GILLA INC. - FORM 10-Q - August 15, 2011

Attached files

file	filename
EX-32.2 - CERTIFICATION - GILLA INC.	glla_ex321.htm
EX-31.1 - CERTIFICATION - GILLA INC.	glla_ex311.htm

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2011

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

COMMISSION FILE NO. 000-28107

GILLA INC.

(Exact Name of Registrant as Specified in its Charter)

Nevada		88-0335710
(State or Other Jurisdiction of		(I.R.S. Employer Identification Number)
Incorporation or Organization)

112 North Curry Street, Carson City, NV		89703
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code (416) 884-8807

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, .0002 PAR VALUE PER SHARE

(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No

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

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

(Do not check if a smaller reporting company)

Smaller Reporting Company þ

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

APPLICABLE ONLY TO REGISTRANTS 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 Section 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. þ Yes o No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

29,477,766 Common Shares - $0.0002 Par Value as of August 12, 2011

		PAGE
PART I -	Financial Information

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheet as of June 30, 2011 (Unaudited) and Consolidated Balance Sheet as of December 31, 2010	3

	Unaudited Condensed Consolidated Statements of Operations for the six months ended June 30, 2011 and 2010 and for the period from March 28, 1995 (Inception) to June 30, 2011	4

	Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010 and for the period from March 28, 1995 (Inception) to June 30, 2011	5

	Notes to Unaudited Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	10

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	14

Item 4.	Control and Procedures	14

PART II -	Other Information

Item 1.	Legal Proceedings

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	15

Item 3.	Defaults Upon Senior Securities	15

Item 4.	Submission of Matters to a Vote of Security Holders	15

Item 5.	Exhibits	15

SIGNATURES		16

CERTIFICATIONS

GILLA, INC.

(AN EXPLORATION STAGE COMPANY)

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30,			December 31,
	2011			2010
	(Unaudited)

ASSETS

CURRENT ASSETS
Cash and cash equivalents	$	1,673		$	1,617

TOTAL CURRENT ASSETS		1,673			1,617


TOTAL ASSETS	$	1,673		$	1,617


LIABILITIES AND (DEFICIENCY) IN STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable	$	6,224		$	5,503
Accrued Liabilities		83,500			61,500
Accrued Liabilities-Interest		4,255			-
Notes payable related party		-			103,717

TOTAL CURRENT LIABILITIES		93,979			170,720

LONG TERM LIABILITIES

Notes payable related party		121,717			-
Derivative liabilities		352,979			-

TOTAL LONG TERM LIABILITIES		474,696			-

TOTAL LIABILITIES	$	568,675		$	170,720

COMMITMENTS AND CONTINGENCIES

(DEFICIENCY) IN SHAREHOLDERS' EQUITY
Common stock, $0.0002 par value, 300,000,000 shares authorized;
29,477,766 and 27,277,766 shares issued and outstanding
as of June 30, 2011 and December 31, 2010 respectively		5,895			5,455
Additional paid - in capital		30,318,145			30,649,564
Deficit accumulated during the exploration stage		(30,891,042	)		(30,824,122	)

TOTAL (DEFICIENCY) IN SHAREHOLDERS' EQUITY		(567,002	)		(169,103	)


TOTAL LIABILITIES AND (DEFICIENCY) IN SHAREHOLDERS' EQUITY	$	1,673		$	1,617

GILLA, INC.

(AN EXPLORATION STAGE COMPANY)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

													For the Period From
	For the Quarter Ended						For the Six Months Ended						March 28, 1995
	June 30,						June 30,						(Inception) to
	2011			2010			2011			2010			June 30, 2011


REVENUES	$	-		$	-		$	-		$	-		$	-

TOTAL REVENUES		-			-			-			-			-

EXPENSES:
Exploration cost		-			53,792			4,450			53,792			1,845,147
Asset impairment Charges		-			-			-			-			17,344,110
General and administrative		30,764			33,207			58,215			97,299			15,729,694

TOTAL OPERATING EXPENSES		30,764			86,999			62,665			151,091			34,918,951


NET LOSS FROM OPERATIONS		(30,764	)		(86,999	)		(62,665	)		(151,091	)		(34,918,951	)

OTHER INCOME (EXPENSES)
Loss on abandonment of mining camp		-			-			-			-			(50,000	)
Gain of forgiveness of debt		-			-			-			-			1,828,932
Gain on sale of mining properties		-			-			-			-			2,100,000
Miscellaneous Income (Loss)		-			-			-			-			(11,393	)
Gain (loss) on foreign exchange rate transactions		-			-			-			(76	)		149,372
Interest expense		(125,972	)		-			(4,255	)		-			(151,249	)
Gain on change in fair value of derivative liabilities		121,717			-			121,717			-			121,717
Interest income		-			-			-			-			40,530
TOTAL OTHER INCOME (EXPENSES)		(4,255	)		-			(4,255	)		(76	)		4,027,909

NET LOSS BEFORE INCOME TAXES	$	(35,019	)	$	(86,999	)	$	(66,920	)	$	(151,167	)	$	(30,891,042	)

INCOME (TAX) BENEFIT		-			-			-			-			-

NET LOSS	$	(35,019	)	$	(86,999	)	$	(66,920	)	$	(151,167	)	$	(30,891,042	)

Comprehensive Loss
Dividends Paid		-			-			-			-			-

Total Comprehensive Loss	$	(35,019	)	$	(86,999	)	$	(66,920	)	$	(151,167	)	$	(30,891,042	)

WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING-BASIC AND DILUTED		29,170,074			23,585,678			28,759,534			31,889,664

LOSS PER COMMON SHARES-
BASIC AND DILUTED	$	(0.00	)	$	(0.00	)	$	(0.00	)	$	(0.00	)

GILLA, INC.

(AN EXPLORATION STAGE COMPANY)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

							For the Period From
	For the Six Months Ended						March 28, 1995
	June 30,						(Inception) to
	2011			2010			June 30, 2011


CASH FLOW FROM OPERATING ACTIVITIES
Net loss from operations	$	(66,920	)	$	(151,167	)	$	(30,891,042	)
Adjustment to reconcile net loss to net cash
used in operating activities:
Asset impairment charges		-			-			17,344,110
Issuance of common stock toward legal settlement charges		-			16,000			16,000
Issuance of common stock for services		-			59,000			11,042,792
Beneficial conversion discount		121,717			-			143,717
Change in fair value of derivative liabilities
Changes in operating assets and liabilities:		(121,717	)		-			(121,717	)
Prepaid expenses		-			3,000			-
Mining camp		-			-			50,000
Accounts payable		721			36,450			376,881
Accrued expenses		26,255			(896	)		91,911
Net cash used in operating activities		(39,944	)		(37,613	)		(1,947,348	)

CASH FLOW FROM FINANCING ACTIVITIES
Dividends distributions		-			-			(240,000	)
Notes payable related party		40,000			-			143,717
Sale of common stock		-			12,000			2,045,304
Net cash provided by financing activities		40,000			12,000			1,949,021



Net Increase (decrease) in cash and cash equivalents		56			(25,613	)		1,673

Cash and cash equivalents at beginning of period		1,617			35,123			-

Cash and cash equivalents at end of period	$	1,673		$	9,510		$	1,673

Supplemental Disclosure of Cash Flow Information:
Cash paid for:
Interest		-			-			-
Taxes		-			-			-

Non-cash investing and financing activities
Common Stock Issued for Notes Payable		22,000			-			22,000
Beneficial conversion features		121,717			-			143,717
Issuance of common stock for services		-			-			222,000

NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS

Gilla Inc. (the “Company”), 112 N. Curry Street, Carson City, Nevada, 87803 was incorporated under the laws of the state of Nevada on March 28, 1995 under the name of Truco, Inc. The shareholders approved a name change on March 22, 1996, March 18, 1997, September 13, 1999, October 3, 2000, April 23, 2003 and February 27, 2007 to Web Tech, Inc., Cynergy, Inc., Mercantile Factoring Credit Online Corp., Incitations, Inc., Osprey Gold Corp. and to its present name, respectively.

We have specialized in acquiring and consolidating large, exploration-stage properties with near-term production potential and future growth through exploration discoveries. Our acquisition and development emphasis is focused on properties containing gold and other strategic minerals located in Africa.

The Company formed and received a 99% ownership interest in GISOR SPRL (“GISOR”), a foreign subsidiary, during the last quarter of 2009 and domiciled in The Democratic Republic of the Congo. This subsidiary was formed solely for the purpose of acquiring mining rights. GISOR has not had significant business activities since its inception.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The following are summarized accounting policies considered to be significant by the company’s management.

Principles of Consolidation

The consolidated financial statements of Gilla, Inc. include the accounts of the following companies: Gilla, Inc. and its subsidiary, GISOR SPRL (GISOR). GISOR did not have significant activities and there were no significant intercompany transactions or balances between the Company and its subsidiary as of June 30, 2011.

Basis of Accounting

The financial statements are prepared using the accrual basis of accounting where revenues and expenses are recognized in the period in which they were incurred. The basis of accounting conforms to accounting principles generally accepted in the United States of America.

Interim Reporting

While the information presented in the accompanying interim six months condensed consolidated financial statements is unaudited, it includes all adjustments, which are, in the opinion of management, necessary to present fairly the consolidated financial position, results of its operations and consolidated cash flows for the interim periods presented in accordance with accounting principles generally accepted in the United States of America. These interim condensed consolidated financial statements follow the same accounting policies and methods of their application as the December 31, 2010 audited annual consolidated financial statements of Gilla Inc. All adjustments are of a normal recurring nature. It is suggested that these interim condensed consolidated financial statements be read in conjunction with the Company’s December 31, 2010 annual consolidated audited financial statements.

Operating results for the six months are not necessarily indicative of the results that can be expected for the year ended December 31, 2011.

Going Concern

As reflected in the accompanying interim condensed consolidated financial statements, the Company has had recurring losses. The Company’s net loss was $66,920 and $151,167 for the six months ended June 30, 2011 and 2010, respectively, and net cash used in operations totaled $39,944 and $37,613 for the six months ended June, 2011 and 2010, respectively. Deficiency in shareholders’ equity of $567,002 and an accumulated deficit of $30,891,042 at June, 2011 raise substantial doubt about the Company’s ability to continue as a going concern. These interim condensed consolidated financial statements do not include any adjustments to reflect the possible effects on recoverability and classification of assets or the amounts and classification of liabilities that may result from our inability to continue as a going concern.

Our ability to continue as a going concern is dependent on the ability to further implement our business plan, raise capital, and generate revenues. Our management recognizes that we must generate additional resources and that we must successfully implement our business plan and achieves profitable operations. We cannot assure that we will be successful in any of these activities. Should any of these events not occur, our financial condition will be adversely affected.

The time required for us to become profitable from operations is highly uncertain, and we cannot assure you that we will achieve or sustain operating profitability or generate sufficient cash flow to meet our planned capital expenditures. If required, our ability to obtain additional financing from other sources also depends on many factors beyond our control, including the state of the capital markets and the prospects for our business. The necessary additional financing may not be available to us or may be available only on terms that would result in further dilution to the current owners of our common stock.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

On April 15, 2011, Gilla Inc. (“Gilla” or the “Company”) entered into a Loan Agreement with Credifinance Capital Corp. (“CFCC” or the “Noteholder”) for the provision of a credit facility for an aggregate principal amount of Two Hundred Thousand Dollars ($200,000) in order to provide working capital and other resources for the business of Gilla. The Loan Agreement will mature on December 31, 2012 and interest of ten percent (10%) per annum is payable annually. CFCC has already provided loans and advances to Gilla. In consideration for the credit facility provided to Gilla, CFCC or its designee shall receive a 15% non-dilution interest in all real and personal properties held by the Company through its 99% GISOR SA subsidiary in the Democratic Republic of the Congo as of the date hereof, and not as security for the payment of the Note, but subject to any liens or other security interests arising from bona fide indebtedness of Gilla and its subsidiaries.

We cannot assure that we will generate sufficient cash flow from operations or obtain additional financing to meet our obligations.

Management’s Plans

The Company is currently exploring options to raise capital for operation and obtaining technical compliant report on some of its mining properties in the Democratic Republic of Congo. The company will continue to acquire mining properties as and when required funding is available.

Use of Estimates

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the date of these financials statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

NOTE 3 - ACCOUNTING STANDARDS UPDATES

Sinificant Recent Accounting Pronouncements

Management does not believe that any recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying interim condensed consolidated financial statements.

NOTE 4 - EQUITY

On February 1, 2011 the Company issued 1,500,000 common shares at $0.01 per share to a shareholder as payment for $15,000 promissory note (See Note 5).

On May 10, 2011 the Company issued 700,000 common shares at $0.01 per share to a shareholder as payment for $7,000 promissory note (See Note 5).

NOTE 5 - NOTES PAYABLE - RELATED PARTY

Notes payable at June 30, 2011 and December 31, 2010 are as follows:

	June 30, 2011		December 31, 2010
Note payable to related party, with 10% interest per annum. The note matures on December 31, 2012. In consideration for the credit facility provided to the Company, CFCC or its designee shall receive a 15% non-dilution interest in all real and personal properties held by the Company through its 99% GISOR SA subsidiary in the Democratic Republic of the Congo as of the date hereof, and not as security for the payment of the Note, but subject to any liens or other security interests arising from bona fide indebtedness of the Company and its subsidiaries.	$	121,717	$	0
Note payable to related party, non-interest bearing and unsecured. The note is due on demand and does not have any specific repayment terms.		0		81,717
Convertible Note payable to related party with 6% interest per annum. The note is convertible into common stock of the Company at a conversion price of $0.01 per share.		0		15,000
Convertible Note payable to related party with 6% interest per annum. The note is convertible into common stock of the Company at a conversion price of $0.01 per share.		0		7,000
Total notes payable	$	121,717		103,717
Less: current portion		121,717		103,717
Notes payable – long term	$	0	$	0

In accordance with ASC Topic “Debt”, the Company attributed a beneficial conversion feature of $22,000 to the convertible debt based upon the difference between the effective conversion price of those shares and the closing price of the Company’s common stock on the date of issuance. The amount attributable to the beneficial conversion feature, aggregating $121, 717 and $22,000, has been recorded as an interest expense for the six months ended June 30, 2011 and the year ended December 31, 2010.

On April 15, 2011, the Company entered into a Loan Agreement with an investor pursuant to which the Company sold and issued a convertible promissory note in the principal amount of for up to $200,000. As of June 30, 2011 the investor has loaned the company $121,717. The Note is convertible into shares of common stock at an initial conversion price of $0.01 per share, subject to adjustment as contained in the Note. The Note accrues interest at a rate of 10% per annum and matures on December 31, 2012. Since the effective conversion price was less than the fair value of the company common stock on the date of issue the Company has recorded a beneficial conversion feature in the amount of $121,717. On April 15, 2011, the company calculated a derivative liability as $ 474,696. The assumptions used in the Black-Scholes model are as follows: (1) dividend yield of 0%; (2) expected volatility of 312% (3) risk-free interest rate of 1.0%, (4) expected life of 1.75 years and (5) fair value of the Company’s common stock of $0.04 per share.

NOTE 6 – DERIVATIVE LIABILITY

At June 30, 2011 the Company recalculated the fair value of the conversion feature of its common stock subject to derivative accounting and have determined that the fair value at June 30, 2011 is $352,979. The fair value of the conversion features was determined using the Black-Scholes method based on the following assumptions: (1) risk free interest rate of 1.0%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of the Company’s common stock of 310%; (4) an expected life of the conversion feature of 1.5 years and (5) estimated fair value of the Company's common stock of $0.03 per share.

The Company has recorded a gain of $121,717 during the six months months ended June 30, 2011.

NOTE 7 - SUBSEQUENT EVENTS

Management evaluated all activities of the Company through the issuance date of the Company’s interim condensed consolidated financial statements and concluded that no subsequent events have occurred that would require adjustments or disclosures into the interim condensed consolidated financial statements.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Gilla is a mineral-property development company specializing in acquiring and consolidating mineral properties with production potential, and future growth through exploration discoveries.

Gilla entered into a definitive agreement effective October 3, 2008 to acquire the mining rights owned by Terra Merchant Resources, (“Terra”), a private company incorporated in Ontario, Canada. Terra has secured rights to a gold exploration property in Angola, known under the name of Salutar Commercio Mining Concession, located some 120 km north of Cabinda City, Angola. The concession covers 199 square kilometers. Through a Joint Venture agreement, Gilla has rights to 70% of the mineral concession.

Following the death of the principal shareholder of Salutar, and the difficulties encountered by the estate, Gilla has made the decision not to expend further resources on this property despite interesting results from the 2008 exploration stream sediment sampling program. Consequently, the mining rights of $4,600,000 have been impaired.

Gilla has received confirmation that the application for Mineral Rights made by its 99% owned Congolese subsidiary, GISOR SPRL (“GISOR”), was successful. The Company was granted approval (“Avis Favorable”) on August 9, 2010, by the Cadastre Minier (CAMI) of a concession covering 451 «carrés miniers» or 383 square kilometres (38,300 Hectares) (Mwenga Project) located in the South-Kivu Province, Democratic Republic of Congo (“DRC”). The licence is contiguous to BANRO CORP’s (TSX-BAA) mining licences.

The Certificate entitles GISOR to conduct gold and diamond exploration on the awarded Exploration licence (Permis de Recherches “PR”).

Banro’s licences in the Lugushwa area cover a total of 641 square kilometers, has announced an inferred resource of 37Mt averaging 2.3g/t. (source: Banro’s Web site)

The company is current in meeting its obligation in the Democratic Republic of Congo as it pertains to it permits rights.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2011

The Registrant conducted no actual mining operation during the six months ended June 30, 2011. As such, it had no revenues as described in the interim condensed consolidated financial statements, attached hereto. However, the Company had total a net loss of $66,920 and $151,167 for the six months ended June 30, 2011 and 2010, respectively.

LIQUIDITY AND CAPITAL RESOURCES

The Company had working capital deficits of $92,306 and $169,103 as of June 30, 2011 and December 31, 2010, respectively. Cash were $1,673 and $1,617 as of June 30, 2011 and December 31, 2010, respectively.

Cash from operating activities

The Company’s cash outflow from operations of $39,944 for the six months ended June 30, 2011 was $2,331 above cash outflow from operations of $37,613 for the six months ended June 30, 2010.

Cash from financing activities

The Company’s net cash inflow from financing activities of $40,000 for the six months ended June 30, 2011 was $28,000 above the cash inflow from financing activities for the six months ended June 30, 2010, which was $12,000.

The report of our independent accountants on our December 31, 2010 financial statements includes an explanatory paragraph indicating that there is substantial doubt about our ability to continue as a going concern due to lack of operations and revenue and substantial recurring losses from operations and significant accumulated deficit and working capital deficit. Our ability to continue as a going concern will be determined by our ability to obtain additional funding and commence and maintain successful operations. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.

OVERVIEW

The Company is a mineral-property development company specializing in acquiring and consolidating mineral properties with production potential and future growth through exploration discoveries. Acquisition and development emphasis is focused on properties containing precious metals and/or other strategic minerals that are located in Canada. In October 2006, the Company sold all the mining claims in the Porcupine Mining Divisions in Ontario, Canada, to a private company, Coldrock Resources Inc.

The Company has a history of operating losses and we expect to continue to incur operating losses in the near future.

CERTAIN BUSINESS RISK FACTORS

You should carefully consider the risks described below before purchasing our common stock. If any of the following risks actually occur, our business, financial condition, or results or operations could be materially adversely affected, the trading of our common stock could decline, and you may lose all or part of your investment. You should acquire shares of our common stock only if you can afford to lose your entire investment.

MINERAL EXPLORATION IS HIGHLY SPECULATIVE, INVOLVES SUBSTANTIAL EXPENDITURES, AND IS FREQUENTLY NON-PRODUCTIVE

Mineral exploration involves a high degree of risk and exploration projects are frequently unsuccessful. Few prospects that are explored end up being ultimately developed into producing mines. To the extent that we continue to be involved in gold explorations, the long-term success of our operations will be related to the cost and success of our exploration programs. We cannot assure you that our gold exploration efforts will be successful. The risks associated with gold exploration include:

·	The identification of potential gold mineralization based on superficial analysis;

·	The quality of our management and our geological and technical expertise; and

·	The capital available for exploration and development.

Substantial expenditures are required to determine if a project has economically mine able mineralization. It may take several years to establish proven and probable reserves and to develop and construct mining and processing facilities. As a result of these uncertainties, we cannot assure you that current and future exploration programs will result in the discovery of reserves, the expansion of our existing reserves and the development of mines.

THE PRICE OF GOLD AND OTHER MINERALS ARE HIGHLY VOLATILE AND A DECREASE IN THE PRICE OF GOLD AND OTHER MINERALS CAN HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS

The profitability of gold and mineral mining operations is directly related to market prices. The market prices of gold other minerals fluctuate significantly and are affected by a number of factors beyond our control, including, but not limited to, the rate of inflation, the exchange rate of the dollar to other currencies, interest rates, development of

a mine is undertaken and the time production can commence can significantly affect the profitability of a mine.

Accordingly, we may begin to develop one or more of our mines at a time when the price of gold or other minerals makes such exploration economically feasible and, subsequently, incur losses because the price of gold or other minerals decreases. We cannot predict the market price or fluctuations of the gold or copper price.

WE HAVE A LIMITED OPERATING HISTORY WITH SIGNIFICANT LOSSES AND EXPECT LOSSES TO CONTINUE FOR THE FORESEEABLE FUTURE

We have yet to establish any history of profitable operations. We expect that our revenues will not be sufficient to sustain our operations for the foreseeable future. Our profitability will require the successful commercialization of our gold mines. No assurances can be given that we will be able to successfully commercialize our gold mines or that we will ever be profitable.

Our independent auditors have added an explanatory paragraph to their audit opinion issued in connection with the financial statements for the year ended December 31, 2010. The Company’s auditors have expressed doubt about the Company’s ability to continue as a going concern. As of June 30, 2011, the Company has current assets in the form of cash of $1,673, current liabilities of $93,979 and long term liabilities of $474,696. The Company’s accumulated losses to date are $30,891,042.

THERE IS SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN DUE TO SIGNIFICANT RECURRING LOSSES FROM OPERATIONS, ACCUMULATED DEFICIT AND WORKING CAPITAL DEFCIT ALL OF WHICH MEANS THAT WE MAY NOT BE ABLE TO CONTINUE OPERATIONS UNLESS WE OBTAIN ADDITIONAL FUNDING

WE ARE DEPENDENT ON KEY PERSONNEL, THEIR LOSS MAY HAVE AN ADVERSE EFFECT

We are dependent on the services of certain key executives, including Georges Benarroch, President and Director, Daniel Barrette, Chief Operating Officer, and Linda Kent, Corporate Secretary. The loss of any of these individuals could have a material adverse effect on our business and operations. We currently do not have key person insurance on these individuals.

THE MARKET PRICE OF OUR COMMON STOCK IS HIGHLY VOLATILE, WHICH COULD HINDER OUR ABILITY TO RAISE ADDITIONAL CAPITAL

The securities have been trading on the over-the-counter market until it was moved to Pink Sheets in February 2011, under the symbol “GLLA” as the trading activity was not sufficient for continuing to trade over the counter. The Company is listed on the Pink Sheets under the symbol "GLLA." The market price of our common stock has been and is expected to continue to be highly volatile. Factors, including regulatory matters, concerns about our financial condition, operating results, litigation, government regulation, developments or disputes relating to agreements, title to our properties or proprietary rights, may have a significant impact on the market price of our stock. The range of the high and low bid prices of our common stock over the last 3 years has been between $2.25 (high) and $0.02(low). In addition, potential dilutive effects of future sales of shares of common stock by shareholders and by the company, and subsequent sale of common stock by the holders of warrants and options could have an adverse effect on the price of our securities, which could hinder our ability to raise additional capital to fully implement our business, operating and development plans.

PENNY STOCK REGULATION EFFECT OUR STOCK PRICE, WHICH MAY MAKE IT MORE DIFFICULT FOR INVESTORS TO SELL THEIR STOCK

Broker-dealer practices in connection with transactions in “penny stocks” are regulated by certain penny stock rules adopted by the Securities and Exchange Commission. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer must also provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, the penny stock rules generally require that prior to a transaction in a penny stock the broker-dealers make a special written determination that the penny stock is a suitable investment for the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to the penny stock rule. Our securities will be subject to the penny stock rules, and investors may find it more difficult to sell their securities.

OWNERSHIP OF OUR SHARES IS CONCENTRATED, TO SOME EXTENT, IN THE HANDS OF A FEW INVESTORS, WHICH COULD LIMIT THE ABILITY OF OUR OTHER STOCKHOLDERS TO INFLUENCE THE DIRECTION OF THE COMPANY

Of the currently issued and outstanding shares of common stock of the Company, approximately 12,425,516 shares (approximately 46% of the total number of shares outstanding) are owned by, or are under the direct or indirect control of, only three individuals or corporations. Accordingly, they collectively may have the ability to significantly influence or determine the election of all of our directors or the outcome of most corporate actions requiring stockholder approval. They may exercise this ability in a manner that advances their best interests and not necessarily those of our other stockholders.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make a wide variety of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods covered by the financial statements. Our management routinely makes judgments and estimates about the effect of matters that are inherently uncertain.

As the number of variables and assumptions affecting the future resolution of the uncertainties increases, these judgments become even more subjective and complex. We have identified certain accounting policies that are most important to the portrayal of our current financial condition and results of operations. Our significant accounting policies are disclosed in Notes to Financial Statements. Several of those critical accounting policies are as follows:

DEPRECIATION AND DEPLETION

Depreciation is based on the estimated useful lives of the assets and is computed using the straight-line method. The Company has not recorded any depletion charges for the six months ended June 30, 2011.

IMPAIRMENT OF LONG-LIVE ASSETS

Management reviews the net carrying value of all property and equipment and other long-lived assets, including mineral properties, on a periodic basis. We estimate the net realizable value of asset based on the estimated undiscounted future cash flows that will be generated from operations at each property, the estimated salvage value of the surface plant and equipment and the value associated with property interests. These estimates of undiscounted future cash flows are dependent upon the estimates of metal to be recovered from proven and probable ore reserves, future production cost estimates and future metals price estimates over the estimated remaining life of the mineral property. If undiscounted cash flows are less than the carrying value of a property, an impairment loss will be recognized based upon the estimated expected future cash flows from the property discounted at an interest rate commensurate with the risk involved.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required for smaller reporting company

ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures: We maintain “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Based on his evaluation as of the end of the period covered by this report, our Chief Executive Officer who also serves as our principal financial and accounting officer has concluded that our disclosure controls and procedures were not effective such that the information relating to our company, required to be disclosed in our Securities and Exchange Commission reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure.

As of June 30, 2011 and as of the date of this report, we did not maintain effective controls over the control environment. Specifically, our board of directors does not currently have any independent members and no director qualifies as an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-B.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On March 2nd, 2010, the Company entered into a Settlement Agreement dismissing claims against Defendants Georges Fotso, Capital Venture Facilitators LLC, Marie-Gisele Momo Minlo and Pauline NGO Papa (the “Fotso Group”). As per the terms of the Settlement Agreement, certificates representing 16,992,150 shares of common stock held by these Defendants have been returned to the Company for cancellation. Defendant DRR Capital Corporation is not part of the Settlement Agreement as it has not yet returned to the Company 544,808 common shares for cancellation.)

The Settlement Agreement also acknowledges that Georges Fotso has resigned as a director of Gilla and its Cameroon subsidiary Free Mining Company S.A. (“FMC”) on January, 30, 2009. Under the terms of the Settlement Agreement, the Fotso Group will retain the $100,000 cash consideration previously paid to them on January 31, 2008.

On February 10, 2011, the Eight Judicial Court, in and for Clark County, Nevada dismissed without prejudice claims against DRR Capital Corporation.

ITEM 2. CHANGES IN SECURITIES

On February 1, 2011 the Company issued 1,500,000 common shares to a shareholder as payment for $15,000 promissory note (See Note 5).

On May 10, 2011 the Company issued 700,000 common shares to a shareholder as payment for $7,000 promissory note (See Note 5).

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

See Item 2 and Item 5

ITEM 5. EXHIBITS

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf on June 30, 2011 by the undersigned, thereunto authorized.

	GILLA INC.

	By:	/s/ Georges Benarroch
		Georges Benarroch, President &
		Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities on the date(s) indicated.


Name	Title	Date

/s/ Georges Benarroch	President Chief Financial Officer Director	August 15, 2011

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