Urban Barns Foods Inc. - FORM 10-Q

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - Urban Barns Foods Inc.	Financial_Report.xls
EX-32.1 - EXHIBIT 32.1 - Urban Barns Foods Inc.	exhibit32-1.htm
EX-31.2 - EXHIBIT 31.2 - Urban Barns Foods Inc.	exhibit31-2.htm
EX-32.2 - EXHIBIT 32.2 - Urban Barns Foods Inc.	exhibit32-2.htm
EX-31.1 - EXHIBIT 31.1 - Urban Barns Foods Inc.	exhibit31-1.htm

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 October 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)

Nevada	N/A
(State or other jurisdiction of incorporation or	(I.R.S. Employer Identification No.)
organization)

Office 205 – 290 Lakeshore Road
Pointe-Claire, Quebec, Canada H9S 4L3	514-907-4989
(Address of principal executive offices) (Zip Code)	(Registrant’s telephone number, including area code)

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 December 20, 2014 the registrant’s outstanding common stock consisted of 281,182,847 shares.

Table of Contents

PART I - FINANCIAL INFORMATION		3
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	4
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	7
Item 4.	Controls and Procedures	7
PART II - OTHER INFORMATION		7
Item 1.	Legal Proceedings	7
Item 1A.	Risk Factors	7
Item 2.	Unregistered Sales of Equity Securities and Use of Procceds	7
Item 3.	Defaults Upon Senior Securities	7
Item 4.	Mine Safety Disclosures	7
Item 5.	Other Information	7

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.

URBAN BARNS FOODS INC.
Consolidated Financial Statements
For the period ended October 31, 2014
(Expressed in U.S. dollars)
(unaudited)

Financial Statement Index

Consolidated Balance Sheets	F–1
Consolidated Statements of Operations	F–2
Consolidated Statements of Cash Flows	F–3
Consolidated Statements of Stockholder's Equity	F–4
Notes to the Consolidated Financial Statements	F–5

URBAN BARNS FOODS INC.
Consolidated Balance Sheets
(expressed in U.S. dollars)

	October 31,		July 31,
	2014		2014
	$		$
	(unaudited)
ASSETS

Current assets
Cash	108,081		75,969
Accounts receivable	11,097		1,318
Amounts receivable	82,229		57,976
Inventory	19,648		13,444
Prepaid expenses and deposits	44,411		52,469
Total current assets	265,466		201,176
Property and equipment (Note 3)	584,957		523,286
Intangible assets (Note 4)	108,851		105,281
Total assets	959,274		829,743

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued liabilities (Note 6)	191,655		170,555
Due to related parties (Note 6)	61,744		73,745
Note payable (Note 5)	197,835		–
Total liabilities	451,234		244,300
Nature of operations and continuance of business (Note 1)
Commitments (Note 10)
Subsequent events (Note 11)

Stockholders’ equity

Preferred stock Authorized: 100,000,000 preferred shares, par value $0.001 Issued and outstanding: nil shares	–		–

Common stock, Class A Authorized: 500,000,000 common shares, par value $0.001 Issued and outstanding: 281,182,847 and 270,746,982 shares, respectively	281,183		270,747

Common stock, Class B Authorized: 25,000,000 common shares, value of $0.001 Issued and outstanding: nil shares	–		–

Additional paid-in capital	5,158,424		4,370,807

Common stock issuable (Note 7)	–		117,553

Deferred compensation (Note 6)	(28,950	)	(37,352	)

Accumulated deficit	(4,902,617	)	(4,136,312	)

Total stockholders’ equity	508,040		585,443

Total liabilities and stockholders’ equity	959,274		829,743

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

F-1

URBAN BARNS FOODS INC.
Consolidated Statements of Operations
(expressed in U.S. dollars)
(unaudited)

	Three Months		Three Months
	Ended		Ended
	October 31,		October 31,
	2014		2013
	$		$
Revenue	17,252		–
Cost of sales	5,908		–

Gross margin	11,344		–

Operating expenses
Depreciation	27,310		14,582
Foreign exchange loss (gain)	2,827		(1,799	)
General and administrative (Note 6)	467,455		261,415
Professional fees (Note 6)	64,910		37,189
Research and development	215,147		4,218
Total operating expenses	777,649		315,605
Loss from operations	(766,305	)	(315,605	)
Other income (expense)
Amortization of deferred financing costs	–		(1,170	)
Gain (loss) on change in fair value of derivative liabilities	–		(4,235	)
Interest expense	–		(17,789	)
Total other income (expense)	–		(23,194	)
Net loss	(766,305	)	(338,799	)

Net loss per share, basic and diluted	–		–

Weighted average shares outstanding	278,242,125		160,890,668

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

F-2

URBAN BARNS FOODS INC.
Consolidated Statements of Cash Flows
(expressed in U.S. dollars)
(unaudited)

	For the Three		For the Three
	Months Ended		Months Ended
	October 31,		October 31,
	2014		2013
	$		$
Operating Activities
Net loss for the period	(766,305	)	(338,799	)
Adjustments to reconcile net loss to net cash used in operating activities: operating activities:
Amortization of deferred financing costs	–		1,170
Depreciation	27,310		14,582
Deferred compensation	8,402		162,602
Loss on change in fair value of derivative liabilities	–		4,235
Stock-based compensation	280,000		–
Changes in operating assets and liabilities:
Accounts receivable	(9,779	)	15
Amounts receivable	(24,253	)	(729	)
Inventory	(6,204	)	–
Prepaid expenses and deposits	8,058		1,440
Accounts payable and accrued liabilities	21,100		44,742
Due to related parties	(12,001	)	60,207
Net cash used in operating activities	(473,672	)	(50,535	)
Investing Activities
Purchase of intangible assets	(3,570	)	–
Purchase of property and equipment	(88,981	)	–
Net cash used in investing activities	(92,551	)	–
Financing Activities
Proceeds from issuance of convertible debentures	–		32,500
Proceeds from issuance of common shares	400,500		1,000,000
Proceeds from note payable	197,835		–
Proceeds from related parties	–		48,424
Net cash provided by financing activities	598,335		1,080,924
Increase in cash	32,112		1,030,389
Cash, beginning of year	75,969		29,617
Cash, end of year	108,081		1,060,006
Supplemental disclosures:
Interest paid	–		–
Income tax paid	–		–

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

F-3

URBAN BARNS FOODS INC.
Consolidated Statements of Stockholders’ Equity
(Expressed in U.S. dollars)
(unaudited)

	Common Stock				Additional	Common
	Class A		Class B		Paid-In	Stock		Deferred
	Shares	Amount	Shares	Amount	Capital	Issuable		Compensation		Deficit		Total
	#	$	#	$	$	$		$		$		$
Balance, July 31, 2014	270,746,982	270,747	–	–	4,370,807	117,553		(37,352	)	(4,136,312	)	585,443
Shares issued for cash	10,435,865	10,436	–	–	507,617	(117,553	)	–		–		400,500
Fair value of stock options granted	–	–	–	–	280,000	–		–		–		280,000
Deferred compensation costs	–	–	–	–	–	–		8,402		–		8,402
Net loss for the period	–	–	–	–	–	–		–		(766,305	)	(766,305	)
Balance, October 31, 2014	281,182,847	281,183	–	–	5,158,424	–		(28,950	)	(4,902,617	)	508,040

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

F-4

URBAN BARNS FOODS INC.
Notes to the Consolidated Financial Statements
(expressed in U.S. dollars)
(unaudited)

1.	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 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 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, 2014, the Company has not generated significant revenues, has a working capital deficit of $185,768, and has an accumulated deficit of $4,902,617. The continued operations of the Company are dependent on its ability to generate future cash flows from operations or obtain additional financing. Management is obtaining working capital through debt or equity financing until such time that the Company’s operations generate positive operating cash flow. 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.

2.	Significant Accounting Policies

	(a)	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.

	(b)	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 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.

	(c)	Interim Financial Statements

		These interim unaudited consolidated financial statements have been prepared on the same basis as the annual consolidated 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.

	(d)	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.

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

F-5

URBAN BARNS FOODS INC.
Notes to the Consolidated Financial Statements
(expressed in U.S. dollars)
(unaudited)

2.	Significant Accounting Policies (continued)

	(e)	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, 2014, the Company had no allowances for doubtful accounts.

	(f)	Inventory

		Inventory is comprised of seeds for growing agricultural products and packaging materials, 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.

	(g)	Property and Equipment

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

	(h)	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.

	(i)	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.

	(j)	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, and collectability is reasonably assured.

	(k)	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, 2014, the Company had no items that affected comprehensive loss.

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

F-6

URBAN BARNS FOODS INC.
Notes to the Consolidated Financial Statements
(expressed in U.S. dollars)
(unaudited)

2.	Significant Accounting Policies (continued)

	(l)	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.

	(m)	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 and July 31, 2014, 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 subsidiaries’ income tax returns for the years ended July 31, 2014 and 2013.

		The Company recognizes interest and penalties related to uncertain tax positions in tax expense. During the year ended July 31, 2014, there were no charges for interest or penalties.

	(n)	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, 2014, the Company had 29,537,027 (July 31, 2014 – 12,237,027) potentially dilutive shares outstanding.

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

F-7

URBAN BARNS FOODS INC.
Notes to the Consolidated Financial Statements
(expressed in U.S. dollars)
(unaudited)

2.	Significant Accounting Policies (continued)

	(o)	Financial Instruments and Fair Value Measures (continued)

		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.

		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, 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.

	(p)	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.

	(q)	Reclassification

		Certain financial statement captions have been reclassified from the prior year to conform to the current year presentation.

	(r)	Recent Accounting Pronouncements

		In June 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-10, which eliminated certain financial reporting requirements of companies previously identified as “Development Stage Entities” (Topic 915). The amendments in this ASU simplify accounting guidance by removing all incremental financial reporting requirements for development stage entities. The amendments also reduce data maintenance and, for those entities subject to audit, audit costs by eliminating the requirement for development stage entities to present inception-to-date information in the statements of income, cash flows, and shareholder equity. Early application of each of the amendments is permitted for any annual reporting period or interim period for which the entity’s financial statements have not yet been issued (public business entities) or made available for issuance (other entities). Upon adoption, entities will no longer present or disclose any information required by Topic 915. The Company has adopted this standard and will not report inception to date financial information.

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

F-8

URBAN BARNS FOODS INC.
Notes to the Consolidated Financial Statements
(expressed in U.S. dollars)
(unaudited)

2.	Significant Accounting Policies (continued)

	(r)	Recent Accounting Pronouncements (continued)

		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.

3.	Property and Equipment

				October 31,	July 31,
				2014	2014
		Accumulated		Net Carrying	Net Carrying
	Cost	Depreciation	Impairment	Value	Value
	$	$	$	$	$
Production equipment	796,974	150,519	61,498	584,957	523,287

4.	Intangible Assets

			October 31,	July 31,
			2014	2014
		Accumulated	Net Carrying	Net Carrying
	Cost	Depreciation	Value	Value
	$	$	$	$
Patent development costs	108,851	–	108,581	105,281

5.	Note Payable

	On October 29, 2014, the Company issued a promissory note for $197,835 (CND$223,000) which is unsecured, bears interest at a rate of 12.68% per annum and due the earlier of i) the Company raising CND$1,000,000 or more through issuance of equity or debt or ii) October 29, 2015.

6.	Related Party Transactions

	(a)	As at October 31, 2014, the Company owed $59,522 (July 31, 2014 - $61,813) to directors and officers of the Company. The amounts owing are unsecured, non-interest bearing, and due on demand.

	(b)	As at October 31, 2014, the Company owed $1,327 (July 31, 2014 - $8,259) to the Vice President of the Company. The amount owing is unsecured, non-interest bearing, and due on demand.

	(c)	As at October 31, 2014, the Company owed $3,549 (July 2014 - $3,673) to a company controlled by the former President. The amount owing is unsecured, non-interest bearing, and due on demand.

	(d)	As at October 31, 2014, the Company had deferred compensation of $28,950 (July 31, 2014 - $37,352) incurred to directors and officers of the Company.

	(e)	During the period ended October 31, 2014, the Company incurred professional fees of $nil (2013 - $6,300) to the spouse of the former President of the Company.

	(f)	During the period ended October 31, 2014, the Company incurred consulting fees of $49,902 (2013 - $57,603) to directors and officers of the Company.

	(g)	During the period ended October 31, 2014, the Company incurred consulting fees of $2,034 (CND$2,250) (2013 - $nil) to the daughter of the President of the Company.

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

F-9

URBAN BARNS FOODS INC.
Notes to the Consolidated Financial Statements
(expressed in U.S. dollars)
(unaudited)

6.	Related Party Transactions (continued)

	(h)	During the period ended October 31, 2014, the Company incurred labour costs of $19,001 (CND$21,000) (2013 - $nil) and cost of living expenses of $4,072 (CND$4,500) (2013 - $nil) to the daughter of the Vice President of the Company.

	(i)	During the period ended October 31, 2014, the Company incurred finders’ fees of $nil (2013 - $150,000) to a director of the Company.

	(j)	During the period ended October 31, 2014, the Company granted 5,925,000 (2013 – nil) stock options with a fair value of $237,000 (2013 - $nil) to directors and officers of the Company.

	(k)	During the period ended October 31, 2014, the Company granted 200,000 (2013 – nil) stock options with a fair value of $8,000 (2013 - $nil) to the spouse of the President of the Company.

	(l)	During the period ended October 31, 2014, the Company granted 150,000 (2013 – nil) stock options with a fair value of $6,000 (2013 - $nil) to the daughter of the Vice President of the Company.

7.	Common Stock

	(a)	On August 21, 2014, the Company completed a private placement of 10,010,000 units at $0.05 per unit for gross proceeds of $500,500, of which $100,000 had been received as at July 31, 2014 and recorded as common stock issuable. Each unit consists of one share of Class A common stock and one share purchase warrant exercisable into one additional share of Class A common stock at a price of $0.075 per share until August 20, 2017.

	(b)	On October 31, 2014, the Company issued 425,865 shares of Class A common stock pursuant to the conversion of $5,062 of a convertible debenture and $3,601 of accrued interest during the year end July 31, 2014. As at July 31, 2014, this amount was recorded as common stock issuable.

8.	Share Purchase Warrants

	The following table summarizes the continuity of share purchase warrants:

		Weighted
		Average
	Number of	Exercise Price
	Warrants	$
Balance, July 31, 2014	2,027,027	0.070
Granted	10,010,000	0.075
Balance, October 31, 2014 (unaudited)	12,037,027	0.074

As at October 31, 2014, the following share purchase warrants were outstanding:

Number of	Exercise
warrants	price	Expiry date
outstanding	$
2,027,027	0.070	October 31, 2016
10,010,000	0.075	August 20, 2017
12,037,027

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

F-10

URBAN BARNS FOODS INC.
Notes to the Consolidated Financial Statements
(expressed in U.S. dollars)
(unaudited)

9.	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 10% of the Company’s issued and outstanding Class A stock at the time of the grant exercisable for the period of up to ten years. The exercise price and the vesting terms of each option is determined by the Board of Directors, or a committee appointed by the Board of Directors.

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

			Weighted	Aggregate
			Average	Intrinsic
	Number		Exercise Price	Value
	of Options		$	$
Outstanding, July 31, 2013	15,800,000		0.10	–
Granted	5,300,000		0.10
Expired	(600,000	)	0.10
Forfeited	(10,000,000	)	0.10
Outstanding, July 31, 2014	10,500,000		0.10	–
Granted	7,000,000		0.10
Outstanding, October 31, 2014 (unaudited)	17,500,000		0.10	–

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

	Outstanding and exercisable
		Weighted
		Average	Weighted
Range of		Remaining	Average
Exercise Prices	Number of	Contractual Life	Exercise Price
$	Options	(years)	$
0.10	17,500,000	9.0	0.10

The fair values for stock options granted have been estimated using the Black-Scholes option pricing model assuming no expected dividends and the following weighted average assumptions:

	2014	2013
Risk-free interest rate	2.46%	–
Expected life (in years)	10.0	–
Expected volatility	443%	–

The fair value of stock options vested during the period ended October 31, 2014 was $280,000 (2013 – $nil) which was recorded as stock-based compensation and charged to operations. The weighted average fair value of stock options granted during the year ended October 31, 2014 was $0.04 (2013 – $nil) per option.

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

F-11

URBAN BARNS FOODS INC.
Notes to the Consolidated Financial Statements
(expressed in U.S. dollars)
(unaudited)

10.	Commitments and Contingencies

	(a)	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 August 19, 2014, the Company agreed to amend the annual consulting fees due to the President of the Company to $125,000.

	(b)	On December 1, 2012, 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 due when the Company either completes financing or four growing machines, and $100,000 annually on January 1, 2014, 2015, 2016, and 2017. Pursuant to the amendment dated October 30, 2013, payments of $100,000 annually are due on October 1, 2014, 2015, 2016, and 2017. The agreement expires on January 1, 2018.

	(c)	On March 19, 2014, the Company leased a warehouse located in Quebec. The term of the lease commences on March 20, 2014, and expires on May 31, 2019. The monthly lease rate is subject to an annual increase of 2%. The minimum lease payments over the remaining term of the lease are as follows:

Year		CND$
2015		169,013
2016		250,002
2017		255,002
2018		260,102
2019		265,304
		1,199,422

(d)

On July 17, 2014, the Company entered into a lease agreement for a delivery van at a rate of CND$630 per month until July 17, 2019. The minimum lease payments over the remaining term of the lease are as follows:

Year		CND$
2015		5,670
2016		7,560
2017		7,560
2018		7,560
2019		7,560
		35,910

11.	Subsequent Events

	On November 28, 2014, the Board of Directors approved a financing of up to $6,000,000 through the offering and sale of up to 150,000,000 Class A common stock at a price of $0.04 per share.

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

F-12

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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

Three Months Ended October 31, 2014 and 2013.

During the three months ended October 31, 2014, we generated $17,252 in revenue at a cost of sales of $5,908, for a gross margin of $11,344. During the three months ended October 31, 2013, we did not generate any revenue.

We incurred operating expenses of $777,649 during the three months ended October 31, 2014, compared with $315,605 during the three months ended October 31, 2013. The increase in our operating expenses of $462,044 was due to increases in research and development, general and administrative expenses and staffing costs as we opened our first growing facility this year, and an increase in the depreciation incurred during the period related to our R&D growing machines.

We incurred a net loss of $766,305 during the three months ended October 31, 2014, compared with a net loss of $338,799 during the three months ended October 31, 2013. In addition to revenues and expenditures from operations, we incurred $1,170 for amortization of deferred financing costs, $4,235 for loss on change in fair value of derivative liabilities and $17,789 of interest expenses during the three months ended October 31, 2013 which were not incurred during the three months ended October 31, 2014.

Liquidity and Capital Resources

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

	October 31,	July 31,
	2014	2014
	$	$

Cash	108,081	75,969
Current Assets	265,466	201,176
Total Assets	959,274	829,743
Current Liabilities	451,234	244,300
Shareholders’ Equity	508,040	244,300

As of October 31, 2014, we had cash of $108,081, total current assets of $265,466, total current liabilities of $451,234 and a working capital deficit of $185,768, compared to cash of $75,969, total current assets of $201,176, total current liabilities of $244,300, and a working capital deficit of $43,124 as of July 31, 2014. The increase in our working capital deficit is due to the increase in our liabilities from a $197,835 promissory note used for our increased operating costs of our recently opened first growing facility as we work to increase our sales.

During the three months ended October 31, 2014, we used received net cash of $598,335 from financing activities, compared to net cash received of $1,080,924 from financing activities during the three months ended October 31, 2013. The decrease is primarily due to $599,500 less in proceeds received from the issuance of our common shares, $32,500 from the issuance of convertible debentures and $48,424 from proceeds from related parties offset by $197,835 of proceeds from a note payable.

During the three months ended October 31, 2014, we used net cash of $473,672 on operating activities compared to $50,535 during the three months ended October 31, 2013. The increase in net cash used was due to our increased research and development expenses and general and administrative expenses as we opened our first growing facility.

During the three months ended October 31, 2014, we used net cash of $92,551 on investing activities compared to $nil during the three month period ended October 31, 2013. The increase in cash used was due to our increased purchase of equipment as we opened our first growing facility as well as payments for patents on our intellectual property.

From February 10, 2010 (inception) to October 31, 2014, our accumulated deficit was $4,902,617. 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 have met and continue to meet with various individuals and institutions to obtain 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 via internally generated cash flow.

Plan of Operations

Our 2015 operating plan is focused on revenue generation, product line development and machine design refinement. We recently completed our demonstration growing facility in the Montreal area and have begun commercial scale operations and sales. We will continue research and development activities in Montreal with McGill University.

The Montreal growing facility consists of 13 machines and, although small, has considerable production capacity. This new facility is fully operational and has been shipping product to multiple 4 and 5-star restaurants and hotels, as well as some important wholesale distributors. Typically, the vast majority of restaurant and hotel establishments go through an introductory phase of testing and product sampling before the company starts to receive orders. This period can take anywhere from one day to three months or more before an order is placed.

In addition to the commercial barn operation we have been collaborating with McGill’s Macdonald campus to research the optimization of the variables of controlled environment agriculture (CEA) and apply those improvements within our growing facility. McGill has set up one machine on the Macdonald campus and Urban Barns has taken over the 3 machines previously allocated for McGill’s testing in our growing facility. McGill will conduct research in conjunction with their recent NSERC Collaborative Research & Development grant with industry support from us.

We estimate that our expenses over the next 6 months will be approximately $1,940,000 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.

Description	Potential Completion Date	Estimated Expenses ($)
Cost of sales	6 months	137,000
Sales & marketing expenses	6 months	225,000
General and administrative expenses	6 months	628,000
Additional Growing Machines & Building Improvements	6 months	650,000
Total		1,940,000

Our general and administrative expenses for the next 6 months 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 $1,940,000 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 October 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. In collaboration with McGill University researcher Dr. Mark Lefsrud of the Faculty of Agricultural and Environmental Sciences, we will further develop an indoor plant growth system aimed at expanding locally grown food. With industrial support from us, 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 our cubic farming system 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.

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.

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.

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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not required.

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 October 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. Our independent auditors, Saturna Group Chartered Accountants LLP, were not required to carry out an evaluation of our internal controls and have not verified or confirmed the accuracy of management’s assertions over its effectiveness of internal controls over financial reporting.

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 that are material in nature.

ITEM 1A. RISK FACTORS.

Not required.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

The following exhibits are included with this quarterly filing:

Exhibit No.	Description

31.1	Sec. 302 Certification of Principal Executive Officer
31.2	Sec. 302 Certification of Principal Financial Officer
32.1	Sec. 906 Certification of Principal Executive Officer
32.2	Sec. 906 Certification of Principal Financial Officer

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.

December 20, 2014	Urban Barns Foods Inc.


	/s/ Richard Groome
	By: Richard Groome
	Chief Executive Officer, President & Director


	/s/ Horst Hueniken
	By: Horst Hueniken
	Chief Financial Officer, Principal Accounting Officer & Director

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