UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~September~~March 3031, ~~2017~~2018

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

For the transition period from __________ to __________

Commission File Number: 000-55821

FRANKLY INC.

(Exact name of registrant as specified in its charter)

British Columbia		98-1230527
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

333 Bryant Street, Suite 310 San Francisco, CA 94107		94107
27-01 Queens Plaza North, Suite 502 Long Island City, NY		11101
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (~~415~~212) ~~861~~931-~~9797~~1200

Not applicable

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

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

Large accelerated filer	[ ]		Accelerated filer	[ ]
Non-accelerated filer	[ ]	(Do not check if a smaller reporting company)	Smaller reporting company	[X]
			Emerging growth company	[X]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

As of ~~November~~May 1415, ~~2017~~2018, there were 2,~~188~~304,~~371~~834 shares of the Company’s common shares, no par value, issued and outstanding.

FRANKLY INC.

TABLE OF CONTENTS

		Page
PART I – FINANCIAL INFORMATION:
Item 1.	Financial Statements:	1
	Condensed Consolidated Balance Sheets as of September 30, 2017 (Unaudited) and December 31, 2016
	Condensed Consolidated Balance Sheets as of March 31, 2018 (Unaudited) and December 31, 2017	1
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited)	2
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2018 and 2017 (Unaudited)	2
	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2017 and 2016 (Unaudited)	3
	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2018 and 2017 (Unaudited)	3
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016 (Unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017 (Unaudited)	4
	Notes to Condensed Consolidated Financial Statements (Unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1716
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3529
Item 4.	Controls and Procedures	3530
PART II – OTHER INFORMATION:
Item 1.	Legal Proceedings	3630
Item 1A.	Risk Factors	3630
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3630
Item 3.	Defaults Upon Senior Securities	3630
Item 4.	Mine Safety Disclosures	3631
Item 5.	Other Information	3631
Item 6.	Exhibits	3732

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Frankly Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

	December 31, 2016			September 30, 2017
	March 31, 2018			December 31, 2017
	(Unaudited)			~~(Unaudited)~~
Assets
Current Assets
Cash and cash equivalents	$	6757,~~053,203~~673		$	1,~~276~~254,~~145~~886
Restricted cash		634,115			634,115
Accounts receivable, net		32,~~242~~214,~~866~~409			23,~~743~~483,~~026~~347
Prepaid expenses and other current assets		~~650~~489,~~898~~984			~~877~~535,~~938~~111
Total Current Assets		104,~~581~~096,~~082~~181			5,~~531~~907,~~224~~459
Property & equipment, net		1851,~~481,328~~351			1985,~~116,380~~321
Software development costs, net		6,~~710~~872,~~494~~693			76,~~006~~972,~~947~~741
Intangible assets, net		76,~~635~~543,~~552~~882			6,~~980~~762,~~550~~216
Goodwill		6,546,581			6,546,581
Other assets		299,651			311,046
Other assets		308,604			178,399
Total Assets	$	18,663,758		$	20,938,783
Total Assets	$	33,263,641		$	27,360,081
Liabilities and Shareholders’ Deficit
Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable	$	45,~~687~~852,~~581~~024		$	5,~~189~~740,~~417~~788
Accrued expenses		12,~~367~~224,~~040~~133			~~949~~1,~~015~~717,030
Revolving credit facility		1,375,474			-
Capital leases, current portion		-			40,449
Capital leases, current portion		167,635			80,461
Deferred revenue		36,103			92,279
Deferred revenue		21,702			47,604
Due to related parties		4,443,931			5,090,358
Due to related parties		2,561,572			3,920,847
Total Current Liabilities		12,556,191			12,680,904
Total Current Liabilities		10,181,004			10,187,344
Non-revolving credit facility, net		13,672,478			12,155,573
Non-revolving credit facility, net		11,630,384			12,006,885
Deferred rent		34,146			35,882
Capital leases, non-current portion		40,449			-
Other liabilities		743,234			840,973
Deferred rent		42,827			37,619
Total Liabilities		27,006,049			25,713,332
Other liabilities		64,766			100,450
Commitments and Contingencies (Note 10)
Total Liabilities		21,959,430			22,332,298
Shareholders’ Deficit
Commitments and Contingencies (Note 9)
Common shares, no par value, unlimited shares authorized, 2,304,834 and 2,226,861 shares outstanding as of March 31, 2018 and December 31, 2017, respectively		-			-
Shareholders’ Equity
Class A restricted voting shares, no par value, unlimited shares authorized, 0 shares outstanding as of March 31, 2018 and December 31, 2017		-			-
Common shares, no par value, unlimited shares authorized, 2,030,800 and 2,183,071 shares outstanding as of December 31, 2016 and September 30, 2017, respectively		-			-
Additional paid-in capital		66,362,525			66,127,485
Class A restricted voting shares, no par value, unlimited shares authorized, 97,674 and 0 shares outstanding as of December 31, 2016 and September 30, 2017, respectively		-			-
Accumulated deficit		(74,645,823	)		(70,836,330	)
Additional paid-in capital		64,986,368			65,761,144
Accumulated other comprehensive loss		(58,993	)		(65,704	)
Accumulated deficit		(53,642,691	)		(60,679,755	)
Total Shareholders’ Deficit		(8,342,291	)		(4,774,549	)
Accumulated other comprehensive loss		(39,466	)		(53,606	)
Total Liabilities and Shareholders’ Deficit	$	18,663,758		$	20,938,783
Total Shareholders’ Equity		11,304,211			5,027,783
Total Liabilities and Shareholders’ Equity	$	33,263,641		$	27,360,081

See accompanying notes to the condensed consolidated financial statements.

Frankly Inc. and Subsidiaries

Condensed Consolidated Statements of

Operations and Comprehensive Loss – Unaudited

	Three Months Ended September 30,						Nine Months Ended September 30,
	Three Months Ended March 31,
	2016			2017			2016			2017
	2018			2017
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Total Revenue	$	5,761,858		$	6,359,154
Total Revenue	$	6,196,691		$	6,537,308		$	16,664,579		$	19,390,089
Costs and operating expenses:
Costs and operating expenses:
Cost of revenue (excluding depreciation and amortization)		2,725,279			2,760,414
Cost of revenue (excluding depreciation and amortization)		2,677,281			3,307,870			5,761,780			9,142,558
General and administrative (excluding depreciation and amortization)		2,475,698			1,892,983
General and administrative (excluding depreciation and amortization)		1,992,650			1,869,037			6,375,419			5,999,894
Selling and marketing		462,020			663,684
Selling and marketing		628,909			606,383			2,257,775			2,013,174
Research and development (excluding depreciation and amortization)		1,079,772			848,415
Research and development (excluding depreciation and amortization)		844,682			1,212,703			2,901,480			3,161,646
Depreciation and amortization		1,147,245			1,066,731
Depreciation and amortization		848,246			1,102,576			2,447,265			3,261,933
Transaction costs		24,673			-
Loss on disposal of assets		-			-			1,093			-
Restructuring expense		460,960			-
Loss on extinguishment of debt		-			38,287			-			38,287
Retention expense		588,099			-
Nasdaq listing fees		410,225			943,822			410,225			943,822
Other expense		-			27,017
Other expense		(135,531	)		-			205,681			27,017
Loss from operations		(3,201,888	)		(900,090	)
Loss from operations		(1,069,771	)		(2,543,370	)		(3,696,139	)		(5,198,242	)
Foreign exchange loss (gain)		10,509			(6,476	)
Foreign exchange (gain) loss		(5,716	)		(16,144	)		(3,061	)		(20,236	)
Interest expense, net		597,096			610,205
Interest expense, net		307,932			601,909			749,706			1,859,058
Loss before income tax expense		(3,809,493	)		(1,503,819	)
Loss before income tax expense		(1,371,987	)		(3,129,135	)		(4,442,784	)		(7,037,064	)
Income tax expense		-			-
Income tax expense		-			-			-			-
Net Loss	$	(3,809,493	)	$	(1,503,819	)
Net Loss	$	(1,371,987	)	$	(3,129,135	)	$	(4,442,784	)	$	(7,037,064	)
Other Comprehensive Net Loss
Other Comprehensive Net Loss
Foreign currency translation		6,711			(3,876	)
Foreign currency translation		(6,612	)		(18,237	)		(4,325	)		(14,140	)
Comprehensive Net Loss	$	(3,802,782	)	$	(1,507,695	)
Comprehensive Net Loss	$	(1,378,599	)	$	(3,147,372	)	$	(4,447,109	)	$	(7,051,204	)
Basic and Diluted Net Loss Per Share	$	(1.70	)	$	(0.71	)
Basic and Diluted Net Loss Per Share	$	(0.71	)	$	(1.46	)	$	(2.33	)	$	(3.29	)
Basic and Diluted Weighted-Average Common and Class A Restricted Voting Shares Outstanding		2,236,209			2,129,464
Basic and Diluted Weighted-Average Common and Class A Restricted Voting Shares Outstanding		1,935,189			2,148,332			1,903,740			2,137,172

See accompanying notes to the condensed consolidated financial statements.

Frankly Inc. and Subsidiaries

Condensed Consolidated Statements of

Shareholders’ Equity (Deficit) – Unaudited

	Common Shares		Class A Restricted Voting Shares			Additional Paid-In Capital			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity (Deficit)
Balance, December 31, 2017		2,226,861		-		$	66,127,485		$	(70,836,330	)	$	(65,704	)	$	(4,774,549	)
Vesting of restricted share units		77,973		-			-			-			-			-
Stock-based compensation		-		-			235,040			-			-			235,040
Net loss		-		-			-			(3,809,493	)		-			(3,809,493	)
Other comprehensive loss		-		-			-			-			6,711			6,711
Balance, March 31, 2018		2,304,834		-		$	66,362,525		$	(74,645,823	)	$	(58,993	)	$	(8,342,291	)
Balance, December 31, 2016		2,030,800		97,674		$	64,986,368		$	(53,642,691	)	$	(39,466	)	$	11,304,211
Vesting of restricted share units		545,~~597~~038		-			-			-			-			-
Exchange of restricted voting shares for common shares		97,674		(97,674	)		-			-			-			-
Stock-based compensation		-		-			228,166			-			-			228,166
Stock-based compensation		-		-			774,776			-			-			774,776
Net loss		-		-			-			(1,503,819	)		-			(1,503,819	)
Net loss		-		-			-			(7,037,064	)		-			(7,037,064	)
Other comprehensive loss		-		-			-			-			(3,876	)		(3,876	)
Other comprehensive loss		-		-			-			-			(14,140	)		(14,140	)
Balance, March 31, 2017		2,035,838		97,674		$	65,214,534		$	(55,146,510	)	$	(43,342	)	$	10,024,682
Balance, September 30, 2017		2,183,071		-		$	65,761,144		$	(60,679,755	)	$	(53,606	)	$	5,027,783
Balance, December 31, 2015		1,294,018		593,826			59,462,420			(42,931,749	)		(30,623	)	$	16,500,048
Issuance of common shares		150,200		-			1,000,000			-			-			1,000,000
Share issuance costs		-		-			(22,722	)		-			-			(22,722	)
Issuance of warrants		-		-			2,921,407			-			-			2,921,407
Exchange of restricted voting shares for common shares		490,711		(490,711	)		-			-			-			-
Stock-based compensation		-		-			859,799			-			-			859,799
Net loss		-		-			-			(4,442,784	)		-			(4,442,784	)
Other comprehensive loss		-		-			-			-			(4,325	)		(4,325	)
Balance, September 30, 2016		1,934,929		103,115		$	64,220,904		$	(47,374,533	)	$	(34,948	)	$	16,811,423

See accompanying notes to the condensed consolidated financial statements.

Frankly Inc. and Subsidiaries

Condensed Consolidated Statements of

Cash Flows – Unaudited

	Nine Months Ended September 30,
	Three Months Ended March 31,
	2016			2017
	2018			2017
	(Unaudited)			(Unaudited)
Cash flows from operating activities
Net loss	$	(43,~~442~~809,~~784~~493	)	$	(71,~~037~~503,~~064~~819	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		21,~~447~~147,~~265~~245			31,~~261~~066,~~933~~731
Amortization of debt discount		45144,~~146~~099			~~405~~145,~~788~~436
Amortization of deferred financing costs		-10,340			8026,~~651~~534
Stock-based compensation expense		~~859~~235,~~799~~040			~~774~~228,~~776~~166
Loss on disposal of assets		1,093			-
Deferred interest		362,466			-
Loss on extinguishment of debt		-			38,287
Provision for bad debt expense		687,806			-
Other non-cash asset writeoff		178,147			-
Changes in assets and liabilities:
Accounts receivable		~~462~~581,~~799~~132			~~499~~(140,~~840~~550	)
Prepaid expenses and other current assets		~~505~~41,~~449~~835			(~~265~~421,~~416~~396	)
Other assets		1211,~~980~~395			~~130~~43,~~205~~402
Accounts payable		1114,~~457,025~~515			~~448~~(1,~~127~~854,889	)
Accrued expenses		(1503,~~077,226~~091	)		(~~421~~127,~~451~~277	)
Deferred revenue		(4656,~~188~~176	)		25(7,~~901~~154	)
Due to / from related parties		(47,100	)		1,359,275
Due to related parties		(646,427	)		1,167,749
Deferred rent and other liabilities		37(99,~~692~~475	)		30(51,~~476~~302	)
Net cash provided by (used in) operating activities		394,097			(668,671	)
Net cash used in operating activities		(772,607	)		(1,428,369	)
Cash flows from investing activities
Capitalized software costs		(3694,~~384,631~~892	)		(2636,~~444,766~~863	)
Purchases of property & equipment		~~(42,275~~-	)		(939,~~667~~582	)
Proceeds from sale of intangible assets or equipment		2,111			-
Net cash used in investing activities		(694,892	)		(646,445	)
Net cash used in investing activities		(3,424,795	)		(2,538,433	)
Cash flows from financing activities
Restricted cash		(634,115	)		-
Revolving credit facility payments		-			(56,225	)
Revolving credit facility payments		(1,950,000	)		(1,375,474	)
Capital lease payments		(40,449	)		(48,887	)
Capital lease payments		(147,620	)		(127,622	)
Proceeds from issuance of debt		1,000,000			-
Share issuance costs		(22,722	)		-
Net cash provided by (used in) financing activities		959,551			(105,112	)
Proceeds from issuance of debt		500,000			-
Effect of exchange rate changes on cash		10,735			4,662
Debit issuance costs		(90,573	)		(64,615	)
Net change in cash and cash equivalents		(497,213	)		(2,175,264	)
Net cash used in financing activities		(2,345,030	)		(1,567,711	)
Cash and cash equivalents at beginning of period		1,254,886			6,053,203
Effect of exchange rate changes on cash		(9,502	)		(2,243	)
Cash and cash equivalents at end of period	$	757,673		$	3,877,939
Net change in cash and cash equivalents		(5,385,230	)		(4,777,058	)
Cash and cash equivalents at beginning of period		7,554,128			6,053,203
Cash and cash equivalents at end of period	$	2,168,898		$	1,276,145
Supplemental cash flow disclosure
Cash paid for interest	$	~~714~~123,~~554~~430		$	1380,~~138,557~~237
Cash paid for income taxes		-			-
Exchange of promissory notes for common shares	$	1,000,000		$	-

See accompanying notes to the condensed consolidated financial statements.

Frankly Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements – Unaudited

1. Description of Business and Going Concern

~~Organization~~Description of Business

Frankly Inc. (“Frankly”), has been operating since the incorporation of its predecessor, TicToc Planet Inc. ~~(“TicToc”)~~, on September 10, 2012. These consolidated financial statements include Frankly and its subsidiaries (Frankly Co. and Frankly Media LLC), together referred to as the “Company.”

OnThe ~~December~~Company ~~23,~~helps ~~2014,~~TV WBbroadcasters ~~III,~~and amedia ~~Canadian~~companies ~~public~~transform ~~shell~~their ~~company~~traditional ~~traded~~business onfrom just delivering content over- the-air via ~~Toronto~~broadcast ~~Stock~~television ~~Exchange~~to distributing content in multi-platform, ~~completed~~digital aformats ~~merger~~on ~~with~~new ~~TicToc~~platforms such as mobile, tablets, ~~whereby~~desktop WBand ~~III~~other ~~Subco~~connected ~~Inc~~devices., The Company’s core product is a ~~wholly~~white-~~owned~~labeled ~~subsidiary~~software ofplatform ~~the~~that WBenables ~~III,~~media companies ~~merged~~to ~~with~~publish ~~TicToc.~~their ~~The~~official ~~transaction~~content onto multiscreen devices, ~~referred~~increase tosocial asinteraction ~~the~~on ~~“Recapitalization”~~those multiscreen experiences, ~~was~~and ~~structured~~enable asdigital advertising. The platform consists of a ~~reverse~~content ~~triangular~~management ~~merger~~system ~~under~~(“CMS”) ~~the~~platform, native ~~Delaware~~mobile ~~General~~and ~~Corporation~~over-the-top ~~Law~~(“OTT”) applications, ~~which~~responsive ~~resulted~~web inframework, ~~TicToc~~digital ~~becoming~~video asolutions ~~wholly-owned~~and ~~Canadian~~digital ~~subsidiary~~advertising ofsolutions. WBThe ~~III.~~Company ~~Subsequent~~generates torevenues ~~the~~by ~~completion~~charging ofmonthly ~~the~~recurring ~~Recapitalization,~~software WBlicensing ~~III~~fees, ~~changed~~variable usage ~~its~~fees ~~name~~for toour ~~Frankly Inc.~~platform and ~~TicToc~~sharing ~~changed~~digital ~~its~~advertising ~~name~~revenue towith ~~Frankly~~our Cocustomers.

As described in Note 3, on August 25, 2015, the Company completed the purchase of the outstanding units of Gannaway Web Holdings LLC, operating as Worldnow, in a transaction referred to as the acquisition of Worldnow. Subsequent to the acquisition, Worldnow changed its name to Frankly Media LLC.

On February 3, 2017, the Company effected a one-for-seventeen reverse split (the “Reverse Stock Split”) of its issued and outstanding common shares and Class A restricted voting shares. All warrant, option, restricted stock units (“RSU”), share and per share information in the consolidated financial statements gives retroactive effect to the Reverse Stock Split for all periods presented.

Going Concern

These condensed consolidated financial statements have been prepared on the assumption that the Company is a going concern, which contemplates the realization of its assets and the settlement of its liabilities in the normal course of operations.

As of ~~September~~March 3031, ~~2017~~2018, the Company has an accumulated deficit of $6074.76 million, representative of recurring losses since inception. Additionally, the Company has not generated positive cash flow from operations since inception, ~~except~~when excluding changes in ~~2016~~working capital. InBeginning ~~the~~January ~~first~~1, ~~nine months of 2017~~2018, the ~~Company~~billing ~~used~~for ~~cash~~all inservices ~~operations,~~provided ~~and~~to inRaycom ~~the~~are ~~third~~being ~~quarter~~applied ofto ~~2017~~the ~~paid~~advance ~~off its revolving credit facility with~~agreement ~~Silicon~~balance ~~Valley~~as ~~Bank~~of ~~(Note~~December ~~6). Also~~31, ~~in the third quarter of~~ 2017, ~~the Company decided to postpone its contemplated initial public offering~~ in the ~~United~~amount ~~States (the “IPO”) and expensed deferred financing costs~~ of $~~943~~4,~~822~~896,585 ~~related to the IPO effort. Lastly~~($3,805,278 as of ~~September~~March 3031, ~~2017,~~2018) ~~the~~and ~~Company~~Raycom ~~was~~will ~~in compliance with all debt covenants, but may~~ not be ~~in compliance~~required asto ofmake ~~December~~cash ~~31,~~payments ~~2017~~for ~~with~~services ~~two~~provided ~~financial~~by ~~covenants~~the ~~which have a measurement date of December 31, 2017. The~~ Company ~~will~~until ~~need additional financing in~~ the ~~near~~balance ~~term~~has tobeen ~~continue~~fully ~~operations~~repaid. These conditions raise substantial doubt about the Company’s ability to continue as a going concern within one year after the issuance of its financial statements.

~~The~~To reduce its operating cash needs, in February 2018, the Company ~~expects~~executed a reduction-in-force that ~~through~~removed approximately 20 full-time employees from its headcount. In addition, the ~~next~~Company 12subleased ~~months~~its ~~from~~remaining office space in San Francisco, CA and is pursuing other areas where operating expenses can be reduced. On March 13, 2018, the ~~date~~Company received $1 million under the existing credit agreement with Raycom, bringing the total outstanding principal balance under the credit agreement to $15.5 million. On May 8, 2018, the Company entered into an amendment of ~~this~~the ~~filing~~2016 credit agreement, itwhereby Raycom will ~~require~~provide ~~external~~the ~~funding~~Company towith ~~sustain~~an ~~operations~~additional ~~and~~$7.5 million of funding, to ~~follow~~be ~~through~~paid onin installments over a six-month period, subject to the ~~execution~~Company’s achievement of ~~its~~certain ~~business~~operational ~~plan~~milestones. The $1.0 million advanced to the Company ison ~~considering~~March ~~several~~13, ~~strategic~~2018 ~~alternatives~~is ~~which~~included ~~may include~~in ~~raising~~the ~~funds~~additional ~~from~~$7.5 million ~~strategic~~funding ~~sources~~noted above. ~~The~~Upon the Company’s ~~has~~receipt ~~retained~~of all of the ~~corporate~~additional ~~advisory~~funding ~~services~~under ofthe ~~Waller~~amended ~~Capital~~credit ~~Partners~~agreement, anthe ~~independent~~total ~~investment~~outstanding ~~bank~~principal ~~and~~balance ~~advisory~~under ~~firm,~~the toamended ~~explore~~credit ~~and~~agreement ~~evaluate~~would ~~strategic~~be ~~options~~$22.0 ~~There~~million. ~~can~~The additional credit facility will be noprimarily ~~assurance~~used ~~that~~to get the Company’s ~~plans~~current ~~will~~with ~~materialize~~its vendor and~~/or~~ ~~that~~customer itnational ~~will~~revenue beshare ~~successful~~payables inas ~~its~~well ~~efforts~~as tooffset the ~~obtain~~operational cash outflow associated with the ~~funding~~utilization toof ~~cover~~the ~~working~~$3.8 million advance agreement balance as of March ~~capital~~31, ~~shortfalls~~2018 discussed above. ~~These~~There ~~consolidated~~can ~~financial~~be ~~statements~~no doassurance ~~not~~that ~~include~~the ~~any~~Company ~~adjustments~~will ~~related~~achieve the operational milestones to obtain the ~~carrying~~additional advances ~~values~~from ~~and classifications~~Raycom, ofor ~~assets~~that ~~and~~those ~~liabilities~~advances, ~~that~~if ~~would~~obtained, bewill ~~necessary~~provide ~~should~~adequate funding to sustain the Company’s operations beand ~~unable~~execute toits ~~continue~~business asplan athrough ~~going~~the ~~concern~~next 12 months from the date of this filing.

2. Summary of Significant Accounting Policies

Basis of Presentation and Use of Estimates

The unaudited interim condensed consolidated financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and include the accounts of Frankly Inc. and its wholly-owned subsidiaries Frankly Co. and Frankly Media LLC. All intercompany balances and transactions have been eliminated in consolidation. In the opinion of the Company’s management, the unaudited interim condensed consolidated financial statements include all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company’s financial position for the periods presented. These unaudited interim condensed consolidated financial statements are not necessarily indicative of the results expected for the full fiscal year or for any subsequent period.

Frankly Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements – Unaudited

The accompanying condensed consolidated balance sheet as of December 31, ~~2016~~2017 was derived from the audited financial statements as of that date, but does not include all the information and footnotes required by U.S. GAAP. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes for the year ended December 31, ~~2016~~2017, included within ~~its~~the Company’s Form 10-K as filed with the ~~SEC~~U.S. Securities and Exchange Commission on ~~August~~April 72, ~~2017~~2018.

Accounting Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported and disclosed in the condensed consolidated financial statements and the accompanying notes. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Such estimates primarily relate to unsettled transactions and events as of the date of the condensed consolidated financial statements. Accordingly, actual results may differ from estimated amounts.

~~Concentrations~~Accounts Receivable and Concentrations of Risk

Accounts receivable are subject to credit risk and as of ~~December~~March 31, ~~2016~~2018 and ~~September~~December 3031, 2017, two ~~and three~~ customers each accounted for greater than 10% of the Company’s accounts receivable balance~~, respectively~~. In total, these customers accounted for 26 40% and 5526% of the Company’s accounts receivable balance as of ~~December~~March 31, ~~2016~~2018 and ~~September~~December 3031, 2017, respectively. Additionally, approximately 42% and 3638% of the Company’s revenue for the ~~nine~~three months ended ~~September~~March 3031, ~~2016~~2018 and 2017, respectively, was generated from ~~three and~~ two customers, ~~respectively,~~ that each accounted for greater than 10% of the Company’s total revenue. In addition, the allowance for doubtful accounts was $757,806 and $70,000 as of March 31, 2018 and December 31, 2017, respectively.

Recently Issued Accounting Pronouncements

The Company is an “emerging growth company” (“EGC”) as defined by the Jumpstart Our Business Startups (“JOBS”) Act of 2012. The JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can selectively delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company has elected to avail itself of this exemption and, as a result, its financial statements may not be comparable to the financial statements of issuers that are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies. Section 107 of the JOBS Act provides that the Company can elect to opt out of the extended transition period at any time, which election is irrevocable.

ASU 2014-09: Revenue from Contracts with Customers (Topic 606) — In May 2014, the Financial Accounting Standards Board (“FASB”), issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers.” The new topic will replace Topic 605, “Revenue Recognition,” and creates modifications to various other revenue accounting ~~standards~~ standards for specialized transactions and industries. The topic is intended to conform revenue accounting principles with a concurrently issued International Financial Reporting Standards to reconcile previously differing treatment between U.S. practices and those of the rest of the world and to enhance disclosures related to disaggregated revenue information. The updated guidance is effective for interim and annual reporting periods beginning on or after December 15, 2018, for private companies; this effective date is applicable for the Company due to the JOBS Act exemption described above. Therefore, the Company plans to adopt this ASU on January 1, 2019 and plans to use the modified retrospective method. The Company will further evaluate during ~~the next year~~2018, the anticipated impact of the adoption of this updated guidance on its consolidated financial statements.

Frankly Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements – Unaudited

ASU ~~2015~~2016-1702: ~~Income~~Leases ~~Taxes~~ (Topic ~~740~~842), ~~Balance Sheet Classification of Deferred Taxes~~ — In ~~November~~February ~~2015~~2016, the FASB issued ASU ~~2015~~2016-1702, towhich ~~simplify~~requires ~~the~~a ~~presentation~~lessee ofto ~~deferred~~recognize ~~taxes~~assets and inliabilities ~~the~~on its consolidated balance sheet. ~~Current~~for ~~guidance~~leases ~~requires~~with anaccounting ~~entity~~lease toterms ~~separate~~of more than 12 months. ASU 2016-02 will ~~deferred~~replace ~~income~~most ~~tax~~existing ~~assets~~lease ~~and~~accounting ~~liabilities~~guidance ~~into~~in ~~current~~U.S. ~~and~~GAAP ~~noncurrent~~when ~~amounts~~it becomes effective. The new ~~guidance~~standard ~~requires~~states ~~all~~that ~~deferred~~a lessee ~~tax~~will ~~assets~~ recognize a lease liability for the obligation to make lease payments and ~~liabilities~~a right-of-use asset for the right to use the underlying asset for the lease term. Leases will be ~~presented~~classified as ~~noncurrent~~either finance or operating, with classification affecting the pattern of expense recognition in the consolidated statements of operations. ASU ~~2015~~2016-1702 ~~was~~will ~~adopted~~be effective for the Company as an EGC in ~~2017~~2020 and ~~did~~requires ~~not~~the ~~have~~modified aretrospective ~~significant~~method ~~impact~~of onadoption. Although the ~~consolidated~~Company is currently evaluating the effect that ASU 2016-02 will have on its consolidated financial statements and related disclosures, the Company expects that most of its operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon adoption.

ASU 2016-0218: ~~Leases~~Statement of Cash Flows (Topic ~~842~~230), Restricted Cash — In ~~February~~November 2016, the FASB issued ASU 2016-0218, which requires that a ~~lessee~~statement toof ~~recognize~~cash ~~assets and~~flows ~~liabilities~~explain onthe ~~its~~change ~~consolidated~~during ~~balance~~the ~~sheet~~period ~~for~~in ~~leases~~the ~~with~~total ~~accounting lease terms~~ of ~~more~~cash, ~~than~~cash 12equivalents, ~~months.~~and ~~ASU 2016-02 will~~amounts ~~replace~~generally ~~most~~described ~~existing~~as ~~lease~~restricted ~~accounting~~cash ~~guidance~~or inrestricted ~~GAAP~~cash ~~when it becomes effective~~equivalents. ~~The~~Therefore, ~~new~~amounts ~~standard~~generally ~~states~~described ~~that~~as arestricted ~~lessee will~~cash ~~recognize~~and arestricted ~~lease~~cash ~~liability~~equivalents ~~for~~should ~~the~~be ~~obligation~~included towith ~~make~~cash ~~lease payments~~ and acash ~~right-of-use~~equivalents ~~asset~~when ~~for~~reconciling the ~~right~~beginning-of-period ~~to use the underlying~~and ~~asset~~end-of-period ~~for~~total ~~the~~amounts ~~lease~~shown ~~term.~~on ~~Leases will be classified as either finance or operating, with classification affecting~~ the ~~pattern of~~statement ~~expense recognition in the consolidated statements~~ of ~~operations~~cash flows. ASU 2016-0218 will be effective for the Company as an EGC in ~~2020 and requires the modified retrospective method of adoption~~2019. Early adoption is permitted., ~~Although~~including ~~the~~adoption ~~Company is~~in ~~currently~~an ~~evaluating~~interim ~~the~~period. ~~effect~~The ~~that~~adoption ~~ASU 2016-02 will have on its consolidated financial statements and related disclosures, the Company expects that most~~ of ~~its~~this ~~operating~~ASU ~~lease commitments~~ will benot ~~subject~~have toa ~~the~~significant ~~new standard and recognized as operating~~impact ~~lease~~on ~~liabilities~~the ~~and~~consolidated ~~right-of-use~~financial ~~assets upon adoption~~statements.

~~ASU~~Recently 2016-09: Compensation – Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting — In March 2016, the FASB issued ASU 2016-09, which is intended to simplify several aspects of the accounting for share-based payment award transactions, including the income tax consequences and classification on the statement of cash flows. ASU 2016-09 was adopted in 2017 and did not have a significant impact on the consolidated financial statements.Adopted

ASU 2016-15: Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments — In August 2016, the FASB issued ASU 2016-15, which provides guidance related to cash flows presentation and is effective for annual reporting periods beginning after December 15, 2017, subject to early adoption, which is permitted using a retrospective transition approach. ASU 2016-15 is intended to standardize the classification of certain cash receipts and cash payments in the Statement of Cash Flows, and was effective for the Company in its first quarter of fiscal 2018. The adoption of this ASU did not have a significant impact on the Company’s consolidated financial statements.

3. Acquisition of Worldnow

On July 28, 2015, the Company signed an agreement (the “Purchase Agreement”) to purchase all of the outstanding units of Gannaway Web Holdings LLC, operating as Worldnow, for total consideration of $45,000,000. On August 25, 2015 (the “Closing Date”), the Company completed the acquisition of Worldnow. Subsequent to the acquisition, Worldnow changed its name to Frankly Media LLC. The acquisition of Worldnow was made primarily to extend the reach of Frankly to Worldnow’s existing customer base within the local broadcast marketplace.

Under the terms of the Purchase Agreement, the Company paid $10,000,000 in cash, issued $20,000,000 in Class A restricted voting shares of the Company (the “Share Consideration”) and executed promissory notes to two shareholders of Worldnow bearing simple interest at a rate of 5 percent per year and agreed to pay $15,000,000 on August 31, 2016 (Note 67). The number of restricted voting shares comprising the Share Consideration was 574,836, determined with reference to the volume-weighted average price of the common shares of the Company on the TSX-V for the five days prior to the date of the Purchase Agreement (CDN$45.46 or $34.79). For purposes of the purchase price allocation, the Share Consideration, prior to discount for lack of marketability, was reflected at fair value as of the Closing Date which amounted to $15,523,058.

~~All of the securities comprising the Share Consideration are subject to a lock-up agreement~~4. ~~The lock-up period with respect to securities~~ ~~representing~~Restructuring 50 percent of the value of the Share Consideration expired August 25, 2016; and the lock-up period with respect to the remainder of the Share Consideration expired upon August 25, 2017. The lock-up periods are subject to earlier expiry upon the occurrence of certain events that constitute a change of control of the Company.Expense

4Following an extensive process to explore and evaluate strategic alternatives, the Company’s Board of Directors, led by the Strategic Committee, determined the best path for the Company at that time was to pursue internal growth opportunities and focus on further optimizing its operations. In an effort to reduce its operating cash needs, in February 2018, the Company executed a reduction-in-force ~~Related~~that ~~Party~~removed ~~Transactions~~approximately 20 full-time employees from its headcount. In addition, the Company subleased its remaining office space in San Francisco, CA and ~~Balances~~is pursuing other areas where operating expenses can be reduced. The restructuring also included a reorganization of the senior management team. Effective April 12, 2018, the Company’s CEO resigned and was succeeded by the Company’s former COO and CFO. A number of other senior management changes were implemented on the same date. The restructuring plan is expected to be completed by the end of the second quarter of 2018. The Company accounted for the one-time termination benefits and certain contract costs in accordance with ASC 420 – Exit or Disposal Cost Obligations.

The ~~Company~~following ~~has~~table ~~several~~summarizes ~~significant~~the ~~shareholders~~changes asin ~~follows:~~the ~~SKP~~restructuring ~~America~~liability ~~LLC~~ (~~“SKP~~included ~~America”),~~in ~~Raycom~~accrued ~~Media Inc. (“Raycom”~~expenses)~~, and~~ ~~Gannaway~~for ~~Entertainment~~the ~~Inc.~~periods ~~(“GEI”) which each owned approximately 25.6%~~presented, ~~25.7% and 8.3%, respectively, as of~~ ~~December~~by ~~31,~~each ~~2016~~major ~~and~~type ~~25.0%, 25.1% and 8.1%, respectively, as~~ of ~~September~~cost ~~30,~~associated ~~2017~~with of the ~~aggregate~~restructuring ~~common shares and Class A restricted voting shares.~~activity:

	One-time
	Termination			Contract
	Benefits			Costs		Total

Balance, December 31, 2017	$	-		$	-	$	-
Restructuring expense		361,884			99,076		460,960
Payments		(134,150	)		-		(134,150	)
Adjustments		-			-		-
Balance, March 31, 2018	$	227,734		$	99,076	$	326,810

5. Related Party Transactions and Balances

The Company has several significant shareholders as follows: Raycom Media Inc. (“Raycom”), SKP America LLC (“SKP America”) and Gannaway Entertainment Inc. (“GEI”) which each owned approximately 23.7%, 23.7% and 7.7%, respectively, as of March 31, 2018 and 24.6%, 24.5% and 8.0%, respectively, as of December 31, 2017 of the aggregate common shares and Class A restricted voting shares.

Frankly Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements – Unaudited

The following table summarizes related party balances in the condensed consolidated balance sheets for the periods presented:

	December 31,			September 30,
Amounts Due (to) from Related Parties	March 31, 2018			December 31, 2017
Amounts Due (to) from Related Parties	2016			2017
	(Unaudited)
					(Unaudited)
Non-revolving credit facility, net
Raycom	$	1113,~~630~~672,~~384~~478		$	12,~~006~~155,~~885~~573
Due (to) from Raycom:
Accounts receivable, net		~~295,231~~-			1427,~~425,501~~489
Prepaid expenses and other current assets		70,000			-
Accounts payable		(307,422	)		(275,960	)
Accounts payable		(159,385	)		(257,368	)
Accrued expenses		(389,564	)		(432,802	)
Accrued expenses		-			(234,062	)
Deferred revenue		(3,805,278	)		(4,896,585	)
Deferred revenue		(2,896,585	)		(4,896,585	)
Total due to Raycom		(4,502,264	)		(5,177,858	)
Total due to Raycom, net		(2,690,739	)		(3,962,514	)
Due from Mobdub:
Prepaid expenses and other current assets		~~129~~58,~~167~~333			4187,~~667~~500
Total due from Mobdub		~~129~~58,~~167~~333			4187,~~667~~500
Total due (to) from related parties	$	(24,~~561~~443,~~572~~931	)	$	(35,~~920~~090,~~847~~358	)

The following table summarizes related party transactions in the condensed consolidated statements of operations and comprehensive loss for the periods presented:

	Three Months Ended September 30,						Nine Months Ended September 30,
	Three Months Ended March 31,
Revenue (Expense) from Related Parties	~~2016~~2018			2017			~~2016~~			~~2017~~
	(Unaudited)			(Unaudited)			~~(Unaudited)~~			~~(Unaudited)~~
Raycom:
Revenue	$	1,~~236~~222,~~060~~065		$	1,~~272~~361,~~827~~884		$	~~3,790,811~~		$	~~3,920,180~~
Interest on promissory notes		(33,333	)		-			(133,333	)		-
Interest on non-revolving credit facility		(516,904	)		(510,080	)
Interest on non-revolving credit facility		(160,037	)		(508,646	)		(160,037	)		(1,525,637	)
Interest on the Advance Agreement		(79,913	)		(57,998	)
Interest on the Advance Agreement		-			(78,021	)		-			(234,062	)
		625,248			793,806
		1,042,690			686,160			3,497,441			2,160,481
Mobdub:
GEI:
License fees		(29,167	)		(29,167	)
Interest on promissory notes		(93,806	)		-			(368,806	)		-
		(29,167	)		(29,167	)
Mobdub:
	$	596,081		$	764,639
License fees		(36,190	)		(29,167	)		(109,288	)		(87,500	)
		(36,190	)		(29,167	)		(109,288	)		(87,500	)
	$	912,694		$	656,993		$	3,019,347		$	2,072,981

Raycom

As partial consideration for the acquisition of Worldnow on August 25, 2015, the Company issued a $4,000,000 promissory note to Raycom and 397,126 Class A restricted voting shares (Note 3). The note bore interest at 5% per annum and was due on August 31, 2016 (Note 67). Raycom was a customer and significant shareholder of Worldnow and, subsequent to the acquisition of Worldnow, remains a customer and significant shareholder of Frankly. Accordingly, during the three ~~and nine~~ months ended ~~September~~March 3031, ~~2016~~2018 and 2017, revenue-related transactions and balances with Raycom arose in the ordinary course of business.

On September 1, 2016, the Company completed the closing of its financing with Raycom (Note 7). The Company received a non-revolving term line of credit from Raycom in the principal amount of $14.5 million and, subject to approval of Raycom, an additional available $1.5 million non-revolving line of credit (collectively, the “Loan”). The proceeds were used to pay down $14 million of the $15 million outstanding promissory notes. In addition, Raycom converted the remaining $1.0 million of its existing $4.0 million promissory note from the Company into 150,200 common shares of the Company and the Company issued 871,160 common share purchase warrants to Raycom. The Loan was recorded at fair value of $11,578,593 with the remaining $2,921,407 being allocated to the warrants. On March 13, 2018, the Company received $1 million of the additional $1.5 million available under the Loan, bringing the total outstanding principal balance to $15.5 million. The carrying value of the Loan at March 31, 2018 and December 31, 2017, net of debt discount and deferred financing costs, was $13,672,478 and $12,155,573, respectively. Interest expense on the Loan for the three months ended March 31, 2018 and 2017, respectively, amounted to $516,904 and $510,080 and is presented within interest expense, net on the consolidated statements of operations and comprehensive loss.

Frankly Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements – Unaudited

On ~~September~~December 122, 2016, ~~the Company completed the closing of its financing with~~ Raycom ~~(Note 6). The Company received a non~~pre-~~revolving term~~paid ~~line of credit from Raycom in the principal amount of~~ $~~14.5~~3 million ~~and, subject to approval~~ of ~~Raycom,~~future anfees ~~additional~~for ~~available $1.5~~services ~~million~~to ~~non-revolving~~be ~~line~~provided ofby ~~credit~~the ~~(collectively,~~Company (the “~~Loan~~Advance Agreement”). On ~~The~~March ~~proceeds~~30, ~~were~~2017, ~~used~~the toCompany ~~pay~~entered ~~down~~into ~~$14~~an ~~million of~~amendment to the ~~$15~~Advance ~~million~~Agreement ~~outstanding~~pursuant ~~promissory~~to ~~notes.~~which ~~In addition,~~ Raycom ~~converted~~pre-paid ~~the~~an ~~remaining~~ additional $~~1.0~~2 million of ~~its~~future ~~existing~~fees ~~$4.0 million~~for ~~promissory~~services ~~note~~to ~~from~~be ~~the~~provided ~~Company~~by ~~into 150,200 common shares of~~ the Company ~~and the Company issued 871,160 common share purchase warrants to Raycom~~. ~~The~~In ~~Loan~~connection ~~was recorded at fair value of $11,578,593~~ with the ~~remaining~~Advance $2Agreement,~~921,407~~ ~~being allocated to~~ the ~~warrants.~~Company ~~The~~recognized interest ~~carrying~~expense ~~value~~ of ~~the Loan at December 31, 2016 and September 30, 2017, net of debt discount and deferred financing costs, was~~ $1179,~~630,384~~913 and $1257,~~006~~998,~~885,~~ ~~respectively. Interest expense on the Loan~~ for the three ~~and nine~~ months ended ~~September~~ 30March 31, ~~2016~~2018 and 2017, respectively,. ~~amounted~~All toservices ~~$160,037,~~provided by ~~$160,037,~~the ~~$508,646~~Company ~~and~~to ~~$1,525,637~~Raycom ~~and~~since isJanuary ~~presented within interest expense~~1, ~~net~~2018 onare ~~the~~being ~~consolidated~~applied ~~statements~~to ofthe ~~operations~~Advance ~~and~~Agreement ~~comprehensive loss~~balance.

On December 22, 2016, Raycom pre-paid $3 million of future fees for services to be provided by the Company (the “Advance Agreement”). On March 30, 2017, the Company entered into an amendment to the Advance Agreement pursuant to which Raycom pre-paid an additional $2 million of future fees for services to be provided by the Company. In connection with this agreement, the Company recognized interest expense of $78,021 and $234,062 for the three and nine months ended September 30, 2017, respectively.

GEI

As partial consideration for the acquisition of Worldnow on August 25, 2015, the Company issued an $11,000,000 promissory note to GEI and 177,710 Class A restricted voting shares (Note 3). The note had interest at 5% per annum and was due on August 31, 2016 (Note 6). On September 1, 2016, the promissory note to GEI was paid in full using the proceeds from the Raycom financing transaction discussed above.

Mobdub

The Company has a license agreement with a company that is owned by an officer of the Company. The agreement is for licensing of mobile applications and has a total contract value of $350,000. The period of the agreement is three years and commenced on October 14, 2015.

56. Long-Lived Assets

All of the Company’s long-lived assets are domiciled in the U.S. Depreciation and amortization expense for long-lived assets was as follows for the periods presented:

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

2016

2017

2016

2017

2018

2017

(Unaudited)

~~(Unaudited)~~

Depreciation of property and equipment

~~169~~133,~~235~~971

~~151~~154,~~281~~849

~~536,998~~

~~458,616~~

Amortization of capitalized software

~~460~~794,~~677~~940

~~732~~693,~~961~~548

~~1,255,265~~

~~2,148,315~~

Amortization of other intangibles

218,334

~~655,002~~

Total depreciation and amortization

~~848~~1,~~246~~147,245

1,~~102~~066,~~576~~731

~~2,447,265~~

~~3,261,933~~

Property and Equipment, Net

The following table summarizes property and equipment, net, including assets held under capital lease:

	March 31, 2018			December 31, 2017
	(Unaudited)
Cost:
Office and computer equipment and software	$	2,064,675		$	2,064,676
Leasehold improvements		603,978			603,978
		2,668,653			2,668,654

Accumulated depreciation and amortization:
Office and computer equipment and software		(1,520,897	)		(1,416,140	)
Leasehold improvements		(296,405	)		(267,193	)
		(1,817,302	)		(1,683,333	)
	$	851,351		$	985,321

Depreciation expense for assets held under capital lease for the three months ended March 31, 2018 and 2017, respectively, was $0 and $35,950. The net carrying value of assets held under capital lease was $0 and $262,747 as of March 31, 2018 and December 31, 2017, respectively.

Frankly Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements – Unaudited

Property and Equipment, Net

The following table summarizes property and equipment, net, including assets held under capital lease:

	December 31, 2016			September 30, 2017
				(Unaudited)
Cost:
Office and computer equipment and software	$	1,981,889		$	2,050,360
Leasehold improvements		578,781			603,978
		2,560,670			2,654,338
Accumulated depreciation and amortization:
Office and computer equipment and software		(926,901	)		(1,299,978	)
Leasehold improvements		(152,441	)		(237,980	)
		(1,079,342	)		(1,537,958	)
	$	1,481,328		$	1,116,380

Depreciation expense for assets held under capital lease for the three and nine months ended September 30, 2016 and 2017, respectively, was $41,062, $123,186, $35,400 and $107,299. The net carrying value of assets held under capital lease was $404,346 and $297,046 as of December 31, 2016 and September 30, 2017, respectively (Note 9).

Software Development Costs, Net

The following table summarizes software development costs, net for the periods presented:

	December 31, 2016			September 30, 2017
	March 31, 2018			December 31, 2017
	(Unaudited)			~~(Unaudited)~~
Cost	$	912,~~001~~815,~~660~~681		$	1112,~~446~~120,~~427~~789
Accumulated amortization		(25,~~291~~942,~~166~~988	)		(45,~~439~~148,~~480~~048	)
	$	6,~~710~~872,~~494~~693		$	76,~~006~~972,~~947~~741

During the ~~nine~~three months ended ~~September~~March 3031, ~~2016~~2018 and 2017, the Company capitalized software development costs of $3694,~~384,631~~892 and $2636,~~444~~863,~~766,~~ respectively.

Goodwill

The following table summarizes the changes in goodwill for the periods presented:

	Carrying Value
Balance, December 31, 2015	$	10,755,581
Impairment		(4,209,000	)
Balance, December 31, 2016	$	6,546,581
Activity		-
Balance, September 30, 2017 (Unaudited)	$	6,546,581

Frankly Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements – Unaudited

Intangible Assets, Net

The following table summarizes intangible assets, net for the periods presented:

	December 31, 2016			September 30, 2017
	March 31, 2018			December 31, 2017
	(Unaudited)			~~(Unaudited)~~
Cost:
Broadcast relationships, 12-year useful life	$	7,600,000		$	7,600,000
Advertiser relationships, 5-year useful life		1,200,000			1,200,000
		8,800,000			8,800,000
Accumulated amortization:
Broadcast relationships		(~~844~~1,~~448~~636,118	)		(1,~~319~~477,~~450~~784	)
Advertiser relationships		(~~320~~620,000	)		(~~500~~560,000	)
		(1,164,448	)		(1,819,450	)
		(2,256,118	)		(2,037,784	)
	$	76,~~635~~543,~~552~~882		$	6,~~980~~762,~~550~~216

67. Debt

Non-revolving Credit Facility~~, Extinguishment of Promissory Notes and Old Revolving Credit Facility~~

On September 1, 2016, the Company completed the closing of its financing with Raycom, a related party (Note 45). The Company ~~received~~ received a non-revolving term line of credit from Raycom in the principal amount of $14.5 million and, subject to approval of Raycom, an additional available $1.5 million non-revolving line of credit. In addition, Raycom converted $1.0 million of its existing $4.0 million promissory note from the Company into 150,200 common shares of the Company and the Company issued 871,160 warrants to to Raycom entitling the holder of each warrant to acquire one common share of the Company upon exercise of each warrant at a price per common share equal to CDN$8.50 ($6.63 based on the exchange rate at August 18, 2016). The warrants will expire on the earlier of: (i) the repayment of the Loan in accordance with its terms; and (ii) 5 years. To the extent that there is a mandatory repayment of any portion of the principal balance of the Loan, a proportionate number of the warrants will have their term reduced to the later of one year from issuance and 30 days from the date of such repayment. On March 13, 2018, the Company received $1 million of the additional $1.5 million available under the Loan, bringing the total outstanding principal balance to $15.5 million.

The warrants were recorded within shareholders’ equity (deficit) in accordance with ASC 470-20 - Debt With Conversion and Other Options. Proceeds from the sale of the debt instrument with stock purchase warrants (detachable call options) were allocated to the two elements based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at time of issuance. The value allocated to the Loan with Raycom was $11,578,593 with the remaining $2,921,407 being allocated to the warrants. The fair value of the 871,160 warrants issued were estimated based on the Black-Scholes pricing model, using the following assumptions: 1) Dividend yield of 0%, 2) Risk free rate of 0.66% for 751,000 warrants and 0.56% for 120,160 warrants, 3) Volatility of 71.14%, 4) Expected term of 5 years for 751,000 warrants and 7 months for 120,160 warrants, and 5) Forfeiture rate of 0%.

The debt discount of $2,921,407 is being amortized to interest expense, net on the consolidated statement of operations and comprehensive loss using the effective-interest method. Amortization of debt discount included in interest expense, net for the three and nine months ended September 30, 2016 and 2017, respectively, amounted to $45,146, $45,146, $132,826 and $405,788. In accordance with ASC 470-50 Debt Modifications and Extinguishments, the Company accounted for the refinancing transaction as an extinguishment of debt. The Company incurred legal fees directly related to the refinancing of $206,805, which were recorded as deferred financing costs and recorded against the carrying value of the Loan. Amortization of deferred financing costs included in interest expense, net for the three and nine months ended September 30, 2016 and 2017, respectively, amounted to $0, $0, $10~~,340 and $35,328.~~

Frankly Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements – Unaudited

The debt discount of $2,921,407 is being amortized to interest expense, net on the consolidated statement of operations and comprehensive loss using the effective-interest method. Amortization of debt discount included in interest expense, net for the three months ended March 31, 2018 and 2017 amounted to $144,099 and $145,436, respectively. In accordance with ASC 470-50 - Debt Modifications and Extinguishments, the Company accounted for the refinancing transaction as an extinguishment of debt. The Company incurred legal fees directly related to the refinancing of $206,805, which were recorded as deferred financing costs and recorded against the carrying value of the Loan. Amortization of deferred financing costs included in interest expense, net for the three months ended March 31, 2018 and 2017 amounted to $10,340 and $7,110, respectively.

Prior to the completion of the financing arrangements, Raycom held 397,125 voting shares of the Company, which represented approximately 21% of the issued and outstanding voting shares of the Company. Immediately following the completion of the financing transactions, Raycom held 547,325 voting shares of the Company and 871,160 warrants, which collectively represented approximately 27% of the issued and outstanding voting shares of the Company on a non-diluted basis.

The proceeds of the Loan were used to pay off the outstanding $15.0 million of promissory notes issued by the Company in connection with the 2015 acquisition of Worldnow, including $3.0 million of the $4.0 million of such notes issued to Raycom, with the remaining $1.0 million promissory note balance owed to Raycom being converted to common shares of the Company as described above.

The Loan has a five-year term and is secured by the grant of a security interest in the Company’s assets, a pledge of shares of the Company’s subsidiaries and a guarantee by the Company’s subsidiaries secured by their assets. Simultaneously, the Company and Raycom also entered into a software code escrow agreement. The software code escrow agreement required the Company to provide source code of its software products with a third party escrow agent.

Interest on outstanding balances of the Loan will accrue at a rate of 10% per annum, with a default interest rate of 12% per annum. The Loan is subject to certain scheduled mandatory principal repayments, with additional mandatory repayments occurring upon the Company’s raising of additional financing, sales of assets and excess cash flow.

In addition, the Company must maintain certain leverage ratios and interest coverage ratios beginning with the fiscal quarter ending December 31, 2017. The Company is also subject to certain covenants relating to, among others, indebtedness, fundamental corporate changes, dispositions, acquisitions and distributions. On December 27, 2017, the Loan was amended to extend the period for commencement of the leverage ratio and interest coverage ratio covenants from the calendar quarter ending December 31, 2017 to the calendar quarter ending March 31, 2018. On March 28, 2018, the Loan was amended to extend the period for commencement of the leverage ratio and interest coverage ratio covenants from the calendar quarter ending March 31, 2018 to the calendar quarter ending June 30, 2019 and agreed that interest payments on the outstanding Loan balance for the period commencing on January 1, 2018 and continuing thereafter will be suspended, and each such suspended interest payment will be added to the principal balance of the Loan, and the 12% rate for overdue interest will not apply to such suspended interest. In connection with the above, during the three months ended March 31, 2018, the Company accrued interest expense of $362,466, which is presented within non-revolving credit facility, net on the condensed consolidated balance sheet as of March 31, 2018 as these amounts will not be paid within one year from the condensed consolidated balance sheet date.

Upon an event of default, Raycom may by written notice terminate the facility immediately and declare all obligations under the Loan, whether matured or not, to be immediately due and payable. Raycom may also as and by way of collateral security, deposit and retain in an interest bearing account, amounts received by Raycom from the Company under the Loan and realize upon the security interest agreements, guaranty agreements and pledge agreement.

~~Promissory Notes Payable to Related Parties~~11

In connection with the acquisition of Worldnow on August 25, 2015 (Note 3), the Company executed unsecured promissory notes, bearing a simple interest at a rate of 5% per year, to pay an aggregate of $15,000,000 in cash on August 31, 2016. The holders of the promissory notes were Raycom ($4,000,000) and GEI ($11,000,000), former shareholders of Worldnow (Note 4). Interest expense on the promissory notes amounted to $125,000 and $500,000 for the three and nine months ended September 30, 2016, respectively, and is presented within interest expense, net on the consolidated statements of operations and comprehensive loss. On September 1, 2016, the promissory notes were extinguished in connection with the refinancing transaction discussed above.

Revolving Credit Facility – Silicon Valley Bank

On December 28, 2016, the Company entered into the Loan and Security Agreement pursuant to which Silicon Valley Bank (“SVB”) issued to the Company a $3 million revolving line of credit (the “Revolving Credit Facility”).

Subject to any adjustments upon an event of default, the principal amount outstanding under the line of credit had accrued interest at a floating per annum rate equal to 2.25% above the Prime Rate published on the Wall Street Journal, which interest was payable monthly and computed on the basis of a 360-day year for the actual number of days elapsed.

As of December 31, 2016 and September 30, 2017, the principal amount outstanding under the Revolving Credit Facility was $1,375,474 and $0, respectively. On August 1, 2017, the Company repaid all amounts owed to SVB under these agreements and such agreements were terminated.

Letter of Credit – Western Alliance Bank

On August 31, 2016, in lieu of a security deposit under the lease dated October 26, 2010, with Metropolitan Life Insurance Company, for real property located at 27-01 Queens Plaza North, Long Island City, NY, Frankly Media LLC entered into a standby letter of credit with Western Alliance Bank for an amount of $500,000 (the “Letter of Credit”). For each advance, interest will accrue at a rate equal to the sum of (i) the Base Rate (as defined below), plus (ii) 3.50%, provided that such interest rate will change from time to time as the Base Rate changes. The “Base Rate” means the rate of interest used as the reference or base rate to establish the actual rates charged on commercial loans and which is publicly announced or reported from time to time by the Wall Street Journal as the “prime rate”. Interest will accrue from the date of the advance until such advance is paid in full. The Company has granted Western Alliance Bank a security interest in a $524,115 controlled cash deposit account together with (i) all interest, whether now accrued or hereafter accruing; (ii) all additional deposits hereafter made to the account; (iii) any and all proceeds from the account; and (iv) all renewals, replacements and substitutions for any of the foregoing. As of December 31, 2016 and September 30, 2017, no advances were made under the Letter of Credit. The cash security interest of $524,115 is presented within restricted cash on the consolidated balance sheet.

Frankly Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements – Unaudited

7.Letter ~~Shareholders’~~of ~~Equity~~Credit – Western Alliance Bank

On August 31, 2016, in lieu of a security deposit under the lease dated October 26, 2010, with Metropolitan Life Insurance Company, for real property located at 27-01 Queens Plaza North, Long Island City, NY, Frankly Media LLC entered into a standby letter of credit with Western Alliance Bank for an amount of $500,000 (the “Letter of Credit”). For each advance, interest will accrue at a rate equal to the sum of (i) the Base Rate (as defined below), plus (ii) 3.50%, provided that such interest rate will change from time to time as the Base Rate changes. The “Base Rate” means the rate of interest used as the reference or base rate to establish the actual rates charged on commercial loans and which is publicly announced or reported from time to time by the Wall Street Journal as the “prime rate”. Interest will accrue from the date of the advance until such advance is paid in full. The Company has granted Western Alliance Bank a security interest in a $524,115 controlled cash deposit account together with (i) all interest, whether now accrued or hereafter accruing; (ii) all additional deposits hereafter made to the account; (iii) any and all proceeds from the account; and (iv) all renewals, replacements and substitutions for any of the foregoing. As of March 31, 2018 and December 31, 2017, no advances were made under the Letter of Credit. The cash security interest of $524,115 is presented within restricted cash on the consolidated balance sheets.

8. Shareholders’ Equity

Common Shares and Class A Restricted Voting Shares

~~Subsequent~~All ~~to the Recapitalization on December 23, 2014, all~~ common and Class A restricted voting shares and related stock-based grants have been denominated in Canadian dollars and have been translated to U.S. dollars using the exchange rate in effect at the date of transaction or grant, as applicable.

The Class A restricted voting shares have the same voting rights as common shares except for voting for the election and removal of directors of the Company. The Class A restricted voting shares participate in dividends and liquidation events in the same manner as common shares. In terms of restrictions on transfer, no Class A restricted voting shares shall be transferred to another party unless an offer to acquire common shares is concurrently made that is identical to the offer for the Class A restricted voting shares in terms of price per share, percentage of outstanding shares to be transferred and in all other material respects.

OnShares ~~February~~Issued 3,During ~~2017,~~ the ~~Company~~Three ~~effected~~Months ~~the~~Ended ~~one-for-seventeen~~March ~~reverse split of its issued and outstanding common shares and Class A restricted voting shares. All warrant~~31, ~~option, RSU, share and per share information in the consolidated financial statements gives retroactive effect to the Reverse Stock Split for all periods presented.~~2018

~~Shares~~During ~~Issued~~the ~~During~~three months ended March 31, 2018, the ~~Nine~~Company ~~Months~~issued ~~Ended~~a ~~September~~total 30of 77,973 ~~2017~~common shares for employee and director restricted stock units (“RSUs”) that vested.

During the nine months ended September 30, 2017, the Company issued a total of 54,597 common shares for employee and director RSUs that vested.

In addition, the Company exchanged 97,674 Class A restricted shares for an equal number of common shares.

Stock-Based Compensation

Description of the Plan

On ~~April~~October 120, ~~2015~~2017, the Company adopted an amended and restated equity incentive plan, ~~which~~(the ~~amends~~“Restated ~~and~~Plan”). ~~restates~~The Restated Plan amends the equity incentive plan, oreffective ~~the “Plan”, which was previously established~~ as of ~~December~~October 231, ~~2014. On January 22~~2017, ~~2016,~~by ~~the~~replacing ~~Company and its Board of Directors (~~the ~~“Board”)~~compensation ~~amended~~plan ~~the~~limit ~~Plan~~with toa ~~fix~~fixed total ~~the~~limit ~~number~~ of 435,000 common shares ~~reserved~~that ~~for~~may ~~issuance~~be ofgranted ~~both~~under ~~stock options~~option and ~~RSUs~~RSU ~~at 336,183~~awards.

~~Based~~Options onmay ~~the~~be ~~number~~exercised over periods of ~~outstanding~~up ~~options~~to ~~and~~10 ~~RSUs~~years as ofdetermined ~~September~~by ~~30,~~the ~~2017~~Company’s Board of Directors (“Board”) and ~~RSUs~~the ~~vested~~exercise ~~through~~price ~~September~~shall ~~30,~~not ~~2017,~~be less than the ~~Company had~~closing ~~7,531~~price ~~options~~of orthe ~~RSUs~~shares ~~remaining~~on ~~for~~the ~~issuance~~day ~~under~~preceding the ~~Plan~~award date. Option awards generally vest over four years with one year cliff vesting.

The Restated Plan allows the Company ~~did~~to ~~not~~award ~~recognize~~RSUs ~~any~~to ~~tax~~officers, ~~benefits~~employees, ~~for~~directors ~~stock-based~~and consultants of Frankly and its subsidiaries upon such conditions as the Board may establish, including the attainment of performance goals recommended by the Company’s compensation ~~during~~committee. ~~any~~The purchase price for common shares of the Company issuable under each RSU award, if any, shall be established by the Board at its discretion. Shares issued pursuant to any RSU award may be made subject to vesting conditions based upon the satisfaction of service requirements, conditions, restrictions, time periods ~~presented~~or performance goals established by the Board.

~~On March 3, 2017, the Company cancelled all outstanding options granted under the Plan with an exercise price of CDN$17.00 or greater and issued one new option for each 1.7 canceled options.~~12

Frankly Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements – Unaudited

Based on the number of outstanding options and RSUs as of March 31, 2018 and RSUs vested through March 31, 2018, the Company had 44,095 options or RSUs remaining for issuance under the Restated Plan.

Total stock-based compensation expense was $235,040 and $228,166 for the three months ended March 31, 2018 and 2017, respectively. The Company did not recognize any tax benefits for stock-based compensation during any of the periods presented.

Stock Options

The following table sets forth the activity for the Company’s stock options during the periods presented:

				Weighted Average
								Remaining
				Exercise		Grant Date		Contractual
						Grant Date		Contractual
	Shares			Exercise Price		Fair Value		Term (Years)
Balance, December 31, 2015		140,809		$	35.53	$	17.17		7.12
Granted		170,147			12.19		3.61
Exercised		-			-		-
Forfeited or canceled		(65,194	)		34.82		12.32
Balance, December 31, 2016		245,762		$	19.52	$	9.10		8.71
Vested and expected to vest, December 31, 2016		235,854		$	19.62	$	9.18		8.70
Adjustment - Balance, December 31, 2016		(53	)		-		-
Exercisable, December 31, 2016		47,595		$	29.18	$	17.07		7.74
Granted		74,327			5.48		2.81
Exercised		-			-		-
Forfeited or canceled		(50,431	)		18.21		9.30
Canceled (Option Replacement)		(193,339	)		19.90		9.11
Granted (Option Replacement)		113,677			5.30		9.11
Balance, December 31, 2017		189,943		$	5.47	$	6.58		8.22
Vested and expected to vest, December 31, 2017		183,924		$	5.48	$	6.65		8.20
Exercisable, December 31, 2017		69,567		$	5.73	$	10.17		7.33
Unaudited interim activity:
Balance, January 1, 2017		245,762		$	19.52	$	9.10		8.71
Balance, December 31, 2017		189,943		$	5.47	$	6.58		8.22
Adjustment - Balance, January 1, 2017		(53	)(a)		-		-
Granted		-			-		-
Granted		69,827			5.47		2.92
Exercised		-			-		-
Forfeited or canceled		(4620,~~857~~301	)		195.1936		94.4964
Canceled (Option Replacement)		(193,339	)(b)		19.90		9.11
Balance, March 31, 2018		169,642		$	5.49	$	6.81		7.92
Granted (Option Replacement)		113,677	(b)		5.30		9.11
Vested and expected to vest, March 31, 2018		165,383		$	5.49	$	6.87		7.90
Balance, September 30, 2017		189,017		$	5.47	$	6.72		8.44
Exercisable, March 31, 2018		84,454		$	5.65	$	9.03		7.39
Vested and expected to vest, September 30, 2017		182,756		$	5.48	$	6.78		8.42
Exercisable, September 30, 2017		63,797		$	5.77	$	10.29		7.53

(a) On February 3, 2017, the Company effected a one-for-seventeen reverse split. Upon finalizing the impact at the holder level, a small rounding adjustment was required to true-up options outstanding as of December 31, 2016.

(b) On March 3, 2017, the Company cancelled all outstanding options granted under the Plan with an exercise price of CDN$17.00 or greater and issued one new option for each 1.7 canceled options (the “Option Replacement”). The Company accounted for the Option Replacement as a modification in accordance with ASC 718, Compensation—Stock Compensation. The Company canceled 193,339 existing options (the “original options”) and concurrently granted 113,677 replacement options (the “replacement options”). The total stock-based compensation expense recognized by the Company for the nine months ended September 30, 2017, relating to the Option replacement, was computed using the original grant date fair value of the original options, plus the incremental fair value calculated as the excess of the fair value of the replacement options over the fair value of the original options on the modification date.

The aggregate intrinsic value of outstanding and exercisable stock options as of September 30, 2017 is $0.

Frankly Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements – Unaudited

Restricted Share Units

The following table sets forth the activity for the Company’s RSUs for the periods presented:

				Weighted-Average
				Grant Date
	Shares			Fair Value
Balance, December 31, 2015		35,767			21.26
Granted		60,832			6.38
Vested		(5,299	)		10.89
Forfeited or canceled		(14,569	)		36.35
Balance, December 31, 2016		76,731		$	7.31
Unaudited interim activity:
Balance, January 1, 2017		76,731		$	7.31
Adjustment - Balance, January 1, 2017		(7	)(a)		-
Granted		58,365			5.01
Vested		(54,597	)		6.05
Forfeited or canceled		(754	)		6.44
Balance, September 30, 2017		79,738		$	6.50

~~(a)~~Frankly ~~On February 3, 2017, the Company effected a one-for-seventeen reverse split~~Inc. ~~Upon~~and ~~finalizing the impact at the holder level, a small rounding adjustment was required to true-up RSUs outstanding as of December 31, 2016.~~Subsidiaries

~~The~~Notes RSUs granted during the nine months ended September 30, 2016 and 2017 had an aggregate fair value of $364,822 and $292,336, respectively, based on the closing price for common shares on the date of grant. Unrecognized compensation cost related to ~~the~~Condensed ~~Company’s non-vested~~Consolidated ~~RSUs~~Financial ~~was~~Statements ~~$369,976~~– ~~as of December 31, 2016, which is expected to be recognized from 2017 through 2019.~~Unaudited

8. Income Taxes

				Weighted-Average
				Grant Date
	Shares			Fair Value

Balance, December 31, 2016		76,731		$	7.31
Adjustment - Balance, December 31, 2016		(7	)		-
Granted		201,507			3.11
Vested		(98,387	)		5.04
Forfeited or canceled		(754	)		6.44
Balance, December 31, 2017		179,090		$	3.84

Unaudited interim activity:
Balance, December 31, 2017		179,090		$	3.84
Granted		-			-
Vested		(77,973	)		3.78
Forfeited or canceled		(1,617	)		5.22
Balance, March 31, 2018		99,500		$	3.86

Unrecognized compensation cost related to the Company’s non-vested RSUs was $223,159 as of March 31, 2018, which is expected to be recognized from 2018 through 2020.

9. Income Taxes

The Company had $0 income tax expense for all periods presented. Deferred tax assets have been fully reserved given the Company’s history of losses.

910. Commitments and Contingencies

Legal Proceedings

On July 21, 2017, a complaint was filed by GEI, Albert C. Gannaway III, and Samantha Gannaway, and was served on August 4, 2017, captioned Gannaway Entertainment, Inc., Albert C. Gannaway III, Samantha Gannaway V.S. Frankly Inc., Steve Chung, SKP America, LLC, JJR Private Capital Limited Partnership, Ron Schmeichel, Louis Schwartz in the ~~United~~U.S. ~~States~~ District Court for the Northern ~~District~~ District of California against the Company, the Company’s Chief Executive Officer, Chief Financial Officer and Chief Operating ~~Officer~~ Officer and others alleging violations of U.S. securities laws, fraud and breach of fiduciary duties, and seeking in excess of $15 million in damages, arising out of the Company’s acquisition of Gannaway Web Holdings, LLC from GEI and other parties in 2015.

On September 30, 2017, the defendants filed a motion to dismiss the complaint. On October 11, 2017 the plaintiffs filed an amended complaint. On October 31, 2017 the defendants filed a motion to dismiss the amended complaint. On March 12, 2018, the plaintiffs in the GEI complaint voluntarily terminated their case. On March 15, 2018, the plaintiffs in the GEI complaint re-filed their complaint in state court. The Company ~~and~~is reviewing the complaint with its counsel ~~continue~~ toand ~~believe~~believes that the claims are without merit. The Company intends to defend the claims vigorously.

Operating Lease Commitments

The Company is obligated under ~~several~~multiple non-cancellable operating leases for office space, expiring in ~~2017~~2019 through 2023. The Company has ~~one~~two ~~sublease~~subleases for its excess office space as of December 31, ~~2016~~2017.

~~The future aggregate minimum lease payments under these non-cancellable operating leases, without regard to subleases, are payable as follows as of September 30, 2017:~~14

Payments Due During the Years Ending December 31,	Total
2017	$	1,403,958
2018		1,381,158
2019		1,076,658
2020		852,908
2021		852,908
Thereafter		995,061
Total	$	6,562,651

Frankly Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements – Unaudited

~~Capital~~The ~~Lease~~future ~~Commitments~~aggregate minimum lease payments under these non-cancellable operating leases, without regard to subleases, are payable as follows as of March 31, 2018:

The Company is party to various computer-related equipment leases that qualify as capital lease obligations, expiring in 2017 and 2018. The present value of the future minimum lease payments at inception of the lease is recorded as a capitalized asset within property and equipment (Note 5) with the related capital lease obligation as a liability in the accompanying consolidated balance sheets.

Payments Due During the Years Ending March 31,	Total

2019		1,592,079
2020		1,152,891
2021		852,908
2022		852,908
2023		781,833
Thereafter		-
Total	$	5,232,619

Future minimum capital lease payments were payable as follows as of December 31, 2016:

Payments Due During the Years Ending December 31,	Total
2017	$	173,224
2018		40,742
Total		213,966
Amount representing interest		(5,882	)
Present value of minimum lease payments		208,084
Less current portion		(167,635	)
Non-current portion	$	40,449

Employee Benefit Plan

The Company’s subsidiaries, Frankly Co. and Frankly Media, have a 401(k) plan (the “Plan”), which covers all eligible employees. Under the Plan, employees may contribute from their gross salaries on a before tax basis up to annual statutory limits determined each year.

1011. Subsequent Events

The Company has evaluated subsequent events through ~~November~~May 1415, ~~2017~~2018 which is the date these unaudited interim condensed consolidated financial statements were available to be issued, and determined that there have been no events that have occurred that would require adjustments to or disclosure in the unaudited interim condensed consolidated financial statements except for the transactions described below.

~~Retention~~Amendment ~~Plan~~to the Non-revolving Credit Facility

On ~~October~~May 198, ~~2017,~~2018 the Company ~~began~~entered ainto ~~Retention~~an ~~Plan~~amendment (of the ~~“Retention~~2016 ~~Plan”)~~credit toagreement ~~induce~~between ~~selected~~the ~~key~~Company ~~contributors~~and ~~to remain~~Raycom, ~~employed~~whereby ~~with~~Raycom will provide the Company, orwith an ~~acquirer~~additional $7.5 million of ~~the~~funding, ~~Company~~to be paid in installments over a ~~strategic~~six-month ~~transaction~~period, ~~and~~ subject to ~~remain~~the ~~actively~~Company’s ~~engaged~~achievement in of certain operational milestones. The $1.0 million Raycom advanced to the Company’s ~~business~~under the credit agreement on March 13, ~~and~~2018 tois ~~enhance~~included in the additional $7.5 million funding. Upon the Company’s ~~value~~receipt of byall ~~providing~~of ~~participants~~the ~~incentive~~additional ~~benefits~~funding tounder ~~help assure~~ the ~~success~~amended ofcredit ~~any~~agreement, ~~strategic~~the ~~transaction~~total ~~concerning~~outstanding principal balance under the ~~Company~~amended credit agreement would be $22.0 million.

The Retention Plan has two primary incentive components, a severance component and a bonus component. The severance component is contingently payable upon a double trigger as follows: 1) the Company completes a strategic transaction by February 15, 2018; and 2) within six months thereafter, Company (including any subsidiary or successor thereof) terminates participant employment without cause. The bonus component is payable at various percentages of base salary, and is contingent upon the occurrence of the following events, with each event being allocated a portion of the total eligible bonus amount, depending on the participant: 1) Retention bonus in the event that the participant remains employed by the Company through February 15, 2018; 2) Company performance goal bonus in the event that the Company achieves internal performance goals in specific areas in the last four months of 2017, subject to final approval by the Board of Directors of the Company; and 3) Strategic transaction bonus in the event that the Company enters a definitive binding agreement for a strategic transaction, as defined in the plan document, by February 15, 2018. The bonus component will be payable in a combination of cash and/or RSUs to be determined by the Company in its sole discretion.

Equity Incentive Plan

On October 20, 2017, the Company adopted an amended and restated equity incentive plan (the “Restated Plan”). The Restated Plan amends the current equity incentive plan, effective as of October 1, 2017, by replacing the compensation plan limit with a fixed total limit of 435,000 common shares that may be granted under Option and RSU awards.

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

You should read the following discussion and analysis together with our condensed consolidated financial statements and the related notes that are included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that are based on our current expectations, estimates and projections about our business and operations. See “Cautionary Notice Regarding Forward-Looking Statements.” Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors, including those we discuss under “Risk Factors” and elsewhere in this Form 10-Q.

CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q contains forward-looking statements, which reflect our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this quarterly report on Form 10-Q and are subject to a number of risks, uncertainties and assumptions described under the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Forward-looking statements include, but are not limited to, statements with respect to the nature of the usage of our software-as-a-service platform, our strategy and capabilities, changing audience and advertising demand for local news and media, needs for new technology from local news and media industry, the vertical and regional expansion of our market and business opportunities, the expansion of our product offering, and the estimated number of smart device users, local news and media businesses and digital advertisers in the future. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict or are beyond our control. Consequently, readers should not place undue reliance on such forward-looking statements.

The forward-looking statements reflect our current expectations and are based on information currently available to us and on assumptions we believe to be reasonable. Forward-looking information is subject to known and unknown risks, uncertainties and other factors that may cause our actual results, activities, performance or achievements to be materially different from that expressed or implied by such forward-looking statements. These forward-looking statements include, but are not limited to:

	●	our ability to obtain additional financing;

	●	our ability to implement our business strategy;

	●	our ability to successfully integrate any acquired businesses;

	●	our overall ability to effectively respond to technology changes affecting the industry and increasing competition from other technology providers;

	●	our ability to retain existing content management system (“CMS”) platform customers or add new ones;

	●	our ability to generate new customers for our mobile technology products;

	●	the availability of advertising inventory and the market demand and prices of such inventory;

	●	our ability to introduce changes to our existing products or develop and introduce new and unproven products and our customers’ or the market’s acceptance of such products;

	●	our ability to manage our growth effectively;

	●	the recent consolidation and vertical integration within the local news broadcasting industry;

	●	the business conditions of our customers particularly in the local news broadcasting and adjacent industries;

1716

● the adoption of ASTC 3.0 and its implications on our customers; ● our ability to expand our customer base to global markets; and ● our ability to protect our intellectual property.

Although we have attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking information, there may be other factors that cause actions, events or results to differ from those anticipated, estimated or intended. The forward-looking information contained herein is made as of the date of this quarterly report on Form 10-Q and, other than as required by law, we do not assume any obligation to update any forward-looking information, whether as a result of new information, future events or results or otherwise.

This quarterly report on Form 10-Q also includes estimates and other statistical data made by independent parties and by us relating to market size and growth and other data about our industry. This data involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. In addition, projections, assumptions and estimates of our future performance and the future performance of the markets in which we operate are necessarily subject to a high degree of uncertainty and risk.

In this quarterly report on Form 10-Q, currency amounts are stated in U.S. dollars (“$”), unless specified otherwise. All references to CDN$ are to Canadian dollars.

Overview

We have had two distinct phases of product evolution in our history. From February 2013 until August 2015, we developed mobile applications and a next generation server platform. Through the acquisition of Frankly Media in August 2015, we leveraged our existing mobile and platform expertise to become a SaaS provider of content management for broadcasters and media companies.

Our mission is to help TV broadcasters and media companies transform their traditional business from just delivering content over-the-air via broadcast television to distributing content in multi-platform, digital formats on new platforms such as mobile, tablets, desktop and other connected devices. Our core product is a white-labeled software platform that enables media companies to publish their official content onto multiscreen devices, increase social interaction on those multiscreen experiences, and enable digital advertising. The platform consists of a CMS platform, native mobile and OTT applications, responsive web framework, digital video solutions and digital advertising solutions.

We generate revenues by charging monthly recurring software licensing fees, variable usage fees for our platform and sharing digital advertising revenue with our customers. We enter into written contracts with our customers pursuant to which we provide access to our online, software-as-a-service, content management platform. These contracts typically cover the use of the platform and ancillary services such as delivery and storage of video content, and access to ad-serving and analytics functionality. Many of these agreements also grant us the right to sell online advertising inventory on behalf of the customer pursuant to a revenue sharing arrangement with the customer. Our agreements are generally for a three-year term and do not provide for early termination rights. We bill our customers monthly or quarterly for the fees associated with the software license, and monthly in arrears for variable usage fees incurred by a customer’s use of our platform. We generally make advertising revenue share payments to our customers on a quarterly basis.

Our platform is currently being used by approximately 200 U.S. local news stations, mostly affiliated with large broadcasting networks such as NBC, CBS, FOX and ABC. We plan to enhance our platform in the future by expanding our offerings to other media verticals and international markets, together with investments into channel partnerships, sales and marketing, enhanced data analytics and innovative advertising products.

We acquired Worldnow in August 2015. Since the acquisition, our revenues have increased significantly, primarily as a result of the acquisition and the inclusion of Worldnow’s results in our consolidated financial statements. Our revenues increased from $6.9 million for the year ended December 31, 2015 to $22.8 million for the year ended December 31, 2016, representing a period-over-period increase of $15.9 million, or 232%. We had a net loss of $24.7 million in 2015 and $10.7 million in 2016.

Trends Affecting Our Business

Our primary customers today are local affiliate TV stations, which as an industry, are undergoing consolidation which we believe will continue in the coming years. This would result in a contraction of the number of customers available to use our services in this particular customer segment, although not necessarily in the total aggregate value of the addressable market size of this segment. In parallel, the local affiliate TV stations are facing increasing competition from companies that deliver video content over the internet, commonly referred to as “over-the-top,” or OTT. The increased competition includes both direct competition from other local affiliate TV stations that are keeping pace with these changing trends and early adoption of OTT alternatives for their user base, as well as new competitors which include a range of players from an individual YouTube star at one end, to large well-funded technology enabled companies such as Netflix, Hulu, Google, Apple and Amazon.

With such growth of OTT programming, consumers’ video content consumption preferences may shift away from existing viewing habits. As a result, many of our customers and potential customers are compelled to find new ways to deliver services and content to their consumers via the internet. We expect this pressure to become even greater as more video content becomes available online. As our customers typically do not have adequate resources in-house to adapt to this changing landscape, we expect to benefit from this trend as customers adopt our solutions to enable digital media and OTT services using our multi-platform technology and services. In fact, customers are enhancing / upgrading their websites to use the internet to deliver rich media content, such as newscasts and weather updates, to attract advertisers and to compete with other internet sites and smart phone and tablet device applications and other social media outlets.

We also see the growth of non-traditional media players that is driven by the availability of less expensive content production and distribution methods. With technology advances in the tools and platforms that enable content producers to produce content with less people and financial resources, content is further becoming more democratized. We expect our results of operations to benefit from this trend as our software-as-a-service platform further enables content producers to leverage technology to produce, distribute and monetize their content.

Another trend affecting our customers and our business is the proliferation of internet-connected devices, especially mobile devices. Smartphones, tablets and connected TVs have made it more convenient for consumers to access services and content online, including television programming. To remain competitive, our customers and potential customers must have the capability to deliver their services and products to consumers on these new devices. Our technology enables them to extend their presence beyond traditional personal computers, and we expect that some portion of our revenue growth will come from traffic on these devices.

Our business is also affected by growth in advertising on the Internet, for which the proliferation of high-speed internet access and internet-connected devices will be the principal drivers. As such, we expect to see growth in new platforms such as mobile, tablets, Internet-connected TVs, and other emerging platforms that require an advertising solutions like ours. We expect our results of operations will benefit from the growth in the number of new platforms as our customers adopt these new platforms to drive their business growth.

Key Metrics

In addition to measures of financial performance presented in our consolidated financial statements, we monitor the key metrics set forth below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts, and assess operational efficiencies.

Adjusted EBITDA

We monitor Adjusted EBITDA, a non-GAAP financial measure, to analyze our financial results and believe that it is useful to investors, as a supplement to U.S. GAAP measures, in evaluating our ongoing operational performance and enhancing an overall understanding of our past financial performance. We believe that Adjusted EBITDA helps illustrate underlying trends in our business that could otherwise be masked by the effect of the income or expenses that we exclude in Adjusted EBITDA. Furthermore, we use this measure to establish budgets and operational goals for managing our business and evaluating our performance. We also believe that Adjusted EBITDA provides an additional tool for investors to use in comparing our recurring core business operating results over multiple periods with other companies in our industry.

Adjusted EBITDA is not a recognized financial measure under U.S. GAAP and does not have a standardized meaning prescribed by U.S. GAAP. Therefore, it may not be comparable to similar financial measures presented by other issuers. Adjusted EBITDA should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with U.S. GAAP. We calculate Adjusted EBITDA as net income (loss) before interest expense, net, income tax expense, depreciation and amortization, further, adjusted to exclude certain non-cash charges and other items that we do not believe are reflective of our ongoing operating results.

~~The following unaudited table presents the reconciliation of net loss to Adjusted EBITDA for the three and nine months ended September 30, 2016 and 2017.~~18

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2017			2016			2017
Net Loss	$	(1,371,987	)	$	(3,129,135	)	$	(4,442,784	)	$	(7,037,064	)
Interest expense, net		307,932			601,909			749,706			1,859,058
Income tax expense		-			-			-			-
Depreciation and amortization		848,246			1,102,576			2,447,265			3,261,933
Stock-based compensation		276,230			262,604			859,799			774,776
Loss on disposal of assets		-			-			1,093			-
Loss on extinguishment of debt		-			38,287			-			38,287
Nasdaq listing fees		410,225			943,822			410,225			943,822
Other expense		(135,531	)		-			205,681			27,017
Adjusted EBITDA	$	335,115		$	(179,937	)	$	230,985		$	(132,171	)

The following unaudited table presents the reconciliation of net loss to Adjusted EBITDA for the three months ended March 31, 2018 and 2017.

	Three Months Ended March 31,
	2018			2017

Net Loss	$	(3,809,493	)	$	(1,503,819	)
Interest expense, net		597,096			610,205
Income tax expense		-			-
Depreciation and amortization		1,147,245			1,066,731
Stock-based compensation		235,040			228,166
Transaction costs		24,673			-
Restructuring expense		460,960			-
Retention expense		588,099			-
Other expense		-			27,017
Adjusted EBITDA	$	(756,380	)	$	428,300

Limitations of Adjusted EBITDA

Adjusted EBITDA, a non-GAAP financial measure, has limitations as an analytical tool, and should not be considered in isolation from or as a substitute for measures presented in accordance with U.S. GAAP. Some of these limitations are:

● Adjusted EBITDA does not reflect certain cash and non-cash charges that are recurring; ● Adjusted EBITDA does not reflect income tax payments that would reduce cash available to us; ● Adjusted EBITDA excludes depreciation and amortization of property and equipment and intangible assets, although these are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future; and ● Other companies, including companies in our industry, may calculate Adjusted EBITDA differently or not at all, which reduces their usefulness as a comparative measure.

Because of these limitations, Adjusted EBITDA should be considered alongside other financial performance measures, including revenues, net income (loss) and our financial results presented in accordance with U.S. GAAP.

Components of our Results of Operations

Revenue

We derive our revenue from three categories: recurring fee based revenue for use of our platform (including license fees and usage fees), revenue generated from digital advertising activities (national and local advertising) and professional services revenue.

License fees and usage fees

We enter into license agreements with customers for our CMS, video software, mobile and ~~mobile~~OTT applications. These license agreements, ~~generally~~ generally non-cancellable and multiyear, provide the customer with the right to use our application solely on a company-hosted ~~platform~~ platform or, in certain instances, on purchased encoders. The license agreements also entitle the customer to technical support. ~~Revenue~~ Revenue from these license agreements, which are accounted for as service arrangements, is recognized ratably over the license term.

We charge our customers for the optional use of our content delivery network to stream and store videos. Revenue from these fees is recognized as earned based on actual usage because it has stand-alone value and delivery is in the control of the customer. We also charge our customers for the use of our ad serving platform to serve ads under local advertising campaigns. We report revenue as earned based on the actual usage.

National and local advertising

Under national advertising agreements with advertisers, we source, create, and place advertising campaigns that run across our network of publisher sites. National advertising revenue, net of third-party costs, is shared with publishers based on their respective contractual agreements. We invoice national advertising amounts due from advertisers and remit payments to publishers for their share. Depending on the agreement with the publisher, the obligation to remit payment to the publisher is based on either billing to the advertiser or the collection of cash from the advertiser. National advertising revenue is recognized in the period during which the ad impressions are delivered. We report revenue earned through national advertising agreements either on a net or gross basis in accordance with ASC Subtopic 605-45, Revenue Recognition - Principal Agent Considerations. Under national advertising agreements wherein we do not bear inventory risk and only have credit risk on our portion of the revenue, national advertising revenues are accounted for on a net basis and the publisher is identified as the customer. Beginning in the second quarter of 2016, we began amending certain advertising agreements with our publishers to take on inventory risk and additional credit risk. Under these revised agreements, we either a) provide the publisher with a guaranteed minimum gross selling price per advertising unit delivered, wherein the greater of the actual selling price or guaranteed minimum selling price is used in determining the publisher’s share or b) provide the publisher with a fixed rate per advertising unit delivered, wherein the publisher is paid the fixed rate per advertising unit delivered irrespective of the actual selling price. Under these national advertising agreements, national advertising revenues are accounted for on a gross basis with the advertiser identified as the customer and the publisher identified as a supplier, with amounts billed to the advertiser reported as revenue and amounts due to the publisher reported as a revenue sharing expense, within cost of revenue.

Under local advertising agreements with customers, we provide local ad sales consulting and support services in exchange for monthly fees over the term of the agreement. The fees are established in the agreement with the customer in one of three ways: fixed annual amounts for an unlimited number of advertisers, flat fee paid per advertiser, or a commission rate of the local advertising revenue paid by the advertiser. Fixed amounts are recognized as revenue ratably over the contract term, and flat fee and commission-based amounts are recognized as revenue based on the revenue earned for each respective period based on actual delivery of the local advertising campaigns.

Professional services

Professional services consist primarily of installation and website design services. Installation fees are contracted on a fixed-fee basis. We recognize revenue as services are performed. Such services are readily available from other vendors and are not considered essential to the functionality of the product. Website design services are also not considered essential to the functionality of the product and have historically been insignificant; the fee allocable to website design is recognized as revenue as we perform the services.

Costs and expenses

Cost of revenue (excluding depreciation and amortization)

Cost of revenue consists of the following: compensation-related expenses of employees, primarily our client services personnel, and outsourced services that directly service our customers, infrastructure costs, licenses and computer support used directly in the delivery of service, content delivery and storage costs including ad serving costs, fees paid for content and revenue sharing expenses related to national advertising revenue.

General and administrative (excluding depreciation and amortization)

General and administrative expenses consist primarily of compensation-related expenses for executive management, finance, accounting, legal and human resources, professional fees and other administrative functions. It also includes certain technology overhead expenses that are not considered to be part of research and development expenses.

Selling and marketing

Selling and marketing expenses consist primarily of compensation-related expenses to our direct sales and marketing personnel, as well as costs related to advertising, industry conferences, and other sales and marketing programs. Advertising cost is expensed as incurred.

Research and development (excluding depreciation and amortization)

Research and development expenses consist primarily of compensation-related expenses to employees and outsourced services incurred for the research and development of, enhancements to, and maintenance and operation of our products, equipment and related infrastructure. Research and development expenses are reported net of amounts capitalized as software development costs. We account for our software development costs as internal-use software in accordance with ASC 350-40 – Intangibles, Goodwill and other Internal-Use Software because software usage by our customers is cloud-based. Development costs that do not meet the criteria of ASC 350-40 are expensed as incurred.

Depreciation and amortization

Depreciation and amortization includes depreciation and amortization of our computer hardware and software, office equipment, leasehold improvements, capitalized software development costs and intangible assets.

Other expenses

Other expenses are comprised of items that we do not believe are reflective of our ongoing operating results, such as costs incurred in integration efforts, ~~and~~ legal or other settlements, abandoned financing transactions, corporate restructuring and employee retention.

Interest expense, net

Interest expense, net consists of interest on debt and capital leases, net of interest income.

Income tax expense

Income tax expense consists of federal and state income taxes in the United States and taxes in certain foreign jurisdictions, as well as any changes to deferred tax assets or liabilities, and deferred tax valuation allowances.

2221

Results of Operations

Three Months Ended ~~September~~March 3031, ~~2017~~2018 Compared to Three Months Ended ~~September~~March 3031, ~~2016~~2017

	Three Months Ended September 30,
	Three Months Ended March 31,
	2016			2017			Variance
	2018			2017			Variance
Total Revenue	$	65,~~196~~761,~~691~~858		$	6,~~537~~359,~~308~~154		$	~~340~~(597,~~617~~296	)
Costs and operating expenses:
Cost of revenue (excluding depreciation and amortization)		2,~~677~~725,~~281~~279			32,~~307~~760,~~870~~414			~~630~~(35,~~589~~135	)
General and administrative (excluding depreciation and amortization)		12,~~992~~475,~~650~~698			1,~~869~~892,~~037~~983			~~(123~~582,~~613~~715	)
Selling and marketing		~~628~~462,~~909~~020			~~606~~663,~~383~~684			(22201,~~526~~664	)
Research and development (excluding depreciation and amortization)		~~844~~1,~~682~~079,772			1848,~~212,703~~415			~~368~~231,~~021~~357
Depreciation and amortization		~~848~~1,~~246~~147,245			1,~~102~~066,~~576~~731			~~254~~80,~~330~~514
Loss on extinguishment of debt		-			38,287			38,287
Transaction costs		24,673			-			24,673
Nasdaq listing fees		410,225			943,822			533,597
Restructuring expense		460,960			-			460,960
Other expense		(135,531	)		-			135,531
Retention expense		588,099			-			588,099
Loss from operations		(1,069,771	)		(2,543,370	)		(1,473,599	)
Other expense		-			27,017			(27,017	)
Foreign exchange gain		(5,716	)		(16,144	)		(10,428	)
Loss from operations		(3,201,888	)		(900,090	)		(2,301,798	)
Interest expense, net		307,932			601,909			293,977
Foreign exchange (gain) loss		10,509			(6,476	)		16,985
Loss before income tax expense		(1,371,987	)		(3,129,135	)		(1,757,148	)
Interest expense, net		597,096			610,205			(13,109	)
Loss before income tax expense		(3,809,493	)		(1,503,819	)		(2,305,674	)
Income tax expense		-			-			-
Net Loss	$	(13,~~371~~809,~~987~~493	)	$	(31,~~129~~503,~~135~~819	)	$	(12,~~757~~305,~~148~~674	)

The following is a breakdown of total revenue for the three months ended ~~September~~March 3031, ~~2017~~2018 compared to the three months ended ~~September 30,~~March ~~2016~~31, 2017:

Three Months Ended September 30,

Three Months Ended March 31,

2016

2017

Variance

2018

2017

Variance

Revenue:

License fees

2,~~873~~408,~~055~~719

2,~~588~~544,~~798~~213

(~~284~~135,~~257~~494

)

Advertising

2,~~415~~380,~~878~~377

2,~~775~~602,~~704~~767

~~359~~(222,~~826~~390

)

Usage fees

~~723~~694,~~947~~586

~~712~~817,~~074~~161

(11122,~~873~~575

)

Professional services and other

~~183~~278,~~811~~176

~~460~~395,~~732~~013

~~276~~(116,~~921~~837

)

Total Revenue

65,~~196~~761,~~691~~858

6,~~537~~359,~~308~~154

~~340~~(597,~~617~~296

)

License fees

License fees for the three months ended ~~September~~March 3031, ~~2017~~2018 were $2.64 million compared to $2.95 million for the comparable period of ~~2016~~2017, a a decrease of $0.31 million. The decrease was due to ~~contract~~a ~~termination~~small ~~fees~~number ~~recognized during the three months ended September 30, 2016 resulting from anticipated consolidation~~ of ~~some~~customer oflosses ~~our~~on ~~existing~~CMS ~~customers.~~license ~~The contract termination~~ fees, ~~were~~ partially offset ~~primarily~~ by growth in our next generation mobile and OTT application license fees.

Advertising

Advertising revenue for the three months ended ~~September~~March 3031, ~~2017~~2018 was $2.84 million compared to $2.46 million for the comparable period of ~~2016~~2017, ana ~~increase~~decrease of $0.42 million. The ~~increase~~decrease was primarily due to ~~amendments~~a todecrease ~~national~~in ~~advertising~~local ~~contracts with select publishers that required us to account for national~~ advertising ~~revenues~~services onbetween a gross basis as amount billed to advertisers with amounts due to publishers presented as a revenue sharing expense within cost of sales. See below for related increase to cost of sales. The remainder of the ~~increase~~two ~~was due to launch of our new product offering “Frankly Local” which expands the products offered within our local advertising business~~periods.

Usage fees

Usage fees for the three months ended ~~September~~March 3031, ~~2017~~2018 ~~and 2016~~ were $0.7 million compared to $0.8 ~~There~~million for the comparable period of 2017, a decrease of $0.1 million. The decrease was noprimarily ~~significant~~due ~~change~~to a decrease in content delivery network fees between the two periods ~~presented~~and correlates with the reduction in CMS license fees discussed above.

Professional services and other

Professional services and other for the three months ended ~~September~~March 3031, ~~2017~~2018 was $0.53 million compared to $0.24 million for the comparable ~~period~~ period of ~~2016~~2017, ana ~~increase~~decrease of $0.31 million. The ~~increase~~decrease was due to ~~additional~~less ad hoc professional services engagements in the ~~2017~~ 2018 period.

Cost of revenue (excluding depreciation and amortization)

Cost of revenue for the three months ended ~~September~~March 3031, 2018 and 2017 was ~~$3.3~~approximately ~~million compared to~~ $2.7 million ~~for the comparable period of 2016, an increase of $0~~.6 ~~million.~~There ~~The increase~~ was ~~primarily~~no ~~due~~significant ~~to the approximately $0.3 million increase in revenue sharing~~change ~~expense~~between ~~related to advertising as described above. The remainder of~~ the ~~increase~~periods was primarily due to launch of our new product offering “Frankly Local” which expands the products offered within our local advertising business, and the direct costs associated with this new businesspresented.

General and administrative (excluding depreciation and amortization)

General and administrative expense for the three months ended ~~September~~March 3031, ~~2017~~2018 was $12.95 million compared to $21.09 million for the comparable period of ~~2016~~2017, aan ~~decrease~~increase of $0.16 million. The ~~decrease~~increase was primarily due to a bad debt reserve in the amount of $0.7 million made in the first quarter of 2018 relating to one advertising customer. The above increase was partially offset by the headcount reduction related to the Company wide reduction,-in-force ~~including~~(“RIF”) ~~resignation~~which ofwas implemented by the ~~former~~Company ~~Chief~~in mid February ~~Product~~2018 ~~Officer~~along ~~effective~~with ~~January~~reduction ~~31,~~in ~~2017~~rent and ~~decrease~~rent inrelated ~~technology~~expenses ~~overhead~~associated with the San Francisco office.

Selling and marketing

Selling and marketing expense for the three months ended ~~September~~March 3031, 2018 was $0.5 million compared to $0.7 million for the comparable period of 2017, ~~and~~a ~~2016~~decrease ~~was~~of $0.62 million. ~~There~~The decrease was noprimarily ~~significant~~due ~~change~~to headcount reduction related to the Company wide RIF which ~~between~~was implemented by the ~~periods~~Company ~~presented~~in mid February 2018.

Research and development (excluding depreciation and amortization)

Research and development expense for the three months ended ~~September~~March 3031, ~~2017~~2018 was $1.21 million compared to $0.8 million for the comparable period of ~~2016~~2017, an increase of approximately $0.43 million. The increase was ~~partially~~primarily due to aincreases ~~reduction of $0.1 million~~ in ~~capitalized~~outsourced research ~~software~~and development ~~costs~~related ~~compared~~ to ~~the~~acceleration ~~2016~~of ~~period.~~our ~~The~~product ~~remainder~~roadmap. ofThis ~~the increase~~ was ~~due~~partially tooffset ~~increases~~by in headcount ofreduction ~~our technology~~related ~~personnel~~to ~~along~~the Company ~~with~~wide ~~increases~~RIF inwhich ~~outsourced~~was ~~research~~implemented ~~and~~by ~~development~~the ~~related~~Company toin ~~acceleration~~mid ofFebruary ~~our product roadmap~~2018.

Depreciation and amortization

Depreciation and amortization expense was $1.1 million for the three months ended ~~September~~March 3031, ~~2017~~2018 ~~compared~~and ~~to $0~~2017.8 ~~million~~There ~~for~~was ~~the~~no ~~comparable period~~significant ~~of 2016, an increase of approximately $0.3 million. The increase resulted from an increase to amortization of capitalized~~change ~~software~~between ~~costs due to~~ the ~~increased~~periods ~~software development throughout 2016 and 2017 related to our next-generation content management system, native mobile applications and OTT applications~~presented.

~~Nasdaq~~Restructuring ~~listing fees~~expense

~~Nasdaq~~Restructuring ~~listing~~expense ~~fees were $0.9 million~~ for the three months ended ~~September~~March 3031, ~~2017~~2018 ~~compared~~was to $0.45 million compared to $0 for the comparable period of ~~2016~~2017, an increase of approximately $0.5 million. The increase was primarily due to ~~write-off~~the ofCompany ~~all~~wide ~~deferred~~RIF ~~financing~~which ~~costs~~was ~~associated with~~implemented ~~our~~by ~~registration~~the ~~process~~Company in mid ~~the~~February U2018.S inThe ~~the~~expenses ~~third~~included ~~quarter~~in ofthis ~~2017.~~line Asitem arepresent ~~result~~one-time oftermination ~~the~~benefits ~~GEI~~(severance) ~~complaint~~for ~~filed~~employees ~~on July 21, 2017,~~that wewere ~~decided~~a topart ~~postpone~~of the URIF.S. ~~IPO~~In ~~until~~addition, ~~the~~restructuring ~~resolution~~expense ofalso ~~the~~included ~~litigation~~contract istermination ~~more~~fees ~~certain~~for one vendor.

24Retention expense

Retention expense was $0.6 million for the three months ended March 31, 2018 compared to $0 for the comparable period of 2017, an increase of approximately $0.6 million. The increase was due to $588,000 relating to our employee retention plan which was rolled out in connection with the strategic investor search in the fourth quarter of 2017.

Interest expense, net

Interest expense, net was $0.6 million for the three months ended ~~September~~March 3031, ~~2017~~2018 ~~compared~~and ~~to $0~~2017.3 ~~million~~There ~~for the comparable period of 2016, an increase of $0.3 million. The increase~~ was ~~primarily~~no ~~due~~significant tochange ~~the~~between ~~$15 million Worldnow Promissory Notes, as defined below, issued in connection with~~ the ~~acquisition of Worldnow and the $14.5 million non-revolving credit facility with Raycom,~~ ~~which~~periods ~~closed on September 1, 2016 and refinanced the Worldnow Promissory Notes~~presented. The 2016 period included two months of interest expense of approximately $125,000 on the Worldnow Promissory Notes and one month of interest expense of approximately $160,000 on the non-revolving credit facility with Raycom. The 2017 period included three months of interest expense of approximately $509,000 on the non-revolving credit facility with Raycom, an increase of approximately $224,000.

Income tax expense

No income tax expense was recognized during the periods presented.

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

	Nine Months Ended September 30,
	2016			2017			Variance
Total Revenue	$	16,664,579		$	19,390,089		$	2,725,510
Costs and operating expenses:
Cost of revenue (excluding depreciation and amortization)		5,761,780			9,142,558			3,380,778
General and administrative (excluding depreciation and amortization)		6,375,419			5,999,894			(375,525	)
Selling and marketing		2,257,775			2,013,174			(244,601	)
Research and development (excluding depreciation and amortization)		2,901,480			3,161,646			260,166
Depreciation and amortization		2,447,265			3,261,933			814,668
Loss on disposal of assets		1,093			-			(1,093	)
Loss on extinguishment of debt		-			38,287			38,287
Nasdaq listing fees		410,225			943,822			533,597
Other expense		205,681			27,017			(178,664	)
Loss from operations		(3,696,139	)		(5,198,242	)		(1,502,103	)
Foreign exchange gain		(3,061	)		(20,236	)		(17,175	)
Interest expense, net		749,706			1,859,058			1,109,352
Loss before income tax expense		(4,442,784	)		(7,037,064	)		(2,594,280	)
Income tax expense		-			-			-
Net Loss	$	(4,442,784	)	$	(7,037,064	)	$	(2,594,280	)

The following is a breakdown of total revenue for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016:

	Nine Months Ended September 30,
	2016		2017		Variance
Revenue:
License fees	$	8,106,932	$	7,773,859	$	(333,073	)
Advertising		5,523,774		8,026,011		2,502,237
Usage fees		2,189,793		2,362,983		173,190
Professional services and other		844,080		1,227,236		383,156
Total Revenue	$	16,664,579	$	19,390,089	$	2,725,510

License fees

License fees for the nine months ended September 30, 2017 were $7.8 million compared to $8.1 million for the comparable period of 2016, a decrease of $0.3 million. The decrease was due to contract termination fees recognized during the nine months ended September 30, 2016 resulting from anticipated consolidation of some of our existing customers. The contract termination fees were partially offset primarily by growth in our next generation mobile and OTT application license fees.

Advertising

Advertising revenue for the nine months ended September 30, 2017 was $8.0 million compared to $5.5 million for the comparable period of 2016, an increase of $2.5 million. The increase was primarily due to amendments to national advertising contracts with select publishers that required us to account for national advertising revenues on a gross basis as amount billed to advertisers with amounts due to publishers presented as a revenue sharing expense within cost of sales. See below for related increase to cost of sales.

Usage fees

Usage fees for the nine months ended September 30, 2017 were $2.4 million compared to $2.2 million for the comparable period of 2016, an increase of $0.2 million. The increase was primarily due to increases in local ad serving revenue.

Professional services and other

Professional services and other for the nine months ended September 30, 2017 was $1.2 million compared to $0.8 million for the comparable period of 2016, an increase of $0.4 million. The increase was due to additional ad hoc professional services engagements in the 2017 period.

Cost of revenue (excluding depreciation and amortization)

Cost of revenue for the nine months ended September 30, 2017 was $9.1 million compared to $5.8 million for the comparable period of 2016, an increase of $3.3 million. The increase was primarily due to the approximately $2.5 million increase in revenue sharing expense related to advertising as described above. The remaining increase was primarily due to additional software licenses used directly in service delivery relating to the advertising business.

General and administrative (excluding depreciation and amortization)

General and administrative expense for the nine months ended September 30, 2017 was $6.0 million compared to $6.4 million for the comparable period of 2016, a decrease of $0.4 million. The decrease was due to headcount reduction, including resignation of the former Chief Product Officer effective January 31, 2017 and decrease in technology overhead.

Selling and marketing

Selling and marketing expense for the nine months ended September 30, 2017 was $2.0 million compared to $2.3 million for the comparable period of 2016, a decrease of $0.3 million. The decrease was primarily due to headcount reduction.

Research and development (excluding depreciation and amortization)

Research and development expense for the nine months ended September 30, 2017 was $3.2 million compared to $2.9 million for the comparable period of 2016, an increase of approximately $0.3 million. The increase was primarily due to a reduction of $0.9 million in capitalized software development costs compared to the 2016 period. This increase was offset by a reduction in headcount of the technology department and reduction in outsourced research and development relating to the legacy instant messaging apps.

Depreciation and amortization

Depreciation and amortization expense was $3.3 million for the nine months ended September 30, 2017 compared to $2.4 million for the comparable period of 2016, an increase of approximately $0.9 million. The increase resulted from an increase to amortization of capitalized software costs due to the increased software development throughout 2016 and 2017 related to our next-generation content management system, native mobile applications and OTT applications.

Nasdaq listing fees

Nasdaq listing fees were $0.9 million for the nine months ended September 30, 2017 compared to $0.4 million for the comparable period of 2016, an increase of approximately $0.5 million. The increase was due to write-off of all deferred financing costs associated with our registration process in the U.S in the third quarter of 2017. As a result of the GEI complaint filed on July 21, 2017, we decided to postpone the U.S. IPO until the resolution of the litigation is more certain.

Interest expense, net

Interest expense, net was $1.9 million for the nine months ended September 30, 2017 compared to $0.8 million for the comparable period of 2016, an increase of $1.1 million. The increase was primarily due to the $15 million Worldnow Promissory Notes, as defined below, issued in connection with the acquisition of Worldnow and the $14.5 million non-revolving credit facility with Raycom, which closed on September 1, 2016 and refinanced the Worldnow Promissory Notes. The 2016 period included eight months of interest expense of approximately $500,000 on the Worldnow Promissory Notes and one month of interest expense of approximately $160,000 on the non-revolving credit facility with Raycom. The 2017 period included nine months of interest expense of approximately $1.5 million on the non-revolving credit facility with Raycom, an increase of approximately $0.9 million.

Income tax expense

No income tax expense was recognized during the periods presented.

Liquidity and Capital Resources

Since inception, we have financed our cash requirements (including acquisitions) primarily through the issuance of securities and convertible promissory notes. ~~Due~~As ~~to our start-up status and limited revenue generated from operations, we have had recurring losses and negative cash flows from operating activities. With the acquisition~~ of ~~Worldnow~~March ~~on August 25~~31, ~~2015~~2018, we ~~have been able to utilize the cash flows from operating activities of the acquired business to help finance and support our operations. As of September 30, 2017, we~~ had total current assets of approximately $54.51 million and total current liabilities of approximately $1012.26 million. As of ~~September~~ 30March 31, ~~2017~~2018, our principal sources of liquidity were our cash and trade accounts receivable. Our cash and cash equivalents and trade accounts receivable, net balances as of ~~September~~March 3031, ~~2017~~2018 were $10.38 million and $2.72 million, respectively.

As of ~~September~~March 3031, ~~2017~~2018, we had an accumulated deficit of $6074.76 million representative of recurring losses since inception. Additionally, we ~~had~~have not generated positive cash flow from operations since inception, ~~except~~when inexcluding ~~2016.~~changes Inin ~~the~~working ~~first~~capital. ~~nine months of 2017, we~~Beginning ~~used~~January ~~cash in operations~~1, ~~and in the third quarter of 2017 we paid off our revolving credit line with Silicon Valley Bank. Also~~2018, in the ~~third~~billing ~~quarter~~for ofall ~~2017,~~services weprovided ~~decided~~ to ~~postpone~~Raycom ~~our~~are USbeing ~~IPO~~applied ~~and expensed deferred financing costs of $943,822 related~~ to the ~~IPO~~ ~~effort.~~advance ~~Lastly,~~agreement balance as of ~~September 30~~December 31, 2017, ~~we were~~ in ~~compliance~~the ~~with~~amount ~~all~~of ~~debt~~$4,896,585 ~~covenants~~($3,805,278 ~~but may not be in compliance~~ as of ~~December~~ March 31, ~~2017~~2018) ~~with~~and ~~two~~Raycom ~~financial~~will ~~covenants~~not ~~which~~be ~~have~~required ato ~~measurement~~make ~~date~~cash ofpayments ~~December~~for services ~~31,~~provided ~~2017.~~by Weus ~~will~~until ~~need additional financing in~~ the ~~near~~balance ~~term~~has tobeen ~~continue~~fully ~~operations~~repaid. These conditions raise substantial doubt about our ability to continue as a going concern ~~into~~within one year after the ~~foreseeable~~issuance ~~future~~of our financial statements.

WeTo ~~expect~~reduce our operating cash needs, in February 2018, we executed a RIF that ~~through~~removed approximately 20 full-time employees from our headcount. In addition, we subleased our remaining office space in San Francisco, CA and are pursuing other areas where operating expenses can be reduced. On March 13, 2018, we received $1 million under the ~~next~~existing 12credit ~~months~~agreement ~~from~~with Raycom, bringing the ~~date~~total ofoutstanding ~~this~~principal ~~filing~~balance under the credit agreement to $15.5 million. On May 8, 2018, we entered into an amendment of the 2016 credit agreement, whereby Raycom will ~~require~~provide ~~external~~us with an additional $7.5 million of funding, to be ~~sustain~~paid ~~operations~~in ~~and~~ installments over a six-month period, subject to ~~follow~~our ~~through~~achievement of certain operational milestones. The $1.0 million advanced to us on March 13, 2018 is included in the ~~execution~~additional of$7.5 ~~our~~million ~~business~~funding ~~plan~~noted above. WeUpon ~~are~~our ~~considering~~receipt ~~several~~of ~~strategic~~all ~~alternatives~~of ~~which~~the additional ~~may~~funding ~~include~~under ~~raising~~the amended credit agreement, the total outstanding principal balance under the amended credit agreement ~~funds~~would ~~from~~be ~~strategic~~$22.0 ~~sources~~million. The additional credit facility will be primarily used to get us current with our vendor and wecustomer ~~have~~national revenue ~~retained~~share payables as well as offset the ~~corporate~~operational ~~advisory~~cash ~~services~~outflow ofassociated ~~Waller~~with ~~Capital~~the ~~Partners,~~utilization anof ~~independent~~the ~~investment~~$3.8 million ~~bank~~advance ~~and~~agreement ~~advisory~~balance ~~firm,~~as toof ~~explore~~March ~~and~~31, ~~evaluate~~2018 ~~strategic~~discussed ~~options~~above. There can be no assurance that ~~our~~we ~~plans~~ will ~~materialize~~achieve ~~and/or~~the operational milestones to obtain the additional advances from Raycom, or that wethose advances, if obtained, will beprovide ~~successful~~adequate infunding to sustain our ~~efforts~~operations toand ~~obtain~~execute our business plan through the ~~funding~~next to12 ~~cover~~months ~~working~~from ~~capital~~the ~~shortfalls~~date of this filing.

Operating Activities

Net cash used in operating activities for the ~~nine~~three months ended ~~September~~March 3031, ~~2017~~2018 was $0.78 million compared to cash ~~provided~~used byin operating activities of $01.4 million for the comparable period of ~~2016~~2017, a decrease in cash used of $10.16 million. The decrease in cash used resulted primarily from an increase of $1.68 million ofin ~~net~~changes ~~loss~~in ~~adjusted~~operating toassets ~~add~~and ~~back non-cash charges~~liabilities, partially offset by ana ~~increase~~ decrease of $01.52 million inof ~~changes in~~net ~~operating~~loss ~~assets~~adjusted ~~and~~to ~~liabilities~~add back non-cash charges.

Investing Activities

Net cash used in investing activities for the ~~nine~~three months ended ~~September~~March 3031, ~~2017~~2018 was $20.57 million compared to $30.46 million for the comparable period of ~~2016~~2017, aan ~~decrease~~increase in cash used of $0.91 million. The ~~decrease~~increase ~~resulted~~was ~~primarily~~due ~~from~~to aan ~~decrease~~increase of $0.91 million in capitalized software costs. Beginning in 2016, we started a large scale development effort for the development of our next-generation content management system, native mobile applications, connected TV applications and mobile responsive web products. Capitalized software costs were reduced to a more normalized level in the first nine months of 2017.

Financing Activities

Net cash ~~used~~provided inby financing activities for the ~~nine~~three months ended ~~September~~March 3031, ~~2017~~2018 was $1.60 million compared to cash used in financing activities of $20.31 million for the comparable period of ~~2016~~2017, aan ~~decrease~~increase in cash provided of $01.71 million. The ~~decrease~~increase was ~~primarily~~ due to aan ~~decrease~~increase ofin ~~$0.6~~proceeds ~~million~~from in the ~~change in~~issuance ~~restricted~~of ~~cash~~debt ~~along with a decrease~~ of $01.60 million. inOn ~~revolving~~March ~~credit~~13, ~~facility payments~~2018, ~~partially~~we ~~offset~~received by$1 million of the additional $01.5 million ~~decrease~~ inavailable ~~net~~under ~~proceeds~~the ~~from~~existing ~~issuance~~credit offacility ~~debt~~with ~~relating~~Raycom, tobringing the ~~August~~total ~~2016~~outstanding ~~Refinancing~~principal ~~described~~balance ~~below~~to $15.5 million.

Unit Purchase Agreement and Worldnow Promissory Notes

On July 28, 2015, we signed an agreement (the “Unit Purchase Agreement”) to purchase the outstanding units of Gannaway Web Holdings, LLC, operating as Worldnow, pursuant to which we issued the Worldnow Promissory Notes to Gannaway Entertainment Inc. (“GEI”) and Raycom Media, Inc. (“Raycom”) in the aggregate principal amounts of $11 million and $4 million, respectively, as partial consideration for their respective membership interests in Gannway Web Holdings, LLC. The Worldnow Promissory Notes bore simple interest at a rate of 5% per year.

The August 2016 Refinancing

On August 31, 2016, we entered into a $14.5 million credit facility (the “Credit Facility”) under a credit agreement, as amended on December 20, 2016, March 30, 2017, ~~and~~May ~~June~~25, 262017, October 25, 2017, December 27, 2017 and March 28, 2018 (the “Credit Agreement”) with Raycom. The proceeds of the Credit Facility were used to pay in full the $11 million promissory note (the “GEI Promissory Note”) issued to GEI and $3 million of the $4 million promissory note issued to Raycom (the “Original Raycom Note” and together with the GEI Promissory Note, the “Worldnow Promissory Notes”), each issued in connection with the acquisition of Gannaway Web Holdings, LLC, now Frankly Media. In addition, we issued to Raycom warrants to purchase 871,160 common shares (the “Raycom Warrants”) at a price per share of CDN$8.50 ($6.63 based on the exchange rate at August 18, 2016) and repaid in full our $2.0 million outstanding revolving credit facility with Bridge Bank (the “Bridge Bank Loan”). ~~Subject~~ Subject to Raycom’s discretion, we also have an additional $1.5 million available for borrowing under the Credit Facility. We also entered into a share purchase agreement, as amended on December 20, 2016 and March 30, 2017 (the “Raycom SPA”) ~~pursuant~~ pursuant to which we converted $1 million of the Original Raycom Note into 150,200 common shares. We refer to these transactions as the “August 2016 Refinancing”.

Securities Purchase Agreement

Pursuant to the Raycom SPA, we issued to Raycom an aggregate of 150,200 common shares for a purchase price of CDN$1,276,700 (or $1 million based on the exchange rate at August 18, 2016) in repayment of $1 million of the Original Raycom Note. Raycom’s 397,125 Class A restricted shares were also converted into our common shares on a one-for-one basis. Under the Raycom SPA, we agreed to to enlarge our Board of Directors to seven (7) directors, subject to shareholder approval, within 90 days of August 31, 2016. In In addition, so long as Raycom held not less than 20% of our issued and outstanding common shares calculated on a fully diluted basis, it had (i) the designation rights to two (2) directors as management’s nominees for election to our Board, one of whom is our current Board member, Joseph G. Fiveash, III and one of which must be an independent director as defined in Rule 5605(a)(2) of the Nasdaq Rules, and (ii) approval rights to one of the independent directors named as management’s nominees for election to our Board outside of the two Raycom designated directors. Pursuant to the SPA, Raycom had designated Joseph Fiveash as one of its director designees. On December 20, 2016, we entered into an amendment to the Raycom SPA and Credit Agreement, pursuant to which Raycom and we agreed to extend the time period for enlargement of the Board to seven members from 90 days following August 31, 2016, to the earlier of, and subject to shareholder approval: (a) 45 days following the effective date of the Form S-1 registration statement for our U.S. IPO, or (b) April 15, 2017. On March 30, 2017, we entered into amendments to the Raycom SPA and ~~Credit~~ Credit Agreement, pursuant to which Raycom and we agreed to further extend the time period for enlargement of the Board to seven ~~members~~ members to the earlier of, and subject to shareholder approval: (a) 45 days following the effective date of our Form S-1 registration statement for our U.S. IPO, or (b) May 31, 2017. On May 25, 2017, we entered into amendments to the Raycom SPA and Credit Agreement, pursuant to which Raycom and we agreed to further extend the time period for the successful listing of our common shares on Nasdaq from May 31, 2017 to June 30, 2017 and the enlargement of the Board to seven members to the earlier of, and subject to shareholder approval: (a) 45 days following the effective date of the Form S-1 registration statement for our U.S. IPO, or (b) July 31, 2017. On October 25, 2017, we entered into amendments to the Raycom SPA and Credit Agreement, pursuant to which Raycom and we agreed to further extend the time period for the successful listing of our common shares on Nasdaq from June 30, 2017 to December 31, 2017 and the enlargement of the Board to seven members to December 31, 2017, subject to shareholder approval. On December 27, 2017, we entered into amendments to the Raycom SPA and Credit Agreement, pursuant to which Raycom and we agreed to extend the date we become subject to various financial covenant ratios from December 31, 2017 to March 31, 2018 and the enlargement of the Board to seven members from December 31, 2017 to March 31, 2018, subject to shareholder approval. On March 28, 2018, we entered into amendments to the Raycom SPA and Credit Agreement, pursuant to which Raycom and we agreed to extend the date we become subject to various financial covenant ratios from March 31, 2018 to June 30, 2019, the enlargement of the Board to seven members from March 31, 2018 to June 30, 2018, subject to shareholder approval and agreed that interest payments on the outstanding Loan balance for the period commencing on January 1, 2018 and continuing thereafter will be suspended, and each such suspended interest payment will be added to the principal balance of the Loan, and the 12% rate for overdue interest will not apply to such suspended interest.

Credit Agreement

Pursuant to the Credit Agreement, we entered into the Credit Facility with Raycom in the principal amount of $14.5 million and issued to Raycom Warrants to purchase 871,160 common shares at a price per share of CDN$8.50 ($6.63 based on the exchange rate at August 18, 2016). The Credit Facility terminates on August 31, 2021. The warrants have a 5-year term but upon a repayment of principal under the Credit Agreement, a pro-rata portion thereof will expire on the date which is later of (a) August 31, 2017 or (b) 30 days from the date of each principal repayment. Upon each payment of principal, the number of warrants that will expire will equal the product of the (i) then outstanding number of warrants and (ii) the principal repayment divided by the then outstanding principal balance of the loan. The exercise price and the number of shares underlying the warrants will be subject to adjustment as set forth in the Credit Agreement.

Subject to approval of Raycom, at its sole discretion, we may require further loans up to an aggregate amount of $1.5 million. We will pay interest on each loan outstanding at any time at a rate per annum of 10%. Interest will accrue and be calculated, but not compounded, daily on the principal amount of each loan on the basis of the actual number of days each loan is outstanding and will be compounded and payable monthly in arrears on each interest payment date. To the maximum extent permitted by applicable law, we will pay interest on all overdue amounts, including any overdue interest payments, from the date each of those amounts is due until the date each of those amounts is paid in full. That interest will be calculated daily, compounded monthly and payable on demand of Raycom at a rate per annum of 12%. We have the option to repay all or a portion of loans outstanding under the Credit Facility without premium, penalty or bonus upon prior notice to Raycom and repayment of all interest, fees and other amounts accrued and unpaid under the Credit Facility.

We also agreed to make the following mandatory repayments:

(a) $2 million prior to August 31, 2019;

(b) commencing on November 30, 2019 and on the last day of the month of each three month period thereafter, an amount of $687,500 per three month period;

(d) upon a successful listing of our common shares on Nasdaq with a capital raise of between $8 million to $11 million, mandatory repayment in the amount of $2 million, which will be applied toward the repayment obligation required by (a) above if completed by June 30, 2017;

(e) upon a successful listing of our common shares on Nasdaq with a capital raise of more than $12 million, a mandatory repayment in the amount of $3 million which will be applied toward the $2 million repayment obligation required by (a) above if completed by June 30, 2017 and any amounts raised in excess of $2 million will be applied pro rata to repayment obligations required by (b) above commencing November 30, 2019; and

(f) commencing on the financial year ending December 31, 2017, and each financial year ending thereafter, 100% of the current year excess cash flow amount in excess of $2 million must be paid to Raycom as a mandatory repayment amount no later than May 1 of the following year until a total leverage ratio of not more than 3:1 has been met for such fiscal year, at which point 50% of the current year excess cash amount in excess of $2 million will be paid to Raycom as mandatory repayment amounts. Such excess cash flow payments will be applied pro rata to reduce other mandatory payments due thereunder.

The mandatory prepayment provision described in subsection (c) above is not applicable to the December Private Placement (as described below), the SVB Line of Credit (as described below) or a U.S. public offering of equity resulting in proceeds to us of less than $8 million.

In addition, we must maintain certain leverage ratios and interest coverage ratios beginning the fiscal quarter ending December 31, 2017. The leverage ratios range from 4:1 to 2.5:1 and 2:1 to 3.5:1 for the interest coverage ratio. On December 27, 2017, the Credit Agreement was amended to extend the period for commencement of the leverage ratio and interest coverage ratio covenants from the calendar quarter ending December 31, 2017 to the calendar quarter ending March 31, 2018. On March 28, 2018, the Credit Agreement was amended to extend the period for commencement of the leverage ratio and interest coverage ratio covenants from the calendar quarter ending March 31, 2018 to the calendar quarter ending June 30, 2019. We are also subject to certain ~~covenants~~ covenants relating to, among others, indebtedness, fundamental corporate changes, dispositions, acquisitions and distributions.

Upon an event of default, Raycom may by written notice terminate the facility immediately and declare all obligations under the Credit Agreement and the related loan documents, whether matured or not, to be immediately due and payable. Raycom may also as and by way of collateral security, deposit and retain in an interest bearing account, amounts received by Raycom from us under the Credit Agreement and the related loan documents and realize upon the Security Interest Agreements, Guaranty Agreements and Pledge Agreement as described below. If we fail to perform any of our obligations under the Credit Agreement and the related loan documents, Raycom may upon 10 days’ notice, perform such covenant or agreement if capable. Any amount paid by Raycom under such covenant or agreement will be repaid by us on demand and will bear interest at 12% per annum.

Guaranty Agreements, Security Interest Agreements and Pledge Agreement

In connection with the Credit Agreement, our subsidiaries Frankly Co. and Frankly Media LLC have entered into Guaranty Agreements whereby Frankly Co. and Frankly Media LLC have guaranteed our obligations under the Credit Agreement. In addition, each of Frankly Inc., Frankly Co. and Frankly Media LLC have entered into security interest agreements (the “Security Interest Agreements”) pursuant to which Raycom has first priority security interests in substantially all of our assets. Under the Security Interest Agreements, we do not have a right to sell or otherwise dispose of all or part of the collateral except in the ordinary course of business that are not material. Frankly Media LLC has also entered into an Intellectual Property Pledge Agreement pursuant to which it has granted a security interest in all of its intellectual property to Raycom. We have also (i) deposited our intellectual property in escrow accounts for the benefit of Raycom, (ii) in furtherance of the security interest granted to Raycom in our equity interest in Frankly Media LLC, entered into a pledge agreement and a control agreement pursuant to which we granted Raycom control of the equity interest of Frankly Media LLC and (iii) entered into an insurance transfer and consent assigning our rights and payments under insurance policies covering our operations and business naming Raycom as mortgagee, first loss payee and additional named insured.

In addition, we have entered into a Pledge Agreement pursuant to which we granted Raycom a security interest on substantially all the assets and securities of our current and future subsidiaries.

Upon an event of default, we will be required to deposit all interests, income, dividends, distributions and other amounts payable in cash in respect of the pledged interests into a collateral account over which Raycom has the sole control and may apply such amounts in its sole discretion to the secured obligations under the Credit Agreement. Upon the cure or waiver of a default, Raycom will repay to us all cash interest, income, dividends, distributions and other amounts that remain in such collateral account. In addition, upon an event of default, Raycom has the right to (i) transfer in its name or the name of any of its agents or nominees the pledged interests, (ii) to exercise all voting, consensual and other rights and power and any and all rights of conversion, exchange, subscription and other rights, privileges or options pertaining to the pledged interests whether or not transferred into the name of Raycom, and (iii) to sell, resell, assign and deliver all or any of the pledged interests. We have also agreed to use our best efforts to cause a registration under the Securities Act and applicable state securities laws of the pledged interests upon the written request from Raycom.

Raycom may transfer or assign, syndicate, grant a participation interest in or grant a security interest in, all or any part of its rights, remedies and obligations under the Credit Agreement and the related loan documents, without notice or our consent.

Repayment of Bridge Bank Loan

As a condition to entering into the Credit Agreement, on August 31, 2016, we fully repaid the Bridge Bank Loan.

Western Alliance Bank Letter of Credit

Intercompany Loan Agreements

Pursuant to a loan agreement dated February 17, 2015 by and between Frankly Inc. and Frankly Co., Frankly Co. has agreed to transfer to Frankly Inc. up to $15 million to cover expenditures of the Company. The interest rate of the loan is fixed at 3% annually and installments will be made until 2020. Frankly Co. unilaterally determines the number, the amount and the frequency of each installment. As of December 31, 2016, there was approximately $13.9 million outstanding.

Reverse Stock Split

On February 3, 2017, we effected the one-for-seventeen Reverse Stock Split of our issued and outstanding common shares. Upon effectiveness of the Reverse Stock Split, every 17 common shares outstanding decreased to one common share.

Raycom Advance

On December 22, 2016, pursuant to an amendment (the “Advance Agreement”), to the Website Software and Services Agreement (the “Raycom Services Agreement”) dated October 1, 2011 by and between the Company and Raycom, Raycom pre-paid $3 million of future fees for services (the “Original Raycom Advance”) to be provided by the Company pursuant to the Raycom Services Agreement. Pursuant to the Advance Agreement, if we had completed an equity raise of at least $5 million before March 31, 2017, then we could have either (i) refunded the prepayment to Raycom within 30 days of the completion of the equity raise along with an additional $30,000 for fees in connection with the prepayment by Raycom, or (ii) applied the prepayment to services provided by us for the year ending December 31, 2017 in which case Raycom would have received a discount of $300,000 (the “Discount”) for the services to be provided by us. If we did not complete an equity raise of at least $5 million by March 31, 2017, then the prepayment would have been applied to the services to be provided for the year ending December 31, 2017 and the Discount will be applied to services to be provided by us for the year ending December 31, 2017.

On March 30, 2017, we entered into an amendment to the Advance Agreement (the “Second Raycom Advance”) pursuant to which Raycom pre-paid an additional $2 million of future fees for services to be provided by the Company pursuant to the Raycom Services Agreement. The amendment also extended the date for completing the equity raise and if we did not complete an equity raise of at least $5 million by May 31, 2017, then the prepayment would have been applied to the services to be provided for the period commencing June 1, 2017 and Raycom would have received the Discount for services to be provided by us for the year ending December 31, 2017.

On May 25, 2017, we entered into a further amendment to the Advance Agreement, pursuant to which if we did not complete an equity raise of at least $5 million by June 30, 2017, then the prepayment would have been applied to the services to be provided for the period commencing July 1, 2017 and Raycom would have received the Discount for services to be provided by us for the year ending December 31, 2017.

On October 6, 2017, we entered into a further amendment to the Advance Agreement, pursuant to which the prepayment will be applied to the services to be provided for the period commencing January 1, 2018. Additionally, Raycom will receive an additional $180,000 discount (the “Second Discount”) in the amount of their 2018 fees.

Silicon Valley Bank Line of Credit

On December 28, 2016, we, Frankly Media and Frankly Co. had entered into the Loan and Security Agreement pursuant to which SVB has provided us with a $3 million revolving line of credit (the “SVB Line of Credit”). Borrowings under the SVB Line of Credit accrued interest at a floating per annum rate equal to 2.25% above the Prime Rate published in the Wall Street Journal, which interest was payable monthly.

The SVB Line of Credit was secured by substantially all of our and our subsidiaries’ assets. We and our subsidiaries had also entered into Intellectual Property Security Agreements pursuant to which we and our subsidiaries have granted a security interest in all of our respective rights, titles and interests in our intellectual property. Pursuant to an intercreditor agreement dated December 28, 2016 (the “Intercreditor Agreement”) between Raycom, The Teachers’ Retirement Systems of Alabama, as agent for Raycom (“TRS”) and SVB, Raycom had a first priority security interest in substantially all of our assets other than accounts receivable, cash, cash accounts, short and long term investments, all bank accounts including, without limitation, all operating accounts, depository accounts, savings accounts, and investment accounts, and all property contained therein, stock, securities, and investment property, and all proceeds arising out of any of the foregoing (the “SVB Priority Collateral”) while SVB had a first priority security interest in the SVB Priority Collateral.

On August 1, 2017, the Company repaid all amounts owed to SVB under these agreements and such agreements were terminated.

December Private Placement

In December 2016, we issued a total aggregate of 85,131 units (“Units”), with each Unit consisting of one common share and one-half warrant to acquire a common share (each whole warrant entitled the holder to purchase one common share for CDN$9.52 for a period of 24 months from the date of issuance, a “Private Placement Warrant”) at a price of CDN$7.65 per Unit raising gross proceeds of CDN$651,250 or $486,116 and net proceeds of approximately CDN$619,660 or $462,536, net of 6% finders’ fee discussed below. Each Private Placement Warrant entitles the holder thereof to purchase one additional common share upon payment of the exercise price of CDN$9.52 for a period of 24 months from issuance. In connection with sale of Units outside of the U.S., we paid finders’ fees of 6% cash totaling CDN$31,590 or $23,580 to Canaccord Genuity Corp. and Industrial Alliance Securities Inc. (the “Private Placement Finders”). We also issued the Broker Warrants to purchase 4,129 common shares (the “Broker Warrants” and together with the Private Placement Warrants, the “December Warrants”) to the Private Placement Finders, representing 6% of the total aggregate Units placed by the Private Placement Finders. 70,294 Units issued pursuant to the exemption under Regulation S are subject to a one year distribution compliance period and an offer and sale of such securities cannot be made to a U.S. person or for the account or benefit of a U.S. person until the expiration of the one year distribution compliance period. In connection with the December Private Placement, we incurred $61,131 in share issuance costs, offset by $9,319, being the value attributed to the Broker Warrants, for net share issuance costs of $51,812. The net proceeds from such offering will be used for general working capital and product development. We refer to these transactions as the “December Private Placement”.

Recent Developments

Legal Proceedings

On July 21, 2017, a complaint was filed by GEI, Albert C. Gannaway III, and Samantha Gannaway, and was served on August 4, 2017, captioned Gannaway Entertainment, Inc., Albert C. Gannaway III, Samantha Gannaway V.S. Frankly Inc., Steve Chung, SKP America, LLC, JJR Private Capital Limited Partnership, Ron Schmeichel, Louis Schwartz in the United States District Court for the Northern District of California against Frankly, our Chief Executive Officer, Chief Financial Officer and Chief Operating Officer and others alleging violations of U.S. securities laws, fraud and breach of fiduciary duties, and seeking in excess of $15 million in damages, arising out of our acquisition of Gannaway Web Holdings, LLC from GEI and other parties in 2015.

On ~~September~~March 3012, ~~2017~~2018, the ~~defendants~~plaintiffs ~~filed~~in athe ~~motion~~GEI tocomplaint ~~dismiss~~voluntarily ~~the~~terminated ~~complaint~~their case. On ~~October~~March 1115, ~~2017~~2018, the plaintiffs ~~filed~~in ~~an amended~~the GEI complaint. Onre-filed ~~October~~their ~~31,~~complaint ~~2017~~in ~~the~~state ~~defendants~~court. ~~filed~~We aare ~~motion~~reviewing ~~to dismiss~~ the ~~amended~~ complaint. ~~The~~with ~~Company~~our ~~and its~~ counsel ~~continue~~ toand believe that the claims are without merit. We intend to defend the claims vigorously.

As a result of the complaint filed on July 21, 2017 as discussed above, we decided to postpone the US IPO until the resolution of the litigation is more certain.

Critical Accounting Policies

There have been no material changes to our critical accounting policies and estimates during the ~~nine~~three months ended ~~September~~March 3031, ~~2017 as~~2018 as compared to those for the year ended December 31, ~~2016~~2017, included within our Form 10-K as filed with the SEC on ~~August~~April 72, ~~2017 (the “Form 10”), aside for the following:~~2018.

We are an “emerging growth company” as defined by the Jumpstart Our Business Startups (“JOBS”) Act of 2012. The JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can selectively delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this exemption and, as a result, our financial statements may not be comparable to the financial statements of issuers that are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies. Section 107 of the JOBS Act provides that we can elect to opt out of the extended transition period at any time, which election is irrevocable.

Recent Accounting Pronouncements

Refer to Note 2, “Summary of Significant Accounting Policies,” to the condensed consolidated financial statements for a discussion of recent accounting pronouncements applicable to us.

Off-Balance Sheet Financing

Other than our operating lease obligations, we have no off-balance sheet arrangements such as guarantees, retained or contingent interests in assets transferred to an unconsolidated entity, obligations indexed to our own stock or variable interests in unconsolidated entities. Future obligations under operating leases, capital leases and debt arrangements are detailed in our condensed consolidated financial statements included elsewhere in this report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

~~Foreign~~Smaller ~~Currency~~reporting ~~Exchange~~companies ~~Rate~~are ~~Risk~~not required to provide disclosure pursuant to this Item.

Our exposure to the risk of changes in foreign exchange rates relates primarily to the Company’s transactions with parties located outside the United States of America, which consists of transactions of the Canadian holding company. Balances denominated in foreign currencies as of September 30, 2017 are not material to the Company.29

Interest rate risk

Our non-revolving credit facility bears interest at a fixed rate, and as such is subject to interest rate price risk resulting from changes in fair value from market fluctuations in interest rates.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in company reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of ~~September~~March 3031, ~~2017~~2018. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15 (e) and 15d-15 (e) under the Exchange Act) were effective.

Changes in Internal Control over Financial Reporting

During the most recently completed fiscal quarter, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

On July 21, 2017, a complaint was filed by GEI, Albert C. Gannaway III, and Samantha Gannaway, and was served on August 4, 2017, captioned Gannaway Entertainment, Inc., Albert C. Gannaway III, Samantha Gannaway V.S. Frankly Inc., Steve Chung, SKP America, LLC, JJR Private Capital Limited Partnership, Ron Schmeichel, Louis Schwartz in the United States District Court for the Northern District of California against ~~the~~ Frankly, our Chief Executive ~~Office~~Officer, Chief Financial Officer and Chief Operating Officer and ~~others~~ others alleging violations of U.S. securities laws, fraud and breach of fiduciary duties, and seeking in excess of $15 million in damages, arising out of our acquisition of Gannaway Web Holdings, LLC from GEI and other parties in 2015.

On ~~September~~March 3012, ~~2017~~2018, the ~~defendants~~plaintiffs ~~filed~~in athe ~~motion~~GEI tocomplaint ~~dismiss~~voluntarily ~~the~~terminated ~~complaint~~their case. On ~~October~~March 1115, ~~2017~~2018, the plaintiffs ~~filed~~in ~~an amended~~the GEI complaint. Onre-filed ~~October~~their ~~31,~~complaint ~~2017~~in ~~the~~state ~~defendants~~court. ~~filed~~We aare ~~motion~~reviewing ~~to dismiss~~ the ~~amended~~ complaint. ~~The~~with ~~Company~~our ~~and its~~ counsel ~~continue to~~and believe that the claims are without merit. We intend to defend the claims vigorously.

We may, from time to time, be party to litigation and subject to claims incident to the ordinary course of business. As our growth continues, we may become party to an increasing number of litigation matters and claims. The outcome of litigation and claims cannot be predicted with certainty, and the resolution of any future matters could materially affect our future financial position, results of operations or cash flows.

Item 1A. Risk Factors

As of the date of this Quarterly Report on Form 10-Q, there have been no material changes to the risk factors disclosed in our Form 10-K as filed with the SEC on ~~August~~April 72, ~~2017, aside for the following:~~2018.

We are an “emerging growth company” and can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. As a result, our financial statements may not be comparable to the financial statements of issuers that are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit Number		Description
31.1		Certification of the Principal Executive Officer required by Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
31.2		Certification of the Principal Financial Officer required by Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
32.1*		Certification of the Principal Executive Officer required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
32.2*		Certification of the Principal Financial Officer required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

* Furnished herewith

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SIGNATURES

In accordance with 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.

	FRANKLY INC.
Dated: November 14, 2017		/s/ Steve Chung
Dated: May 15, 2018		/s/ Lou Schwartz
	Name:	~~Steve~~Lou ~~Chung~~Schwartz
	Title:	Chief Executive Officer
		(Principal Executive Officer)

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