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 |
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| | | | For the Fiscal Year Ended December 31, 2008 |
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| | | | 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)
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Nevada
(State or Other Jurisdiction of Incorporation or Organization) | | 88-0335710
(I.R.S. Employer Identification Number) |
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112 North Curry Street, Carson City, NV
(Address of Principal Executive Offices) | | 89703
(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.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
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.
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).
The aggregate market value of the voting common stock held by non-affiliates of the Registrant on June 30,2008, was approximately $17,447,442, based on the average bid and asked prices on such date of $0.74.The registrant does not have any non-voting equities.
The Registrant had 38,898,055 shares of common stock, .0002 par value per share, outstanding on March 20, 2009
TABLE OF CONTENTS
FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 2008
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.
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.
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.
The Company has 1 full time, and 2 part-time employees.
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. 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 25,062,803 shares (approximately 64% of the total number of shares outstanding) are owned by, or are under the direct or indirect control of, only three individuals. 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 Cameroon or Angola 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 Cameroon and Angola 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.
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:
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.
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, 2008, 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
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 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.
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 $3,000 (US) monthly, which includes rent, and certain administrative services, such as bookkeeping, copying and printing, courier services, and telephone.
The Company owns no investments.
ITEM 3. LEGAL PROCEEDINGS
There have been no changes since the filing of our Form 10-KSB for December 31, 2007 except the following:
Shawn Ruddy under the name of RM Communications has commenced an action alleging a breach of contract against Gilla, Linda Kent and Netnation Communications Inc. Claims against Gilla and Kent in the sum of $36,000 and delivery of 750,000 warrants with a 3 year expiration for unrestricted common shares of Gilla, dated November 2004, Priced at $0.05 each. In addition they are asking for pre-judgment and post-judgment interest and costs. Gilla and Kent have counterclaimed for damages for conspiracy against Ruddy and others, and seek an injunction of $1 million in damages. Discovery is complete, and the case will proceed to trial, however no hearing date has been set.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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 on February 28, 2007 have been exchanged for one (1) share of the Company’s common stock. In all other respects, the registrant’s capitalization has remained unchanged.
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-QSB) and an annual report (Form 10-KSB) 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.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been publicly traded since August 19, 2003. The securities were traded on the over-the-counter market until NASD removed the Company from the over-the-counter market as it failed to file audited financial statements, which such action caused on June 6, 2005, the United States District Court, District of Nevada to return complete control of the Company to the Benarroch Group. 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.
| | | | | | | | | |
| 2008 | | HIGH | | | LOW | |
| First Quarter | | $ | 1.25 | | | $ | 0.51 | |
| Second Quarter | | $ | 0.95 | | | $ | 0.53 | |
| Third Quarter | | $ | 0.95 | | | $ | 0.37 | |
| Fourth Quarter | | $ | 0.52 | | | $ | 0.25 | |
On December 31, 2008, the closing price of our common stock as reported on the OTCBB was $0.45 per share. On December 31, 2008, we had in excess of 616 beneficial stockholders of our common stock and 38,899,953 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.
RECENT SALES OF UNREGISTERED SECURITIES
In 2008, the Company issued the following shares:
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 January 31, 2008, Gilla issued 220,311 of common stock for termination of 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, 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.
On October 29, 2008 1,000,000 Common Shares of the company were issued to Credifinance Capital Corporation as a fee.
In October 2008, the Company sold a total of 916,667 shares of common stock for net proceeds of $275,000.
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, | |
| | | 2008 | | | 2007 | |
| Revenues | | | — | | | | — | |
| Net Loss | | $ | (2,248,898 | ) | | $ | (562,475 | ) |
| Earning Loss Per Share | | $ | (0.08 | ) | | $ | (0.10 | ) |
| Total assets | | $ | 17,582,217 | | | $ | 724,112 | |
| Total liabilities | | $ | 7,293 | | | $ | 10,889 | |
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.
In 2008 Gilla added to its management, allowing Gilla to increase its focus on further developing existing properties and acquiring new properties.
On January 31, 2008, Gilla Inc. entered into an 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.
The exploration permits, granted by the Ministry of Industry, Mines and Technological Development in 2007, for Mfoumou and Sele are respectively for the Nanga Eboko Rutile Project and the Akonolinga Rutile Project. The Mfoumou permit covers 998km2 and the Sele permit covers 993km2. Each permit has a validity of three years and is renewable four times for a period of two years each.
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.
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, 2008 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.
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, 2008. 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 $235,774, other receivable of $2,333 and current liabilities of $7,293. The Company’s net losses to date are $12,774,095.
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, 2008 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Gilla Inc
(Osprey Gold Corp.
(An Exploration Stage Company)
Financial Statements
December 31, 2008
Table of Contents
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| | | F-2 | |
| | | F-3 | |
| | | F-4 | |
| | | F-5 | |
| | | F-6 | |
| | | F-7 - F-20 | |
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, changes in shareholders’ equity and cash flows for the years ended December 31, 2008 and 2007 and for the period from March 28, 1999 (inception) through December 31, 2008. 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 audits.
We conducted our audits 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 audits 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, 2008 and the results of its operations and its cash flows for the years then ended December 31, 2008 and 2007, and from March 28, 1999 (inception) through December 31, 2008 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
Hollywood, Florida
March 27, 2009
F-2
GILLA, INC.
(formerly OSPREY GOLD CORP.)
(AN EXPLORATION STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
| | | | | | | | | |
| | | December 31, | | | December 31, | |
| | | 2008 | | | 2007 | |
ASSETS
|
CURRENT ASSETS | | | | | | | | |
| Cash | | $ | 235,774 | | | $ | 670,142 | |
| Other receivable | | | 2,333 | | | | 3,970 | |
| | | | | | | |
| TOTAL CURRENT ASSETS | | | 238,107 | | | | 674,112 | |
| | | | | | | | | |
NON CURRENT ASSETS | | | | | | | | |
| Mining rights | | | 17,344,110 | | | | — | |
| Mining camp | | | — | | | | 50,000 | |
| | | | | | | |
TOTAL ASSETS | | $ | 17,582,217 | | | $ | 724,112 | |
| | | | | | | |
| | | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ DEFICIT
|
CURRENT LIABILITIES | | | | | | | | |
| Accounts payable | | $ | 7,293 | | | $ | 6,731 | |
| Accrued expenses | | | — | | | | 4,158 | |
| | | | | | | |
| TOTAL LIABILITIES | | | 7,293 | | | | 10,889 | |
| | | | | | | |
| | | | | | | | | |
SHAREHOLDERS’ DEFICIT | | | | | | | | |
| Common stock, .0002 par value, 300,000,000 shares authorized; 38,898,055 and 5,676,069 shares issued and outstanding, respectively | | | 7,780 | | | | 1,135 | |
| Additional paid in capital | | | 30,341,239 | | | | 11,237,285 | |
| Accumulated deficit | | | (12,774,095 | ) | | | (10,525,197 | ) |
| | | | | | | |
| TOTAL SHAREHOLDERS’ EQUITY | | | 17,574,924 | | | | 713,223 | |
| | | | | | | |
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT | | $ | 17,582,217 | | | $ | 724,112 | |
| | | | | | | |
The accompanying notes are an integral part of these financial statements
F-3
GILLA, INC.
(formerly OSPREY GOLD CORP.)
(AN EXPLORATION STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | | | | | | | | |
| | | | | | March 28, 1995 | |
| | | For the Year Ended | | | For the Period From | |
| | | December 31, | | | (Inception) to | |
| | | 2008 | | | 2007 | | | December 31, 2008 | |
REVENUES | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | |
TOTAL REVENUES | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
EXPENSES: | | | | | | | | | | | | |
| Exploration cost | | | 44,650 | | | | 31,481 | | | | 1,660,122 | |
| General and administrative | | | 2,142,271 | | | | 718,816 | | | | 15,165,315 | |
| | | | | | | | | | |
TOTAL OPERATING EXPENSES | | | 2,186,921 | | | | 750,297 | | | | 16,825,437 | |
| | | | | | | | | | |
NET LOSS FROM OPERATIONS | | | (2,186,921 | ) | | | (750,297 | ) | | | (16,825,437 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
OTHER INCOME (EXPENSES) | | | | | | | | | | | | |
| Loss on abandoment of mining camp | | | (50,000 | ) | | | — | | | | (50,000 | ) |
| Gain of forgiveness of debt | | | 3,941 | | | | 167,553 | | | | 1,828,932 | |
| Gain on sale of mining properties | | | — | | | | — | | | | 2,100,000 | |
| Bad Debt (write off) | | | (13,874 | ) | | | — | | | | (13,874 | ) |
| Gain (loss) on foreign exchange rate transactions | | | (2,044 | ) | | | (8,358 | ) | | | 149,044 | |
| Interest expense | | | — | | | | (3,277 | ) | | | (3,277 | ) |
| Interest income | | | — | | | | 31,904 | | | | 40,517 | |
| | | | | | | | | | |
TOTAL OTHER EXPENSES | | | (61,977 | ) | | | 187,822 | | | | 4,051,342 | |
| | | | | | | | | | |
NET LOSS | | $ | (2,248,898 | ) | | $ | (562,475 | ) | | $ | (12,774,095 | ) |
| | | | | | | | | | |
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING-BASIC | | | 27,951,703 | | | | 5,548,691 | | | | 25,933,983 | |
| | | | | | | | | | |
EARNINGS (LOSS) PER COMMON SHARES-BASIC | | $ | (0.08 | ) | | $ | (0.10 | ) | | $ | (0.49 | ) |
| | | | | | | | | | |
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING-DILUTED | | | 29,747,165 | | | | 5,548,691 | | | | 27,224,445 | |
| | | | | | | | | | |
EARNINGS (LOSS) PER COMMON SHARES-DILUTED | | $ | (0.08 | ) | | $ | (0.10 | ) | | $ | (0.47 | ) |
| | | | | | | | | | |
The accompanying notes are an integral part of these financial statements
F-4
GILLA, INC.
(formerly OSPREY GOLD CORP.)
(AN EXPLORATION STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT
For the year ended December 31, 2008, 2007, 2006, 2005, 2004, and 2003
| | | | | | | | | | | | | | | | | | | | | |
| | | Common Stock | | | Additional | | | Accumulated | | | | |
| | | Shares | | | Amount | | | Paid In Capital | | | Deficit | | | Total | |
Balance — December 31, 2002 | | | 10,882 | | | $ | 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 | | | 800,882 | | | $ | 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 | | | 3,908,095 | | | $ | 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 | | | 5,908,095 | | | $ | 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 | | | 5,646,069 | | | $ | 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 | | | 5,676,069 | | | $ | 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 | | | 38,898,055 | | | $ | 7,780 | | | $ | 30,341,239 | | | $ | (12,774,095 | ) | | $ | 17,574,924 | |
| | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these financial statements
F-5
GILLA, INC.
(formerly OSPREY GOLD CORP.)
(AN EXPLORATION STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN CASH FLOWS
| | | | | | | | | | | | | |
| | | | | | | | | | | For the Period From | |
| | | For the Year Ended | | | March 28, 1995 | |
| | | December 31 | | | (Inception) to | |
| | | 2008 | | | 2007 | | | December 31, 2008 | |
CASH FLOW FROM OPERATING ACTIVITIES | | | | | | | | | | | | |
| Net (loss) from operations | | $ | (2,248,898 | ) | | $ | (562,475 | ) | | $ | (12,774,095 | ) |
| Adjustment to reconcile net income (loss) to net cash used in operating activities: | | | | | | | | | | | | |
| Stock compensation | | | 1,731,489 | | | | 22,500 | | | | 10,836,792 | |
| (Increase) decrease in assets: | | | | | | | | | | | | |
| Other receivable | | | 1,637 | | | | (971 | ) | | | (2,333 | ) |
| Mining camp | | | 50,000 | | | | — | | | | 50,000 | |
| Increase(decrease) in current liabilities | | | | | | | | | | | | |
| Accounts payable | | | (3,596 | ) | | | (131,580 | ) | | | 377,950 | |
| Accrued expenses | | | — | | | | (51,539 | ) | | | 4,156 | |
| | | | | | | | | | |
| Net cash provided by (used in) operating activities | | | (469,368 | ) | | | (724,065 | ) | | | (1,507,530 | ) |
| | | | | | | | | | | | | |
CASH FLOW FROM FINANCING ACTIVITIES | | | | | | | | | | | | |
| Dividends | | | (240,000 | ) | | | — | | | | (240,000 | ) |
| Sale of common stock | | | 275,000 | | | | — | | | | 1,983,304 | |
| | | | | | | | | | |
| Net cash provided by financing activities | | | 35,000 | | | | — | | | | 1,743,304 | |
| | | | | | | | | | | | | |
CASH FLOW FROM INVESTING ACTIVITIES | | | | | | | | | | | | |
| Restricted cash | | | — | | | | 1,058,613 | | | | — | |
| | | | | | | | | | |
| Net cash used in investing activities | | | — | | | | 1,058,613 | | | | — | |
Net Increase (decrease) in cash | | | (434,368 | ) | | | 334,548 | | | | 235,774 | |
Cash and cash equivalents at beginning of period | | | 670,142 | | | | 335,594 | | | | — | |
| | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 235,774 | | | $ | 670,142 | | | $ | 235,774 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Supplemental Disclosure of Cash Flow | | | | | | | | | | | | |
Information: | | | | | | | | | | | | |
Cash paid for: | | | | | | | | | | | | |
Interest | | | — | | | | — | | | | — | |
| | | | | | | | | | |
Taxes | | | — | | | | — | | | | — | |
| | | | | | | | | | |
The accompanying notes are an integral part of these financial statements
F-6
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 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. Prior to the merger in September 1999 (Note 6), 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.
During the year ended December 31, 2007, the Company formed two wholly owned subsidiaries, Geolyndar, Inc. and Polar Bear Mining Co. During the year ended December 31, 2008. The Company will focus entirely on the Cameroon and Angola operation and has relinquished both of its subsidiaries.
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.
Going Concern
As shown in the accompanying financial statements, the Company has incurred net losses of $2,248,898 and $562,475 during the years ended December 31, 2008 and 2007, 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 no include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Cash Equivalents
The company considers cash equivalents to be cash as well as short term investments.
F-7
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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. Actual results could differ from those estimates.
Earnings per share
The Company computes basic and diluted loss per share amounts for December 31, 2008 and 2007, pursuant to the Statement of Financial Accounting Standards (SFAS) No. 128, “Earnings per Share.”
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.
The recoverability of the amounts capitalized in respect of non producing mining properties is dependant 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
The Company places its cash and cash equivalents with financial institutions and, at times, cash held in checking accounts may exceed the Federal Deposit Insurance Corporation insured limit.
F-8
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes
Under FASB Statement No. 109, Accounting for income taxes, 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.
Our policy for interest and penalties on material uncertain income tax positions recognized in our 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, 2008.
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, 2008 because of the relatively short maturity of the instruments.
Stock Based Compensation
The company accounts for its stock option grants based on the recognition and measurement principles of FAS 123. The application of FAS 123 results in compensation expense being recorded in these financial statements. Applying FAS 123 to stock compensation results in the equity instruments being measured and recognized at their fair value and the compensation cost being the excess of that amount over any amount paid.
Loss per common share is computed using the weighted-average number of common shares outstanding during each period.
Impairment or Disposal of Long-Lived Assets
In August 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” which supersedes both SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” and the accounting and reporting provisions of Accounting Practice Bulletin (“APB”) Opinion No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” for the disposal of a segment of a business (as previously defined in that opinion).This statement establishes the accounting model for long-lived assets to be disposed of by sale and applies to all long-lived assets, including discontinued operations. This statement requires those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred.
SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with SFAS No. 121.
F-9
NOTE 2 RECENT ACCOUNTING PRONOUNCEMENTS
Employers’ Disclosures about Postretirement Benefit Plan Assets
In December 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position on Financial Accounting Standard (“FSP FAS”) No. 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets.” This FSP amends FASB Statement No. 132(R) (“SFAS No. 132(R)”), “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. FSP FAS No. 132(R)-1 also includes a technical amendment to SFAS No. 132(R) that requires a nonpublic entity to disclose net periodic benefit cost for each annual period for which a statement of income is presented. The required disclosures about plan assets are effective for fiscal years ending after December 15, 2009. The technical amendment was effective upon issuance of FSP FAS No. 132(R)-1. The implementation of this standard will not have a material impact on the Company’s financial position and results of operations.
Effective Date of FASB Interpretation No. 48 for Certain Nonpublic Enterprises
In December 2008, the FASB issued FSP FIN No. 48-3, “Effective Date of FASB Interpretation No. 48 for Certain Nonpublic Enterprises.” FSP FIN No. 48-3 defers the effective date of FIN No. 48, “Accounting for Uncertainty in Income Taxes,” for certain nonpublic enterprises as defined in SFAS No. 109, “Accounting for Income Taxes.” However, nonpublic consolidated entities of public enterprises that apply U.S. generally accepted accounting principles (GAAP) are not eligible for the deferral. FSP FIN No. 48-3 was effective upon issuance. The impact of adoption was not material to the Company’s financial condition or results of operations.
Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities
In December 2008, the FASB issued FSP FAS No. 140-4 and FIN No. 46(R) -8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities.” This FSP amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” to require public entities to provide additional disclosures about transfers of financials assets. FSP FAS No. 140-4 also amends FIN No. 46(R)-8, “Consolidation of Variable Interest Entities,” to require public enterprises, including sponsors that have a variable interest entity, to provide additional disclosures about their involvement with a variable interest entity. FSP FAS No. 140-4 also requires certain additional disclosures, in regards to variable interest entities, to provide greater transparency to financial statement users. FSP FAS No. 140-4 is effective for the first reporting period (interim or annual) ending after December 15, 2008, with early application encouraged. The Company is currently assessing the impact of FSP FAS No. 140-4 on its financial position and results of operations.
Accounting for an Instrument (or an Embedded Feature) with a Settlement Amount That is Based on the Stock of an Entity’s Consolidated Subsidiary
In November 2008, the FASB issued FSP Emerging Issues Task Force (“EITF”) Issue No. 08-8, “Accounting for an Instrument (or an Embedded Feature) with a Settlement Amount That is Based on the Stock of an Entity’s Consolidated Subsidiary.” EITF No. 08-8 clarifies whether a financial instrument for which the payoff to the counterparty is based, in whole or in part, on the stock of an entity’s consolidated subsidiary is indexed to the reporting entity’s own stock. EITF No. 08-8 also clarifies whether or not stock should be precluded from qualifying for the scope exception of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” or from being within the scope of EITF No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” EITF No. 08-8 is effective for fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years. The implementation of EITF No. 08-8 will not have a material impact on the Company’s financial position and results of operations.
F-10
NOTE 2 RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
Accounting for Defensive Intangible Assets
In November 2008, the FASB issued EITF Issue No. 08-7, “Accounting for Defensive Intangible Assets.” EITF No. 08-7 clarifies how to account for defensive intangible assets subsequent to initial measurement. EITF No. 08-7 applies to all defensive intangible assets except for intangible assets that are used in research and development activities. EITF No. 08-7 is effective for intangible assets acquired on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company is currently assessing the impact of EITF No. 08-7 on its financial position and results of operations.
Equity Method Investment Accounting Considerations
In November 2008, the FASB issued EITF Issue No. 08-6 (“EITF No. 08-6”), “Equity Method Investment Accounting Considerations.” EITF No. 08-6 clarifies accounting for certain transactions and impairment considerations involving the equity method. Transactions and impairment dealt with are initial measurement, decrease in investment value, and change in level of ownership or degree of influence. EITF No. 08-6 is effective on a prospective basis for fiscal years beginning on or after December 15, 2008. The Company is currently assessing the impact of EITF No. 08-6 on its financial position and results of operations.
Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active
In October 2008, the FASB issued FSP FAS No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active.” This FSP clarifies the application of SFAS No. 157, “Fair Value Measurements,” in a market that is not active. The FSP also provides examples for determining the fair value of a financial asset when the market for that financial asset is not active. FSP FAS No. 157-3 was effective upon issuance, including prior periods for which financial statements have not been issued. The impact of adoption was not material to the Company’s financial condition or results of operations.
Issuer’s Accounting for Liabilities Measured at Fair Value with a Third-Party Credit Enhancement
In September 2008, the FASB issued EITF Issue No. 08-5 (“EITF No. 08-5”), “Issuer’s Accounting for Liabilities Measured at Fair Value with a Third-Party Credit Enhancement.” This FSP determines an issuer’s unit of accounting for a liability issued with an inseparable third-party credit enhancement when it is measured or disclosed at fair value on a recurring basis. FSP EITF No. 08-5 is effective on a prospective basis in the first reporting period beginning on or after December 15, 2008. The Company is currently assessing the impact of FSP EITF No. 08-5 on its financial position and results of operations.
Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161
In September 2008, the FASB issued FSP FAS No. 133-1, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161.” This FSP amends FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” to require disclosures by sellers of credit derivatives, including credit derivatives embedded in a hybrid instrument. The FSP also amends FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” to require and additional disclosure about the current status of the payment/performance risk of a guarantee. Finally, this FSP clarifies the Board’s intent about the effective date of FASB Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” FSP FAS No. 133-1 is effective for fiscal years ending after November 15, 2008. The Company is currently assessing the impact of FSP FAS No. 133-1 on its financial position and results of operations.
F-11
NOTE 2 RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
Endowments of Not-for-Profit Organizations: Net Asset Classification of Funds Subject to an Enacted Version of the Uniform Prudent Management of Institutional Funds Act, and Enhanced Disclosures for all Endowment Funds
In August 2008, the FASB issued FSP FAS No. 117-1, “Endowments of Not-for-Profit Organizations: Net Asset Classification of Funds Subject to an Enacted Version of the Uniform Prudent Management of Institutional Funds Act (“UPMIFA”), and Enhanced Disclosures for all Endowment Funds.” The intent of this FSP is to provide guidance on the net asset classification of donor-restricted endowment funds. The FSP also improves disclosures about an organization’s endowment funds, both donor-restricted and board-designated, whether or not the organization is subject to the UPMIFA. FSP FAS No. 117-1 is effective for fiscal years ending after December 31, 2008. Earlier application is permitted provided that annual financial statements for that fiscal year have not been previously issued. The implementation of FSP FAS No. 117-1 will not have a material impact on the Company’s financial position and results of operations.
Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities
In June 2008, the Financial Accounting Standards Board (“FASB”) issued FSP Emerging Issues Task Force (“EITF”) Issue No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” The FSP addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method. The FSP affects entities that accrue dividends on share-based payment awards during the awards’ service period when the dividends do not need to be returned if the employees forfeit the award. This FSP is effective for fiscal years beginning after December 15, 2008. The Company is currently assessing the impact of FSP EITF No. 03-6-1 on its financial position and results of operations.
Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an entity’s Own Stock
In June 2008, the FASB ratified EITF Issue No. 07-5, “Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity’s Own Stock” (EITF No. 07-5). EITF No. 07-5 provides that an entity should use a two step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. It also clarifies on the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation. EITF No. 07-5 is effective for fiscal years beginning after December 15, 2008. The Company is currently assessing the impact of EITF No. 07-5 on its financial position and results of operations.
Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion ( Including Partial Cash Settlement)
In May 2008, the FASB issued FSP Accounting Principles Board (“APB”) Opinion No. 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” The FSP clarifies the accounting for convertible debt instruments that may be settled in cash (including partial cash settlement) upon conversion. The FSP requires issuers to account separately for the liability and equity components of certain convertible debt instruments in a manner that reflects the issuer’s nonconvertible debt (unsecured debt) borrowing rate when interest cost is recognized. The FSP requires bifurcation of a component of the debt, classification of that component in equity and the accretion of the resulting discount on the debt to be recognized as part of interest expense in our consolidated statement of operations. The FSP requires retrospective application to the terms of instruments as they existed for all periods presented. The FSP is effective for the Company as of April 1, 2009 and early adoption is not permitted. The Company is currently evaluating the potential impact of FSP APB No. 14-1 upon its financial statements.
F-12
NOTE 2 RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
The Hierarchy of Generally Accepted Accounting Principles
In May 2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS No. 162). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles”. The implementation of this standard will not have a material impact on the Company’s financial position and results of operations.
Determination of the Useful Life of Intangible Assets
In April 2008, the FASB issued Staff Position on Financial Accounting Standard (“FSP FAS”) No. 142-3, “Determination of the Useful Life of Intangible Assets”, which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of intangible assets under SFAS No. 142 “Goodwill and Other Intangible Assets”. The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of the expected cash flows used to measure the fair value of the asset under SFAS No. 141 (revised 2007) “Business Combinations” and other U.S. generally accepted accounting principles. The Company is currently evaluating the potential impact of FSP FAS No. 142-3 on its financial statements.
NOTE 3 MINING 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. In 2008, the camp was abandoned.
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 $3,650 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 year ended December 31, 2008 was $44,000
NOTE 5 EQUITY
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.
F-13
NOTE 5 EQUITY (continued)
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.
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 $400,000.
2003-Stock issued for directors fees
On September 29, 2003 the Company issued a total of 10,000 shares of common to the Board of Directors for services. The Company recorded an expense of $310,000 which is 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.
F-14
NOTE 5 EQUITY (continued)
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.)
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.
F-15
NOTE 5 EQUITY (continued)
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.
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.
F-16
NOTE 5 EQUITY (continued)
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.
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. Please see exhibit “A” attached.
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.
F-17
NOTE 5 EQUITY (continued)
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 valued at $326,882.
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 valued at $281,636.
On October 29, 2008 1,000,000 Common Shares of the company were issued to Credifinance Capital Corporation as a fee valued at $500,000.
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.
B) Stock Options and Warrants
For stock options and warrants issued to non-employees, the Company applies SFAS 123. Accordingly, expense of $712,406 was recognized in 2008, upon granting of 5,144,804 common stock options
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 SFAS 123. The following weighted-average assumptions were used for the year ended December 31:
| | | | | |
| | | 2008 | |
| 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 | | | WEIGHTED AVERAGE | |
| | | WARRANTS | | | EXERCISE PRICE | |
| Stock Options | | | | | | | | |
| Balance at December 31, 2007 | | | — | | | | — | |
| Granted | | | 5,144,804 | | | $ | 0.60 | |
| Exercised | | | — | | | | — | |
| Forfeited | | | — | | | | — | |
| Terminated | | | — | | | | — | |
| | | | | | | |
| Balance at December 31, 2008 | | | 5,144,804 | | | $ | 0.60 | |
| | | | | | | |
| Weighted average fair value of options granted for services during 2008 | | | | | | $ | 0.60 | |
| | | | | | | |
F-18
NOTE 6 EARNINGS PER SHARE
Basic earnings per share are computed by dividing earnings available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect per share amounts that would have resulted if dilutive potential common stock had been converted to common stock. The following reconciles amounts reported in the financial statements:
| | | | | | | | | | | | | |
| | | Income | | | Shares | | | Per-share | |
| | | (Numerator) | | | (Denominator) | | | Amount | |
| Income from continuing operations | | $ | (2,248,898 | ) | | | | | | | | |
| Less preferred stock dividends | | | — | | | | | | | | | |
| | | | | | | | | | |
| Income available to common stockholders — Basic earnings per share | | | (2,248,898 | ) | | | 27,951,703 | | | $ | (0.08 | ) |
| Effect of dilutive securities no dilutive securities | | | — | | | | — | | | | — | |
| | | | | | | | | | |
| Income available to common stockholders — Diluted earnings per share | | $ | (2,248,898 | ) | | | 29,747,165 | | | $ | (0.08 | ) |
| | | | | | | | | | |
F-19
NOTE 7 BUSINESS COMBINATION
On September 29, 1999, the Company and Mercantile Factoring & Credit Corp. (“MFCC”) completed their agreement to merge upon the filing of the Articles of Merger with the Secretary of State of the state of Nevada.
Pursuant to a separate transaction, MFCC bought 2,534,615 shares of the Company (61.3%) from the shareholders for cash of $250,000 and, prior to the Merger, contributed those shares to the Company for cancellation. The investment was written off and charged to expenses on the statement of operations for the year ended December 31, 1999.
Under the merger agreement, the Company issued 22,500,000 post-merger shares to the former owner of MFCC in consideration for all of the issued and outstanding common shares of MFCC. As the former shareholder of MFCC obtained control (91.97%) of the Company through the share exchange, this transaction was accounted for in these financial statements as a reverse takeover and the purchase method of accounting had been applied. Under reverse takeover accounting, MFCC was considered to have acquired Osprey with the results of operations included in these financial statements from the date of acquisition. MFCC was then merged into the Company.
NOTE 8 INCOME TAXES
Deferred income taxes arise from timing differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. A deferred tax asset valuation allowance is recorded when it is more likely than not that deferred tax assets will not be realized. There are no deferred taxes as of December 31, 2008.
There was no income tax expense for the year ended December 31, 2008.
The Company’s benefit differs from the “expected” benefit for the year ended December 31, 2008 (computed by applying the Corporate tax rate of 38% to the loss before taxes), as follows:
| | | | | | | | | |
| | | December 31, | |
| | | 2008 | | | 2007 | |
| Computed expected tax benefit | | $ | (854,581 | ) | | $ | (213,741 | ) |
| Benefit of operating loss carryforwards | | | — | | | | — | |
| Valuation allowance | | | 854,581 | | | | 213,741 | |
| | | | | | | |
| Net tax benefit | | $ | — | | | $ | — | |
| | | | | | | |
The effects of temporary differences that gave rise to significant portions of deferred tax assets and liabilities at December 31, 2008 are as follows:
| | | | | |
| Deferred Tax Assets | | December 31, 2008 | |
| Current Deferred Tax Assets | | $ | — | |
| Net operating loss carryforward | | | 4,854,156 | |
| | | | |
| Total gross deferred Tax Assets Less valuation allowance | | $ | (4,854,156 | ) |
| | | | |
| Net deferred tax assets | | $ | — | |
| | | | |
The Company has a net operating loss carryforward of approximately $12,774,095 available to offset future taxable income through 2027.
F-20
NOTE 9 SUBSEQUENT EVENTS
On January 13, 2009, a resolution was signed by a majority of the board of directors of Gilla Inc. (“Gilla”), to remove Mr. Georges Fotso as a Director of Gilla, and as an officer and Director of Free Mining Company, S.A., a wholly owned Gilla subsidiary in Cameroon.
As part of the above resolution, Daniel Barrette, Chief Operation Officer of Gilla, and Linda Kent, Corporate Secretary of Gilla have been elected as directors to join the board of Directors of Gilla.
On January 30, 2009, David Robinson resigned from the Board of Directors of Gilla Inc. and from the Board of Directors of Free Mining Company. Mr. Georges Fotso resigned as Director, President and CEO of Free Mining Company
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL DISCLOSURE
A. New Independent Accountants: November 28, 2005, Jewett, Schwartz, Wolfe and Associates had been engaged as the Principal Accountant to Audit the Registrant’s financial statements.
B. The change of independent accountants was approved by the Company’s Board of Directors on June 17th, 2005.
ITEM 9A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, we have concluded that these disclosure controls and procedures are effective.
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the company. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the company’s internal control over financial reporting was effective as of December 31, 2008. the company’s internal control over financial reporting is effective based on those criteria.
ITEM 9B OTHER ITEMS
Please refer to the financial statements for additional costs and expenditures and other financial information.
F-21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
A) IDENTIFY DIRECTORS AND EXECUTIVE OFFICERS
| | | | | |
| NAME | | AGE | | POSITION |
| Georges Benarroch | | 62 | | President/Chief Financial Officer/Director |
| | | | | |
| Linda Kent | | 53 | | Corporate Secretary & Treasurer
Director |
| | | | | |
| Daniel Barrette | | 44 | | Chief Operating Officer
Director |
| | | | | |
| Stanley D. Robinson | | 59 | | Director |
The business experience of the persons listed above during the past five years are as follows:
Georges Benarroch/Chief Financial Officer/President/Director:
Mr. Benarroch was elected as President effective November 18th, 2004, and a Director of the Company since September 2004. Mr. Benarroch is the President and Chief Financial Officer of Credifinance Capital Corp. and Credifinance Securities Limited and President of and Chief Executive Officer of Kyto Biopharma Inc. a public company.
Linda Kent/Corporate Secretary Treasurer/Director:
Ms. Kent has worked in the securities brokerage industry since 1979. Since 2000 she has been the Head of Trading for Credifinance Securities Limited in Toronto, Canada.
Mr. Daniel Barrette
Has spent the last few years in Africa where he has gained experience and developed, over the years, an extensive network of strategic business contacts as well as being responsible for the acquisition of several mineral properties for public listed and private mining companies. He was also responsible for the establishment of some Canadian companies : creation of subsidiaries, JV negotiations, logistics, dealings with government bodies and Cadastre Minier.
Mr. Stanley D. Robinson, M.Sc., P.Geo
An exploration geologist with over 30 years of experience in Africa (Angola, Democratic Republic of Congo, Ghana, Tanzania, Burkina Faso), Canada and South America. Mr. Robinson’s dominant technical expertise is in the management of gold and base metal exploration projects, from grassroots to feasibility stage, geological interpretations with an emphasis on structure and alteration, and in the identification of projects with economic potential. He has extensive experience in managing exploration projects in remote locations and in climatic environments that range from permafrost to tropical and semi-desert. His exploration experience includes data base compilations and ore deposit interpretations used to calculate ore resources for and feasibility studies.
F-22
B) IDENTIFY SIGNIFICANT EMPLOYEES
The Company does not expect to receive a significant contribution from employees that are not executive officers.
C) FAMILY RELATIONSHIPS
There are no directors, executive officers or persons nominated or persons chosen by the Company to become a director or executive officer of the Company who are directly related to an individual who holds the position of director or executive officer or is nominated to one of the said positions.
D) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
There are no material events that have occurred in the last five years that would affect the evaluation of the ability or integrity of any director, person nominated to become a director, executive officer, promoter or control person of the Company.
E) AUDIT COMMITTEE
The Audit Committee has the responsibility of (i) recommending the selection of our independent public accountants, (ii) reviewing and approving the scope of the independent public accountants’ audit activity and extent of non-audit services, (iii) reviewing with management and our independent public accountants the adequacy of our accounting system and the effectiveness of our internal audit plan and activities, (iv) reviewing with management and our independent public accountants the financial statements and exercising general oversight of the financial reporting process and (v) reviewing with us litigation and other legal matters that may affect our financial condition, and monitoring compliance with our business ethics and other policies.
The Audit Committee is composed of Daniel Barrette, Linda Kent, and Georges Benarroch. The Audit Committee did not meet in 2008. The Audit Committee has not adopted a charter. The functions that would normally be performed by the Audit Committee were performed by the Board.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the annual and long-term compensation awarded to, earned by, payable/paid to Georges Benarroch the Company’s President/Director, Linda Kent the Company’s Corporate Secretary Treasurer, Daniel Barrette the Company’s Chief Operating Officer, for all services rendered in all capacities to the company for the years ended December 31, 2008, 2007 and 2006.
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Other | | | Restricted | |
| | | | | | | | | | | | | | | Annual | | | Option Stocks/ | |
| | | | | | | Salary | | | Bonus | | | Compensation | | | Payouts Awarded | |
| Name/Title | | Year | | | $ | | | $ | | | $ | | | # | |
| Georges Benarroch | | | 2008 | | | | 6,666 | | | | — | | | | — | | | | 100,000 | |
| President/CEO | | | 2007 | | | | 80,000 | | | | — | | | | — | | | | 10,000 | |
| | | | 2006 | | | | 17,857 | | | | — | | | | — | | | | 475,100 | |
| | | | | | | | | | | | | | | | | | | | | |
| Linda Kent | | | 2008 | | | | 10,917 | | | | — | | | | — | | | | 100,000 | |
| Secretary/Treasurer | | | 2007 | | | | 65,000 | | | | — | | | | — | | | | 10,000 | |
| | | | 2006 | | | | 47,382 | | | | — | | | | — | | | | 328,850 | |
| | | | | | | | | | | | | | | | | | | | | |
| Daniel Barrette | | | 2008 | | | | 3,000 | | | | — | | | | — | | | | — | |
| COO | | | 2007 | | | | — | | | | — | | | | — | | | | — | |
| | | | 2006 | | | | — | | | | — | | | | — | | | | — | |
OPTIONS/SAR GRANTS TABLE
There were no options granted to employees and no grants to key employees in fiscal year 2008.
COMPENSATION OF DIRECTORS
All directors hold office until the next annual meeting of stockholders and until their successors have been duly elected and qualified. There are no agreements with respect to the election and compensation of directors. The Board of Directors appoints officers annually and each executive officer serves at the discretion of the Board of Directors. The Company does not have any standing committees at this time.
The Company does not currently maintain insurance for the benefit of the directors and officers of Gilla against liabilities incurred by them in their capacity as directors or officers of Gilla. Gilla does not maintain a pension plan for its employees, officers or directors.
Two directors received 100,000 common shares each for services during the fiscal year 2008. Three directors received 10,000 common shares each for services during fiscal years 2007. .
None of the directors or senior officers of Gilla and no associate of any of the directors or senior officers of Gilla was indebted to the Company during the financial period ended December 31, 2008 of Gilla other than for routine indebtedness.
EMPLOYMENT CONTRACTS
None
REPORT ON REPRICING OF OPTIONS/SARS
None
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
A) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following persons (including any group as defined in Regulation S-B, Section 228.403) are known to the Company, as the issuer, to be beneficial owner of more than five percent (5%) of any class of the said issuer=s voting securities.
| | | | | | | | | | | | | |
| Title of | | | | | | | | | | Percentage of | |
| Class | | Name of Beneficial Owner | | | Common Shares | | | Class | |
| Common | | Georges Fotso | | | 10,000,000 | | | | 26 | % |
| Common | | Capital Venture Facilitators (1) | | | 6,392,150 | | | | 16 | % |
| Common | | Mathurin Djekam | | | 4,248,037 | | | | 11 | % |
| Common | | Credifinance Capital Corp. (2) | | | 2,649,752 | | | | 7 | % |
| | |
| (1) | | Georges Fotso has direct/indirect control of Gilla shares held by Capital Venture Facilitators. |
| |
| (2) | | Credifinance Capital Corp. is a privately held Delaware corporation. Georges Benarroch is the President & Chief Financial Officer of Credifinance Capital Corp. |
B) SECURITY OWNERSHIP OF MANAGEMENT
| | | | | | | | | | | | | |
| Title of | | | | | | | | | | Percentage of | |
| Class | | Name of Beneficial Owner | | | Common Shares | | | Class | |
| Common | | Daniel Barrette/Chief Operating Office | | | 200,000 | | | | 0.51 | % |
| Common | | Linda Kent/Corporate Secretary Treasurer Director | | | 502,530 | | | | 1 | % |
| Common | | Georges Benarroch (1) | | | 4,422,616 | | | | 11 | % |
| | |
| (1) | | Mr. Benarroch’s shares include the shares held by Credifinance Capital Corp. and FRD Trust which he is either the beneficiary of the trust or has voting power of. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(A) CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Detail of related party transactions are described in note 4 & 5 of the Financial Statements.
(B) TRANSACTIONS WITH PROMOTERS
Georges Benarroch would be considered as a promoter of the Company. Georges Benarroch, is the President & CEO of Credifinance Capital Corp which owns 2,649,752 common shares representing 7% of issued shares.
Officers, directors and employees will refrain from gathering competitor intelligence by illegitimate means and refrain from acting on knowledge, which has been gathered in such a manner. The officers, directors and employees of Gilla Inc. will seek to avoid exaggerating or disparaging comparisons of the services and competence of their competitors.
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Officers, directors and employees will obey all Equal Employment Opportunity laws and act with respect and responsibility towards others in all of their dealings. Officers, directors and employees will remain personally balanced so that their personal life will not interfere with their ability to deliver quality products or services to the company and its clients.
Officers, directors and employees agree to disclose unethical, dishonest, fraudulent and illegal behavior, or the violation of company policies and procedures, directly to management.
Violation of this Code of Ethics can result in discipline, including possible termination. The degree of discipline relates in part to whether there was a voluntary disclosure of any ethical violation and whether or not the violator cooperated in any subsequent investigation.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Board of Directors appointed Jewett, Schwartz, Wolfe and Associates. (“Jewett”) as our independent auditors for the fiscal year ending December 31, 2008.
(1) Audit Fees
Jewett, Schwartz, Wolfe and Associates, Independent Registered Public Accounting firm billed an aggregate of $25,000 for the following professional services: audit of our annual consolidated financial statements for the fiscal year ended December 31, 2008 included in our annual report on Form 10-K and review of our interim financial statements included in our quarterly reports on Form 10-Q.
(2) Audit Related Fees
No other professional services were rendered by Jewett, Schwartz, Wolfe and Associates for audit related services rendered during the fiscal year ended December 31, 2008, in connection with, among other things, the preparation of a Registration Statement on Form 10-SB.
(3) Tax Fees
No professional services were rendered by Jewett, Schwartz, Wolfe and Associates for tax compliance, tax advice, and tax planning the fiscal year ended December 31,2008.
The Company hired Mcarney Greenwood to file there Canadian Tax returns for 2003, 2004, 2005 and 2006.
(4) All Other Fees
Not applicable.
F-25
ITEM 15. EXHIBITS AND REPORTS ON FORM 8-K
| | | | | |
| Date | | Item(s) | |
| 2006-01-19 | | | 5.02 | |
| 2006-02-08 | | | 8.01, 9.01 | |
| 2006-10-05 | | | 2.01, 5.02, 8.01, 9.1 | |
| 2006-12-29 | | | 3.02 | |
| 2007-02-01 | | | 3.01 | |
| 2007-03- | | | | |
(A) LISTING OF EXHIBITS
| | | |
| EXHIBIT NUMBER | | DESCRIPTION |
| | | |
| 3(i)(a) | | *Articles of Incorporation of Osprey Gold Corp. |
| | | |
| 3(i)(b) | | *Articles of Amendment changing name to Osprey Gold Corp. |
| | | |
| 3(ii) | | *Bylaws of Osprey Gold Corp. |
| | | |
| 31.1 | | Section 302 Certification |
| | | |
| 32.1 | | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
| * | | Incorporated by reference filed as form 10SB |
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(B) CODE OF ETHICS
Gilla Inc. will conduct its business honestly and ethically wherever we operate in the world. We will constantly improve the quality of our services, products and operations and will create a reputation for honesty, fairness, respect, responsibility, and integrity, trust and sound business judgment. No illegal or unethical conduct on the part of officers, directors, employees or affiliates is in the company’s best interest. Gilla Inc. will not compromise its principles for short-term advantage. The ethical performance of this company is the sum of the ethics of the men and women who work here. Thus, we are all expected to adhere to high standards of personal integrity.
Officers, directors, and employees of the company must never permit their personal interests to conflict, or appear to conflict, with the interests of the company, its clients or affiliates. Officers, directors and employees must be particularly careful to avoid representing Gilla Inc. in any transaction with others with whom there is any outside business affiliation or relationship. Officers, directors, and employees shall avoid using their company contacts to advance their private business or personal interests at the expense of the company, its clients or affiliates.
No bribes, kickbacks or other similar remuneration or consideration shall be given to any person or organization in order to attract or influence business activity. Officers, directors and employees shall avoid gifts, gratuities, fees, bonuses or excessive entertainment, in order to attract or influence business activity.
Officers, directors and employees of Gilla Inc. will often come into contact with, or have possession of, proprietary, confidential or business-sensitive information and must take appropriate steps to assure that such information is strictly safeguarded. This information - whether it is on behalf of our company or any of our clients or affiliates — could include strategic business plans, operating results, marketing strategies, customer lists, personnel records, upcoming acquisitions and divestitures, new investments, and manufacturing costs, processes and methods. Proprietary, confidential and sensitive business information about this company, other companies, individuals and entities should be treated with sensitivity and discretion and only be disseminated on a need-to-know basis.
Misuse of material inside information in connection with trading in the company’s securities can expose an individual to civil liability and penalties. Directors, officers, and employees in possession of material information not available to the public are “insiders”. Spouses, friends, suppliers, brokers, and others outside the company who may have acquired the information directly or indirectly from a director, officer or employee are also “insiders.” The Act prohibits insiders from trading in, or recommending the sale or purchase of, the company’s securities, while such inside information is regarded as “material”, or if it is important enough to influence you or any other person in the purchase or sale of securities of any company with which we do business, which could be affected by the inside information.
The following guidelines should be followed in dealing with inside information:
Until the company has publicly released the material information, an employee must not disclose it to anyone except those within the company whose positions require use of the information.
Employees must not buy or sell the company’s securities when they have knowledge of material information concerning the company until it has been disclosed to the public and the public has had sufficient time to absorb the information.
Employees shall not buy or sell securities of another corporation, the value of which is likely to be affected by an action by the company of which the employee is aware and which has not been publicly disclosed.
Officers, directors and employees will seek to report all information accurately and honestly, and as otherwise required by applicable reporting requirements.
F-27
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 March 31 2009 by the undersigned, thereunto authorized.
| | | | | |
| |
GILLA INC.
(FORMERLY INCITATIONS)
| |
| | By: | /s/ Georges Benarroch | |
| | | Georges Benarroch, President & | |
| | | Chief Financial Officer | |
| |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities on the date(s) indicated.
| | | | | |
| Name | | Title | | Date |
| | | | | |
| /s/ Georges Benarroch | | President
Chief Financial Officer
Director | | March 31,2009 |
F-28
