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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Fiscal Year Ended December 31, 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 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
 No
 
Indicate 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
o  
Non-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
 
    Page  
Part I  
         
ITEM 1 Business     4  
           
ITEM 2 Properties     7  
           
ITEM 3.  Legal Proceedings     8  
           
ITEM 4.  (Removed and Reserved)     8  
           
Part II  
           
ITEM 5. Market for Registrants Common Equity and Related Stockholders Matters     9  
           
ITEM 6 Selected Financial Data     10  
           
ITEM 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operation     11  
           
ITEM 8.  Financial Statements and Supplementary Data     F-1  
           
ITEM 9.   Changes In and Disagreements with Accountants on Accounting and FinancialDisclosure     13  
           
ITEM 9A.   Controls and Procedures     13  
           
ITEM 9B. Other Items     14  
           
Part III  
           
ITEM 10.  Directors, Executive Officers, Promoters and Control Persons; Compliance with Section16(a) of the Exchange Act     15  
           
ITEM 11.  Executive Compensation     17  
           
ITEM 12.  Security Ownership of Certain Beneficial Owners and Management     18  
           
ITEM 13.   Certain Relationships and Related Transactions     18  
           
ITEM 14. Principal Accountants Fee and Services     19  
           
ITEM 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
   
LOW
 
First Quarter
  $ 0.14     $ 0.03  
Second Quarter
  $ 0.07     $ 0.02  
Third Quarter
  $ 0.07     $ 0.01  
    Fourth Quarter   $  0.11     $ 0.03  
 
2009
 
HIGH
   
LOW
 
First Quarter
  $ 0.52     $ 0.05  
Second Quarter
  $ 0.43     $ 0.07  
Third Quarter
  $ 0.28     $ 0.05  
 Fourth 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
   
2009
 
Revenues
  $ -     $ -  
                 
Net Loss
  $ (5,033,142 )   $ (13,016,885 )
                 
Earning Loss Per Share
  $ (0.18 )   $ (0.33 )
                 
Total assets
  $ 1,617     $ 4,638,123  
                 
Total 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-2  
         
Report of Independent Registered Public Accounting Firm                                                                                                            
    F-3  
         
Consolidated Balance Sheets
    F-4  
         
Consolidated Statements of Operations                                                                                                            
    F-5  
         
Consolidated Statement of (Deficiency) in Stockholders’ Equity                                                                                                            
    F-6  
         
Consolidated Statements of Cash Flows                                                                                                            
    F-7  
         
Notes 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
   
2009
 
             
ASSETS
           
             
CURRENT ASSETS
           
Cash and cash equivalents
  $ 1,617     $ 35,123  
Prepaid expenses
    -       3,000  
                 
TOTAL CURRENT ASSETS
    1,617       38,123  
                 
Mining rights
    -       4,600,000  
                 
TOTAL ASSETS
  $ 1,617     $ 4,638,123  
                 
                 
LIABILITIES AND (DEFICIENCY) IN STOCKHOLDERS' EQUITY
               
                 
CURRENT LIABILITIES
               
Accounts payable
  $ 5,503     $ 5,188  
Accrued liabilities
    61,500       24,896  
Notes payable related party
    103,717       -  
                 
TOTAL LIABILITIES
    170,720       30,084  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
(DEFICIENCY) IN STOCKHOLDERS' EQUITY
               
Common stock, $0.0002 par value, 300,000,000 shares authorized;
               
27,277,766 and 39,649,916 shares issued and outstanding
               
 as of   December 31, 2010 and 2009 respectively
    5,455       7,930  
Additional paid - in capital
    30,649,564       30,391,089  
Deficit accumulated during the exploration stage
    (30,824,122 )     (25,790,980 )
                 
TOTAL (DEFICIENCY) IN STOCKHOLDERS'  EQUITY
    (169,103 )     4,608,039  
                 
                 
TOTAL 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) to
 
 
 
2010
   
2009
   
December 31, 2010
 
REVENUES
  $ -     $ -     $ -  
                         
TOTAL REVENUES
    -       -       -  
                         
EXPENSES:
                       
Exploration cost
    142,642       53,933       1,856,697  
Asset impairment changes
    4,600,000       12,744,110       17,344,110  
General and administrative
    268,582       221,582       15,655,479  
                         
TOTAL OPERATING EXPENSES
    5,011,224       13,019,625       34,856,286  
                         
                         
LOSS 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
    -       -       1,828,932  
Gain on sale of mining properties
    -       (3,774 )     2,100,000  
Miscellaneous Income (loss)
    158       6,097       (11,393 )
Gain (loss) on foreign exchange rate transactions
    (76 )     404       149,372  
Interest expense
    (22,000 )     -       (25,277 )
Interest income
    -       13       40,530  
TOTAL OTHER INCOME (EXPENSES)
    (21,918 )     2,740       4,032,164  
                         
NET 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 SHARES
                       
OUTSTANDING-BASIC AND DILUTED
    28,453,209       39,023,726          
                         
LOSS 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' DEFICIT
FOR THE PERIOD FROM MARCH 28, 1995 (INCEPTION) TO DECEMBER 31, 2010
 
   
Common Stock
                   
   
Shares
   
Amount
   
Additional
Paid In Capital
   
Accumulated
Deficit
   
Total
 
                               
Inception on March 28, 1995
                             
                               
Issuance 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       -       23,000  
                                         
Common Stock Issued as profession fees
    310       -       15,500       -       15,500  
                                         
Net 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       -       267,905  
                                         
Net 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       -       6,200  
                                         
Issuance of common stock for consulting services
    120,000       24       399,976       -       400,000  
                                         
Issuance of common stock for directors fees
    10,000       2       309,998       -       310,000  
                                         
Fair market value of options granted
    -       -       465,000       -       465,000  
                                         
Purchase of camp
    40,000       8       49,992       -       50,000  
                                         
Net 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       -       20,168  
                                         
Issuance of common stock for mining claims
    11,000       2       176,998       -       177,000  
                                         
Issuance of common stock for directors fees
    6,000       1       41,999       -       42,000  
                                         
Issuance of common stock for consulting fees
    463,813       93       4,430,167       -       4,430,260  
                                         
Issuance of common stock for management fees
    80,000       16       527,984       -       528,000  
                                         
Issuance of common stock for financing fees
    4,000       1       23,999       -       24,000  
                                         
Issuance of common stock for cancellation of letter of intent and services
    310,000       62       324,938       -       325,000  
                                         
Sale of common stock
    215,600       43       1,208,261       -       1,208,304  
                                         
Capital contribution
                    68,408               68,408  
                                         
Net 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       -       500,000  
                                         
Net 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       -       1,575,000  
                                         
Issuance of common stock for services rendered
    33,802       7       43,500       -       43,507  
                                         
Issuance of common stock for directors fees
    10,000       2       32,498       -       32,500  
                                         
Issuance of common stock for satisfaction of debt
    6,567       1       19,699       -       19,700  
                                         
Issuance of common stock for salary
    210,605       42       684,426       -       684,468  
                                         
Net loss
    -       -       -       (415,270 )     (415,270 )
Balance December 31, 2006
    5,645,967     $ 1,129     $ 11,214,791     $ (9,962,722 )   $ 1,253,198  
                                         
Issuance of common stock for directors fees
    30,000       6       22,494       -       22,500  
                                         
Net loss
    -       -       -       (562,475 )     (562,475 )
Balance December 31, 2007
    5,675,967     $ 1,135     $ 11,237,285     $ (10,525,197 )   $ 713,223  
                                         
Sale of common stock
    916,667       183       274,817       -       275,000  
                                         
Issuance of common stock for management fees
    1,000,000       200       499,800       -       500,000  
                                         
Issuance of common stock for mining claims
    30,440,184       6,089       17,338,022       -       17,344,111  
                                         
Issuance of common stock for termination of service
    220,331       44       132,154       -       132,198  
                                         
Issuance of common stock for consulting fees
    644,804       129       386,753       -       386,882  
                                         
Fair market value of options  granted
    -       -       712,407       -       712,407  
                                         
Dividends
    -       -       (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 )   $ 17,574,924  
                                         
Sale of common stock
    5,000,000       1,000       49,000       -       50,000  
                                         
Cancellation 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 )   $ 4,608,039  
                                         
Sale of common stock
    300,000       60       11,940       -       12,000  
                                         
Cancellation of common stock
    (16,992,150 )     (3,399 )     3,399       -       -  
                                         
Issuance of common stock for consulting fees
    1,880,000       376       93,624       -       94,000  
                                         
Issuance of common stock for management fees
    2,000,000       400       99,600       -       100,000  
                                         
Issuance of common stock for directors fees
    240,000       48       11,952       -       12,000  
                                         
Issuance of Stock toward legal settlement
    200,000       40       15,960       -       16,000  
                                         
Beneficial conversion feature
    -       -       22,000       -       22,000  
                                         
Net 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 From
 
   
For the Year Ended
   
March 28, 1995
 
   
December 31,
         
(Inception) to
 
   
2010
   
2009
   
December 31, 2010
 
CASH FLOW FROM OPERATING ACTIVITIES
                 
Net loss from operations
  $ (5,033,142 )   $ (13,016,885 )   $ (30,824,122 )
Adjustment to reconcile net loss to net cash
                       
     used in operating activities:
                       
Asset impairment charges     4,600,000       12,744,110       17,344,110  
Issuance of common stock toward legal settlement charges
    16,000       -       16,000  
Issuance of common stock for services
    206,000       -       11,042,792  
Beneficial conversion discount
    22,000       -       22,000  
Changes in operating assets and liabilities:
                       
     Prepaid expenses
    3,000       (3,000 )     -  
     Other receivable
    -       2,333       -  
     Mining camp
    -       -       50,000  
     Accounts payable
    315       (2,105 )     376,160  
     Accrued expenses
    36,604       24,896       65,656  
Net cash used in operating activities
    (149,223 )     (250,651 )     (1,907,404 )
                         
CASH FLOW FROM FINANCING ACTIVITIES
                       
Dividends distributions
    -       -       (240,000 )
Notes payable related party
    103,717       -       103,717  
Sale of common stock
    12,000       50,000       2,045,304  
Net cash provided by financing activities
    115,717       50,000       1,909,021  
                         
                         
                         
Net Increase (decrease) in cash and cash equivalents
    (33,506 )     (200,651 )     1,617  
                         
Cash and cash equivalents at beginning of period
    35,123       235,774       -  
                         
Cash and cash equivalents at end of period
  $ 1,617     $ 35,123     $ 1,617  
                         
Supplemental Disclosure of Cash Flow Information:
                       
        Cash paid for:
                       
           Interest
    -       -       -  
           Taxes
    -       -       -  
                         
Non-cash investing and financings activities:                        
Beneficial conversion feature     22,000       -       22,000  
Issuance 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     2009  
Note payable to related party, non-interest bearing and unsecured. The note is due on demand and does not have any specific repayment terms.
  $ 81,717     $ 0  
Convertible 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       0  
Convertible 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     $ 0  
Total notes payable   $ 103,717          
Less: current portion     103,717       0  
Notes 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 and 20,000 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:
   
2009
 
Expected 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 OF OPTIONS AND
WARRANTS
   
WEIGHTED
AVERAGE EXERCISE PRICE
 
Stock Options
           
Balance at December 31, 2008
    5,144,804     $ 0.60  
Granted
    -       -  
Exercised
    -       -  
Forfeited