GILLA INC. - FORM 10-Q - November 14, 2013

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EXCEL - IDEA: XBRL DOCUMENT - GILLA INC.	Financial_Report.xls
EX-32.1 - CERTIFICATION - GILLA INC.	glla_ex321.htm
EX-31.1 - CERTIFICATION - GILLA INC.	glla_ex311.htm
EX-32.2 - CERTIFICATION - GILLA INC.	glla_ex322.htm
EX-31.2 - CERTIFICATION - GILLA INC.	glla_ex312.htm

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2013

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 Incorporation or Organization)		(I.R.S. Employer Identification Number)

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

Registrant’s telephone number, including area code (416) 843-2881

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). o Yes þ 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.

65,444,510 Common Shares - $0.0002 Par Value as of November 12, 2013

GILLA, INC.

INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

		Page
PART I - Financial Information

Item 1.	Financial Statements (unaudited)

	Condensed Consolidated Balance Sheets as of September 30, 2013 (Unaudited) and December 31, 2012		3

	Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2013 and 2012 and for the period from November 29, 2011 (date of inception) through September 30, 2013		4

	Unaudited Condensed Consolidated Statement of Changes in Shareholder’s Deficiency for the period from November 29, 2011 (date of inception) through September 30, 2013		5

	Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012 and for the period from November 29, 2011 (date of inception) through September 30, 2013		6

	Notes to Unaudited Condensed Consolidated Financial Statements		7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operation		14

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		19

Item 4.	Control and Procedures		19

PART II - Other Information

Item 1.	Legal Proceedings		20

Item 1A.	Risk Factors		20

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		20

Item 3.	Defaults Upon Senior Securities		20

Item 4.	Mine Safety Disclosures		20

Item 5.	Other Information		20

Item 6.	Exhibits		20

SIGNATURES			21

Gilla Inc.

(A Development Stage Company)

Condensed Consolidated Balance Sheets

	September 30, 2013				December 31, 2012
	(Unaudited)
ASSETS
Current assets
Cash		$	210,071			$	11,444
Deposit on inventory (note 6)			81,751				-
Inventory			17,233				-
Prepaid and sundry assets			250				799
Total current assets			309,305				12,243

Property and equipment (note 7)			2,953				3,434

Total assets		$	312,258			$	15,677

LIABILITIES AND SHAREHOLDER’S DEFICIENCY
Current liabilities
Accounts payable		$	109,679			$	67,669
Accrued liabilities			51,379				29,478
Accrued interest- related party			55,405				1,479
Loan from shareholder (note 8)			176,416				247,836
Due to related parties			723,885				246,655
Notes payable, related party (note 9)			225,000				-
Total current liabilities			1,341,764				593,117

Long term liabilities
Note payable, related party (note 9)			200,000				225,000
Convertible debentures (note 10)			425,000				-
Total long term liabilities			625,000				225,000

Total liabilities			1,966,764				818,117

Commitments and contingencies (note 11)

SHAREHOLDERS’ DEFICIENCY
Common stock (note 12)
$0.0002 par value, 300,000,000 shares authorized; 65,394,510 and 62,277,766 shares issued and outstanding as of September 30, 2013 and December 31, 2012, respectively			13,079				12,455
Additional paid-in capital			416,685				291,218
Shares to be issued (922,467)			32,286				-
Deficit accumulated during the development stage			(2,133,954	)			(1,103,039	)
Accumulated other comprehensive income (loss)			17,398				(3,074	)
Total shareholders’ deficiency			(1,654,506	)			(802,440	)

Total liabilities and shareholders’ deficiency		$	312,258			$	15,677

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

Gilla Inc.

(A Development Stage Company)

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss

	For the Three Months Ended September 30, 2013			For the Three Months Ended September 30, 2012			For the Nine Months Ended September 30, 2013			For the Nine Months Ended September 30, 2012			For the Period from November 29, 2011 (Date of Inception) to September 30, 2013

Revenue	$	27,936		$	-		$	27,936		$	-		$	27,936
Cost of goods		23,325			-			23,325			-			23,325
Gross profit		4,611			-			4,611			-			4,611

Operating expenses
Administrative		231,634			165,141			493,946			274,610			855,227
Consulting fees-related party		159,909			72,073			443,546			117,273			697,999
Depreciation		372			51			1,053			251			1,730
Foreign exchange		(9,063)			2,220			(2,532)			2,220			(785)
Loss on write off of loan receivable		-			-			21,405			-			21,405
Loss on acquisition		-			-			-			-			292,226
Loss on write off of deposit		-			-			-			-			162,371

Total operating expenses		382,852			239,485			957,418			394,354			2,030,173

Loss from operations		(378,241	)		(239,485	)		(952,807	)		(394,354	)		(2,025,562)

Other income (expense):
Interest expense, net		(35,149)			(9,388	)		(78,108	)		(15,186	)		(103,490)

Total other expenses		(35,149)			(9,388	)		(78,108	)		(15,186	)		(103,490)

Net loss before income taxes		(413,390	)		(248,873	)		(1,030,915	)		(409,540	)		(2,129,052	)
Income taxes		-			-			-			-			-
Net loss	$	(413,390	)	$	(248,873	)	$	(1,030,915	)	$	(409,540	)	$	(2,129,052)

Loss per weighted average number of shares outstanding during the period (basic and diluted)	$	(0.007)		$	(0.010	)	$	(0.017)		$	(0.016)

Weighted average number of shares outstanding during the period (basic and diluted)		62,481,032			25,173,913			62,346,266			25,058,608
Comprehensive (loss) income:
Net loss	$	(413,390	)	$	(248,873	)	$	(1,030,915	)	$	(409,540)		$	(2,129,052	)

Foreign exchange translation adjustment for the period		(17,242)			4,702			20,472			6,593			17,398

Comprehensive loss	$	(430,632	)	$	(244,171	)	$	(1,010,443	)	$	(402,947	)	$	(2,111,654)

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

Gilla Inc.

(A Development Stage Company)

Unaudited Condensed Consolidated Statement of Changes in Shareholder’s Deficiency

For the period from November 29, 2011 (Date of Inception) to September 30, 2013

	Common Stock					Additional Paid In			Shares to be	Deficit accumulated during the development			Accumulated other comprehensive income
	Shares		Amount			Capital			Issued	stage			(loss)			Total
Balance, November 29, 2011 (Date of inception)		-	$	-		$	-	$	-	$	-		$	-		$	-

Issuance of shares for seed capital, November 2011 at $0.0002 per share		25,000,000		5,000			-		-		(4,902	)		-			98

Foreign currency translation loss		-		-			-		-		-			(228	)		(228	)

Net loss		-		-			-		-		(34,334	)		-			(34,334	)

Balance, December 31, 2011		25,000,000		5,000	-		-		-		(39,236	)		(228	)		(34,464	)

Common shares issued for cash at $0.025 per share, November 2012		400,000		80			9,920		-		-			-			10,000

Common shares issued for cash at $0.03 per share, November 2012		4,366,667		873			130,127		-		-			-			131,000

Effect of reverse acquisition, November 21, 2012		29,477,766		5,895			-		-		-			-			5,895

Common shares issued for settlement of loans at $0.05 per share, November 2012		800,000		160			39,840		-		-			-			40,000

Issuance of shares and warrants at $0.05 per share as the result of a private placement, November 2012		2,233,333		447			111,331		-		-			-			111,778

Foreign currency translation loss		-		-			-		-		-			(2,846	)		(2,846	)

Net loss		-		-			-		-		(1,063,803	)		-			(1,063,803	)

Balance, December 31 2012		62,277,766		12,455			291,218		-		(1,103,039	)		(3,074	)		(802,440	)

Common shares subscribed to for cash at $0.035 per share, on September 25, 2013		200,000		40			6,960		2,677		-			-			9,677

Common shares issued for consulting fees at $0.05 on September 25, 2013		942,784		189			49,811		-		-			-			50,000

Common shares issued in settlement of related party loans at $0.035 on September 25, 2013		1,000,000		200			34,800		15,000		-			-			50,000

Common shares issued in settlement of shareholder loan at $0.035on September 25, 2013		973,960		195			33,896		14,609		-			-			48,700

Foreign currency translation gain		-		-			-		-		-			20,472			20,472

Net loss		-		-			-		-		(1,030,915	)		-			(1,030,915	)

Balance, September 30, 2013		65,394,510	$	13,079		$	416,685	$	32,286	$	(2,133,954	)	$	17,398		$	(1,654,506	)

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

Gilla Inc.

(A Development Stage Company)

Unaudited Condensed Consolidated Statements of Cash Flows

	For the Nine Months Ended September 30, 2013		For the Nine Months Ended September 30, 2012		For the Period from November 29, 2011 (Date of Inception) to September 30, 2013
CASH FLOWS FROM OPERATING ACTIVITIES :
Net loss	$	(1,030,915)	$	(409,540)	$	(2,129,052)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		1,053		251		1,730
Expenses paid by related party on behalf of Company		20,387		-		20,387
Loan receivable write off		21,405		-		21,405
Loss on acquisition		-		-		292,226
Deposit write off		-		-		162,371
Changes in operating assets and liabilities
Prepaid expenses		549		1,913		(250)
Inventory deposit		(81,751)		(165,013)		(244,122)
Inventory		(17,233)		-		(17,233)
Related party payables		367,636		133,170		469,134
Accounts payable		92,010		33,515		163,475
Accrued interest-related party		53,926		800		53,926
Accrued liabilities and interest		29,231		23,142		57,684
Net cash used in operating activities		(543,702)		(381,762)		(1,148,319)

CASH FLOWS FROM INVESTING ACTIVITIES:
Factoring loan		(19,477)		-		(19,477)
Addition of capital assets		(600)		(3,194)		(4,713)
Net cash used in investing activities		(20,077)		(3,194)		(24,190)

CASH FLOWS FROM FINANCING ACTIVITIES:
Shareholder loan received		-		330,563		42,606
Net proceeds from loans payable		-		-		282,840
Net proceeds from related parties		359,867		(12,170)		454,891
Proceeds from note payable		200,000		-		200,000
Repayment of debt		(84,265)		-		(134,265)
Proceeds from sale of debentures		275,000		-		275,000
Proceeds from the sale of common stock		9,677		72,043		262,455
Net cash provided by financing activities		760,279		390,436		1,383,527
Effect of foreign exchange		2,127		(6,130)		(947)
Net increase (decrease) in cash and cash equivalents	$	198,627	$	(650)	$	210,071

Cash and cash equivalents at beginning of period		11,444		881		-

Cash and cash equivalents at end of period	$	210,071	$	231	$	210,071

Supplemental Schedule of Cash Flow Information:
Cash paid for interest	$	-	$	-	$	-
Cash paid for income taxes	$	-	$	-	$	-

Non Cash investing and financial activities:
Common stock issued in settlement of loans	$	98,700	$	-	$	138,700
Common stock issued for reverse acquisition	$	-	$	-	$	5,895
Common stock issued for payment of consulting fees payable	$	50,000	$	-	$	50,000
Debentures issued for settled of consulting fees payable	$	50,000	$	-	$	50,000
Debentures issued for settlement of loans	$	100,000	$	-	$	100,000

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

Gilla Inc.

(A Development Stage Company)

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2013 and 2012

(Amounts expressed in US Dollars)

1.	NATURE OF OPERATIONS

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 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 25, 2012, the Company entered into a Share Purchase Agreement to sell all of the Company’s shares in GISOR in exchange for a reduction of a portion of the Company’s outstanding debt. The Company sold 990 shares of common stock held in GISOR to a related party for $10,000.

On June 25, 2012, the Company entered into a Letter of Intent with Snoke Distribution Canada Ltd., a corporation existing under the laws of Ontario (“Snoke Distribution”), to acquire all of the outstanding common shares of Snoke Distribution through the issuance of 25 million common shares of the Registrant to the shareholders of Snoke Distribution.

On November 21, 2012, the Company closed the acquisition of Snoke Distribution through the issuance of 29,766,667 commons shares of the Registrant.

On November 21, 2012, the Company closed a private placement of $135,000 at a price of $0.05 per common share with a half warrant entitling the holder to acquire one common share of the Company at a price of $0.10 per share for a period of 6 months from the Merger date.

On December 12, 2012, the Company closed a private placement of $16,667 at a price of $0.05 per common share with a half warrant entitling the holder to acquire one common share of the Company at a price of $0.10 per share for a period of 6 months from the date of issuance.

On March 9, 2013, the Company received a notice that the Exclusive Distribution Agreement has been terminated by ecoreal GmbH & Co. KG. The Company is not in agreement with reason for termination, however, has subsequently accepted the termination as significant doubt exists regarding the ability of the European manufacturer to meet the terms of the agreement.

On April13, 2013, Henry Kloepper was appointed as lead independent director of the board. Mr. Kloepper will also serve as chairman of the audit committee and compensation committee.

The Company incorporated Gilla Operations LLC (“Gilla Operations”), a wholly-owned subsidiary under the laws of the State of Florida, on May 2, 2013. Since incorporation, Gilla Operations has been the primary operating subsidiary of the Company.

On May 20, 2013, Gilla Operations entered into a Supply Contract with a Chinese e-cigarette contract manufacturer to produce and supply the Company with e-cigarette products and related accessories. The supply contract set forth the terms and conditions of the purchase order between Gilla Operations and the manufacturer who has agreed to supply e-cigarettes as specifically designed by the Company.

On June 18, 2013, the Company signed a Production and Supply Agreement with a South American Distributor to supply e-cigarettes and related accessories. Under the terms of the supply agreement, the Distributor has reserved the exclusive right to distribute a brand of the Company’s e-cigarette products in Brazil, Chile, Paraguay, Uruguay, Argentina, Venezuela, Columbia, Peru and Ecuador (collectively, the “Territory”). The supply agreement has a five-year term, which shall automatically renew for an additional five-year term, provided that the Distributor has satisfied all of the minimum performance and order quantity requirements set forth to maintain exclusivity in the distribution Territory.

On September 3, 2013, the Company issued $425,000 of Unsecured Subordinated Convertible Debentures (“Debentures”). The Debentures will mature on January 31, 2016 and bear interest at a rate of 12% per annum. The Debentures shall be convertible into the Common Stock of the Company at a conversion rate of $0.07 per share at any time prior to the maturity date.

On September 25, 2013, the Company closed a private placement of $108,377 at a price of $0.035 per Gilla common share and issued 2,173,960 common shares. The remaining 922,467 common shares remain unissued. Of these shares, 1,973,960 shares were issued in settlement of shareholders loan valued at $98,700. The Company also issued 942,784 common shares as the result of a consulting settlement.

On September 30, 2013, the Company issued a $200,000 Secured Promissory Note (“Secured Note”). The Secured Note shall be due on January 1, 2015 and bear interest at a rate of 1.5% per month.

Subsequent to the quarter ended September 30, 2013, the Company incorporated Charlie’s Club, Inc. (“Charlie’s Club”), a wholly-owned subsidiary under the laws of the State of Florida. Charlie’s Club will be primary operating subsidiary of the Company’s e-commerce sales initiative.

Prior to the acquisition, the Company was a mineral-property development company specializing in acquiring and consolidating mineral properties with production potential and future growth through its exploration activities and its discoveries. Acquisition and development emphasis was focused on properties containing gold and other strategic minerals that were located in Africa.

The Company designs, markets and distributes electronic cigarettes (“e-cigarettes”) and accessories. E-cigarettes are replacements for traditional cigarettes allowing smokers to reproduce the smoking experience. E-cigarettes do not burn tobacco are not smoking cessation devices.

The Company is in the development stage as defined by Accounting Standards Codification subtopic 915-10 Development stage Entities (“ASC 915-10”). To date, the Company, has not generated sales revenues, has incurred expenses and has sustained losses. Consequently, its operations are subject to all the risks inherent in the establishment of a new business enterprise. For the period from November 29, 2011 (date of inception) through September 30, 2013, the Company has accumulated losses of $2,133,954.

2.	REVERSE MERGER TRANSACTION AND ACCOUNTING

On November 21, 2012, Gilla Inc. (“Gilla” or the “Company” or the “Registrant”) merged with Snoke Distribution Canada Ltd. (“Snoke Distribution”), a corporation existing under the laws of Ontario (the "Merger"). Pursuant to the Merger, the Registrant acquired all of the outstanding common shares of Snoke Distribution through the issuance of common shares of the Registrant to the shareholders of Snoke Distribution.

As a result of the Merger and pursuant to the resolutions, Snoke Distribution has become a wholly-owned subsidiary of the Registrant and the Registrant issued shares of its common stock to shareholders of Snoke Distribution at a rate of 1 share of the Registrant’s common stock for each Snoke Distribution common share. Immediately prior to the Merger, the Registrant had 29,477,766 shares of common stock outstanding.

Following the Merger, the Registrant had 59,244,433 shares of common stock outstanding after the share exchange and the issuance of 29,766,667 common shares to the shareholders of Snoke Distribution, which included a private placement of $141,000 into Snoke Distribution.

At closing of Merger, the Registrant also closed a private placement of $135,000 at a price of $0.05 per Gilla common share, each entitled to a half warrant to purchase one common share at an exercise price of $0.10 per common share for a period of six months following the Merger. The private placement resulted in the issuance of 2,700,000 shares and 1,350,000 warrants of the Registrant’s common stock from treasury. Following the Merger and the private placement, the Registrant has 61,944,433 shares of common stock outstanding.

The transaction has been accounted for as a reverse merger, and Snoke Distribution is the acquiring company on the basis that Snoke Distribution’s senior management became the entire senior management of the merged entity and there was a change of control of the Company. In accordance with Accounting Standards Codification (“ASC”) 805-10-40, Business Combinations; Reverse Acquisitions, Snoke Distribution was the acquiring entity for accounting purposes. While the transaction is accounted for using the purchase method of accounting, in substance the transaction was a recapitalization of the Snoke Distribution’s capital structure. Following the reverse merger, the historical financial statements of Snoke Distribution became the historical financial statements of the Company.

3.	GOING CONCERN UNCERTAINTIES

The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying unaudited condensed consolidated financial statement, the Company has incurred a deficit accumulated during the development stage of $2,133,954, used $1,148,319 in cash for operating activities from date of inception through September 30, 2013. The ability of the Company to continue as a going concern is in doubt and dependent upon achieving a profitable level of operations or on the ability of the Company to obtain necessary financing to fund ongoing operations. Management believes that its current and future plans enable it to continue as a going concern for the next twelve months.

To meet these objectives, the Company continues to seek other sources of financing in order to support existing operations and expand the range and scope of its business. However, there are no assurances that any such financing can be obtained on acceptable terms and timely manner, if at all. The failure to obtain the necessary working capital would have a material adverse effect on the business prospects and, depending upon the shortfall, the Company may have to curtail or cease its operations.

The accompanying unaudited condensed consolidated financial statements do not include any adjustment to the recorded assets or liabilities that might be necessary should the Company have to curtail operations or be unable to continue in existence.

4.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of the results that may be expected for a full year. During the nine months ended September 30, 2013, the Company updated its revenue recognition policy and adopted a policy for inventory. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012, as filed with the Securities and Exchange Commission.

The accounting policies of the Company are in accordance with accounting principles generally accepted in the United States of America. Outlined below are those policies considered particularly significant:

(a) Basis of Consolidation

These unaudited interim condensed consolidated financial statements include the financial statements of Gilla Inc., Gilla Operations LLC, Snoke Distribution Canada Ltd. and its wholly-owned subsidiary Snoke Distribution USA LLC. All inter-company accounts and transactions are eliminated in preparing the consolidated financial statements.

(b) Foreign Currency Translation

The Company maintains its books and records in Canadian Dollars (CAD). The Company’s subsidiary in the USA maintains their books in U.S. Dollars (the reporting currency). The Company’s financial statements are converted to U.S. Dollars for consolidation purposes. The translation method used is the current rate method. Under the current rate method all assets and liabilities are translated at the current rate, stockholders’ equity accounts are translated at historical rates and revenues and expenses are translated at average rates for the reporting period. Due to the fact that items in the financial statements are being translated at different rates according to their nature, a translation adjustment is created. This translation adjustment has been included in Accumulated Other Comprehensive Income (Loss).

The exchange rates used to translate amounts in CAD into USD for the purposes of preparing the unaudited condensed consolidated financial statements were as follows:

	September 30, 2013		December 31, 2012		September 30, 2012

Period-end CAD: USD exchange rate	$	0.9706	$	1.0051	$	1.0171
Average Period CAD: USD exchange rate	$	0.9772	$	1.0008	$	0.9979

Basic earnings (loss) per share are computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period year computed under the provisions of Accounting Standards Codification subtopic 260-10, Earnings per Share (“ASC 260-10”). Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding plus common stock equivalents (if dilutive).

(d) Financial Instruments

Financial assets and financial liabilities are recognized in the statement of financial position when the Company has become party to the contractual provisions of the instruments.

The Company’s financial instruments consist of cash, accounts payable and accrued liabilities, loan from shareholder and a promissory note (classified as other financial liabilities). The fair values of these financial instruments approximate their carrying values. Initial and subsequent measurement and recognition of changes in the value of financial instruments depend on their initial classification:

The three levels of the fair value hierarchy are:

● Level 1	-	Unadjusted 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; and
● Level 3	-	Inputs that are not based on observable market data.

(e) Comprehensive Income or Loss

The Company reports comprehensive income or loss in its unaudited condensed consolidated financial statements. In addition to items included in net income or loss, comprehensive income or loss will include items charged or credited directly to stockholders’ equity, such as foreign currency translation adjustments and unrealized gains or losses on available for sale marketable securities.

(f) Property and Equipment

Property and Equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Costs include expenditures that are directly attributable to the acquisition of the asset. Gains and losses on disposal of an item of property and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment, and are recognized net within other income in statement of operations.

Depreciation is recognized in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property and equipment, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Company will obtain ownership by the end of the lease term.

The estimated useful lives for the current and comparative periods are as follows:

● Computer hardware	3 years
● Furniture and equipment	3 years

Depreciation methods, useful lives and residual values are reviewed at each financial year-end and adjusted if appropriate.

(g) Revenue Recognition

The Company recorded revenue when the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price to the customer is fixed and determinable, and collectability is reasonably assured. Delivery is not considered to have occurred until the customer assumes the risks and rewards of ownership. Customers take delivery at the time of shipment for terms designated free on board shipping point. For sales designated free on board destination, customers take delivery when the product is delivered to the customer's delivery site. Provisions for sales incentives, product returns, and discounts to customers are recorded as an offset to revenue in the same period the related revenue is recorded. The Company does not currently record a provision for product returns.

(h) Inventory

Inventory is stated at the lower of cost as determined by the first-in, first-out (FIFO) cost method, or market.

(i) Use of Estimates and Critical Judgements

Preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and related notes to financial statements. These estimates are based on management's best knowledge of current events and actions the Company may undertake in the future. Actual results may ultimately differ from such estimates. Significant estimates include accrued liabilities.

(j) Cash and Cash Equivalents

The Company considers all highly liquid debt instruments with a maturity of less than three months at purchase to be cash equivalents. The Company did not have any cash equivalents at September 30, 2013 and December 31, 2012. Cash balances at financial institutions are insured by the Federal Deposit Insurance Corporation (“FDIC”). At times, cash and cash equivalents may be uninsured or in deposit accounts that exceed the FDIC insurance limits. Periodically, the Company evaluates the credit worthiness of the financial institutions and has determined the credit exposure to be negligible.

(k) Reclassification

Certain reclassifications have been made to conform the prior period data to the current presentation. These reclassifications had no effect on reported net loss.

(l) Recent Accounting Pronouncements

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not expect the future adoption of any such pronouncements to have a significant impact on its results of operations, financial condition or cash flow.

5.	LOAN RECEIVABLE

On March 13, 2013, the Company entered into a factoring agreement with a third party in which the Company advanced $19,867 in cash to the party to purchase a receivable owing to that party from a customer (the “Receivable”) at face value. The Receivable purchased is required to be paid by the applicable customer on or before the date that is 30 days after the date of issue of the Receivable. In addition to payment of the account, the Company will receive an additional 2% of the Receivable.

If the Receivable is not paid on the date due, default Interest of 1/10th of 1% per day shall be calculated on the outstanding amount accruing from the due date until the amount is paid in full.

The receivable has not been paid and at September 30, 2013, default interest in the amount of $1,538 had been accrued.

During the nine month period ended September 30, 2013, the Company determined the loan receivable to be uncollectable and as a result recorded a loss of $21,405.

6. DEPOSIT FOR PURCHASE OF INVENTORY

During the nine months ended September 30, 2013, the Company made payments of $81,751 as deposits on Inventory. This amount is full payment for an order of inventory which was delivered subsequent to the end of the quarter.

7.	PROPERTY & EQUIPMENT

	September 30, 2013						December 31, 2012
	Cost		Accumulated Depreciation		Net		Net
Furniture and equipment	$	2,570	$	917	$	1,653	$	1,710
Computer hardware		2,100		800		1,300		1,724
	$	4,670	$	1,717	$	2,953	$	3,434

Depreciation expense for the three month period ended September 30, 2013 and 2012 amounted to $372 and $51 respectively. Depreciation expense for the nine month period ended September 30, 2013 and 2012 was $1,053 and $251 respectively.

8.	LOAN FROM SHAREHOLDER

The Company has outstanding loans from shareholders of $16,267 and $16,559 as at September 30, 2013 and December 31, 2012, respectively, which are non-interest bearing and have no specific terms of repayment. In addition, the Company has outstanding loans from shareholder of $160,149 and $231,277 as at September 30, 2013 and December 31, 2012, respectively bearing interest of 1% per month on a cumulative basis. The Company accrued net interest of $11,473 during the nine month period ended September 30, 2013 on these loans. During the nine month period ended September 30, 2013, the Company repaid $74,051of the loan from shareholder consisting of $63,089 in principal and $10,962 in interest. The amount was repaid with $24,265 cash and the remaining $48,700 was settled with the issuance of 1,391,371 common shares valued at $0.035 (of which 417,411 shares are to be issued as of September 30, 2013).

9.	NOTE PAYABLE, RELATED PARTY

On November 15, 2012, the Company entered into a 6% Convertible Revolving Credit Note (the “Note”), with a related party, for $225,000 due on or before February 15, 2014, bearing an interest rate of 6% per annum. Interest shall accrue and be added to the principal amount of the Note at the Maturity Date. The Note may be repaid, in whole or in part, without penalty with five days prior written notice. At any time subsequent to 30 days after the Maturity Date, the outstanding principal amount and any accrued and unpaid interest is convertible in to Common Stock at a conversion price of the lower of $0.01 per share or the average of the bid prices for the Common Stock of the Company for the 15 trading days prior to the notice of conversion.

At September 30, 2013 and December 31, 2012, the accrued interest on the above note was $11,758 and $1,479, respectively.

On September 30, 2013, the Company entered into a Secured Promissory Note (the “Secured Note”) with a related party for $200,000 due on or before January 1, 2015, bearing interest at a rate of 1.5% per month. Interest shall accrue and be added to the principal amount of the Secured Note. The related party will also be paid an establishment fee of 2.0%. The Secured Note is secured by a General Security Agreement.

10.	CONVERTIBLE DEBENTURE

On September 3, 2013, the Company issued a total of $425,000 of Unsecured Subordinated Convertible Debentures (“Debentures”). The Debentures mature on January 31, 2016 and bear interest at a rate of 12% per annum, which shall be paid quarterly in arrears. The December 31, 2013 interest payment will represent accrued and unpaid interest from the date of issuance. The Debentures shall be convertible into the Common Stock of the Company at a conversion rate of $0.07 per share at any time prior to the maturity date. Of theses $425,000 convertible debenture, $100,000 and $50,000 convertible debentures was issued in settlement of loans and accrued consulting fees, respectively.

11.	COMMITMENTS AND CONTINGENCIES

(a) Operating Lease

The future minimum payment under an operating lease for the use of a vehicle amounts to approximately $6,384. The lease expires on May 31, 2014. Minimum annual lease payments are as follows:

December 31, 2013	$	2,394
December 31, 2014		3,990
	$	6,384

(b) Rental Lease for Snoke Distribution US LLC

Effective April 23, 2012, the Company entered into an operating lease agreement for a rental premises in Hollywood, Florida, USA. The terms of this agreement are to be for a period of 2 years beginning May 1, 2012 and ending April 30, 2014 with payments made monthly and annual rent in year 1 of $37,800 and year 2 of $38,924 plus Florida sales tax of 7%. The Company has the option to extend the lease for 3 consecutive years at 3% annual increase in rental amounts.

Minimum annual lease payments under this lease are as follows:

December 31, 2013	$	10,415
December 31, 2014		13,886
	$	24,301

Litigation

The Company is subject to certain legal proceedings and claims, which arise in the ordinary course of its business. Although occasional adverse decisions or settlements may occur, the Company believes that the final disposition of such matters should not have a material adverse effect on its financial position, results of operations or liquidity. There was no outstanding litigation as of September 30, 2013.

12.	SHARE CAPITAL

The Company is authorized to issue 300,000,000 shares of $0.0002 par value common stock. As of September 30, 2013 and December 31, 2012, 65,394,510 and 62,277,766 shares were issued and outstanding, respectively. During the period ended September 30, 2013, the Company:

●	Issued 200,000 common shares for cash proceeds of $7,000. As part of this transaction the Company also received an additional $2,677 in cash for the subscription of 76,485 common shares valued at $0.035 which remain unissued;

●	Issued 942,784 common shares at an average price of $0.053 as settlement of $50,000 in consulting fees owing to an unrelated party;

●	Issued 1,000,000 common shares valued at $0.035 as settlement of $35,000 in related party loans. As part of this transaction the Company also settled $15,000 in related party loans for the subscription of 428,571 common shares valued at $0.035 which remain unissued.

●	Issued 973,960 common shares valued at $0.035 as settlement of loans from shareholder in the amount of $34,091. As part of this transaction the Company also settled an additional $14,609 of loans from shareholder for the subscription of 417,411 common shares valued at $0.035 which remain unissued.

13.

WARRANTS

During fiscal 2012, the Company issued warrants to acquire 1,516,667 common shares. The warrants were included in units issued as part of a private placement. Each unit of the private placement was comprised of one common share of the Company and one half purchase warrant. Each warrant entitles the holder to acquire one common share of the Company at a price of $0.10 per share. The warrants expire 6 months from date of issuance.

The following schedule summarizes the outstanding warrants at September 30, 2013 and December 31, 2012:

	September 30, 2013				December 31, 2012
	No. of Warrants		WAEP		No. of Warrants		WAEP
Beginning of year		1,516,667	$	0.10		-	$	-
Issued		-		-		1,516,667		0.10
Expired		(1,516,667)		(0.10)		-		-
End of year		-	$	-		1,516,667	$	0.10

The fair value of the issued warrants was determined using the Black-Scholes Option Pricing Model, however, no stock based compensation expense was recorded since the warrants were issued as a part of the private placement of common stock.

14.	RELATED PARTY TRANSACTIONS

Transactions with related parties are incurred in the normal course of business and are measured at the exchange amount, which is the amount of consideration established and agreed to between the related parties. The Company’s current and former officers and stockholders have advanced funds on a non-interest bearing basis to the Company for travel related and working capital purposes. The Company has not entered into any agreement on the repayment terms for these advances. As of September 30, 2013 and December 31, 2012, the amounts due to related parties were $723,885 and $246,655, respectively. During the nine months ended September 30, 2013, the Company expensed $133,230 as consulting fee payable to two directors of the Company, $58,334 as consulting fee payable to two officers of the Company, $243,640 as consulting fee payable to a company owned by two officers, one of which is also a director and expensed $8,342 to a consultant that is related to an officer and director of the Company. During the period the Company also expensed $58,055 to administrative payable to two individuals who are related to a director of the Company. During the period, the Company settled $50,000 of fees owing to an officer of the Company with the issuance of an unsecured subordinated convertible debenture.

During the nine months ended September 30, 2013, an officer and director of the Company made cash payments to and on behalf of the Company in amounts of $380,254. During the nine month period ended September 30, 2013, the Company repaid $210,000. The settlement included cash payments of $60,000, a settlement of $50,000 for 1,428,571 common shares and a settlement of $100,000 for the issuance of an unsecured subordinated convertible debenture. At December 31, 2012 the balance owing to this related party for cash advances was $95,024. At September 30, 2013 the balance owing was $332,736 including interest. Interest is accrued on a monthly basis at 1.5%; at September 30, 2013, $43,647 in interest had been accrued.

15.	FINANCIAL INSTRUMENT AND RISK FACTORS

(i) Credit Risk

It is management’s opinion that the Company is not exposed to significant credit risk as financial assets consist of cash placed with major stable financial institutions with investment grade ratings.

(ii) Liquidity Risk

Liquidity risk is the risk that a Company will encounter difficulty in meeting obligations associated with financial liabilities. The Company is exposed to this risk mainly in respect of its loan payable, notes payable, accounts payable and accrued liabilities.

(iii) Foreign Currency Risk

Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The company purchases inventory in a foreign currency, however no inventory purchased in a foreign currency exists on the balance sheet as at September 30, 2013. The Company does not use derivative financial instruments to reduce its exposure to this risk.

(iv) Interest Rate Risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company is exposed to interest rate risk on its fixed interest rate financial instruments. These fixed-rate instruments subject the Company to a fair value risk.

(v) Fair Value of Financial Instruments

The carrying values of cash, loans receivable, accounts payable and accrued liabilities and loans payable approximates their fair values due to the short term maturity of these financial instruments.

Cash in reflected on the statement of financial position at fair value and is classified as Level 1 hierarchy because measurements are determined using quoted prices in active markets for identical assets.

Fair value measurements of accounts payable and accrued liabilities, and loans payable are classified under Level 3 hierarchy because inputs are generally unobservable and reflect management’s estimates of assumptions that market participants would use in pricing the liabilities.

16.	SEGMENTED INFORMATION

The Company currently operates in only one business segment, namely designing, marketing and distributing of e-cigarettes and accessories in North America. All of the Company's assets are located in Canada.

17.	SUBSEQUENT EVENTS

Subsequent to the period ended September 30, 2013, the Company incorporated Charlie’s Club, Inc. (“Charlie’s Club”), a wholly-owned subsidiary under the laws of the State of Florida. Charlie’s Club will be primary operating subsidiary of the Company’s e-commerce sales initiative.

On October 8, 2013, the Company closed a private placement of $2,500 at a price of $0.05 per common share and issued 50,000 common shares.

On October 28, 2013, the Company's Board of Directors authorized the Company to re-issue the outstanding Unsecured Subordinated Convertible Debentures ("Debentures") at a conversion rate of $0.07 per share. The Company initially issued $425,000 Debentures at a conversion rate of $0.10 per share on September 3, 2013. All the other terms and conditions of the re-issued Debentures remained the same as the original issuance.

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

The information and financial data discussed below is derived from the unaudited interim condensed consolidated financial statements of Gilla Inc. for the three month period ended September 30, 2013. The unaudited interim condensed consolidated financial statements were prepared and presented in accordance with United States generally accepted accounting principles and are expressed in U.S. Dollars. The information and financial data discussed below is only a summary and should be read in conjunction with the unaudited interim condensed consolidated financial statements and related notes of Gilla Inc. contained elsewhere in this Report, which fully represent the financial condition and operations of Gilla Inc., but which are not necessarily indicative of future performance.

Overview

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.

Recent Developments

On November 21, 2012, Gilla Inc. (“Gilla” or the “Company” or the “Registrant”) merged with Snoke Distribution Canada Ltd., a corporation existing under the laws of Ontario (“Snoke Distribution”). Pursuant to the Merger, the Registrant acquired all of the outstanding common shares of Snoke Distribution through the issuance of common shares of the Registrant to the shareholders of Snoke Distribution.

Following the Merger, the Registrant has 59,244,433 shares of common stock outstanding after the share exchange and the issuance of 29,766,667 common shares to the shareholders of Snoke Distribution, which included a private placement of $141,000 into Snoke Distribution.

At closing, the Registrant also closed a private placement of $135,000 at a price of $0.05 per Gilla common share, each entitled to a half warrant to purchase one common share at an exercise price of $0.10 per common share for a period of six months following the Merger. The private placement resulted in the issuance of 2,700,000 shares and 1,350,000 warrants of the Registrant’s common stock from treasury. Following the Merger and the private placement, the Registrant has 61,944,433 shares of common stock outstanding.

On April13, 2013, Henry Kloepper was appointed as lead independent director of the board. Mr. Kloepper will also serve as chairman of the audit committee and compensation committee.

On September 30, 2013, the Company issued a $200,000 Secured Promissory Note (“Secured Note”). The Secured Note shall be due on January 1, 2015 and bear interest at a rate of 1.5% per month.

The Company is in the development stage as defined by Accounting Standards Codification subtopic 915-10 Development stage Entities (“ASC 915-10”) with its efforts principally devoted to developing a platform of prime quality energy assets. To date, the Company, has generated minimal sales revenues, has incurred expenses and has sustained losses. Consequently, its operations are subject to all the risks inherent in the establishment of a new business enterprise. For the period from inception through September 30, 2013, the Company has accumulated losses of $2,133,954.

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

Revenue

For the three and nine month periods ended September 30, 2013, the Company generated $27,936 in revenues. Since the Merger, this is the first three month period that the Company has generated revenues from the sales of e-cigarettes and accessories. Gross profit for the three and nine month periods ended September 30, 2013 was $4,611.

Operating Expenses

For the three month period ended September 30, 2013, the Company incurred administrative expense of $231,634, consulting fees to related parties of $159,909, depreciation expense of $372 and a foreign exchange gain of $9,063. Administrative costs were primarily comprised of rent, legal fees, travel expenses and subcontractor fees. For the three month period ended September 30, 2012, the Company incurred administrative expense of $165,141, consulting fees to related parties of $72,073, depreciation expense of $51 and a foreign exchange loss of $2,220. The increase in administrative expense of $66,493 and increase of consulting fees to related parties of $87,836 is attributable to the Company’s focus on generating sales of e-cigarettes and the result of consulting expenses increasing due to the hiring of officers and other consultants.

For the nine month period ended September 30, 2013, the Company incurred administrative expense of $493,946, consulting fees to related parties of $443,546, depreciation expense of $1,053, a foreign exchange gain of $2,532 and a loss on the write off of loan receivable of $21,405. Administrative costs were primarily comprised of rent, legal fees, travel expenses and subcontractor fees. For the nine month period ended September 30, 2012, the Company incurred administrative expense of $274,610, consulting fees to related parties of $117,273, depreciation expense of $251, and a foreign exchange loss of $2,220. The increase in administrative expense of $219,336 and increase of consulting fees to related parties of $326,273 is attributable to the Company’s focus in the e-cigarette business.

Loss from Operations

For the three month period ended September 30, 2013, the Company incurred a loss from operations of $378,241 as compared to $239,485 for the three month period ended September 30, 2012. For the nine month period ended September 30, 2013 we incurred a loss from operations of $952,807 as compared to $394,354 for the nine month period ended September 30, 2012. The increase is attributable to an increase in consulting fees and other administrative expenses as discussed above.

Other Expenses

For the three month period ended September 30, 2013, the Company incurred $35,149 in interest expense on demand, advances from related parties and other promissory notes for working capital provided as compared to interest expense of $9,388 for the three month period ended September 30, 2012.

For the nine month period ended September 30, 2013, the Company incurred $78,108 in interest expense on demand, advances from related parties and other promissory notes for working capital provided as compared to interest expense of $15,186 for the nine month period ended September 30, 2012.

Net Loss and Comprehensive Loss

Net loss amounted to $413,390 for the three month period ended September 30, 2013 compared to $248,873 for the comparative period in 2012. Net loss amounted to $1,030,915 for the nine month period ended September 30, 2013 compared to $409,540 for the comparative period in 2012. Net loss amounted to $2,129,052 for the period from November 29, 2011 (date of inception) through September 30, 2013.

Comprehensive loss amounted to $430,632 and $1,010,443 for the three and nine month periods ended September 30, 2013, compared to $244,171 and $402,947 for the three and nine month periods ended September 30, 2012. Comprehensive loss amounted to $2,111,654 for the period from November 29, 2011 (date of inception) through September 30, 2013. These figures include the foreign currency translation adjustment for conversion of financial statement of the Company from Canadian Dollars to U.S. Dollars.

Liquidity and Capital Resources

As at September 30, 2013, we had total assets of $312,258 (December 31, 2012: $15,677) consisting of cash of $210,071, prepaid and sundry assets of $250, deposits on inventory of $81,751, inventory of $17,233 and property and equipment of $2,953. The increase in assets at September 30, 2013 is primarily the result of cash from financing activities, inventory and inventory deposits. We had total liabilities of $1,966,764 (December 31, 2012: $818,117) consisting of accounts payable of $109,679, accrued liabilities of $51,379, accrued interest – related party of $55,405, a shareholder loan of $176,416, amounts due to related parties of $723,885, notes payable from related party of $425,000 and convertible debentures of $425,000. The increase in liabilities can be primarily attributed to an increase in consulting fees accrued to officers and other parties, an increase in interest accrued on loans on notes payable, the issuance of a $200,000 secured note payable and the issuance of convertible debentures in the amount of $425,000.

At September 30, 2013, we had negative working capital of $1,032,459 (December 31, 2012: $580,874) and an accumulated deficit during development stage of $2,133,954.

Net cash used in operating activities

For the nine month period ended September 30, 2013, net cash used in investing activities was $20,077 compared to $3,194 used during the nine month period ended September 30, 2012. The September 2013 amount is the result of the purchase of capital assets and factoring loans.

Net cash used in investing activities

For the nine month period ended September 30, 2013, net cash used in investing activities was $20,477 compared to $3,194 used during the nine month period ended September 30, 2012. Both amounts are the result of the purchase of capital assets.

Net cash flow from financing activities

Net cash provided by financing activities for the nine month period ended September 30, 2013 was $760,279, compared to $390,436 during the comparable period ended September 30, 2012. The increase was due to advances and a note payable being provided by an officer and director of the Company sale of debentures during the nine month period ended September 30, 2013.

Satisfaction of Our Cash Obligations for the Next 12 Months

Our unaudited condensed consolidated financial statements have been prepared assuming that we will continue as a going concern. The general business strategy of the Company is to design, market and distribute e-cigarettes and accessories. The continued operations of the Company depend upon its ability to generate sales for its products. Based on the Company’s current monthly expenses, management believes cash and cash equivalents on hand at September 30, 2013, will not be sufficient to meet the anticipated cash requirements for operations, funding our growth plans and repayment of debt obligations over the next few quarters. As a result, the Company intends to continue raising additional funds either through issuance of notes payable or the sale of its shares. No assurances can be made that these funds will be available on a timely basis or on terms acceptable to the Company.

The accompanying unaudited interim condensed consolidated financial statements have been prepared on a going concern basis, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business. The ability of the Company to continue as a going concern is in doubt and dependent upon achieving a profitable level of operations and on the ability of the Company to obtain necessary financing to fund ongoing operations.

Off-Balance Sheet Arrangements

We have no off balance sheet arrangements.

Inflation

We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could adversely affect our business, financial condition and results of operations.

Climate Change

We believe that neither climate change, nor governmental regulations related to climate change, have had, or are expected to have, any material effect on our operations.

Recent Accounting Pronouncements

We have reviewed all recently issued, but not yet effective, accounting pronouncements and do not expect the future adoption of any such pronouncements to have a significant impact on our results of operations, financial condition or cash flow.

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

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 notes.

Revenue Recognition

We record revenue when the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price to the customer is fixed and determinable, and collectability is reasonably assured. Delivery is not considered to have occurred until the customer assumes the risks and rewards of ownership. Customers take delivery at the time of shipment for terms designated free on board shipping point. For sales designated free on board destination, customers take delivery when the product is delivered to the customer's delivery site. Provisions for sales incentives, product returns, and discounts to customers are recorded as an offset to revenue in the same period the related revenue is recorded. The Company does not currently record a provision for product returns.

Inventory

Inventory is stated at the lower of cost as determined by the first-in, first-out cost method, or market.

Financial Instruments

Financial assets and financial liabilities are recognized in the statement of financial position when the Company has become party to the contractual provisions of the instruments.

The three levels of the fair value hierarchy are:

● Level 1 -	Unadjusted 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; and
● Level 3 -	Inputs that are not based on observable market data.

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 that are designed to ensure that material information required to be disclosed in our periodic reports filed under the Securities Exchange Act of 1934, as amended, or 1934 Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and to ensure that such information is accumulated and communicated to our management, including our chief executive officer/chief financial officer (principal financial officer) as appropriate, to allow timely decisions regarding required disclosure. During the three month period ended September 30, 2013 we carried out an evaluation, under the supervision and with the participation of our management, including the principal executive officer and the principal financial officer (principal financial officer), of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13(a)-15(e) under the 1934 Act. Based on this evaluation, because of the Company’s limited resources and limited number of employees, management concluded that our disclosure controls and procedures were ineffective as of September 30, 2013.

LIMITATIONS ON EFFECTIVENESS OF CONTROLS AND PROCEDURES

Our management, including our Chief Executive Officer and Chief Financial Officer (principal financial officer), does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include, but are not limited to, the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls 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. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Changes in Internal Controls

During the quarter ended September 30, 2013, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal controls 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, 2012.

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 Chief Executive Officer*

31.2 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 Chief 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 the Chief Executive Officer*

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

__________

*	Filed herewith

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

	GILLA INC.
	(Registrant)
November 14, 2013	By:	/s/ J. Graham Simmonds
		J. Graham Simmonds
		CEO and Director

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