13, 2013.
|--- | ------------------------------------------------------------------------------------------------------
|(2) | Incorporated by reference from an exhibit to our Current Report on Form 8-K filed on July 31, 2013.   





21







SIGNATURES



Pursuant to the requirements 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.



|             | CANNAVEST CORP.
|------------ | ---------------
|             |                
|May 15, 2014 | By:            
|             |                
|             |                
|             | By:            
|             |                
|             |                













































22