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 June 30, 2012

 

¨

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)
410 S. Rampart Blvd. Ste. 390 Las Vegas, NV 89145 (Address of principal executive offices)
(702) 726-6820 (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 ¨

 

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 ¨ No x

 

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): 292,204,180

 

Large accelerated filer ¨		Accelerated filer ¨		Non-accelerated filer ¨		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 ¨ No x

 

The number of shares outstanding of the registrant’s common stock at August 20, 2012 was 292,204,180.

 

 

 

INDEX

 

		Page
		Number
PART I - FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS	3
	Balance Sheet as at June 30, 2012 (unaudited) and December 31, 2011 (audited)	5
	Statement of Operations for the three and six months periods ended June 30, 2012 and 2011 and for the period March 14, 2007 (Date of Inception) to June 30, 2012 (unaudited)	6
	Statement of Cash Flows for the three and six month periods ended June 30, 2012 and 2011 and for the period March 14, 2007 (Date of Inception) to June 30, 2012 (unaudited)	7
	Statement of Stockholders’ Equity (Deficit) for the period March 14, 2007 (Date of Inception) to June 30, 2012 (unaudited)	8
	Notes to the Financial Statements	9-21
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	22
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS	26
ITEM 4.	CONTROLS AND PROCEDURES	26
PART II - OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	26
ITEM 1A.	RISK FACTORS	26
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	26
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	27
ITEM 4.	MINE SAFETY DISCLOSURE	27
ITEM 5.	OTHER INFORMATION	27
ITEM 6.	EXHIBITS	27
SIGNATURES		28

  

 

PART I - FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

 

The accompanying balance sheets of Thwapr, Inc. at June 30, 2012 (with comparative figures as at December 31, 2011) and the statement of operations for the three and six months ended June, 2012 and 2011 and for the period from March 14, 2007 (date of inception) to June 30, 2012, the statement of shareholders’ equity (deficit) for the period from March 14, 2007 (date of inception) to June 30, 2012, and the statement of cash flows for the three and six months ended June 30, 2012 and 2011 and for the period from March 14, 2007 (date of inception) to June 30, 2012 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 three and six month ended June 30, 2012 are not necessarily indicative of the results that can be expected for the year ending December 31, 2012. These financial statements should be read in conjunction with the financial statements and notes for the years ended December 31, 2011 and 2010, included in Form 10-K amended and filed with the Securities on May 21, 2012.

 

  

THWAPR, INC.

 

CONTENTS

 

	PAGE
BALANCE SHEETS	5
STATEMENTS OF OPERATIONS	6
STATEMENTS OF CASH FLOWS	7
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)	8
NOTES TO FINANCIAL STATEMENTS	9-21

 

 

THWAPR, INC.

(A DEVELOPMENT STAGE COMPANY)

BALANCE SHEETS

 

		(Unaudited)
		June 30,				December 31,
		2012				2011
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	527			$	8,083
Accounts receivable, net of allowance for doubtful accounts of $3,750 at June 30, 2012 and $0 December 31, 2011			-				17,788
Prepaid expenses			142,506				17,213
TOTAL CURRENT ASSETS			143,033				43,084
PROPERTY AND EQUIPMENT, NET			2,633				12,409
TOTAL ASSETS		$	145,666			$	55,493
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses		$	183,713			$	184,940
Notes payable to stockholders			173,064				-
Deferred revenue			-				5,833
Secured Convertible notes due to stockholders less discount of $862,298 and $0 at June 30, 2012 and December 31, 2011, respectively			830,030				1,339,334
Derivative liability			2,487,508				1,701
Amount payable to stockholders			513,162				734,798
TOTAL CURRENT LIABILITIES			4,187,477				2,266,606
LONG-TERM LIABILITIES
Convertible note, less discount of $12,292 and $14,792 at June 30, 2012 and December 31, 2011, respectively			12,708				10,208
TOTAL LONG-TERM LIABILITIES			12,708				10,208
COMMITMENTS AND CONTINGENCIES, Note 5
STOCKHOLDERS' DEFICIT:
Convertible preferred, $.0001 par value; 50,000,000 shares authorized; 46,961,636 shares issued and outstanding			4,706				4,706
Common stock, $.0003 par value; 300,000,000 shares authorized; 292,147,392 and 58,094,129 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively			73,927				3,711
Additional paid-in capital			23,716,941				20,474,730
Deficit accumulated during the development stage			(27,850,093	)			(22,704,468	)
TOTAL STOCKHOLDERS' DEFICIT			(4,054,519	)			(2,221,321	)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT		$	145,666			$	55,493

 

 

THWAPR, INC.

(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF OPERATIONS (Unaudited)

FOR THE THREE MONTHS ENDED June 30, 2012 AND 2011 AND THE PERIOD FROM

MARCH 14, 2007 (DATE OF INCEPTION) THROUGH June 30, 2012

 

																		March 14, 2007
		For the Three Months Ended								For the Six Months Ended								(Date of Inception)
		June 30,								June 30,								through
		2012				2011				2012				2011				June 30, 2012
REVENUE		$	6,458			$	5,700			$	23,433			$	6,208			$	61,263
COST OF SALES			24,895				47,397				64,943				95,374				279,052
GROSS LOSS			(18,437	)			(41,697	)			(41,510	)			(89,166	)			(217,789	)
OPERATING EXPENSES:
Product Development			22,058				680,345				95,359				1,708,019				9,995,057
General and Administrative Expenses			757,554				668,074				1,569,769				2,003,231				14,075,275
TOTAL OPERATING EXPENSES			779,612				1,348,419				1,665,128				3,711,250				24,070,332
LOSS FROM OPERATIONS			(798,049	)			(1,390,116	)			(1,706,638	)			(3,800,416	)			(24,288,121	)
OTHER INCOME (EXPENSES)
Interest Income			-				5				-				5				193
Other Income			-				43,198				-				43,198				43,198
Change in Derivative Liability			(1,586,314	)			9,809				(1,324,334	)			15,407				(1,299,235	)
Interest Expense			(411,815	)			(12,431	)			(460,483	)			(17,123	)			(644,670	)
Other Expense, note 10			(1,654,170	)			-				(1,654,170	)			-				(1,661,459	)
TOTAL OTHER INCOME (EXPENSE)			(3,652,299	)			40,581				(3,438,987	)			41,487				(3,561,973	)
NET LOSS		$	(4,450,348	)		$	(1,349,535	)		$	(5,145,625	)		$	(3,758,929	)		$	(27,850,094	)
Basic and diluted (loss) per share		$	(0.02	)		$	(0.03	)		$	(0.03	)		$	(0.07	)
Weighted average shares			248,503,422				53,769,129				153,171,954				53,194,499

 

 

THWAPR, INC.

(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF CASH FLOWS (Unaudited)

FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011 AND THE PERIOD FROM

MARCH 14, 2007 (DATE OF INCEPTION) THROUGH June 30, 2012

 

										March 14, 2007
		For the Six Months Ended								(Date of Inception)
		June 30,								through
		2012				2011				June 30, 2012
CASH FLOW FROM OPERATING ACTIVITIES
Net loss		$	(5,145,625	)		$	(3,758,929	)		$	(27,850,093	)
Adjustments to reconcile net loss to net cash used in operating activities:
Forgiveness of debt			-				(43,198	)			(43,198	)
Stock based compensation			1,202,172				2,884,706				16,326,499
Amortization of note discount			414,547				2,500				536,880
Change in derivative liability			1,324,334				(15,407	)			1,299,235
Issuance of additional shares - financing			1,649,202								1,649,202
Depreciation Expense			4,808				6,702				37,138
Loss on disposal of fixed assets			4,968				-				12,257
(Increase) decrease in:
Accounts receivable			17,788				(2,958	)			-
Prepaid expense			11,874				(940	)			(5,339	)
Increase (decrease) in:
Accounts payable and accrued expenses			212,125				(117,759	)			500,829
Deferred revenue			(5,833	)			-				-
Amounts payable to stockholders			67,084				134,379				801,882
NET CASH USED IN OPERATING ACTIVITIES			(242,556	)			(910,904	)			(6,734,708	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment			-				(3,848	)			(52,029	)
NET CASH USED IN INVESTING ACTIVITIES			-				(3,848	)			(52,029	)
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from convertible notes			-				-				25,000
Proceeds from convertible notes due to stockholders			235,000				877,500				1,619,068
Proceeds from sale of common stock, net			-				50,200				5,143,196
NET CASH PROVIDED BY FINANCING ACTIVITIES			235,000				927,700				6,787,264
NET INCREASE (DECREASE) IN CASH			(7,556	)			12,948				527
CASH AT BEGINNING OF THE PERIOD			8,083				5,637				-
CASH AT END OF PERIOD		$	527			$	18,585			$	527
SUPPLEMENTARY DISCLOSURE:
Income taxes paid in cash		$	-			$	-			$	2,660
Conversion of notes payable into equity		$	280,618			$	-			$	384,118
Issuance of notes as payment of accounts payable		$	173,064			$	-			$	173,064
Issuance of shares as payment of accounts payable		$	113,268			$	-			$	113,268
Convertible notes issued to stockholder as payment of accounts payable		$	-			$	-			$	296,238

 

 

THWAPR, INC.

(A DEVELOPMENT STAGE COMPANY)

STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)

FOR THE PERIOD MARCH 14, 2007 (DATE OF INCEPTION)

THROUGH June 30, 2012

 

																		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			-				-				12,857,136				429				(429	)			-				-
Issuance of stock for cash ($.023 per share)			-				-				30,000,000				1,000				770,676				-				771,676
Net loss			-				-				-				-				-				(454,014	)			(454,014	)
BALANCE, DECEMBER 31, 2007			-				-				42,857,136				1,429				770,247				(454,014	)			317,662
Issuance for cash, ($0.33 per share)			-				-				1,350,000				45				448,755				-				448,800
Net loss			-				-				-				-				-				(891,552	)			(891,552	)
BALANCE, DECEMBER 31, 2008			-				-				44,207,136				1,474				1,219,002				(1,345,566	)			(125,090	)
Issuance for cash ($0.33 per share)			-				-				2,980,500				99				993,401				-				993,500
Conversion of common stock to preferred stock			15,729,212				1,573				(47,187,636	)			(1,573	)			-				-				-
Issuance for cash ($0.41 per share)			-				-				2,133,600				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				2,133,600				71				3,694,190				(3,820,896	)			(125,062	)
Conversion of preferred stock to common			(15,729,212	)			(1,573	)			424,688,724				14,156				(12,583	)			-				-
Shares added due to reverse merger			-				-				43,829,262				1,461				(1,461	)			-				-
Issuance for cash ($0.42 per share)											1,207,200				40				495,460								495,500
Issuance for cash ($0.42 per share)			-				-				750,000				75				312,425				-				312,500
Issuance for cash ($0.73 per share)			-				-				684,933				68				469,932				-				470,000
Issuance for cash ($0.83 per share)			-				-				910,800				92				731,369				-				731,461
Conversion of common stock to preferred			47,061,636				4,706				(423,554,724	)			(14,118	)			9,412				-				-
Amortization of warrants			-				-				-				-				7,113,192				-				7,113,192
Amortization of preferred stock issuance			-				-				-				-				2,468,749				-				2,468,749
Stocks issued for services			-				-				1,386,000				138				637,861				-				637,999
Net loss			-				-				-				-				-				(12,681,777	)			(12,681,777	)
BALANCE, DECEMBER 31, 2010			47,061,636				4,706				52,035,795				1,983				15,918,546				(16,502,673	)			(577,438	)
Issuance for cash ($0.06 per share)											833,334				280				49,920				-				50,200
Amortization of stock options																			764,938								764,938
Amortization of warrants			-				-				-				-				1,022,368				-				1,022,368
Amortization of preferred stock issuance for services			-				-				-				-				1,549,166				-				1,549,166
Common stock issued for services			-				-				3,500,000				930				829,795				-				830,725
Amortization of common stock issuance for services			-				-				-				-				124,890				-				124,890
Beneficial conversion feature			-				-				-				-				112,125				-				112,125
Conversion of notes into shares ($0.06 per share)			-				-				1,725,000				518				102,982				-				103,500
Preferred stock forfeited			(100,000	)			-				-				-				-				-				-
Net loss			-				-				-				-				-				(6,201,795	)			(6,201,795	)
BALANCE, DECEMBER 31, 2011			46,961,636				4,706				58,094,129				3,711				20,474,730				(22,704,468	)			(2,221,321	)
Issuance of stock for as payment of payables ($0.07 per share)			-				-				1,000,000				300				69,700				-				70,000
Amortization of stock options			-				-				-				-				463,665				-				463,665
Amortization of warrants			-				-				-				-				67,555				-				67,555
Amortization of common stock issued for services			-				-				-				-				16,416				-				16,416
Net loss			-				-				-				-				-				(695,277	)			(695,277	)
BALANCE, MARCH 31, 2012			46,961,636				4,706				59,094,129				4,011				21,092,066				(23,399,745	)			(2,298,962	)
Issuance of stock for as payment of payables ($0.015 per share)			-				-				2,884,405				866				42,402				-				43,268
Common stock issued for services											22,550,000				6,765				240,185								246,950
Issuance of "make-good" shares											191,767,635				57,530				1,591,672								1,649,202
Conversion of notes into shares ($0.01 per share)			-				-				16,717,889				5,015				275,603				-				280,618
Common stock cancelled											(866,666	)			(260	)			260				-				-
Amortization of stock options			-				-				-				-				423,922				-				423,922
Amortization of warrants			-				-				-				-				50,831				-				50,831
Net loss			-				-				-				-				-				(4,450,348	)			(4,450,348	)
BALANCE, JUNE 30, 2012			46,961,636			$	4,706				292,147,392			$	73,927			$	23,716,941			$	(27,850,093	)		$	(4,054,519	)

 

The above shares of common stock retroactively reflect a 3-for-1 stock split in February 2011.

 

 

Notes to Financial Statements

 

1.

ORGANIZATION AND BASIS OF PRESENTATION

 

Organization and Nature of Operations

 

Thwapr, Inc. (“Thwapr” or the “Company”) is a Nevada corporation which has developed a mobile video sharing platform that solves the problem of sending quality video content to and from mobile devices and from Websites to mobile devices.  Thwapr’s systems, applications and software 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 launched its service in late 2010 but to date has not generated any meaningful revenues and does not anticipate such revenues until such time that a significant number of users and brands have signed up for and are using the service.  This service was 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 research and 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. For its research and 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.

 

Development Stage Activities

 

Since inception the Company has minimal revenue producing business operations. All of the operating results and cash flows reported in the accompanying financial statements from March 14, 2007 through June 30, 2012 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.  The Company is focusing its efforts in two areas during the development stage. First, the Company has devoted a substantial time and resources to software development related to the service it was to provide.  Second, the Company has spent significant time and resources testing the software against a variety of cell phone models, platforms and carriers.

 

Restructuring Plan

 

On March 23, 2012 the Company announced a restructuring plan as part of the Company’s efforts to achieve liquidity, avoid defaults under indebtedness that was due and payable, and satisfy approximately $740,000 of additional debt, accounts payable and accrued expense obligations owed to certain consultants, employees and vendors (the “Payables”), in addition to seeking to raise additional working capital, the Company’s management has commenced to implement a debt restructuring plan (the “Restructuring Plan”). In June 2012 the Company issued 2,884,405 shares of $.0003 Common stock and notes of $173,064 bearing interest at 6% due March 31, 2013 as payment of $216,330 of accounts payable.

 

As an initial step, Messrs. Kevir Kang, an individual who previously loaned the Company an aggregate of $1,282,320, Ron Singh, the President and CEO of the Company, and Barry Hall, Chief Financial Officer of the Company, who previously advanced approximately $117,463 to the Company, each agreed to restructure the repayment of an aggregate of $1,664,847 (inclusive of accrued interest at 6% per annum) of cash loans and advances made to the Company. Under the terms of the Restructuring Plan, each of these creditors were issued 6% convertible secured promissory notes payable as to principal and accrued interest due on June 30, 2013 (the “New Notes”), in lieu of existing indebtedness, including the $200,000 line of credit payable on demand. The New Notes are secured as to repayment by a first priority lien on all of the Company’s assets and are convertible at any time by the holder(s) into shares of the Company’s common stock, $0.0003 par value per share (the “Common Stock”) at an initial conversion price of $0.015 per share, subject to certain anti-dilution and other adjustments.

 

 

In addition to the issuance of the New Notes, the Company’s management is seeking to negotiate separate settlement and deferred payment arrangements with certain of its creditors holding Company Payables, including Bruce Goldstein, the former President and CEO of the Company. In some cases, the offered such creditors payment of 80% of their payables in the form of 6% Company notes payable on March 31, 2013, but subject to mandatory prepayment out of the net proceeds, if any, received by the Company in connection with any one or more future financings, to the extent of such net proceeds that are in excess of $1.5 million. The balance of such payment would be in the form of restricted shares of Company Common Stock which the Company proposes to issue at $0.015 per share.

 

Pursuant to private placements of Common Stock consummated in 2009 and 2010, the Company received a total of $2,963,500 in connection with the issuance and sale to 15 investors (none of whom is or was a direct or indirect officer, director or affiliate of the Company) of an aggregate of 5,686,532 shares of Common Stock at prices ranging from $0.417 to $0.833 per share. The Company issued to such investors 191,767,635 additional shares at a value of $0.015 per share on April 23, 2012.

 

Going Concern

 

The Company has sustained operating losses since its inception, continues to use cash in its operations 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, 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 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. Should management fail to raise funds or generate sufficient revenue, the company may need to curtail its operations.

 

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. 

 

Accounts Receivable

The Company maintains an allowance for doubtful accounts for estimated losses that may arise if any of its customers are unable to make required payments. Management specifically analyzes the age of customer balances, historical bad debt experience, customer credit-worthiness, and changes in customer payment terms when making estimates of the collectability of the Company's trade accounts receivable balances. If the Company determines that the financial conditions of any of its customers have deteriorated, whether due to customer specific or general economic issues, increases in the allowance may be made. Accounts receivable are written off when all collection attempts have failed.

 

Property & Equipment

 

Property and Equipment are stated at cost. Depreciation is provided for using the straight-line method over the estimated useful lives of the assets for 3 to 5 years.

 

 

Revenue Recognition

 

Revenue currently consists of fees for usage of our technology including set up fees and fees for one-time consulting services. Our contracts for the usage of our technology are typically usage-based or in some case on a flat fee for monthly services. Set up fees are recognized over the contract period. We recognize revenue when the service has been rendered.

 

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:

 

·

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 June 30, 2012 for assets and liabilities measured at fair value on a recurring basis:

 

		Level 1				Level 2				Level 3
Cash and cash equivalents		$	527			$	-			$	-
Derivative liability (conversion feature and warrants)		$	-			$	-			$	2,487,508

 

The following table summarizes fair value measurements by level at December 31, 2011 for assets and liabilities measured at fair value on a recurring basis:

 

		Level 1				Level 2				Level 3
Cash and cash equivalents		$	8,083			$	-			$	-
Derivative liability (conversion feature and warrants)		$	-			$	-			$	1,701

 

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 six months ended June 30, 2012.

 

		Level 3 Liabilities
		Derivative Liability
Balance as of December 31, 2011		$	1,701
Creation of Derivative			1,274,345
Reclassification to Equity			(112,872	)
Changes in value of Derivative Liability			1,324,334
Balance as of June 30, 2012		$	2,487,508

 

 

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 Company used the Black-Scholes option pricing model for estimating the fair value of the note conversion feature and the warrants with the following assumptions: expected life of 1.00 to 2.75 years; risk-free interest rate of 0.3% to 1.0% dividend yield of 0%; and expected volatility of 200%.

 

Valuation of Derivative Instruments

 

ASC 815-40 (formerly SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities”) requires that embedded derivative instruments be bifurcated and assessed, along with free-standing derivative instruments such as warrants, on their issuance date and in accordance with ASC 815-40-15 to determine whether they should be considered a derivative liability and measured at their fair value for accounting purposes. In determining the appropriate fair value, the Company uses the Black-Scholes option pricing formula. At March 31, 2012, the Company adjusted its derivative liability to its fair value, and reflected the decrease of $261,980, which represents the gain on change in derivative.

 

Product Development

 

Product development costs are expensed as incurred.  These costs primarily include the costs associated with the research and development and testing of video and picture sharing technology.  During the three months ended June 30, 2012 and 2011, product development costs amounted to $22,058 and $680,345, respectively.  During the six months ended June 30, 2012 and 2011 product development costs amounted to $95,359 and $1,708,019, respectively.

 

Concentrations

 

The Company has three major customers that individually exceeded 10% of total revenue for the three months ended June 30, 2012. Revenue from these major customers accounted for 98% of total revenue. Revenue from one customer accounted for 100% of total revenue for the three months ended June 30, 2011. Revenue from five major customers accounted for 100% of total revenue for the six month ended June 30, 2012. Revenue from one customer accounted for 100% of total revenue for the six months ended June 30, 2011. One customer accounted for 100% of total accounts receivable at June 30, 2011.

 

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.

 

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.

 

 

Concentration of Risk

 

The Company maintains its cash at a financial institution which may, at times, exceed insured limits.

 

Recently Issued or Newly Adopted Accounting Standards

 

In May 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-04, Fair Value Measurement (“ASU 2011-04”), which amended ASC 820, Fair Value Measurements (“ASC 820”), providing a consistent definition and measurement of fair value, as well as similar disclosure requirements between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles, clarifies the application of existing fair value measurement and expands the disclosure requirements. ASU 2011-04 was effective for us beginning January 1, 2012. The adoption of ASU 2011-04 did not have a material effect on our financial statements or disclosures.

 

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 requires the presentation of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. ASU 2011-05 was effective for us beginning January 1, 2012. The adoption of ASU 2011-05 did not have a material effect on our financial statements or disclosures.

 

In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment (“ASU 2011-08”), which amends the guidance in ASC 350-20, Intangibles—Goodwill and Other – Goodwill. ASU 2011-08 provides entities with the option of performing a qualitative assessment before calculating the fair value of the reporting unit when testing goodwill for impairment. If the fair value of the reporting unit is determined, based on qualitative factors, to be more likely than not less than the carrying amount of the reporting unit, the entities are required to perform a two-step goodwill impairment test. ASU 2011-08 was effective for us beginning January 1, 2012. The adoption of ASU 2011-08 did not have a material effect on our financial statements or disclosures.

 

In December 2011, the FASB issued ASU No. 2011-11, "Disclosures about Offsetting Assets and Liabilities." The amendments in this update require enhanced disclosures around financial instruments and derivative instruments that are either (1) offset in accordance with either ASC 210-20-45 or ASC 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with either ASC 210-20-45 or ASC 815-10-45. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The amendments are effective during interim and annual periods beginning after December 31, 2012. The Company does not expect this guidance to have any impact on its financial position, results of operations or cash flows.

  

3.

PROPERTY AND EQUIPMENT

 

Property and equipment consists of the following:

 

		June 30,				December 31,
		2012				2011
Computer equipment		$	8,772			$	41,663
Accumulated depreciation			(6,139	)			(29,254	)
Property and equipment, net		$	2,633			$	12,409

 

Depreciation expense for the three and six months ended June 30, 2012 was $1,481 and $4,808, respectively. Depreciation expense for the three and six months ended June 30, 2011 was $3,175 and $6,702, respectively.

 

 

4.

RELATED PARTY TRANSACTIONS

 

Payment for Consulting Services

 

Certain stockholders of the Company have provided and provide general management and technology services to the Company as Chairman, CEO, CFO, CTO and Vice President Product. 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 June 30, 2012 and 2011 the amounts incurred to these stockholders were $33,500 and $171,225, respectively. During the six months ended June 30, 2012 and 2011 the amounts incurred to these stockholders were $167,250 and $371,475, respectively. A balance of $166,000 remained unpaid at June 30, 2012 not including notes payable of $144,560 issued as payment.

 

Line of Credit and Restructuring Purchase Agreement

 

On February 23, 2012, the Company entered into a line of credit and restructuring purchase agreement (the “Agreement”) with Ron Singh the President and CEO of the Company.

 

Under the terms of the Agreement, Mr. Singh agreed that he or his affiliates would make available to the Company a maximum $200,000 line of credit to be funded in installments over the next four months. The amount of the advances under the line of credit would be used for working capital and to pay or reduce certain of the accounts payable and accrued expenses of the Company deemed to be critical by an executive committee of the board of directors, consisting of Mr. Singh and Barry Hall, the Chief Financial Officer.

 

Amounts funded under the line of credit are secured by a 6% convertible secured promissory note payable as to principal and accrued interest on June 30, 2013. The note is secured as to repayment by a first priority lien on all of the Company’s assets and are convertible at any time by the holder into shares of the Company’s common stock, $0.0003 par value per share (the “Common Stock”) at an initial conversion price of $0.015 per share, subject to certain anti-dilution and other adjustments. At June 30, 2012, the amount drawn against this line was $200,000 

 

5.

COMMITMENTS AND CONTINGENCIES

 

Lease Commitments

 

The company leases offices in Las Vegas, Nevada, which expires in July of 2013. Monthly rent is $2,514.

 

Legal Proceeding

 

On March 27, 2012, Bruce Goldstein and Universal Management, Inc. ("Universal") filed a summons and complaint against the Company in the Supreme Court of the State of New York County of New York, alleging . This suit is based on an alleged breach of contract between Mr. Goldstein and the Company. Mr. Goldstein owns Universal, through which the Company engaged Goldstein to act as a consultant and later President and CEO of the Company. Mr. Goldstein seeks damages in excess of $225,000. The Company and Mr. Goldstein are in disagreement regarding the amounts owed him for past compensation and the Company believes that only $121,759 is owed to Mr. Goldstein ($160,759 at December 31, 2011) and it has been recorded in the books and record of the Company. The Company also believes that it has substantial defense to Mr. Goldstein’s claims and intends to defend the suit vigorously.

 

 

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 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 June 30, 2012, the Company has net operating loss carryforwards available for federal tax purposes, which expire from 2028 to 2031.  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 through 2031. The amounts of operating loss carryforwards are not determined. The Company’s net operating loss carryforwards are subject to IRS examination until they are fully utilized and such tax years are closed.  

 

At June 30, 2012 and December 31, 2011, 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, 2011, the Company files income tax returns with the Internal Revenue Service (“IRS”).  For jurisdictions in which tax filings are made, the Company is subject to income tax examination for all fiscal years since inception. The Company’s net operating loss carryforwards are subject to IRS examination until they are fully utilized and such tax years are closed.   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.

 

7.

CONVERTIBLE NOTES DUE TO STOCKHOLDERS

 

On April 8, April 15 and April 20, 2010, the Company issued three separate notes of $20,000 to a stockholder. On December 30, 2010 the Company issued a note to another stockholder for $17,500.  The notes bear interest at 7% per annum and are convertible to common stock at the sole discretion of the note holder at a conversion price of $1.25 per share (pre 3-for-1 stock split of February 2011).  The notes along with accrued interest are fully due and payable one year from the date of issue. On March 29, 2012, as part of a restructuring plan, the company issued a note of $60,000 to the holder of the notes. The new note plus accrued interest of $7,178.89 is convertible to the company’s $0.0003 par value common stock at $0.01 per share subject to certain adjustment at the sole discretion of the note holder. The note matures on December 31, 2013 and does not bear interest. This note was converted during the three months ended June 30, 2012.

 

During the three months ended March 31, 2011, the Company issued six separate notes totaling $277,500 to a stockholder. The notes bear interest at 7% per annum. The notes along with accrued interest are fully due and payable one year from the date of issue in either restricted shares of common stock at a price agreeable to both parties at the time of conversion or cash. On March 20, 2012, as part of a restructuring plan, the Company issued the note holder a 6% convertible secured promissory note payable as to principal and accrued interest due on June 30, 2013 The note is secured as to repayment by a first priority lien on all of the Company’s assets and are convertible at any time by the holder into shares of the Company’s common stock, $0.0003 par value per share (the “Common Stock”) at an initial conversion price of $0.015 per share, subject to certain anti-dilution and other adjustments.

 

During the three months ended June 30, 2011, the Company issued three separate notes totaling $550,000 to two stockholders. The notes bear interest at 7% per annum and are convertible to common stock at the sole discretion of the note holder at a conversion price of $0.06 per share.  The notes along with accrued interest are fully due and payable six months from the date of issue. The conversion feature is contingent upon the Company raising $4,000,000. The Company became in default on certain notes issued in the second quarter of 2011. One note holder elected to convert two notes totaling $100,000 to common stock in accordance with the terms of the notes. For the remaining notes, on March 20, 2012, as part of a restructuring plan, the Company issued the note holder a 6% convertible secured promissory note payable as to principal and accrued interest due on June 30, 2013 The note is secured as to repayment by a first priority lien on all of the Company’s assets and are convertible at any time by the holder into shares of the Company’s common stock, $0.0003 par value per share (the “Common Stock”) at an initial conversion price of $0.015 per share, subject to certain anti-dilution and other adjustments.

 

 

During the three months ended September 30, 2011, the Company issued five separate notes totaling $318,500 to a stockholder. The notes bear interest at 7% per annum and are convertible to common stock at the sole discretion of the note holder at a conversion price of $0.06 per share.  The notes along with accrued interest are fully due and payable six months from the date of issue. The conversion feature is contingent upon the Company raising $4,000,000. On March 20, 2012, as part of a restructuring plan, the Company issued the note holder a 6% convertible secured promissory note payable as to principal and accrued interest due on June 30, 2013 The note is secured as to repayment by a first priority lien on all of the Company’s assets and are convertible at any time by the holder into shares of the Company’s common stock, $0.0003 par value per share (the “Common Stock”) at an initial conversion price of $0.015 per share, subject to certain anti-dilution and other adjustments.

 

During the three months ended December 31, 2011, the Company issued two separate notes totaling $95,000 to a stockholder. The notes bear interest at 7% per annum and are convertible to common stock at a price to be mutually agreed upon. Should the Company and the note holder not agree on a price, the note holder may, at his discretion convert the notes to common stock at the most favorable price for which the Company has sold restricted common stock since April 1, 2010.  The notes along with accrued interest are fully due and payable six months from the date of issue. The conversion feature is contingent on the Company raising $4,000,000 in debt or equity financing. On March 20, 2012, as part of a restructuring plan, the Company issued the note holder a 6% convertible secured promissory note payable as to principal and accrued interest due on June 30, 2013 The note is secured as to repayment by a first priority lien on all of the Company’s assets and are convertible at any time by the holder into shares of the Company’s common stock, $0.0003 par value per share (the “Common Stock”) at an initial conversion price of $0.015 per share, subject to certain anti-dilution and other adjustments.

 

On October 28, November 4, November 9, and November 16, 2011 the Company issued four separate notes totaling $65,568. These notes were convertible contingent upon raising $4.0 million. In the first quarter of 2012, these notes were amended and they are now convertible to the company’s $0.0003 par value common stock at $0.01 per share subject to certain adjustment at the sole discretion of the note holder. The notes mature on December 31, 2013 and do not bear interest. These notes were converted during the three months ended June 30, 2012.

 

On March 27, 2012 the Company issued a note for $35,000 in exchange for services. The note is convertible to the company’s $0.0003 par value common stock at $0.015 per share subject to certain adjustment at the sole discretion of the note holder. The note matures on December 31, 2013 and does not bear interest.

 

All convertible notes to stockholders mature in 2013.

 

8.

NOTES PAYABLE TO STOCKHOLDERS

 

On June 25, 2012, the Company issued four notes totaling $173,064 as partial payment of accounts payable. The notes bear interest at 6% and are due March 31, 2012.

  

9.

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% which mature in 5 years, convertible on the same conditions as the next major equity financing of the Company in excess of $2.0 million (the “Notes”).  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 (pre 3-for-1 stock split of February 2011).  As of March 31, 2012 and December 31, 2011 the Company had issued Notes aggregating $25,000.

 

 

10.

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 (pre 3-for-1 stock split of February 2011).  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 (these numbers are pre 3-for-1 stock split of February 2011).

 

On July 20, 2010, the Company entered into another Exchange Offer Agreement with Thwapr’s five largest stockholders including the founders of the Company.  Pursuant to this agreement Thwapr issued 47,061,636 shares of Series A preferred stock in exchange for 141,184,908 shares of common stock (pre 3-for-1 stock split of February 2011) which was retired.  This preferred stock will automatically convert into common stock at a ratio of 3 (after the stock split and subsequently 6.5) shares of Common Stock for each share of preferred upon the occurrence of either of the following events:

 

(a)

the two year anniversary of the Offering, or

 

(b)

a change of control in the Company.

 

On February 4, 2011, the company effected a 3-for-1 forward stock split. As a result of the split the number of the Company’s issued and outstanding common stock increase to 52,335,795, from 17,445,265.

 

On March 24, 2011 the Board of Directors authorized the Company to offer for sale up to 100,000,000 shares of restricted common stock to raise up to $6,000,000. As of March 31, 2012, 2,558,334 shares were sold under this offering.

 

On January 5, 2012 the Company issued 1,000,000 registered shares of common stock to Mr. Goldstein, the Company’s CEO at that time in exchange for the forgiveness of $70,000 of accounts payable owed to Mr. Goldstein.

 

Preferred Stock

 

The Company is authorized to issue preferred stock. The board of directors has the authority to fix and determine the designations, rights, qualification, preferences, limitations and terms of the preferred stock. Each share of preferred stock issued and outstanding were convertible into 9 shares of common stock upon the occurrence of either of the following events: (1) two year anniversary of the Offering and when the Company obtain at least 10,000,000 registered users, or (2) a change in control of the Company.

 

On February 28, 2011 all of the preferred shareholders signed an agreement whereby they accepted a modification in the conversion ratio of the preferred to common from 9-for-1 to 6.5-for-1 in exchange for removing the restriction that such shares could not be converted until the Company obtained at least 10,000,000 active registered users. On March 24, 2011 this modification was ratified by the Board of Directors of the Company. The effect of this modification was to reduce the amount of the common shares that that would be issued upon conversion to 305,250,634.

 

On April 26, 2012, the board of directors of Thwapr, Inc. (the “Company”), with the consent of the holder of approximately 72% of our outstanding shares of Series A convertible preferred stock (the “Series A Preferred Stock”), amended and restated the certificate of designation of such Series A Preferred Stock (the "Designation").  Based on the amended sections,

 

 

·

until July 18, 2015, none of the shares of Series A Preferred Stock or shares of common stock into which the Series A Preferred Stock may be converted, can be sold or otherwise transferred by the holder or any of such holder’s affiliates (other than to such affiliates or immediate family members or trusts established for the benefit of such family members);

 

·

each share of Series A Preferred Stock shall vote, together with our outstanding common stock, at any meeting of shareholders or on any other matter requiring shareholder consent, on the basis of one vote per share of Series A Preferred Stock; provided, that upon the filing of an amendment to the Articles of Incorporation of the Corporation permitting the board of directors to fix the number of votes to each outstanding share of Series A Preferred Stock shall be entitled to cast, each share of Series A Preferred Stock shall have a number of votes equal to the number of shares of Common Stock then issuable upon conversion of each share of Series A preferred stock; and,

 

·

a majority of the outstanding shares of Series A preferred stock will be able to amend the Designation.

  

The amended and restated Designation shall be effective upon filing it with Nevada's Secretary of State, which the Company intends to do immediately.

 

Warrant Agreements

 

On March 1, 2009, the Company issued warrants to consultants to purchase 70,000 shares at $1.00 per share.

 

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 ($0.333 adjusted for the stock split).  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.

 

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 nine 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 if the Company has obtained at least 10,000,000 active registered users, or

 

(b)

a change of control in the Company.

 

In preparation for a reverse merger into a public shell, on February 19, 2010 the Company converted all of the warrants for Series A preferred shares into warrants for 9 shares of common stock with such stock underlying the warrants being restricted from sale until the prior conditions for conversion to common from preferred are met.

 

In addition to the warrants described above, the Company issued more warrants to Directors and Consultants to the Company. On February 16, 2010 the Company issued 3,000,000 warrants with and exercise price of $0.42 per share to a consultant to the Company. Such warrants vest quarter over a period of three years. On March 5, 2010 the Company issued 360,000 warrants with an exercise price of $0.42 per warrant to consultants to the Company. Such warrants vest quarterly over one year. On May 19, 2010 the Company issued 7,896,000 warrants to members of the Board of Directors and consultants to the Company with an exercise price of $0.42 per warrant. Such warrants vest quarterly over three years. On November 12, 2010 the Company issued 420,000 with an exercise price of $1.78 per warrant to members of the Board of Directors. Such warrants vest quarterly over one year. On January 4, 2011, the Company issued 1,110,000 warrants with an exercise price of $0.32 per share to members of the Board of Directors. Such warrants vest quarterly over one year. All warrants issued to members of the Board of Directors were done in accordance with the Company’s Board Compensation Plan.

 

 

On September 27, 2010, the Company issued 1,666,666 shares of its convertible preferred stock to consultants to the Company in exchange for 1,047,916 of previously issued warrants to purchase the Company’s common stock issued in March 2009. The preferred shares were previously returned to the Company by the former Chairman of the Company on August 15, 2010. One-fourth of the preferred shares vested to the consultants upon issuance. The remaining three-quarters of the shares vested to the consultants quarterly over the next three quarters so long as the consultants remained associated with the Company.

 

For the three months ended June 30, 2012 and 2011, compensation expense related to the issuance of these shares was $0 and $595,834, respectively. For the six months ended June 30, 2012 and 2011, compensation expense related to the issuance of these shares was $0 and $1,549,166, respectively.

 

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 Common Shares				Average Exercise Price
Outstanding at December 31, 2011			36,176,340			$	0.36
Granted			-				-
Expired/cancelled			(840,000	)			0.56
Exercised			-				-
Outstanding at June 30, 2012			35,336,340			$	0.36
Exercisable at June 30, 2012			34,836,339			$	0.36

  

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
$	0.33				29,885,010				6.75			$	0.33			$	0.33				29,885,010				6.75			$	0.33
$	0.42				4,498,830				2.79			$	0.42			$	0.42				3,686,328				2.79			$	0.42
$	1.78				307,500				3.42			$	1.78			$	1.78				307,500				3.42			$	1.78
$	0.32				645,000				3.58			$	0.32			$	0.32				645,000				3.58			$	0.32

 

 Warrants to purchase 1,890,000 share of stock at $0.33 per share have no maturity date.

 

Compensation expenses related to outstanding warrants for the three months ended June 30, 2012 and 2011 was $50,831 and $213,605, respectively.  Compensation expenses related to outstanding warrants for the six months ended June 30, 2012 and 2011 was $118,386 and $598,650, respectively.   

  

Stock Option Plan

 

In October 2011 the Board of Directors adopted the Thwapr, Inc. Equity Incentive Plan (the “Plan”) under which up to 72,000,000 million of common stock have been reserved for issuance.

 

 

The following table summarizes the stock option transactions: 

 

TRANSATIONS IN FISCAL YEAR 2012

 

		Number of Common Shares				Weighted- Average Excercise Price				Weighted- Average Remaining Contractual Life
Outstanding at December 31, 2011			36,000,000			$	0.1300				4.56
Granted			40,500,000				0.0061				4.88
Expried/cancelled			(35,550,000	)			0.1300				4.56
Exercised			-				-				-
Outstanding at March 31, 2012			40,950,000			$	0.0075				4.85
Exercisable at March 31, 2012			450,000			$	0.1300				4.14

 

For the three months ended June, 2012 and 2011, compensation expense related to the issuance of these options was $423,922 and $0, respectively. For the six months ended June 30, 2012 and 2011, compensation expense related to the issuance of these shares was $1,188,842 and $0, respectively. The Company used the Black-Scholes option pricing model for estimating the fair value of the warrants with the following assumptions:

 

Risk Free Interest Rate:	0.91% - 1.04%
Expected Life:	3 – 3.5 years
Expected Volatility:	200%
Dividend Yield:	0%

 

Restructuring Plan

 

Pursuant to private placements of Common Stock consummated in 2009 and 2010, the Company received a total of $2,963,500 in connection with the issuance and sale to 15 investors (none of whom is or was a direct or indirect officer, director or affiliate of the Company) of an aggregate of 5,686,532 shares of Common Stock at prices ranging from $0.417 to $0.833 per share. On April 23, 2012 the Company issued to such investors additional shares at a value of $0.015 per share in the second quarter of 2012. The Company issued 191,880,135 additional shares of Common Stock to such investors, and recorded related expenses of $1,649,202.

 

Preferred Stock

 

On April 26, 2012, the board of directors of Thwapr, Inc. (the “Company”), with the consent of the holder of approximately 72% of our outstanding shares of Series A convertible preferred stock (the “Series A Preferred Stock”), amended and restated the certificate of designation of such Series A Preferred Stock (the "Designation").  Based on the amended sections,

 

·

until July 18, 2015, none of the shares of Series A Preferred Stock or shares of common stock into which the Series A Preferred Stock may be converted, can be sold or otherwise transferred by the holder or any of such holder’s affiliates (other than to such affiliates or immediate family members or trusts established for the benefit of such family members);

 

 

·

each share of Series A Preferred Stock shall vote, together with our outstanding common stock, at any meeting of shareholders or on any other matter requiring shareholder consent, on the basis of one vote per share of Series A Preferred Stock; provided, that upon the filing of an amendment to the Articles of Incorporation of the Corporation permitting the board of directors to fix the number of votes to each outstanding share of Series A Preferred Stock shall be entitled to cast, each share of Series A Preferred Stock shall have a number of votes equal to the number of shares of Common Stock then issuable upon conversion of each share of Series A preferred stock; and,

 

·

a majority of the outstanding shares of Series A preferred stock will be able to amend the Designation.

 

The amended and restated Designation shall be effective upon filing it with Nevada's Secretary of State, which the Company intends to do immediately.

 

 

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. We did not have operations prior to the share exchange agreement described below.

 

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. During the remainder of 2012, 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. During the first fiscal quarter of 2012 we actively marketed and sold our product offering to our target market in order to generate revenues.

 

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.

 

 

Our discussion and analysis of our financial condition and results of operations, including the discussion on liquidity and capital resources, are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we re-evaluate our estimates and judgments. 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 financial statements for the year ended December 31, 2011, included in our Current Report on Form 10-K, as filed with the SEC on April 16, 2012. As of, and for the three months ended June 30, 2012, 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 financial statements and notes thereto for the fiscal year ended December 31, 2011 included in our Current Report on Form 10-K filed on April 16, 2012.

 

Comparison of Three Month Periods Ended June 30, 2012 and June 30, 2011

 

The following table sets forth the results of our operations for the periods indicated:

 

		Three months ended June 30,
		2012				2011
Sales		$	6,458			$	5,700
Gross loss			(18,437	)			(41,697	)
Operating expenses:
Product Development			22,058				680,345
General and Administrative			757,554				668,074
Loss from operations			(798,049	)			(1,390,116	)
Net loss		$	(4,450,348	)		$	(1,349,535	)

 

Sales and Gross Loss

 

Sales for the three months ended June 30, 2012 and 2011 were $6,458 and $5,700, respectively. Sales increased in the three months ended June 30, 2012 by $758 as the result of the recognition of revenue from five customers, all obtained during 2011. Gross loss for the three months ended June 30, 2012 was $18,437 versus a gross loss of $41,697 in the same quarter in 2011 as a result of slightly higher revenue and lower cost of sales. The decrease in cost of sales was the result of lower messaging transcoding fees marginally offset by slightly higher equipment costs.

 

Product Development Expenses

 

Product Development Expenses for the three months ended June 30, 2012 decreased 96.8% from $680,345 for the same period in 2011 to $22,058 in 2012. The decrease was mainly due to a decrease non-cash compensation expense and a decrease in the amounts paid to independent contractors.

 

General and Administrative Expense

 

General and Administrative expenses for the three months ended June 30, 2012 increased by 13.4% from $668,074 for the same period in 2011 to $757,554 in 2012. The primary reasons for the increase was increases to professional fees, investor relation expenses, sales and marketing consulting expenses resulting from the issuance of common stock and other non-cash compensation expense. This increase was partially offset by a decrease in expense recognized related to compensation of executive management.

 

Taxes for the three months ended June 30, 2012 and 2011amounted to $0 and $0, respectively.

 

 

Loss from Operations

 

We had a loss from operation of $798,049 for the three months ended June 30, 2012, compared to an operating loss of $1,390,116 for three months ended June 30, 2011.

 

Net Loss

 

Net loss for the three months ended June 30, 2012 was $4,450,348, an increase of $3,100,813, or 229.8% from $1,349,535 for the same period in 2011. This increase in net loss was primarily attributable to the increase of other expenses related to the issuance of additional shares to existing investors, change in derivative liability and increase interest expense partially offset by a lower loss from operations.

 

Comparison of Six Month Periods Ended June 30, 2012 and June 30, 2011

 

The following table sets forth the results of our operations for the periods indicated:

 

		Six months ended June 30,
		2012				2011
Sales		$	23,433			$	6,208
Gross loss			(41,510	)			(89,166	)
Operating expenses:
Product Development			95,359				1,708,019
General and Administrative			1,569,769				2,003,231
Loss from operations			(1,706,638	)			(3,800,416	)
Net loss		$	(5,145,625	)		$	(3,758,929	)

 

Sales and Gross Loss

 

Sales for the six months ended June 30, 2012 and 2011 were $23,433 and $6,208, respectively. Sales increased in the six months ended June 30, 2012 by $17,225 as the result of the addition of three new customers in the fourth quarter of 2011. Gross loss for the six months ended June 30, 2012 was $41,510 versus a gross loss of $89,167 in the same quarter in 2011 as a result of higher revenue and lower cost of sales. The decrease in cost of sales was the result of lower messaging transcoding fees partially offset by higher equipment rental costs.

 

Product Development Expenses

 

Product Development Expenses for the six months ended June 30, 2012 decreased 94.4% from $1,708,019 for the same period in 2011 to $95,359 in 2012. The decrease was mainly due to a decrease non-cash compensation expense and a decrease in the amounts paid to independent contractors.

 

General and Administrative Expense

 

General and Administrative expenses for the six months ended June 30, 2012 decreased by 21.6% from $2,003,231 for the same period in 2011 to $1,569,769 in 2012. The primary reasons for the decrease were decreases in non-cash compensation expense, rent expense and telecom expense. Non-cash compensation expense related to general and administrative expense for the six months ended June 30, 2012 and 2011 was $1,009,880 and $1,476,373, respectively. This increase was partially offset by a decrease in expense recognized related to compensation of executive management.

 

Taxes for the six months ended June 30, 2012 and 2011amounted to $0 and $0, respectively.

 

Loss from Operations

 

We had a loss from operation of $1,706,638 for the six months ended June 30, 2012, compared to an operating loss of $3,800,416 for six months ended June 30, 2011.

 

 

Net Loss

 

Net loss for the six months ended June 30, 2012 was $5,145,625, a increase of $1,386,696, or 36.9% from $3,758,929 for the same period in 2011. This increase in net loss was primarily attributable to the increase of other expenses related to the issuance of additional shares to existing investors, change in derivative liability and increase interest expense partially offset by a lower loss from operations.

 

Liquidity and Capital Resources

 

As of June 30, 2012, we had cash and cash equivalents of $527 and current liabilities of $4,187,477. Our cash needs are primarily for working capital to support our operations and working capital. We presently finance our operations through the private placement of equity and debt securities. As of the date of this report we do not have sufficient cash to launch our products and services, grow our customer base, increase revenue and expand our operations. As we have in the past, we rely on obtaining ongoing investments to maintain our business. 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.

 

On March 23, 2012, we announced a restructuring plan as part of our efforts to achieve liquidity, avoid defaults under indebtedness that was due and payable, and satisfy approximately $740,000 of additional debt, accounts payable and accrued expense obligations owed to certain consultants, employees and vendors (the “Payables”), in addition to seeking to raise additional working capital, our management has commenced to implement a debt restructuring plan (the “Restructuring Plan”). In May and June 2012 the Company issued 2,884,405 shares of $.0003 Common stock and notes of $173,064 bearing interest at 6% due March 31, 2013 in as payment of $216,330 of accounts payable.

 

As an initial step, Messrs. Kevir Kang, an individual who previously loaned the Company an aggregate of $1,282,320, Ron Singh, the President and CEO of the Company, and Barry Hall, Chief Financial Officer of the Company, who previously advanced approximately $117,463 to the Company, each agreed to restructure the repayment of an aggregate of $1,664,847 (inclusive of accrued interest at 6% per annum) of cash loans and advances made to the Company. Under the terms of the Restructuring Plan, each of these creditors were issued 6% convertible secured promissory notes payable as to principal and accrued interest on June 30, 2013 (the “New Notes”), in lieu of existing indebtedness, including the $200,000 line of credit payable on demand. As of June 30, 2012 $200,000 has been drawn against the line of credit. The New Notes are secured as to repayment by a first priority lien on all of the Company’s assets and are convertible at any time by the holder(s) into shares of the Company’s common stock, $0.0003 par value per share (the “Common Stock”) at an initial conversion price of $0.015 per share, subject to certain anti-dilution and other adjustments.

 

Pursuant to private placements of Common Stock consummated in 2009 and 2010, the Company received a total of $2,963,500 in connection with the issuance and sale to 15 investors (none of whom is or was a direct or indirect officer, director or affiliate of the Company) of an aggregate of 5,686,532 shares of Common Stock at prices ranging from $0.417 to $0.833 per share. The Company issued to such investors 191,767,635 additional shares at a value of $0.015 per share on April 23, 2012.

 

Net cash used in operating activities for the six month ended June 30, 2012 was $242,556 compared with net cash used in operating activities of $910,904 for the same period in 2011. Net cash used in operating activities for year six months ended June 30, 2012 was mainly due to net loss of $5,145,625 and conversion of secured convertible notes to stockholder to long-term secured convertible notes to stockholders, partially offset by non-cash expenses that did not affect cash flows of $4,600,031. Net cash used in operating activities for the six months ended June 30, 2011 was primarily due to net loss of $3,758,929 and a decrease in accounts payable partially offset by non-cash items not affecting cash flows of $2,835,303 (net), and an increase of $134,379 in amounts payable to shareholders.

 

Net cash provided by financing activities was $235,000 for the six months ended June 30, 2012 as a result of funds drawn against a $200,000 credit line and $35,000 from a convertible note, compare to financing activities of $927,700 for the six months ended June 30, 2011 resulting from the proceeds from sales of our common stock and from the issuance of notes to stockholders.

 

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

 

As a smaller reporting company, we are not required to provide this information.

 

ITEM 4.

CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures.

 

It is management's responsibility to establish and maintain adequate internal control over all financial reporting pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 (the "Exchange Act"). Our management, including our chief executive officer and our chief financial officer, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2012. Following this review and evaluation, management collectively determined that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to management, including our chief executive officer, and our chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

There were no significant changes in the Company's internal controls over financial reporting or in other factors that could significantly affect these internal controls subsequent to the date of their most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.  

 

PART II - OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

 

On March 27, 2012, Bruce Goldstein and Universal Management, Inc. ("Universal") filed a summons and complaint against the Company in the Supreme Court of the State of New York County of New York, alleging . This suit is based on an alleged breach of contract between Mr. Goldstein and the Company. Mr. Goldstein owns Universal, through which the Company engaged Goldstein to act as a consultant and later President and CEO of the Company. Mr. Goldstein seeks damages in excess of $225,000. The Company and Mr. Goldstein are in disagreement regarding the amounts owed him for past compensation and the Company believes that only $121,759 is owed to Mr. Goldstein ($160,759 at December 31, 2011) and it has been recorded in the books and record of the Company. The Company also believes that it has substantial defense to Mr. Goldstein’s claims and intends to defend the suit vigorously.

 

ITEM 1A.

RISK FACTORS

 

As a smaller reporting company we are not required to provide this information; however, we direct you to the risk factors in our Annual Report Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission on April 16, 2012.

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

On March 20, 2012, as part of the Restructuring Plan described above, Messrs. Kevir Kang, an individual who previously loaned the Company an aggregate of $1,282,320, Ron Singh, the President and CEO of the Company, and Barry Hall, Chief Financial Officer of the Company, who previously advanced approximately $117,463 to the Company, each agreed to restructure the repayment of an aggregate of $1,664,847 (inclusive of accrued interest at 6% per annum) of cash loans and advances made to the Company. Under the terms of the Restructuring Plan, each of these creditors were issued 6% convertible secured promissory notes payable as to principal and accrued interest on June 30, 2013 (the “New Notes”), in lieu of existing indebtedness, including the $200,000 line of credit payable on demand. As of June 30, 2012 $200,000 has been drawn against the line of credit. The New Notes are secured as to repayment by a first priority lien on all of the Company’s assets and are convertible at any time by the holder(s) into shares of the Company’s common stock, $0.0003 par value per share (the “Common Stock”) at an initial conversion price of $0.015 per share, subject to certain anti-dilution and other adjustments. The New Notes were issued pursuant to Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”).

 

 

On April 23, 2012, pursuant to private placements of Common Stock consummated in 2009 and 2010, the Company received a total of $2,963,500 in connection with the issuance and sale to 15 investors (none of whom is or was a direct or indirect officer, director or affiliate of the Company) of an aggregate of 5,686,532 shares of Common Stock at prices ranging from $0.417 to $0.833 per share. The Company issued to such investors 191,767,635 additional shares at a value of $0.015 per share on April 23, 2012; these shares were issued pursuant to the Securities Act. Additionally, the Company issued 16,717,889 shares of stock at $.01 per share for convertible notes totaling $167,746.

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.

MINE SAFETY DISCLOSURE

 

Not applicable.

 

ITEM 5.

OTHER INFORMATION

 

On August 17, 2012 Mr. Guriqbal Randhawa resigned from the Board of Director for personal reasons.

 

ITEM 6.

EXHIBITS

 

Exhibit Number		Description
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.

  

 

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:  August 20, 2012	/s/ Ron Singh
	Name:  Ron Singh
	Title:  President and Chief Executive Officer
	(Principal Executive Officer)
Date:  August 20, 2012	/s/ Barry Hall
	Name:  Barry Hall
	Title:  Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)