SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





FORM 10-Q


þ

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





For the quarterly period ended September 30, 2011





OR


o

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





COMMISSION FILE NO. 000-28107




GILLA INC.


(Exact Name of Registrant as Specified in its Charter)


Nevada

88-0335710(State or Other Jurisdiction of

(I.R.S. Employer Identification Number)Incorporation or Organization)112 North Curry Street, Carson City, NV

89703(Address of Principal Executive Offices)

(Zip Code)





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


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





COMMON STOCK, .0002 PAR VALUE PER SHARE





(Title of Class)




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




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




Large accelerated filer o

Accelerated filer o

Non-accelerated filer   o

(Do not check if a smaller reporting company)

Smaller Reporting Company þ





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). þYes   oNo





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





APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY


PROCEEDINGS DURING THE PRECEDING FIVE YEARS:





Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. þYes   o  No





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





29,477,766Common Shares - $0.0002 Par Value as of November 11, 2011















PART I - Financial InformationItem 1. Financial StatementsCondensed Consolidated Balance Sheet as of September 30, 2011 (Unaudited) and Consolidated Balance Sheet as of December 31, 2010


3Unaudited Condensed Consolidated Statements of Operations for the  Three and Nine months ended September 30, 2011 and 2010


4Unaudited Condensed Consolidated Statements of Cash Flows for the Nine months ended September  30, 2011 and 2010


5Notes to Unaudited Condensed Consolidated Financial Statements


6Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation


10Item 3. Quantitative and Qualitative Disclosures About Market Risk


14Item 4. Control and Procedures


14PART II - Other InformationItem 1. Legal Proceedings


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


15Item 3. Defaults Upon Senior Securities


15Item 4. [Removed and Reserved]


15Item 5. Other Information


15Item 6. Exhibits


15SIGNATURES


16CERTIFICATIONS


2




GILLA, INC.CONDENSED CONSOLIDATED BALANCE SHEETSSetpember 30


December 31,2011


2010(Unaudited)ASSETSCURRENT ASSETSCash and cash equivalents

$
94


$
1,617TOTAL CURRENT ASSETS


94



1,617TOTAL ASSETS

$
94


$
1,617LIABILITIES AND (DEFICIENCY) IN STOCKHOLDERS' EQUITYCURRENT LIABILITIESAccounts payable

$
9,970


$
5,503Accrued Liabilities


98,000



61,500Accrued Liabilities-Interest


7,325



-Notes payable related party


-



103,717TOTAL CURRENT LIABILITIES


115,295



170,720LONG TERM LIABILITIESNotes payable related party


122,717



-Derivative Liability


441,781TOTAL LONG TERM  LIABILITIES


564,498



-TOTAL LIABILITIES

$
679,793


$
170,720COMMITMENTS AND CONTINGENCIES(DEFICIENCY) IN SHAREHOLDERS' EQUITYCommon stock, $0.0002 par value, 300,000,000 shares authorized;29,477,766 and 27,277,766  shares issued and outstandingas of  September 30, 2011 and December 31, 2010 respectively


5,895



5,455Additional paid - in capital


30,319,145



30,649,564Deficit accumulated


(31,004,739
)


(30,824,122
)TOTAL (DEFICIENCY) IN SHAREHOLDERS' EQUITY


(679,699
)


(169,103
)TOTAL LIABILITIES AND  (DEFICIENCY) IN SHAREHOLDERS' EQUITY

$
94


$
1,617
  See the accompanying notes to the unaudited condensed consolidated financial statements


3
 
  GILLA, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(UNAUDITED)
  For the Quarter Ended


For the Nine Months EndedSeptember 30


September 302011


2010


2011


2010REVENUES

$
-


$
-


$
-


$
-TOTAL REVENUES


-



-



-



-EXPENSES:Exploration cost


-



58,500



4,450



112,292Asset impairment Charges


-



-



-



-General and administrative


20,825



140,035



79,040



237,331TOTAL OPERATING EXPENSES


20,825



198,535



83,490



349,623NET LOSS FROM OPERATIONS


(20,825
)


(198,535
)


(83,490
)


(349,623
)OTHER INCOME (EXPENSES)Gain (loss) on foreign exchange rate transactions


-



-



-



(76
)Gain on change in fair value of derivative liabilities


(88,802
)


-



32,915



-Interest expense


(4,070
)


-



(130,042
)


-Interest income


-



-



-



-TOTAL OTHER INCOME (EXPENSES)


(92,872
)


-



(97,127
)


(76
)NET LOSS BEFORE INCOME TAXES

$
(113,697
)

$
(198,535
)

$
(180,617
)

$
(349,699
)INCOME (TAX) BENEFIT


-



-



-



-NET LOSS

$
(113,697
)

$
(198,535
)

$
(180,617
)

$
(349,699
)Comprehensive LossDividends Paid


-



-



-



-Total Comprehensive Loss

$
(113,697
)

$
(198,535
)

$
(180,617
)

$
(349,699
)WEIGHTED AVERAGE NUMBER OF SHARESOUTSTANDING-BASIC  AND DILUTED


29,170,074



24,657,331



28,759,534



28,453,209LOSS PER COMMON SHARES-BASIC AND DILUTED

$
(0.00
)

$
(0.01
)

$
(0.01
)

$
(0.01
)
  See the accompanying notes to the unaudited condensed consolidated financial statements
  4
 GILLA, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)  For the Nine Months EndedSeptember 302011


2010CASH FLOW FROM OPERATING ACTIVITIESNet loss from operations

$
(180,617
)

$
(349,699
)Adjustment to reconcile net loss to net cashused in operating activities:Issuance of common stock toward legal settlement charges


-



16,000Issuance of common stock for services


-



206,000Beneficial conversion discount


122,717



-Change in fair value of derivative liabilities


(32,915
)


-Changes in operating assets and liabilities:Prepaid expenses


-



3,000Accounts payable


4,467



5,570Accrued expenses


43,825



3,604Net cash used in operating activities


(42,523
)


(115,525
)CASH FLOW FROM FINANCING ACTIVITIESNotes payable related party


41,000



77,217Sale of common stock


-



12,000Net cash provided by financing activities


41,000



89,217Net Increase (decrease) in cash and cash equivalents


(1,523
)


(26,308
)Cash and cash equivalents at beginning of period


1,617



35,123Cash and cash equivalents at end of period

$
94


$
8,815Supplemental Disclosure of Cash Flow Information:Cash paid for:Interest


-



-Taxes


-



-Non-cash investing and financing activities:Common Stock Issued for Notes Payable


22,000



-Beneficial conversion features


122,717



-
  See the accompanying notes to the unaudited condensed consolidated financial statements
 
 5
  GILLA, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS





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





We have specialized in acquiring and consolidating large,exploration-stage properties with near-term production potential and future growth through exploration discoveries.  Our acquisition and development emphasis is focused on properties containing gold and other strategic minerals located in Africa.  The company was in  “exploration stage” till June 30, 2011.





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





NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




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




Principles of Consolidation




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




Basis of Accounting




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




Interim Reporting




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




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




6




NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


Going Concern





As reflected in the accompanying interim condensed consolidated financial statements, the Company has had recurring losses.  The Company’s net loss was $180,617 and $349,699 for the nine months ended September 30, 2011 and 2010, respectively, and net cash used in operations totaled $42,523 and $115,525 for the nine  months ended September 30, 2011 and 2010, respectively.  Deficiency in shareholders’ equity of $679,699 and an accumulated deficit of $31,004,739 at September 30, 2011 raise substantial doubt about the Company’s ability to continue as a going concern. These interim condensed consolidated financial statements do not include any adjustments to reflect the possible effects on recoverability and classification of assets or the amounts and classification of liabilities that may result from our inability to continue as a going concern.





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





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




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


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





Management’s Plans





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




Use of Estimates





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




7





NOTE 3 - ACCOUNTING STANDARDS UPDATES





Significant Recent Accounting Pronouncements





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





NOTE 4 - EQUITY





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





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





NOTE 5 - NOTES PAYABLE - RELATED PARTY





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





September30,

2011


December 31,

2010Note payable to related party, with 10% interest per annum. The note matures on December 31, 2012. In consideration for the credit facility provided to the Company, CFCC or its designee shall receive a 15% non-dilution interest in all real and personal properties held by the Company through its 99% GISOR SA subsidiary in the Democratic Republic of the Congo as of the date hereof, and not as security for the payment of the Note, but subject to any liens or other security interests arising from bona fide indebtedness of the Company and its subsidiaries.

$
122,717


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


-



81,717Convertible 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.


-



15,000Convertible 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.


-



7,000Total notes payable

$
122,717



103,717Less: current portion


-



103,717Notes payable – long term

$
122,717


$
-




8





NOTE 5 - NOTES PAYABLE - RELATED PARTY (Continued)


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 $122,717 and $22,000, has been recorded as an interest expense for the nine months ended September 30, 2011 and the year ended December 31, 2010.





On April 15, 2011, the Company entered into a Loan Agreement with an investor pursuant to which the Company sold and issued a convertible promissory note in the principal amount of for up to $200,000.  As of September 30, 2011 the investor has loaned the company $122,717.  The Note is convertible into shares of common stock at an initial conversion price of $0.01 per share subject to adjustment as contained in the Note. The Note accrues interest at a rate of 10% per annum and matures on December 31, 2012.  Since the effective conversion price was less than the fair value of the company common stock on the date of issue the Company has recorded a beneficial conversion feature in the amount of $122,717. On April 15, 2011, the company calculated a derivative liability as $ 474,696. The assumptions used in the Black-Scholes model are as follows: (1) dividend yield of 0%; (2) expected volatility of 312% (3) risk-free interest rate of 1.0%, (4) expected life of 1.75 years and (5) fair value of the Company’s common stock of $0.04 per share.





NOTE 6 – DERIVATIVE LIABILITY





At September 30, 2011 the Company recalculated the fair value of the conversion feature of its common stock subject to derivative accounting and have determined that the fair value at September 30, 2011 is $441,781. The fair value of the conversion features was determined using the Black-Scholes method based on the following assumptions:  (1) risk free interest rate of 1.0%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of the Company’s common stock of 213%; (4) an expected life of the conversion feature of 1.25 years and (5) estimated fair value of the company’s common stock of $0.04 per share.





The Company has recorded a gain of $32,915 during the nine months ended September 30, 2011.





NOTE 7 - SUBSEQUENT EVENTS




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





9


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





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





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





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





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





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





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





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





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




The company was in “explorative stage” till June 30, 2011




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





The Registrant conducted no actual mining operation during the nine months ended September 30, 2011. As such, it had no revenues as described in the interim condensed consolidated financial statements, attached hereto.  However, the Company had total a net loss of $180,617 and $349,699 for the nine months ended September 30, 2011 and 2010, respectively.




10





LIQUIDITY AND CAPITAL RESOURCES





The Company had working capital deficits of $115,201 and $169,103 as of September 30, 2011 and December 31, 2010, respectively.  Cash were $94 and $1,617 as of September 30, 2011 and December 31, 2010, respectively.





Cash from operating activities





The Company’s cash outflow from operations of $42,523 for the nine months ended September 30, 2011 was $73,002 below cash outflow from operations of $115,525 for the nine months ended September 30, 2010.





Cash from financing activities





The Company’s net cash inflow from financing activities of $41,000 for the nine months ended September 30, 2011 was $48,217 below the cash inflow from financing activities for the nine months ended September 30, 2010, which was $89,217.





OVERVIEW





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




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




The report of our independent accountants on our December 31, 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.




11





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





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




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


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


·
The capital available for exploration and development.





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





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





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


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


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





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





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





Our independent auditors have added an explanatory paragraph to their audit opinion issued in connection with the financial statements for the year ended December 31, 2010. The Company’s auditors have expressed doubt about the Company’s ability to continue as a going concern. As of September 30, 2011, the Company has current assets in the form of cash of $94, current liabilities of $115,295 and long term liabilities of $564,498. The Company’s accumulated losses to date are $31,004,739.





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





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





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





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





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





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





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





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





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





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




13


CRITICAL ACCOUNTING POLICIES





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





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





DEPRECIATION AND DEPLETION





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





IMPAIRMENT OF LONG-LIVE ASSETS





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


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


Not required for smaller reporting company
  ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES
  Evaluation of Disclosure Controls and Procedures:  We maintain “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934.  In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met.  Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.  The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Based on his evaluation as of the end of the period covered by this report, our Chief Executive Officer who also serves as our principal financial and accounting officer has concluded that our disclosure controls and procedures were not effective such that the information relating to our company, required to be disclosed in our Securities and Exchange Commission reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure.





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




14





PART II - OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS


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





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





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




ITEM 2. CHANGES IN SECURITIES
 
 On February 1, 2011 the Company issued 1,500,000 common shares to a shareholder as payment for $15,000 promissory note (See Note 5).
 
 On May 10, 2011 the Company issued 700,000 common shares to a shareholder as payment for $7,000 promissory note (See Note 5).
 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  None.
  ITEM 4. [REMOVED AND RESERVED]
  ITEM 5. OTHER INFORMATION
   ITEM 6. EXHIBITS
  31.1    Certification by Chief Executive Officer and Chief Financial Officer required by Rule 13a-14(a)or Rule 15d-14(a) of the Exchange Act, promulgated pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32.1    Certification by Chief Executive Officer and Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code, promulgated pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 15
  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 November 14, 2011 by the undersigned, thereunto authorized.




GILLA INC.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,Chief Financial Officer andDirector

November 14, 2011Georges Benarroch