As Lakshman said, you need to execute sbmerge on a machine where ThinApp is installed.
Following those steps should be enough:
http://blogs.vmware.com/thinapp/2010/02/simple-steps-for-using-sbmerge.html
Briefly, to make it simple:
1. Choose a machine (whichever you want)
2. Install ThinApp on that machine
3. Delete %APPDATA%\Thinstall\<Application name> if exists
4. Copy the project folder, including the binaries in the 'bin folder', at the root of the C drive
5. Execute the application locating in the bin folder of your project
6. Make your changes, updates
7. Close the application.
8. Relaunch it to check everything works and the updates were successful. If so, close the application.
9. Open a command prompt, start -> run -> cmd
10. cd C:\<Project name>
11. Type "sbmerge apply" (without the quotes)
12. Execute build.bat
Done!