UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





FORM 10-K





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





For the Fiscal Year Ended December 31, 2010





OR





oTRANSITION 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) 884-8807





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





Common Shares, Preferred Shares


(Title of Class)




Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.o
Yes
þ
NoIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.þ
Yes
o
No





Check whether the issuer  (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, and (2) has been subject to such filing requirements for the past 90 days. Yes þ     No  o




Check if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.  o





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.Large accelerated filer
o


Accelerated filer
oNon-accelerated filer
o


Smaller reporting company
þ








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


The aggregate market value of the voting common stock held by non-affiliates of the Registrant on June 30,2010, was approximately $ 474,367.50, based on the average bid and asked prices on such date of $0.03.The registrant does not have any non-voting equities.





The Registrant had 28,777,766 shares of common stock, .0002 par value per share, outstanding on April 11, 2011














TABLE OF CONTENTS




FORM 10-K




FOR FISCAL YEAR ENDED DECEMBER 31, 2010




PagePart IITEM 1
Business


4ITEM 2
Properties


7ITEM 3.
Legal Proceedings


8ITEM 4.
(Removed and Reserved)


8Part IIITEM 5.
Market for Registrants Common Equity and Related Stockholders Matters


9ITEM 6
Selected Financial Data


10ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operation


11ITEM 8.
Financial Statements and Supplementary Data


F-1ITEM 9.
Changes In and Disagreements with Accountants on Accounting and FinancialDisclosure


13ITEM 9A.
Controls and Procedures


13ITEM 9B.
Other Items


14Part IIIITEM 10.
Directors, Executive Officers, Promoters and Control Persons; Compliance with Section16(a) of the Exchange Act


15ITEM 11.
Executive Compensation


17ITEM 12.
Security Ownership of Certain Beneficial Owners and Management


18ITEM 13.
Certain Relationships and Related Transactions


18ITEM 14.
Principal Accountants Fee and Services


19ITEM 15.
Exhibits and Financial Statement Schedules Signatures


19




2





Forward-Looking Statements





This Report contains, in addition to historical information, forward-looking statements regarding Gilla Inc., which represent the Company's expectations or beliefs including, but not limited to, statements concerning the Company's operations, performance, financial condition, business strategies, and other information and that involve substantial risks and uncertainties. The Company's actual results of operations, some of which are beyond the Company's control, could differ materially. For this purpose, any statements contained in this Report that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "estimate," "continue" or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. Factors that could cause or contribute to such difference include, but are not limited to, history of operating losses and accumulated deficit; need for additional financing; competition; dependence on management;; and other factors discussed herein and in the Company's other filings with the Securities and Exchange Commission.





3


PART I





ITEM 1.  BUSINESS





Business Development





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





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





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





Business of Issuer





The Company is a mineral-property development company specializing in acquiring and consolidating mineral properties with production potential and future growth through exploration discoveries. Acquisition and development emphasis has been focused on properties containing gold and other strategic minerals that are located in Africa.





MANAGEMENT RISKS





Management of the Company consists of Georges Benarroch/President and Chief Financial Officer, Daniel Barrette/Chief Operating Officer. There is only one full-time employee of the Company.  Consequently, management of the Company has historically relied upon, and will continue to rely upon for the foreseeable future, the employment of outside consultants and independent contractors such as attorneys, accountants, geologists, petroleum engineers, financial advisors, and others to assist management in conducting the business affairs of the Company. The President and directors of the Company have other business interests in which they devote their primary attention or a substantial portion of their time and they are expected to continue to do so for the foreseeable future. As a result, there are at least potential conflicts of interest which may arise because of such other commitments. Any such conflicts, however, have been and are expected to be resolved through the exercise of sound business judgment by such individuals consistent with their fiduciary duties to the Company.





SECURITIES MARKET AND STOCK OWNERSHIP RISKS





There is no predictable method by which investors in the securities of the Company shall be able to realize any gain or return on their investment in the Company, or shall be able to recover all or any substantial portion of the value of their investment.  There is, currently no public market for the securities of the Company, and no assurance can be given that a market will develop or that an investor will be able to liquidate his investment without considerable delay, if at all. Consequently, should the investor suffer a change in circumstances arising from an event not contemplated at the time of his investment, and should the investor therefore wish to transfer the common stock owned by him, he may find he has only a limited or no ability to transfer or market the common stock. Accordingly, purchasers of the common stock need to be prepared to bear the economic risk of their investment for an indefinite period of time. If a market should develop, the price may be highly volatile. Factors such as those discussed in this “Risk Factors” section may have a significant impact upon the market price of the securities of the Company. Owing to what may be expected to be the low price of the securities, many brokerage firms may not be willing to effect transactions in the securities.





4





Even if an investor finds a broker willing to effect a transaction in these securities, the combination of brokerage commissions and any other selling costs may exceed the selling price. Further, many lending institutions will not permit the use of such securities as collateral for any loans. The Company has no agreement with any securities broker or dealer that is a member of the National Association of Securities Dealers, Inc., to act as a market maker for the Company’s securities. Should the Company fail to obtain one or more market makers for the Company’s securities, the trading level and price of the Company’s securities will be materially and adversely affected. Should the Company happen to obtain only one market maker for the Company’s securities, the market maker would in effect dominate and control the market for such securities. The Company’s registered securities are covered by a Securities and Exchange Commission rule that imposes additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors. For purposes of the rule, the phrase “accredited investors” means, in general terms, institutions with assets in excess of $5,000,000, or individuals having a net worth in excess of $1,000,000 or having an annual income that exceeds $200,000 (or that, when combined with a spouse’s income, exceeds $300,000). For transactions covered by the rule, the broker-dealer must make a special suitability determination for the purchaser and receive the purchaser’s written, agreement to the transaction prior to the sale. Consequently, the rule may affect the ability of broker-dealers to sell the Company’s securities and also may affect the ability of investors in securities of the Company to sell their securities in any market that might develop therefore.





Of the currently issued and outstanding shares of common stock of the Company, approximately 12,425,516 shares (approximately 46% of the total number of shares outstanding) are owned by, or are under the direct or indirect control of, only three individuals or corporations.  That number of shares is enough to dominate and control the price and trading volume in the Company’s securities. Because those shares are controlled by such a limited number of persons, selling decisions by either or both of those persons can be expected to have a substantial impact upon (or “overhang” over) the market, if any, for the common stock. Should either or both of such persons chose to sell a large number of shares over a short period of time, the market price for the shares could be significantly depressed.


The majority of the Company’s authorized but un-issued common stock remains un-issued. The board of directors of the Company has authority to issue such un-issued shares without the consent or vote of the stockholders of the Company. The issuance of these shares may dilute the interests of investors in the securities of the Company and will reduce their proportionate ownership and voting power in the Company.





GEOLOGIC UNCERTAINTY AND INHERENT VARIABILITY





Although the estimated reserves and additional mineralized material have been delineated with appropriately spaced drilling to provide a high degree of assurance in the continuity of the mineralization, there is inherent variability between duplicate samples taken adjacent to each other and between sampling points that cannot be reasonably eliminated. There may also be unknown geologic details that have not been identified or correctly appreciated at the current level of delineation. This results in uncertainties that cannot be reasonably eliminated from the estimation process.  Some of the resulting variances can have a positive effect and others can have a negative effect on mining operations.  Acceptance of these uncertainties is part of any mining operation.





POLITICAL RISKS





Political unrest or changes in The Democratic Republic of the Congo or nearby countries could interfere with our operating or financing activities.





The political risk in sub-Saharan Africa is significant. Gilla’s rights to explore and develop mineral deposits in The Democratic Republic of the Congo are always subject to the continued political stability of the respective government’s. Political unrest or upheaval in adjoining countries could adversely affect our mining and development activities, and, if significant, would likely increase the costs of long term financing of the mining and processing activities. Further, Gilla may not be able to finance or operate the Cameroon or Angola Properties at all if future state or regional political upheavals occur.




5





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





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





The identification of potential gold and probable uncertainties, we cannot assure you that current and future exploration programs will have mineralization based on superficial analysis.  Quality of our management, and our geological and reserves, and to develop and construct mining and processing facilities.





Substantial expenditures are required to determine if a project has economically mine able mineralization. It may take several years to establish proven result in the discovery of reserves, the expansion of our existing reserves and the development of mines.


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





The profitability of gold and mineral mining operations is directly related to market prices. The market prices of gold and other minerals fluctuate significantly and are affected by a number of factors beyond our control, including, but not limited to, the rate of inflation, the exchange rate of the dollar to other currencies, interest rates, development of a mine is undertaken and the time production can commence can significantly affect the profitability of a mine.  Accordingly, we may begin to develop one or more of our mines at a time when the price of gold or other minerals makes such exploration economically feasible and, subsequently, incur losses because the price of gold or other minerals decreases.  We cannot predict the market price or fluctuations of the gold or copper price.





FUEL PRICE VARIABILITY





The cost of fuel can be a major variable in the cost of mining, one which is not necessarily included in the contract mining prices obtained from mining contractors but is passed on to the overall  cost of  operation.  Although high fuel prices by historical standards have been used in making the reserve estimates included herein, future fuel prices and their impact on operating profitability cannot be predicted.





VARIATIONS IN MINING AND PROCESSING PARAMETERS





The parameters used in estimating mining and processing efficiency are based on testing and experience with previous operations at the properties or on operations at similar properties.  While the parameters used have a reasonable basis, various unforeseen conditions can occur that may materially affect the estimates.  In particular, past operations indicate that care must be taken to ensure that proper ore grade control is employed and that proper steps are taken to ensure that the leaching operations are executed as planned.   The mining contracts for the mines include clauses addressing these issues to help ensure planned requirements are met. Nevertheless, unforeseen difficulties may occur in planned operations.





6





CHANGES IN ENVIRONMENTAL AND MINING LAWS AND REGULATIONS





Registrant believes that it currently complies with existing environmental and mining laws and regulations affecting its operations.  The reserve estimates contain cost estimates based on requirements compliance with current laws and regulations.  While there are no currently known proposed changes in these laws or regulations, significant changes have affected past operations and no assurance can be given that such changes will not occur in the future.





Through December 31, 2010, the Company has generated no revenues from operations.





REPORTS TO SECURITIES HOLDERS





There were no shareholders meetings during the period covered by this report.





The Bylaws of the Gilla Inc. are silent regarding an annual report to shareholders. Gilla Inc. is a reporting company and files reports with the U.S. Securities and Exchange Commission (SEC). The Company is required to file quarterly reports (Form 10-Q) and an annual report (Form 10-K) with the SEC. The annual report includes an audited financial statement.





Any materials that the Company filed with the Securities and Exchange Commission may be read and copied at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Further, you may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The Company is an electronic filer and the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Commission. That site is http://www.sec.gov.





ITEM 2.  PROPERTIES





The Company occupies office space on a month-to-month basis and therefore has no leasehold interest. The Company pays a fee to a related party, at the rate of $10,000 (US) quarterly, which includes rent, and certain administrative services, such as bookkeeping, copying and printing, courier services, and telephone.





The Company owns no investments.





7





ITEM 3.  LEGAL PROCEEDINGS





There have been no changes since the filing of our Form 10-K for December 31, 2009 except the following:





On September 17, 2009, Gilla, Inc. (the “Company”) filed a lawsuit in the District Court of Nevada, Clark County, seeking a declaratory judgment and injunctive relief against Georges Fotso, Capital Venture Facilitators, LLC, Mathurin Djekam, Marie-Gisele Momo Minlo, Pauline NGO Bapa and DRR Capital Corporation (collectively, the “Defendants”). The Company is seeking a declaration by the Court affirming the Company’s cancellation of a total of 21,784,995 shares of the Company’s common stock issued to the Defendants and to temporarily and permanently enjoin the Defendants from attempting to transfer the certificates representing such shares and to require the Defendants to return such certificates for cancellation. The certificates that are the subject of this lawsuit include Certificate #31241 representing 10,000,000 shares issued to Mr. Fotso, Certificate #31240 representing 6,392,150 shares issued to Capital Venture Facilitators, LLC, Certificate #31244 representing 4,248,037 shares issued to Mr. Djekam, Certificate #31238 representing 500,000 shares issued to Ms. Minlo, Certificate #31239 representing 100,000 shares issued to Ms. Bapa and Certificate #31248 representing 544,808 shares issued to DRR Capital Corporation, represented by David Robinson. The Company’s board of directors took formal action to cancel these shares on June 8, 2009 based on failure of consideration and breaches of contractual and fiduciary duties on behalf of the Defendants.





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





On February 10, 2011, the Eight Judicial District Court, in and for Clark County Nevada dismissed without prejudice claims against DRR Capital Corporation.
 
 The Settlement Agreement also acknowledges that Georges Fotso has resigned as a director of Gilla and its Cameroon subsidiary Free Mining Company S.A. (“FMC”) on January, 30, 2009. Under the terms of the Settlement Agreement, the Fotso Group will retain the $100,000 cash consideration previously paid to them on January 31, 2008.





On January 28, 2010 Gilla Inc. authorized the Issuance of 200,000 common shares in the capital stock of the company at a price of $0.08 per share, $16,000, to be in settlement with RM Communications Inc.


ITEM 4.  (REMOVED AND RESERVED)




8





PART II





ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS





The securities have been trading  on the over-the-counter market until it was moved to Pink Sheets in February 2011, under the symbol “GLLA” as the trading activity was not sufficient for continuing to trade over the counter.The Company is listed on the Pink Sheets under the symbol "GLLA." The following table sets forth for the periods indicated the range of high and low closing bid quotations per share as reported by the over-the-counter market for the past two years. These quotations represent inter-dealer prices, without retail markups, markdowns or commissions and may not necessarily represent actual transactions. The market for the common stock has been sporadic and there have been long periods during which there were few, if any, transactions in the common stock and no reported quotations. Accordingly, reliance should not be placed on the quotes listed below, as the trades and depth of the market may be limited, and therefore, such quotes may not be a true indication of the current market value of the Company's common stock.




2010

HIGH


LOWFirst Quarter

$
0.14


$
0.03Second Quarter

$
0.07


$
0.02Third Quarter

$
0.07


$
0.01Fourth Quarter

$
0.11


$
0.03





2009

HIGH


LOWFirst Quarter

$
0.52


$
0.05Second Quarter

$
0.43


$
0.07Third Quarter

$
0.28


$
0.05Fourth Quarter

$
0.16


$
0.02





On December 31, 2010, the closing price of our common stock as reported on the OTCBB was $0.05 per share. On December 31, 2010, we had in excess of 374 beneficial stockholders of our common stock and 27,277,766 shares of our common stock were issued and outstanding.





DIVIDENDS




On January 17, 2008 the Board of Directors of Gilla Inc. declared a cash dividend to its common stock Shareholders of Record on February 4, 2008 in the amount of $0.035 per share of common stock, which was distributed on February 15, 2008.  The next dividend payment is unknown.





9





RECENT SALES OF UNREGISTERED SECURITIES





In 2010, the Company issued the following shares:





On January 28, 2010, 200,000 Common Shares of the company were issued to RM Communication in settlement of a law suit.   The shares were valued at $16,000.





In March 2010, 16,992,150 shares of common stock held by these individuals, Georges Fotso, Capital Venture Facilitators, LLC, Mathurin Djekam, Marie-Gisele Momo Minlo and Pauline NGO Bapa have been returned to the Company for cancellation and which were subsequently cancelled. Defendant DRR Capital Corporation is not part of the Settlement Agreement.





In March 2010, Gilla Inc. completed a Private Placement for 300,000 common shares for proceeds of $12,000 at $0.04 per share.  The sole subscriber was a shareholder of the Corporation.





In April 2010, 1,180,000 common shares were issued to Daniel Barratte. 1,000,000 common shares, valued at $50,000 in lieu of cash as a bonus for obtaining mining permits in the Democratic Republic of Congo, and 180,000 common shares valued at $9,000 were issued in lieu of cash for consulting services.





In September 2010, 2,000,000 common shares were issued to Georges Benarroch (one of the directors), valued at $100,000 in lieu of cash as management fee. In September 2010, 60,000 common shares were issued as directors fees, to each of our four directors, in lieu of cash. Total common shares issued as directors fees during the year ended December 31, 2010 were 240,000 valued at $0.05 per share





In September 2010, 700,000 common shares were issued, valued at $35,000 in lieu of cash as a bonus for obtaining additional mining permits in the Democratic Republic of Congo.


ITEM 6.   SELECTED FINANCIAL DATA




Earnings per share for each of the fiscal years shown below are based on the weighted average number of shares outstanding.





Years ended December 31,2010


2009Revenues

$
-


$
-Net Loss

$
(5,033,142
)

$
(13,016,885
)Earning Loss Per Share

$
(0.18
)

$
(0.33
)Total assets

$
1,617


$
4,638,123Total liabilities

$
170,720


$
30,084





10





ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION





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





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





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





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





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





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





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





RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2010




The Registrant conducted no actual mining operation during the year ended December 31, 2010. As such, it had no revenues as described in the consolidated financial statements, attached hereto.  However, the Company had total a net loss of $5,033,142 and $13,016,885 for the years ended December 31, 2010 and 2009, respectively


LIQUIDITY AND CAPITAL RESOURCES




The Company had working capital deficits of $169,103 as of December 31, 2010 and a working capital of $8,039 as of December 31, 2009.  Cash were $1,617 and $35,123 as of December 31, 2010 and 2009, respectively.





Cash from operating activities





The Company’s cash outflow from operations of $149,223 for year ended December 31, 2010 was $101,428 below cash flow from operations of $250,651 for the year ended December 31, 2009.




Cash from financing activities





The Company’s net cash inflow from financing activities of $115,717 for the year ended December 31, 2010 was $65,717 above the cash inflow from financing activities for the year ended December 31, 2009, which was $50,000.





11





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





CERTAIN BUSINESS RISK FACTORS





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





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





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





Our independent auditors have added an explanatory paragraph to their audit opinion issued in connection with the financial statements for the year ended December 31, 2010.  The Company's auditors have expressed doubt about the Company's ability to continue as a going concern. The Company has current assets in the form of cash of $1,617 and current liabilities of $170,720.  The Company's net losses to date are $30,824,122.





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





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




12





ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA








Gilla, Inc.


(An Exploration Stage Company)




Consolidated Financial Statements




December 31, 2010 and 2009






Table of Contents








Report of Independent Registered Public Accounting Firm


F-2Report of Independent Registered Public Accounting Firm


F-3Consolidated Balance Sheets


F-4Consolidated Statements of Operations


F-5Consolidated Statement of (Deficiency) in Stockholders’ Equity


F-6Consolidated Statements of Cash Flows


F-7Notes to the Consolidated Financial Statements


F-8 - F-22





F-1





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








Board of Directors and Stockholders


Gilla, Inc.


Ontario, Canada





We have audited the accompanying consolidated balance sheet of Gilla, Inc. and its subsidiaries (the “Company”), an exploration stage company as of December 31, 2010, and the related consolidated statements of operations, (deficiency) in stockholders’ equity and cash flows for the year ended December 31, 2010 and for the period from March 28, 1995 (date of inception) through December 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The accompanying consolidated financial statements of the Company for the period March 28, 1995 (date of inception) through December 31, 2009 were not audited by us. Those statements were audited by other auditors wose report, dated March 24, 2010 expressed an unqualified opinion on those statements and included an explanatory paragraph regarding the Company's ability to continue as a going concern. The consolidated financial statements for tperiod March 28, 1995 (date of inception) to December 31, 2009 reflect a net loss of $25,790,980. Our opinion, insofar as it relates to the amounts included for such prior periods as indicated in the accompanying consolidated financial statements for such periods from March 28, 1995 (date of inception) through December 31, 2009, is based solely on the report of such other auditors.





We have conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.





In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Gilla, Inc. and its subsidiaries as of December 31, 2010, and the consolidated results of its operations and its cash flows for the year ended December 31, 2010 and for the period from March 28, 1995 (date of inception) through December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.





The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the accompanying consolidated financial statements, the Company is an exploration stage company and has not commenced its planned principal operations, has suffered recurring losses since inception, which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to this matter are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.








/s/ RBSM LLP





New York, New York


April 15, 2011





F-2





Report of Independent Registered Public Accounting Firm









To the board of directors and shareholders of


Gilla, Inc.




We have audited the accompanying consolidated balance sheets of Gilla, Inc. (An Exploration Stage Company) and the related consolidated statements of operations, (deficiency) in stockholders’ equity and cash flows for the year ended December 31, 2009 and for the period from March 28, 1995 (inception) through December 31, 2009. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.




We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provided a reasonable basis for our opinion.




In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Gilla, Inc. (An Exploration Stage Company) as of December 31, 2009 and the results of its operations and its cash flows for the year ended December 31, 2009, and from March 28, 1995 (inception) through December 31, 2009 in conformity with accounting principles generally accepted in the United States.




The accompanying consolidated financial statements referred to above have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 1, the Company’s need to seek new sources or methods of financing or revenue to pursue its business strategy, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans as to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.







/s/ Jewett, Schwartz, Wolfe & Associates




March 24, 2010




F-3





GILLA, INC.(AN EXPLORATION STAGE COMPANY)CONSOLIDATED BALANCE SHEETS
 
 December 31,


December 31,2010


2009ASSETSCURRENT ASSETSCash and cash equivalents

$
1,617


$
35,123Prepaid expenses


-



3,000TOTAL CURRENT ASSETS


1,617



38,123Mining rights


-



4,600,000TOTAL ASSETS

$
1,617


$
4,638,123LIABILITIES AND (DEFICIENCY) IN STOCKHOLDERS' EQUITYCURRENT LIABILITIESAccounts payable

$
5,503


$
5,188Accrued liabilities


61,500



24,896Notes payable related party


103,717



-TOTAL LIABILITIES


170,720



30,084COMMITMENTS AND CONTINGENCIES(DEFICIENCY) IN STOCKHOLDERS' EQUITYCommon stock, $0.0002 par value, 300,000,000 shares authorized;27,277,766 and 39,649,916 shares issued and outstandingas of   December 31, 2010 and 2009 respectively


5,455



7,930Additional paid - in capital


30,649,564



30,391,089Deficit accumulated during the exploration stage


(30,824,122
)


(25,790,980
)TOTAL (DEFICIENCY) IN STOCKHOLDERS'  EQUITY


(169,103
)


4,608,039TOTAL LIABILITIES AND (DEFICIENCY) IN STOCKHOLDERS' EQUITY

$
1,617


$
4,638,123





See accompanying notes to the consolidated financial statements.








F-4





GILLA, INC.(AN EXPLORATION STAGE COMPANY)CONSOLIDATED STATEMENTS OF OPERATIONS
 
 For the Year Ended

December 31


For the Period From

March 28, 1995(Inception) to2010


2009


December 31, 2010REVENUES

$
-


$
-


$
-TOTAL REVENUES


-



-



-EXPENSES:Exploration cost


142,642



53,933



1,856,697Asset impairment changes


4,600,000



12,744,110



17,344,110General and administrative


268,582



221,582



15,655,479TOTAL OPERATING EXPENSES


5,011,224



13,019,625



34,856,286LOSS FROM OPERATIONS


(5,011,224
)


(13,019,625
)


(34,856,286
)OTHER INCOME (EXPENSES)Loss on abandonment of mining camp


-



-



(50,000
)Gain of forgiveness of debt


-



-



1,828,932Gain on sale of mining properties


-



(3,774
)


2,100,000Miscellaneous Income (loss)


158



6,097



(11,393
)Gain (loss) on foreign exchange rate transactions


(76
)


404



149,372Interest expense


(22,000
)


-



(25,277
)Interest income


-



13



40,530TOTAL OTHER INCOME (EXPENSES)


(21,918
)


2,740



4,032,164NET LOSS BEFORE INCOME TAXES

$
(5,033,142
)

$
(13,016,885
)

$
(30,824,122
)INCOME (TAX) BENEFIT


-



-



-NET LOSS

$
(5,033,142
)

$
(13,016,885
)

$
(30,829,122
)WEIGHTED AVERAGE NUMBER OF SHARESOUTSTANDING-BASIC AND DILUTED


28,453,209



39,023,726LOSS PER COMMON SHARES-BASIC AND DILUTED

$
(0.18
)

$
(0.33
)





See accompanying notes to the consolidated financial statements.








F-5





GILLA, INC.(AN EXPLORATION STAGE COMPANY)CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICITFOR THE PERIOD FROMMARCH 28, 1995 (INCEPTION) TO DECEMBER 31, 2010
 
 Common StockShares


Amount


Additional

Paid In Capital


Accumulated

Deficit


TotalInception on March 28, 1995Issuance of Common Stock for Cash


1,409



-



-



-



-Net loss


-



-



-



-



-Balance - December 31, 1995


1,409


$
-


$
-


$
-


$
-Net loss














(1,500
)


(1,500
)Balance - December 31, 1996


1,409


$
-


$
-


$
(1,500
)

$
(1,500
)Issuance of Common Stock for Cash


169



-



-



-



-Net loss














(535
)


(535
)Balance - December 31, 1997


1,578


$
-


$
-


$
(2,035
)

$
(2,035
)Net loss














(3,035
)


(3,035
)Balance - December 31, 1998


1,578


$
-


$
-


$
(5,070
)

$
(5,070
)Cancellation of Common Stock


(11
)


-



-



-



-Cancellation of Common Stock


(1,014
)


-



-



-



-Cancellation of Common Stock


(155
)


-



-



-



-Common Stock Issued as a result of merger


9,000



2



22,998



-



23,000Common Stock Issued as profession fees


310



-



15,500



-



15,500Net loss


-



-



-



(429,997
)


(429,997
)Balance - December 31, 1999


9,708


$
2


$
38,498


$
(435,067
)

$
(393,727
)Net loss














(81,301
)


(81,301
)Balance - December 31, 2000


9,708


$
2


$
38,498


$
(516,368
)

$
(477,868
)Conversion of Loan Payable to Common Shares


1,072



-



267,905



-



267,905Net loss






-



-



(95,677
)


(95,677
)Balance - December 31, 2001


10,780


$
2


$
306,403


$
(612,045
)

$
(305,640
)Net loss


-



-



-



(88,087
)


(88,087
)Balance - December 31, 2002


10,780


$
2


$
306,403


$
(700,132
)

$
(393,727
)Issuance of common stock  for mining claims - related party


620,000



124



6,076



-



6,200Issuance of common stock for consulting services


120,000



24



399,976



-



400,000Issuance of common stock for directors fees


10,000



2



309,998



-



310,000Fair market value of options granted


-



-



465,000



-



465,000Purchase of camp


40,000



8



49,992



-



50,000Net loss










-



(915,574
)


(915,574
)Balance December 31, 2003


800,780


$
160


$
1,537,445


$
(1,615,706
)

$
(78,101
)Issuance of common stock for mining claims - related party


2,016,800



404



19,764



-



20,168Issuance of common stock for mining claims


11,000



2



176,998



-



177,000Issuance of common stock for directors fees


6,000



1



41,999



-



42,000Issuance of common stock for consulting fees


463,813



93



4,430,167



-



4,430,260Issuance of common stock for management fees


80,000



16



527,984



-



528,000Issuance of common stock for financing fees


4,000



1



23,999



-



24,000Issuance of common stock for cancellation of letter of intent and services


310,000



62



324,938



-



325,000Sale of common stock


215,600



43



1,208,261



-



1,208,304Capital contribution










68,408







68,408Net loss














(7,717,947
)


(7,717,947
)Balance December 31, 2004


3,907,993


$
782


$
8,359,963


$
(9,333,653
)

$
(972,908
)Sale of common stock


2,000,000



400



499,600



-



500,000Net loss














(213,799
)


(213,799
)Balance December 31, 2005


5,907,993


$
1,182


$
8,859,563


$
(9,547,452
)

$
(686,707
)Cancellation of common stock


(1,223,000
)


(245
)


245



-



-Issuance of common stock for consulting fees


700,000



140



1,574,860



-



1,575,000Issuance of common stock for services rendered


33,802



7



43,500



-



43,507Issuance of common stock for directors fees


10,000



2



32,498



-



32,500Issuance of common stock for satisfaction of debt


6,567



1



19,699



-



19,700Issuance of common stock for salary


210,605



42



684,426



-



684,468Net loss


-



-



-



(415,270
)


(415,270
)Balance December 31, 2006


5,645,967


$
1,129


$
11,214,791


$
(9,962,722
)

$
1,253,198Issuance of common stock for directors fees


30,000



6



22,494



-



22,500Net loss


-



-



-



(562,475
)


(562,475
)Balance December 31, 2007


5,675,967


$
1,135


$
11,237,285


$
(10,525,197
)

$
713,223Sale of common stock


916,667



183



274,817



-



275,000Issuance of common stock for management fees


1,000,000



200



499,800



-



500,000Issuance of common stock for mining claims


30,440,184



6,089



17,338,022



-



17,344,111Issuance of common stock for termination of service


220,331



44



132,154



-



132,198Issuance of common stock for consulting fees


644,804



129



386,753



-



386,882Fair market value of options  granted


-



-



712,407



-



712,407Dividends


-



-



(240,000
)


-



(240,000
)Net loss


-



-



-



(2,248,898
)


(2,248,898
)Balance December 31, 2008


38,897,953


$
7,780


$
30,341,239


$
(12,774,095
)

$
17,574,924Sale of common stock


5,000,000



1,000



49,000



-



50,000Cancellation of common stock


(4,248,037
)


(850
)


850



-



-Net loss


-



-



-



(13,016,885
)


(13,016,885
)Balance December 31, 2009


39,649,916


$
7,930


$
30,391,089


$
(25,790,980
)

$
4,608,039Sale of common stock


300,000



60



11,940



-



12,000Cancellation of common stock


(16,992,150
)


(3,399
)


3,399



-



-Issuance of common stock for consulting fees


1,880,000



376



93,624



-



94,000Issuance of common stock for management fees


2,000,000



400



99,600



-



100,000Issuance of common stock for directors fees


240,000



48



11,952



-



12,000Issuance of Stock toward legal settlement


200,000



40



15,960



-



16,000Beneficial conversion feature


-



-



22,000



-



22,000Net loss


-



-







(5,033,142
)


(5,033,142
)Balance December 31, 2010


27,277,766


$
5,455


$
30,649,564


$
(30,824,122


$
(169,103
)





See accompanying notes to the consolidated financial statements.





F-6





GILLA, INC.(AN EXPLORATION STAGE COMPANY)CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 For the Period FromFor the Year Ended


March 28, 1995December 31,





(Inception) to2010


2009


December 31, 2010CASH FLOW FROM OPERATING ACTIVITIESNet loss from operations

$
(5,033,142
)

$
(13,016,885
)

$
(30,824,122
)Adjustment to reconcile net loss to net cashused in operating activities:Asset impairment charges


4,600,000



12,744,110



17,344,110Issuance of common stock toward legal settlement charges


16,000



-



16,000Issuance of common stock for services


206,000



-



11,042,792Beneficial conversion discount


22,000



-



22,000Changes in operating assets and liabilities:Prepaid expenses


3,000



(3,000
)


-Other receivable


-



2,333



-Mining camp


-



-



50,000Accounts payable


315



(2,105
)


376,160Accrued expenses


36,604



24,896



65,656Net cash used in operating activities


(149,223
)


(250,651
)


(1,907,404
)CASH FLOW FROM FINANCING ACTIVITIESDividends distributions


-



-



(240,000
)Notes payable related party


103,717



-



103,717Sale of common stock


12,000



50,000



2,045,304Net cash provided by financing activities


115,717



50,000



1,909,021Net Increase (decrease) in cash and cash equivalents


(33,506
)


(200,651
)


1,617Cash and cash equivalents at beginning of period


35,123



235,774



-Cash and cash equivalents at end of period

$
1,617


$
35,123


$
1,617Supplemental Disclosure of Cash Flow Information:Cash paid for:Interest


-



-



-Taxes


-



-



-Non-cash investing and financings activities:Beneficial conversion feature


22,000



-



22,000Issuance of common stock for services


222,000



-



222,000





See accompanying notes to the consolidated financial statements.





F-7


GILLA, INC.


(AN EXPLORATION STAGE COMPANY)


DECEMBER 31, 2010 AND 2009







NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





ORGANIZATION AND DESCRIPTION OF BUSINESS





Gilla Inc. ("Gilla" or the "Company") was incorporated under the Laws of the State of Nevada on March 28, 1995 under the name of Truco, Inc. The stockholders 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’s activities are focused on mineral-property development specializing in acquiring and consolidating mineral properties with production potential and future growth through exploration discoveries.





Principles of Consolidation





The consolidated financial statements include the accounts of the Company and its 99% subsidiary, GISOR SPRL (“GISOR”). All significant intercompany transactions have been eliminated in consolidation.  Gisor had no activities during the years ended December 2010 and 2009.





Basis of Accounting





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





Development Stage Company





As a result of impairing the value of the Company’s mining rights, at December 31, 2010, the Company began implementing new plans.The Company was granted approval (“Avis Favorable”) on August 9, 2010, by the Cadastre Minier (CAMI) of a concession covering 451 «carrés miniers» or 383 square kilometres (38,300 Hectares) (Mwenga Project) located in the South-Kivu Province, Democratic Republic of Congo (“DRC”). The Company is current in meeting its obligation in the DRC. As a result, the Company is an exploration stage enterprise, as defined by Accounting Standards Codification (the “Codification” or “ASC”) 915-10. The Company is devoting all of its present efforts in securing and establishing a new business, and its planned principle operations have not commenced, and, accordingly, no revenue has been derived during the organization period. From its inception of exploration stage through the date of these financial statements, the Company has not generated any revenues and has incurred significant operating expenses. Consequently, its operations are subject to all risks inherent in the establishment of a new business enterprise. For the period from inception of exploration stage through December 31, 2010, the Company has accumulated losses of $30,824,122.





F-8





NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Going Concern





The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The Company is an exploration stage entity and has not established any sources of revenue and has incurred net losses of $5,033,142 and $13,016,885 during the years ended December 31, 2010 and 2009, respectively.  These conditions create an uncertainty as to the Company’s ability to continue as a going concern. Management plans to explore new mining opportunities and possibly form joint ventures with other exploration and mining interests.  The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.





Cash and Cash Equivalents





For purposes of the Statements of Cash Flows, the Company considers all highly liquid debt instruments purchased with an original maturity date of three months or less to be cash equivalents.





Use of Estimates





The preparation of 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 disclosure of contingent assets and liabilities, at the date of these financial statements, and the reported amounts of revenues and expenses during the reporting period. The most significant of these estimates is the impairment evaluation of mining rights. Accordingly, 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 and the exercise of the Company's stock options and warrants.





Mining Properties and Deferred Expenditures





Significant payments related to the acquisition of land and mineral rights are capitalized as mining properties at cost.  If a mineral ore body is discovered, such costs are amortized to income when production begins, using the unit of production method, based on estimated proven and probable reserves. If no mineral ore body is discovered, such costs are expensed in the period in which it is determined the property has no future economic value.





Expenditures for new facilities and improvements that can extend the useful lives of existing facilities are capitalized as plant and equipment at cost.





Mineral exploration costs are charged to income in the year in which they are incurred. When it is determined that a mining property can be economically developed as a result of established proven and probable reserves, the costs of further exploration and development to further delineate the ore body on such property are capitalized. The establishment of proven and probable reserves is based on results of final feasibility studies, which indicate whether a property is economically feasible.  Upon the commencement of the commercial production of a development project, these costs are transferred to the appropriate asset category and are amortized to income using the unit of production method.





F-9





NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)




The recoverability of the amounts capitalized in respect of non producing mining properties is dependent upon the existence of economically recoverable reserves, the ability of the company to obtain the necessary financing to complete the exploration and development of the properties, and upon future profitable production or proceeds from the disposition of the property.





Foreign Currency Translation





Monetary assets and liabilities denominated in a currency other than US dollars are translated into US dollars using the exchange rate in effect at the year end. Non monetary assets and liabilities are translated at historical exchange rates while revenues and expenses are translated at the average exchange rate during the year. Exchange gains and losses are included in income.





Concentration of Credit Risk





Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents. The Company places its cash and temporary cash investments with credit quality institutions. At times, such investments may be in excess of the FDIC insurance limit.





Income Taxes





The Company accounts for income taxes in accordance with FASB ASC 740-10 “Income Taxes.” Under this method, deferred income taxes are recognized for the tax consequences in future years for differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income.  Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.  Income tax expense is the tax payable for the period and the change during the period of deferred tax assets and liabilities.





The Company policy for interest and penalties on material uncertain income tax positions recognized in the Company’s consolidated financial statements is to classify these as interest expense and operating expense, respectively. The Company did not incur material income tax interest or penalties during the year ended December 31, 2010.





Fair Value of Financial Instruments




The carrying amounts of financial instruments, including cash, accounts receivable, accounts payable and accrued expenses approximate fair value at December 31, 2010 and 2009 because of the relatively short maturity of the instruments.




The Company adopted ASC 820-10, “Fair Value Measurements” (SFAS 157), which provides a framework for measuring fair value under GAAP.  ASC 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  ASC 820-10 requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs.





Stock Based Compensation





The Company accounts for stock based awards in accordance with Accounting Standards Codification subtopic 718-10, Compensation (“ASC 718-10”), which requires a fair value measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options and restricted stock awards.





The Company estimates the fair value of stock options granted using the Black-Scholes valuation model. This model requires the Company to make estimates and assumptions including, among other things, estimates regarding the length.





F-10





NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)




of time an employee will retain vested stock options before exercising them, the estimated volatility of our common stock price and the number of options that will be forfeited prior to vesting. The fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. Changes in these estimates and assumptions can materially affect the determination of the fair value of stock-based compensation and consequently, the related amount recognized in Company’s consolidated statements of operations.





The expected term of the options represents the estimated period of time until exercise and is based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior.





Share-based compensation expense for the years ended December 31, 2010 and 2009 was $22,000 and $0, respectively.





Reclassifications





Certain reclassifications have been made in prior year's financial statements to conform to classifications used in the current year.





Impairment or Disposal of Long-Lived Assets





The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with ASC 360-10 (formerly Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets). Recoverability is measured by comparison of the carrying amount to the future net cash flows which the assets are expected to generate.  If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the projected discounted future cash flows arising from the asset using a discount rate determined by management to be commensurate with the risk inherent to Company’s current business model. The company recorded impairment expenses of $4,600,000 and 12,744,000 for the years ended December 31, 2010  and 2009, respectively.





Research and Development





All research and development costs must be charged to expense as incurred. Accordingly, internal research and development costs are expensed as incurred. Third-party research and development costs are expensed when the contracted work has been performed or as milestone results have been achieved. Company sponsored research and development costs related to both present and future products are expensed in the period incurred. The Company had no expenditures on research and product development for the years ended December 31, 2010 and 2009 and from March 28, 1995 (the inception of exploration stage) through December 31, 2010.





F-11





NOTE 2 – ACCOUNTING STANDARDS UPDATES





Significant Recent Accounting Pronouncements





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


.


NOTE 3 MINING RIGHTS





On October 29, 2008, Gilla Inc. (“Gilla”) entered into an agreement (“Acquisition Agreement”) with Terra Merchant Resources Corporation (“Terra”) and the stockholders of Terra to acquire substantially all of Terra assets.  On December 18, 2008, 9.2 million shares of Gilla Inc. were issued to Terra shareholders. By acquiring Terra mining rights, Gilla has secured a minimum 70% interest in the Salutar Comercio Mining Concession in Angola. Following the death of the principal shareholder of Salutar, and the difficulties encountered by the estate, the Company has made the decision not to expend further resources on this property. Consequently, the mining rights of $4,600,000 have been impaired and charged to operations in 2010 and the total carrying value at December 31, 2010 and 2009 was $0 and $4,600,000, respectively.





.NOTE 4 RELATED PARTY





The company rents office space and administrative services on a month to month basis from a related party at an average rate of $3,333 per month.  Administrative services provided include bookkeeping, copying and printing, courier services, and telephone. Total expense for rent and administrative fees paid to this related party for the years ended December 31, 2010 and 2009 was $40,000 and $40,000, respectively.





F-12





NOTE 5 NOTES PAYABLE-RELATED PARTY





Notes payable at December 31, 2010 and December 31, 2009 are as follows:




2010


2009Note payable to related party, non-interest bearing and unsecured. The note is due on demand and does not have any specific repayment terms.

$
81,717


$
0Convertible Note payable to related party with 6% interest per annum. The note is convertible into common stock of the Company at a conversion price of $0.01 per share.


15,000



0Convertible Note payable to related party with 6% interest per annum. The note is convertible into common stock of the Company at a conversion price of $0.01 per share.


7,000


$
0Total notes payable

$
103,717Less: current portion


103,717



0Notes payable – long term

$
0


$
0




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





NOTE 6 EQUITY





1995




In March 1995, the Company issued 37,011 shares of common stock to individuals at $1.45 per share for cash.






At the end of 1995, the Company completed a public offering. A total of 37,247 shares of common stock were issued at $1.67 per share. The stock offering costs were offset against the proceeds of the common stock. On January 10, 1996, the Company effected a 10-for-1 reverse stock split. On March 28, 1996, the Company effected a 6-for-1 forward stock split and changed its par value from $0.01 per share to $0.001 per share. The authorized shares were 300,000,000 after these amendments. The financial statements reflect the stock splits on a retroactive basis.






F-13




NOTE 6 EQUITY (continued)





1998





On March 24, 1998, the Company entered into a Rescission Agreement with the shareholders of Geo Ram, Inc. whereby the shareholders of Geo Ram, Inc. returned the 120,000 shares issued in connection with the Share Exchange Agreement dated November 30, 1996. The rescission has been reflected on a retroactive basis.




Based on a letter of Understanding, dated May 25, 1998, the Company acquired the rights to purchase a 100% working interest, subject to a 21% royalty (79% net revenue interest), in oil and gas leases consisting of 960 acres for a total of $240,000. The leases were located in San Joaquin Valley, Kern County, California.




The Company decided not to proceed with the option. No further payments were made and the option expired. The initial payment of $15,000 was paid by shareholders who were issued 8,435 shares of common stock at $1.78 per share.




1999




On September 3, 1999, the Company cancelled 562 common shares and credited the paid-in capital for the original par value.




On September 13, 1999, the Company effected a 17.784 for 1 reverse stock split. The financial statements reflect the stock splits on a retroactive basis.




On September 22 and 23, 1999, the Company cancelled 50,693 and 7,672 common stock, respectively, and credited the paid-in capital for the original par value.




In accordance with the merger agreement, the Company issued 450,000 common shares at $0.05 per share to the former owner of MFCC in exchange for all issued and outstanding shares of MFCC.




2001




In April 2001, the par value of the Company's common stock was changed from $0.001 to $0.0002 per Certificate of Amendment to the Articles of Incorporation.




On April 23, 2003, the Company amended its authorized capital stock to include 20,000,000 shares of preferred stock with a par value of $0.0002 per share.





On May 16, 2003, the Company affected a 50 to 1 reverse stock split per Certificate of Amendment to the Articles of Incorporation.  The financial statements reflect the stock splits on a retroactive basis.





2003-Stock issued for mining claims-related party





On June 6, 2003, the Company issued 360,000 common shares value at $3,600, in connection with the acquisition of 53 unpatented mining claims, from a related party, comprising of 27,280 acres situated in the Porcupine Mining Division of Northern Ontario. (Please note these were purchased from a related party that had no actual basis in the property and therefore must be recorded at the par value of the stock issued)  These claims were transferred to the company in March 2004 of which 140,000 shares to an unrelated party for services.





On November 14, 2003 the Company issued for the Lingman Lake 4 patented claims, 241,000 shares to a related party and 19,000 shares to an unrelated party. The fair value is approximately $2,600. (Please note these were purchased from a related party that had no actual basis in the property and therefore must be recorded at the par value of the stock). As the Company is not able to begin production, or substantiate any proven reserves, it has fully impaired the value.





F-14





NOTE 6 EQUITY (continued)




2003-Stock issued for consulting services





The Company issued to consultants for their services rendered 100,000 common shares at $0.03 per share on July 14, 2003 and 20,000 common shares at $0.25 per share on September 26, 2003. The issuances were recorded at the fair market value of $400,000.





2003-Stock issued for directors fees





On September 29, 2003 the Company issued a total of 10,000 common shares to the Board of Directors for services. The Company recorded an expense of $310,000 which was the fair market value on the date of issuance.





2003-Stock issued for purchase of camp





On July 14, 2003 The Company acquired a mining camp from a related party. The acquisition was valued at $50,000 and was paid for by the issuance of 2,000,000 common shares.  The shares were issued subsequent to year end. (Shares issued March 25th 2004.) (Please note the camp was purchased from a related party that had a cost basis of $50,000 in the property and therefore must be recorded at their basis).  The License of Occupation for the camp was issued to the company in May of 2006.





2004-Stock issued for mining claims-related party





In January, 2004 The Company purchased the Lingman Assets from a related party for 160,000 of common stock value at $1,600. (Shares issued March 25th 2004) The Company has not received control of these assets. (Please note these were purchased from a related party that had no actual basis in the property and therefore must be recorded at the par value of the stock) As the Company is not able to begin production, or substantiate any proven reserves, it has fully impaired the value.





In March, 2004, The Company purchased the Jerome Patented Claims which consist of 63 patented claims in the Porcupine Mining Division of Northern Ontario for 956,800 shares of common stock valued at $9,568 from a related party. (Please note these were purchased from a related party that had no actual basis in the property and therefore must be recorded at the par value of the stock) As the Company is not able to begin production, or substantiate any proven reserves, it has fully impaired the value.





In August, 2004 the Company purchased the Lingman Lakes claims which consist of 14 patented mining claims in the Red Lake Division of Northern Ontario for 900,000 shares of common stock valued at $9,000 from a related third party. In May, 2006 the United States District of Nevada, ordered the third party to transfer title of the claims to the Company.





2004-Stock issued for mining claims





In July, 2004 the Company issued 2,000 shares of common stock valued at $16,500 to Anaconda Gold for the purchase of 8 unpatented claims in the Red Lake Division of Northern Ontario. The agreement was cancelled in early 2005. The shares are non-returnable.





In August 2004, the Company issued 5,000 shares of common stock valued at $52,500 to an unrelated party as part of the purchase of the 63 patented mining claims from a related party.





In October, 2004 the Company entered into an agreement to purchase 4 unpatented claims in the Porcupine Division of Northern Ontario from an unrelated third party. The Company issued a total of 4,000 shares valued at $108,000. The shares are non-returnable. (This agreement was cancelled in 2005.)





F-15





NOTE 6 EQUITY (continued)




2004-Stock issued for directors fees





In August, 2004 the Board of Directors issued itself a total of 6,000 shares of common stock valued at $42,000 for director’s fees.





2004-Stock issued for consulting services





In April 2004, the Company issued a total of 80,000 shares of common to two consultants for services. The fair market value of the common stock on the date of issuance was $2,080,000.





In July 2004, the Company issued a total of 380,000 of common stock for investor relations in Europe.  The fair market value of the common stock on the date of issuance was $2,280,000.





In August 2004, the Company issued 900 shares of common stock valued at $12,000 for services.





In October 2004, the Company issued 2,913 shares of common stock valued at $58,260 for services.





2004-Stock issued for management fees





In August 2004, the Company issued a total of 60,000 shares of common stock to the Company’s former President and20,000 shares of common stock to the Company’s former Vice-President.  The fair market value of the common stock on the date of issuance was $528,000.





2004-Stock issued for financing fees





In July 2004, the Company issued 4,000 shares of common stock valued at $24,000 for financing fees.





2004-Stock issued for cancellation of letter of intent and services





In December 2004, the Company sold a total of 310,000 units to a related party for net proceeds of $225,000 and fees of $100,000.  Each unit consisted of one share of common stock and one warrant expiring two years from the date of issuance.





2004-Sale of common stock





In August, 2004 the Company sold a total of 90,000 units for net proceeds of $225,000. Each unit consisted of one share of common stock and one $.10 warrant expiring 2 years from the date of issuance.





In August 2004, the Company sold a total of 33,000 units to 5 investors for net proceeds of $115,500.  Each unit consisted of one share of common stock and one $.25 warrant expiring two years from the date of issuance.





In August 2004, the Company sold a total of 46,520 units to an unrelated investor for net proceeds of $687,804. Each unit consisted of one share of common stock and one $.25 warrant expiring two years from the date of issuance.





In September 2004, the Company sold a total of 46,080 units to related investors for net proceeds of $180,000.  Each unit consists of one share of common stock and one $.25 warrant expiring in September 2006.





2004- Capital contribution





Capital contributions were made in 2004 for the total amount of $68,408.





F-16





NOTE 6 EQUITY (continued)




2005-Sale of common stock





In November, 2005 the Company sold a total of 2,000,000 shares of common stock for net proceeds of $500,000.





2006-Cancellation of common stock





In August 2006, as a result of the “Settlement Agreement”, July 17th, 2006, the Company recovered and was able to cancel 1,223,000 shares issued to related parties.  The transaction was recorded at par value.





2006- Stock issued for consulting services





During November 2006, 700,000 common shares were issued for consulting fees.  The fair market value at time of issuance was valued at $1,575,000.





2006- Common stock issued for services rendered





In November 2006, the Company issued 32,740 common shares for legal services and 1,062 for staking claims in the Porcupine Mining Division for a value of $43,507.





2006- Common stock issued for directors fees





On November 1, 2006, 10,000 common shares for director’s fees were issued at fair market value of $32,500.





2006- Common stock issued for satisfaction of debt





In November 2006, the company issued 6,567 common shares valued at $19,700 for satisfaction of debt.





2006- Common stock issued for salary





In November 2006, 210,605 common shares were issued in lieu of salary.  The fair market value at time of issuance was $684,468.





2007- Reverse stock split





On February 27, 2007 a majority of the shareholders of the registrant, pursuant to a recommendation by the Board of Directors, voted for a reverse split of the Company’s common shares.  All Shares held as of February 28, 2007 were subject to the reversal.  As a result of the amendment to the Company’s Articles of Incorporation, each fifty (50) shares held by a shareholder of record on February 28, 2007 were exchanged for one (1) share of the Company’s common stock effective March 14, 2007. All per share data in the consolidated financial statements have been adjusted to reflect the reverse stock split on a retrospective basis.  In all other respects, the registrant’s capitalization remains unchanged.





2007-Issuance of common stock for directors fees





During December 2007, the Board of Directors approved the issuance of 30,000 common shares at $0.0002 per share to all directors of the Company for their services rendered and a compensation expense of $22,500 has been recorded.  These shares were issued during the fourth quarter of 2007.





F-17





NOTE 6 EQUITY (continued)




2008-Stock issued for mining claims





On January 31, 2008, Gilla Inc. entered into an agreement (“Acquisition Agreement”) with Free Mining Company S.A. (“FMC”) and the shareholders of FMC to acquire all issued and outstanding shares of FMC which is the exclusive owner of the rights to two mineral properties in Cameroon, respectively known as “MFOUMOU” and “SELE” in exchange for an aggregate of 21,240,184 common shares, or 76.5% of Gilla to the shareholders of FMC. Through the acquisition of FMC, Gilla will acquire 100% of the rights to exploration, development and production of all mineral rights of Mfoumou and Sele.








On October 29, 2008, Gilla Inc. (“Gilla”) entered into an agreement (“Acquisition Agreement”) with Terra Merchant Resources Corporation (“Terra”) and the stockholders of Terra for substantially all of Terra assets in exchange for 10 million Common Shares of Gilla and 5,000,000 Purchase Warrants for Common Shares of Gilla. 10 million Gilla Common shares, have been issued “in trust” pending completion of a $200,000 Private Placement at $0.30 per share by Terra shareholders to close by November 31, 2008 (“the Terra Private Placement”). Upon closing the Terra Private Placement, Terra shareholders will receive 5,000,000 Common Share Purchase Warrants exercisable until May 30, 2009 at $0.60 per Common Share. If the Terra Private Placement does not close, Terra shareholders will receive only 9,200,000 Common Shares of Gilla, and no warrants.  On December 18, 2008 9.2 million shares of Gilla Inc. were issued to Terra shareholders. By acquiring Terra, Gilla has secured a minimum 70% interest in the Salutar Comercio Mining Concession in Angola.





2008- Stock issued for consulting services





On January 31, 2008, 544,804 common shares of the company were issued to D.R.R. Capital Corporation for consulting fees.





On January 31, 2008, Gilla entered into an Option Agreement with D.R.R. Capital Corporation (DRR), in which Gilla issued an option to DRR to purchase up to 544,804 common shares of Gilla at an exercise price of $0.75. The Option Agreement expires on January 31, 2010.





On October 29, 2008 1,000,000 Common Shares of the company were issued to Credifinance Capital Corporation as a fee.





2008- Stock issued for termination of services





On January 31, 2008, Gilla issued 220,311 of common stock for termination of services.





2008-Sale of common stock





In October 2008, the Company sold a total of 916,667 shares of common stock for net proceeds of $275,000.00.





2009-Cancellation of common stock





On October 28, 2009, 4,248,037 shares were returned to Treasury.





2009-Sale of common stock





On October 31, 2009, Gilla Inc. completed a Private Placement for 5 million shares for proceeds of $50,000 at $0.01 per share. The sole subscriber was Credifinance Capital Corp., a shareholder of the Corporation.




F-18





NOTE 6 EQUITY (continued)




2010 – Stock issued in settlement of legal action





On January 28, 2010, 200,000 Common Shares of the company were issued to RM Communication in settlement of a law suit. The shares were valued at $16,000 at $0.08 per share.





2010 – Cancellation of common stock





In March 2010, 16,992,150 shares of common stock held by these individuals; Georges Fotso, Capital Venture Facilitators, LLC, Mathurin Djekam, Marie-Gisele Momo Minlo and Pauline NGO Bapa have been returned to the


Company for cancellation and were subsequently cancelled. Defendant DRR Capital Corporation is not part of the Settlement Agreement.





2010 – Sale of common stock





In March 2010, Gilla Inc. completed a Private Placement for 300,000 common shares for proceeds of $12,000 at $0.04 per share.  The sole subscriber was a shareholder of the Company.





2010 – Stock issued for services





In April 2010, 1,180,000 common shares were issued to Daniel Barratte. 1,000,000 common shares, valued at $50,000   at $0.05 per share, in lieu of cash as a bonus for obtaining mining permits in the Democratic Republic of Congo, and 180,000 common shares valued at $9,000 at $0.05 per share were issued in lieu of cash for consulting services.





In September 2010, 700,000 common shares were issued, valued at $35,000 at $0.05 per share in lieu of cash as a bonus for obtaining additional mining permits in the Democratic Republic of Congo.





2010 – Stock issued as directors fees and management fees





In September 2010, 2,000,000 common Shares were issued to Georges Benarroch (one of the directors), valued at $100,000 at $0.05 per share in lieu of cash as management fee. In September 2010, 60,000 common shares were issued as directors fees, to each of the Company’s four directors, in lieu of cash. Total common shares issued as directors fees for the year ended December 31, 2010 were 240,000 valued at $0.05 per share.





B) Stock Options and Warrants




For stock options and warrants issued to non-employees, the Company applies ASC 718. Accordingly, expense of $712,406 was recognized in 2008, upon granting of 5,144,804 common stock options.






F-19




NOTE 6 EQUITY (continued)


For financial statement disclosure purposes and for purposes of valuing stock options and warrants issued, the fair market value of each stock granted was estimated on the grant date using the Black-Scholes Option-Pricing Model in accordance with ASC 718. The following weighted-average assumptions were used for the year ended December 31:


2009Expected Dividend Yield

$
--Risk Free Interest Rate


--Expected Volatility


138
%Expected Term

1 Year




A summary of the options outstanding, which were granted for cash or services are presented below:


NUMBER OFOPTIONS AND

WARRANTS


WEIGHTED

AVERAGEEXERCISE PRICEStock OptionsBalance at December 31, 2008


5,144,804


$
0.60Granted


-



-Exercised


-



-Forfeited


(4,600,000
)

$
0.60Terminated


-



--



-Balance at December 31, 2009


544,804


$
0.60Granted


-



-Exercised


-



-Forfeited


(544,804
)

$
0.60Terminated


-



--



-Balance at December 31, 2010


-



-Weighted average fair valueof options granted forservices during 2010






-




F-20





NOTE 7 INCOME TAXES





Deferred income taxes arise from timing differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. A deferred tax asset valuation allowance is recorded when it is more likely than not that deferred tax assets will not be realized. There are no deferred taxes as of December 31, 2010.





There was no income tax expense for the year ended December 31, 2010.





The Company's benefit differs from the "expected" benefit for the year ended December 31, 2010 (computed by applying the Corporate tax rate of 38% to the loss before taxes), as follows:





December 31,2010


2009Computed “expected" tax benefit

$
(1,912,594
)

$
(4,946,416
)Benefit of operating loss carryforwards


-



-Valuation allowance


1,912,954



4,946,416Net tax benefit

$
-


$
-





The effects of temporary differences that gave rise to significant portions of deferred tax assets and liabilities at December 31, 2010 are as follows:




December 31, 2010Deferred Tax AssetsCurrent Deferred Tax Assets

$
-Net operating loss carryforward


11,713,166Total gross deferred Tax Assets


11,713,166Less valuation allowance


(11,713,166
)Net deferred tax assets

$
-





The Company has a net operating loss carryforward of approximately $30,824,122 available to offset future taxable income through 2029.









F-21





NOTE 8 FAIR VALUE MEASUREMENTS





Fair Value Measurements under GAAP clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements are separately disclosed by level within the fair value hierarchy. It only applies to accounting pronouncements that already require or permit fair value measures, except for standards that relate to share-based payments.





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





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





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





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





The carrying value of the Company’s cash and cash equivalents, accounts payable, short-term borrowings (including convertible notes payable), and other current assets and liabilities approximate fair value because of their short-term maturity. All other significant financial assets, financial liabilities and equity instruments of the Company are either recognized or disclosed in the consolidated financial statements together with other information relevant for making a reasonable assessment of future cash flows, interest rate risk and credit risk. Where practicable the fair values of financial assets and financial liabilities have been determined and disclosed; otherwise only available information pertinent to fair value has been disclosed.





As of December 31, 2010 and 2009, there were no financial assets or liabilities that were measured at fair value on a recurring basis.





NOTE 9 SUBSEQUENT EVENTS





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





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





On February 10, 2011, the Eight Judicial Court, in and for Clark County, Nevada dismissed with out prejudice claims against DRR Capital Corporation.




On February 20, 2011 Jewett, Schwartz, Wolfe & Associates(“JSW”) advised Gilla Inc. that its audit practice was acquired by RBSM LLP (“RBSM ”), an independent registered public accounting firm and that, accordingly, JSW was resigning as the Company’s independent registered public accounting firm. On February 20, 2011 the Company engaged RBSM LLP as its independent registered public accounting firm for the Company’s fiscal year ended December 31, 2010. The engagement of RBSM as the Company’s independent registered public accounting firm was approved by the Company’s Board of Directors.





F-22





ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL DISCLOSURE




Previous independent registered public accounting firm





On February 20, 2011 (the “Resignation Date”), Jewett, Schwartz, Wolfe & Associates   (“JSW”) advised Gilla Inc. (the “Company”) that its audit practice was acquired by RBSM LLP (“RBSM ”), an independent registered public accounting firm and that, accordingly, JSW was resigning as the Company’s independent registered public accounting firm.





The reports of JSW on the Company’s  financial statements for the years ended December 31, 2009 and 2008  and for the period March 28, 1995 (date of inception) through December 31, 2009 did not contain an adverse opinion or disclaimer of opinion, and such reports were not qualified or modified as to uncertainty, audit scope, or accounting principle, except that the reports of JSW on the Company’s consolidated financial statements as of and for the years ended December 31, 2009 and 2008 and for the period March 28, 1995 (date of inception) through December 31, 2009 contained an explanatory paragraph which noted that there was substantial doubt as to the Company’s ability to continue as a going concern due to a deficit in working capital and incurring significant losses.





During the years ended December 31, 2009 and 2008 and for the period March 28, 1995 (date of inception) through December 31, 2009, and through February 20, 2011, the Company has not had any disagreements with JSW on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to JSW’s satisfaction, would have caused them to make reference thereto in their reports on the Company’s financial statements for such periods.





During the years ended December 31, 2009 and 2008 and for the period March 28, 1995 (date of inception) through December 31, 2009, and through February 20, 2011, there were no reportable events, as defined in Item 304(a)(1)(v) of Regulation S-K.





New independent registered public accounting firm





On February 20, 2011  (the “Engagement Date”), the Company engaged RBSM LLP (“RBSM ”) as its independent registered public accounting firm for the Company’s fiscal year ended December 31, 2010. The engagement of RBSM as the Company’s independent registered public accounting firm was approved by the Audit Committee of the Company’s Board of Directors.





ITEM 9A.  CONTROLS AND PROCEDURES





Under the supervision and with the participation of our management, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, we have concluded that these disclosure controls and procedures are effective.




REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING




Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the company. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected.





Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the company’s internal control over financial reporting were not effective based on criteria set forth by the COSO as of December 31, 2010. The following material weaknesses were identified in our internal control over financial reporting as of December 31, 2010.




·
The company was unable to maintain the proper segregation of various accounting and finance duties because of our small size and limited resources.  At risk areas include cash receipts and payments, processing of journal entries and accounts reconciliations


·
The company’s financial closing process is done off-line on electronic spreadsheets that are maintained on individual computers





13
 
 
 These control deficiencies could result in a misstatement of account balances that would result in a reasonable possibility that a material misstatement to our consolidated financial statements may not be prevented or detected on a timely basis. Accordingly, we have determined that these control deficiencies as described above together constitute a material weakness.
 
 In light of this material weakness, we performed additional analyses and procedures in order to conclude that our consolidated financial statements for the year ended December 31, 2010 included in this Annual Report on Form 10-K were fairly stated in accordance with US GAAP. Accordingly, management believes that despite our material weaknesses, our consolidated financial statements for the year ended December 31, 2010 are fairly stated, in all material respects, in accordance with US GAAP.
 
 This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report on Form 10-K.
 
 Limitations on Effectiveness of Controls and Procedures
 
 Our management, including our Chief Executive 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 fiscal quarter ended December 31, 2010, 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.





ITEM 9B. OTHER ITEMS





Please refer to the financial statements for additional costs and expenditures and other financial information.





14





PART III





ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT





A) IDENTIFY DIRECTORS AND EXECUTIVE OFFICERS





NAME

AGE

POSITIONGeorges Benarroch

64

President/Chief Financial Officer/DirectorLinda Kent

55

Corporate Secretary &TreasurerDaniel Barrette

46

DirectorChief Operating OfficerDirectorStanley D. Robinson

61

Director





The business experience of the persons listed above during the past five years are as follows:





Georges Benarroch/Chief Financial Officer/President/Director:


Mr. Benarroch was elected as President effective November 18th, 2004, and a Director of the Company since September 2004.  Mr. Benarroch is the President and Chief Financial Officer of Credifinance Capital Corp. and President of and Chief Executive Officer of Kyto Biopharma Inc. a public company. The Company believes Mr. Benarroch's past experience in corporate finance gives him the qualifications and skills to serve as a Director.





Linda Kent/Corporate Secretary Treasurer/Director:


Ms. Kent has worked in the securities brokerage industry from 1979 to 2008.





Mr. Daniel Barrette


Mr. Barrette has spent the last few years in Africa where he has gained experience and developed, over the years, an extensive network of strategic business contacts as well as being responsible for the acquisition of several mineral properties for public listed and private mining companies. He was also responsible for the establishment of some Canadian companies: creation of subsidiaries, JV negotiations, logistics, dealings with government bodies and Cadastre Minier. The Company believes Mr. Barrette's experience in business development qualifies him to serve as a Director.





Mr. Stanley D. Robinson, M.Sc., P.Geo


An exploration geologist with over 30 years of experiencein Africa (Angola, Democratic Republic of Congo, Ghana, Tanzania, Burkina Faso), Canada and South America. Mr. Robinson’s dominant technical expertise is in the management of gold and base metal exploration projects, from grassroots to feasibility stage, geological interpretations with an emphasis on structure and alteration, and in the identification of projects with economic potential. He has extensive experience in managing exploration projects in remote locations and in climatic environments that range from permafrost to tropical and semi-desert. His exploration experience includes data base compilations and ore deposit interpretations used to calculate ore resources for and feasibility studies, which the Company believes qualifies him to serve as a Director.




15





B) IDENTIFY SIGNIFICANT EMPLOYEES





The Company does not expect to receive a significant contribution from employees that are not executive officers.





C) FAMILY RELATIONSHIPS





There are no directors, executive officers or persons nominated or persons chosen by the Company to become a director or executive officer of the Company who are directly related to an individual who holds the position of director or executive officer or is nominated to one of the said positions.





D) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS





There are no material events that have occurred in the last five years that would affect the evaluation of the ability or integrity of any director, person nominated to become a director, executive officer, promoter or control person of the Company.





E) AUDIT COMMITTEE





The Audit Committee has the responsibility of (i) recommending the selection of our independent public accountants, (ii) reviewing and approving the scope of the independent public accountants' audit activity and extent of non-audit services, (iii) reviewing with management and our independent public accountants the adequacy of our accounting system and the effectiveness of our internal audit plan and activities, (iv) reviewing with management and our independent public accountants the financial statements and exercising general oversight of the financial reporting process and (v) reviewing with us litigation and other legal matters that may affect our financial condition, and monitoring compliance with our business ethics and other policies.





The Audit Committee is composed of Daniel Barrette, Linda Kent, and Georges Benarroch.  The Audit Committee did not meet in 2010. The Audit Committee has not adopted a charter. The functions that would normally be performed by the Audit Committee were performed by the Board.







16




ITEM 11.  EXECUTIVE COMPENSATION
 
 SUMMARY COMPENSATION TABLE
 
 The following table sets forth information concerning the annual and long-term compensation awarded to, earned by, payable/paid to Georges Benarroch the Company’s President/Director, Linda Kent the Company’s Corporate Secretary Treasurer, Daniel Barrette the Company’s Chief Operating Officer, for  all services rendered in all capacities to the company for the years ended December 31, 2010 and 2009.




Name/Title
Year
Salary
Bonus
Other
RestrictedAnnual
Option Stocks/Compensation
Payouts Awarded$
$
$
#-
-Georges Benarroch
2010
-
-
-
2,060,000President/CEO/Director
2009
-
-
-
-Linda Kent
2010
-
-
-
60,000Secretary/Treasurer/Director
2009
-
-
-
-Daniel Barrette
2010
24,000
-
-
1,640,000COO/Director
2009
36,000
-
-
-Stanley Robinson
2010
-
-
-
60,000Director
2009
-
-
-
-





OPTIONS/SAR GRANTS TABLE





There were no options granted to employees and no grants to key employees in fiscal years 2010 and 2009.





COMPENSATION OF DIRECTORS





All directors hold office until the next annual meeting of stockholders and until their successors have been duly elected and qualified. There are no agreements with respect to the election and compensation of directors. The Board of Directors appoints officers annually and each executive officer serves at the discretion of the Board of Directors. The Company does not have any standing committees at this time.





The Company does not currently maintain insurance for the benefit of the directors and officers of Gilla against liabilities incurred by them in their capacity as directors or officers of Gilla. Gilla does not maintain a pension plan for its employees, officers or directors.





The directors received 60,000 common shares each for services during the fiscal year 2010.  None of the directors or senior officers of Gilla and no associate of any of the directors or senior officers of Gilla was indebted to the Company during the financial period ended December 31, 2010 of Gilla other than for routine indebtedness.





EMPLOYMENT CONTRACTS





None





REPORT ON REPRICING OF OPTIONS/SARS





None





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ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT





A)    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS





The following persons (including any group as defined in Regulation S-B, Section 228.403) are known to the Company, as the issuer, to be beneficial owner of more than five percent (5%) of any class of the said issuer=s voting securities.





Title of Class
Name of Beneficial Owner

Common Shares


Percentage of ClassCommon
Georges Benarroch


2,060,000



7.55
%Common
Daniel Barratte


1,840,000



6.75
%





B)    SECURITY OWNERSHIP OF MANAGEMENT





Title of Class
Name of Beneficial Owner

Common Shares


Percentage of ClassCommon
Daniel Barrette/Chief Operating Office


1,840,000



6.75
%Common
Linda Kent/Corporate Secretary Treasurer Director


560,530



2.05
%Common
Georges Benarroch/ President and Chief Executive officer


2,060,000



7.55
%





ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


(A) CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS





Detail of related party transactions are described in note 4 & 5 of the consolidated Financial Statements.





(B) TRANSACTIONS WITH PROMOTERS


Officers, directors and employees will refrain from gathering competitor intelligence by illegitimate means and refrain from acting on knowledge, which has been gathered in such a manner. The officers, directors and employees of Gilla Inc. will seek to avoid exaggerating or disparaging comparisons of the services and competence of their competitors.





Officers, directors and employees will obey all Equal Employment Opportunity laws and act with respect and responsibility towards others in all of their dealings. Officers, directors and employees will remain personally balanced so that their personal life will not interfere with their ability to deliver quality products or services to the company and its clients.


Officers, directors and employees agree to disclose unethical, dishonest, fraudulent and illegal behavior, or the violation of company policies and procedures, directly to management.





Violation of this Code of Ethics can result in discipline, including possible termination. The degree of discipline relates in part to whether there was a voluntary disclosure of any ethical violation and whether or not the violator cooperated in any subsequent investigation.





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ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES





The Board of Directors appointed RBSM LLP (“RBSM”), as our independent auditors for the fiscal year ending December 31, 2010.





(1) Audit Fees





RBSM LLP, Independent Registered Public Accounting firm billed an aggregate of $21,000 for audit of our annual consolidated financial statements for the fiscal year ended December 31, 2010 included in our annual report on Form 10-K. Jewett, Schwartz, Wolfe and Associates, billed an aggregate of $12,000 for the review of our interim financial statements included in our quarterly reports on Form 10-Q.





(2) Audit Related Fees





No other professional services were rendered by RBSM LLP and Jewett, Schwartz, Wolfe and Associates for audit related services rendered during the fiscal year ended December 31, 2010, in connection with, among other things, the preparation of a Registration Statement on Form 10-K.





(3) Tax Fees





No professional services were rendered by RBSM LLP and Jewett, Schwartz, Wolfe and Associates for tax compliance, tax advice, and tax planning the fiscal year ended December 31, 2010.





(4) All Other Fees





Not applicable.





ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES SIGNATURES




Date

Item(s)2006-01-19

5.022006-02-08

8.01, 9.012006-10-05

2.01, 5.02, 8.01, 9.12006-12-29

3.022007-02-01

3.012007-03-





(A)   LISTING OF EXHIBITS




EXHIBIT NUMBER

DESCRIPTION3(i)(a)

*Articles of Incorporation of Osprey Gold Corp.3(i)(b)

*Articles of Amendment changing name to Osprey Gold Corp.3(ii)

*Bylaws of Osprey Gold Corp.31.1

Section 302 Certification32.1

Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002





* Incorporated by reference filed as form 10SB





19





(B)   CODE OF ETHICS





Gilla Inc. will conduct its business honestly and ethically wherever we operate in the world. We will constantly improve the quality of our services, products and operations and will create a reputation for honesty, fairness, respect, responsibility, and integrity, trust and sound business judgment. No illegal or unethical conduct on the part of officers, directors, employees or affiliates is in the company's best interest. Gilla Inc. will not compromise its principles for short-term advantage. The ethical performance of this company is the sum of the ethics of the men and women who work here. Thus, we are all expected to adhere to high standards of personal integrity.





Officers, directors, and employees of the company must never permit their personal interests to conflict, or appear to conflict, with the interests of the company, its clients or affiliates. Officers, directors and employees must be particularly careful to avoid representing Gilla Inc. in any transaction with others with whom there is any outside business affiliation or relationship. Officers, directors, and employees shall avoid using their company contacts to advance their private business or personal interests at the expense of the company, its clients or affiliates.





No bribes, kickbacks or other similar remuneration or consideration shall be given to any person or organization in order to attract or influence business activity. Officers, directors and employees shall avoid gifts, gratuities, fees, bonuses or excessive entertainment, in order to attract or influence business activity.





Officers, directors and employees of Gilla Inc. will often come into contact with, or have possession of, proprietary, confidential or business-sensitive information and must take appropriate steps to assure that such information is strictly safeguarded. This information - whether it is on behalf of our company or any of our clients or affiliates - could include strategic business plans, operating results, marketing strategies, customer lists, personnel records, upcoming acquisitions and divestitures, new investments, and manufacturing costs, processes and methods. Proprietary, confidential and sensitive business information about this company, other companies, individuals and entities should be treated with sensitivity and discretion and only be disseminated on a need-to-know basis.





Misuse of material inside information in connection with trading in the company's securities can expose an individual to civil liability and penalties.  Directors, officers, and employees in possession of material information not available to the public are "insiders". Spouses, friends, suppliers, brokers, and others outside the company who may have acquired the information directly or indirectly from a director, officer or employee are also "insiders." The Act prohibits insiders from trading in, or recommending the sale or purchase of, the company's securities, while such inside information is regarded as "material", or if it is important enough to influence you or any other person in the purchase or sale of securities of any company with which we do business, which could be affected by the inside information.





The following guidelines should be followed in dealing with inside information:





Until the company has publicly released the material information, an employee must not disclose it to anyone except those within the company whose positions require use of the information.





Employees must not buy or sell the company's securities when they have knowledge of material information concerning the company until it has been disclosed to the public and the public has had sufficient time to absorb the information.





Employees shall not buy or sell securities of another corporation, the value of which is likely to be affected by an action by the company of which the employee is aware and which has not been publicly disclosed.





Officers, directors and employees will seek to report all information accurately and honestly, and as otherwise required by applicable reporting requirements.





20





SIGNATURES





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





GILLA INC.(FORMERLY INCITATIONS)By:
/s/  Georges BenarrochGeorges Benarroch, President & Chief Financial Officer





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





Name

Title

Date/s/  Georges Benarroch

President

April 15,2011Chief Financial Officer