GILLA INC. - FORM 10-Q - November 14, 2012

Attached files

file	filename
EX-32.1 - GILLA INC.	glla_ex321.htm
EX-31.1 - 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 September 30, 2012

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, $0.0002 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No þ

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). 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 November 12, 2012

GILLA, INC.

INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PART I - Financial Information		Page

Item 1.	Financial Statements (unaudited)

	Condensed Consolidated Balance Sheet as of September 30, 2012 (Unaudited) and December 31, 2011	3

	Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2012 and 2011	4

	Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011	5

	Notes to Unaudited Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	12

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	15

Item 4.	Control and Procedures	15

PART II - Other Information

Item 1.	Legal Proceedings	16

Item 1A.	Risk Factors	16

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	16

Item 3.	Defaults Upon Senior Securities	16

Item 4.	Mine Safety Disclosures	16

Item 5.	Other Information	16

Item 6.	Exhibits	17

SIGNATURES		18

CERTIFICATIONS

GILLA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30.			December 31.
	2012			2011
	(unaudited)

ASSETS

CURRENT ASSETS
Cash and cash equivalents	$	28		$	118

TOTAL CURRENT ASSETS		28			118

TOTAL ASSETS	$	28		$	118

LIABILITIES AND (DEFICIENCY) IN STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable	$	14,879		$	8,170
Accrued liabilities		2,500			10,000
Accrued liabilities, related party		100,000			70,000
Accrued interest payable, related party		19,936			10,450
Convertible notes payable related party (net of debt discount)		109,857			-

TOTAL CURRENT LIABILITIES		247,172			98,620

LONG TERM LIABILITIES

Convertible notes payable related party (net of debt discount)		-			51,360
Derivative liability		90,214			37,865
TOTAL LONG TERM LIABILITIES		90,214			89,225

TOTAL LIABILITIES		337,386			187,845

COMMITMENTS AND CONTINGENCIES

(DEFICIENCY) IN STOCKHOLDERS' EQUITY
Common stock, $0.0002 par value, 300,000,000 shares authorized;
29,477,766 shares issued and outstanding
as of September 30, 2012 and December 31, 2011		5,895			5,895
Additional paid - in capital		30,681,124			30,671,124
Accumulated deficit		(31,024,377	)		(30,864,746	)

TOTAL (DEFICIENCY) IN STOCKHOLDERS' EQUITY		(337,358	)		(187,727	)

TOTAL LIABILITIES AND (DEFICIENCY) IN STOCKHOLDERS' EQUITY	$	28		$	118

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

GILLA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

	For the Quarter Ended						For the Nine Months Ended
	September 30.						September 30.
	2012			2011			2012			2011

OPERATING EXPENSES:
Exploration cost	$	-		$	-		$	-		$	4,450
General and administrative		13,672			20,825			41,960			79,040

TOTAL OPERATING EXPENSES		13,672			20,825			41,960			83,490

LOSS FROM OPERATIONS		(13,672	)		(20,825	)		(41,960	)		(83,490	)

OTHER INCOME (EXPENSES)
Gain (loss) on change in fair value of derivative liabilities		10,009			(88,802	)		(52,350	)		32,915
Interest expense		(21,708	)		(4,070	)		(65,321	)		(130,042	)
TOTAL OTHER INCOME (EXPENSES)		(11,699	)		(92,872	)		(117,671	)		(97,127	)

NET (LOSS) BEFORE INCOME TAXES	$	(25,371	)	$	(113,697	)	$	(159,631	)	$	(180,617	)

INCOME (TAX) BENEFIT		-			-			-			-

NET (LOSS)	$	(25,371	)	$	(113,697	)	$	(159,631	)	$	(180,617	)

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING-
BASIC		29,477,766			29,170,074			29,477,766			28,759,534
FULLY DILUTED		29,477,766			29,170,074			29,477,766			28,759,534

(LOSS) PER COMMON SHARES-
BASIC	$	(0.00	)	$	(0.00	)	$	(0.01	)	$	(0.01	)
DILUTED	$	(0.00	)	$	(0.00	)	$	(0.01	)	$	(0.01	)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

GILLA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

	For the Nine Months Ended
	September 30.
	2012			2011

CASH FLOW FROM OPERATING ACTIVITIES
Net loss	$	(159,631	)	$	(180,617	)
Adjustment to reconcile net loss to net cash used in operating activities:
Amortization of deferred debt discount		55,835			122,717
(Gain) loss on change in fair value of derivative liabilities		52,349			(32,915	)
Changes in operating liabilities:
Increase in accounts payable		6,711			4,467
Increase in accrued expenses and related party accruals		31,986			43,825
Net cash used in operating activities		(12,751	)		(42,523	)

CASH FLOW FROM INVESTING ACTIVITIES		-			-

CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from notes payable, related party		12,660			41,000
Net cash provided by financing activities		12,660			41,000

Net decrease in cash and cash equivalents		(91	)		(1,523	)

Cash and cash equivalents at beginning of period		118			1,617

Cash and cash equivalents at end of period	$	28		$	94

Supplemental Disclosure of Cash Flow Information:
Cash paid for:
Interest	$	-		$	-
Income taxes	$	-		$	-

Non-cash investing and financing activities
Common Stock Issued for Notes Payable	$	-		$	22,000
Beneficial conversion features	$	-		$	121,717
Sale of 990 shares of subsdiairy to related party	$	10,000		$	-

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

GILLA, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS

Gilla Inc. (the “Company”), 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.

The Company has specialized in acquiring and consolidating large, exploration-stage properties with near-term production potential and future growth through exploration discoveries. Company’s acquisition and development emphasis is focused on properties containing gold and other strategic minerals located in Africa. The company is currently not in the exploration stage and was in “exploration stage” till June 30, 2011.

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. On June 22, 2012 the company entered into share purchase agreement and sold 990 shares of common stock held in GISOR to a related party for $10,000.

GILLA, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

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 unaudited condensed 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. On June 22, 2012, Gilla entered into share purchase agreement and sold 990 shares of common stock held in GISOR to a related party for $10,000.

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 nine 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 unaudited condensed consolidated financial statements follow the same accounting policies and methods of their application as the December 31, 2011 audited annual consolidated financial statements of Gilla Inc. All adjustments are of a normal recurring nature. It is suggested that these interim unaudited condensed consolidated financial statements be read in conjunction with the Company’s December 31, 2011 annual consolidated audited financial statements.

Operating results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that can be expected for the year ended December 31, 2012.

Going Concern

The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As reflected in the accompanying interim unaudited condensed consolidated financial statements, the Company has incurred net loss of $159,631, an accumulated deficit of 31,024,377, deficiency in stockholders’ equity of $337,358, used $12,751 in cash for operating activities and had a negative working capital (current liabilities exceeded current assets) of $247,144. These factors raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time. These interim unaudited 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.

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

GILLA, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

The Company cannot assure that it will generate sufficient cash flow from operations or obtain additional financing to meet its obligations.

Management’s Plans

On June 26, 2012 the company entered into a Letter of Intent to acquire all of the outstanding common shares of Snoke Distribution Canada Ltd. (“Snoke Distribution”) through the issuance of 25 million common shares of Gilla to the shareholders of Snoke Distribution and Snoke Distribution satisfying Gilla’s outstanding debt. Snoke Distribution is the holder of a distribution agreement with German manufacturer Ecoreal GmbH & Co. KG (www.isnoke.com) for the exclusive rights to distribute all Snoke electronic cigarette (“e-cigarette”) products in North America, the United Kingdom, Mexico and the Caribbean (“Snoke Rights”). The Snoke Rights have a five year term, which automatically renews in perpetuity unless there is a breach of the distribution agreement or Snoke Distribution becomes insolvent. As of the date of issuance of these Form 10-Q, the company had not closed on this agreement.

The Snoke e-cigarette was invented by leading German Oncologist Dr. Jürgen Ruhlmann. It is the only e-cigarette manufactured in Germany and is done so to the GMP2000 pharmaceutical standard. The Snoke comes in both premium version, which is rechargeable, and a disposable version that is the equivalent of 1.5-2 packages of regular cigarettes. SNO-Caps (the inhaled flavor packages inside the tip) are available in nicotine and non-nicotine and come in a range of pleasant flavours: tobacco, tobacco mild, mint, menthol, coffee, espresso, chocolate, vanilla, apple, cherry, green-tea, and energy.

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.

Net Income (Loss) per Common Share

The Company computes earnings per share under Accounting Standards Codification subtopic 260-10, Earnings Per Share (“ASC 260-10”). Basic net income (loss) per common share is computed by dividing net loss by the weighted average number of shares of common stock. Diluted earnings per share is computed using the weighted average number of common and common stock equivalent shares outstanding during the period. There is no effect on diluted loss per share since the common stock equivalents are anti-dilutive. Dilutive common stock equivalents consist of shares issuable upon conversion of convertible .

Reclassifications

Certain reclassifications have been made in prior period's unaudited condensed consolidated financial statements to conform to classifications used in the current period. These reclassifications had no effect on reported income or losses.

GILLA, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

NOTE 3 - ACCOUNTING STANDARDS UPDATES

Significant 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 unaudited condensed consolidated financial statements.

NOTE 4 - EQUITY

The Company is authorized to issue 300,000,000 shares of $0.0002 par value common stock as of September 30, 2012. As of September 30, 2012 and December 31, 2011, 29,477,766 shares of the Company's common stock were issued and outstanding.

On January 2011 the Company issued 1,500,000 common shares at $0.01 per share to a shareholder as payment for $15,000 promissory note.

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.

NOTE 5 – CONVERTIBLE NOTES PAYABLE - RELATED PARTY

Convertible Notes payable, related party at September 30, 2012 and December 31, 2011 are as follows:

	September 30, 2012 (unaudited)		December 31, 2011
Convertible 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.	$	128,877	$	126,217

Total		128,877		126,217
Less: Unamortized deferred debt discount		(19,020)		(74,855)
Total		109,857		51,362
Less: current portion		(109,857)		-
Notes payable – long term	$	-	$	51,362

Note issued in 2011

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 September 30, 2012 the investor has loaned the company $128,877. 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.

GILLA, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

NOTE 5 – CONVERTIBLE NOTES PAYABLE - RELATED PARTY (Continued)

The Company identified embedded derivatives related to the Convertible Note entered into on April 15, 2011. These embedded derivatives included certain conversion features. The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each subsequent balance sheet date.

During the three and nine months ended September 30, 2012, the Company amortized $18,611 and $55,833, respectively to current period operations as interest expense.

The fair value of the described embedded derivative of $90,214 at September 30, 2012 was determined using the Black-Scholes Model with the following assumptions:

(1) risk free interest rate of	10%;
(2) dividend yield of	0%;
(3) expected volatility factor of	479%;

(4) an expected life of the conversion feature of	0.25 year, and
(5) fair value of the company’s common stock of	$0.0095 per share.

At September 30, 2012, the Company adjusted the recorded fair value of the derivative liability to market resulting in non-cash, non-operating gain of $10,009 and non-operating loss of $52,350 for the three and nine months ended September 30, 2012, respectively.

NOTE 6 – FAIR VALUE OF FINANCIAL INSTRUMENTS

ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of inputs that may be used to measure fair value:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed is determined based on the lowest level input that is significant to the fair value measurement.

GILLA, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

NOTE 6 – FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

Items recorded or measured at fair value on a recurring basis in the accompanying unaudited condensed consolidated financial statements consisted of the following items as of September 30, 2012:

			Fair Value Measurements at September30, 2012 using:
	September 30, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Liabilities:
Debt Derivative liabilities	$	90,214		-		-	$	90,214

The debt derivative liabilities are measured at fair value using quoted market prices and estimated volatility factors based on historical prices for the Company’s common stock and are classified within Level 3 of the valuation hierarchy.

The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of September 30, 2012:

	Debt Derivative Liability
Balance, January 1, 2012	$	37,865
Initial fair value of debt derivatives at note issuances		-
Mark-to-market at September , 2012:
- Embedded debt derivatives		52,350
Balance, September 30, 2012	$	90,214

Net loss for the period included in earnings relating to the liabilities held at September 30, 2012	$	(52,350	)

NOTE 7 – SUBSEQUENT EVENTS

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

On June 25, 2012 entered into a Letter of Intent to acquire all of the outstanding common shares of Snoke Distribution Canada Ltd. (“Snoke Distribution”) through the issuance of 25 million common shares of Gilla to the shareholders of Snoke Distribution and Snoke Distribution satisfying Gilla’s outstanding debt. Snoke Distribution is the holder of a distribution agreement with German manufacturer Ecoreal GmbH & Co. KG (www.isnoke.com) for the exclusive rights to distribute all Snoke electronic cigarette (“e-cigarette”) products in North America, the United Kingdom, Mexico and the Caribbean (“Snoke Rights”). The Snoke Rights have a five year term, which automatically renews in perpetuity unless there is a breach of the distribution agreement or Snoke Distribution becomes insolvent. As of the date of issuance of these Form 10-Q, the company had not closed on this agreement.

On April 15, 2011, Gilla Inc. (“Gilla” or the “Company”) entered into a Loan Agreement with Credifinance Capital Corp. (“CFCC” or the “Note holder”) 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.

on June 25, 2012, the entered into a Share Purchase Agreement with Credifinance Capital Corp. (“CFCC”) to sell all of the Company’s shares in GISOR SA, a private company registered in the Democratic Republic of the Congo to CFCC in reduction of a portion of the Company’s outstanding debt to CFCC.

The company is currently not in the exploration stage and was in “explorative stage” till June 30, 2011

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

The Registrant conducted no actual mining operation during the three months ended September 30, 2012. As such, it had no revenues as described in the interim unaudited condensed consolidated financial statements, attached hereto. However, the Company had a net loss of $25,371 for the three months ended September 30, 2012 and a net loss of $113,697 for the three months ended September 30, 2012. The net loss of $25,371 during the three months ended September 30, 2012, was a result of gain on change in the fair value of derivative liability of $10,009, offset by operating expenses of $13,672 and interest expense of $21,708.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

The Registrant conducted no actual mining operation during the nine months ended September 30, 2012. As such, it had no revenues as described in the interim unaudited condensed consolidated financial statements, attached hereto. However, the Company had a net loss of $159,631 and $180,617 for the nine months ended September 30, 2012 and 2011, respectively. The net loss of $159,631 during the three months ended September 30, 2012, was a result of operating expenses of $41,960, loss on change in the fair value of derivative liability of $52,350 and interest expense of $65,321.

LIQUIDITY AND CAPITAL RESOURCES

The Company had working capital deficits (current liabilities exceeded current assets) of $247,144 and $98,502 as of September 30, 2012 and December 31, 2011, respectively. Cash were $28 and $118 as of September 30, 2012 and December 31, 2011, respectively.

Cash from operating activities

The Company’s cash outflow from operations of $12,751 for the nine months ended September 30, 2012 which was $29,772 below cash outflow from operations of $42,523 for the nine months ended September 30, 2011.

Cash from financing activities

The Company had $12,660 net cash inflow from financing activities for the nine months ended September 30, 2012 which was $28,340 below the cash inflow from financing activities for the nine months ended September 30, 2011, which was $41,000.

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.

The report of our independent accountants on our December 31, 2011 consolidated 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 unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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 Unaudited Condensed Consolidated Financial Statements. Several of those critical accounting policies are as follows:

Use of Estimates

Net Income (Loss) per Common Share

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 September 30, 2012 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.

Changes in Internal Control over Financial Reporting

There were no changes in internal control over financial reporting that occurred during the last fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

There have been no material changes in our risk factors from those disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

31.1 Certification Pursuant to Rule 13A-14 or 15D-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed by the Principal Executive and Financial Officer*

32.1 Certification Required by 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by Principal Executive and Financial Officer,*

●	Filed herewith

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 September 30, 2012 by the undersigned, thereunto authorized.

	GILLA INC.

	By:	/s/ Georges Benarroch
		Georges Benarroch, President, Chief Executive Officer &
		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	November 14, 2012
	Chief Executive Officer Chief Financial Officer

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