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 June 30, 2010





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). oYes   þNo




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. xYes   o  No




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




24,337,766Common Shares-$0.0002 Par Value as  of  August 11, 2010









PART I Financial InformationItem 1. Financial StatementsUnaudited Consolidated Balance Sheet as of June 30, 2010, and Audited Consolidated Balance Sheet as of December 31, 2009


2Unaudited Consolidated Statements of Operations for the Six  months June 30,  2010 and 2009.


3Unaudited Consolidated Statements of Cash Flows for the Six  months ended June, 2010 and  2009 and


4Notes to Unaudited Consolidated Financial Statements


5Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation


9Item 3. Quantitative and Disclosures About Market Risk


13PART II-Other InformationItem 1. Legal Proceedings


14Item 2. Unregistered Sales of Equity Securities and Use of Proceeds


14Item 3. Defaults Upon Senior Securities


14Item 4. Submission of Matters to a Vote of Security Holders


14Item 5. Exhibits and Reports on Form 8-K


14SIGNATURES


15CERTIFICATIONS




1





PART I - FINANCIAL INFORMATION
 ITEM 1. FINANCIAL STATEMENTS
 
 GILLA, INC.
 (FORMERLY OSPREY GOLD CORP.) (AN EXPLORATION STAGE COMPANY) CONSOLIDATED BALANCE SHEETS





June 30,


December 31,2010


2009(UNAUDITED)


AUDITEDASSETSCURRENT ASSETSCash

$
9,510


$
35,123Prepaid expenses


-



3,000TOTAL CURRENT ASSETS


9,510



38,123Mining rights


4,600,000



4,600,000TOTAL ASSETS

$
4,609,510


$
4,638,123LIABILITIES AND SHAREHOLDERS' EQUITYCURRENT LIABILITIESAccounts payable

$
41,639


$
5,188Accrued Liabilities


14,000



24,896Loan Payable-Related Party


10,000



-TOTAL LIABILITIES


65,639



30,084COMMITMENTS AND CONTINGENCIESSHAREHOLDERS' EQUITYCommon stock, $0.0002 par value, 300,000,000 shares authorized;24,337,766 and 39,650,018  shares issued and outstanding respectively


4,867



7,930Additional paid - in capital


30,481,151



30,391,089Deficit accumulated during the exploration stage


(25,942,147
)


(25,790,980
)TOTAL SHAREHOLDERS' EQUITY


4,543,871



4,608,039TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

$
4,609,510


$
4,638,123





2





GILLA, INC. (FORMERYLY OSPREY GOLD CORP.) (AN EXPLORATION STAGE COMPANY) CONSOLIDATED STATEMENTS OF OPERATIONS
 For the Quarter Ended


For the Six Months


March 28, 1995June 30,


June 30,


For the Period From(Inception) to2010


2009


2010


2009


June 30 , 2010REVENUES

$
-


$
-



-


$
-


$
-TOTAL REVENUES


-



-



-



-



-EXPENSES:Exploration cost


53,792



-



53,792



40,038



1,767,847General and administrative


33,207



46,223



81,299



94,369



15,468,196TOTAL OPERATING EXPENSES


86,999



46,223



135,091



134,407



17,236,043NET LOSS FROM OPERATIONS


(86,999
)


(46,223
)


(135,091
)


(134,407
)


(17,236,043
)OTHER INCOME (EXPENSES)Loss on abandonment of mining camp


-



-



-



-



(50,000
)Gain of forgiveness of debt


-



-



-



-



1,828,932Gain on sale of mining properties


-



-



-



-



2,100,000Write Off


-



(3,774
)


-



(3,774
)


(17,648
)Asset impairment expenses


-



(12,744,110
)


-



(12,744,110
)


(12,744,110
)Miscellaneous Income (Loss)


-



-



-



6,097



6,097Legal settlement charges


-



-



(16,000
)


-



(16,000
)Gain (loss) on foreign exchange rate transactions


-



(1,604
)


(76
)


544



149,372Interest expense


-



-



-



-



(3,277
)Interest income


-



-



-



13



40,530TOTAL OTHER EXPENSES


-



(12,749,488
)


(16,076
)


(12,741,230
)


(8,706,104
)NET LOSS

$
(86,999
)

$
(12,795,711
)


(151,167
)

$
(12,875,637
)

$
(25,942,147
)WEIGHTED AVERAGE NUMBER OF SHARESOUTSTANDING-BASIC


23,585,678



38,898,055



31,889,664



38,898,055LOSS PER COMMON SHARES-BASIC

$
(0.00
)

$
(0.33
)


(0.00
)

$
(0.33
)WEIGHTED AVERAGE NUMBER OF SHARESOUTSTANDING- DILUTED


23,585,678



44,042,859



31,889,664



44,042,859LOSS PER COMMON SHARES-DILUTED

$
(0.00
)

$
(0.29
)


(0.00
)

$
(0.29
)
 
 3
 
 GILLA, INC. (formerly OSPREY GOLD CORP.) (AN EXPLORATION STAGE COMPANY) CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the Six Months Ended


March 28, 1995June 30


(Inception) to2010


2009


June 30, 2010CASH FLOW FROM OPERATING ACTIVITIESNet loss from operations

$
(151,167
)

$
(12,875,637
)

$
(25,942,147
)Adjustment to reconcile net loss to net cashused in operating activities:Issuance of common stock toward legal settlement charges


16,000



-



16,000Issuance of common stock for services


59,000



-



10,895,792Changes in operating assets and liabilities:Prepaid expenses


3,000



(3,000
)


-Other receivable


-



2,333



-Asset impairment expenses


-



12,744,110



12,744,110Mining camp


-



-



50,000Accounts payable


36,450



(2,190
)


412,295Loans payable: related party


10,000



-



10,000Accrued expenses


(10,896
)


-



18,156Net cash used in operating activities


(37,613
)


(134,384
)


(1,795,794
)CASH FLOW FROM FINANCING ACTIVITIESDividends distributions


-



-



(240,000
)Sale of common stock


12,000



-



2,045,304Net cash provided by financing activities


12,000



-



1,805,304Net Increase (decrease) in cash


(25,613
)


(134,384
)


9,510Cash a at beginning of period


35,123



235,774



-Cash at end of period

$
9,510


$
101,390


$
9,510Supplemental Disclosure of Cash Flow Information:Cash paid for:Interest


-



-



-Taxes


-



-



-Supplemental Disclosure of Non-CashInvesting and Financing ActivitiesIssuance of common stock towards legal settlement

$
16,000


$
-


$
16,000Issuance of comon stock for services

$
59,500


$
-


$
10,895,792
 
 4


GILLA, INC. (formerly OSPREY GOLD CORP.) (AN EXPLORATION STAGE COMPANY)
 Notes to Financial Statements


NOTE 1 - 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 shareholders approved name changes on March 22, 1996, March 18, 1997, September 13, 1999, October 3, 2000, April 23, 2003 and March 30, 2007 to Web Tech, Inc., Cynergy, Inc., Mercantile Factoring Credit Online Corp., Incitations, Inc., Osprey Gold Corp. and to its present name, respectively. On February 5, 2007 the board of directors approved the creation of two subsidiaries of the Company, a United States Subsidiary and a Canadian Subsidiary.  Prior to the merger in September 1999, the Company's activities had been in the development of proprietary technology and services using smart and remote memory cards and wireless and landline networks in the fields of commerce, publishing and network based systems.  The Company’s activities are currently focused on mineral-property development specializing in acquiring and consolidating mineral properties with production potential and future growth through exploration discoveries.


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




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




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 three months 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 consolidated financial statements follow the same accounting policies and methods of their application as the December 31, 2009 audited annual consolidated financial statements of Gilla Inc.  All adjustments are of a normal recurring nature. It is suggested that these interim consolidated financial statements be read in conjunction with the Company’s December 31, 2009 annual  consolidated audited financial statements.





Operating results for the six months ended June 30, 2010 are not necessarily indicative of the results that can be expected for the year ended December 31, 2010.





Going Concern





As reflected in the accompanying consolidated financial statements, the Company has had recurring losses.  The Company’s net loss was $151,167 and $12,875,637 for the six months ended  June 30, 2010 and 2009, respectively, and net cash used in operations totaled $47,613and $134,384 for the six months ended  June 30 2010 and 2009, respectively.  Shareholders’ equity of $4,543,871 and an accumulated deficit of $25,942,147 at June 30, 2010 raise substantial doubt about the Company’s ability to continue as a going concern. These 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.





5




NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)





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 properties in the Democratic Republic of  Congo.  The company is evaluating requirements for  senior listing. Most of all, the company will continue to acquire mining properties.





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.




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 for 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.  Management has determined the fair value of the Angolan mining rights at June 30, 2010 to be $4,600,000.





NOTE 4 - ACCOUNTING STANDARDS UPDATES





In March 2010, the FASB issued Accounting Standard Update No. 2010-11 “Derivatives and Hedging” (Topic 815). ASU No. 2010-11 update provides amendments to subtopic 815-15, Derivatives and hedging. The amendments clarify about the scope exception in paragraph 815-10-15-11 and section 815-15-25 as applicable to the embedded credit derivatives. The ASU is effective on the first day of the first fiscal quarter beginning after June 15, 2010. Therefore, for a calendar-year-end entity, the ASU becomes effective on July 1, 2010. Early application is permitted at the beginning of the first fiscal quarter beginning after March 5, 2010.  The adoption of this ASU did not have a material impact on our consolidated financial statements.




In April 2010, the FASB issued Accounting Standard Update No. 2010-12. “Income Taxes” (Topic 740). ASU No.2010-12 amends FASB Accounting Standard Codification subtopic 740-10 Income Taxes to include paragraph 740-10-S99-4. On March 30, 2010 The President signed the Health Care & Education Affordable Care Act reconciliation bill that amends its previous Act signed on March 23, 2010. FASB Codification topic 740, Income Taxes, requires the measurement of current and deferred tax liabilities and assets to be based on provisions of enacted tax law. The effects of future changes in tax laws are not anticipated.” Therefore, the different enactment dates of the Act and reconciliation measure may affect registrants with a period-end that falls between March 23, 2010 (enactment date of the Act), and March 30, 2010 (enactment date of the reconciliation measure). However, the announcement states that the SEC would not object if such registrants were to account for the enactment of both the Act and the reconciliation measure in a period ending on or after March 23, 2010, but notes that the SEC staff “does not believe that it would be appropriate for registrants to analogize to this view in any other fact patterns.”




In April 2010, the FASB issued Accounting Standard Update No. 2010-13 “Stock Compensation” (Topic 718). ASU No.2010-13 provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity's equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The amendments in this Update should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings. The cumulative-effect adjustment should be calculated for all awards outstanding as of the beginning of the fiscal year in which the amendments are initially applied, as if the amendments had been applied consistently since the inception of the award. The cumulative-effect adjustment should be presented separately. Earlier application is permitted. The adoption of this ASU did not have a material impact on our consolidated financial statements; however, it may affect any future stock distributions





6




NOTE 4 - ACCOUNTING STANDARDS UPDATES (Continued)





In April 2010, the FASB issued Accounting Standard Update No. 2010-17. “Revenue Recognition-Milestone Method” (Topic 605) ASU No.2010-17 provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. An entity often recognizes these milestone payments as revenue in their entirety upon achieving a specific result from the research or development efforts. A vendor can recognize consideration that is contingent upon achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone meets all criteria to be considered substantive. Determining whether a milestone is substantive is a matter of judgment made at the inception of the arrangement. The ASU is effective for fiscal years and interim periods within those fiscal years beginning on or after June 15, 2010. Early application is permitted. Entities can apply this guidance prospectively to milestones achieved after adoption. However, retrospective application to all prior periods is also permitted.  The adoption of this ASU did not have a material impact on our consolidated financial statements





In May 2010, the FASB issued Accounting Standard Update No. 2010-19 “Foreign Currency”. (“ASU No. 2010-19”). ASU 2010-19, codifies the SEC staff announcement made at the March 18, 2010, EITF meeting. The ASU “provides the SEC staff’s views on certain foreign currency issues related to investments in Venezuela.” These issues relate to Venezuela’s highly inflationary status. The ASU became effective on March 18, 2010.  The adoption of this ASU did not have a material impact on our consolidated financial statements





Other ASUs not effective until after June 30, 2010, are not expected to have a significant effect on the Company’s consolidated financial position or results of operations.




7




NOTE 5 - EQUITY





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 Defendants have been returned to the Company for cancellation. 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.




NOTE 6 – LOANS PAYABLE – RELATED PARTY




During the three months ended June 30, 2010, the Company borrowed $10,000 from a related party of the Company. The loan is non-interest bearing, unsecured, due on demand, and included in the loans payable, related party balance




NOTE 7 - SUBSEQUENT EVENTS





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


8


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 is pleased to announce that it has received confirmation that the application for Mineral Rights made by its 100% 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 Certificate entitles GISOR to conduct gold and diamond exploration on the awarded Exploration Licence (Permis de Recherches “PR”).





In addition to GILLA’s four (4) Licences obtained, as reported in June 2010, GILLA has successfully secured to date in the DRC a total area of 1,450 «carrés miniers» or 1,232 square kilometres (123,200 Hectares)distributed amongst five concessions located in the Oriental and South Kivu Provinces.





“Further to the four (4) Licenses we already received, we are extremely pleased to have been granted the final approval on this concession which was of great interest to a number of parties due to its very strategic position” said Georges Benarroch, President of GILLA INC. “We consider the location strategic because of its location in the Lugushwa area known for its gold occurrences, and for being contiguous to BANRO CORP’s (TSX-BAA) mining licences” said Daniel Barrette, COO of GILLA Inc.





Banro’s Licences in the Lugushwa area cover a total of 641 square kilometres. It has announced an inferred resource of  37Mt averaging 2.3g/t.




“It should be noted that the permits represent a sizeable position for Gilla in the area, considering the lack of available permits and high demand for any permits that become available.  The permits are located in well established gold areas coveted by other DRC players looking to add valuable prospective gold assets to their portfolios.” said Daniel Barrette, Chief Operations Officer of the Company, who added: “We are delighted with the co-operation GISOR has secured in the DRC and of the efficacy of all the individuals who have been instrumental in securing the “carrés miniers””.





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 approximately 200 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, Gilla is now in the processs to negotiate a new venture agreement with the heirs of the property.





The 2008 exploration stream sediment sampling program returned anomalous gold values on its 199 square kilometerSalutar Comercio Prospecting Licence (“PL”) in the Province of Cabinda, Angola.  Predominantly metasedimentary lithologies of Pre-Cambrian age of the Mayombe tectonic system underlie the PL.




Based on the success of the 2008 exploration program the Company will carry out stream sediment sampling on the unsampled portion of the PL.  In addition soil sampling of five areas upstream of the anomalous gold values is planned.





9




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, 2009 financial statements includes an explanatory paragraph indicating that there is substantial doubt about our ability to continue as a going concern due to 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.





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.





10




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, 2009. The Company’s auditors have expressed doubt about the Company’s ability to continue as a going concern. As of  June 30, 2010, the Company has current assets in the form of cash of  $9,510,  and current liabilities of $65,639. The Company’s accumulated  losses to date are $25,992,147.





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, 2009 financial statements includes an explanatory paragraph indicating that there is substantial doubt about our ability to continue as a going concern due to 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.





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 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.




11




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:




Credifinance Capital Corp. owned approximately 32% of our common stock; Finance Research & Development (FRD) Trust owned approximately 5% as of  June 30, 2010. 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.





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.





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.




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RESULTS OF OPERATIONS FOR THE  SIX MONTHS ENDED JUNE 30, 2010


The Registrant conducted no actual mining operation during the three months ended  June 30, 2010. As such, it had no revenues as described in the financial statements, attached hereto.  However, the Company had total operating and other expenses of $151,167.




LIQUIDITY AND CAPITAL RESOURCES





As of March 31, 2010 we had $9,510 in cash. We anticipate total expenditures in  2010 for general and administrative expenses  and legal expenses to be approximately $200,000. The amount spent for this expense will be directly affected by our capital raising ability.




These amounts could increase or decrease significantly, at any time during the fiscal year, based on exploration/development results and decisions about releasing or acquiring additional properties, among other factors.





As of  June 30 ,2010 , the Company had current assets of $9,510 compared to current liabilities of $65,639 resulting in working capital deficient of $56,129.




ITEM 3.  DISCLOSURE CONTROLS AND PROCEDURES





(a) The registrant’s principal executive officer and principal financial officer have concluded that the registrant’s disclosure controls and procedures (as defined in Exchange Act Rule 13a - 15(e)), based on their evaluation of these controls and procedures as of the end of the period covered by this report, are appropriately designed to ensure that material information relating to the registrant is made known to such officers and are operating effectively.





(b) The registrant’s principal executive officer and principal financial officer have determined that there have been no changes in the registrant’s internal control over financial reporting that occurred during the registrant’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.








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PART II




ITEM 1. LEGAL PROCEEDINGS




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.




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.




ITEM 2. CHANGES IN SECURITIES





In January 2010, 200,000 common shares were issued in settlement  with RM Communications at $0.0002 per share for a total of $16,000





In March 2010, 16,992,150 common  shares were returned to Treasury.





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





ITEM 3. DEFAULTS UPON SENIOR SECURITIES





None.





ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





See Item 2 and Item 5





ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K





None.




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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 June 30, 2010 by the undersigned, thereunto authorized.
  GILLA INC.

(FORMERLY OSPREY GOLD CORP.)By:
/s/ Georges BenarrochGeorges BenarrochPresident &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

PresidentChief Financial OfficerDirector

August 16, 2010Georges Benarroch