Medical Marijuana Subsidiary PhytoSphere Outsources Oil Production

On Friday, one of the first public companies to try to capitalize on the marijuana legalization wave -- aptly named Medical Marijuana,  (NASDAQOTH: MJNA  ) , announced that its 80%-owned PhytoSPHERE Systems subsidiary has entered into a transaction with hemp-extract company CannaVEST.

Specifically, PhytoSPHERE is selling certain assets to CannaVEST for $35 million, payable in cash or CannaVEST stock in five quarterly installments beginning Jan. 31 and ending Dec. 31. The assets being sold include "equipment and inventory, Web domain names, phone numbers, and all existing and pending agreements with hemp production and processing facilities," along with the grant of a license to use PhytoSPHERE brand names and logos.

The first installment payment, transferred on Jan. 29, shows how the agreement works in practice. CannaVEST issued 900,000 shares of stock, valued at $5 each, to PhytoSPHERE. PhytoSPHERE then transferred 720,000 of these shares to MM based on MM's 80% ownership interest in PhytoSPHERE.

PhytoSPHERE explains the logic behind the transaction as "eliminating ... substantial capital commitment required by our production facilities" by shifting raw material-production assets to CannaVEST. PhytoSPHERE maintains its access to hemp-based raw materials by entering into a supply agreement whereby CannaVEST will supply it with such ingredients at "high CBD concentrate hemp oil" needed to develop, manufacture, and market its products.