GILLA INC. - FORM 10-Q - May 15, 2015

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EXCEL - IDEA: XBRL DOCUMENT - GILLA INC.	Financial_Report.xls
EX-32.2 - CERTIFICATION - GILLA INC.	glla_ex322.htm
EX-31.2 - CERTIFIATION - GILLA INC.	glla_ex312.htm
EX-31.1 - CERTIFICATION - GILLA INC.	glla_ex311.htm
EX-32.1 - CERTIFICATION - GILLA INC.	gllla_ex321.htm

UNITED STATES

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 March 31, 2015

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

For the transition period from _______________ to _______________

Commission File Number: 000-28107

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)

15540 Biscayne Blvd, North Miami, Florida		33160
(Address of Principal Executive Offices)		(Zip Code)

(416) 843-2881

Registrant’s telephone number, including area code

Not Applicable

(Former name, Former Address and Former Fiscal year, if changed since last report.)

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). þ Yes o No

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

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o (Do not check if a smaller reporting company)	Smaller reporting company	þ

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

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

93,448,178 Common Shares, $0.0002 Par Value, were issued and outstanding as of May 15, 2015.

GILLA, INC.

INDEX TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

		Page
PART I - Financial Information

Item 1.	Interim Financial Statements (unaudited)

	Consolidated Interim Balance Sheets as of March 31, 2015 (Unaudited) and December 31, 2014 (Audited)		3

	Unaudited Consolidated Interim Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2015 and 2014		4

	Unaudited Consolidated Interim Statement of Changes in Shareholders’ Deficiency for the Three Months Ended March 31, 2015		5

	Unaudited Consolidated Interim Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014		6

	Notes to Unaudited Condensed Consolidated Interim Financial Statements		7-20

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operation		22

Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Item 4.	Disclosure Control and Procedures

PART II - Other Information

Item 1.	Legal Proceedings

Item 1A.	Risk Factors

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

Item 3.	Defaults Upon Senior Securities

Item 4.	Mine Safety Disclosures

Item 5.	Other Information

Item 6.	Exhibits

SIGNATURES

Gilla Inc.

Consolidated Interim Balance Sheets

(Amounts expressed in US Dollars)

	March 31, 2015			December 31, 2014
	(unaudited)			(audited)
ASSETS
Current assets
Cash	$	1,234		$	496,724
Accounts receivable		33,248			37,421
Inventory (note 6)		76,649			78,901
Prepaid expenses and vendor deposits		284,289			378,252
Total current assets		395,420			991,298
Long term assets
Property and equipment (note 7)		1,411			1,864
Website development (note 8)		88,323			93,323
Total long term assets		89,734			95,187

Total assets	$	485,154		$	1,086,485

LIABILITIES
Current liabilities
Accounts payable	$	402,962		$	309,139
Accrued liabilities		51,748			69,017
Accrued interest - related parties (note 17)		57,966			39,279
Loans from shareholders (note 9)		534,093			34,739
Due to related parties (note 17)		1,442,041			1,144,789
Credit facility (note 10)		-			387,110
Total current liabilities		2,488,810			1,984,073

Long term liabilities
Loan from shareholders (note 9)		-			531,000
Due to related party (note 17)		-			100,000
Convertible debentures (note 12)		34,605			24,828
Total long term liabilities		34,605			655,828

Total liabilities		2,523,415			2,639,901

Going concern (note 2)
Related party transactions (note 17)
Commitments and contingencies (note 18)
Subsequent events (note 21)
STOCKHOLDERS’ DEFICIENCY

Common stock (note 13)	$	18,542		$	18,542
Additional paid-in capital		4,037,201			3,998,482
Shares to be issued (note 15)		53,096			-
Accumulated deficit		(6,372,740	)		(5,702,351	)
Accumulated other comprehensive income		225,640			131,911
Total shareholders’ deficiency		(2,038,261	)		(1,553,416	)

Total liabilities and stockholders’ deficiency	$	485,154		$	1,086,485

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

Gilla Inc.

Unaudited Consolidated Interim Statements of Operations and Comprehensive Loss

(Amounts expressed in US Dollars)

	For the Three Months Ended March 31, 2015			For the Three Months Ended March 31, 2014

Sales	$	3,804		$	19,261
Cost of goods sold		2,231			32,022
Gross profit (loss)		1,573			(12,761	)

Operating expenses
Administrative		365,639			400,599
Consulting fees - related parties (note 17)		176,994			161,828
Depreciation and amortization		5,449			700
Total operating expenses		548,082			563,127

Loss from operations		(546,509	)		(575,888	)

Other income (expenses):
Foreign exchange		10,084			(20,978	)
Loss on loan receivable written off (note 5)		-			19,867
Loss on settlement of debt		-			(27,563	)
Amortization of debt discount		(61,777	)		(8,847	)
Interest expense, net		(72,187	)		(51,074	)

Total other expenses		(123,880	)		(88,595	)

Net loss before income taxes		(670,389	)		(664,483	)
Income taxes		-			-
Net loss	$	(670,389	)	$	(664,483	)

Loss per share (basic and diluted)	$	(0.007	)	$	(0.010	)

Weighted average number of shares outstanding during the period		92,698,018			67,723,122


Comprehensive loss:
Net loss	$	(670,389	)	$	(664,483	)

Foreign exchange translation adjustment for the period		93,729			34,565

Comprehensive loss	$	(576,660	)	$	(629,918	)

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

Gilla Inc.

Unaudited Consolidated Interim Statement of Changes in Stockholders’ Deficiency

(Amounts expressed in US Dollars)

	Common Stock				Additional Paid-In		Shares To Be		Accumulated			Accumulated Other Comprehensive		Total Stockholders’
	Shares		Amount		Capital		Issued		Deficit			Income		Deficiency
Balance, December 31, 2014		92,698,018	$	18,542	$	3,998,482	$	-	$	(5,702,351	)	$	131,911	$	(1,553,416	)

Common shares to be issued for settlement of interest payable on convertible debentures at $0.15 per share		-		-		-		738		-			-		738

Common shares to be issued for settlement of interest payable on convertible debentures with a director at $0.15 per share		-		-		-		358		-			-		358

Common shares to be issued for conversion of convertible debentures at $0.07 per share		-		-		-		52,000		-			-		52,000

Stock based compensation		-		-		38,719		-		-			-		38,719

Foreign currency translation gain		-		-		-		-		-			93,729		93,729

Net loss		-		-		-		-		(670,389	)		-		(670,389	)

Balance, March 31, 2015		92,698,018	$	18,542	$	4,037,201	$	53,096	$	(6,372,740	)	$	225,640	$	(2,038,261	)

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

Gilla Inc.

Unaudited Consolidated Interim Statements of Cash Flows

(Amounts Expressed in US Dollars)

	For the Three Months Ended March 31, 2015			For the Three Months Ended March 31, 2014
CASH FLOWS FROM OPERATING ACTIVITIES :
Net loss	$	(670,389	)	$	(664,483	)
Items not requiring an outlay of cash
Depreciation		450			700
Amortization		4,999			-
(Gain) on loan receivable written-off		-			(19,867	)
Stock based compensation		38,719			-
Amortization of debt discount		61,777			8,847
Loss on settlement of debt					27,563
Common shares to be issued for settlement of interest		1,096			-
Common shares issued for services		-			65,000
Changes in operating assets and liabilities
Accounts receivable		-			56
Funds held in trust		-			20,000
Prepaid expenses and vendor deposits		93,305			(55,658	)
Inventory		2,231			32,708
Accounts payable		101,498			12,240
Accrued liabilities		(17,269	)		(29,599	)
Related party payables		138,177			119,753
Accrued interest-related party		18,687			(74,274	)
Net cash used in operating activities		(226,719	)		(557,014	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Website development		-			(20,000	)
Net cash used in investing activities		-			(20,000	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net cash acquired from Drinan Marketing Ltd.		-			8,812
Repayment of credit facility		(387,110	)		-
Loans to subsidiary prior to acquisition		-			(109,978	)
Shareholder loan received (paid)		7,106			452,583
Net proceeds from related parties		71,443			35,525
Repayment of related party note payable		-			(225,000	)
Proceeds from sale of convertible debentures		-			80,000
Net cash provided by financing activities		(308,561	)		241,942
Effect of exchange rate changes on cash		39,790			21,693

Net increase in cash	$	(495,490	)	$	(313,379	)

Cash at beginning of period		496,724			355,860

Cash at end of period	$	1,234		$	42,481

Supplemental Schedule of Cash Flow Information:
Cash paid for interest	$	6,943		$	96,051
Cash paid for income taxes	$	-		$	-

Non cash financing activities:
Common stock issued for payment of consulting fees payable	$	-		$	65,000
Debentures issued for settlement of related party and shareholder loans	$	-		$	53,000

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

Gilla Inc.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

March 31, 2015

(Amounts expressed in US Dollars)

1. NATURE OF OPERATIONS

Gilla Inc. (“Gilla”, the “Company” or the “Registrant”) 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.

On November 21, 2012, the Company closed the acquisition of Snoke Distribution Canada Ltd. (“Snoke Distribution”) through the issuance of 29,766,667 Common Shares (as defined in note 13) of the Registrant.

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.

On February 28, 2014, the Company closed the acquisition of all of the issued and outstanding shares of Drinan Marketing Limited (“DML”), a private limited company engaged in the sales and distribution of electronic cigarettes (“E-cigarettes”) in Ireland. The Company issued to the sellers 500,000 Common Shares valued at $0.11 per share and warrants for the purchase of 1,000,000 Common Shares of the Company. On October 6, 2014, the Company appointed liquidators for the purpose of winding up DML by way of a voluntary liquidation by reason of its liabilities.

On March 18, 2015, the Company entered into a letter of intent (the “LOI”) to acquire all of the issued and outstanding shares of a Florida based e-liquids manufacturer (the “Target”). The total purchase price would be $1,500,000 (the “Purchase Price”) payable to the vendors as (i) $600,000 in cash payable on closing, (ii) $600,000 in Common Shares of the Company issued on closing, and (iii) $300,000 in promissory notes issued to the vendors, due eighteen (18) months from the closing date, non-interest bearing and secured by common stock in the Company. The Purchase Price is subject to confirmatory due diligence of the Target’s overall business operations. The Company will maintain the existing management team and operational structure of the Target. The transaction is expected to close on or before May 15, 2015 or such other date as agreed between the parties. The Company has completed its due diligence and the parties have agreed to extend the closing until the formal closing documents are prepared.

The current business of the Company consists of the design, marketing and distribution of electronic cigarettes, vaporizers, e-liquids and accessories (collectively, “E-cigarettes”). An E-cigarette is an electronic inhaler meant to simulate and substitute for traditional cigarettes. E-cigarettes are often designed to mimic traditional smoking implements, such as cigarettes or cigars, in their use and/or appearance, but do not burn tobacco. E-cigarettes generally use a heating element that vaporizes a liquid solution. When used, some E-cigarettes release nicotine, while others merely release flavored vapor, which allows users to replicate the smoking experience, nicotine free. The Company has a two-pronged business model: white-label solutions, including branding, marketing and sales support; and e-commerce solutions like Charlie’s Club, a members-only online E-cigarette monthly subscription service featuring free hardware and no contracts.

2. GOING CONCERN

These unaudited condensed consolidated interim 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 shown in these unaudited condensed consolidated interim financial statements, at March 31, 2015, the Company has an accumulated deficit of $6,372,740 , a working capital deficiency of $2,093,390 and negative cash flows from operating activities of $226,719 for the three month period ended March 31, 2015. 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 the Company will not be able to continue as a going concern for the next twelve months without additional financing or increased revenues.

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 in a timely manner, if at all. 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.

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

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited condensed consolidated interim 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. These condensed consolidated interim 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, 2014, as filed with the U.S. 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 condensed consolidated interim financial statements include the accounts of the Company and its wholly-owned subsidiaries; Gilla Operations, LLC; Charlie’s Club, Inc.; Gilla Enterprises Inc.; Gilla Operations Worldwide Limited; Gilla Franchises, LLC and its wholly-owned subsidiary Gilla Biscayne, LLC; and Snoke Distribution Canada Ltd. and its wholly-owned subsidiary Snoke Distribution USA, LLC. All inter-company accounts and transactions have been eliminated in preparing these unaudited condensed consolidated interim financial statements.

(b) Foreign Currency Translation

The Company’s Canadian subsidiaries maintain their books and records in Canadian dollars (CAD) which is also their functional currency. The Company’s Irish subsidiary maintains its books in Euros (EUR) which is also its functional currency. The Company and its U.S. subsidiaries maintain their books and records in United States dollars (USD) which is both the Company’s functional currency and reporting currency. The accounts of the Company are translated into United States dollars in accordance with provisions of ASC 830, Foreign Currency Matters. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated using the exchange rate prevailing at the balance sheet date. Non-monetary assets and liabilities are translated using the historical rate on the date of the transaction. Revenue and expenses are translated at average rates in effect during the reporting periods. All exchange gains or losses arising from translation of these foreign currency transactions are included in net income (loss) for the period. In translating the financial statements of the Company's Canadian and Irish subsidiaries from their functional currencies into the Company's reporting currency of United States dollars, balance sheet accounts are translated using the closing exchange rate in effect at the balance sheet date and income and expense accounts are translated using an average exchange rate prevailing during the reporting period. Adjustments resulting from the translation, if any, are included in cumulative other comprehensive income (loss) in shareholders' equity. The Company has not, to the date of these unaudited condensed consolidated interim financial statements, entered into derivative instruments to offset the impact of foreign currency fluctuations.

Basic earnings (loss) per share are computed by dividing net income (loss) by the weighted average number of Common Shares outstanding for the period, 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) related to convertible preferred stock, stock options and warrants for each period. There were no common stock equivalent shares outstanding at March 31, 2015 and 2014 that have been included in the diluted loss per share calculation as the effects would have been anti-dilutive.

(d) Financial Instruments

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

The Company’s financial instruments consist of cash, funds held in trust, accounts receivable, accounts payable, accrued interest, due to related parties, accrued liabilities, note payable, convertible debentures, loan from shareholders and credit facility. The fair values of these financial instruments approximate their carrying value, due to their short term nature. Fair value of a financial instrument is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company’s financial instruments recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by FASB ASC No. 820, Fair Value Measurement and Disclosure (“ASC 820”), with the related amount of subjectivity associated with the inputs to value these assets and liabilities at fair value for each level, are as follows:

●	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.

Cash and funds held in trust are reflected on the consolidated balance sheets at fair value and classified as Level 1 hierarchy because measurements are determined using quoted prices in active markets for identical assets.

Fair value measurements of accounts receivable, accounts payable, accrued interest, due to related parties, accrued liabilities, note payable, convertible debentures, loan from shareholder and credit facility 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 financial instruments.

(e) Advertising Costs

In accordance with FASB ASC 720, the Company expenses the production costs of advertising the first time the advertising takes place. During the year ended December 31, 2014, $136,200 in production costs were incurred, $90,800 of which have been allocated to prepaid expenses and vendor deposits on the consolidated balance sheet, $45,400 in production costs were expensed during the year ended December 31, 2014 representing the release of the first phase of the Company’s online advertising campaign. The Company expenses all other advertising costs as incurred. During the three month period ended March 31, 2015, the Company expensed $46,782 (March 31, 2014: $71,639) as corporate promotions.

(f) Revenue Recognition

The Company records 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. For the Company’s membership program the Company records revenue on collection of the monthly fee and after delivery of the products has occurred. 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 as to date sales in the membership program have been minimal and any returns related to sales through the Company’s wholesale distribution channels become the responsibility of the manufacturer. Therefore, any related provision for product returns was not deemed material for the periods ended March 31, 2015 and 2014.

(g) Comprehensive Income or Loss

The Company reports comprehensive income or loss in its unaudited condensed consolidated interim financial statements. In addition to items included in net income or loss, comprehensive income or loss includes 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.

(h) Use of Estimates

The preparation of consolidated interim financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated interim financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from these estimates, and such differences could be material. The key sources of estimation uncertainty at the balance sheet date, which have a significant risk of causing a material adjustment to the carrying amounts of assets within the next financial year, include reserves and write downs of receivables and inventory, useful lives of property and equipment, impairment of goodwill, accruals, impairment of property and equipment, valuing stock based compensation, valuing equity securities, valuation of convertible debenture conversion options and deferred taxes and related valuation allowances. Certain of our estimates could be affected by external conditions, including those unique to our industry and general economic conditions. It is possible that these external factors could have an effect on our estimates that could cause actual results to differ from our estimates. The Company re-evaluates all of its accounting estimates at least quarterly based on the conditions and records adjustments when necessary.

(i) Recent Accounting Pronouncements

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and other than the below, 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.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 requires an entity to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the financial statements are available to be issued when applicable) and to provide related footnote disclosures in certain circumstances. ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter with early adoption permitted. We do not expect the adoption of ASU 2014-15 to have a material impact on our consolidated financial statements.

4. BUSINESS COMBINATION

On February 28, 2014, the Company closed the acquisition of all the issued and outstanding shares of DML, a private limited company organized under the laws of Ireland. DML is engaged in the sales and distribution of E-cigarettes in Ireland. The following summarizes the fair value of the assets acquired, liabilities assumed and the consideration transferred at the acquisition date:

Assets acquired:
Cash	$	8,828
Receivables		112,460
Inventory		60,777
Loan receivable		84,936
Fixed, assets		3,826
Goodwill		167,538
Total assets acquired	$	438,365

Liabilities assumed:		-
Accounts payable	$	253,247
Loans payable		130,118
Total liabilities assumed	$	383,365

Consideration - 500,000 Common Shares	$	55,000

In consideration for the acquisition, the Company issued 500,000 Common Shares at $0.11 per share and 1,000,000 warrants (“Warrants”), each to acquire one Common Share of the Company. The Warrants will vest upon DML achieving cumulative E-cigarette sales revenues of over $1,500,000 beginning on the closing date. The Warrants are to be exercisable over 3 years with an exercise price of $0.25 per Common Share.

5. LOAN RECEIVABLE

On March 13, 2013, the Company entered into a factoring agreement with DML, who at the time was a third party, in which the Company advanced $19,867 in cash to DML to purchase a receivable owing to DML from a customer (the “Receivable”) at face value. The Receivable purchased was required to be paid by the applicable customer on or before the date that is 30 days after the date of issuance of the Receivable. In addition to payment of the account, the Company was to receive an additional fee of 2% of the face amount of the Receivable. 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 is secured by a general security agreement covering all assets of DML and a first security interest in respect of all receivables purchased by the Company under the factoring agreement.

Default interest in the amount of $1,538 was accrued on the Receivable. During the year ended December 31, 2013, the Company determined the Receivable to be uncollectable and as a result recorded a loss of $21,405.

On February 28, 2014, the Company acquired DML. As a result, the Company reversed the write-off of the Receivable and recorded a gain of $19,867.

As a result of DML’s expected voluntary liquidation by reason of its liabilities, the Company wrote off the entire loan receivable from the previous shareholder of DML and recorded a loss on loan receivable of $85,717.

6. INVENTORY

Inventory consists of the following:

		March 31, 2015				December 31, 2014
E-cigarettes and accessories		$	76,649			$	78,901

During the year ended December 31, 2014, the Company wrote off the full value of DML’s inventory in the amount of $60,301 as a result of DML’s liquidation and impaired the inventory located in Florida in the amount of $41,157 due to inventory obsolescence. During the year ended December 31, 2014, the Company recorded an impairment of inventory of $101,458.

7. PROPERTY AND EQUIPMENT

	March 31, 2015						December 31, 2014
	Cost		Accumulated Depreciation		Net		Net
Furniture and equipment	$	2,459	$	2,058	$	401	$	595
Computer hardware		3,402		2,392		1,010		1,269
	$	5,861	$	4,450	$	1,411	$	1,864

Depreciation expense for the three month periods ended March 31, 2015 and 2014 amounted to $450 and $700 respectively.

8. WEBSITE DEVELOPMENT

	March 31, 2015						December 31, 2014
	Cost		Accumulated Amortization		Net		Net
Charlie’s Club Website	$	99,989	$	11,666	$	88,323	$	93,323

Amortization expense for the three month period ended March 31, 2015 and 2014 amounted to $4,999 and Nil respectively.

The estimated amortization expense for the next 4 years ending December 31, 2015, 2016, 2017 and 2018 approximates $19,998 per year, for the year ending December 31, 2019 it approximates $13,331.

9. LOANS FROM SHAREHOLDERS

The Company has outstanding loans from shareholders as follows:

	March 31, 2015		December 31, 2014
Non-interest bearing, unsecured, no specific terms of repayment	$	5,000	$	5,000
Bears interest of 10% per annum on a cumulative basis, secured by the assets of the Company, matures on January 1, 2016		100,000		100,000
Bears interest of 10% per annum on a cumulative basis, secured by the assets of the Company, matures on January 1, 2016		394,750		431,000
Bears interest of 1.5% per month on a cumulative basis, unsecured, no specific terms of repayment		34,343		29,739
	$	534,093	$	565,739

During the year ended December 31, 2014, the Company repaid $17,370 of loans from shareholders consisting of $13,569 in principal and $3,801 in interest. The amount was repaid with $13,935 of cash and amounts of $3,435 were settled with the issuance of $3,000 of Convertible Debentures (note 12), resulting in a $435 gain on settlement of debt.

The Company accrued interest of Nil during the three month period ended March 31, 2015 (March 31, 2014: $172) on this loan.

On February 13, 2014, the Company entered into a secured promissory note (the “Secured Note”) with a shareholder, whereby the Company agreed to pay the party the aggregate unpaid principal amount of CAD $500,000 (USD $394,750) on or before August 13, 2014, bearing interest at a rate of 10% per annum, such interest will accrue monthly and be added to the principal. The Secured Note is secured by a general security agreement over the assets of the Company. During the year ended December 31, 2014 the Company and the shareholder extended the maturity date of the Secured Note to January 1, 2016.

The Company accrued interest of $8,587 during the three month period ended March 31, 2015 (March 31, 2014: Nil) on the Secured Note which is included in accrued liabilities. During the year ended December 31, 2014, the Company settled $30,690 in interest on the Secured Note with the issuance of common shares.

On July 15, 2014, the Company entered into a secured promissory note (the “Secured Note No.2”) with a shareholder, whereby the Company agreed to pay the party the aggregate unpaid principal amount of $100,000 on or before July 18, 2014, bearing interest at a rate of 10% per annum, such interest will accrue monthly and be added to the principal. The Secured Note No.2 is secured by the general security agreement issued with the Secured Note. During the year ended December 31, 2014, the Company and the shareholder extended the maturity date of the Secured Note No.2 to January 1, 2016.

The Company accrued interest of $2,585 during the three month period ended March 31, 2015 (March 31, 2014:Nil) on the Secured Note No. 2 which is included in accrued liabilities. During the year ended December 31, 2014, the Company settled $2,111 in interest on the Secured Note No.2 with the issuance of common shares.

On August 15, 2014, the Company settled CAD $1,500 (USD $1,378) of non-interest bearing shareholder loans with the issuance of 10,919 Common Shares of the Company resulting in a loss of $260.

10. CREDIT FACILITY

On August 1, 2014, the Company entered into a revolving credit facility (the “Credit Facility”) with an unrelated party acting as an agent to a consortium of participants (the “Lender”), whereby the Lender would make a revolving credit facility in the aggregate principal amount of CAD $500,000 for the exclusive purpose of purchasing inventory for sale in the Company’s ordinary course of business to approved customers. The Credit Facility shall bear interest at a rate of 15% per annum on all drawn advances and a standby fee of 3.5% per annum on the undrawn portion of the Credit Facility. The Credit Facility shall mature on August 1, 2015 whereby the outstanding advances together with all accrued and unpaid interest theron shall be due and payable. On August 1, 2014, and in connection to the Credit Facility, the Company issued 250,000 warrants to purchase Common Shares of the Company exercisable over two years with an exercise price of $0.30 per Common Share. The Company’s Chief Executive Officer and Chief Financial Officer are both participants of the consortium of participants of the Credit Facility, each having committed to provide ten percent of the principal amount of the Credit Facility.

During the year ended December 31, 2014, the Company was advanced $387,110 (CAD $449,083) from the Credit Facility for the purchase of inventory including $77,453 (CAD $89,852) of advances from the Company’s Chief Executive Officer and Chief Financial Officer as their participation in the Credit Facility.

During the three month period ended March 31, 2015, the Company paid $6,943 of interest as a result of the Credit Facility.

On February 11, 2015, the Company fully repaid the amounts advanced from The Credit Facility.

11. NOTE PAYABLE - RELATED PARTY

On November 15, 2012, the Company entered into a convertible revolving credit note (the “Credit Note”), with a related party, for $225,000 due on or before February 15, 2014, bearing interest at a rate of 6% per annum payable at the maturity date. The Credit Note could 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 could be converted into 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.

On February 14, 2014, the Company repaid all amounts due under the Credit Note.

During the three month periods ended March 31, 2014 and 2013, the Company accrued Nil and $1,638 of interest on the Credit Note, respectively.

12. CONVERTIBLE DEBENTURES

On September 3, 2013, December 23, 2013 and February 11, 2014, the Company issued $425,000, $797,000 and $178,000 of unsecured subordinated convertible debentures (the “Convertible Debentures”), respectively. The Convertible Debentures mature on January 31, 2016 and bear interest at a rate of 12% per annum, which is payable quarterly in arrears. The Convertible Debentures are convertible into Common Shares of the Company at a fixed conversion rate of $0.07 per share at any time prior to the maturity date. Of the $178,000 Convertible Debentures issued on February 11, 2014, $3,000 were issued in settlement of loans from shareholders (note 9) and $50,000 was issued in settlement of loans from related parties (note 17).

As at December 31, 2013, the Company received $45,000 in advance for Convertible Debentures not yet issued. Of this amount $25,000 was received by the Company in cash and $20,000 was collected by the Company’s lawyer and held in trust. The Company received the funds held in trust on February 21, 2014. These Debentures were issued February 11, 2014.

The Company evaluated the terms and conditions of the Convertible Debentures under the guidance of ASC 815, Derivatives and Hedging. The conversion feature met the definition of conventional convertible for purposes of applying the conventional convertible exemption. The definition of conventional contemplates a limitation on the number of shares issuable under the arrangement. The instrument was convertible into a fixed number of shares and there were no down round protection features contained in the contracts.

Since a portion of the Convertible Debentures were issued as an exchange of nonconvertible instruments at the nonconvertible instruments maturity date, the guidance of ASC 470-20-30-19 & 20 was applied. The fair value of the newly issued Convertible Debentures was equal to the redemption amounts owed at the maturity date of the original instruments. Therefore there was no gain or loss on extinguishment of debt recorded. After the exchange occurred, the Company was required to consider whether the new hybrid contracts embodied a beneficial conversion feature (“BCF”).

For the face value $425,000 Convertible Debentures that were issued on September 3, 2013, the calculation of the effective conversion amount did not result in a BCF because the effective conversion price was greater than the Company’s stock price on the date of issuance, therefore no BCF was recorded. However, for the face value $797,000 Convertible Debentures that were issued on December 23, 2013 and the face value $178,000 Convertible Debentures that were issued on February 11, 2014, the calculation of the effective conversion amount did result in a BCF because the effective conversion price was less than the Company’s stock price on the date of issuance and a BCF in the amounts of $797,000 and $178,000, respectively, were recorded in additional paid-in capital. The BCF which represents debt discount is accreted over the life of the loan using the effective interest rate. For the three month period ended March 31, 2015, the Company recorded interest expense in the amount of $61,777 (March 31, 2014: $8,847) related to debt discount which includes $43,435 related to the conversion of convertible debentures in the aggregate amount of $52,000.

On April 15, 2014, the Company received forms of election whereby holders of the Convertible Debentures elected to convert a total of $50,000 into Common Shares of the Company at $0.07 per share pursuant to the Convertible Debenture offering. On May 30, 2014, the Company issued 714,286 Common Shares on the conversion of the Convertible Debentures.

On September 30, 2014, the Company received forms of election whereby holders of the Convertible Debenture elected to convert a total of $800,000 into Common Shares of the Company at $0.07 per share pursuant to the Convertible Debenture offering. On November 4, 2014, the Company issued 11,428,572 Common Shares on the conversion of the Convertible Debentures.

On November 10, 2014, the Company received forms of election whereby holders of the Convertible Debenture elected to convert a total of $275,000, into Common Shares of the Company at $0.07 per share pursuant to the Convertible Debenture offering. On November 20, 2014, the Company issued 3,928,571 Common Shares on the conversion of the Convertible Debentures.

On March 9, 2015, the Company received forms of election whereby holders of the Convertible Debenture elected to convert a total of $52,000, into Common Shares of the Company at $0.07 per share pursuant to the Convertible Debenture offering. At March 31, 2015, the 742,857 Common Shares related to the conversion were not yet issued, the Common Shares were issued subsequently on April 13, 2015.

13. COMMON STOCK

Authorized: 300,000,000 Common Shares of $0.0002 par value (the “Common Shares”)

Issued and Outstanding:

		March 31, 2015				December 31, 2014
92,698,018 Common Shares (December 31, 2014: 92,698,018)		$	18,542			$	18,542

The Company did not issue any Common Shares during the three month period ended March 31, 2015.

During the year ended December 31, 2014, the Company:

	●	Issued 200,000 Common Shares for settlement of $10,000 in consulting fees owing to an unrelated party.
	●	Issued 500,000 Common Shares valued at $0.035 per share for cash proceeds of $17,500;
	●	Issued 280,433 Common Shares valued at $0.1426 per share for settlement of $40,000 in consulting fees owing to an unrelated party;
	●	Issued 270,597 Common Shares valued at $0.1293 per share for settlement of $35,000 in consulting fees owing to an unrelated party;
	●	Issued 835,000 Common Shares valued at $0.10 per share for settlement of $83,500 owing as a result of the production costs of advertising;
	●	Issued 10,000 Common Shares valued at $0.10 per share for settlement of $1,000 owing to a related party as a result of the production costs of advertising;
	●	Issued 92,500 Common Shares valued at $0.19 per share for settlement of $17,500 in consulting fees owing to an unrelated party;
	●	Issued 500,000 Common Shares valued at $0.11 per share for the acquisition of Drinan Marketing Ltd.;
	●	Issued 55,000 Common Shares valued at $0.25 per share for settlement of $13,750 in consulting fees owing to an unrelated party;
	●	Issued 2,734,667 Common Shares valued at $0.15 per share for cash proceeds of $410,200;
	●	Issued 300,000 Common Shares valued at $0.18 per share as a prepayment of $54,000 in consulting fees to an unrelated party;
	●	Issued 10,919 Common Shares valued at $0.15 per share for settlement of $1,638 of shareholder loans;
	●	Issued 182,749 Common Shares valued at $0.15 per share for settlement at $27,412 in consulting fees owing to an unrelated party;
	●	Issued 63,559 Common Shares at $0.236 per share as compensation for $15,000 in consulting fees to an unrelated party;
	●	Issued 100,000 Common Shares at $0.16 per share as compensation for $16,000 in consulting fees to an unrelated party;
	●	Issued 10,357,143 Common Shares at $0.07 per share as a result of the conversion of $725,000 of Convertible Debentures;
	●	Issued 5,714,286 Common Shares at $0.07 per share to related parties as a result of the conversion of $400,000 of Convertible Debentures;
	●	Issued 638,978 Common Shares at $0.15 per share for settlement of $102,291 in interest payable to unrelated parties;
	●	Issued 277,370 Common Shares at $0.15 per share for settlement of $35,162 in interest payable to related parties;
	●	Issued 717,840 Common Shares at $0.15 per share for settlement of $107,676 in consulting fees payable to related parties;
	●	Issued 800,000 Common Shares at a fair value of $0.15 per share as compensation for consulting fees to an unrelated party in the amount of $120,000;
	●	Issued 500,000 Common Shares at $0.15 per share for settlement of $75,000 in consulting fees to a related party; and
	●	Issued 490,000 Common Shares at $0.15 per share for cash proceeds of $73,500.

14. WARRANTS

The following schedule summarizes the outstanding warrants:

	March 31, 2015				December 31, 2014
	Warrants Outstanding		Weighted Average Exercise Price		Warrants Outstanding		Weighted Average Exercise Price
Beginning of period		1,510,640	$	0.25		-	$	-
Issued		250,000		0.30		1,510,640		0.25
Expired		-		-		-		-
End of period		1,760,640	$	0.26		1,510,640	$	0.25

(a) On February 28, 2014, as part of the acquisition of DML, the Company issued Warrants to acquire 1,000,000 Common Shares of the Company. The Warrants will vest upon DML achieving cumulative E-cigarette sales revenues of over $1,500,000 beginning on the closing date. The Warrants are to be exercisable over 3 years with an exercise price of $0.25 per Common Share. No value has been assigned as the Company has since placed DML into voluntary liquidation, and as a result, there is 0% probability of achieving the vesting provision.

(b) On July 25, 2014, and in connection to the private placement, the Company issued 10,640 warrants to purchase Common Shares of the Company exercisable over one year with an exercise price of $0.15 per Common Share.

The fair value of these issued warrants of $2,615 was determined using the Black Scholes option-pricing model with the following weighted average assumptions:

Risk-free interest rate		0.32	%
Expected life	1 year
Estimated volatility in the market price of the Common Shares		247	%
Dividend yield	Nil

The Company fully expensed the value of the warrants in stock based compensation which has been recorded as an administrative expense.

(c) On August 1, 2014, and in connection to the Credit Facility, the Company issued 250,000 warrants to purchase Common Shares of the Company exercisable over two years with an exercise price of $0.30 per Common Share.

The fair value of these issued warrants of $59,240 was determined using the Black Scholes option-pricing model with the following weighted average assumptions:

Risk-free interest rate		0.69	%
Expected life	2 years
Estimated volatility in the market price of the Common Shares		357	%
Dividend yield	Nil

The Company booked the value of the warrants as prepaid to be expensed over the life of the Credit Facility. During the three month period ended March 31, 2015, the Company expensed $14,810 in stock based compensation which has been recorded as an administrative expense.

(d) On November 10, 2014, and in connection to the Secured Note and Secured Note No. 2 (together, the “Secured Notes”), the Company issued 250,000 warrants to purchase Common Shares of the Company exercisable over 14 months with an exercise price of $0.20 per Common Share.

The fair value of these issued warrants of $41,991 was determined using the Black Scholes option-pricing model with the following weighted average assumptions:

Risk-free interest rate		0.34	%
Expected life	1.14 years
Estimated volatility in the market price of the Common Shares		237	%
Dividend yield	Nil

The Company booked the value of the warrants as prepaid to be expensed over the life of the Secured Notes. During the three month period ended, the March 31, 2015 Company expensed $9,063 in stock based compensation which has been recorded as an administrative expense.

(e) On January 30, 2015, and in connection to a supply and distribution agreement, the Company issued 250,000 warrants to purchase Common Shares of the Company exercisable over two years with an exercise price of $0.30 per Common Share.

The fair value of these issued warrants of $38,719 was determined using the Black Scholes option-pricing model with the following weighted average assumptions:

Risk-free interest rate	0.71	%
Expected life	2 years
Estimated volatility in the market price of the Common Shares	320	%
Dividend yield	Nil

The Company fully expensed the value of the warrants in stock based compensation which has been recorded as an administrative expense.

15. SHARES TO BE ISSUED

At March 31, 2015, the Company had $53,096 in unissued share liability, consisting of the following:

	●	The Company settled $738 of interest payable on Convertible Debentures at $0.15 per share, the Common Shares were issued on April 13, 2015;
	●	The Company settled $358 of interest payable on Convertible Debentures with a Director of the Company at $0.15 per share, the Common Shares were issued on April 13, 2015; and
	●	The Company converted $52,000 of Convertible Debentures at $0.07 per share, the Common Shares were issued on April 13, 2015.

At December 31, 2014, the Company had no unissued share liability.

16. DECONSOLIDATION OF SUBSIDIARY

On October 6, 2014, the Company’s wholly owned subsidiary DML held a meeting of DML’s creditors, whereby DML, with the approval of the Company as its sole shareholder, agreed that by reason of its liabilities, DML be wound up by way of a voluntary liquidation. Mr. Aengus Burns of the accounting firm of Grant Thornton and Mr. Patric Black of the accounting firm of CB Accounting Services were appointed as joint liquidators for the purposes of the winding up of DML. In accordance with Accounting Standards Codification (“ASC”) 810, when a subsidiary becomes subject to the control of a government, court, administrator, or regulator, deconsolidation of that subsidiary is required. The Company has therefore deconsolidated DML from its balance sheet as of October 6, 2014. The operations of DML for the period from the acquisition date of February 28, 2014 to the deconsolidation date of October 6, 2014 are included in the operations of the Company. The Company believes it has no responsibility for the liabilities of DML.

As a result of the loss of control and resulting deconsolidation the Company recorded a gain on deconsolidation in the amount of $126,867. The Company also wrote off its investment in Drinan in the amount of $55,000, the intercompany receivable owing from DML in the amount of $233,659 and also the Company released $34,036 in currency translation adjustments retained in other comprehensive income into income.

17. 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.

(a)

The Company’s current and former officers and shareholders have advanced funds on an unsecured, non-interest bearing basis to the Company, unless stated otherwise below, for travel related and working capital purposes. The Company has not entered into any agreement on the repayment terms for these advances.

Advances from related parties were as follows:

	March 31, 2015		December 31, 2014
Advances by and amounts payable to Officers of the Company, two of which are also Directors	$	261,240	$	133,820
Advances by and consulting fees payable to a corporation owned by two Officers of the Company, one of which is also a Director		596,897		523,824
Consulting fees owing to persons related to an Officer who is also a Director of the Company		46,097		49,255
Advances by Officers of the Company, one of which is also a Director, bears interest at 1.5% per month		463,614		401,264
Amounts payable to a corporation related by virtue of a common Officer of the Company		45,693		30,294
Consulting fees and director fees payable to Directors of the Company		28,500		6,332
	$	1,442,041	$	1,144,789

During the year ended December 31, 2014, the Company settled $50,000 of amounts owing to an Officer of the Company with the issuance of a $50,000 Convertible Debenture (note 12).

During the year ended December 31, 2014, the Company settled $220,075 of the loans owing to an Officer and Director of the Company with cash.

During the year ended December 31, 2014, the Company settled $40,379 of amounts owing to persons related to a Director of the Company with the issuance of 269,190 Common Shares at $0.15 (note 13).

During the year ended December 31, 2014, the Company settled $142,298 of amounts owing to Directors of the Company with the issuance of 948,650 Common Shares at $0.15 (note 13).

During the year ended December 31, 2014, the Company owed an amount of $100,000 to an Officer and Director of the Company. The amount is non-interest bearing and payable on January 1, 2016.

(b)	Interest accrued to related parties were as follows:

	March 31, 2015		December 31, 2014

Interest accrued on advances by Officers of the Company, one of which is also a Director	$	57,966	$	39,279
	$	57,966	$	39,279

c)	Transactions with related parties were as follows:

During the three month period ended March 31, 2015, the Company expensed Nil (March 31, 2014: $3,761) in rent expense payable to a corporation related by virtue of a common Officer of the Company. The Company also expensed $29,187 (March 31, 2014: $47,055) in travel and entertainment expenses incurred by Officers and Directors of the Company.

During the year ended December 31, 2014, the Company received $21,000 in cash proceeds from a Director of the Company as part of a private placement at $0.15. As a result the Company issued 140,000 Common Shares.

During the three month period ended March 31, 2015, the Company settled $358 of interest payable on Convertible Debentures with a Director of the Company at $0.15 per share, the Common Shares were issued on April 13, 2015.

The Company expensed consulting fees payable to related parties as follows:

	March 31. 2015		March 31, 2014
Directors	$	38,250	$	33,900
Officers		27,322		-
Corporation owned by two Officers, one of which is also a Director		95,505		108,428
Persons related to a Director		15,917		19,500
	$	176,994	$	161,828

The Company’s Chief Executive Officer and Chief Financial Officer are both participants of the consortium of participants of the Credit Facility, each having committed to provide ten percent of the principal amount of the Credit Facility (see note 10).

18. COMMITMENTS AND CONTINGENCIES

a) Operating Lease

The future minimum payment under an operating lease for the use of a vehicle amounts to approximately $799 per month. The lease expires on April 30, 2016. Minimum annual lease payments are as follows:

2015	$	7,190
2016		3,196
	$	10,386

b) Rental Leases

Effective August 15, 2014, the Company entered into an operating lease agreement for a rental premises in Miami, Florida, USA. The terms of this agreement are to be for a period of 2 years commencing on August 15, 2014 and ending August 14, 2016 with payments made monthly and annual rent in year 1 of $28,020 and year 2 of $30,420. The landlord waived and forgave payment for the first month of the operating lease as part of the agreement. The Company has a one time option to extend the lease for an additional 2 year period with an annual rent increase of $1,200 per each year of the extended term.

2015	$	21,540
2016		21,548
	$	43,087

Effective September 17, 2014, the Company entered into a rental lease agreement for a rental premises in Dublin, Ireland. The terms of this agreement are for a period of 1 year commencing on September 17, 2014 and ending on September 16, 2015 with payments made monthly and annual rent in the 1 year of EUR 22,200.

2015

12,787

c) 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 March 31, 2015.

d) Consulting Agreement

The Company entered into a consulting services agreement with a related party on April 1, 2013. The Company agreed to pay fees with respect to various professional services to be provided to it under the agreement. The agreement may be terminated by either party by notice in writing to the other party given not less than 90 days prior to the effective date of termination.

19. FINANCIAL INSTRUMENT

i) Credit Risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Company’s credit risk is primarily attributable to fluctuations in the realizable values of its cash and accounts receivable. Cash accounts are maintained with major international financial institutions of reputable credit and therefore bear minimal credit risk. The Company minimizes its exposure to credit risk related to its receivables by requiring all orders to be prepaid before delivery of the product.

(ii) Liquidity Risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company’s approach to managing liquidity risk is to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company’s reputation. The Company manages liquidity risk by closely monitoring changing conditions in its investees, participating in the day to day management and by forecasting cash flows from operations and anticipated investing and financing activities.

(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, at March 31, 2015, the Company included $174 in inventory purchased in a foreign currency on its balance sheet. 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.

20. SEGMENTED INFORMATION

The Company currently operates in only one business segment, namely, designing, marketing and distributing E-cigarettes, vaporizers, e-liquids and accessories in North America and Ireland. Total assets by geographic location are as follows:

	March 31, 2015		December 31, 2014
Canada	$	196	$	5,524
United States		449,476		645,383
Ireland		37,713		435,578
	$	487,385	$	1,086,485

Total sales by geographic location are as follows:

	March 31, 2015		March 31, 2014
Canada	$	-	$	-
United States		3,804		-
Ireland		-		19,261
	$	3,804	$	19,261

21. SUBSEQUENT EVENTS

On April 13, 2015, the Company issued 742,857 Common Shares at a price of $0.07 per share, as a result of elections received on March 9, 2015 to convert $52,000 of the Convertible Debentures.

On April 13, 2015, the Company issued 7,303 Common Shares at a price of $0.15 per share, related to the settlement of $1,096 in interest payable on the Convertible Debentures.

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

The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q (this “Report”). This Report contains certain forward-looking statements and the Company's future operating results could differ materially from those discussed herein. Our disclosure and analysis included in this Report concerning our operations, cash flows and financial position include forward-looking statements. Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expect”, “anticipate”, “intend”, “plan”, “believe”, “estimate”, “may”, “project”, “will likely result”, and similar expressions are intended to identify forward-looking statements. Such forward-looking statements include (i) the ability to raise additional capital; and (ii) expectations regarding anticipated growth. Such forward-looking statements are subject to certain risks, uncertainties and assumptions, and are more fully described under “Part I, Item 1A - Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2014. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. In any event, these and other important factors, including those set forth in Item 1A – “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2014 may cause actual results to differ materially from those indicated by our forward-looking statements. We assume no obligation to update or revise any forward-looking statements we make in this Report, except as required by applicable securities laws.

Except as otherwise stated or required by the context, references in this document to “Gilla” the “Registrant”, the “Company,” “we,” and “our” refer to Gilla Inc.

Overview

Gilla was incorporated under the laws of the state of Nevada on March 28, 1995 under the name of Truco, Inc. The Company later changed its name to Web Tech, Inc., and then to Cynergy, Inc., Mercantile Factoring Credit Online Corp., Incitations, Inc., Osprey Gold Corp. and to its present name. The Company adopted the present name, Gilla Inc., on February 27, 2007. Gilla’s address is 15540 Biscayne Blvd, North Miami, Florida 33160.

Recent Developments

On January 30, 2015, the Company entered into a supply and distribution agreement with an e-cigarette company distributing primarily to the United Kingdom, whereby the Company is to supply white label products for the clients existing brand. In connection with this agreement, the Company issued 250,000 warrants to purchase Common Shares of the Company exercisable over two years with an exercise price of $0.30 per Common Share.

On March 9, 2015, the Company received forms of election whereby holders of its 12% unsecured subordinated convertible debentures (the “Convertible Debentures”) elected to convert a total of $52,000 of the Convertible Debentures into Common Shares of the Company pursuant to the terms of the Convertible Debentures. On April 13, 2015, the Company issued 742,857 Common Shares at a price of $0.07 per Common Share, as a result of these elections received on March 9, 2015 to convert $52,000 of the Convertible Debentures.

On March 9, 2015, the Company settled $1,096 in interest payable to holders of the Convertible Debentures and issued 7,303 Common Shares at a price of $0.15 per Common Share on April 13, 2015.

On March 18, 2015, the Company entered into a letter of intent to acquire all of the issued and outstanding shares of a Florida based e-liquids manufacturer (the “Target”). The total purchase price would be $1,500,000 (the “Purchase Price”) payable to the vendors as (i) $600,000 in cash payable on closing, (ii) $600,000 in common stock of the Company issued on closing, and (iii) $300,000 in promissory notes issued to the vendors, due eighteen (18) months from the closing date, non-interest bearing and secured by shares of common stock of the Company. The Purchase Price is subject to confirmatory due diligence of the Target’s overall business operations. The Company will maintain the existing management team and operational structure of the Target. The transaction was expected to close on or before May 15, 2015 or such other date as agreed between the parties. As at the date of this Report, the Company has completed its due diligence and the parties have agreed to extend the closing until the formal closing documents are prepared.

Subsequent Events

On May 5, 2015, Ashish Kapoor was appointed as Interim Corporate Secretary of the Company following the resignation of Carrie J. Weiler from her position as the Corporate Secretary of the Company.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND MARCH 31, 2014

Revenue

For the three month period ended March 31, 2015, the Company generated $3,804 in sales from the white label sales of electronic cigarettes, vaporizers, e-liquids and accessories (collectively, “E-cigarettes”) as compared to $19,261 in sales for the three month period ended March 31, 2014. For the three month period ended March 31, 2015, E-cigarette sales of $3,804 was generated in the United States. For the three month period ended March 31, 2014, E-cigarette sales of $19,261 was generated in Ireland.

The Company’s cost of goods sold for the three month period ended March 31, 2015 was $2,231 which represents E-cigarette products and the related packaging as compared to $32,022 for the three month period ended March 31, 2014. Gross profit for the three month period ended March 31, 2015 was $1,573 as compared to a loss of $12,761 for the comparative period. The Company incurred higher than usual cost of goods sold in the three month period ended March 31, 2014 due to one-time expenses related to packaging setup for white label clients.

Operating Expenses

For the three month period ended March 31, 2015, the Company incurred administrative expenses of $365,639, consulting fees to related parties of $176,994 and depreciation and amortization expense of $5,449. Administrative costs were primarily comprised of rent, legal and audit fees, marketing fees, travel expenses and subcontractor fees. Total operating expenses for the three month period year ended March 31, 2015 were $548,082. For the three month period ended March 31, 2014, the Company incurred administrative expenses of $400,599, consulting fees to related parties of $161,828 and depreciation and amortization expense of $700. Total operating expenses for the three month period ended March 31, 2014 were $563,127. The increase in consulting fees due to related parties of $15,166 is attributable to the effects of foreign exchange translation.

Loss from Operations

For the three month period ended March 31, 2015 the Company incurred a loss from operations of $546,509 as compared to a loss from operations of $575,888 for the three month period ended March 31, 2014 due to the reasons discussed above.

Other Expenses

For the three month period ended March 31, 2015, the Company incurred a foreign exchange gain of $10,084, amortization of debt discount of $61,777 and interest expense of $72,187. For the three month period ended March 31, 2014, the Company incurred a foreign exchange loss of $20,978, amortization of debt discount of $8,847, gain on loan receivable written off of $19,867, loss on settlement of debt of $27,563 and interest expense of $51,074. For the three month period ended March 31, 2015, the Company incurred total other expenses of $123,880 as compared to $88,595 for the three month period ended March 31, 2014.

Net Loss and Comprehensive Loss

Net loss amounted to $670,389 for the three month period ended March 31, 2015 compared to a loss of $664,483 for the three month period ended March 31, 2014.

Comprehensive loss amounted to $576,660 for the three month period ended March 31, 2015 compared to a loss of $629,918 for the three month period ended March 31, 2014. The change in comprehensive loss compared to net loss was due to foreign currency translation adjustments resulting from the Company’s translation of financial statements from Canadian dollars and Euros to U.S. dollars.

Inflation

Through the period covered by this Report, inflation has not had a significant impact on the Company’s net sales and revenues and on income from continuing operations.

Liquidity and Capital Resources

As at March 31, 2015, the Company had total assets of $485,154 (compared to total assets of $1,086,485 at December 31, 2014) consisting of cash of $1,234, accounts receivable of $33,248, inventory of $76,649, prepaid expenses and vendor deposits of $284,289, property and equipment of $1,411 and website development of $88,323. The decrease in assets at March 31, 2015 from December 31, 2014, is primarily the result of the repayment of the credit facility during the three month period ended March 31, 2015.

As at March 31, 2015, the Company had total liabilities of $2,523,415 (compared to total liabilities of $2,639,901 at December 31, 2014) consisting of accounts payable of $402,962, accrued liabilities of $51,748, accrued interest due to related parties of $57,966, loans from shareholders of $534,093, amounts due to related parties of $1,442,041 and Convertible Debentures of $34,605.

At March 31, 2015, the Company had negative working capital of $2,093,390 and an accumulated deficit of $6,372,740.

As at December 31, 2014, the Company had total assets of $1,086,485 consisting of cash of $496,724, accounts receivable of $37,421, inventory of $78,901, prepaid expenses and vendor deposits of $378,252, property and equipment of $1,864 and website development of $93,323.

As at December 31, 2014, the Company had total liabilities of $2,639,901 consisting of accounts payable of $309,139, accrued liabilities of $69,017, accrued interest due to related parties of $39,279, loans from shareholders of $34,739, amounts due to related parties of $1,144,789, advances on Credit Facility of $387,110, long term loans from shareholders of $531,000, long term amounts due to a related party of $100,000 and Convertible Debentures of $24,828.

At December 31, 2014, the Company had negative working capital of $992,775 and an accumulated deficit of $5,702,351.

Net cash used in operating activities

For the three month period ended March 31, 2015, the Company used cash of $226,719 (compared to $557,014 of cash used in operating activities during the three month period ended March 31, 2014) in operating activities to fund administrative, marketing and sales. The decrease is attributable to the results of operations and changes in the operating assets and liabilities as discussed above.

Net cash used in investing activities

For the three month period ended March 31, 2015, net cash used in investing activities was $nil. For the three month period ended March 31, 2014, net cash used in investing activates was $20,000 attributable to website development.

Net cash flow from financing activities

For the three month period ended March 31, 2015, net cash used by financing activities was $308,561 (see “Credit Facility”) compared to net cash provided by financing activities of $241,942 for the three month period ended March 31, 2014.

Credit Facility

During the three month period ended March 31, 2015, the Company paid $6,943 of interest on its borrowings under the Credit Facility.

On February 11, 2015, the Company fully repaid the amounts advanced from the Credit Facility.

Satisfaction of Our Cash Obligations for the Next 12 Months

These unaudited condensed consolidated interim 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 shown in these unaudited condensed consolidated interim financial statements, at March 31, 2015, the Company has an accumulated deficit of $6,372,740, a working capital deficiency of $2,093,390 and negative cash flows from operating activities of $226,719 for the three month period ended March 31, 2015. 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 the Company will not be able to continue as a going concern for the next twelve months without additional financing or increased revenues.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

Recent Accounting Pronouncements

CRITICAL ACCOUNTING POLICIES

Basis of Consolidation

Foreign Currency Translation

Earnings (Loss) Per Share

Financial Instruments

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

● 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.

Advertising Costs

Revenue Recognition

Comprehensive Income or Loss

Use of Estimates

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

This item is not applicable to smaller reporting companies.

ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our filings with the Securities and Exchange Commission (SEC) is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

As of the end of the period covered by this Report, and under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on this evaluation, we believe that disclosure controls and procedures were not effective as of March 31, 2015, due to our limited resources and staff.

Limitations on Effectiveness of Controls and Procedures

Our management, including our Chief Executive Officer (Principal 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 March 31, 2015, 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

The Company is not currently a party in any material legal proceeding or governmental regulatory proceeding nor are we currently aware of any pending or potential material legal proceeding or governmental regulatory proceeding proposed to be initiated against us.

ITEM 1A. RISK FACTORS

There have been no material changes in the Company’s 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, 2014.

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

During the period covered by this Report, we did not have any sales of securities in transactions that were not registered under the Securities Act of 1933, as amended, (the “Securities Act”) that have not been previously reported in a Form 8-K, Form 10-Q or Form 10-K, except for the following:

Subsequent Events

On March 9, 2015, the Company received forms of election whereby holders of the Convertible Debentures elected to convert a total of $52,000 of the Convertible Debentures into Common Shares of the Company pursuant to the terms of the Convertible Debentures. On April 13, 2015, the Company issued 742,857 Common Shares at a price of $0.07 per Common Share, as a result of these elections received on March 9, 2015 to convert $52,000 of the Convertible Debentures.

On March 9, 2015, the Company settled $1,096 in interest payable to holders of the Convertible Debentures and issued 7,303 Common Shares at a price of $0.15 per Common Share on April 13, 2015.

The Company issued all the foregoing Common Shares in reliance upon the exemption from the registration requirements of the Securities Act provided by Section 4(2) of the Securities Act or Regulation D promulgated thereunder.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

On May 14, 2015, Ernest Eves resigned as a director and as the Chairman of the Board of the Company. On May 14, 2015, the Board of Directors accepted his resignation and authorized compensation to Mr. Eves, on account of his service to the Company, in the amount of $50,000. This compensation will be paid in the form of common shares of the company, at a price per share of $0.15.

In addition, on May 14, 2015, the Board of Directors appointed J. Graham Simmonds to serve as Chairman of the Board. Mr. Simmonds has served as a director and as the Chief Executive Officer of the Company since November 15, 2012. His business background is described in Item 10 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

ITEM 6. EXHIBITS

			Incorporated by Reference
Exhibit Number	Exhibit Description	Filed Herewith	Form	Exhibit	Filing Date

31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	X

31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	X

32.1	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*	X

32.2	Certifications of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*	X

101.INS	XBRL Instance Document	X

101.SCH	XBRL Taxonomy Extension Schema	X

101.CAL	XBRL Taxonomy Extension Calculation Linkbase	X

101.DEF	XBRL Taxonomy Definition Linkbase	X

101.LAB	XBRL Taxonomy Extension label Linkbase	X

101.PRE	XBRL Taxonomy Extension Presentation Linkbase	X

* This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act.

SIGNATURES

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

	GILLA INC.
	(Registrant)

May 15, 2015	By:	/s/ J. Graham Simmonds
		Name: J. Graham Simmonds
		Title: Chief Executive Officer

	By:	/s/ Ashish Kapoor
		Name: Ashish Kapoor
		Title: Chief Financial Officer and Chief Accounting Officer

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