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. 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.

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. (“NIM”), 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 NIM in exchange for 100% of the issued and outstanding shares of common stock of NIM.

These consolidated 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 October 31, 2013, the Company has not generated significant revenues, and has an accumulated deficit of $2,428,852. 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

Basis of Presentation and Principles of Consolidation

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 (Canada) 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 collectability of accounts and amounts receivable, valuation of inventory, useful life and recoverability of long-lived assets, valuation of convertible debentures, assumptions used to determine the fair value of stock-based compensation and derivative liabilities, 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.

Accounts Receivable

Accounts receivable represents invoiced amounts to customers for the sale of agricultural products. Amounts are presented net of the allowance for doubtful accounts, which represents the Company’s best estimate of the amount of probable credit losses in the existing accounts receivable balance. The Company determines allowance for doubtful accounts based upon historical experience and current economic conditions. The Company reviews the adequacy of its allowance for doubtful accounts on a regular basis. As of October 31 and July 31, 2013, the Company had no allowances for doubtful accounts.

Inventory

Inventory is comprised of seeds for growing agricultural products and is recorded at the lower of cost or net realizable value on a first-in first-out basis. The Company establishes inventory reserves for estimated obsolete or unsaleable inventory equal to the difference between the cost of inventory and the estimated realizable value based upon assumptions about future and market conditions.

Property and Equipment

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

Intangible Assets

Intangible assets consist of patent development costs. Intangible assets acquired are initially recognized and measured at cost and amortized over its expected useful life once the patents are in use. Impairment tests are conducted annually or more frequently if events or changes in circumstances indicate that the asset may be impaired. The impairment test compares the carrying amount of the intangible asset with its fair value, and an impairment loss is recognized in income for the excess, if any. The amortization methods and estimated useful lives of intangible assets are reviewed annually.

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.

Revenue Recognition

The Company derives revenue from the sale of agricultural products. In accordance with ASC 605, Revenue Recognition, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the amount is fixed and determinable, risk of ownership has passed to the customer, and collection is reasonably assured.

Significant Accounting Policies (continued)

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 October 31 and July 31, 2013, 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.

Income Taxes

The Company accounts for income taxes using the asset and liability method in accordance with ASC 740, “Accounting for Income Taxes”. The asset and liability method provides that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.

As of October 31, 2013 and 2012, the Company did not have any amounts recorded pertaining to uncertain tax positions.

The Company files federal and provincial income tax returns in Canada and federal, state and local income tax returns in the U.S., as applicable. The Company may be subject to a reassessment of federal and provincial income taxes by Canadian tax authorities for a period of three years from the date of the original notice of assessment in respect of any particular taxation year. In certain circumstances, the U.S. federal statute of limitations can reach beyond the standard three year period. U.S. state statutes of limitations for income tax assessment vary from state to state. Tax authorities of Canada and U.S. have not audited any of the Company’s, or its wholly-owned subsidiary’s income tax returns for the years ended July 31, 2013 and 2012.

The Company recognizes interest and penalties related to uncertain tax positions in tax expense. During the year ended July 31, 2013, there were no charges for interest or penalties.

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. As at October 31, 2013, the Company had 16,162,461 (July 31, 2013 – 16,959,908) potentially dilutive shares outstanding.

Significant Accounting Policies (continued)

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 receivable, amounts receivable, accounts payable and accrued liabilities, convertible debentures, derivative 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, with the exception of derivative liabilities which is a “Level 2” input.

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.

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.

Property and Equipment

Intangible Assets

Convertible Debentures

On March 30, 2012, the Company entered into a convertible promissory note agreement for $32,500, less deferred financing charges of $5,750. Pursuant to the agreement, the loan is unsecured, bears interest at 8% per annum, and is due on January 4, 2013. The loan is convertible into common shares at a conversion price equal to 45% of the average of the three lowest closing prices for the Company’s common shares in the ten trading days prior to conversion, at the option of the note holder, commencing on September 26, 2012.

In accordance with ASC 470-20, “Debt with Conversion and Other Options”, the Company recognized the fair value of the embedded beneficial conversion feature of $4,338. On October 16, 2012, the Company issued 6,692,158 common shares pursuant to the conversion of $27,438. During the year ended July 31, 2013, the Company recorded accretion expense of $32,500 (2012 - $nil). As of October 31, 2013, the carrying value of the convertible note was $5,062.

On June 12, 2013, the Company entered into a convertible promissory note agreement for $100,000, less deferred financing charges of $3,500. Pursuant to the agreement, the loans are unsecured, bear interest at 8% per annum, and are due on March 14, 2014. The loans are convertible into common shares at a conversion price equal to 61% of the average of the three lowest closing prices for the Company’s common shares in the thirty-five trading days prior to conversion, at the option of the note holder, commencing on December 9, 2013. As at October 31, 2013, the carrying value of the convertible note was $100,000.

On September 17, 2013, the Company entered into a convertible promissory note agreement for $32,500, less deferred financing charges of $2,500. Pursuant to the agreement, the loans are unsecured, bear interest at 8% per annum, and are due on June 19, 2014. The loans are convertible into common shares at a conversion price equal to 61% of the average of the three lowest closing prices for the Company’s common shares in the thirty-five trading days prior to conversion, at the option of the note holder, commencing on March 16, 2014. As at October 31, 2013, the carrying value of the convertible note was $32,500.

Derivative Liabilities

The conversion options of the convertible notes payable, as disclosed in Note 5, are required to be record as derivatives at their estimated fair values on each balance sheet date with changes in fair value reflected in the statements of operations.

Derivative Liabilities (continued)

The fair value of the derivative liabilities for the January 4, 2012, February 9, 2012 and March 30, 2012 convertible notes were $27,500, $123,484 and $44,844 on vesting, respectively. The fair values as at October 31 and July 31, 2013 are as follows:

Related Party Transactions

As at October 31, 2013, the Company owed $167,845 (2013 - $120,079) to directors and officers of the Company. The amounts owing are unsecured, non-interest bearing, and due on demand.

As at October 31, 2013, the Company owed $47,945 (2013 - $48,605) to the President of Company. The amounts owing are unsecured, bears interest at 8% per annum, and due on May 1, 2014. During the period ended October 31, 2013, the Company incurred interest expense of $1,046 (2013 - $2,623), which has been recorded in accounts payable and accrued liabilities.

As at October 31, 2013, the Company owed $100,269 (2013 - $101,649) to a company controlled by the former President of the Company. The amounts owing are unsecured, bears interest at 8% per annum, and due on May 1, 2014. During the period ended October 31, 2013, the Company incurred interest expense of $2,187 (2013 - $6,145), which has been recorded in accounts payable and accrued liabilities.

As at October 31, 2013, the Company owed $52,200 (2013 - $45,900) to the spouse of the President of the Company. The amounts owing are unsecured, non-interest bearing, and due on demand.

As at October 31, 2013, the Company had $6,463 owing to (2013 - $1,726 owing from) the Vice President of the Company. The amounts owing are unsecured, non-interest bearing, and due on demand.

As at October 31, 2013, the Company had $3,499 (2013 - $nil) of amounts owing to the President of the Company for expenses, which have been recorded in accounts payable. The amount owing is unsecured, non-interest bearing, and due on demand.

As at October 31, 2013, the Company owed $92,698 (2012 - $77,255) to a company controlled by the former President of the Company, which has been recorded in accounts payable and accrued liabilities. The amount owing is unsecured, non-interest bearing, and due on demand.

Related Party Transactions (continued)

On October 22, 2013, the Company received $48,424 (Cdn$50,500) from a company controlled by the former President of the Company for financing of the intangible asset. In accordance with the agreement, the amount owing is unsecured, bears interest at 25% per annum for the first 90 days, 35% per annum between 91-365 days, 50% interest between 366-730 days, and is due on demand. As at October 31, 2013, the Company owed $60,531, comprised of $48,424 (Cdn$50,500) relating to the principal and $12,107 of accrued interest which has been recorded in accounts payable and accrued liabilities. If the amounts owing are not repaid before October 22, 2015, the company controlled by the former President of the Company will receive a 5% royalty on revenues generated by the license for a period of three years.

As at October 31, 2013, the Company owed $24,000 (2013 - $24,000) to the children of the President of the Company, which has been recorded in accounts payable and accrued liabilities. The amounts owing are unsecured, non-interest bearing, and due on demand.

As at October 31, 2013, the Company had deferred compensation of $93,425 (July 31, 2013 - $256,027) incurred to directors and officers of the Company.

During the period ended October 31, 2013, the Company incurred professional fees of $6,300 (2012 - $5,400) to the spouse of the President of the Company.

During the period ended October 31, 2013, the Company incurred travel fees of $nil (2012 - $13,807) to directors and officers of the Company.

During the period ended October 31, 2013, the Company incurred consulting fees of $57,603 (2012 - $156,575) to directors and officers of the Company.

During the period ended October 31, 2013, the Company incurred finders’ fees of $150,000 (2013 - $7,550) to a director of the Company. On October 21, 2013, the deferred compensation of $150,000 was expensed as the terms for the compensation expense were fulfilled.

Common Stock

On October 21, 2013, the Company issued 67,567,597 shares of Class A common stock for proceeds of $1,000,000. The Company incurred a finders’ fee of $80,000 to a non-related party and $150,000 to a related party in conjunction with the private placement.

Stock Options

The Company has adopted a stock option plan pursuant to which options may be granted to directors, officers, employees and consultants of the Company to a maximum of 25,000,000 shares issued and outstanding at the time of the grant. The exercise price and the vesting terms of each option is equal to the market price on the date of the grant.

The following table summarizes the continuity of the Company’s stock options:

Stock Options (continued)

Additional information regarding stock options as of October 31, 2013, is as follows:

Commitments

On June 25, 2012, the Company entered into an agreement with a director of the Company. In accordance with the terms and provisions of the agreement, the director agreed to aid with introductions to management of the Company with respect to the current round of financing of a minimum of $1,000,000 on a best efforts basis through various sources of capital.

Pursuant to the agreement, the Company agreed to the following terms and provisions:

The Company agreed to pay a finders' fee of 5% on actual funds raised or 2% via third parties with regards to private placements.

The Company agreed to pay a finders' fee in the amount of 3% on actual funds loaned or 1.5% via third parties with regards to debt financings.

The Company agreed to pay a scalable finders' fee of 5% on the first $2,000,000, 4% of the next $2,000,000 and 3% on the remaining amount of $4,000,000 if the Company is merged with any other private or public entity with regards to an introduction to a third party who wishes to acquire, merger or perform a business combination; and

The Company agreed to pay a scalable finders' fee of 5% on the first $2,000,000, 4% of the next $2,000,000 and 3% on the remaining amount of $4,000,000 if the Company is merged with any other private or public entity with regards to an introduction to a third party who wishes to acquire, merger or perform a business combination; and

The Company agreed to pay a monthly fee of $4,000 as compensation for his role as a member of the Board of Directors for a one-year term upon the closing of a minimum of $1,000,000 raised.

On November 1, 2012, the Company entered into three consulting agreements with directors and officers of the Company. Each agreement pays each director and officer a consulting fee of $5,000 per month until November 1, 2017.

On December 1, 2012, as amended on October 30, 2013, the Company entered into a research agreement with McGill University (“McGill”), where McGill will perform testing, research and development towards improvements and efficiency gains on the Company’s patent-pending growing machines. Under the terms of the agreement, the Company will pay $500,000, where $25,000 is due upon the signing of the agreement (paid), $75,000 is November 30, 2013, and $100,000 annually on October 1, 2014, 2015, 2016, and 2017. The agreement expires on January 1, 2018.

On February 15, 2013, the Company entered into a consulting agreement for consulting and financing services for a period of one year. Under the terms of the agreement, the consultant will provide assistance with consulting and obtaining additional financing for the Company in exchange for a finders’ fee of 5% in cash and 2.5% in share purchase warrants, exercisable at $0.10 per share and expiring twelve months from the grant date, for all funds raised, 3% in cash for closing of convertible debentures, and 1% in cash on the successful closing of a revolving credit facility. This agreement expires on February 14, 2014.

Commitments (continued)

On June 11, 2013, the Company entered into a one year non-exclusive placement agent agreement. Under the terms of the agreement, the consultant will obtain financing for the Company in exchange for a finders’ fee of 10% in cash of equity funds raised up to $3,000,000 and 8% in cash of equity funds raised between $3,000,000 and $5,000,000, and 6% in cash of equity funds raised over $5,000,000. The Company also agreed to issue to the consultant warrants equal to 3% of the number of shares purchased by investors, which are exercisable at $0.07 per share for a period of 36 months from the issuance date.

On June 17, 2013, the Company entered into a six-month financial agent agreement. Under the terms of the agreement, the consultant will obtain financing up to $6,000,000 in either debt financing, convertible debentures, equity financing, bank financing or any other securities, for the Company in exchange for a financing fee equal to 2% on any funds raised through certain specified individuals, 10% of any equity funds raised up to $3,000,000, 8% of any convertible debt funds raised up to $3,000,000, 8% of any equity funds raised between $3,100,000 and $5,000,000 and 6% of any funds raised over $5,000,000 from investors. The Company also agreed to issue to the consultant warrants with the option to purchase one share of common stock for each warrant exercisable for a period of three years at an exercise price of $0.07 per share with the number of warrants to be issued to be 3% of the aggregate amount invested by investors divided by $0.07. If the warrants are not exercised within two years, the Company can call the warrants in the event of any other liquidity of financing event that is completed or if the Company’s shares are trading at a premium of 200% to the exercise price of $0.21 or greater for thirty trading days or more.

Subsequent Events

The Company has evaluated subsequent events through the date of issuance of the financial statements, and did not have any material recognizable subsequent events.