Attached files
file | filename |
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EX-31.1 - Thwapr, Inc. | v185519_ex31-1.htm |
EX-31.2 - Thwapr, Inc. | v185519_ex31-2.htm |
EX-32.2 - Thwapr, Inc. | v185519_ex32-2.htm |
EX-32.1 - Thwapr, Inc. | v185519_ex32-1.htm |
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 March 31,
2010
|
o
|
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: 000-53640
THWAPR,
INC.
(Exact
name of registrant as specified in its charter)
Nevada
|
26-1359430
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
Number)
|
|
220
12th
Avenue, 3rd
Floor
|
||
New York, New York 10001
|
||
(Address
of principal executive offices)
|
||
(212) 268-0220
|
||
(Registrant’s
telephone number, including area
code)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Sections 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 o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data 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 o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “larger accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer o Accelerated
filer o Non-accelerated
filer o Smaller reporting
company x
(Do not
check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
The
number of shares outstanding of the registrant’s common stock at May 14, 2010
was 157,286,262.
INDEX
Page
|
||
Number
|
||
PART
I - FINANCIAL INFORMATION
|
||
ITEM
1.
|
FINANCIAL
STATEMENTS
|
1
|
Balance
Sheet as at March 31, 2010 (unaudited) and December 31, 2009
(audited)
|
2
|
|
Statement
of Operations for the three month periods ended March 31, 2010 and 2009
and for the period March 14, 2007 (Date of Inception) to March
31, 2010 (unaudited)
|
3
|
|
Statement
of Cash Flows for the three month periods ended March 31, 2010 and 2009
and for the period March 14, 2007 (Date of Inception) to March
31, 2010 (unaudited)
|
4
|
|
Statement
of Stockholders’ Equity (Deficit) for the period March 14, 2007 (Date of
Inception) to March 31, 2010 (unaudited)
|
5
|
|
Notes
to the Financial Statements
|
6
|
|
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
14
|
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
|
16
|
ITEM
4T.
|
CONTROLS
AND PROCEDURES
|
17
|
PART
II - OTHER INFORMATION
|
||
ITEM
1.
|
LEGAL
PROCEEDINGS
|
17
|
ITEM
1A.
|
RISK
FACTORS
|
18
|
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
26
|
ITEM
3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
26
|
ITEM
4.
|
REMOVED
AND RESERVED
|
26
|
ITEM
5.
|
OTHER
INFORMATION
|
26
|
ITEM
6.
|
EXHIBITS
|
27
|
SIGNATURES
|
i
PART
I - FINANCIAL INFORMATION
ITEM
1.
|
FINANCIAL
STATEMENTS
|
The
accompanying balance sheets of Thwapr, Inc. at March 31, 2010 (with comparative
figures as at December 31, 2009) and the statement of operations for the three
months ended March 31, 2010 and 2009 and for the period from March 14, 2007
(date of inception) to March 31, 2010, the statement of shareholders’ equity
(deficit) for the period from March 14, 2007 (date of inception) to March 31,
2010, and the statement of cash flows for the three months ended March 31, 2010
and 2009 and for the period from March 14, 2007 (date of inception) to March 31,
2010 have been prepared by the Company’s management in conformity with
accounting principles generally accepted in the United States of
America. In the opinion of management, all adjustments considered
necessary for a fair presentation of the results of operations and financial
position have been included and all such adjustments are of a normal recurring
nature.
Operating
results for the quarter ended March 31, 2010 are not necessarily indicative of
the results that can be expected for the year ending December 31,
2010. These financial statements should be read in conjunction with
the financial statements and notes for the years ended December 31, 2009
and 2008, included in Form 8-K/A filed with the Securities and Exchange
Commission on April 23, 2010.
1
THWAPR,
INC.
(A
DEVELOPMENT STAGE COMPANY)
BALANCE
SHEETS
AS OF
MARCH 31, 2010 AND DECEMBER 31, 2009
(Unaudited)
|
||||||||
March
31,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
and cash equivalents
|
$ | 8,623 | $ | 23,820 | ||||
Prepaid
Expenses
|
17,891 | 3,348 | ||||||
TOTAL
CURRENT ASSETS
|
26,514 | 27,168 | ||||||
PROPERTY
AND EQUIPMENT, NET
|
28,804 | 31,661 | ||||||
TOTAL
ASSETS
|
$ | 55,318 | $ | 58,829 | ||||
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Accounts
payable and accrued expenses
|
$ | 205,003 | $ | 124,513 | ||||
Due
to stockholders
|
92,954 | 32,370 | ||||||
TOTAL
CURRENT LIABILITIES
|
297,957 | 156,883 | ||||||
LONG-TERM
LIABILITIES
|
||||||||
Convertible
note, less discount of $23,542 and $24,792 at March 31, 2010 and December
31, 2010, respectively
|
1,458 | 208 | ||||||
Derivative
liability
|
26,800 | 26,800 | ||||||
TOTAL
LONG-TERM LIABILITIES
|
28,258 | 27,008 | ||||||
COMMITMENTS
AND CONTINGENCIES, Note 5
|
||||||||
STOCKHOLDERS'
DEFICIT:
|
||||||||
Common
stock, $.0003 par value; 300,000,000 shares
|
||||||||
authorized;
157,286,262 shares issued and outstanding at March 31,
2010
|
||||||||
(2009
shares include 15,729,212 preferred
|
||||||||
shares
and 711,200 common shares of Thwapr Delaware)
|
47,186 | 1,644 | ||||||
Additional
paid-in capital
|
4,399,256 | 3,694,190 | ||||||
Deficit
accumulated during the development stage
|
(4,717,339 | ) | (3,820,896 | ) | ||||
TOTAL
STOCKHOLDERS' DEFICIT
|
(270,897 | ) | (125,062 | ) | ||||
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
$ | 55,318 | $ | 58,829 |
See
report of independent registered public accounting firm and notes to financial
statements.
2
THWAPR,
INC.
(A
DEVELOPMENT STAGE COMPANY)
STATEMENTS
OF OPERATIONS
FOR THE
THREE MONTHS ENDED MARCH 31, 2010 AND 2009 AND THE PERIOD
FROM
MARCH 14, 2007 (DATE OF INCEPTION) THROUGH MARCH 31, 2010
March
14, 2007
|
||||||||||||
For
the Three Month Ended
|
(Date
of Inception)
|
|||||||||||
March
31,
|
through
|
|||||||||||
2010
|
2009
|
March 31, 2010
|
||||||||||
REVENUE
|
$ | - | $ | - | $ | - | ||||||
COST
OF SALES
|
- | - | - | |||||||||
GROSS
PROFIT
|
- | - | - | |||||||||
OPERATING
EXPENSES:
|
||||||||||||
Product
Development
|
306,756 | 50,034 | 1,444,947 | |||||||||
General
and Administrative Expenses
|
588,437 | 251,061 | 3,267,951 | |||||||||
TOTAL
OPERATING EXPENSES
|
895,193 | 301,095 | 4,712,898 | |||||||||
LOSS
FROM OPERATIONS
|
(895,193 | ) | (301,095 | ) | (4,712,898 | ) | ||||||
OTHER
INCOME (EXPENSES)
|
||||||||||||
Interest
income
|
- | - | 105 | |||||||||
Interest
expense
|
(1,250 | ) | - | (4,546 | ) | |||||||
TOTAL
OTHER INCOME (EXPENSES)
|
(1,250 | ) | - | (4,441 | ) | |||||||
NET
LOSS
|
$ | (896,443 | ) | $ | (301,095 | ) | $ | (4,717,339 | ) | |||
Basic
and diluted loss per share
|
$ | (0.01 | ) | $ | (0.00 | ) | ||||||
Weighted
average shares
|
142,797,916 | 133,255,837 |
See
report of independent registered public accounting firm and notes to financial
statements.
3
THWAPR,
INC.
(A
DEVELOPMENT STAGE COMPANY)
STATEMENTS
OF CASH FLOWS
FOR THE
THREE MONTHS ENDED MARCH 31, 2010 AND 2009 AND THE PERIOD FROM
MARCH 14,
2007 (DATE OF INCEPTION) THROUGH MARCH 31, 2010
March
14, 2007
|
||||||||||||
For
the Three Month Ended
|
(Date
of Inception)
|
|||||||||||
March
31,
|
through
|
|||||||||||
2010
|
2009
|
March
31, 2010
|
||||||||||
CASH
FLOW FROM OPERATING ACTIVITIES
|
||||||||||||
Net
loss
|
$ | (896,443 | ) | $ | (301,095 | ) | $ | (4,717,339 | ) | |||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||||||
Stock-based
compensation
|
255,108 | 70,000 | 867,406 | |||||||||
Amortization
of note discount
|
1,250 | 1,496 | ||||||||||
Depreciation
expense
|
2,857 | 149 | 8,171 | |||||||||
(Increase)
decrease in:
|
||||||||||||
Deposits
|
- | (5,000 | ) | - | ||||||||
Prepaid
expense
|
(14,543 | ) | - | (17,891 | ) | |||||||
Increase
(decrease) in:
|
||||||||||||
Accounts
payable and accrued expenses
|
80,490 | (56,357 | ) | 206,766 | ||||||||
Due
to stockholders
|
60,584 | (49,747 | ) | 92,954 | ||||||||
NET
CASH USED IN OPERATING ACTIVITIES
|
(510,697 | ) | (342,050 | ) | (3,558,437 | ) | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
Purchase
of property and equipment
|
- | (7,465 | ) | (36,976 | ) | |||||||
NET
CASH USED IN INVESTING ACTIVITIES
|
- | (7,465 | ) | (36,976 | ) | |||||||
CASH
FLOW FROM FINANCING ACTIVITIES
|
||||||||||||
Proceeds
from sale of common stock, net
|
495,500 | 705,000 | 3,579,036 | |||||||||
Proceeds
from convertible notes payable, net
|
- | - | 25,000 | |||||||||
NET
CASH PROVIDED BY
|
||||||||||||
FINANCING
ACTIVITIES
|
495,500 | 705,000 | 3,604,036 | |||||||||
NET
INCREASE (DECREASE)
|
||||||||||||
IN
CASH
|
(15,197 | ) | 355,485 | 8,623 | ||||||||
CASH
AT BEGINNING OF THE PERIOD
|
23,820 | 356 | - | |||||||||
CASH
AT END OF PERIOD
|
$ | 8,623 | $ | 355,841 | $ | 8,623 | ||||||
SUPPLEMENTARY
DISCLOSURE:
|
||||||||||||
Income
taxes paid in cash
|
$ | 174 | $ | - | $ | 2,660 |
See
report of independent registered public accounting firm and notes
to financial statements.
4
THWAPR,
INC.
(A
DEVELOPMENT STAGE COMPANY)
STATEMENTS
OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE
PERIOD MARCH 14, 2007 (DATE OF INCEPTION)
THROUGH
MARCH 31, 2010
Additional
|
||||||||||||||||||||||||||||
Convertible
Preferred Stock
|
Common
Stock
|
Paid
in
|
Accumulated
|
|||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Total
|
||||||||||||||||||||||
BALANCE,
MARCH 14, 2007 (Date of Inception)
|
- | $ | - | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||
Issuance
of stock to founders
|
- | - | 4,285,712 | 429 | (429 | ) | - | - | ||||||||||||||||||||
Issuance
of stock for cash ($.07 per share)
|
- | - | 10,000,000 | 1,000 | 770,676 | - | 771,676 | |||||||||||||||||||||
Net
loss
|
- | - | - | - | - | (454,014 | ) | (454,014 | ) | |||||||||||||||||||
- | ||||||||||||||||||||||||||||
BALANCE,
DECEMBER 31, 2007
|
- | - | 14,285,712 | 1,429 | 770,247 | (454,014 | ) | 317,662 | ||||||||||||||||||||
Issuance
for cash, ($1.00 per share)
|
- | - | 450,000 | 45 | 448,755 | - | 448,800 | |||||||||||||||||||||
Net
loss
|
- | - | - | - | - | (891,552 | ) | (891,552 | ) | |||||||||||||||||||
- | ||||||||||||||||||||||||||||
BALANCE,
DECEMBER 31, 2008
|
- | - | 14,735,712 | 1,474 | 1,219,002 | (1,345,566 | ) | (125,090 | ) | |||||||||||||||||||
Issuance
for cash ($1.00 per share)
|
- | - | 993,500 | 99 | 993,401 | - | 993,500 | |||||||||||||||||||||
Conversion
of common stock to preferred stock
|
15,729,212 | 1,573 | (15,729,212 | ) | (1,573 | ) | - | - | - | |||||||||||||||||||
Issuance
for cash ($1.25 per share)
|
- | - | 711,200 | 71 | 869,489 | - | 869,560 | |||||||||||||||||||||
Amortization
of warrants
|
- | - | - | - | 612,298 | - | 612,298 | |||||||||||||||||||||
Net
loss
|
- | - | - | - | - | (2,475,330 | ) | (2,475,330 | ) | |||||||||||||||||||
- | ||||||||||||||||||||||||||||
BALANCE,
DECEMBER 31, 2009
|
15,729,212 | 1,573 | 711,200 | 71 | 3,694,190 | (3,820,896 | ) | (125,062 | ) | |||||||||||||||||||
Conversion
of preferred stock to common
|
(15,729,212 | ) | (1,573 | ) | 141,562,908 | 14,156 | (12,583 | ) | - | - | ||||||||||||||||||
Issuance
for cash ($1.25 per share)
|
- | - | 402,400 | 40 | 495,460 | - | 495,500 | |||||||||||||||||||||
Amortization
of warrants
|
- | - | - | - | 255,108 | - | 255,108 | |||||||||||||||||||||
Net
Loss
|
- | - | - | - | (896,443 | ) | (896,443 | ) | ||||||||||||||||||||
Shares
added due to reverse merger
|
14,609,754 | 438 | (438 | ) | ||||||||||||||||||||||||
Effect
of Merger on Par Value
|
- | - | - | 32,481 | (32,481 | ) | - | - | ||||||||||||||||||||
BALANCE,
MARCH 31, 2010
|
- | $ | - | 157,286,262 | $ | 47,186 | $ | 4,399,256 | $ | (4,717,339 | ) | $ | (270,897 | ) |
See
report of independent registered public accounting firm and notes to financial
statements.
5
1.
|
ORGANIZATION
AND BASIS OF PRESENTATION
|
Organization and Nature of
Operations
Thwapr,
Inc. (“Thwapr” or the “Company”) is a Nevada Corporation whose purpose is
to is to develop systems, applications and software that allow users
and brands to share pictures and video to mobile phone users regardless of
device, platform or carrier. Additionally, Thwapr expects to enable users to
easily capture and share pictures and videos on their phones with other mobile
and desktop users and into social networks. Thwapr plans to derive revenues from
banner and video advertising on its mobile and desktop websites and from mobile
media messaging fees from brand sponsors. Thwapr also plans to sell premium
services to users and brands via subscriptions and other fees. In December 2009,
Thwapr launched a public beta test of its service. Thwapr expects to
launch its service in 2010 but does not anticipate generating any meaningful
revenues until such time that a significant number of users and brands have
signed up for and are using the service. This service will be
launched under the name of Thwapr, a trademark it owns.
The
technology underlying Thwapr’s product is complex and as such, a significant
amount of development expense has gone into the creation of the Thwapr service
infrastructure. To minimize start-up costs, Thwapr uses
only consultants for its activities at this time and has no full-time employees
and owns no real estate or personal property. For its development and other
operations, Thwapr employs independent contractors on a part-time and full-time
basis. Thwapr expects to convert most of these independent contractors to
employees over time as funding becomes available.
Thwapr’s
business is subject to several significant risks, any of which could materially
adversely affect its business, operating results, financial condition and the
actual outcome of matters as to which it makes forward-looking
statements.
Recent Events – Financial
Statement Presentation
On March
29, 2010 the Company, then named Seaospa, Inc., entered into a Share Exchange
Agreement (the “Exchange Agreement”) with Thwapr, Inc., a Delaware Corporation
(“Thwapr Delaware”), to acquire all of the stock of Thwapr
Delaware. Thwapr Delaware was incorporated on March 14, 2007
under the name Mobile Video Development, Inc.
At the
closing of the Exchange Agreement, the Company issued 142,676,508 shares of its
common stock and warrants to acquire 12,181,363 shares of its common stock to
the Thwapr Stockholders in exchange for 100% of the issued and outstanding
capital stock of Thwapr (including 141,562,908 shares of common stock that
represented preferred shares converted into common stock as part of the
transaction). Immediately prior to the Exchange Transaction, the
Company had 14,609,754 shares of common stock issued and outstanding, subsequent
to the Stock Split described below. Immediately after the Exchange
Transaction, the Company had 157,286,262 shares of common stock issued and
outstanding, of which 141,562,908 cannot be sold or traded (i) until June 9,
2012, if Thwapr has 10,000,000 registered users on such date, or (ii) upon a
change of control of Thwapr. Additionally, of the warrants
outstanding, 10,950,003 shares of the underlying securities cannot be sold or
traded (i) until June 9, 2012, if Thwapr has 10,000,000 registered users on such
date, or (ii) upon a change of control of Thwapr.
As a
condition to closing the Exchange Agreement and as more fully described, Mr.
Yakov Terner resigned as President, Treasurer, and Director of the Company, and
Mr. Yossi Benitah resigned as Secretary and Director of the
Company. Effective March 22, 2010, Messrs. Bruce Goldstein, Maurizio
Vecchione, and Barry Hall, the current directors of Thwapr Delaware, were
appointed to the Company’s board of directors. At the closing of the
Exchange Transaction, Mr. Goldstein was appointed President and Chief Executive
Officer, Maurizio Vecchione was appointed as Chairman of the Board, and Mr. Hall
was appointed Chief Financial Officer, Treasurer, and
Secretary. Other key members of the management team include Mr. Eric
Hoffert as Integrated Chief Technology Officer, Mr. Duncan Kennedy as Chief
Operating Officer, and Mr. Leigh Newsome as Vice President of User Experience,
each of whom were appointed as of the Closing Date.
Although
from a legal perspective, Seaospa acquired Thwapr Delaware, from an accounting
perspective, the transaction is viewed as a recapitalization of Thwapr Delaware
accompanied by an issuance of stock of Thwapr Delaware for the net assets of
Seaospa. This is because Seaospa did not have operations immediately
prior to the merger, and following the merger, Thwapr Delaware is the operating
company. Thwapr Delaware’s officers and directors serve as the
officers and directors of the new combined entity. Additionally,
Thwapr Delaware’s stockholders now own over 90% of the outstanding shares of
Seaospa.
6
Given
these circumstances, the transaction is accounted for as a capital transaction
rather than as a business combination. That is, the transaction is
equivalent to the issuance of stock by Thwapr Delaware for the net assets of
Seaospa, accompanied by a recapitalization. The financial statements
include the accounts of Thwapr, Inc and Thwapr Delaware, its wholly owned
subsidiary. Thwapr Delaware was merged into Thwapr, Inc. in April
2010. All intercompany balances and transactions have been eliminated
in consolidation.
Development Stage
Activities
Since
inception the Company has not conducted any revenue producing business
operations. All of the operating results and cash flows reported in the
accompanying financial statements from March 14, 2007 through March 31, 2010 are
considered to be those related to the development stage activities and represent
the 'cumulative from inception' amounts required to be reported pursuant to
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) 915-205 (formerly Statements of Financial Accounting Standards (“SFAS”)
No. 7, “Development Stage Enterprises”). The Company is focusing its
efforts in two areas during the development stage. First, the Company
is devoting substantial time and resources to software development related to
the service it intends to provide. Second, the Company will spend
significant time and resources testing the software against a variety of cell
phone models, platforms and carriers.
Going
Concern
The
Company has sustained operating losses since its inception and has negative
working capital and an accumulated deficit. The accompanying financial
statements have been prepared on a going concern basis of accounting, which
contemplates continuity of operations, realization of assets and liabilities and
commitments in the normal course of business. The accompanying
financial statements do not reflect any adjustments that might result if the
Company is unable to continue as a going concern. The Company’s ability to
continue as a going concern and the appropriateness of using the going concern
basis is dependent upon, among other things, additional cash
infusions. Management is seeking investors and believes the reverse
merger into Seaospa will help raise capital, which will allow the Company to
pursue the development of its software and business model. However,
there can be no assurance that the Company will be able to raise sufficient
capital to fully implement its business model.
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Cash and Cash
Equivalents
The
Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
Use of
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Management uses its
historical records and knowledge of its business in making
estimates. Accordingly, actual results could differ from those
estimates.
Fair Value
Measurements
|
The
Company measures its financial assets and liabilities at fair
value. Fair value is defined as the price that would be
received to sell an asset or paid to transfer a liability (i.e., exit
price) in an orderly transaction between market participants at the
measurement date. Additionally, the Company is required to
provide disclosure and categorize assets and liabilities measured at fair
value into one of three different levels depending on the assumptions
(i.e., inputs) used in the valuation. Level 1 provides the most
reliable measure of fair value while Level 3 generally requires
significant management judgment. Financial assets and
liabilities are classified in their entirety based on the lowest level of
input significant to the fair value measurement. The fair value
hierarchy is defined as
follows:
|
7
|
·
|
Level
1 – quoted prices in active markets for identical assets or
liabilities,
|
|
·
|
Level
2 – other significant observable inputs for the assets or liabilities
through corroboration with market data at the measurement
date,
|
|
·
|
Level
3 – significant unobservable inputs that reflect management’s best
estimate of what market participants would use to price the assets or
liabilities at the measurement
date.
|
The
following table summarizes fair value measurements by level at March 31, 2010
for assets and liabilities measured at fair value on a recurring
basis:
Level I
|
Level II
|
Level III
|
||||||||||
Cash
and cash equivalents
|
$ | 8,623 | $ | - | $ | - | ||||||
Derivative
liability
|
$ | - | $ | - | $ | 26,800 |
The
carrying amount of certain financial instruments, including cash and cash
equivalents and accounts payable and accrued expenses, approximates fair value
due to the relatively short maturity of such instruments.
The
following table sets forth a summary of changes in the fair value of the
Company’s level 3 assets (conversion feature and warrants) for the three months
ended March 31, 2010.
Level 3 Assets
Derivative Liability
|
||||
Balance
as of December 31, 2009
|
26,800 | |||
Changes
in Derivative Liability
|
- | |||
Balance
as of March 31, 2010
|
$ | 26,800 |
The
Company used the Black-Scholes option pricing model for estimating the fair
value of the note conversion feature and the warrants at $26,800 with the
following assumptions: expected life of 5 years; risk-free interest rate of
2.00%; dividend yield of 0%; and expected volatility of 200%.
Product
Development
Product
development costs are expensed as incurred. These costs primarily
include the costs associated with the development and testing of video and
picture sharing technology. During the three months ended March 31,
2010 and 2009, Product development costs amounted to $306,756 and $50,034,
respectively. From March 14, 2007 (inception) through March 31, 2010,
technology development costs amounted to $1,444,947.
Income
Taxes
The
Company accounts for income taxes under the liability method in accordance with
FASB ASC 740-10. Under this standard, deferred income tax liabilities and
assets are determined based on the difference between the financial statement
and tax bases of assets and liabilities using the enacted tax rates expected to
be in effect for the year in which the differences are expected to reverse.
Deferred income tax assets are reduced by a valuation allowance when the
Company is unable to make the determination that it is more likely than not that
some portion or all of the deferred income tax asset will be
realized.
8
Earnings (Loss) per
Share
The
Company utilizes FASB ASC 260. Basic earnings per share is computed
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding. Diluted earnings per share is computed
similar to basic earnings per share except that the denominator is increased to
include the number of additional common shares that would have been outstanding
if the potential common shares had been issued and if the additional common
shares were dilutive. Common equivalent shares are excluded from the computation
if their effect is anti-dilutive. The weighted average number of
shares outstanding used to calculate the basic and diluted loss per share gives
retroactive effect of the conversion of preferred shares into common shares at a
ratio of 9 to 1.
Recently Issued Accounting
Pronouncements
Accounting
Standards Update 2009-13 (ASU 2009-13) Revenue Recognition — Multiple
Deliverable Revenue Arrangements was issued in October 2009 and
updates Accounting Standards Codification (ASC) 605 — Revenue Recognition. ASU
2009-13 removes the objective-and-reliable-evidence-of-fair-value criterion from
the separation criteria used to determine whether an arrangement involving
multiple deliverables contains more than one unit of accounting; replaces
references to “fair value” with “selling price” to distinguish from the fair
value measurements required under the “Fair Value Measurements and Disclosures”
guidance; provides a hierarchy that entities must use to estimate the selling
price; eliminates the use of the residual method for allocation; and expands the
ongoing disclosure requirements. ASU 2009-13 is effective for fiscal years
beginning on or after June 15, 2010, and can be applied prospectively or
retrospectively. The Company is currently evaluating the effect, if any, that
adopting ASU 2009-13 will have on its consolidated financial position and
results of operations.
Accounting
Standards Update 2009-14 (ASU 2009-14) Certain Revenue Arrangements That
Include Software Elements was issued in October 2009 and updates ASC
985 — Software — Revenue
Recognition. ASU 2009-14 clarifies which accounting guidance should be
used to measure and allocate revenue for arrangements that contain both tangible
products and software, where the software is more than incidental to the
tangible product as a whole. ASU 2009-14 is effective for fiscal years beginning
on or after June 15, 2010 and applies to arrangements entered into or
materially modified on or after that date. The Company is currently evaluating
the effect, if any, that adopting ASU 2009-14 will have on its consolidated
financial position and results of operations.
3.
|
PROPERTY
AND EQUIPMENT
|
Property
and equipment consists of the following:
March 31,
2010
|
December 31,
2009
|
|||||||
Computer
equipment
|
$ | 30,340 | $ | 30,340 | ||||
Furniture
and fixtures
|
6,636 | 6,636 | ||||||
36,976 | 36,976 | |||||||
Accumulated
depreciation
|
(8,172 | ) | (5,315 | ) | ||||
Property
and equipment, net
|
$ | 28,804 | $ | 31,661 |
Depreciation expense for the three
months ended March 31, 2010 was $2,856.
4.
|
RELATED
PARTY TRANSACTIONS
|
Payment for Consulting
Services
Certain
stockholders of the Company, have provided and provide general management
services to the Company in the form of a Chairman, CEO, CFO, and In-house
Counsel. Amounts paid to these stockholders were in lieu of
salaries and represented compensation for services rendered as executives,
directors and the attorney of the Company. During the three months ended March
31, 2010 and 2009 and the period from March 14, 2007 (date of inception) through
March 31, 2010, the amounts paid to these stockholders totaled $120,000,
$202,400 and $1,396,400, respectively.
9
5.
|
COMMITMENTS
AND CONTINGENCIES
|
Cash
Deposits
The
Company maintains its cash at a financial institution. The account is
insured by the Federal Deposit Insurance Corporation (“FDIC”) up to
$250,000. On October 3, 2008, the FDIC temporarily increased its
coverage from $100,000 to $250,000 per depositor through December 31,
2013. The Company’s cash account, at times, may exceed federally
insured limits.
Development
Contracts
The
Company has a contract with one vendor to develop software and a corresponding
user interface that will allow mobile phone users to send videos and pictures
captured on their phone to other mobile phone users. The contract can
be terminated by the Company with 15-days written notice or by the vendor with
30-days written notice.
The
Company has a consulting agreement with another vendor regarding the development
of a mobile phone application prototype. The contract can be
terminated by the Company with a 2-week notice. The completion of the
project will cost approximately $115,000 of which $25,000 was accrued for by the
Company as of March 31, 2010.
The
Company has an agreement with another vendor who provides hosted video
transcoding services and other related services and
deliverables. Either party may terminate the agreement with a 30-day
notice. Total fee for the services is a minimum of $42,000 for 12
months. The Company incurred $10,000 of service fees as of during the
three months ended March 31, 2010.
6.
|
INCOME
TAXES
|
The
Company has adopted FASB Interpretation No. 48 (“FIN 48”), “Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109”
codified in FASB ASC 740-10. This interpretation clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with FASB Statement 109, "Accounting for
Income Taxes" codified in FASB ASC 740-10, and prescribes a recognition
threshold of more likely than not and a measurement process for financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. In making this assessment, a company must determine
whether it is more likely than not that a tax position will be sustained upon
examination, based solely on the technical merits of the position and must
assume that the tax position will be examined by taxing
authorities. The Company is subject to examination for all years it
has filed income tax returns. The Company’s net operating loss
carryforwards are subject to IRS examination until they are fully utilized and
such tax years are closed. The Company’s policy is to include
interest and penalties related to unrecognized tax benefits within the provision
for income taxes. The Company’s review of prior year tax positions
using the criteria and provisions presented in FIN 48 did not result in a
material impact on the Company’s financial position or results of
operations.
At March
31, 2010, the Company has net operating loss carryforwards available for federal
tax purposes, which expire from 2027 to 2029. The amount of net
operating losses which may be utilized in future years may be subject to
significant annual limitations should an ownership change occur. The Company
also has operating loss carryforwards available for California income tax
purposes, which expire from through 2029.
At March
31, 2010 and December 31, 2009, total deferred income tax asset consist
principally of net operating loss carryforwards in amounts still to be
determined. For financial reporting purposes, a valuation allowance
has been recognized in an amount equal to such deferred income tax asset due to
the uncertainty surrounding its ultimate realization.
At
December 31, 2009, the Company files income tax returns with the Internal
Revenue Services (“IRS”) and the state of California. For
jurisdictions in which tax filings are made, the Company is subject to income
tax examination for all fiscal years since inception. Our review of
prior year tax positions using the criteria and provisions presented by the FASB
did not result in a material impact on the Company’s financial position or
results of operations.
10
7.
|
CONVERTIBLE
PROMISSORY NOTES
|
On
November 2, 2009, the Board of Directors of the Company authorized the issuance
of Convertible Notes bearing simple interest at 5%, convertible on the same
conditions as the next major equity financing of the Company in excess of $2.0
million. Additionally, each investor in the notes will be issued,
upon conversion of the Notes, warrants in an amount of 10% of the number of
shares obtained during the conversion and such warrants would be price at the
price stock upon conversion. Also, upon reorganization, consolidation
or merger, the Company, at its sole discretion, may convert the principal
amount of the Notes and all accrued and unpaid interest, into securities or
cash, as the case may be, at a price of $1.25 per share. As of March
31, 2010 and December 31, 2009 the Company had issued Convertible Notes
aggregating $25,000, maturing in December 2014.
8.
|
STOCKHOLDERS’
EQUITY
|
|
Between
January 27, 2009 and June 11, 2009, the Company sold an aggregate of
993,500 shares of common stock to the Company’s largest
stockholder. Each share was sold at a price of $1.00 per
share. These shares were converted to Series A preferred stock
on July 29, 2009.
|
Between
July 31, 2009 and December 16, 2009, the Company sold an aggregate of 711,200
shares of common stock in private placements with institutional and accredited
investors. Each share of common stock was priced at $1.25 per share,
and as an added incentive, for every 10 shares purchased, a five-year warrant to
purchase one share at a price per share of $1.25 was added. In total,
the Company issued to these investors 71,120 warrants along such terms described
above.
During
the three months ended March 31, 2010 the Company sold an aggregate of 402,400
shares of common stock with institutional and accredited
investors. Each share of common stock was priced at $1.25 per share,
and as an added incentive, for every 10 shares purchased, a five-year warrant to
purchase one share at a price per share of $1.25 was added. In total,
the Company issued to these investors 40,240 warrants along such terms described
above.
Warrant
Agreements
On March
1, 2009, the Company issued warrants to consultants to purchase 70,000 shares at
$1.00 per share.
The
Company used the Black-Scholes option pricing model for estimating the fair
value of the warrants at $70,000 with the following assumptions: average
expected life of 10 years; average risk-free interest rate of 1.82%; dividend
yield of 0%; and expected volatility of 200%.
On April
15, 2009 and May 11, 2009 the Company issued warrants to consultants, vendors
and advisors to purchase a total of 1,170,000 at $1.00 per
share. Such warrants vest over a period of 18 months with one-third
of the warrants vesting at the end of each six month period from the date of
issuance.
The
Company used the Black-Scholes option pricing model for estimating the fair
value of the warrants at $1,152,450 with the following assumptions: average
expected life of 5-3/4 years; average risk-free interest rate of 2.93%; dividend
yield of 0%; and expected volatility of 200%.
On
November 2, 2009 all of the warrants described above were converted to warrants
for Series A preferred shares described in Note 1. The shares of
Series A preferred stock shall automatically convert into shares of common stock
at a ratio of 9 shares of common stock for each share of Series A preferred
Stock upon the occurrence of either of the following events:
|
(a)
|
the
three year anniversary of the Offering and the Company obtains at least
10,000,000 active registered users,
or
|
|
(b)
|
change
of control in the Company.
|
In
preparation for a reverse merger into Seaospa, on February 19, 2010 the Company
converted all of the warrants for Series A preferred shares into warrants for
common stock with such stock underlying the warrants being restricted from sale
until the prior conditions for conversion to common from preferred are
met.
11
The
following table summarizes the changes in warrants outstanding and the related
prices for the shares of the Company’s common stock issued to employees and
non-employees of the Company. These warrants were granted in lieu of
cash compensation for services performed or as part of fundraising related to
the sale of the Company’s common stock.
Number of
Shares
|
Average
Exercise Price
|
|||||||
Outstanding
at December 31, 2009
|
1,287,787 | $ | 1.01 | |||||
Granted
|
1,160,240 | 1.25 | ||||||
Effect
of 9:1 conversion from preferred to common
|
9,733,336 | 1.00 | ||||||
Expired/cancelled
|
- | - | ||||||
Exercised
|
- | - | ||||||
Outstanding
at March 31, 2009
|
12,181,363 | $ | 1.03 | |||||
Exercisable
at December 31, 2009
|
4,181,361 | $ | 1.03 |
Awards Outstanding
|
Awards Exercisable
|
||||||||||||||||||||||||
Exercise
Price
|
Quantity
|
Weighted
Average
Remaining
Contractual
Life
|
Weighted
Average
Exercise
Price
|
Exercise
Price
|
Quantity
|
Weighted
Average
Remaining
Contractual
Life
|
Weighted
Average
Exercise
Price
|
||||||||||||||||||
$ | 1.00 | 10,950,003 |
9.0
years
|
$ | 1.00 | $ | 1.00 | 3,440,001 |
9.0
years
|
$ | 1.00 | ||||||||||||||
$ | 1.25 | 1,231,360 |
4.7
years
|
$ | 1.25 | $ | 1.25 | 111,360 |
4.6
years
|
$ | 1.25 |
Warrants
to purchase 630,000 share of stock at $1.00 per share included above have no
maturity date.
Compensation
expenses related to outstanding warrants at for the three month ended March 31,
2010 and 2009 were $255,108 and $70,000, respectively.
Preferred
Shares
The
Company is authorized to issue 50,000,000 shares of preferred stock with a par
value of $0.0001 per share. The Board of Directors of teh Company is authorized
within any limitation prescribed by law and the Articles of Incorporation, to
fix and determine the designations, rights, qualifications, preferences,
limitations and terms of the shares of preferred stock.
12
9.
|
SUBSEQUENT
EVENTS
|
On April
8, 2010, April 15, 2010 and April 20, 2010, the Company issued three promissory
notes for $20,000 each to a stockholder bearing interest at 7%. The
notes are due April 7, 2011, April 14, 2011, and April 20, 2011,
respectively.
As of May
13, 2010, an additional 240,000 shares of common stock had been sold at a price
of $1.25 per share with proceeds net of expenses of
$300,000.
13
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The
following discussion should be read in conjunction with the information
contained in our financial statements and the notes thereto, which form an
integral part of the financial statements, which are attached
hereto.
The
financial statements mentioned above have been prepared in conformity with
accounting principles generally accepted in the United States of America and are
stated in United States dollars.
Our Form
10-Q includes a number of forward-looking statements that reflect our current
views with respect to future events and financial performance. Forward-looking
statements are often identified by words such as: believe, expect, estimate,
anticipate, intend, project and similar expressions, or words which, by their
nature, refer to future events. You should not place undue certainty on these
forward-looking statements, which apply only as of the date of this Form 10-Q.
These forward-looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from historical results or
our predictions.
Overview
Thwapr,
Inc. (“Thwapr,” the “Company,” “we,” “us,” or “our”) is a technology company
that develops systems, applications and software that allow users and brands to
share pictures and video to mobile phone users regardless of device, platform or
carrier. Our technology and products enable users to easily capture
and share pictures and videos on their phones with other mobile and desktop
users and into social networks. We have not generated any revenue to
date. However, we plan to derive revenues from banner and video
advertising on our mobile and desktop websites and from mobile media messaging
fees from brand sponsors and to sell premium services to users and brands via
subscriptions and other fees.
Background
and Corporate History
We were
formed as Seaospa, Inc. in Nevada on December 2, 2007 for the purpose of being
engaged in the marketing of skin care, hair care and body treatment
products. Seospa did not have operations prior to the share exchange
agreement.
On March
29, 2010, we closed a voluntary share exchange transaction (the “Exchange
Transaction”) with Thwapr, Inc., a Delaware corporation (“Thwapr DE”), pursuant
to a Share Exchange Agreement by and among us, certain of our
significant stockholders, Thwapr DE and the stockholders of Thwapr DE (the
“Thwapr DE Stockholders”), and we conducted a 3-for-1 forward stock split of all
of our outstanding and authorized shares of common stock (the “Stock Split”). As
a result of the Exchange Transaction, the Thwapr DE Stockholders acquired
approximately 90% of our issued and outstanding common stock, Thwapr DE became
our wholly-owned subsidiary, and we acquired the business and operations of
Thwapr DE.
At the
closing of the Exchange Transaction, we issued 142,676,508 shares of our common
stock and warrants to acquire 12,181,363 shares of our common stock to the
Thwapr DE Stockholders in exchange for 100% of the issued and outstanding
capital stock of Thwapr DE. Immediately prior to the Exchange Transaction, we
had 14,609,754 shares of common stock issued and outstanding, subsequent to the
Stock Split. Immediately after the Exchange Transaction, we had 157,286,262
shares of common stock issued and outstanding, of which 141,562,908 cannot be
sold or traded (i) until June 9, 2012, if we have 10,000,000 registered users on
such date, or (ii) upon a change of control. Additionally, of the warrants
outstanding, 10,950,003 shares of the underlying securities cannot be sold or
traded (i) until June 9, 2012, if we have 10,000,000 registered users on such
date, or (ii) upon a change of control.
On April
21, 2010, we changed our name to “Thwapr, Inc.” from “Seaospa, Inc.”
by amending our Articles of Incorporation and merging our
wholly-owned subsidiary, Thwapr DE into us, with us surviving.
We
recently launched our service but we do not anticipate generating any meaningful
revenues until such time that a significant number of users and brands have
signed up for and are using our service. For the remainder of 2010,
we expect to continue to enhance our service offering with an emphasis on
allowing brands and content providers to use Thwapr to promulgate rich media to
their customers.
Critical
Accounting Policies
The
preparation of financial statements in conformity with United States generally
accepted accounting principles requires management of our company to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods.
14
The
discussion and analysis of our financial condition and results of operations are
based upon our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of
America. We believe certain critical accounting policies affect our
more significant judgments and estimates used in the preparation of our
financial statements. A description of our significant accounting
policies is set forth in the notes to our audited consolidated financial
statements for the year ended December 31, 2009, included in our Current Report
on Form 8-K/A, as filed with the SEC on April 23, 2010. As of, and
for the three months ended March 31, 2010, there have been no material changes
or updates to our critical accounting policies.
Results
of Operations
The
following discussion of the financial condition, results of operations, cash
flows and changes in our financial position should be read in conjunction with
our audited consolidated financial statements and notes thereto for the fiscal
year ended December 31, 2009 included in our Current Report on Form 8-K/A filed
on April 23, 2010.
Comparison
of Three Month Periods Ended March 31, 2010 and March 31, 2009
The
following table sets forth the results of our operations for the periods
indicated:
Three months ended March
31,
|
||||||||
2010
|
2009
|
|||||||
Sales
|
$ | — | $ | — | ||||
Gross
profit
|
— | — | ||||||
Operating
expenses:
|
||||||||
Product
Development
|
306,756 | 50,034 | ||||||
General
and Administrative
|
588,437 | 301,095 | ||||||
Loss
from operations
|
(896,443 | ) | (351,129 | ) | ||||
Net
loss
|
$ | (896,443 | ) | $ | (351,129 | ) |
Sales
and Gross Profit
Sales for
the three months ended March 31, 2010 and 2009 were $0 and $0,
respectively. There were no sales or gross profits for either of the
three month periods because we are still in the process of designing and
developing our services and have not conducted any revenue producing business
operations.
Product
Development Expenses
Product
Development Expenses for the three months ended March 31, 2010 increased by
513.1% from $50,034 for the same period in 2009 to $306,755 in
2010. The increase was mainly due to an increase in fees paid to
independent contractors. Also included in the increase were testing
supplies, hosting expenses and other outside services.
General
and Administrative Expense
General
and Administrative Expenses for the three months ended March 31, 2010 increased
by 134.4% from $251,061 for the same period in 2009 to $588,437 in
2010. The primary reasons for the increase were an increase in
professional fees for legal and accounting services and non-cash compensation
expense related to the issuance of warrants to independent
contractors. Also contributing to the increase were payments to
independent contractors, rent expense, office expense, public relations expense
and travel expense. This increase was partially offset by a decrease
in payments to senior management.
Taxes for
the three months ended March 31, 2010 and 2009 amounted to $0 and $0,
respectively.
Loss
from Operations
We had a
loss from operations of $895,193 for the three months ended March 31, 2010,
compared to an operating loss of $351,129 for the three months ended March 31,
2009. Included in the loss was interest expense of $1,250 and $0 for
the three months ended March 31, 2010 and 2009,
respectively.
15
Net
Loss
Net loss
for the three months ended March 31, 2010 was $896,443, an increase of $545,314,
or 155.3% from $351,129 for the same period in 2009. This increase in
net loss was attributable to the increases in the operating expenses described
above.
Liquidity
and Capital Resources
As of
March 31, 2010, we had cash and cash equivalents of $8,623 and current
liabilities of $297,919. Our cash needs are primarily for working
capital to support our operations and develop our technology, products and
services. We presently finance our operations through the private placement of
equity and debt securities. We have significant capital needs in the next 12
months in order to launch our products and services, grow our customer base,
increase revenue and expand our operations. We believe that our
existing capital resources is sufficient to meet our current obligations and
operating requirements, but will not be sufficient to meet our more aggressive
growth plans and that we will need to raise additional capital in the next 12
months. We will consider debt or equity offerings or institutional borrowing as
potential means of financing, however, there are no assurances that we will be
successful or that we will obtain terms that are favorable to us.
Net cash
used in operating activities for the three months ended March 31, 2010 was
$510,697 compared with net cash used in operating activities of $342,050 for the
same period in 2009. Net cash used in operating activities for the three months
ended March 31, 2010 was mainly due to net loss of $896,443, partially
offset by non-cash items not affecting cash flows of $259,253, and a $141,037
increase in liabilities. Net cash used in operating activities for
the same period in 2009 was mainly due to a net loss of $301,095 and a decrease
of liabilities of $106,104. This was partially offset by non-cash
items of $70,149.
Net cash
used in investing activities was $0 for the three months ended March 31, 2010,
compared with $7,465 used in investing activities for the same period in
2009. Cash was used in investing activities in 2010 to purchase
property and equipment.
Net cash
provided by financing activities was $495,500 for the three months ended March
31, 2010, compared with $705,000 net cash provided by financing activities for
the same period in 2009. Cash provided by financing activities during
the three months ended March 31, 2010 and 2009 resulted from the proceeds from
sales of our common stock.
Off-Balance
Sheet Arrangements
We have
not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not
entered into any derivative contracts that are indexed to our shares and
classified as shareholder’s equity or that are not reflected in our consolidated
financial statements. Furthermore, we do not have any retained or
contingent interest in assets transferred to an unconsolidated entity that
serves as credit, liquidity or market risk support to such entity. We
do not have any variable interest in any unconsolidated entity that provides
financing, liquidity, market risk or credit support to us or engages in leasing,
hedging or research and development services with us.
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS
|
We do not
use derivative financial instruments and have no foreign exchange contracts. Our
financial instruments consist of cash, accounts payable, accrued expenses, debt
and derivative liability. The objective of our policies is to mitigate potential
income statement, cash flow and fair value exposures resulting from possible
future adverse fluctuations in rates. We evaluate our exposure to market risk by
assessing the anticipated near-term and long-term fluctuations in interest rates
and foreign exchange rates. This evaluation includes the review of leading
market indicators, discussions with financial analysts and investment bankers
regarding current and future economic conditions and the review of market
projections as to expected future rates.
We did
not experience any material changes in interest rate exposures during 2009 and
2010, to date. Hence, the effect of the fluctuations of the interest
rates is considered minimal to our business operations. Based upon economic
conditions and leading market indicators at March 31, 2010, we do not foresee a
significant adverse change in interest rates in the near future and do not use
interest rate derivatives to manage exposure to interest rate
changes.
16
ITEM
4T.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
We
carried out an evaluation, under the supervision and with the participation of
our management, including our Chief Executive Officer along with our Chief
Financial Officer, of the effectiveness of the design of our disclosure controls
and procedures (as defined by Exchange Act Rule 13a-15(e) and 15a-15(e)) as of
March 31, 2010 pursuant to Exchange Act Rule 13a-15. Based upon that
evaluation, our Chief Executive Officer along with our Chief Financial Officer
concluded that our disclosure controls and procedures are not effective as of
the end of the period covered by this report in ensuring that information
required to be disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules and
forms. This conclusion is based on findings that constituted material
weaknesses. A material weakness is a deficiency, or a combination of
control deficiencies, in internal control over financial reporting such that
there is a reasonable possibility that a material misstatement of the Company’s
interim financial statements will not be prevented or detected on a timely
basis. We are currently reviewing our disclosure controls and
procedures related to these material weaknesses and expect to implement changes
in the near term. These material weaknesses include the following:
|
i)
|
We
have insufficient quantity of dedicated resources and experienced
personnel involved in reviewing and designing internal controls. As a
result, a material misstatement of the interim and annual financial
statements could occur and not be prevented or detected on a timely
basis.
|
|
ii)
|
We
have not achieved the optimal level of segregation of duties relative to
key financial reporting functions.
|
|
iii)
|
We
do not have an audit committee or an independent audit committee financial
expert. While not being legally obligated to have an audit committee or
independent audit committee financial expert, it is the management’s view
that to have an audit committee, comprised of independent board members,
and an independent audit committee financial expert is an important
entity-level control over our financial
statements.
|
|
iv)
|
We
did not perform an entity level risk assessment to evaluate the
implication of relevant risks on financial reporting, including the impact
of potential fraud related risks and the risks related to non-routine
transactions, if any, on our internal control over financial
reporting. Lack of an entity-level risk assessment constituted an
internal control design deficiency which resulted in more than a remote
likelihood that a material error would not have been prevented or
detected, and constituted a material
weakness.
|
We are
currently reviewing our disclosure controls and procedures related to these
material weaknesses and expect to implement changes in the near
term.
Changes
in Internal Control Over Financial Reporting
We
entered into a material restructuring through a reverse acquisition transaction
on March 29, 2010 and as a result, our entire management team was replaced by a
new management team. As a result, we faced challenges in our internal
control over financial reporting as indicated in the preceding
paragraphs. These have resulted in additional material weaknesses in
our internal controls over financial reporting during the three months ended
March 31, 2010 that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting. We believe
that a control system, no matter how well designed and operated, cannot provide
absolute assurance that the objectives of the control system are met, and no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within any company have been
detected.
Limitations
on the Effectiveness of Controls
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate. All internal control systems, no matter
how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.
PART
II - OTHER INFORMATION
ITEM
1.
|
LEGAL
PROCEEDINGS
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None.
17
ITEM
1A.
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RISK
FACTORS
|
You
should carefully consider the risks described below together with all of the
other information included in this Form 10-Q and our other filings with the
Securities and Exchange Commission before making an investment decision with
regard to our securities. The statements contained in or incorporated into this
Form 10-Q that are not historic facts are forward-looking statements that are
subject to risks and uncertainties that could cause actual results to differ
materially from those set forth in or implied by forward-looking statements. If
any of the following events described in these risk factors actually occurs, our
business, financial condition or results of operations could be harmed. In that
case, the trading price of our common stock could decline, and you may lose all
or part of your investment.
Risks
Relating to Our Business and Industry
We
are a development stage company with a limited operating history on which to
evaluate our business or base an investment decision.
Our
business prospects are difficult to predict because of our limited operating
history, early stage of development, unproven business strategy and unproven
product. We are a development stage company that has yet to generate any
revenue. Since our inception on March 14, 2007, it has been our business plan to
design, develop, manufacture and distribute our Thwapr service. Thwapr has only
been introduced in selected test markets and there is no guarantee that our
product will be able to generate any significant revenues. As a
development stage company, we face numerous risks and uncertainties in the
competitive markets. In particular, we have not proven that we
can:
|
·
|
develop
our product offering in a manner that enables us to be profitable and meet
our customers’ requirements;
|
|
·
|
develop
and maintain relationships with key customers and strategic partners that
will be necessary to optimize the market value of our products and
services;
|
|
·
|
raise
sufficient capital in the public and/or private markets;
or
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|
·
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respond
effectively to competitive
pressures.
|
If we are
unable to accomplish these goals, our business is unlikely to succeed and you
should consider our prospects in light of these risks, challenges and
uncertainties.
We
have no revenues and have incurred and expect to continue to incur substantial
losses.
Since
inception through March 31, 2010, we have not generated any revenues and
approximately $3,579,036 has been invested in the Company to date. We
have generated significant operating losses since our formation and expect to
incur substantial losses and negative operating cash flows for the foreseeable
future. For the year ended December 31, 2009, our net loss was
$2,475,330 and as of March 31, 2010 our accumulated deficit, excluding non-cash
charges, was $3,849,933. We anticipate that our existing cash and
cash equivalents will not be sufficient to fund our short term business needs
and we will need to generate revenue or receive additional investment in the
Company to continue operations. In addition, our business operations
may prove more expensive than we currently anticipate and we may incur
significant additional costs and expenses. We expect that capital outlays and
operating expenditures will continue to increase as we attempt to expand our
infrastructure and development activities and we will require significant
additional capital in order to implement our business plan and continue our
operations. It is uncertain when or if we will generate revenues from
product sales or the licensing of our technology.
Our
auditors have expressed uncertainty as to our ability to continue as a going
concern.
Primarily
as a result of our recurring losses and our lack of liquidity, we
received a report from our independent auditors that includes an explanatory
paragraph describing the substantial uncertainty as to our ability to continue
as a going concern as of our fiscal year ended December 31, 2009.
We
are in the early stages of product development and, if we are unable to
successfully develop our products and services, we will not be able to implement
our business strategy.
We are a
development stage company and are in the early stages of developing our products
and services and we have not yet successfully completed the development of any
products or services. We may be unable to complete the development of
our products or services or, if developed, update our products and services to
address changing industry conditions and our
competition. Furthermore, no assurance can be given that our products
or services, even if successfully developed, will generate sufficient revenues
to enable us to be profitable. If we do not successfully develop our
products and services, our ability to implement our business strategy and our
results of operations and financial condition will be materially adversely
affected.
18
If
we are unable to establish sales and marketing capabilities we may not be able
to generate sales and product revenue.
We do not
currently have an organization for the sales, marketing and distribution of our
services. Our strategy is to enter into agreements or other
arrangements with carriers to market our products and services. We
need to develop and maintain strategic relationships with these entities in
order for them to market our products and services to their end
users. We expect to face severe competition in this effort to
establish strategic relationships from other companies vying for the same type
of relationships with carriers. Some of these competitors may have a
competitive advantage over us in obtaining agreements with carriers due to their
size, reputation, relative financial stability or longer operating
history. If we are unable to establish such relationships on terms
that are favorable to us, or at all, we may not be able to penetrate the market
on a scale required to become viable or profitable.
If
we fail to raise additional capital, our ability to implement our business model
and strategy could be compromised.
We have
limited capital resources and operations. To date, our operations have been
funded entirely from the proceeds from equity and debt financings. We
expect to require substantial additional capital in the near future to develop
and market new products, services and technologies. We currently do
not have commitments for financing to meet our expected needs and we may not be
able to obtain additional financing on terms acceptable to us, or at
all. Even if we obtain financing for our near term operations and
product development, we expect that we will require additional capital beyond
the near term. If we are unable to raise capital when needed, our
business, financial condition and results of operations would be materially
adversely affected, and we could be forced to reduce or discontinue our
operations.
If
we borrow money to expand our business, the likelihood that investors may lose
some or all of their investment may increase.
We
anticipate that we may incur debt for financing our growth. Our
ability to borrow funds will depend upon a number of factors, including the
condition of the financial markets. If we receive debt financing, it
will have priority in any liquidation over the claims of holders of our
stockholders, which could increase the risk of loss of your investment in our
common stock. In addition, our payment obligations with respect to
any indebtedness could divert funds away from operations, marketing and product
development efforts.
Our
products and services are based on new and unproved technologies and are subject
to the risks of failure inherent in the development of new products and
services.
Because
our products and services are and will be based on new technologies, they are
subject to risks of failure that are particular to new technologies, including
the possibility that:
|
·
|
our
new approaches will not result in any products or services that gain
market acceptance;
|
|
·
|
our
products and services may unfavorably interact with other types of
commonly used applications and services, thus restricting the
circumstances in which they may be
used;
|
|
·
|
proprietary
rights of third parties may preclude us from marketing a new product or
service; or
|
|
·
|
third
parties may market superior or more cost-effective products or
services.
|
As a
result, our activities may not result in any commercially viable products or
services, which would harm our sales, revenue and financial
condition.
We
face intense competition and expect competition to increase in the future, which
could prohibit us from developing a customer base and generating
revenue.
There are
many companies who will compete directly with our planned products and
services. These companies may already have an established market in
our industry. Most of these companies have significantly greater
financial and other resources than us and have been developing their products
and services longer than we have been developing ours. Additionally,
there are not significant barriers to entry in our industry and new companies
may be created that will compete with us and other, more established companies
who do not now directly compete with us, may choose to enter our markets and
compete with us in the future.
19
Our business depends upon our
ability to keep pace with the latest technological changes, and our failure to
do so could make us less competitive in our industry.
The
market for our products and services is characterized by rapid change and
technological change, frequent new product innovations, changes in customer
requirements and expectations and evolving industry
standards. Products using new technologies or emerging industry
standards could make our products and services less
attractive. Furthermore, our competitors may have access to
technology and strategic relationships not available to us, which may enable
them to produce products of greater interest to consumers or at a more
competitive cost. In addition, our competitors may have greater
financial resources, greater experience in critical areas such as development,
testing, marketing and sales, and proprietary rights that prevent us from
developing certain technology without compensating them. Failure to
respond in a timely and cost-effective way to technological developments in our
markets may result in serious harm to our business and operating results. As a
result, our success will depend, in part, on our ability to develop and market
product and service offerings that respond in a timely manner to the
technological advances available to our customers, evolving industry standards
and changing preferences.
If
our services developed for mobile devices do not gain widespread adoption by the
devices’ users, we will not generate sales or substantial revenue and our
financial condition will be adversely affected.
The
commercial success of our future products and services will be dependent on
their acceptance by potential customers. Our services are developed
for mobile devices and may not be compelling to users due to a number of
reasons, including, among others, competitors’ services, service failures, or
our inability to adequately market our services. If we are unable to
attract mobile device users to our services, we may be unsuccessful in
attracting both advertisers and premium service subscribers to these services,
which could have a material adverse impact on our financial condition and
operating results.
Our services
may experience quality problems from time to time that can result in decreased
sales and operating margin.
We expect
to provide a highly complex service that may contain defects in design and
manufacture that may not enable our service to operate on all devices for which
they are intended. There can be no assurance we will be able to
detect and fix all defects in the products or services we provide. Failure to do
so could result in lost revenue, harm to our reputation, and other expenses, and
could have a material adverse impact on our financial condition and operating
results.
Major
network failures could have an adverse effect on our business.
Major
equipment failures, natural disasters, including severe weather, terrorist acts,
acts of war, cyber attacks or other breaches of network or information
technology security that affect third-party networks, transport facilities,
communications switches, routers, microwave links, cell sites or other
third-party equipment on which we rely, could cause major network failures
and/or unusually high network traffic demands that could have a material adverse
effect on our operations or our ability to provide service to our customers.
These events could disrupt our operations, require significant resources to
resolve, result in a loss of customers or impair our ability to attract new
customers, which in turn could have a material adverse effect on our business,
results of operations and financial condition.
If we
experience significant service interruptions, which could require significant
resources to resolve, it could result in a loss of customers or impair our
ability to attract new customers, which in turn could have a material adverse
effect on our business, results of operations and financial
condition.
In
addition, with the growth of wireless data services, enterprise data interfaces
and Internet-based or Internet Protocol-enabled applications, wireless networks
and devices are exposed to a greater degree to third-party data or applications
over which we have less direct control. As a result, the network infrastructure
and information systems on which we rely, as well as our customers’ wireless
devices, may be subject to a wider array of potential security risks, including
viruses and other types of computer-based attacks, which could cause lapses in
our service or adversely affect the ability of our customers to access our
service. Such lapses could have a material adverse effect on our business and
our results of operations.
Concerns
about health risks associated with wireless equipment may reduce the demand for
our services.
Portable
communications devices have been alleged to pose health risks, including cancer,
due to radio frequency emissions from these devices. The actual or
perceived risk of mobile communications devices could adversely affect us
through a reduction in mobile communication devise users, thereby reducing
potential users of our services.
20
If
we are not able to adequately protect our intellectual property, we may not be
able to compete effectively.
Our
ability to compete depends in part upon the strength of our proprietary rights
in our technologies, brands and content. We expect to rely on a combination of
U.S. and foreign patents, copyrights, trademark, trade secret laws and
license agreements to establish and protect our intellectual property and
proprietary rights. We have filed for certain patents on our core
technology, however, to date no patents have been issued and there is no
certainty that we will ever be issued patents protecting our intellectual
property. The efforts we have taken and expect to take to protect our
intellectual property and proprietary rights may not be sufficient or effective
at stopping unauthorized use of our intellectual property and proprietary
rights. In addition, effective trademark, patent, copyright and trade secret
protection may not be available or cost-effective in every country in which our
services are made available. There may be instances where we are not
able to fully protect or utilize our intellectual property in a manner that
maximizes competitive advantage. If we are unable to protect our intellectual
property and proprietary rights from unauthorized use, the value of our products
may be reduced, which could negatively impact our business. Our inability to
obtain appropriate protections for our intellectual property may also allow
competitors to enter our markets and produce or sell the same or similar
products. In addition, protecting our intellectual property and other
proprietary rights is expensive and diverts critical managerial resources. If we
are otherwise unable to protect our intellectual property and proprietary
rights, our business and financial results could be adversely
affected.
If we are
forced to resort to legal proceedings to enforce our intellectual property
rights, the proceedings could be burdensome and expensive. In addition, our
proprietary rights could be at risk if we are unsuccessful in, or cannot afford
to pursue, those proceedings. In addition, the possibility of
extensive delays in the patent issuance process could effectively reduce the
term during which a marketed product is protected by patents.
We may
also need to obtain licenses to patents or other proprietary rights from third
parties. We may not be able to obtain the licenses required under any patents or
proprietary rights or they may not be available on acceptable terms. If we do
not obtain required licenses, we may encounter delays in product development or
find that the development, manufacture or sale of products requiring licenses
could be foreclosed. We may, from time to time, support and collaborate in
research conducted by universities and governmental research organizations. We
may not be able to acquire exclusive rights to the inventions or technical
information derived from these collaborations, and disputes may arise over
rights in derivative or related research programs conducted by us or our
collaborators.
A
dispute concerning the infringement or misappropriation of our intellectual
property or proprietary rights or the intellectual property
or proprietary rights of others could be time consuming and costly
and an unfavorable outcome could harm our business.
There is
significant litigation in the telecommunications technology field regarding
patents and other intellectual property rights. Other companies with greater
financial and other resources than us have gone out of business from costs
related to patent litigation and from losing a patent litigation. We may be
exposed to future litigation by third parties based on claims that our
technologies or activities infringe the intellectual property rights of others.
Although we try to avoid infringement, there is the risk that we will use a
patented technology owned or licensed by another person or entity and be sued
for patent infringement or infringement of another party’s intellectual property
or proprietary rights. If we or our products are found to infringe
the intellectual property or proprietary rights of others, we may have to pay
significant damages or be prevented from making, using, selling, offering for
sale or importing such products or services or from practicing methods that
employ such intellectual property or proprietary rights.
Confidentiality
agreements with employees and others may not adequately prevent disclosure of
our trade secrets and other proprietary information.
Our
success depends upon the skills, knowledge and experience of our technical
personnel, our consultants and advisors as well as our licensors and
contractors. Because we operate in a highly competitive field, we rely almost
wholly on trade secrets to protect our proprietary technology and processes.
However, trade secrets are difficult to protect. We enter into confidentiality
and intellectual property assignment agreements with our corporate partners,
employees, consultants, outside scientific collaborators, developers and other
advisors. These agreements generally require that the receiving party keep
confidential and not disclose to third parties confidential information
developed by us during the course of the receiving party’s relationship with us.
These agreements also generally provide that inventions conceived by the
receiving party in the course of rendering services to us will be our exclusive
property. However, these agreements may be breached and may not effectively
assign intellectual property rights to us. Our trade secrets also could be
independently discovered by competitors, in which case we would not be able to
prevent use of such trade secrets by our competitors. The enforcement of a claim
alleging that a party illegally obtained and was using our trade secrets could
be difficult, expensive and time consuming and the outcome would be
unpredictable. In addition, courts outside the United States may be less willing
to protect trade secrets. The failure to obtain or maintain meaningful trade
secret protection could adversely affect our competitive
position.
21
Adverse
changes in general economic or political conditions in any of the countries in
which we do business or intend to launch our products could adversely affect our
operating results.
If we
grow our business to customers located in the United States as well as customers
located outside of the United States as we intend, we expect to become subject
to the risks arising from adverse changes in both domestic and global economic
and political conditions. For example, the direction and relative strength of
the United States and international economies remains uncertain due to softness
in the housing markets, difficulties in the financial services sector and credit
markets and continuing geopolitical uncertainties. If economic growth in the
United States and other countries continue to slow, the demand for our
customer’s products could decline, which would then decrease demand for our
products. Furthermore, if economic conditions in the countries into which our
customers sell their products continue to deteriorate, some of our customers may
decide to postpone or delay certain development programs, which would then delay
their need to purchase our products. This could result in a reduction in sales
of our service or in a reduction in the growth of our service revenues. Any of
these events would likely harm investors view of our business, our results of
operations and financial condition.
Our
business depends substantially on the continuing efforts of our executive
officers and our ability to maintain a skilled labor force and our business may
be severely disrupted if we lose their services.
Our
future success depends substantially on the continued services of our executive
officers. We do not maintain key man life insurance on any of our executive
officers and directors. If one or more of our executive officers are unable or
unwilling to continue in their present positions, we may not be able to replace
them readily, if at all. Therefore, our business may be severely disrupted, and
we may incur additional expenses to recruit and retain new officers. In
addition, if any of our executives joins a competitor or forms a competing
company, we may lose some of our customers.
If
we are unable to attract, train and retain technical and financial personnel,
our business may be materially and adversely affected.
Our
future success depends, to a significant extent, on our ability to attract,
train and retain technical and financial personnel. Recruiting and retaining
capable personnel, particularly those with expertise in our chosen industries,
are vital to our success. There is substantial competition for qualified
technical and financial personnel, and there can be no assurance that we will be
able to attract or retain our technical and financial personnel. If we are
unable to attract and retain qualified employees, our business may be materially
and adversely affected.
Litigation
may adversely affect our business, financial condition and results of
operations.
From time
to time in the normal course of our business operations, we may become subject
to litigation that may result in liability material to our financial statements
as a whole or may negatively affect our operating results if changes to our
business operation are required. The cost to defend such litigation may be
significant and may require a diversion of our resources. There also may be
adverse publicity associated with litigation that could negatively affect
customer perception of our business, regardless of whether the allegations are
valid or whether we are ultimately found liable. As a result, litigation may
adversely affect our business, financial condition and results of
operations.
Corporate
insiders or their affiliates may be able to exercise significant control matters
requiring a vote of our stockholders and their interests may differ from the
interests of our other stockholders.
Upon the
Closing of the Exchange Transaction, our directors and officers collectively own
approximately 22% of our issued and outstanding common stock. In
addition, one stockholder owns approximately 65% of our issued and outstanding
common stock. As a result, these officers and directors and
stockholder are able to exercise significant control over matters requiring
approval by our stockholders. Matters that require the approval of our
stockholders include the election of directors and the approval of mergers or
other business combination transactions. Certain transactions are effectively
not possible without the approval of these officers and directors and
stockholder by virtue of their control over a majority of our outstanding
shares, including, proxy contests, tender offers, open market purchase programs
or other transactions that can give our stockholders the opportunity to realize
a premium over the then-prevailing market prices for their shares of our common
stock.
We
will incur significant increased costs as a public company and our management
will be required to devote substantial time to new compliance
initiatives.
As a
public company, we will incur significant legal, accounting and other expenses
that we would not incur if we were a private company. SEC rules and
regulations impose heightened requirements on public companies, including
requiring changes in corporate governance practices. Our management
and other personnel will devote a substantial amount of time to these compliance
initiatives. We may also need to hire additional finance and administrative
personnel to support our compliance requirements. Moreover, these rules and
regulations will increase our legal and financial costs and make some activities
more time-consuming.
22
In
addition, as described above, we will be required to maintain effective internal
controls over financial reporting and disclosure controls and procedures
pursuant to the Sarbanes-Oxley Act. Our testing, and the subsequent testing by
our independent registered public accounting firm, may reveal deficiencies or
material weaknesses in our internal controls over financial
reporting. Our compliance with Section 404 of the Sarbanes-Oxley
Act will require that we incur substantial accounting expense and expend
significant management effort. We currently do not have an internal
audit group and we may need to hire additional accounting and financial staff
with appropriate public company experience and technical accounting
knowledge. If we are not able to comply with the requirements of
Section 404 in a timely manner, or if we or our independent registered
public accounting firm identifies deficiencies or material weaknesses in our
internal controls over financial reporting, the market price of our securities
could decline and we could be subject to sanctions or investigations by the SEC
or other regulatory authorities, which would require additional financial and
management resources.
We
will be required to evaluate our internal control over financial reporting under
Section 404 of the Sarbanes-Oxley Act and, since we have not been subject to
Sarbanes-Oxley regulations we may lack the financial controls and safeguards now
required of public companies.
Pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and
regulations of the SEC, for the fiscal year ending December 31, 2010, we are
required to include in our annual report our assessment of the effectiveness of
our internal control over financial reporting. Our independent
registered public accounting firm will also be required to issue a report on
management’s assessment of our internal control over financial reporting and
their evaluation of the operating effectiveness of our internal control over
financial reporting. Our assessment will require us to make
subjective judgments and our independent registered public accounting firm may
not agree with our assessment.
As required
by Rule 13a-15 under the Securities Exchange Act of 1934, as
amended, (the “1934 Act”), as of the quarter ended March 31, 2010, we
carried out an evaluation of the effectiveness of the design and operation of
our disclosure controls and procedures. This evaluation was carried
out under the supervision and with the participation of our management,
including our Principal Executive Officer and Principal Financial
Officer. Based upon the results of that evaluation, our
Principal Executive Officer and Principal Financial Officer have concluded that,
as of March 31, 2010, our disclosure controls and procedures were not
effective to provide reasonable assurance that the material information related
to our Company required to be disclosed in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and
forms, and that such information is accumulated and communicated to management
to allow timely decisions on required disclosure.
Our
annual report for the year ended December 31, 2009 did not include a report of
management’s assessment regarding internal control over financial reporting or
an attestation report of the company’s registered public accounting firm due to
a transition period established by rules of the Securities and Exchange
Commission for newly public companies. However, we do not currently
have the internal infrastructure necessary to complete an attestation about our
financial controls that would be required under Section 404 of the
Sarbanes-Oxley Act. We expect to incur additional expenses and expend
management’s time as a result of performing the system and process evaluation,
testing and remediation required in order to comply with the management
certification and auditor attestation requirements. There can be no assurance
that there are no significant deficiencies or material weaknesses in the quality
of our financial controls.
Nevertheless,
our management has determined that all matters to be disclosed in this report
have been fully and accurately reported. We are in the process of
improving our processes and procedures to ensure full, accurate and timely
disclosure in the current fiscal year, with the expectation of establishing
effective disclosure controls and procedures and internal control over financial
reporting as soon as reasonably practicable. Achieving continued
compliance with Section 404 may require us to incur significant costs and expend
significant time and management resources. We cannot assure you that we will be
able to fully comply with Section 404 or that we and our independent registered
public accounting firm would be able to conclude that our internal control over
financial reporting is effective at fiscal year end. As a result, investors
could lose confidence in our reported financial information, which could have an
adverse effect on the trading price of our securities, as well as subject us to
civil or criminal investigations and penalties. In addition, our independent
registered public accounting firm may not agree with our management’s assessment
or conclude that our internal control over financial reporting is operating
effectively. We will continue to consistently improve our internal
control over the financial reporting with our best efforts and we plan to engage
assistance from outside experts in doing so.
23
We
are subject to SEC reporting requirements and we do not have significant SEC
reporting experience.
We
currently do not have a clear process, schedule, segregation of duties or review
with respect to the SEC reporting process. In addition, we do not have
significant experience with or knowledge about the Sarbanes-Oxley
Act. The Company is committed to remedying this deficiency and
weakness and plans to implement certain remedial measures, including hiring a
comptroller or other finance personnel with SEC reporting experience, providing
additional training to our accounting personnel on the requirements of SEC
reporting requirements to increase their familiarity with those standards, and
reassessing our existing finance and accounting policies and
procedures.
Risks
Related to an Investment in Our Securities
Our
stock is categorized as a penny stock. Trading of our stock may be restricted by
the SEC’s penny stock regulations which may limit a shareholder’s ability to buy
and sell our stock.
Our stock
is categorized as a “penny stock”. The SEC has adopted Rule 15g-9 which
generally defines “penny stock” to be any equity security that has a market
price (as defined) less than $5.00 per share or an exercise price of less than
$5.00 per share, subject to certain exceptions. Our securities are covered by
the penny stock rules, which impose additional sales practice requirements on
broker-dealers who sell to persons other than established customers and
accredited investors. The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document in a form prepared by the SEC which
provides information about penny stocks and the nature and level of risks in the
penny stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction and monthly account
statements showing the market value of each penny stock held in the customer’s
account. The bid and offer quotations, and the broker-dealer and salesperson
compensation information, must be given to the customer orally or in writing
prior to effecting the transaction and must be given to the customer in writing
before or with the customer’s confirmation. In addition, the penny stock rules
require that prior to a transaction in a penny stock not otherwise exempt from
these rules, the broker-dealer must make a special written determination that
the penny stock is a suitable investment for the purchaser and receive the
purchaser’s written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for the stock that is subject to these penny stock rules. Consequently,
these penny stock rules may affect the ability of broker-dealers to trade our
securities. We believe that the penny stock rules discourage investor interest
in and limit the marketability of our common stock.
FINRA
sales practice requirements may also limit a shareholder’s ability to buy and
sell our stock.
In
addition to the “penny stock” rules described above, the Financial Industry
Regulatory Authority (“FINRA”) has adopted rules that require that in
recommending an investment to a customer, a broker-dealer must have reasonable
grounds for believing that the investment is suitable for that customer. Prior
to recommending speculative low priced securities to their non-institutional
customers, broker-dealers must make reasonable efforts to obtain information
about the customer’s financial status, tax status, investment objectives and
other information. Under interpretations of these rules, FINRA believes that
there is a high probability that speculative low priced securities will not be
suitable for at least some customers. The FINRA requirements make it more
difficult for broker-dealers to recommend that their customers buy our common
stock, which may limit your ability to buy and sell our stock and have an
adverse effect on the market for our shares.
We
expect to experience volatility in our stock price, which could negatively
affect shareholders’ investments.
While our
common stock is not currently traded, if and when there is an active trading
market, the market price for shares of our common stock may be volatile and may
fluctuate based upon a number of factors, including, without limitation,
business performance, news announcements or changes in general market
conditions.
Other
factors, in addition to the those risks included in this section, that may have
a significant impact on the market price of our common stock include, but are
not limited to:
|
·
|
receipt
of substantial orders or order cancellations of
products;
|
|
·
|
quality
deficiencies in services or
products;
|
|
·
|
international
developments, such as technology mandates, political developments or
changes in economic policies;
|
|
·
|
changes
in recommendations of securities
analysts;
|
|
·
|
shortfalls
in our backlog, revenues or earnings in any given period relative to the
levels expected by securities analysts or projected by
us;
|
24
|
·
|
government
regulations, including stock option accounting and tax
regulations;
|
|
·
|
energy
blackouts;
|
|
·
|
acts
of terrorism and war;
|
|
·
|
widespread
illness;
|
|
·
|
proprietary
rights or product or patent
litigation;
|
|
·
|
strategic
transactions, such as acquisitions and divestitures;
or
|
|
·
|
rumors
or allegations regarding our financial disclosures or
practices.
|
In the
past, securities class action litigation has often been brought against a
company following periods of volatility in the market price of its
securities. Due to the volatility of our common stock price, we may
be the target of securities litigation in the future. Securities
litigation could result in substantial costs and divert management’s attention
and resources.
Shareholders
should also be aware that, according to SEC Release No. 34-29093, the market for
“penny stock”, such as our common stock, has suffered in recent years from
patterns of fraud and abuse. Such patterns include (1) control of the
market for the security by one or a few broker-dealers that are often related to
the promoter or issuer; (2) manipulation of prices through prearranged matching
of purchases and sales and false and misleading press releases; (3) boiler room
practices involving high-pressure sales tactics and unrealistic price
projections by inexperienced sales persons; (4) excessive and undisclosed
bid-ask differential and markups by selling broker-dealers; and (5) the
wholesale dumping of the same securities by promoters and broker-dealers after
prices have been manipulated to a desired level, along with the resulting
inevitable collapse of those prices and with consequent investor
losses. Our management is aware of the abuses that have occurred
historically in the penny stock market. Although we do not expect to
be in a position to dictate the behavior of the market or of broker-dealers who
participate in the market, management will strive within the confines of
practical limitations to prevent the described patterns from being established
with respect to our securities. The occurrence of these patterns or practices
could increase the future volatility of our share price.
To
date, we have not paid any cash dividends and no cash dividends will be paid in
the foreseeable future.
We do not
anticipate paying cash dividends on our common stock in the foreseeable future
and we may not have sufficient funds legally available to pay
dividends. Even if the funds are legally available for distribution,
we may nevertheless decide not to pay any dividends. We presently
intend to retain all earnings for our operations.
Our
common stock is not currently publicly traded, and investors may be unable to
sell at or near ask prices or at all if they need to sell or liquidate their
shares.
We cannot
predict the extent to which an active public market for our common stock will
develop or be sustained. However, we do not rule out the possibility
of applying for listing on the NYSE Amex (formerly known as American Stock
Exchange), NASDAQ Capital Market or other markets.
Our
common stock is not currently traded. There is no assurance that an
active public trading market for our common stock will develop or be sustained,
or that trading levels will be sustained, which may result in you being unable
to sell any shares of our common stock at or near ask prices or at
all.
Our
corporate actions are substantially controlled by our principal shareholders and
affiliated entities.
Following
the closing of the Exchange Transaction, our principal shareholders, which
includes our officers and directors, and their affiliated entities, own
approximately 87% of our outstanding shares of common stock. These shareholders,
acting individually or as a group, could exert substantial influence over
matters such as electing directors and approving mergers or other business
combination transactions. In addition, because of the percentage of
ownership and voting concentration in these principal shareholders and their
affiliated entities, elections of our board of directors will generally be
within the control of these shareholders and their affiliated entities. While
all of our shareholders are entitled to vote on matters submitted to our
shareholders for approval, the concentration of shares and voting control
presently lies with these principal shareholders and their affiliated entities.
As such, it would be difficult for shareholders to propose and have approved
proposals not supported by management. There can be no assurances that matters
voted upon by our officers and directors in their capacity as shareholders will
be viewed favorably by all of our shareholders.
25
Our
Articles of Incorporation authorize the issuance of preferred stock, which could
have rights, preferences and privileges superior to those of our common
stock.
Our
Articles of Incorporation authorize the issuance of shares of preferred stock
with designations, rights and preferences determined from time to time by our
Board of Directors. Accordingly, our Board of Directors is empowered, without
stockholder approval, to issue preferred stock with dividend, liquidation,
conversion, voting, or other rights which could adversely affect the voting
power or other rights of the holders of the common stock. In the
event of issuance, the preferred stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company.
The
elimination of monetary liability against our directors, officers and employees
under Nevada law and the existence of indemnification rights to our directors,
officers and employees may result in substantial expenditures by our company and
may discourage lawsuits against our directors, officers and
employees.
Our
Articles of Incorporation contain a provision permitting us to eliminate the
personal liability of our directors to our company and shareholders for damages
for breach of fiduciary duty as a director or officer to the extent provided by
Nevada law. We may also have contractual indemnification obligations under our
employment agreements with our officers. The foregoing indemnification
obligations could result in the Company incurring substantial expenditures to
cover the cost of settlement or damage awards against directors and officers,
which we may be unable to recoup. These provisions and resultant
costs may also discourage our company from bringing a lawsuit against directors
and officers for breaches of their fiduciary duties, and may similarly
discourage the filing of derivative litigation by our shareholders against our
directors and officers even though such actions, if successful, might otherwise
benefit our company and shareholders.
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
During
the quarter ended March 31, 2010, we issued a total of 402,400 shares of common
stock at a sales price of $1.25 per share, for net proceeds of $495,500. We
issued the shares in reliance on Section 506 of Regulation D and/or Regulation S
of the Securities Act, and comparable exemptions for sales to "accredited"
investors under state securities laws. We used the proceeds from
these sales of common stock for general corporate purposes.
Subsequent
to our fiscal quarter ended March 31, 2010, on April 28, 2010, we sold
160,000 shares of common stock at a sales price of $1.25 per share, for net
proceeds of $200,000. On May 13, 2010, we sold 80,000 shares of common
stock at a sales price of $1.25 per share, for net proceeds of $100,000. We
issued these shares in reliance on Section 506 of Regulation D and/or Regulation
S of the Securities Act, and comparable exemptions for sales to "accredited"
investors under state securities laws. We used the proceeds from
these sales of common stock for general corporate purposes. As of the date
of this Quarterly Report on Form 10-Q, we have not issued these
shares.
ITEM
3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
None.
ITEM
4.
|
REMOVED
AND RESERVED
|
ITEM
5.
|
OTHER
INFORMATION
|
None.
26
ITEM
6.
|
EXHIBITS
|
Exhibit
Number
|
Description
|
|
2.1
|
Share
Exchange Agreement, dated March 5, 2010 (incorporated by reference to
Exhibit 2.1 of the Registrant’s Current Report on Form 8-K filed on March
9, 2010).
|
|
3.1
|
Articles
of Incorporation of the Registrant, dated November 2, 2007, including
amendments (incorporated by reference to Exhibit 3.1 of the Registrant’s
Current Report on Form 8-K filed on April 2, 2010).
|
|
3.1(a)
|
Amendment
to Articles of Incorporation (incorporated by reference to Exhibit 3.1(a)
of the Registrant’s Current Report on Form 8-K filed on April 21,
2010).
|
|
3.2
|
By-laws
of the Registrant, dated November 2, 2007 (incorporated by reference to
Exhibit 3.2 of Registrant’s Registration Statement on Form S-1 filed on
February 9, 2009).
|
|
4.1
|
Form
of Stock Specimen (incorporated by reference to Exhibit 4.1 of
Registrant’s Registration Statement on Form S-1 filed on February 9,
2009).
|
|
10.4(a)
|
Addendum
No. 1 to Exchange Offer Agreement, dated February 2010, by and among
Thwapr, Inc. and the stockholders listed therein (incorporated by
reference to Exhibit 10.4(a) of the Registrant’s Current Report on Form
8-K filed on April 2, 2010).
|
|
10.8
|
Form
of Indemnification Agreement for the officers and directors of Seaospa,
Inc.(incorporated by reference to Exhibit 10.8 of the Registrant’s Current
Report on Form 8-K filed on April 2, 2010).
|
|
10.9
|
Registration
Rights Agreement, dated March 29, 2010, by and among Seaospa, Inc. and the
stockholders listed therein (incorporated by reference to Exhibit 10.9 of
the Registrant’s Current Report on Form 8-K filed on April 2,
2010).
|
|
31.1
|
Certification
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31.2
|
Certification
of Principal Financial Officer and Principal Accounting Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32.1
|
Certification
of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
32.2
|
|
Certification
of Principal Financial Officer and Principal Accounting Officer pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of
2002.
|
27
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
THWAPR,
INC.
|
|
Date: May
17, 2010
|
/s/ Bruce Goldstein
|
Name: Bruce
Goldstein
|
|
Title: President
and Chief Executive Officer
|
|
(Principal
Executive Officer)
|
|
Date: May
17, 2010
|
/s/ Barry Hall
|
Name: Barry
Hall
|
|
Title: Chief
Financial Officer
|
|
(Principal
Financial Officer and Principal Accounting
Officer)
|