UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 31, 2014

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________________ To ______________________

Commission file number: 000-53942

URBAN BARNS FOODS INC.
(Exact name of registrant as specified in its charter)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was require to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer       Accelerated filer       Non-accelerated filer       Smaller reporting company [ x ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [   ] No [X]

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. [   ] Yes [   ] No

APPLICABLE ONLY TO CORPORATE ISSUERS

As of March 17, 2014 the registrant’s outstanding common stock consisted of 229,215,442 shares.

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

The unaudited interim financial statements of Urban Barns Foods Inc. (the “Company”, “Urban Barns”, “we”, “our”, “us”) follow. All currency references in this report are to U.S. dollars unless otherwise noted.

Financial Statement Index

(The accompanying notes are an integral part of these consolidated financial statements)

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(The accompanying notes are an integral part of these consolidated financial statements)

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(The accompanying notes are an integral part of these consolidated financial statements)

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(The accompanying notes are an integral part of these consolidated financial statements)

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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 January 31, 2014, the Company has not generated significant revenues, has a working capital deficit of $214,474 and has an accumulated deficit of $3,080,290. 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.

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Level 1

Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

Level 2

Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

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Level 3

Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

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.

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

The fair value of the derivative liabilities for the March 30, 2012 convertible notes was $4,338 on vesting. The fair values as at January 31, 2014 and July 31, 2013 are as follows:

During the six months ended January 31, 2014, the Company recorded a loss on the change in fair value of the derivative liabilities of $151,870 (2013 – $410,656).

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The fair value of the derivative financial liabilities was determined using the Black-Scholes option pricing model using the following assumptions:

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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.

On November 1, 2013, the Company granted 2,027,027 stock options to a consultant for services. The stock options vest immediately, and have an exercise price of $0,07 per Class A common stock, and expire on October 31, 2016. The fair value of the stock options were valued at $60,811 using the Black-Scholes option price model assuming a risk free rate of 0.61%, an expected life of 3 years, volatility of 539%, and no expected dividends.

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

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Additional information regarding stock options as of January 31, 2014, is as follows:

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

Forward Looking Statements

This report on Form 10-Q contains certain forward-looking statements. All statements other than statements of historical fact are “forward-looking statements” for purposes of these provisions, including any projections of earnings, revenues, or other financial items; any statements of the plans, strategies, and objectives of management for future operation; any statements concerning proposed new products, services, or developments; any statements regarding future economic conditions or performance; statements of belief; and any statement of assumptions underlying any of the foregoing. Such forward-looking statements are subject to inherent risks and uncertainties, and actual results could differ materially from those anticipated by the forward-looking statements.

These forward-looking statements involve significant risks and uncertainties, including, but not limited to, the following: competition, promotional costs and the risk of declining revenues. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of a number of factors. These forward-looking statements are made as of the date of this filing, and we assume no obligation to update such forward-looking statements. The following discusses our financial condition and results of operations based upon our consolidated financial statements which have been prepared in conformity with accounting principles generally accepted in the United States. It should be read in conjunction with our financial statements and the notes thereto included elsewhere herein.

Results of Operations

We are still in our development stage and have generated $nil of revenues during the six months ended January 31, 2014 compared with $778 for the six months ended January 31, 2013 and $5,691 of revenue and $1,132 of cost of sales from February 10, 2010 (date of inception) to January 31, 2014 relating to the sale of produce.

We incurred operating expenses of $634,040 for the six months ended January 31, 2014 compared with $866,803 during the six months ended January 31, 2013. The decrease in operating expenses of $232,763 primarily due to a $277,472 decrease in general and administrative expenses as we had incurred a charge of $373,052 for the issuance of 15,000,000 stock options in the prior year, offset by a $95,580 increase in general and administrative expenses for day-to-day operations, and an increase of $52,989 in research and development costs as we are preparing to open our first revenue generating growing facility this year.

We incurred a net loss of $855,252 during the period ended January 31, 2014 compared with a net loss of $1,418,181 during the period ended January 31, 2013. In addition to our net loss from operations, we incurred interest expense of $22,197 (2013 - $3,872) for accrued interest on loans and convertible debentures, a loss on the change in fair value of derivative liabilities of $151,870 (2013 - $410,656), accretion of discounts on convertible debentures of $44,281 (2013 - $132,798), and amortization of deferred financing costs of $2,864 (2013 - $4,438).

The following table provides selected financial data about our company for the quarter ended January 31, 2014.

Liquidity and Capital Resources

As of January 31, 2014, we had cash of $346,714, total current assets of $371,713, total current liabilities of $586,187, and a working capital deficit of $214,474 compared to cash of $29,617, total current assets of $56,045, total current liabilities of $644,152, and working capital deficit of $588,107 as of July 31, 2013. The decrease in working capital deficit is due to the fact that we raised financing from the issuance of common shares during the year, of which a portion has remained unspent as we are investing the proceeds to prepare to open our first revenue generating growing facility this year.

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During the period ended January 31, 2014, we received net cash of $849,144 from financing activities, compared to net cash received of $327,450 from financing activities during the period ended January 31, 2013. The increase is due to proceeds received from the issuance of common shares of $1,000,000 less finders’ fees of $80,000, $32,500 from the issuance of a convertible note payable, and $48,424 from a related party compared with $335,000 from the issuance of common shares in the prior year less $7,550 of share issuance costs.

During the period ended January 31, 2014, we used net cash of $323,954 on operating activities compared to $228,902 net cash used on operating activities during the period ended January 31, 2013. The increase in cash used was due to our increased operating expenses as we prepare to open our first revenue generating growing facility this year.

During the periods ended January 31, 2014 and 2013, we used net cash of $208,093 on investing activities compared to $94,912 net cash used on investing activities during the period ended January 31, 2013. The increase in cash used was due to our increased purchase of equipment as we prepare to open our first revenue generating growing facility this year.

Since February 10, 2010 (inception) to January 31, 2014, our accumulated deficit was $3,080,290. We are dependent on the funds raised through our equity or debt financing, investing activities, and revenue generated through the sales of our products to fund our operations.

We anticipate that we will meet our ongoing cash requirements by retaining income as well as through equity or debt financing. We plan to cooperate with various individuals and institutions to acquire the financing required to produce and distribute our products and anticipate this will continue until we accrue sufficient capital reserves to finance all of our productions independently.

Plan of Operation

The 2014 Urban Barns Foods operating plan will have a focus on revenue generation, product line development and machine design refinement. We will continue research and development at our Langley facility and have a planned expansion to a second location in the Montreal area to begin commercial scale operations and sales.

The Montreal barn will consist of 10 machines and although small, will have considerable production and associated sales. This new facility is scheduled to open in April and begin shipping product in May.

In addition to the commercial barn operation Urban Barns Foods will be collaborating with McGill McDonald campus to research optimization of the variables of controlled environment agriculture (CEA) and apply those improvements to the new facility. McGill will set up four machines on their campus and will conduct research in conjunction with their recent NSERC Collaborative Research & Development grant with industry support from Urban Barns Foods.

The Langley site will continue work on development of new product lines, machine development and the barn setup process.

We estimate that our expenses over the next 6 months will be approximately $485,000 as summarized in the table below. These estimates may change significantly depending on the nature of our future business activities and our ability to raise capital from investors or other sources.

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Our general and administrative expenses for the year will consist of professional fees, office maintenance, communication expenses (cellular, internet, fax and telephone), bank charges, courier and postage costs, office supply costs and fees related to our website. Our professional fees will include legal, accounting and auditing fees related to our regulatory filings throughout the year.

Based on our planned expenditures, we require additional funds of $485,000 to proceed with our business plan over the next 6 months. If we are not able to obtain additional financing on a timely basis, we will be unable to conduct our operations as planned, and we will not be able to meet our obligations as they become due. In such event, we will be forced to scale down or perhaps even cease our operations.

Inflation

The amounts presented in the financial statements do not provide for the effect of inflation on our operations or financial position. The net operating losses shown would be greater than reported if the effects of inflation were reflected either by charging operations with amounts that represent replacement costs or by using other inflation adjustments.

Off-Balance Sheet Arrangements

As of January 31, 2014 we had one off balance sheet transactions that will have or is reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. Urban Barns in collaboration with McGill University researcher Dr. Mark Lefsrud, of the Faculty of Agricultural and Environmental Sciences, will further develop an indoor plant growth system aimed at expanding locally grown food. With industrial support from Urban Barns, McGill University was recently awarded an NSERC Collaborative Research & Development (CRD) grant in the amount of $240,000 in order to continue the development of this important project. The grant will run for an initial period of two years with the aim of optimizing light emitting diodes to assess photosynthetic efficiency of horticultural plants. The project is focused on the refinement of the photosynthetically active radiation efficiency (PAR curve) of plants using light emitting diodes (LEDs), and the basic science research will be used to optimize the lighting in the cubic farming system of Urban Barns to maximize production and reduce energy costs.

Critical Accounting Policies

Our financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. A complete summary of these policies are included in note 2 of the Notes to our Financial Statements. We have identified below the accounting policies that are of particular importance in the presentation of our financial position, results of operations and cash flows, and which require the application of significant judgment by our management.

a. Basis of Accounting

The Company’s financial statements are prepared using the accrual method of accounting. The Company has elected a July 31 year-end.

b. 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.

c. Use of Estimates and Assumptions

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, fair value of convertible debt and share-based payments, 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.

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d. Foreign Currency Translation

Transactions in foreign currencies are translated into the currency of measurement at the exchange rates in effect on the transaction date. Monetary balance sheet items expressed in foreign currencies are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. The resulting exchange gains and losses are recognized in income.

The Company’s integrated foreign subsidiary is financially or operationally dependent on the Company. The Company uses the temporal method to translate the accounts of its integrated operations into U.S. dollars. Monetary assets and liabilities are translated at the 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.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of January 31, 2014. Based on the evaluation of these disclosure controls and procedures the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

Changes in Internal Controls

During the quarter covered by this report there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCCEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. REMOVED AND RESERVED.

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ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS.

The following exhibits are included with this quarterly filing:

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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