GILLA INC. (Form: 8-K, Received: 08/08/2014 15:39:50)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

DATE OF EARLIEST EVENT REPORTED – August 1, 2014

GILLA INC.

(Exact Name of Registrant as Specified in its Charter)

NEVADA	000-28107	88-0335710
(State or other jurisdiction of	(Commission	(IRS Employer
incorporation)	File Number)	Identification Number)

112 North Curry Street, Carson City, Nevada 89703

(Address of principal executive offices)

(416) 843-2881

(Registrant’s telephone number, including area code)

N/A

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o	Written communications pursuant to Rule 425 under the Securities Act

o	Soliciting material pursuant to Rule 14a-12 under the Exchange Act

o	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act

o	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act

Item 1.01 Entry into a Material Definitive Agreement.

Credit Facility

On August 1, 2014, Gilla Inc. (“Gilla” or the “Company”) and Sarasvati Investments Inc., (“Sarasvati” or the “Lender”), an agent to a consortium of investors as further described below, entered into a Revolving Credit Facility (the “Credit Facility”) whereby the Lender would make a revolving credit facility in the aggregate principal amount of Five Hundred Thousand Canadian Dollars (CAD $500,000) for the exclusive purpose of purchasing inventory (together with related costs) for sale in the Company’s, or any of its subsidiaries’, ordinary course of business to approved customers. The Credit Facility is secured by all of the Company’s inventory and accounts due relating to any inventory as granted in the intercreditor and subordination agreement and a security agreement as described below.

The Credit Facility shall bear interest at a rate of 15% per annum, on the outstanding Advances (the “Advances” meaning the extension of credit by the Lender to the Company), such interest shall accrue daily and paid monthly, in arrears. The Credit Facility shall also bear a standby fee at a rate of 3.5% per annum with respect to the unused portion of the Credit Facility, calculated on a daily basis as being the difference between the Credit Facility and the outstanding Advances. The Credit Facility shall mature on August 1, 2015 (the “Maturity Date”) whereby the outstanding Advances together with all accrued and unpaid interest thereon shall become due and payable on the Maturity Date.

The Company shall provide written notice to the Lender ten (10) business days prior to a proposed Advance and shall have the right and privilege of repaying the whole or any portion of the Advances, without premium or penalty, at any time. The Company shall also provide to the Lender a monthly security report deliverable at the end of each month until the Maturity Date, indicating the outstanding Advances relative to the Secured Inventory value (“Secured Inventory”). The Lender shall have five (5) business days to request that the Company repay any amount up to the difference between the outstanding Advances and the Secured Inventory, in which case, the Company shall have five (5) business days to repay that portion of the Advances.

In connection to the Credit Facility, the Company issued 250,000 warrants on August 1, 2014 to purchase Gilla common shares at an exercise price of US$0.30 per share, exercisable over a term of two (2) years from the date of issuance.

Furthermore, Sarasvati is acting as an agent for a consortium of investors as outlined in a private agency and participation agreement by and among Sarasvati and each of the participants. The Company’s Chief Executive Officer and its Chief Financial Officer are both beneficial investors in the consortium and have each committed to provide ten (10) percent of the principal amount of the Credit Facility. Neither the Chief Executive Officer nor the Chief Financial Officer shall participate in the warrants issued in connection with the Credit Facility. The Company’s Board of Directors passed a resolution to approve the Credit Facility and J. Graham Simmonds, the Company’s Chief Executive Officer and Director, abstained from voting.

A copy of such Credit Facility is attached hereto as Exhibit 10.15 and incorporated herein by reference.

Intercreditor and Subordination Agreement

On February 13, 2014, the Company entered into a General Security Agreement (the “GSA”) with Gravitas Financial Inc. (“Gravitas”), granting Gravitas a general security interest over all the assets of the Company including property, fixtures and leasehold interests. The Company shall be required to pay Gravitas on demand all reasonable costs and expenses (collectively, “Expenses”) incurred by Gravitas in connection with the preparation, execution, delivery, registration and enforcement of the GSA. A copy of such GSA is filed as Exhibit 10.12 in the Company’s Form 8-K dated February 19, 2014 and incorporated herein by reference.

In connection with the Credit Facility, on August 1, 2014, the Company, Sarasvati and Gravitas (Sarasvati and Gravitas each a “Creditor” as the context may require, or together the “Creditors”) entered into an Intercreditor and Subordination Agreement (the “Subordination Agreement”) in order to establish the Creditors’ relative rights and priorities against the Company.

The Creditors agreed that security shall rain in descending order of priority as follows:

A.	First, the Sarasvati security, to the extent of the Sarasvati Priority Collateral (“Priority Collateral” as defined below);

B.	Second, the Gravitas security, to the extent of any Gravitas indebtedness; and

C.	Third, the Sarasvati security, to the extent of any remaining Sarasvati indebtedness.

A copy of such Subordination Agreement is attached hereto as Exhibit 10.16 and incorporated herein by reference.

Security Agreement

In connection with the Credit Facility, on August 1, 2014, the Company entered into a Security Agreement (the “Security Agreement”) and Sarasvati, granting Sarasvati, a security interest in the Company’s (i) inventory including goods held for sale, lease or resale, goods furnished or to be furnished to third parties under contracts of lease, consignment or service, goods which are raw materials or work in process, goods used in or procured for packing and materials used or consumed in the business of the Company (collectively, the “Inventory”) and (ii) accounts due or accruing and all related agreements, books, accounts, invoices, letters, documents and papers recording, evidencing or relating to any Inventory (i and ii collectively, the “Priority Collateral”). The Company will also be liable for and will pay on demand by Sarasvati any and all expenses.

A copy of such Security Agreement is attached hereto as Exhibit 10.17 and incorporated herein by reference.

Item 8.01 Other Events.

On August 8, 2104, the Company issued a press release announcing that it has closed the Credit Facility as described in Item 1.01, above.

A copy of such press release is attached hereto as Exhibit 99.1 and incorporated herein by reference.

Item 9.01 Financial Statements and Exhibits.

(d) Exhibits

Exhibit No.		Description

10.15		Revolving Credit Facility, by and between the Company and Sarasvati Investments Inc., dated as of August 1, 2014.

10.16		Intercreditor and Subordination Agreement, by and between the Company, Sarasvati Investments Inc., and Gravitas Financial Inc., dated as of August 1, 2014.

10.17		Security Agreement from the Company to Sarasvati Investments Inc., dated as of August 1, 2014.

99.1		Press Release dated August 8, 2014 from Gilla Inc.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	GILLA INC.

August 8, 2014	By:	/s/ J. Graham. Simmonds
		J. Graham. Simmonds
		Chief Executive Off

Exhibit 10.15

LOAN AGREEMENT

Loan agreement dated August 1, 2014 (this “ Agreement ”) between Gilla Inc. (the “ Borrower ”) and Sarasvati Investments Inc. (the “ Lender ”).

RECITALS

WHEREAS the Borrower desires that the Lender make available a revolving credit facility to the Borrower in the aggregate principal amount of $500,000;

AND WHEREAS the Lender is prepared to extend such a revolving credit facility to the Borrower subject to the terms and conditions set out herein;

NOW, THEREFORE , in consideration of the premises and the agreements, provisions and covenants herein contained and other good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged), the Borrower and the Lender agree as follows:

ARTICLE 1

INTERPRETATION

Section 1.1 Defined Terms.

As used in this Agreement, the following terms have the following meanings:

“ Advance ” means an extension of credit by the Lender to the Borrower pursuant to this Agreement.

“ Applicable Rate ” means, at any given time, the greater of: (a) 15% per annum; and (b) from the Closing Date up to and including the Maturity Date, the highest interest rate per annum paid, or payable, by the Borrower to any arm’s length commercial lender (or syndicate of lenders) pursuant to a financing arrangement with such lender (or lenders) for the purposes set out in Section 2.3 on terms and conditions equivalent to the terms and conditions of this Agreement.

“ Borrower ” means Gilla Inc. and its successors and permitted assigns .

“ Business Day ” means any day of the year, other than a Saturday, Sunday or any day on which major banks are closed for business in Toronto, Ontario.

“ Closing Date ” means the date on which this Agreement becomes effective.

“ Default ” means an event which, with the giving of notice or passage of time, or both, would constitute an Event of Default.

“ Event of Default ” has the meaning specified in Section 6.1 .

“ Funded Debt ” of any Person means (i) all indebtedness of such Person for or in respect of, borrowed money, bankers acceptances, letters of credit or letters of guarantee, (ii) all indebtedness of such Person for the deferred purchase price of property or services represented by a note, bond, debenture or other evidence of indebtedness, (iii) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (iv) all current liabilities of such Person represented by a note, bond, debenture or other evidence of indebtedness, and (v) all obligations under leases which have been or should be, in accordance with U.S. GAAP, recorded as capital leases in respect of which such Person is liable as lessee.

“ U.S. GAAP ” means generally accepted accounting principles in the United States, as approved by the Financial Accounting Standards Board, as in effect from time to time.

“ Governmental Entity ” means (i) any international, multinational, national, federal, provincial, state, municipal, local or other governmental or public department, central bank, court, commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) any subdivision or authority of any of the above, (iii) any stock exchange and (iv) any quasi-governmental or private body exercising any regulatory, expropriation or taxing authority under or for the account of any of the above.

“ Indemnified Person ” has the meaning specified in Section 7.4 .

“ Intercreditor and Subordination Agreement ” means the intercreditor and subordination agreement dated the date hereof among Gravitas Financial Inc., the Lender and the Borrower, as amended, restated, amended and restated or replaced from time to time.

“ Lender ” means Sarasvati Investments Inc. and its successors and assigns.

” Loan ” means the revolving credit facility in the aggregate principal amount not exceeding the Loan Limit to be made available to the Borrower by the Lender under this Agreement for the purposes set out in Section 2.3.

“ Loan Limit ” means $500,000.

“ Lien ” means any mortgage, charge, pledge, hypothecation, security interest, assignment, encumbrance, lien (statutory or otherwise), title retention agreement or arrangement, restrictive covenant or other encumbrance of any nature or any other arrangement or condition that in substance secures payment or performance of an obligation.

“ Loan Documents ” means this Agreement, the Intercreditor and Subordination Agreement, the Warrant, the Security Documents and all other documents to be executed and delivered to the Lender by the Borrower pursuant to or in connection with this Agreement.

“ Material Adverse Effect ” means a material adverse effect on the business, operations, results of operations, prospects, assets, liabilities or financial condition of the Borrower.

“ Material Agreement ” means any contract or agreement to which the Borrower is a party or by which it is bound, the termination or cancellation of which (prior to the scheduled termination date) could have a Material Adverse Effect.

“ Maturity Date ” means August 1, 2015.

“ Permitted Liens ” means, in respect of any Person, any one or more of the following:

(a)	Liens for taxes, assessments or governmental charges or levies which are not delinquent or the validity of which is being contested at the time by the Person in good faith by proper legal proceedings if, in the Lender’s opinion, adequate provision has been made for payment;

(b)

inchoate or statutory Liens of contractors, subcontractors, mechanics, workers, suppliers, materialmen, carriers and others in respect of construction, maintenance, repair or operation of assets of the Person, provided that such Liens are related to obligations not due or delinquent, are not registered against title to any assets of the Person and in respect of which adequate holdbacks are being maintained as required by applicable law or such Liens are being contested in good faith by appropriate proceedings and in respect of which there has been set aside a reserve (segregated to the extent required by U.S. GAAP) in an adequate amount and provided further that such Liens do not, in the Lender’s reasonable opinion, reduce the value of the asset so affected or materially interfere with the use of such asset in the operation of the business of the Person;

(c)

the right reserved to or vested in any Governmental Entity by any statutory provision or by the terms of any lease, licence, franchise, grant or permit of the Person, to terminate any such lease, licence, franchise, grant or permit, or to require annual or other payments as a condition to the continuance thereof; and

(d)	Liens in favour of the Lender created by the Security Documents.

“ Person ” means a natural person, partnership, corporation, joint stock company, trust, unincorporated association, joint venture or other entity or Governmental Entity and pronouns have a similarly extended meaning.

“ Secured Inventory ” means the secured inventory value and accounts due relating to any inventory.

“ Security ” means, at any time, the security interest in favour of the Lender, in those assets and properties of the Borrower securing its obligations under this Agreement and the other Loan Documents to which it is a party.

" Security Agreement ” means the security agreement dated the date hereof by the Borrower in favour of the Lender.

“ Security Documents ” means the Security Agreement and any other security granted to the Lender, as security for the obligations of the Borrower under this Agreement and the other Loan Documents.

“ Security Report ” means a monthly security report, certified by the Borrower’s management and deliverable at the end of each month until the Maturity Date, indicating the outstanding Advances relative to the Secured Inventory value.

“ Warrant ” means the warrant granted by Borrower to Karen Gautam, containing terms acceptable to Karen Gautam in its sole and reasonable discretion, entitling Karen Gautam to purchase 250,000 common shares of the Borrower at an exercise price equal to US$0.30, which warrant is to remain in effect from the Closing Date until the date that is two (2) years following the Maturity Date.

Section 1.2 Gender and Number.

Any reference in the Loan Documents to gender includes all genders and words importing the singular number only include the plural and vice versa .

Section 1.3 Headings, etc.

The division of this Agreement into Articles and Sections and the insertion of headings are for convenient reference only and are not to affect the interpretation of this Agreement.

Section 1.4 Currency.

All references in the Loan Documents to dollars, unless otherwise specifically indicated, are expressed in Canadian currency.

Section 1.5 Certain Phrases, etc.

In any Loan Document (i) (a) the words “including” and “includes” mean “including (or includes) without limitation” and (b) the phrase “the aggregate of”, “the total of”, “the sum of”, or a phrase of similar meaning means “the aggregate (or total or sum), without duplication, of”, and (ii) in the computation of periods of time from a specified date to a later specified date, unless otherwise expressly stated, the word “from” means “from and including” and the words “to” and “until” each mean “to but excluding”.

Section 1.6 Accounting Terms.

All accounting terms not specifically defined in this Agreement shall be interpreted in accordance with U.S. GAAP.

Section 1.7 Conflict.

The provisions of this Agreement prevail in the event of any conflict or inconsistency between its provisions and the provisions of any of the other Loan Documents.

ARTICLE 2

CREDIT FACILITY

Section 2.1 Availability.

(1)	The Lender agrees, on the terms and subject to the conditions of this Agreement, to make the Loan available from or after the Closing Date.

(2)

The Loan shall be a revolving credit facility. For greater certainty, the Borrower shall be entitled to obtain Advances under the Loan from time to time and, subject to Section 2.5, repay all or any portion of the outstanding Advances under the Loan from time to time; provided that the outstanding Advances under the Loan shall not at any time exceed the Loan Limit.

(3)	The Lender shall maintain, in accordance with its usual practice, records evidencing the amounts owing under this Agreement; and the information entered into such records shall constitute conclusive evidence of such amounts owed absent manifest error.

Section 2.2 Notice.

The Borrower shall provide written notice to the Lender ten (10) Business Days prior to a proposed Advance.

Section 2.3 Purpose.

Advances shall be used by the Borrower for the exclusive purpose of purchasing inventory (together with related costs) for sale in the Borrower’s, or any of its subsidiaries’, ordinary course of business to the approved customers listed in Schedule “A” hereto as such schedule may be amended or replaced from time to time.

Section 2.4 Repayment of Principal, Interest Payments and Standby Fees.

(1)	The principal amount of the outstanding Advances from time to time shall bear interest at the Applicable Rate.

(2)	Interest shall accrue daily and shall be calculated and payable monthly, in arrears.

(3)	a standby fee with respect to the unused portion of the Loan, calculated on a daily basis as being the difference between the Loan Limit and the outstanding Advances, multiplied by 3.5% and divided by 365 shall be payable in arrears on the last day of each month.

(4)	Subject to Section 6.2, the outstanding principal amount of the Advances together with all accrued and unpaid interest thereon shall become due and payable on the Maturity Date.

Section 2.5 Repayments.

The Borrower shall have the right and privilege of repaying the whole or any portion of the Advances, without premium or penalty, at any time or times.

If any given Security Report indicates that the outstanding Advances is greater than the Secured Inventory value, the Lender shall have five (5) Business Days to request that the Borrower repay an amount up to the difference between the outstanding Advances and the Secured Inventory. Upon the Lender’s request for such repayment, the Borrower shall have five (5) Business Days to repay that portion of the Advances.

Section 2.6 Payments under this Agreement.

(1)

Unless otherwise expressly provided in this Agreement or by the parties in writing, the Borrower shall make any payment required to be made by it to the Lender by depositing the amount of the payment to an account specified by the Lender not later than 10:00 a.m. (Toronto time) on the date the payment is due.

(2)

All amounts owed by the Borrower to the Lender, which are not paid when due (whether at stated maturity, by acceleration or otherwise) shall bear interest (both before and after default and judgment), from the date on which such amount is due until such amount is paid in full, payable on demand, at a rate per annum equal to the Applicable Rate, plus 2%

Section 2.7 Computations of Interest.

(1)	All computations of interest shall be made by the Lender taking into account the actual number of days occurring in the period for which such interest is payable, on the basis of a year of 365 days.

(2)

For purposes of the Interest Act (Canada), (i) whenever any interest or fee under this Agreement is calculated using a rate based on a year of 365 days, the rate determined pursuant to such calculation, when expressed as an annual rate, is equivalent to (x) the applicable rate based on a year of 365 or 366 days, as the case may be, (y) multiplied by the actual number of days in the calendar year in which the period for which such interest or fee is payable (or compounded) ends, and (z) divided by 365 or 366 days, as the case may be, (ii) the principle of deemed reinvestment of interest does not apply to any interest calculation under this Agreement, and (iii) the rates of interest stipulated in this Agreement are intended to be nominal rates and not effective rates or yields.

Section 2.8 Security Report.

The Borrower shall provide to the Lender a monthly security report (each a “Security Report”), certified by the Borrower’s management and deliverable at the end of each month until the Maturity Date, indicating the outstanding Advances relative to the secured inventory value and accounts due relating to any inventory (the “Secured Inventory”).

ARTICLE 3

CONDITIONS OF LENDING

Section 3.1 Conditions Precedent to First Advance.

The Lender shall have no obligation to make the first Advance hereunder unless at the time of making such Advance the following terms and conditions shall have been satisfied:

(a)	the Lender has received, in form, substance, scope and dated a date satisfactory to it and its counsel:

(i)	an executed copy of each of the Loan Documents;

(ii)	evidence of registration of the Security Documents in such jurisdictions as the Lender may reasonably require, including all required consents to obtain such registrations; and

(b)	the conditions precedent in Section 3.2 shall have been satisfied.

Section 3.2 Conditions Precedent to all Advances.

The Lender shall have no obligation to make the first Advance or any subsequent Advance unless at the time of making each such Advance the following terms and conditions shall have been satisfied:

(a)	no Default or Event of Default has occurred or is continuing or would arise immediately after giving effect to or as a result of the Advance;

(b)	the Advance will not violate any applicable law, order or judgment;

(c)

(i) the Advance is to be used for the purposes identified in Section 2.3; (ii) the Borrower shall have provided the Lender with information reasonably satisfactory to the Lender with respect to the proposed use of the Advance; and (iii) the Lender, or its designate, shall have approved the proposed use of the Advance;

(d)	the representations and warranties of the Borrower contained in Article 4 are true and correct on the date of the Advance as if such representations and warranties were made on that date; and

(e)	the Borrower shall have delivered an Advance request to the Lender in accordance with the notice requirements provided in Section 2.2.

ARTICLE 4

REPRESENTATIONS AND WARRANTIES

Section 4.1 Representations and Warranties.

The Borrower represents and warrants to the Lender, acknowledging and confirming that the Lender is relying on such representations and warranties without independent inquiry in entering into this Agreement and providing the Loan that:

(a)

Incorporation and Qualification. The Borrower is a corporation duly incorporated, organized and validly existing under the laws of the State of Nevada. The Borrower is qualified, licensed or registered to carry on business under the laws applicable to it in all jurisdictions in which such qualification, licensing or registration is necessary or where failure to be so qualified would have a Material Adverse Effect;

(b)	Corporate Power. The Borrower has all requisite corporate power and authority to (i) own, lease and operate its properties and assets and to carry on its business as now being conducted by it, and (ii) enter into and perform its obligations under the Loan Documents;

(c)

Conflict with Other Instruments. The execution and delivery by the Borrower and the performance by it of its obligations under, and compliance with the terms, conditions and provisions of, the Loan Documents will not (i) conflict with or result in a breach of any of the terms or conditions of (t) its constating documents, (u) any applicable law, rule or regulation, (v) any contractual restriction binding on or affecting it or its properties, or (w) any judgment, injunction, determination or award which is binding on it, or (ii) result in, require or permit (x) the imposition of any Lien in, on or with respect to any of its assets or property (except in favour of the Lender), (y) the acceleration of the maturity of any Funded Debt binding on or affecting the Borrower, or (z) any third party to terminate or acquire rights under any Material Agreement;

(d)

Corporate Action, Governmental Approvals, etc. The execution and delivery of each of the Loan Documents by the Borrower and the performance by the Borrower of its obligations under the Loan Documents has been duly authorized by all necessary corporate action including, without limitation, the obtaining of all necessary shareholder consents. No authorization, consent, approval, registration, qualification, designation, declaration or filing with any Governmental Entity or other Person, is or was necessary in connection with the execution, delivery and performance of obligations under the Loan Documents except as are in full force and effect, unamended, at the date of this Agreement;

(e)

Execution and Binding Obligation. This Agreement and the other Loan Documents have been duly executed and delivered by the Borrower and constitute legal, valid and binding obligations of the Borrower enforceable against it in accordance with its terms, subject only to any limitation under applicable laws relating to (i) bankruptcy, insolvency, arrangement or creditors’ rights generally, and (ii) the discretion that a court may exercise in the granting of equitable remedies;

(f)

Authorizations, etc. The Borrower possesses all authorizations, permits, consents, registrations and approvals necessary to properly conduct its businesses and to enter into and perform its obligations under the Loan Documents and all such authorizations, permits, consents, registrations and approvals are in good standing and in full force and effect;

(g)

Ownership and Use of Property. Except for Permitted Liens, the Borrower has good and marketable title to all the real and personal property reflected as assets in its books and records. The Borrower owns, leases or has the lawful right to use all of the assets necessary for the conduct of its businesses;

(h)	Compliance with Laws. The Borrower is in compliance with all applicable laws, judgments and orders and rulings, guidelines and decisions having force of law;

(i)	No Default. The Borrower is not in violation of its constating documents, or any shareholders’ agreement applicable to it or any Material Agreement; and

(j)

No Material Adverse Agreements. The Borrower is not party to any agreement or instrument or subject to any restriction (including any restriction set forth in its constating documents, any shareholders’ agreement applicable to it or any Material Agreement) which has or may have a Material Adverse Effect.

Section 4.2 Survival of Representations and Warranties.

The representations and warranties in this Agreement and in any certificates or documents delivered to the Lender shall not merge in or be prejudiced by and shall survive each Advance and shall continue in full force and effect so long as any amounts are owing by the Borrower to the Lender under this Agreement.

ARTICLE 5

COVENANTS OF THE BORROWER

Section 5.1 Affirmative Covenants.

So long as there remains any outstanding amount owing under the Loan or the Lender has any obligation under this Agreement, the Borrower shall:

(a)	Corporate Existence. Preserve and maintain its corporate existence;

(b)	Compliance with Laws, etc. Comply with the requirements of all applicable laws, judgments, orders, decisions, awards, Material Agreements and Loan Documents;

(c)

Payment of Taxes and Claims. Pay when due, (i) all taxes, assessments and governmental charges or levies imposed upon it or upon its income, sales, capital or profit or any other property belonging to, and (ii) all claims which, if unpaid, might by law become a Lien upon the assets, except any such tax, assessment, charge, levy or claim which is being contested in good faith and by proper proceedings and in respect of which the Borrower has established adequate reserves in accordance with U.S. GAAP or which are Permitted Liens;

(d)	Keeping of Books. Keep proper books of record and account, in which full and correct entries shall be made in respect of its business and operations;

(e)	Ordinary Course. The Borrower shall conduct its business in a manner consistent with past practices, and in the ordinary course of its normal day-to-day operations; and

(f)

Further Assurances. At its cost and expense, upon the reasonable request of the Lender, execute and deliver or cause to be executed and delivered to the Lender such further instruments, agreements and security documents and do and cause to be done such further acts as may be necessary or proper in the reasonable opinion of the Lender to carry out more effectually the provisions and purposes of the Loan Documents.

Section 5.2 Negative Covenants.

So long as there remains any outstanding amount owing under the Loan or the Lender has any obligation under this Agreement, the Borrower shall not create, incur, assume or suffer to exist any Lien on any of its property or assets covered by the Security other than Permitted Liens.

ARTICLE 6

EVENTS OF DEFAULT

Section 6.1 Events of Default.

If any of the following events (each an “ Event of Default ”) occurs and is continuing:

(a)	the Borrower fails to pay any amount under the Loan, any interest thereon or any other amounts due under any Loan Document when such amount becomes due and payable;

(b)	any representation or warranty or certification made or deemed to be made by the Borrower or any of its respective directors or officers in any Loan Document shall prove to have been incorrect when made or deemed to be made;

(c)	the Borrower fails to perform, observe or comply with any other term, covenant or agreement contained in any Loan Document to which it is a party and such failure remains unremedied for thirty (30) days;

(d)

any judgment or order for the payment of money in excess of $1,000,000 (or the equivalent amount in any other currency) is rendered against the Borrower and either (i) enforcement proceedings have been commenced by a creditor upon the judgment or order, or (ii) there is any period of fifteen (15) consecutive days during which a stay of enforcement of the judgment or order, by reason of a pending appeal or otherwise, is not in effect; or

(e)

the Borrower (i) becomes insolvent or generally not able to pay its debts as they become due, (ii) admits in writing its inability to pay its debts generally or makes a general assignment for the benefit of its creditors, (iii) institutes or has instituted against it any proceeding seeking (x) to adjudicate it a bankrupt or insolvent, (y) liquidation, winding-up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors including any plan of compromise or arrangement or other corporate proceeding involving or affecting its creditors, or (z) the entry of an order for relief or the appointment of a receiver, trustee or other similar official for it or for any substantial part of its properties and assets, and in the case of any such proceeding instituted against it (but not instituted by it), either the proceeding remains undismissed or unstayed for a period of forty-five (45) days, or any of the actions sought in such proceeding (including the entry of an order for relief against it or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its properties and assets) occurs, or (iv) takes any corporate action to authorize any of the above actions.

then the Lender may declare that the Loan, all accrued interest and fees and all other amounts payable under this Agreement to be immediately due and payable, without presentment, demand, protest or further notice of any kind, all of which are expressly waived by the Borrower.

Section 6.2 Remedies Upon Default.

(1)

Upon a declaration that the Loan is immediately due and payable pursuant to Section 6.1 , the Lender may commence such legal action or proceedings as it, in its sole discretion, deems expedient, including, the commencement of enforcement proceedings under the Loan Documents all without any additional notice, presentation, demand, protest, notice of dishonour, entering into of possession of any property or assets, or any other action or notice, all of which are expressly waived by the Borrower.

(2)

The rights and remedies of the Lender under the Loan Documents are cumulative and are in addition to, and not in substitution for, any other rights or remedies. Nothing contained in the Loan Documents with respect to the indebtedness or liability of the Borrower to the Lender, nor any act or omission of the Lender with respect to the Loan Documents or the Security shall in any way prejudice or affect the rights, remedies and powers of the Lender under the Loan Documents and the Security.

ARTICLE 7

MISCELLANEOUS

Section 7.1 Amendments, etc.

No amendment or waiver of any provision of any of the Loan Documents, nor consent to any departure by the Borrower or any other Person from such provisions, is effective unless in writing and approved by the Lender. Any amendment, waiver or consent is effective only in the specific instance and for the specific purpose for which it was given.

Section 7.2 Waiver.

(1)

No failure on the part of the Lender to exercise, and no delay in exercising, any right under any of the Loan Documents shall operate as a waiver of such right; nor shall any single or partial exercise of any right under any of the Loan Documents preclude any other or further exercise of such right or the exercise of any other right.

(2)

Except as otherwise expressly provided in this Agreement, the covenants, representations and warranties shall not merge on and shall survive each Advance and, notwithstanding such Advance or any investigation made by or on behalf of any party, shall continue in full force and effect. The closing of this transaction shall not prejudice any right of one party against any other party in respect of anything done or omitted under this Agreement or in respect of any right to damages or other remedies.

Section 7.3 Notices, etc.

Any notice, direction or other communication to be given under this Agreement shall, except as otherwise permitted, be in writing and given by delivering it or sending it by facsimile or other similar form of recorded communication addressed:

(a)	to the Lender at:

33 Kennedy Park Road

Toronto, Ontario

M6P 3H2

Karen.gautam@gmail.com (with a copy to rajeevuofw@gmail.com)

(b)	to the Borrower at:

110 Yonge Street, Suite 1602

Toronto, Ontario, M5C 1T4

graham@gillainc.com

Any such communication shall be deemed to have been validly and effectively given if (i) personally delivered, on the date of such delivery if such date is a Business Day and such delivery was made prior to 4:00 p.m. (Toronto time), otherwise on the next Business Day, (ii) transmitted by facsimile or similar means of recorded communication on the Business Day following the date of transmission. Any party may change its address for service from time to time by notice given in accordance with the foregoing and any subsequent notice shall be sent to the party at its changed address.

Section 7.4 Costs, Expenses and Indemnity.

(1)

The Borrower shall, whether or not the transaction contemplated by this Agreement is completed, indemnify and hold the Lender and its officers, directors, employees and agents (each an “ Indemnified Person ”) harmless from, and shall pay to such Indemnified Person on demand any amounts required to compensate the Indemnified Person for, any cost, expense, claim or loss suffered by, imposed on, or asserted against, the Indemnified Person as a result of, or arising out of (i) the preparation, execution and delivery of, preservation of rights under, enforcement of, or refinancing, renegotiation or restructuring of, the Loan Documents and any related amendment, waiver or consent, (ii) a Default (whether or not constituting a Default or an Event of Default), and (iii) any proceedings brought by or against the Indemnified Person, or in which the Indemnified Person otherwise participates, due to its entering into or being a party to any of the Loan Documents, or by reason of its exercising or performing, or causing the exercise or performance of, any right, power or obligation under any of the Loan Documents, whether or not such proceedings are directly related to the enforcement of any Loan Document, except to the extent caused by the gross negligence or wilful misconduct of the Indemnified Person.

(2)

The Borrower shall pay to the Lender all reasonable costs and expenses (including all legal fees and disbursements on a solicitor and own client basis) incurred by the Lender in connection with this Agreement and the other Loan Documents; provided that the aggregate amount payable by the Borrower to the Lender, pursuant to this Section 7.4(2), shall not exceed $15,000.

Section 7.5 Successors and Assigns.

(1)	This Agreement shall become effective when executed by the Borrower and the Lender and after that time shall be binding upon and enure to the benefit of the Borrower and the Lender and their respective successors and permitted assigns.

(2)	The Borrower shall not have the right to assign its rights or obligations under this Agreement or any interest in this Agreement without the prior consent of the Lender, which consent may not be unreasonably withheld.

Section 7.6 Right of Set-off.

Upon the occurrence and during the continuance of any Event of Default, the Lender is authorized at any time and from time to time, to the fullest extent permitted by law (including general principles of common-law), to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by it to or for the credit or the account of the Borrower against any and all of the obligations of the Borrower under any of the Loan Documents, irrespective of whether or not the Lender has made demand under any of the Loan Documents and although such obligations may be unmatured or contingent. If an obligation is unascertained, the Lender may, in good faith, estimate the obligation and exercise its right of set-off in respect of the estimate, subject to providing the Borrower with an accounting when the obligation is finally determined. The Lender shall promptly notify the Borrower after any set-off and application is made by it, provided that the failure to give notice shall not affect the validity of the set-off and application. The rights of the Lender under this Section 7.6 are in addition to other rights and remedies (including all other rights of set-off) which the Lender may have.

Section 7.7 Entire Agreement

This Agreement, together with the Loan Documents, contain the entire agreement between the Lender and the Borrower with respect to the matters hereof and supersedes all prior agreements and understandings, oral or written, with respect to such matters.

Section 7.8 Governing Law.

This Agreement shall be governed by and interpreted and enforced in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein.

Section 7.9 Counterparts.

This Agreement may be executed in any number of counterparts and all of such counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of an executed counterpart of this Agreement by electronic means, including, without limitation, by facsimile transmission or by electronic delivery in portable document format (“ . pdf ”) or tagged image file format (“ . tif ”), shall constitute the valid and binding signature of such party with the same effect as if it were an original signature endorsed on this Agreement.

Section 7.10 Language.

The parties hereto acknowledge that they have required and are satisfied that this Agreement and all communications to be delivered pursuant hereto be drawn in the English language.

Section 7.11 Syndication.

The Borrower acknowledges that the Lender is acting for and on behalf of itself and certain other Persons with respect to the establishment and maintenance of the Loan and that, except for the Warrant, the Loan Documents shall be granted in favour of and held by the Lender for and on behalf of itself and certain other Persons.

IN WITNESS WHEREOF the parties have executed this Agreement as of the date indicated above.

	GILLA INC.

	By:	/s/ J. Graham Simmonds
		Authorized Signing Officer

	SARASVATI INVESTMENTS INC.

	By:	/s/ Ashok Gautam
		Authorized Signing Officer

SCHEDULE “A”

Approved Customers

[intentionally left blank]

Exhibit 10.16

INTERCREDITOR AND SUBORDINATION AGREEMENT

This agreement is made as of August 1, 2014 between:

SARASVATI INVESTMENTS INC. (hereinafter referred to as “ Sarasvati ”)

- and -

GRAVITAS FINANCIAL INC.

(hereinafter referred to as “ Gravitas ”)

- and -

GILLA INC. (hereinafter referred to as the “ Borrower ”)

RECITALS:

The Borrower is indebted to Gravitas pursuant to a secured promissory note dated February 13, 2014 and a secured promissory note dated July 15, 2014 (together the “ Promissory Notes "); and as security for such indebtedness the Borrower has granted to Gravitas a general security agreement dated February 13, 2014 (the “ Gravitas Security Agreement ”) .

B.	The Borrower is indebted to Sarasvati pursuant to a revolving loan agreement dated August 1 , 2014 (the “ Loan Agreement "); and as security for such indebtedness the Borrower has granted to Sarasvati a security agreement dated August 1 , 2014 (the “ Sarasvati Security Agreement ”) .

D.	Gravitas and Sarasvati have entered into this intercreditor and subordination agreement (this “ Agreement ”) in order to establish their relative rights and priorities as against the Borrower.

FOR GOOD AND VALUABLE CONSIDERATION , the receipt and adequacy of which are hereby acknowledged by each of the parties hereto, the parties hereto hereby agree as follows:

SECTION 1 — DEFINITIONS

1.1 Definitions. The following terms set out herein with initial capital letters shall have the meanings assigned to them below:

“ Business Day ” means any day on which chartered banks are open for business in the Province of Ontario and excludes a Saturday, Sunday and any other day which is a statutory holiday in the Province of Ontario.

“ Gravitas Indebtedness ” means, collectively, all indebtedness, liabilities and obligations of the Borrower to Gravitas (whether for the payment of principal, interest, fees, expenses or otherwise), now or hereafter existing, whether direct or indirect, pursuant to the Promissory Notes.

“ Gravitas Security ” means, collectively, all security (including the Gravitas Security Agreement) in respect of the Borrower’s present and future personal property, assets and undertaking, now or hereafter granted or given by the Borrower to or in favour of Gravitas for the payment and/or performance of the Gravitas Indebtedness or any parts or portions thereof.

“ Creditor ” means either Sarasvati or Gravitas, as the context may require, and “ Creditors ” means both Sarasvati and Gravitas.

“ Default ” means any default by the Borrower in the payment, performance or satisfaction of any Indebtedness.

“ Indebtedness ” means the Sarasvati Indebtedness and the Gravitas Indebtedness, collectively, or either of them, as the context may require.

“ Person ” means any individual, partnership, firm, corporation, trust, unincorporated organization, government or any department or agency thereof, or any other entity.

“ Realization Proceeds ” means, collectively, all payments, proceeds and other amounts received by either Creditor in connection with any property, assets or undertaking of the Borrower subject to the Security held by such Creditor, specifically including as a result of any enforcement action taken by such Creditor with respect thereto.

“ Sarasvati Indebtedness ” means, collectively, all indebtedness, liabilities and obligations of the Borrower to Sarasvati (whether for the payment of principal, interest, fees, expenses or otherwise), now or hereafter existing, pursuant to the Loan Agreement.

“ Sarasvati Priority Collateral ” means, with respect to the Borrower, all: (a) inventory, including goods held for sale, lease or resale, goods furnished or to be furnished to third parties under contracts of lease, consignment or service, goods which are raw materials or work in process, goods used in or procured for packing and materials used or consumed in the business of the Borrower (collectively, the “ Inventory ”); (b) accounts due or accruing and all related agreements, books, accounts, invoices, letters, documents and papers recording, evidencing or relating to any Inventory; (c) all substitutions and replacements of and increases, additions and, where applicable, accessions to the property described in (a) and (b); and (d) all proceeds in any form derived directly or indirectly from any dealing with all or any part of the property described in (a) through (c) inclusive, including the proceeds of such proceeds.

“ Sarasvati Security ” means, collectively, all security in respect of the Borrower’s present and future personal property, assets and undertaking, now or hereafter granted or given by the Borrower to or in favour of Sarasvati for the payment and/or performance of the Sarasvati Indebtedness or any parts or portions thereof.

“ Security ” means the Sarasvati Security and the Gravitas Security, collectively, or either of them, as the context may require.

SECTION 2 — MUTUAL CONSENT

2.1 Mutual Consent. Notwithstanding any term or provision contained in any document, instrument or agreement to the contrary: (a) Gravitas hereby acknowledges and consents to the incurring by the Borrower of the Sarasvati Indebtedness and the creation, execution, delivery, registration, filing and perfection of the Sarasvati Security; and (b) Sarasvati hereby consents to the incurring by the Borrower of the Gravitas Indebtedness and the creation, execution, delivery, registration, filing and perfection of the Gravitas Security.

SECTION 3 — PRIORITY AND SUBORDINATION

3.1 Priority. The Creditors agree that with respect to the Security and the mortgages, charges and security interests created thereby, that the Security shall rank in descending order of priority as follows:

(a)	first, the Sarasvati Security, to the extent of the Sarasvati Priority Collateral;

(b)	second, the Gravitas Security to the extent of the Gravitas Indebtedness, and

(c)	third, the Sarasvati Security, to the extent of any remaining Sarasvati Indebtedness.

and each Creditor hereby subordinates its respective Security to and in favour of the other Creditor’s Security to the extent necessary to give effect to the priorities provided for in this Section 3.1.

3.2 Repayment on Account of the Gravitas Indebtedness. Sarasvati agrees that, notwithstanding any term or provision contained in the Loan Agreement or the Sarasvati Security, or any other document, instrument or agreement to the contrary the Borrower shall be entitled to pay and Gravitas shall be entitled to receive regularly scheduled principal and interest payments in respect of the Gravitas Indebtedness.

3.3 Repayment on Account of the Sarasvati Indebtedness. Gravitas agrees that, notwithstanding any term or provision contained in the Promissory Notes or the Gravitas Security, or any other document, instrument or agreement to the contrary the Borrower shall be entitled to pay and Sarasvati shall be entitled to receive: (i) regularly scheduled principal and interest payments in respect of the Sarasvati Indebtedness; and (ii) repayment of the Sarasvati Indebtedness in whole or in part from the proceeds from the Sarasvati Priority Collateral.

3.4 Acknowledgement and Undertaking. Each of the Credit Parties hereby acknowledges and consents to the rights and interests of the Creditors in its property, assets and undertaking, as set forth in this Agreement, and undertakes to give full effect to the subordinations contained herein and to deal with its property, assets and undertaking in accordance with the terms of this Agreement.

3.5 No Effect on Priority. The respective priorities of each Creditor’s Security established hereby, and all other rights established or specified in, or altered by, this Agreement are applicable, irrespective of:

(1)	the time or order of creation, execution, delivery, attachment or perfection of the Security;

(2)	the method of perfection of the Security;

(3)	the time or order of registration or filing of financing statements or similar statements or documents, or other recordings of the Security;

(4)	the acquisition of any additional Security;

(5)	the dates of any existing or future loans, advances or credit accommodations extended by either Creditor to the Borrower, or the dates upon which the Borrower has incurred or may in the future incur any indebtedness or liabilities to either Creditor;

(6)	the date of any Default; or

(7)	the date of crystallization of any floating charge contained in any Security.

SECTION 4 — LIMITATION ON RIGHTS

4.1 Limitation on Rights to Proceeds. Notwithstanding anything to the contrary, nothing in this Agreement shall be construed so as to entitle either Creditor to receive Realization Proceeds derived from property or assets in respect of which such Creditor does not have security (or has agreed herein that it does not claim an interest) or in respect of which such Creditor’s Security is invalid, ineffective or unenforceable against the Borrower or any third parties. Each of the Creditors agrees that, subject to the terms of this Agreement, it will not challenge the other Creditor’s Security on the grounds that it is invalid, ineffective or unenforceable.

4.2 Restriction on Enforcement. Each Creditor acknowledges and agrees that until the termination of this Agreement in accordance with Section 13 hereof it shall not take any steps whatsoever to enforce payment or any right or remedy, or otherwise take any enforcement action to enforce any Security. Each Creditor agrees that it shall not take, or cause any other Person to take, any steps whatsoever whereby the priority of the Security held by the other Creditor (as established pursuant to this Agreement), the validity of such Security or the rights of such other Creditor thereunder (as may be modified herein), shall be delayed, defeated, impaired or diminished and, without limiting the generality of the foregoing, each Creditor shall not challenge, object to, compete with or impede in any manner any act taken or proceeding commenced by the other Creditor in accordance with the provisions of this Agreement in connection with the enforcement of the Security held by it.

SECTION 5 — NOTICES

5.1 Notices Re: Default, Demand, Enforcement. Each Creditor shall promptly provide the other Creditor with a copy of any notice of demand for payment or other similar notice, as the case may be, delivered to the Borrower relating to any Default or proposed enforcement of any Security, contemporaneously with its delivery to the Borrower, provided , however, that any failure to give the notices required hereby shall not affect the priorities established or other confirmations or agreements set forth in this Agreement.

SECTION 6 — PROCEEDS

6.1 Proceeds of Realization. Notwithstanding any provision to the contrary contained in any Security or in any other document, instrument or agreement, all Realization Proceeds with respect to the Sarasvati Priority Collateral shall, subject to applicable law, be applied and distributed as follows:

(a)	firstly, on account of the costs and expenses, if any, incurred in connection with the sale, collection and realization of the Sarasvati Security; and

(b)	secondly, on account of Sarasvati Indebtedness until repaid in full.

6.2 Proceeds of Insurance and Disposition. If any of the property, assets or undertaking of the Borrower are disposed of, dealt with, lost or damaged so as to give rise to proceeds (including amounts payable under insurance policies), the relative priority of claims against, and the entitlement of each of the Creditors to, such proceeds shall be determined in accordance with the provisions of Section 3.1 above as if such claims were made against the original collateral which gave rise to such proceeds.

6.3 Trust Funds. The Creditors agree that to the extent that they receive Realization Proceeds which are payable to the other Creditor (the “ Beneficiary ”) pursuant to the terms and provisions of this Agreement, such amounts or proceeds shall be deemed to be received or held by it in trust for the Beneficiary and shall be paid over to the Beneficiary forthwith.

SECTION 7 — RIGHTS OF OTHER PARTIES

7.1 Rights of Other Parties. Nothing in this Agreement shall be construed so as to entitle any Person not a signatory to this Agreement to receive any Realization Proceeds or to confer any rights upon the Borrower or any Person not a party to this Agreement.

SECTION 8 — EXCHANGE OF INFORMATION

8.1 Exchange of Information. The Borrower hereby irrevocably consents to the disclosure between the Creditors (should they choose to do so) of any and all financial information relating to it, including particulars as to the amounts owing by the Borrower to either Creditor and whether or not a Default in respect of any Indebtedness to either Creditor has occurred and/or is continuing. Each Creditor is solely responsible for making its own independent appraisal of and investigation into the financial condition, creditworthiness, affairs and status of the Borrower.

SECTION 9 — COMPULSORY ENFORCEMENT

9.1 Compulsory Enforcement. Nothing contained in this Agreement shall require or obligate either Creditor to enforce any of their Security or to realize upon any of the property, assets or undertaking of the Borrower.

SECTION 10 — CONDITIONS TO AGREEMENT

10.1 Conditions Precedent. This Agreement shall become effective upon each of the Creditors having received a fully executed copy of this Agreement.

SECTION 11 — FURTHER ASSURANCES

11.1 Further Assurances. Each Creditor agrees that it shall at all times do, execute, acknowledge and deliver all such acts, deeds and agreements as may be reasonably necessary or desirable to give effect to the terms and provisions of this Agreement including any and all acts, deeds or agreements as may be necessary for the purpose of registering or filing notice of the terms and provisions of this Agreement.

SECTION 12 — NOTICES

12.1 Notices. All notices and other communications (each referred to as the “ Notice ”) permitted or required to be given to any of the parties hereto shall be in writing and may be delivered personally, by registered prepaid mail (except during an actual or threatened postal disruption) or sent by facsimile transmission to the following addresses or email addresses or to such other address or email addresses as shall be designated by such party by notice in writing to the other parties hereto:

(a)	if to Gravitas:

333 Bay Street, Suite 650

Toronto, Ontario, M5H 2R2

Attention: David Carbonaro

Fax No.:

(b)	if to Sarasvati:

33 Kennedy Park Road

Toronto, Ontario M6P 3H2

karen.gautam@gmail.com (with a copy to rajeevuofw@gmail.com )

(c)	if to the Borrower:

110 Yonge Street, Suite 1602

Toronto, Ontario, M5C 1T4

graham@gillainc.com

The Notice shall be deemed to have been delivered (a) in the case of personal delivery, when the Notice is delivered to the party receiving the Notice, unless the Notice was not delivered on a Business Day in which case the Notice shall be deemed to have been delivered on the next Business Day, (b) in the case of registered prepaid mail, on the fifth (5 th ) Business Day after the Notice was deposited in the mail, and (c) in the case of electronic transmission, on the day the Notice was sent, unless the Notice was not received on a Business Day or was received after 4 p.m. in which case the Notice shall be deemed to have been delivered on the next Business Day.

SECTION 13 — TERMINATION

13.1 Termination. This Agreement shall continue in full force and effect until the earliest of:

(1)	the date on which it is terminated by mutual agreement of the Creditors;

(2)	the date on which all of the Gravitas Indebtedness has been repaid in full or the date on which all of the Gravitas Security has been released; and

(3)	the date on which all of the Sarasvati Indebtedness has been repaid in full or the date on which all of the Sarasvati Security has been released.

SECTION 14 — ENTIRE AGREEMENT

14.1 Entire Agreement. This Agreement constitutes the entire agreement between the Creditors in respect of its subject matter and supersedes any prior agreements, undertakings, declarations, or representations, written or oral, in respect thereof.

SECTION 15 — PARAMOUNTCY

15.1 Paramountcy. The terms of this Agreement shall govern all of the Creditors’ respective documents, instruments and agreements relating to the Indebtedness or any part thereof as if recited in all respects therein. In the event that any term or provision of any documents, instruments and agreements relating to any Indebtedness should conflict with any term or provision of this Agreement, the term or provision of this Agreement shall prevail.

SECTION 16 — ENUREMENT

16.1 Enurement. This Agreement shall be binding upon each of the parties hereto and their respective successors and assigns.

SECTION 17 — GOVERNING LAW

17.1 Governing Law. This Agreement shall be governed by and interpreted in accordance with the laws of the Province of Ontario and the laws of Canada applicable therein.

SECTION 18 — COUNTERPARTS; EXECUTION

18.1 Counterparts. This Agreement may be executed in any number of counterparts, and each such counterpart may be delivered by facsimile (including pdf) transmission. Each such counterpart so executed and delivered shall be deemed to be an original and all such counterparts when taken together shall be deemed to constitute one and the same agreement.

SECTION 19 — ASSIGNMENT

19.1 Assignment. No Creditor shall transfer or assign its Indebtedness or Security to any Person (the “ Transferee ”) without obtaining, in favour of the other Creditor, the written agreement of the Transferee to be bound by the provisions of this Agreement.

(The remainder of this page is intentionally left blank; signature page follows.)

IN WITNESS WHEREOF the parties have executed this Agreement as of the date noted above.

	SARASVATI INVESTMENTS INC.

	By:	/s/ Askok Gautam
		Name: Askok Gautam
		Title: President

	GRAVITAS FINANCIAL INC.

		/s/ David Carbonaro
		Name: David Carbonaro
		Title: President

	GILLA INC.

		/s/ J. Graham Simmonds
		Name: J. Graham Simmonds
		Title: CEO

Exhibit 10.17

SECURITY AGREEMENT

Security agreement dated as of August 1, 2014 made by Gilla Inc. (the “ Borrower ”) to and in favour of Sarasvati Investments Inc. (the “ Lender ”).

RECITALS:

(a)

The Borrower is or will become indebted or liable to the Lender pursuant to the loan agreement between the Lender and the Borrower dated the date hereof (as the same may be amended, restated, amended and restated, supplemented or replaced from time to time, the “ Loan Agreement ”); and

(b)

In connection with the Loan Agreement, the Borrower agreed to execute and deliver this Agreement in favour of the Lender.

In consideration of the foregoing and other good and valuable consideration, the receipt and adequacy of which are acknowledged, the Borrower agrees as follows.

ARTICLE 1

INTERPRETATION

Section 1.1 Defined Terms.

As used in this Agreement, the following terms have the following meanings:

“ Agreement ” means this security agreement.

“ Borrower ” means Gilla Inc. and its successors and permitted assigns.

“ Collateral ” has the meaning specified in Section 2.1 .

“ Expenses ” has the meaning specified in Section 2.2(b) .

“ Inventory ” has the meaning specified in Section 2.1(a) .

“ Lender ” means Sarasvati Investments Inc. and its successors and assigns.

“ Secured Obligations ” has the meaning specified in Section 2.2(a) .

“ Security Interest ” has the meaning specified in Section 2.2 .

Section 1.2 Interpretation.

(1)

Terms defined in the Personal Property Security Act (Ontario) (“ PPSA ”) and used but not otherwise defined in this Agreement have the same meanings. For greater certainty, the terms “ account ”, “ chattel paper ”, “ document of title ”, “ equipment ”, “ intangible ”, “ investment property ”, “ money ”, “ personal property ” and “ proceeds ” have the meanings given to them in the PPSA.

(2)	Capitalized terms used in this Agreement but not otherwise defined have the meanings given to them in the Loan Agreement.

(3)	Any reference in any Loan Document to Permitted Liens are not intended to and do not and will not subordinate the Security Interest to any such Lien or give priority to any Person over the Lender.

(4)	In this Agreement the words “including”, “includes” and “include” mean “including (or includes or include) without limitation”. The expressions “Article”, “Section” and other subdivision followed by a number mean and refer to the specified Article, Section or other subdivision of this Agreement.

(5)	Any reference in this Agreement to gender includes all genders. Words importing the singular number only include the plural and vice versa .

(6)	The division of this Agreement into Articles, Sections and other subdivisions and the insertion of headings are for convenient reference only and do not affect its interpretation.

(7)	The schedules attached to this Agreement form an integral part of it for all purposes of it.

(8)

Except as otherwise provided in this Agreement, any reference to this Agreement, any Loan Document or any Security Document refers to this Agreement or such Loan Document or Security Document as the same may have been or may from time to time be amended, modified, extended, renewed, restated, replaced or supplemented and includes all schedules attached to it. Except as otherwise provided in this Agreement, any reference in this Agreement to a statute refers to such statute and all rules and regulations made under it as the same may have been or may from time to time be amended or re-enacted.

ARTICLE 2

SECURITY

Section 2.1 Grant of Security.

The Borrower grants to the Lender, a security interest in, and assigns, mortgages, charges, hypothecates and pledges to the Lender, all of the following property and undertaking of the Borrower now owned or hereafter acquired (collectively, the “ Collateral ”):

(a)

inventory including goods held for sale, lease or resale, goods furnished or to be furnished to third parties under contracts of lease, consignment or service, goods which are raw materials or work in process, goods used in or procured for packing and materials used or consumed in the business of the Borrower (collectively, the “ Inventory ”);

(b)	accounts due or accruing and all related agreements, books, accounts, invoices, letters, documents and papers recording, evidencing or relating to any Inventory;

(c)	all substitutions and replacements of and increases, additions and, where applicable, accessions to the property described in Section 2.1(a) and Section 2.1(b) ; and

(d)	all proceeds in any form derived directly or indirectly from any dealing with all or any part of the property described in Section 2.1(a) through Section 2.1(c) inclusive, including the proceeds of such proceeds.

Section 2.2 Secured Obligations.

The security interest, assignment, mortgage, charge, hypothecation and pledge granted by this Agreement (collectively, the “ Security Interest ”) secures the payment and performance of:

(a)

all debts, liabilities and obligations, present or future, direct or indirect, absolute or contingent, matured or unmatured, at any time or from time to time due or accruing due and owing by or otherwise payable by the Borrower to the Lender pursuant to the Loan Agreement (collectively, and together with the Expenses, the “ Secured Obligations ”); and

(b)

all expenses, costs and charges incurred by or on behalf of the Lender in connection with this Agreement, the Security Interest or the Collateral, including all legal fees, court costs, receiver’s or agent’s remuneration and other expenses of taking possession of, repairing, protecting, insuring, preparing for disposition, realizing, collecting, selling, transferring, delivering or obtaining payment for the Collateral, and of taking, defending or participating in any action or proceeding in connection with any of the foregoing matters or otherwise in connection with the Lender’s interest in any Collateral (collectively, the “ Expenses ”).

Section 2.3 Attachment.

The Borrower acknowledges that (i) value has been given, (ii) it has rights in the Collateral or the power to transfer rights in the Collateral to the Lender (other than after-acquired Collateral), (iii) it has not agreed to postpone the time of attachment of the Security Interest, and (iv) it has received a copy of this Agreement.

Section 2.4 Care and Custody of Collateral.

(1)	The Lender has no obligation to keep Collateral in its possession identifiable.

(2)

The Lender may, upon the occurrence and during the continuance of an Event of Default, (i) notify any Person obligated on an account to make payments to the Lender, whether or not the Borrower was previously making collections on such accounts, chattel paper, instruments, and (ii) assume control of any proceeds arising from the Collateral.

Section 2.5 Expenses.

The Borrower is liable for and will pay on demand by the Lender any and all Expenses.

ARTICLE 3

ENFORCEMENT

Section 3.1 Enforcement.

The Security Interest becomes and is enforceable against the Borrower upon the occurrence and during the continuance of an Event of Default.

Section 3.2 Remedies.

Whenever the Security Interest is enforceable, the Lender may realize upon the Collateral and enforce the rights of the Lender by:

(a)	entry onto any premises where Collateral consisting of Inventory may be located;

(b)	entry into possession of the Collateral by any method permitted by law;

(c)	sale, grant of options to purchase, or lease of all or any part of the Collateral;

(d)	holding, storing all or any part of the Collateral;

(e)	collection of any proceeds arising in respect of the Collateral;

(f)	collection, realization or sale of, or other dealing with, accounts;

(g)	application of any moneys constituting Collateral or proceeds thereof in accordance with Section 5.11 ;

(h)	appointment by instrument in writing of a receiver (which term as used in this Agreement includes a receiver and manager) or agent of all or any part of the Collateral and removal or replacement from time to time of any receiver or agent;

(i)	institution of proceedings in any court of competent jurisdiction for the appointment of a receiver of all or any part of the Collateral;

(j)	institution of proceedings in any court of competent jurisdiction for sale or foreclosure of all or any part of the Collateral;

(k)	filing of proofs of claim and other documents to establish claims to the Collateral in any proceeding relating to the Borrower; and

(l)	any other remedy or proceeding authorized or permitted under the PPSA or otherwise by law or equity.

Section 3.3 Additional Rights.

In addition to the remedies set forth in Section 3.2 and elsewhere in this Agreement, whenever the Security Interest is enforceable, the Lender may:

(a)	require the Borrower, at the Borrower’s expense, to assemble the Collateral at a place or places designated by notice in writing and the Borrower agrees to so assemble the Collateral immediately upon receipt of such notice;

(b)	require the Borrower, by notice in writing, to disclose to the Lender the location or locations of the Collateral and the Borrower agrees to promptly make such disclosure when so required;

(c)	repair, process, modify, complete or otherwise deal with the Collateral and prepare for the disposition of the Collateral, whether on the premises of the Borrower or otherwise;

(d)	redeem any prior security interest against any Collateral, procure the transfer of such security interest to itself, or settle and pass the accounts of the prior mortgagee, chargee or encumbrancer (any accounts to be conclusive and binding on Borrower);

(e)	pay any liability secured by any Lien against any Collateral (the Borrower will immediately on demand reimburse the Lender for all such payments);

(f)

carry on all or any part of the business of the Borrower and, to the exclusion of all others including the Borrower, enter upon, occupy and use all or any of the premises, buildings, and other property of or used by the Borrower for such time as the Lender sees fit, free of charge, and the Lender is not liable to the Borrower for any act, omission or negligence in so doing or for any rent, charges, depreciation or damages incurred in connection with or resulting from such action;

(g)	borrow for the purpose of carrying on the business of the Borrower or for the maintenance, preservation or protection of the Collateral and grant a security interest in the Collateral, whether or not in priority to the Security Interest, to secure repayment;

(h)

commence, continue or defend any judicial or administrative proceedings for the purpose of protecting, seizing, collecting, realizing or obtaining possession or payment of the Collateral, and give good and valid receipts and discharges in respect of the Collateral and compromise or give time for the payment or performance of all or any part of the accounts or any other obligation of any third party to the Borrower; and

(i)

at any public sale, and to the extent permitted by law on any private sale, bid for and purchase any or all of the Collateral offered for sale and upon compliance with the terms of such sale, hold, retain and dispose of such Collateral without any further accountability to the Borrower or any other Person with respect to such holding, retention or disposition, except as required by law. In any such sale to the Lender, the Lender may, for the purpose of making payment for all or any part of the Collateral so purchased, use any claim for Secured Obligations then due and payable to it as a credit against the purchase price.

Section 3.4 Exercise of Remedies.

The remedies under Section 3.2 and Section 3.3 may be exercised from time to time separately or in combination and are in addition to, and not in substitution for, any other rights of the Lender however arising or created. The Lender is not bound to exercise any right or remedy, and the exercise of rights and remedies is without prejudice to the rights of the Lender in respect of the Secured Obligations including the right to claim for any deficiency.

Section 3.5 Receiver’s Powers.

(1)

Any receiver appointed by the Lender is vested with the rights and remedies which could have been exercised by the Lender in respect of the Borrower or the Collateral and such other powers and discretions as are granted in the instrument of appointment and any supplemental instruments. The identity of the receiver, its replacement and its remuneration are within the sole and unfettered discretion of the Lender.

(2)

Any receiver appointed by the Lender will act as agent for the Lender for the purposes of taking possession of the Collateral, but otherwise and for all other purposes (except as provided below), as agent for the Borrower. The receiver may sell, lease, or otherwise dispose of Collateral as agent for the Borrower or as agent for the Lender as the Lender may determine in its discretion. The Borrower agrees to ratify and confirm all actions of the receiver acting as agent for the Borrower, and to release and indemnify the receiver in respect of all such actions.

(3)	The Lender, in appointing or refraining from appointing any receiver, does not incur liability to the receiver, the Borrower or otherwise and is not responsible for any misconduct or negligence of such receiver.

Section 3.6 Appointment of Attorney.

The Borrower hereby irrevocably constitutes and appoints the Lender (and any officer of the Lender) the true and lawful attorney of the Borrower. As the attorney of the Borrower, the Lender has the power to exercise for and in the name of the Borrower with full power of substitution, upon the occurrence and during the continuance of an Event of Default, any of the Borrower’s right (including the right of disposal), title and interest in and to the Collateral including the execution, endorsement, delivery and transfer of the Collateral to the Lender, its nominees or transferees, and the Lender and its nominees or transferees are hereby empowered to exercise all rights and powers and to perform all acts of ownership with respect to the Collateral to the same extent as the Borrower might do. This power of attorney is irrevocable, is coupled with an interest, has been given for valuable consideration (the receipt and adequacy of which is acknowledged) and survives, and does not terminate upon, the bankruptcy, dissolution, winding up or insolvency of the Borrower. This power of attorney extends to and is binding upon the Borrower’s successors and permitted assigns. The Borrower authorizes the Lender to delegate in writing to another Person any power and authority of the Lender under this power of attorney as may be necessary or desirable in the opinion of the Lender, and to revoke or suspend such delegation.

Section 3.7 Dealing with the Collateral.

(1)	The Lender is not obliged to exhaust its recourse against the Borrower or any other Person or against any other security it may hold in respect of the Secured Obligations before realizing upon or otherwise dealing with the Collateral in such manner as the Lender may consider desirable.

(2)

The Lender may grant extensions or other indulgences, take and give up securities, accept compositions, grant releases and discharges and otherwise deal with the Borrower and with other Persons, sureties or securities as it may see fit without prejudice to the Secured Obligations, the liability of the Borrower or the rights of the Lender in respect of the Collateral.

(3)

Except as otherwise provided by law or this Agreement, the Lender is not (i) liable or accountable for any failure to collect, realize or obtain payment in respect of the Collateral, (ii) bound to institute proceedings for the purpose of collecting, enforcing, realizing or obtaining payment of the Collateral or for the purpose of preserving any rights of any Persons in respect of the Collateral, (iii) responsible for any loss occasioned by any sale or other dealing with the Collateral or by the retention of or failure to sell or otherwise deal with the Collateral, or (iv) bound to protect the Collateral from depreciating in value or becoming worthless.

Section 3.8 Standards of Sale.

Without prejudice to the ability of the Lender to dispose of the Collateral in any manner which is commercially reasonable, the Borrower acknowledges that:

(a)	the Collateral may be disposed of in whole or in part;

(b)	the Collateral may be disposed of by public auction, public tender or private contract, with or without advertising and without any other formality;

(c)	any assignee of such Collateral may be the Lender or a customer of any such Person;

(d)	any sale conducted by the Lender will be at such time and place, on such notice and in accordance with such procedures as the Lender, in its sole discretion, may deem advantageous;

(e)

the Collateral may be disposed of in any manner and on any terms necessary to avoid violation of applicable law (including compliance with such procedures as may restrict the number of prospective bidders and purchasers, require that the prospective bidders and purchasers have certain qualifications, and restrict the prospective bidders and purchasers to Persons who will represent and agree that they are purchasing for their own account for investment and not with a view to the distribution or resale of the Collateral) or in order to obtain any required approval of the disposition (or of the resulting purchase) by any Governmental Entity;

(f)	a disposition of the Collateral may be on such terms and conditions as to credit or otherwise as the Lender, in its sole discretion, may deem advantageous; and

(g)	the Lender may establish an upset or reserve bid or price in respect of the Collateral.

Section 3.9 Dealings by Third Parties.

(1)

No Person dealing with the Lender or an agent or receiver is required to determine (i) whether the Security Interest has become enforceable, (ii) whether the powers which such Person is purporting to exercise have become exercisable, (iii) whether any money remains due to the Lender by the Borrower, (iv) the necessity or expediency of the stipulations and conditions subject to which any sale or lease is made, (v) the propriety or regularity of any sale or other dealing by the Lender with the Collateral, or (vi) how any money paid to Lender has been applied.

(2)

Any bona fide purchaser of all or any part of the Collateral from the Lender or any receiver or agent will hold the Collateral absolutely, free from any claim or right of whatever kind, including any equity of redemption, of the Borrower, which it specifically waives (to the fullest extent permitted by law) as against any such purchaser together with all rights of redemption, stay or appraisal which the Borrower has or may have under any rule of law or statute now existing or hereafter adopted.

ARTICLE 4

REPRESENTATIONS, WARRANTIES AND COVENANTS

Section 4.1 General Representations, Warranties and Covenants.

The Borrower represents and warrants and covenants and agrees, acknowledging and confirming that the Lender is relying on such representations, warranties, covenants and agreements, that:

(a)

Continuous Perfection. Schedule A sets out the Borrower’s place of business or, if more than one, the Borrower’s chief executive office. Such place of business or chief executive office, as the case may be, has been located at such address for the 60 days immediately preceding the date of this Agreement. Schedule A also sets out the address at which the books and records of the Borrower are located, the address at which senior management of the Borrower are located and conduct their deliberations and make their decisions with respect to the business of the Borrower and the address from which the invoices and accounts of the Borrower are issued. The Borrower will not change the location of any of these items, people or addresses without providing at least 30 days prior written notice to the Lender. Except for sales of Inventory made in the ordinary course of business, the Collateral has been kept for the 60 days immediately preceding the date of this Agreement and will be kept at those locations listed on Schedule A, and the Borrower will not remove the Collateral from such locations, without providing at least 30 days prior written notice to the Lender. The Borrower will not change its name in any manner without providing at least 30 days prior written notice to the Lender.

(b)

Additional Security Perfection and Protection of Security Interest. The Borrower will grant to the Lender, security interests, assignments, mortgages, charges, hypothecations and pledges in such property and undertaking of the Borrower that is not subject to a valid and perfected first ranking security interest (subject only to Permitted Liens) constituted by the Security Documents, in each relevant jurisdiction as determined by the Lender, the Borrower will perform all acts, execute and deliver all agreements, documents and instruments and take such other steps as are requested by the Lender at any time to register, file, signify, publish, perfect, maintain, protect, and enforce the Security Interest including: (i) executing, recording and filing of financing or other statements, and paying all taxes, fees and other charges payable, (ii) placing notations on its books of account to disclose the Security Interest, and (iii) delivering acknowledgements, confirmations and subordinations that may be necessary to ensure that the Security Documents constitute a valid and perfected first ranking security interest (subject only to Permitted Liens).

ARTICLE 5

GENERAL

Section 5.1 Notices.

Any notices, directions or other communications provided for in this Agreement must be in writing and given in accordance with the Loan Agreement.

Section 5.2 Discharge.

The Security Interest will not be discharged except by a written release or discharge signed by the Lender. The Borrower will be entitled to require a discharge by notice to the Lender upon, but only upon, (i) full and indefeasible payment and performance of the Secured Obligations and (ii) the Lender having no obligations under any Loan Document. Upon discharge of the Security Interest and at the request and expense of the Borrower, the Lender will execute and deliver to the Borrower such financing statements and other documents or instruments as the Borrower may reasonably require and the Lender will redeliver to the Borrower, or as the Borrower may otherwise direct the Lender, any Collateral in its possession.

Section 5.3 No Merger, Survival of Representations and Warranties.

This Agreement does not operate by way of merger of any of the Secured Obligations and no judgment recovered by the Lender will operate by way of merger of, or in any way affect, the Security Interest, which is in addition to, and not in substitution for, any other security now or hereafter held by the Lender in respect of the Secured Obligations. The representations, warranties and covenants of the Borrower in this Agreement survive the execution and delivery of this Agreement and any advances under the Loan Agreement. Notwithstanding any investigation made by or on behalf of the Lender these covenants, representations and warranties continue in full force and effect.

Section 5.4 Further Assurances.

The Borrower will do all acts and things and execute and deliver, or cause to be executed and delivered, all agreements, documents and instruments that the Lender may require and take all further steps relating to the Collateral or any other property or assets of the Borrower that the Lender may require for (i) protecting the Collateral, (ii) perfecting, preserving and protecting the Security Interest, and (iii) exercising all powers, authorities and discretions conferred upon the Lender. After the Security Interest becomes enforceable, the Borrower will do all acts and things and execute and deliver all documents and instruments that the Lender may require for facilitating the sale or other disposition of the Collateral in connection with its realization.

Section 5.5 Supplemental Security.

This Agreement is in addition to, without prejudice to and supplemental to all other security now held or which may hereafter be held by the Lender.

Section 5.6 Successors and Assigns.

This Agreement is binding on the Borrower and its successors and permitted assigns, and enures to the benefit of the Lender and its successors and assigns. This Agreement may be assigned by the Lender without the consent of, or notice to, the Borrower, to such Person as the Lender may determine and, in such event, such Person will be entitled to all of the rights and remedies of the Lender as set forth in this Agreement or otherwise. In any action brought by an assignee to enforce any such right or remedy, the Borrower will not assert against the assignee any claim or defence which the Borrower now has or may have against the Lender. The Borrower may not assign, transfer or delegate any of its rights or obligations under this Agreement without the prior written consent of the Lender which may be unreasonably withheld.

Section 5.7 Severability.

If any court of competent jurisdiction from which no appeal exists or is taken, determines any provision of this Agreement to be illegal, invalid or unenforceable, that provision will be severed from this Agreement and the remaining provisions will remain in full force and effect.

Section 5.8 Amendment.

This Agreement may only be amended, supplemented or otherwise modified by written agreement executed by the Lender and the Borrower.

Section 5.9 Waivers, etc.

(1)

No consent or waiver by the Lender in respect of this Agreement is binding unless made in writing and signed by an authorized officer of the Lender. Any consent or waiver given under this Agreement is effective only in the specific instance and for the specific purpose for which given. No waiver of any of the provisions of this Agreement constitutes a waiver of any other provision.

(2)

A failure or delay on the part of the Lender in exercising a right under this Agreement does not operate as a waiver of, or impair, any right of the Lender however arising. A single or partial exercise of a right on the part of the Lender does not preclude any other or further exercise of that right or the exercise of any other right by the Lender.

Section 5.10 Application of Proceeds of Security.

All monies collected by the Lender upon the enforcement of its rights and remedies under the Security Documents and the Liens created by them including any sale or other disposition of the Collateral, together with all other monies received by the Lender under the Security Documents, will be applied as provided in the Loan Agreement. To the extent any other Loan Document requires proceeds of collateral under such Loan Document to be applied in accordance with the provisions of this Agreement, the Lender shall apply such proceeds in accordance with this Section.

Section 5.11 Conflict.

In the event of any conflict between the provisions of this Agreement and the provisions of the Loan Agreement which cannot be resolved by both provisions being complied with, the provisions contained in the Loan Agreement, will prevail to the extent of such conflict.

Section 5.12 Governing Law.

This Agreement will be governed by, interpreted and enforced in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein.

[The remainder of this page is intentionally left blank; signature page follows]

IN WITNESS WHEREOF the Borrower has executed this Agreement.

	GILLA INC.

Per:	/s/ J. Graham Simmonds
	Authorized Signing Officer

SCHEDULE A

LOCATIONS OF COLLATERAL

Chief Executive Office:

110 Yonge Street, Suite 1602

Toronto, Ontario, M5C 1T4

Locations of Ontario Collateral and Ontario Places of Business:

Same as above.

Locations of Books and Records:

Same as above.

Locations of Senior Management:

Same as above.

Address from which Invoices and Accounts are sent:

Same as above.

Exhibit 99.1

Gilla Secures New Revolving Credit Facility

Miami, Florida – August 8, 2014 – Gilla Inc. (“Gilla” or the “Company”) ( OTCQB: GLLA ) is pleased to announce it has closed a new $500,000 Revolving Credit Facility for the exclusive purpose of purchasing inventory for sale in the Company’s electronic cigarette business initiatives. This new Credit Facility demonstrates Gilla’s successful strategy to grow and diversify its financing sources to support its growing operations.

“Our new revolving credit facility provides substantially greater financial flexibility and the expanded capacity to finance inventory purchases while improving our overall working capital position,” said Graham Simmonds, CEO of Gilla. “We are pleased with the confidence shown in our Company by our lenders and we are encouraged by their indication to provide additional funds within the facility as we grow and expand our business.”

About the Revolving Credit Facility

The Revolving Credit Facility (the “Credit Facility”) provides for the ability to draw on the aggregate principal amount of CDN$500,000 for the exclusive purpose of purchasing inventory (together with related costs) for sale in the Company’s ordinary course of business to approved customers. The Credit Facility shall mature on August 1, 2015 and bear interest at a rate of 15% per annum on all drawn advances alongside a standby fee of 3.5% per annum with respect to the undrawn portion of the facility, such interest accruing daily and paid monthly, in arrears. The Credit Facility is secured by all of the Company’s inventory and accounts due relating to any inventory.

In connection to the Credit Facility, the Company issued 250,000 warrants to purchase the Company’s common stock at an exercise price of US$0.30 per share, exercisable over a term of two years from the date of issuance.

Additionally, the lender is acting as an agent for a consortium of investors, of which the Company’s CEO and CFO have each committed to provide 10% of the principal amount of the Credit Facility. Neither officer shall have any participation in the warrants issued in connection to the Credit Facility.

About Gilla Inc.

Gilla Inc. designs, markets and distributes electronic cigarettes (“e-cigarettes”), vaporizers, e-liquids and related accessories. Gilla provides white-label solutions to its clients including branding, marketing and sales support. E-cigarettes and vaporizers are replacements for traditional cigarettes allowing smokers to reproduce the smoking experience. E-cigarettes and vaporizers do not burn tobacco and are not smoking cessation devices.

Forward-looking Statements

Note: This press release contains "forward looking statements" as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on currently available competitive, financial and economic data and management's views and assumptions regarding future events. Such forward-looking statements are inherently uncertain. Gilla Inc. cannot provide assurances that the matters described in this press release will be successfully completed or that the company will realize the anticipated benefits of any transaction. Actual results may differ materially from those projected as a result of certain risks and uncertainties, including but not limited to: global economic and market conditions; the war on terrorism and the potential for war or other hostilities in other parts of the world; the availability of financing and lines of credit; successful integration of acquired or merged businesses; changes in interest rates; management's ability to forecast revenues and control expenses, especially on a quarterly basis; unexpected decline in revenues without a corresponding and timely slowdown in expense growth; the company's ability to retain key management and employees; intense competition and the company's ability to meet demand at competitive prices and to continue to introduce new products and new versions of existing products that keep pace with technological developments, satisfy increasingly sophisticated customer requirements and achieve market acceptance; relationships with significant suppliers and customers; as well as other risks and uncertainties, including but not limited to those detailed from time to time in Gilla Inc. SEC filings. Gilla Inc. undertakes no obligation to update information contained in this release. For further information regarding risks and uncertainties associated with Gilla Inc.'s business, please refer to the risks and uncertainties detailed from time to time in Gilla Inc.'s SEC filings.

For more information, please visit gillainc.com , or contact:

Gilla Inc.

Mr. Graham Simmonds

Chief Executive Officer

1 (855) 547-6653 Ext. 300

email: graham@gillainc.com

website: www.gillainc.com

twitter: @gillainc