EVOLUTIONARY GENOMICS, INC. - Quarter Report: 2016 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

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(Mark One)

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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2016

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________

Commission File Number: 000-54129

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EVOLUTIONARY GENOMICS, INC.

(Exact name of small business issuer as specified in its charter)

1026 Anaconda Drive, Castle Rock, CO 80108

(Address of principal executive offices including zip code)

(720) 900-8666

(Issuer's telephone number)

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 þ  No ¨

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 þ  No ¨

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.

Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨  No þ

As of March 31, 2016, the Registrant had 5,881,898 shares of common stock, $.001 par value and 558,015 shares of series A-1 preferred stock, $.001 par value outstanding.

EVOLUTIONARY GENOMICS, INC.

INDEX

PART I. FINANCIAL STATEMENTS

ITEM 1.

FINANCIAL STATEMENTS

The accompanying financial statements have been prepared by Evolutionary Genomics, Inc., without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position of the Company as of March 31, 2016 and 2015 and for the periods then ended have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s December 31, 2015 audited financial statements. The results of operations for these interim periods are not necessarily indicative of the results for the entire year.

1

EVOLUTIONARY GENOMICS, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of the financial statements.

2

EVOLUTIONARY GENOMICS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

The accompanying notes are an integral part of the financial statements.

3

EVOLUTIONARY GENOMICS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

The accompanying notes are an integral part of the financial statements.

4

EVOLUTIONARY GENOMICS, INC.

NOTES TO FINANCIAL STATEMENTS

March 31, 2015

(Unaudited)

Note 1: Business Activity

Evolutionary Genomics, Inc. (the “Company,” “We,” or “Our”) has developed a technology platform, the Adapted Traits Platform (“ATP”), to identify commercially valuable genes that control important traits in animals and plants. We are using the ATP to identify genes to improve crop plant traits such as yield, sugar content, biomass, drought tolerance, and pest/disease resistance. Our platform identifies key genes that have changed successfully to impart new or improved traits.

The Company performs its research on behalf of governmental organizations, non-profit foundations, and commercial entities and receives revenue from grants and commercial research contracts. These grants/contracts contain fixed-fee arrangements and may also have licensing provisions upon effective commercialization of research results. Successful commercialization may take many years to produce license royalty payments. Ownership of intellectual property developed in research projects varies from the Company retaining no rights to intellectual property, to joint ownership, to the Company retaining all rights.

During the three months ended March 31, 2015, the Company purchased 75.16% of the outstanding stock of Fona, Inc., (“Fona”) a public shell company for $255,000. Since Fona was a public shell company which does not constitute a business and the purchase was done in contemplation of a reverse merger, the Company accounted for the payment as a distribution to Fona, Inc. shareholders. The Company also entered into an Agreement and Plan of Merger (the “Merger”), which was consummated on October 19, 2015. Further information about these transactions can be found in Note 12.

As a result of the Merger, Evolutionary Genomics, Inc. became a wholly owned subsidiary of Fona. For accounting purposes, the merger was treated as a reverse acquisition with Evolutionary Genomics, Inc. as the acquirer and Fona as the acquired party. The business and financial information included in this report is the business and financial information of Evolutionary Genomics, Inc. Pro-forma information has not been presented as the financial information of Fona was insignificant. Subsequent to the Merger, Fona, Inc. was renamed Evolutionary Genomics, Inc.

In conjunction with the Merger, the Company acquired the remaining 77% of EG I, LLC. This transaction was accounted for as a business combination.

Note 2: Summary of Significant Accounting Policies

Principals of Consolidation: These consolidated financial statements include the accounts of Evolutionary Genomics, Inc. and its wholly owned and majority-owned subsidiaries. All material intercompany transactions and balances have been eliminated.

Use of Estimates: The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

Cash: The Company considers all highly liquid investments purchased with an original or remaining maturity of three months or less when purchased to be cash.  

Accounts Receivable: Accounts receivable are carried at cost less an allowance for doubtful accounts, if an allowance is deemed necessary. On a periodic basis the Company evaluates its accounts receivable and determines the requirement for an allowance for doubtful accounts based upon the history of past write-offs, collections, and current credit conditions. A receivable is written off when it is determined that all reasonable collection efforts have been exhausted and the potential for recovery is considered remote. The Company recorded no allowance for doubtful accounts as of March 31, 2016 and December 31, 2015. Recoveries of receivables previously written off are recorded when received. The Company does not charge interest on past-due receivables.

5

EVOLUTIONARY GENOMICS, INC.

NOTES TO FINANCIAL STATEMENTS

March 31, 2015

(Unaudited)

Trading Securities: The Company’s short-term investments are comprised of equity securities, treasury bonds and bank certificates of deposit, all of which are classified as trading securities and are carried at their fair value based on the quoted market prices of the securities at March 31, 2016 and December 31, 2015. Net realized and unrealized gains and losses on trading securities are included in net earnings. For purpose of determining realized gains and losses, the cost of securities sold is based on specific identification.

Property and Equipment: Property and equipment are stated at cost. Depreciation is provided for by the straight-line method over three- to seven-year estimated useful lives of software, furniture and fixtures, and equipment. Maintenance and repairs are expensed as incurred; major renewals and betterments that extend the useful lives of property and equipment are capitalized. When property and equipment are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is recognized.

Long-Lived Assets: The long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In the event that facts and circumstances indicate that the cost of any long-lived assets may be impaired, an evaluation of recoverability is performed. An impairment is considered to exist if the total estimated undiscounted cash flows are less than the carrying amount of the asset. An impairment loss is measured and recorded to the extent that the carrying amount of the asset exceeds its estimated fair value. No asset impairment was recorded during the three months ended March 31, 2016 and 2015.

Intangible Assets: Intangible assets include acquired research in progress and patents on the Company’s core technology for gene identification. Patents are amortized over their expected useful life of 20 years using the straight-line method. Acquired research in progress is an indefinite-lived intangible asset until the development is complete at which time the useful life of the asset will be assigned. Costs incurred to renew intangible assets are expensed in the period incurred, while costs incurred to extend the lives of patents are capitalized and amortized over the remaining useful life of the asset.

Investment in VetDC, Inc.: As of November 1, 2013, the Company committed to making a $201,924 investment for 201,924 shares of series A-2 preferred stock in VetDC, Inc., a Delaware C corporation, which is focused on developing pet therapeutic products. VetDC, Inc. is related to the Company through common ownership and management. The investment was made for purposes of capital appreciation and from the Company’s excess cash reserves. The Company accounts for its investment in VetDC, Inc. using the cost method. During the three months ended March 31, 2016, the Company sold 47,827 of these shares to unrelated parties for $55,000 and recorded a gain of $7,113. The carrying amount of the investment as of March 31, 2016 and December 31, 2015 was $124,097 and $171,924, respectively. VetDC, Inc. is the only cost method investment that the Company owns. The Company is exempt from estimating interim fair values because the investment does not meet the definition of a publicly traded company. The fair value of the investment was not measured as of March 31, 2016 and December 31, 2015 because no identified events or changes in circumstances have occurred that may have a significant adverse effect on the fair value of the investment.  

Billings in Excess of Costs: The liability account, billings in excess of costs and estimated earnings on uncompleted contracts, represents billings in excess of revenues recognized and earned.

Revenue Recognition: The Company recognizes revenue where persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, and collectability is reasonably assured. Service revenues are generally recognized as fees for service contracts, including payments for Company personnel on a per-day basis and reimbursement for subcontractors and supplies on a cost-incurred basis. Under our milestone-based contracts, consideration associated with at-risk substantive performance milestones is recognized as revenue upon the achievement of the related milestone, as defined in the respective contracts. Advance project payments are recorded as customer deposits. There were no customer deposits as of March 31, 2016 and December 31, 2015. All revenue for the three months ended March 31, 2016 and 2015 was from sources inside the United States, was from contractual research projects and grants, and there was no licensing revenue. The Company recorded no other revenue for the three months ended March 31, 2016 and 2015.

6

EVOLUTIONARY GENOMICS, INC.

NOTES TO FINANCIAL STATEMENTS

March 31, 2015

(Unaudited)

In our Master Services Agreement with the Bill and Melinda Gates Foundation, we grant them a royalty-free license for use of intellectual property developed in low-income economies and lower-middle-income economies according to the World Bank classification and expressly excludes all of North America and Europe. The Company retains all rights to the use of intellectual property outside of these regions.

Income Taxes: Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. Management regularly assesses the likelihood that deferred tax assets will be recovered from future taxable income, and to the extent management believes that it is more likely than not that a deferred tax asset will not be realized, a valuation allowance is established. When a valuation allowance is established, increased or decreased, an income tax charge or benefit is included in the consolidated financial statements and net deferred tax assets are adjusted accordingly. As of March 31, 2016 and December 31, 2015, a full valuation allowance has been established on the net deferred tax asset.

Under the Income Tax topic of the ASC, in order to recognize an uncertain tax benefit, the taxpayer must be more likely than not of sustaining the position, and the measurement of the benefit is calculated as the largest amount that is more than 50% likely to be realized upon resolution of the benefit. The Company has no accruals for uncertain tax benefits.

Stock-Based Compensation: The estimated grant-date fair value of stock-based awards, adjusted for those awards that are not expected to vest (forfeitures), is expensed over the requisite service period, which is typically equivalent to the vesting term of the award.  

For equity instruments issued to consultants and vendors in exchange for goods and services received, the measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.

Research and Development: Research and development costs are expensed as incurred. In instances where we enter into agreements with third parties for research and development activities, we may prepay for services at the initiation of the contract. We record the prepayment as a prepaid asset and amortize the asset into research and development expense over the period of time the contracted research and development services are performed.

Net Loss Per Common Share: Basic net (loss) income per common share excludes any dilutive effects of equity instruments.  We compute basic net (loss) income per common share using the weighted average number of common shares outstanding during the period.  We compute diluted net (loss) income per common share using the weighted average number of common shares and common stock equivalents outstanding during the period. For the three months ended March 31, 2016, common stock equivalents including 558,015 shares of convertible preferred stock, options for 466,667 shares of common stock and warrants for 113,479 shares of common stock were excluded because their effect was anti-dilutive.

Subsequent Events: The Company has evaluated all subsequent events through the date of these consolidated financial statements.  

Note 3: New Accounting Standards

In November 2014, the FASB issued ASU 2015-17, “Income Taxes (Topic 740) Related to the Balance Sheet Classification of Deferred Taxes,” which will require entities to present deferred tax assets (DTAs) and deferred tax liabilities (DTLs) as non-current in a classified balance sheet. The ASU simplifies the current guidance (ASC 740-10-45-4), which requires entities to separately present DTAs and DTLs as current and non-current in a classified balance sheet. The ASU is effective for annual reporting periods beginning on or after December 15, 2016, and interim periods within those annual periods. The Company is evaluating the impact of the standard on its consolidated financial statements, but upon adoption it is not expected to have a material impact on the consolidated financial statements.

7

EVOLUTIONARY GENOMICS, INC.

NOTES TO FINANCIAL STATEMENTS

March 31, 2015

(Unaudited)

In May 2014, and further amended in August 2015, March 2016 and April 2016, ASUs No. 2014-09, No. 2015-14, No. 2016-08, and No. 2016-10 were issued related to revenue from contracts with customers which  supersedes existing revenue recognition guidance.  In August 2015, the FASB approved a one year delay of the effective date to reporting periods beginning after December 15, 2017, while permitting companies to voluntarily adopt the new standard as of the original effective date. The core principle of the comprehensive new guidance is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. The guidance defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The new standard permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. The Company is currently evaluating when to adopt the new standard, the impacts of adoption and the implementation approach to be used.

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements — Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”), which requires management to evaluate, in connection with preparing financial statements for each annual and interim reporting period, whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable) and provide related disclosures. ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted. The Company believes the adoption of this guidance will not have a material effect on its consolidated financial statements.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842). The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are currently evaluating the impact of adoption.

In March 2016, the FASB issued ASU No. 2016-07, "Investments—Equity Method and Joint Ventures (Topic 323)." This standard eliminates the requirement that when an existing cost method investment qualifies for use of the equity method, an investor must restate its historical financial statements, as if the equity method had been used during all previous periods. Under the new guidance, at the point an investment qualifies for the equity method, any unrealized gain or loss in accumulated other comprehensive income/(loss) ("AOCI") will be recognized through earnings. The standard is effective for interim and annual reporting periods beginning after December 15, 2016, although early adoption is permitted. We are currently evaluating the impact of adoption.

In March 2016, the FASB issued ASU No. 2016-09, "Compensation—Stock Compensation (Topic 718)." This standard makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. The standard is effective for interim and annual reporting periods beginning after December 15, 2016, although early adoption is permitted. We are currently assessing how the adoption of this standard will impact our Consolidated Financial Statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities.  This ASU is intended to improve the recognition and measurement of financial instruments. Among other things, this ASU requires certain equity investments to be measured at fair value with changes in fair value recognized in net income. This guidance is effective for fiscal years beginning after December 15, 2017, and interim periods therein. The Company is currently assessing the impact this guidance will have on its consolidated financial statements.

8

EVOLUTIONARY GENOMICS, INC.

NOTES TO FINANCIAL STATEMENTS

March 31, 2015

(Unaudited)

In March 2016, the FASB issued Accounting Standards Update No. 2016-06, Derivatives and Hedging (Topic 815) – Contingent Put and Call Options in Debt Instruments  (“ASU 2016-06”), which will reduce diversity of practice in identifying embedded derivatives in debt instruments. ASU 2016-06 clarifies that the nature of an exercise contingency is not subject to the “clearly and closely” criteria for purposes of assessing whether the call or put option must be separated from the debt instrument and accounted for separately as a derivative. Public business entities must apply the new requirements for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements and footnote disclosures.

Note 4: Fair Value Measurements

The Company complies with the provisions of FASB ASC No. 820, “Fair Value Measurements and Disclosures” (“ASC 820”), in measuring fair value and in disclosing fair value measurements at the measurement date. ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements required under other accounting pronouncements. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements also reflect the assumptions market participants would use in pricing an asset or liability based on the best information available. Assumptions include the risks inherent in a particular valuation technique (such as a pricing model) and/or the risks inherent in the inputs to the model.

ASC 820 provides three levels of the fair value hierarchy as described below:

Level 1 Inputs – Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 Inputs – Observable market-based inputs, other than quoted prices in active markets for identical assets or liabilities.

Level 3 Inputs – Unobservable inputs that are supported by little or no market activity.

When determining the fair value measurements for assets or liabilities required or permitted to be recorded at and/or marked to fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability. When possible, the Company looks to active and observable markets to price identical assets. When identical assets are not traded in active markets, the Company looks to market observable data for similar assets.

The following tables summarize the basis used to measure certain financial assets and liabilities at fair value on a recurring basis in the consolidated balance sheets:

9

EVOLUTIONARY GENOMICS, INC.

NOTES TO FINANCIAL STATEMENTS

March 31, 2015

(Unaudited)

The following summarizes the valuation technique for assets and liabilities measured and recorded at fair value:

For the Company’s Level 1 measures, which represent common stock in publicly traded companies, treasury bonds or bank certificates of deposit, fair value is based on the closing trade on March 31, 2016. The carrying value of financial instruments, including cash, receivables, accounts payable, and accrued expenses, approximates their fair value at March 31, 2016 and December 31, 2015 due to the relatively short-term nature of these instruments.

Note 5: Property and Equipment

Property and equipment is comprised of the following as of March 31, 2016 and December 31, 2015:

Depreciation expense for the three months ended March 31, 2016 and 2015 was $6,377 and $6,377, respectively.

Note 6: Intangible Assets

Intangible assets are comprised of the following as of March 31, 2016 and December 31, 2015:

The Company expects to recognize $2,603 of amortization expense related to its patents during each of the next five years and the remaining $15,739 thereafter. Amortization expense for the patents during the three months ended March 31, 2016 and 2015 was $651 and $651, respectively.

In its merger completed on October 19, 2015 (Note 12), the Company acquired research in progress. The value of the acquired research in progress was based upon several factors including, evaluation of other intangible assets, the purchase price, estimated future cash flows, and the amounts expended on the research to date. Acquired research in progress is an indefinite lived intangible asset until the development phase is complete, at which time a useful life of the asset will be determined. The research in progress was the identification and validation of genes to provide pest and disease resistance to soybean plants performed by EG I, LLC. The research had been in process since November 2010 and the Company expects to complete the research and place this asset in service in early 2017. Additional expected costs to complete the research are expected to be approximately $280,000, which will be expensed as incurred. The timing and cost of additional research may vary from these estimates as the success of the research is subject to many factors outside of the Company’s control. If this research is not completed within a reasonable timeframe or within estimated costs, future licensing revenue and the financial condition of the Company could be significantly impacted.

10

EVOLUTIONARY GENOMICS, INC.

NOTES TO FINANCIAL STATEMENTS

March 31, 2015

(Unaudited)

Note 7: Stockholders’ Equity and Warrants

The Amended and Restated Certificate of Incorporation of the Company dated October 19, 2015 authorized the issuance of 800,000,000 shares of all classes of stock including 780,000,000 shares of Common Stock having a par value of $0.001 per share and 20,000,000 shares of Preferred Stock having a par value of $0.001 per share, 600,000 of which were designated as Series A-1 Convertible Preferred Stock (“Series A-1”).  The Board of Directors, without a vote of the shareholders, is authorized to issue additional shares of Preferred Stock in series and to establish the characteristics thereof.

Liquidation: Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, the holders of the Series A-1 Preferred Stock shall be entitled to receive out of the assets of the Company for each share of Series A-1 Preferred Stock an amount equal to its stated value, $5.25 per share as of March 31, 2016, plus any accrued but unpaid dividends before any distribution or payment shall be made to the holders of any other class or series of stock of the Company that ranks junior to the Series A-1 Preferred Stock.  The holders shall be entitled to convert their shares of Series A-1 Preferred Stock into Common Stock at any time prior to the consummation of a Liquidation.  This is considered a contingent redemption feature. The Company determined that there were no beneficial conversion features or embedded derivatives associated with this conversion feature.

Conversion: The holders of Series A-1 may convert their shares of Preferred Stock into shares of Common Stock, at the option of the holder, on a one-share-for-one-share basis, and shall be subject to certain adjustments.

Optional Redemption; Sinking Fund Account:  The Company may elect to redeem some or all of the then outstanding shares of Series A-1 Preferred Stock, (i) for cash in an amount equal to the liquidation preference per share, $5.25 per share as of March 31, 2016, subject to adjustment and (ii) by issuing one share, subject to adjustment, of Common Stock for each share of Series A-1 Preferred Stock outstanding.  50% of all licensing fees received by the Company will be deposited into a separate sinking fund for use in an optional redemption.  As of March 31, 2016, no licensing revenue has been received under these provisions and no sinking fund account has been established.

In the event that the amount of cash in the sinking fund account exceeds the liquidation preference of all issued and outstanding shares of Series A-1 Preferred Stock not previously redeemed or converted, the Company shall deliver a notice to the holders of Series A-1 Preferred Stock of its obligation to redeem all of the then outstanding shares of Series A-1 Preferred Stock (i) for cash in an amount equal to $5.25 per share and (ii) by issuing such number of fully paid and nonassessable whole shares of common stock as is obtained by multiplying the Series A-1 Conversion Rate times the number of shares of Series A-1 Preferred Stock so to be redeemed. The Company will accrue for the common stock to be issued when redemption becomes probable.

Dividends: The Company shall pay to the holders of the Series A-1 Preferred Stock dividends at the rate of 8% per annum. The dividend amount shall accrue and shall be payable in shares of Common Stock upon the conversion of the Series A-1 Preferred Stock.  No dividends shall be paid on any Common Stock of the Company or any capital stock of the Company that ranks junior to the Series A-1 Preferred Stock until dividends of Series A-1 Preferred Stock been paid.  As of March 31, 2016, there were $13,484 in accrued stock dividends, which is reflected as equity as they will be paid in common stock upon conversion or redemption.

Voting: The holders of the Series A-1 are entitled to vote on all matters submitted to the stockholders for a vote on an as-if-converted to Common Stock basis, with all stockholders voting as a single class.   

11

EVOLUTIONARY GENOMICS, INC.

NOTES TO FINANCIAL STATEMENTS

March 31, 2015

(Unaudited)

Warrants: As of March 31, 2016 and December 31, 2015, the Company had outstanding warrants to purchase 113,479 shares of the Company’s Common Stock. The following table summarizes the status of the Company’s aggregate warrants outstanding:

Note 8: Stock-Based Compensation

The Company grants stock-based instruments under the 2015 Stock Incentive Plan (“Plan”) for which 1,400,000 shares of the Company’s Common Stock has been reserved. The Plan allows for the issuance of incentive stock options and non-qualified stock options with a maximum contractual term of 10 years. Shares and options that are cancelled reload in the Plan for future issuance. For the three months ended March 31, 2016 and 2015, the Company recorded compensation costs for incentive stock options of $10,590 and $5,643, respectively. Stock options are generally issued with an exercise price at or above the estimated per-share value of the Company’s Common Stock. The Company granted 280,000 options at an exercise price of $3.00 per share and no options during the three months ended March 31, 2016 and 2015, respectively.

Management has valued the options at their date of grant utilizing the Black-Scholes option pricing model. As of the issuance of the outstanding options, the Company’s stock was very thinly traded in the public market. Accordingly, volatility of the underlying common shares was determined based on the historical volatility for similar companies that are actively traded in the public markets for a term consistent with the expected life of the options. The risk-free interest rate used in the calculations is based on the implied yield available on U.S. Treasury issues with an equivalent term approximating the expected life of the options on the date of the grant. Due to the lack of sufficient historical activity, the expected life of the options was estimated using the formula set forth in Securities and Exchange Commission SAB 107 and the forfeiture rate was set at 0%.  

The fair value of options granted was determined using the following assumptions:

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EVOLUTIONARY GENOMICS, INC.

NOTES TO FINANCIAL STATEMENTS

March 31, 2015

(Unaudited)

The following table summarizes the status of the Company’s aggregate stock options granted:

During the three months ended March 31, 2016 and 2015, no options vested. As of March 31, 2016, there was $224,868 unrecognized compensation cost related to share-based compensation arrangements.

Note 9: Commitments and Contingencies

Officer Indemnification: Under the Company’s organizational documents, the Company’s officers, employees, and directors are indemnified against certain liabilities arising out of the performance of their duties. The Company’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. However, based on experience, the Company expects any risk of loss to be remote. The Company also has an insurance policy for its directors and officers to insure them against liabilities arising from their performance in their positions with the Company.

Lease Commitments: The Company leases its operating facility and pays its rent in monthly installments of $2,291 per month. Renewals are by mutual agreement. The Company’s rent expense for the three months ended March 31, 2016 and 2015 was $6,875 and $6,875, respectively.

Royalty: Effective March 1, 2012, the Company entered into an Agreement for Contract Services with SmithBucklin Corporation (the “Contractor”) on behalf of the United Soybean Board. The contract includes the payment of certain royalties, as defined in the Agreement.

The Company is obligated to pay royalties to the United Soybean Board of 10% of the sale of products derived from the soybean genes that were the subject of the research performed by the Contractor or from royalties received by the Company from the sale of products by a third party not to exceed 150% of the total amount paid to the Contractor under this Agreement. The Company has recognized to date grant revenue from the contract of $262,400 as of March 31, 2016, thus limiting any future royalties as of March 31, 2016 to a total of $393,600. The Company has not accrued or paid any royalties under the terms of the Agreement as of and during the three months ended March 31, 2016 and  2015 because it has not received any revenue from the sale of products to date.

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EVOLUTIONARY GENOMICS, INC.

NOTES TO FINANCIAL STATEMENTS

March 31, 2015

(Unaudited)

Note 10: Related Parties and Transactions

Steve B. Warnecke: Mr. Warnecke is the Company’s Chief Executive Officer and Chairman of the Board and owns, directly or indirectly, 2,052,840 shares or 34.9% of the Common Stock outstanding as of March 31, 2016.  

VetDC, Inc.: As of November 1, 2013, the Company committed to making a $201,924 investment for 201,924 shares of Series A-2 preferred stock in VetDC, Inc., a Delaware C corporation that is focused on developing pet therapeutic products. VetDC, Inc. is related to the Company through common ownership and management. The investment was made for purposes of capital appreciation and from the Company’s excess cash reserves. During the three months ended March 31, 2016, the Company sold 47,827 of these shares to unrelated parties for $55,000 and recorded a gain of $7,113.

Note 11: Concentrations

Revenue and Account Receivable Concentrations: The Company is dependent on a relatively few sources of revenue from grants and commercial research contracts. For the three months ended March 31, 2016, the Company had two customers that represented all gross service revenue. As of March 31, 2016 and December 31, 2015, 100% of the Company’s accounts receivable were due from one customer. As of March 31, 2016 and December 31, 2015, the maximum exposure to credit losses for these customers was $18,963 and $16,148, respectively. Loss of one or both of these customers without acquisition of additional customers could significantly impact the Company’s revenue.

Considerations of Credit Risk: Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. The Company maintains its cash balances at high-credit, quality financial institutions. The balances, at times, may exceed federally insured limits. The Company routinely monitors the credit quality of its customers.

Note 12: Agreement and Plan of Merger

On June 6, 2014, the Company, EG I, LLC (“EG I”), Fona, Inc., a Nevada corporation (“Fona”), Fona Merger Sub, Inc., a Delaware corporation (“Sub”), and Fona Merger Sub, LLC, a Colorado limited liability company (“Sub LLC”) entered into an Agreement and Plan of Merger as amended by the Amended and Restated Agreement and Plan of Merger dated March 2, 2015 (the “Merger Agreement”), pursuant to which, on October 19, 2015 Sub merged with the Company and Sub LLC merged with EG I, with each the Company and EG I surviving as wholly owned subsidiaries of Fona. On October 19, 2015, Fona changed its name to Evolutionary Genomics, Inc.

Pursuant to the terms of the Merger Agreement, Fona issued to stockholders of record of the Company 308,821,675 newly issued shares of Common Stock, par value $0.001 per share of Fona, giving them 86.2% of the combined company, and 47,323,188 shares of Common Stock to the members of EG I, giving them 13.3% of the combined company. The original shareholders of Fona retained 1,960,688 shares, or 0.5% of the combined company. The Mergers are intended to be a transaction or transactions described in Section 351 of the Internal Revenue Code (the “Code”). In addition, a 1 for 60.8826565 shares reverse split of the Common Stock took place on October 19, 2015.

The acquisition of the remaining 77% of EG, I LLC was accounted for as a business combination on October 19, 2015.  The outstanding shares were acquired by issuing 777,286 (post-split) shares of common stock with an estimated fair value of approximately $2,011,000. The purchase price was allocated as follows:

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ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Caution Regarding Forward-Looking Information

This report includes “forward-looking statements” that are subject to risks, uncertainties and other factors.  All statements other than statements of historical fact are statements that could be deemed forward-looking statements including continued compliance with government regulations, changing legislation or regulatory environments; any statements of expectation or belief and any statements of assumptions underlying any of the foregoing. These risks, uncertainties and other factors, and the general risks associated with the businesses of the Company described in the reports and other documents filed with the SEC, could cause actual results to differ materially from those referred to in the forward-looking statements.  The Company cautions readers not to rely on these forward-looking statements.  All forward-looking statements are based on information currently available to the Company and are qualified in their entirety by this cautionary statement.  The Company anticipates that subsequent events and developments may cause its views to change.  The information contained in this report speaks as of the date hereof and the Company has or undertakes no obligation to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise unless required by law.

Company Overview

Evolutionary Genomics, Inc. (the "registrant" or "Company") was incorporated under the laws of the state of Minnesota in November 1990 under the name Fonahome Corporation. On March 24, 2009, the Articles of Merger of Fonahome Corporation, a Minnesota Corporation, into Fona, Inc., a Nevada Corporation, were filed with the Nevada Secretary of State.  On June 6, 2014, Evolutionary Genomics, Inc., a Delaware corporation (“EG”), EG I, LLC (“EG I”) and Fona, Inc., a Nevada corporation (“Fona”), Fona Merger Sub, Inc., a Delaware corporation (“Sub”) and Fona Merger Sub, LLC, a Colorado limited liability company (“Sub LLC”), entered into an Agreement and Plan of Merger as amended by the Amended and Restated Agreement and Plan of Merger dated March 2, 2015 (the “Merger Agreement”), pursuant to which, on October 19, 2015 Sub merged with EG and Sub LLC merged with EG I, with each EG and EG I surviving as wholly owned subsidiaries of Fona.  On October 19, 2015, Fona changed its name to Evolutionary Genomics, Inc.  The Company maintains headquarters at the office of its Chief Executive Officer. The Company maintains a website at www.evolgen.com.

On August 14, 2000, the Company was issued patent number 6274319, titled “Methods to identify evolutionarily significant changes in polynucleotide and polypeptide sequences in domestic plants and animals”. On June 1, 2004, the Company was issued patent number 6743580, titled “Methods for producing transgenic plants containing evolutionarily significant polynucleotides”. These patents are for the core Adapted Traits Platform that we use for the discovery of genes in humans, animals and commercial crops. The Company has applied the Adapted Traits Platform in research projects including identifying genes believed to be responsible for increases in yield in corn, increases in yield in rice, salt tolerance and sugar content in tomatoes and pest/disease resistance in soybeans and multiple other crops.

In the past century, agriculture has been characterized by enhanced productivity, the use of synthetic fertilizers and pesticides, selective breeding, mechanization, water contamination, and farm subsidies. Proponents of organic farming such as Sir Albert Howard argued in the early 20th century that the overuse of pesticides and synthetic fertilizers damages the long-term fertility of the soil. While this feeling lay dormant for decades, as environmental awareness has increased in the 21st century there has been a movement towards sustainable agriculture by some farmers, consumers, and policymakers. Advances in genetic research and modification of crop species has led to increased yield, drought tolerance and disease/pest resistance. These advances have also led to an increased concentration within the providers of seed to the industry. The top seed companies control much of the implementation of new seed varieties through patents and licensing agreements. Genetic traits providers, like Evolutionary Genomics, identify and develop genes that impact traits of interest to the industry and market those genes to these seed companies.

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Evolutionary Genomics’ primary source of revenue to date has been contract services revenue for research performed by Evolutionary Genomics on behalf of other commercial entities and grant income received from governmental agencies, industry associations and grant making foundations for research performed. Ownership of the intellectual property developed can vary from Evolutionary Genomics retaining all intellectual property rights to retaining none of the developed intellectual property for the crop that is the subject of the project. In addition to the revenue resulting from contract services and grants, Evolutionary Genomics has entered into licensing agreements for the commercial use of intellectual property that we have developed. Licensing revenue can be lump sum payments, milestone payments upon achievement of defined goals and/or percentages of revenue for products sold by licensee. These payments are often many years after completion of gene identification project as licensees engage in significant additional testing including field trials prior to integration into licensee commercial germplasm lines. There can be no guarantee that these licensing agreements will result in any additional revenue for Evolutionary Genomics as further development of licensed intellectual property is mostly controlled by the licensee.

On April 29, 2014, the United States Patent and Trademark Office issued patent 8,710,300 titled EXPRESSION OF DIRIGENT GENE EG261 AND ITS ORTHOLOGS AND PARALOGS ENHANCES PATHOGEN RESISTANCE IN PLANTS. Evolutionary Genomics has also filed international patents on EG261 and engaged in discussions with seed companies regarding further validation of the effectiveness of EG261. Based on information received in those discussions, Evolutionary Genomics has engaged in a whole plant validation trial of EG261, EG19 another soybean pest resistance gene and a synthetic gene with the University of Missouri. The Company has also discovered additional candidate genes that may impact pathogen resistance in multiple crops and genes that may impact fiber length in cotton. There can be no assurance that any of these genes will be proven effective in validation testing or lead to licensing agreements or revenue and this strategy will require Evolutionary Genomics to incur significant research costs prior to any confirmation of commercial viability.

Evolutionary Genomics intends to pursue grant funding from governmental agencies, industry associations and grant making foundations but these sources of funding are often subject to limitations in available funds, funding priorities in areas other than the our area of focus, political uncertainties, long approval processes and competition with other research proposals. If such funding is not available, Evolutionary Genomics may incur the costs of these projects with the prospect of revenue uncertain and likely many years in the future.

Evolutionary Genomics has no registered trademarks. The Company had three full time employees and one part time employee as of March 31, 2016 and leases its operating facility through June 30, 2016. Evolutionary Genomics is not currently involved in or aware of any threatened or actual legal proceedings.

Results of Operations

Service and Grant Revenue

Service revenue increased $67,984 to $67,984 for the three months ended March 31, 2016 from $0 for the three months ended March 31, 2015. The increase was primarily due to revenue recognized from our grant project for the Bill and Melinda Gates Foundation and grant revenue received from the State of Colorado Advanced Industries Grant. As of March 31, 2016, there is $64,881 of revenue remaining to be recognized on the Bill and Melinda Gates Foundation grant and $148,103 of revenue remaining to be recognized on the Colorado Advanced Industries Grant.

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Cost of Services Sold

Cost of services sold increased to $32,087 for the three months ended March 31, 2016 from $0 for the three months ended March 31, 2015. The increase was primarily due to costs incurred on our grant project for the Bill and Melinda Gates Foundation. As a percentage of revenue, cost of services sold was 47.2% for the three months ended March 31, 2016.

Operating Expenses

Operating expenses increased $44,473, or 21.1%, to $255,233 for the three months ended March 31, 2016 from $210,760 for the three months ended March 31, 2015 and were 375.4% of revenue for the three months ended March 31, 2016. Operating expenses consist of research and development expense, salaries and benefits and general and administrative expense. Changes in these items are described below.

Research and Development

Research and development increased $38,268, or 38.6%, to $137,497 for the three months ended March 31, 2016 from $99,229 for the three months ended March 31, 2015. The increase was primarily due to increased costs incurred on our pest resistance projects. As a percentage of revenue, research and development were 202.2% for the three months ended March 31, 2016.  

Salaries and Benefits

Salaries and benefits increased $4,947, or 13.9%, to $40,590 for the three months ended March 31, 2016 from $35,643 for the three months ended March 31, 2015. The increase was primarily due to increased stock compensation expense related to the issuance of stock options. As a percentage of revenue, salaries and benefits were 59.7% for the three months ended March 31, 2016.

General and Administrative

General and administrative expenses increased $1,258, or 1.7%, to $77,146 for the three months ended March 31, 2016 from $75,888 for the three months ended March 31, 2015. The increase was primarily due to increased professional fees paid to attorneys and accountants. As a percentage of revenue, general and administrative expenses were 113.5% for the three months ended March 31, 2016.

Other Income and (Expenses)

Total other income and (expenses) decreased $382,079, or 123.1%, to net expenses of $71,680 for the three months ended March 31, 2016 from income of $310,399 for the three months ended March 31, 2015. The decrease was primarily due to unrealized losses on trading securities for the three months ended March 31, 2016 compared to unrealized gains on trading securities for the three months ended March 31, 2015. As a percentage of revenue, other income and (expenses) was (105.4%) for the three months ended March 31, 2016.

Income Taxes

The Company records a valuation allowance for certain temporary differences for which it is more likely than not that it will not receive future tax benefits. It assesses its past earnings history and trends, sales backlogs, and projections of future net income. The Company recorded a valuation allowance for the entire amount of the net deferred tax asset because of our history of net losses and its decision that it is unlikely to recognize sufficient net income to realize the benefit of these assets over time until such time that the Company has had a reasonable history of net income. We will continue to review this valuation allowance and make adjustments as appropriate.

As of December 31, 2015 and 2014, the Company maintained federal net operating loss (“NOL”) carry-forwards of approximately $3,772,000 and $3,565,000, respectively.  Use of NOL carry-forwards are limited by the provisions of section 382 of the Internal Revenue Code. A study under these provisions will be required to determine NOL limitations.  As of December 31, 2015, we also maintained a general business tax credit carryover of approximately $200,000 related to its qualifying research and development activities. The NOL carry-forwards and tax credits expire in the years 2027 through 2033.

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Net Income (Loss)

Net income (loss) decreased $390,655, or 392.1%, to ($291,016) for the three months ended March 31, 2016 from $99,639 for the three months ended March 31, 2015. The decrease was primarily due to unrealized losses on trading securities for the three months ended March 31, 2016 compared to unrealized gains on trading securities for the three months ended March 31, 2015 and increased research costs partially offset by increased revenue.

Financial Condition

The Company’s working capital increased $2,678,461 to $2,724,472 as of March 31, 2016 from $46,011 as of December 31, 2015 primarily due the issuance of $2,929,579 of preferred stock partially offset by the net loss from operations.

Liquidity and Capital Resources

The Company has historically financed operations through cash flows from operations and equity transactions. Net cash used in operating activities was $381,715 for the three months ended March 31, 2016 compared to $193,924 for the three months ended March 31, 2015. The $187,791, or 110.0%, increase was primarily due to an increased net loss from operations and decreases in accounts payable and billings in excess of costs. Net cash flows used for investing activities increased to $2,198,961 for the three months ended March 31, 2016 from $0 for the three months ended March 31, 2015 primarily due to the purchase of trading securities (treasury bonds and bank certificates of deposit) partially offset by the proceeds from the sale of part of our interest in VetDC, Inc. We expect to use proceeds from the sale of these treasury bonds and bank certificates of deposit to fund operations and working capital needs. Net cash provided from financing activities was $2,904,033 for the three months ended March 31, 2016 compared to $0 for the three months ended March 31, 2015 due to the issuance of preferred stock during the three months ended March 31, 2016.  The Company expects that these resources are sufficient to fund operational activities for more than the next twelve months and prior to reaching licensing revenue expected in the year ending December 31, 2017.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements that have a material current effect, or that are reasonably likely to have a material future effect, on its financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures, or capital resources.

Contractual Obligations

The Company leases its operating facility and prepaid twelve months of rent on June 16, 2014 for the period of July 1, 2014 through June 30, 2015.  The lease was extended and the second year rent of $27,500 will be paid monthly installments of $2,291 per month during the second year.  Renewals are by mutual agreement.  The Company recorded no prepaid rent as of March 31, 2016 or December 31, 2015.  The Company’s rent expense for the three months ended March 31, 2016 and 2014 was $6,875 and $6,875, respectively.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required by smaller reporting companies.

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ITEM 4.

CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

Under the supervision and with the participation of the Company’s management, including the principal executive officer and principal financial officer, as of the end of the period covered by this report, the Company conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act. The Company’s disclosure controls and procedures are designed to provide reasonable assurance that the information required to be included in the Company’s reports to the Commission is recorded, processed, summarized and reported within the time periods specified in Commission rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that, as of the period covered by this report, the Company’s disclosure controls and procedures are not effective at these reasonable assurance levels for the reasons stated below.

Our internal control system is designed to provide reasonable cost-effective assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. There is no assurance that our disclosure controls or our internal controls over financial reporting can prevent all errors. An internal control system, no matter how well designed and operated, has inherent limitations, including the possibility of human error. Because of the inherent limitations in a cost-effective control system, misstatements due to error may occur and not be detected. We monitor our disclosure controls and internal controls and make modifications as we believe appropriate given our financial resources and limited level of activities. Our intent in this regard is that our disclosure controls and our internal controls will improve as systems change and conditions warrant.

(b) Changes in internal controls.

Our Certifying Officers have indicated that there were no changes in our internal controls over financial reporting or other factors during the three months ending March 31, 2016, that could significantly affect such controls subsequent to the date of his evaluation, and there were no such control actions with regard to significant deficiencies and material weaknesses.

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PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

None.

ITEM 1A.

RISK FACTORS

Not required by smaller reporting companies.

ITEM 2.

UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS

During the three months ended March 31, 2016, the Company issued 558,015 shares of Series A-1 Convertible Preferred Stock and received proceeds of $2,929,579.  The proceeds will be used to advance our research projects and for general corporate purposes.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.

OTHER INFORMATION

None.

ITEM 6.

EXHIBITS

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this quarterly report to be signed on its behalf by the undersigned, thereunto duly authorized.

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