Nature of Operations and Continuance of Business

Urban Barns Foods Inc. (the “Company”) was incorporated under the laws of the State of Nevada on May 21, 2007 as HL Ventures Inc.

On December 4, 2009, the Company closed a reverse takeover transaction with Urban Barns Foods Inc., a privately-held company incorporated on July 3, 2009 under the laws of the province of Alberta. In accordance with the transaction, the Company issued 125,000 shares of common stock to the shareholders of Urban Barns in exchange for 100% of the issued and outstanding shares of common stock of Urban Barns. As part of the acquisition, the Company also cancelled 102,500 shares of common stock held by management.

On June 2, 2011, the Company closed a reverse takeover transaction with Non Industrial Manufacture Inc. (“Non Industrial”), a privately-held company incorporated on February 10, 2010, under the laws of the province of Alberta. In accordance with the transaction, the Company issued 2,500,000 shares of Class B common stock to the shareholders of Non Industrial in exchange for 100% of the issued and outstanding shares of common stock of Non Industrial.

The Company is a development stage company and is an urban produce production company that aims to be the supplier of choice for fresh and high-quality organic and conventional fruits and vegetables for urban consumers.

These financial statements have been prepared on the going concern basis, which assumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business. As at January 31, 2012, the Company has not realized any revenues, has a working capital deficit of $162,058 and has an accumulated deficit of $366,547. The continued operations of the Company are dependent on its ability to generate future cash flows from operations or obtain additional financing. These factors raise substantial doubt about the Company’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments to the recorded assets or liabilities that might be necessary should the Company be unable to continue as a going concern.

Significant Accounting Policies

(a)

The consolidated financial statements and the related notes of the Company are prepared in accordance with generally accepted accounting principles in the United States and are expressed in United States dollars. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Urban Barns Foods (Alberta) Inc., and Non- Industrial Manufacture Inc. All inter-company accounts and transactions have been eliminated. The Company’s fiscal year-end is July 31.

 Use of Estimates

The preparation of these consolidated financial statements in conformity with generally accepted accounting principles in the United States 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. The Company regularly evaluates estimates and assumptions related to the useful life and recoverability of long-lived assets, stock-based compensation, and deferred income tax valuation allowances. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

Significant Accounting Policies (continued)

Cash and Cash Equivalents

The Company considers all highly liquid instruments with a maturity of three months or less at the time of issuance to be cash equivalents.

Property and Equipment

Property and equipment consists of production equipment and is stated at cost and amortized straight-line over five years.

Impairment of Long-Lived Assets

In accordance with ASC 360, Property Plant and Equipment, the Company tests long-lived assets or asset groups for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life. Recoverability is assessed based on the carrying amount of the asset and its fair value which is generally determined based on the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances. An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value.

Interim Financial Statements

These interim unaudited financial statements have been prepared on the same basis as the annual financial statements and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for a full year or for any future period.

Comprehensive Loss

ASC 220, Comprehensive Income, establishes standards for the reporting and display of comprehensive loss and its components in the financial statements. As at January 31, 2012 and July 31, 2011, the Company had no items that affected comprehensive loss.

Foreign Currency Translation

The Company’s functional and reporting currency is the U.S. dollar. Monetary assets and liabilities of integrated operations and other monetary assets and liabilities denominated in foreign currencies are translated to U.S. dollars at exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are translated at historical rates. Revenues and expenses are translated at average rates for the period, except for amortization, which is translated on the same basis as the related asset. The resulting exchange gains or losses are recognized in income.

Significant Accounting Policies (continued)

Loss Per Share

The Company computes net loss per share in accordance with ASC 260, “Earnings Per Share”, which requires presentation of both basic and diluted earnings per share (EPS) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti dilutive.

Financial Instruments and Fair Value Measures

ASC 820, “Fair Value Measurements and Disclosures” requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 prioritizes the inputs into three levels that may be used to measure fair value:

The Company’s financial instruments consist principally of cash, accounts payable and accrued liabilities, and amounts due to related parties. Pursuant to ASC 820, the fair value of cash is determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical assets. The recorded values of all other financial instruments approximate their current fair values because of their nature and respective maturity dates or durations.

Stock-based Compensation

The Company records stock-based compensation in accordance with ASC 718, “Compensation – Stock Compensation”, using the fair value method. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. Equity instruments issued to employees and the cost of the services received as consideration are measured and recognized based on the fair value of the equity instruments issued.

Significant Accounting Policies (continued)

Recent Accounting Pronouncements

The Company has implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on the consolidated financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.

Acquisition of Non Industrial Manufacture Inc. and Recapitalization

On June 2, 2011, the Company acquired 100% of the issued and outstanding shares of common stock of Non Industrial Manufacture Inc. (“NIM”) in exchange for 2,500,000 shares of Class B common stock. The acquisition was a capital transaction in substance and therefore was accounted for as a recapitalization of the business of NIM. Under recapitalization accounting, NIM is considered the acquirer for accounting and financial reporting purposes, and acquired the assets and assumed the liabilities of the Company. These financial statements include the accounts of the Company since the effective date of the recapitalization being June 2, 2011, and the historical accounts of the business of NIM since inception being February 10, 2010.

The assets acquired and liabilities assumed are as follows:

Property and Equipment

Convertible Note

On January 4, 2012, the Company entered into a Convertible Promissory Note agreement for $27,500. Pursuant to the agreement, the loan is convertible into shares of common stock at a variable conversion price equal to the lower of 55% of the average of the lowest three closing bid prices for the common stock during the 10 trading days prior to the date of the conversion notice. The loan bears interest at 8% per year and the principal amount and any interest thereon are due on October 6, 2012.

Pursuant to ASC 815, “Derivatives and Hedging,” the Company will recognize the fair value of the embedded conversion feature as a derivative liability when the Note becomes convertible on October 6, 2012. The Company paid $3,750 of deferred finance costs relating to the issuance of the Note. At January 31, 2012, the Company had recorded amortization of $563 and the remaining $3,187 will be charged to operation over the life of the note.

Related Party Transactions

As at January 31, 2012, the Company owed $76,381 (2011 - $76,320) to directors and officers of the Company. The amounts owing are unsecured, non-interest bearing, and due on demand.

As at January 31, 2012, the Company owed $3,351 (2011 - $3,517) to a company controlled by an officer of the Company. The amounts owing are unsecured, non-interest bearing, and due on demand.

As at January 31, 2012, the Company had $14,400 (2011 - $5,400) recorded in accounts payable for amounts owing to the spouse of the President of the Company. The amounts owing are unsecured, non-interest bearing, and due on demand.

As at January 31, 2012, the Company had $48,420 (2011 - $37,604) recorded in accounts payable for amounts owing to companies controlled by an officer of the Company. The amounts owing are unsecured, non-interest bearing, and due on demand.

During the period ended January 31, 2012, the Company incurred accounting fees of $10,800 (2011 - $nil) to the spouse of the President of the Company.

During the period ended January 31, 2012, the Company incurred travel expenses fees of $30,944 (2011 - $nil) to an officer of the Company.

During the period ended January 31, 2012, the Company incurred consulting fees of $19,020 (2011 - $nil) to officers of the Company.

During the period ended January 31, 2012, the Company incurred rental fees of $7,089 (2011 - $6,598) to a company controlled by an officer of the Company.

Common Stock

On August 8, 2011, the Company issued 3,400,000 shares of Class A common stock pursuant to the exercise of 3,400,000 stock options for proceeds of $510,000 of which $82,962 was received and $427,038 was recorded in share subscription received as of January 31, 2012.

On August 8, 2011, the Company issued 1,700,000 shares of Class A common stock pursuant to the exercise of 1,700,000 stock options for proceeds of $42,500 that was received as of January 31, 2012.

On August 9, 2011, the Company entered into entered into one-year consulting agreements with several officers and directors of the Company for strategic business planning and management services. In consideration, the Company agreed to issue an aggregate of 951,000 shares of common stock for total value of $19,020 based on the fair value of the share price of $0.02 on the issuance date.

On August 9, 2011, the Company entered into entered into certain other consulting agreements with various consultants for business planning and development services. In consideration, the Company agreed to issue an aggregate of 449,000 shares of common stock for total value of $8,980 based on the fair value of the share price of $0.02 on the issuance date.

Share Purchase Warrants

The following table summarizes the continuity of share purchase warrants:

Stock Options

On August 8, 2011, the Company granted 1,700,000 stock options at an exercise price of $0.025 per share expiring on November 15, 2011 and granted 3,400,000 stock options at an exercise price of $0.15 per share expiring on November 15, 2011. All 5,100,000 stock options were vested immediately. The fair value for these stock options was estimated at the date of grant using the Black-Scholes option-pricing model assuming a weighted average expected life of 0.25 years, a risk- free rate of 0.03%, an expected volatility of 195%, and a 0% dividend yield. The weighted average fair value of stock options granted was $0.11 per share. During the six months ended January 31 2012, the Company recorded stock-based compensation of $11,575 (2011 - $nil) as general and administrative expense.

The following table summarizes the continuity of stock options:

Subsequent Events

On February 9, 2012, the Company entered into four Convertible Promissory Note agreements for a total of $60,000. Pursuant to the agreement, the loan is convertible into shares of common stock at a variable conversion price equal to the lower of 55% of the average of the lowest three closing bid prices for the common stock during the 10 trading days prior to the date of the conversion notice. The loan bears interest at 8% per year and the principal amount and any interest thereon are due on November 9, 2012.

On February 9, 2012, the Company entered into a consulting agreement with a non-related party for a period of six months through August 9, 2012. In consideration of the services, the Company issued an aggregate of 1,000,000 shares of its common stock.

Basis of Accounting

Loss Per Share

Use of Estimates and Assumptions

Foreign Currency Translation