Pet DRx (VETS) 10-Q 2006 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________

FORM 10-Q

(Mark One)

X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

or

___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 000-51596

ECHO HEALTHCARE

ACQUISITION CORP.

(Exact name of Registrant as specified in its charter)

Delaware	56-2517815
(State of Incorporation)	(I.R.S. Employer Identification No.)

8000 Towers Crescent Drive, Suite 1300, Vienna, VA 22182

(Address of principal executive offices)

(703) 448-7688

(Telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to the filing requirements for the past 90 days.

Yes X No __

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [   ] Accelerated filer [   ] Non-accelerated filer [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes X No __

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of August 18, 2006.

Common Stock, $.0001 par value	8,750,000
(Class)	(Number of shares)

Part I - Financial Information

Item 1. Condensed Financial Statements

Echo Healthcare Acquisition Corp.

(a development stage company)

Condensed Balance Sheets

	June 30, 2006 (Unaudited)		December 31, 2005
ASSETS
Current Assets:
Cash	$	25,922	$	14,807
Prepaid expenses		69,438		-
Total current assets		95,360		14,807
Investments held in Trust Fund		55,650,806		-
Deferred offering costs - Non-current		-		601,413
Total assets	$	55,746,166	$	616,220
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accrued expenses	$	79,600	$	136,052
Derivative Liabilities		5,582,849
Notes Payable to Founding Stockholders		-		150,000
Line of Credit from Founding Stockholders		105,700		-
Accrued offering costs		152,713		443,288
Deferred underwriting and other offering costs		2,018,233		-
Accrued Income Taxes		139,948		-
Total current liabilities		8,079,043		729,340
COMMITMENTS AND CONTINGENCIES
Common stock subject to possible conversion, 1,436,781 shares at a conversion value of approximately $7.70 per share, including accretion of allocated income of $92,856 (net of $47,835 income taxes)		11,076,761		-
STOCKHOLDERS’ EQUITY
Preferred stock—$.0001 par value; 1,000,000 shares authorized; 0 issued and outstanding
Common stock—$.0001 par value, 25,000,000 shares authorized; 8,750,000 and 1,562,500 issued and outstanding (which includes 1,436,781 shares subject to possible conversion)		875		156
Additional paid-in capital		36,195,054		24,844
Retained Earnings (Deficit) accumulated during the development stage		394,433		(138,120	)
Total stockholders’ equity		36,590,362		(113,120	)
Total liabilities and stockholders’ equity	$	55,746,166	$	616,220

See Notes to Condensed Financial Statements.

1

Echo Healthcare Acquisition Corp.

(a development stage company)

Condensed Statements of Operations

(Unaudited)

	Six months ended June 30, 2006			Three months ended June 30, 2006			June 10, 2005  (Date of Inception) to June 30, 2005			June 10, 2005 (Date of Inception) through June 30, 2006
Revenue	$	0		$	0					$	0
Operating expenses		(154,075	)		(127,604	)		(1,000	)		(291,195	)
Organization costs		0			0			0			(1,000	)
Operating loss		(154,075	)		(127,604	)		(1,000	)		(292,195	)
Gain/(loss) on derivative liabilities		215,625			399,862						215,625
Interest income		703,806			642,108			-			703,807
Income/(loss) before provision for income taxes		765,356			914,366			(1,000	)		627,237
Provision for income taxes		(139,948	)		(139,948	)		0			(139,948	)
Net income/(loss)	$	625,408		$	774,418			(1,000	)	$	487,289
Weighted average number of shares outstanding—basic		5,111,360			7,968,750			1,562,500
Net income per share—basic	$	0.12		$	0.10			0.00
Net income	$	625,408		$	774,418
Gain on derivative liabilities attributed to warrants		(215,625	)		(399,862	)
Adjusted net income - for diluted earnings	$	409,783		$	374,556
Weighted average shares outstanding		5,111,360			7,968,750			1,562,500
Shares from assumed conversion of warrants		692,232			1,275,232			0
Weighted average number of shares outstanding - diluted		5,803,592			9,243,982			1,562,500
Net income per share - diluted	$	0.07		$	0.04		$	0.00

See Notes to Condensed Financial Statements.

2

Echo Healthcare Acquisition Corp.

(a development stage company)

Condensed Statements of Stockholders’ Equity (Capital Deficit)

	Common Stock
	Shares		Amount		Additional Paid-In Capital			Deficit Accumulated During the Development Stage			Total Stockholders’ Equity (Capital Deficit)
Balance - June 10, 2005 (date of inception)	-0-		-0-		-0-			-0-			-0-
Contributions from
Founding Stockholders		1,562,500	$	156	$	24,844					$	25,000
Net loss for the period ended December 31, 2005									(138,120	)		(138,120	)
Balance - December 31, 2005		1,562,500	$	156	$	24,844		$	(138,120	)	$	(113,120	)
Sale of 7,187,500 Units, net of underwriter’s discount and offering expenses (includes 1,436,781 shares subject to possible conversion) less derivative liabilities		7,187,500		719		52,495,345						52,496,064
Proceeds subject to possible conversion of 1,436,781 shares						(11,076,761	)					(11,076,761	)
Reclassification of proceeds allocated to warrants - derivatives liabilty						(5,798,474	)					(5,798,474	)
Proceeds from issuance of underwriter’s purchase option						100						100
Proceeds from sale of warrants to founding stockholders						550,000						550,000
Net income for the period									532,553			532,553
Balance - June 30, 2006 (unaudited)		8,750,000	$	875	$	36,195,054		$	394,433		$	36,683,217

See Notes to Condensed Financial Statements.

3

Echo Healthcare Acquisition Corp.

(a development stage company)

Condensed Statements of Cash Flows

(Unaudited)

	January 1, 2006 through June 30, 2006			June 10, 2005 (Date of Inception) through June 30,  2006
Cash flows from operating activities:
Net income (loss)	$	625,408		$	487,289
Adjustments to reconcile net income (loss) to net cash used by operating activities:
Gain on derivative liabilities		(215,625	)		(215,625	)
Changes in:
Prepaid expenses		(69,438	)		(69,438	)
Accrued expenses		83,497			219,548
Net cash generated by operating activities		423,842			421,774
Cash flows from investing activities:
Increase in cash equivalents held in Trust Fund		(55,650,806	)		(55,650,806	)
Net cash used in investing activities		(55,650,806	)		(55,650,806	)
Cash flows from financing activities:
Proceeds from notes payable to Founding Stockholders Proceeds from Line of Credit from Founding Stockholders		50,000 105,700			200,000 105,700
Payments on notes payable to Founding Stockholders		(200,000	)		(200,000	)
Proceeds from sale of common stock to Founding Stockholders		--			25,000
Gross proceeds from public offering		57,500,000			57,500,000
Proceeds from issuance of underwriter’s purchase option		100			100
Proceeds from sale of warrants to Founding Stockholders		550,000			550,000
Costs of offering		(2,767,721	)		(2,925,846	)
Net cash provided by financing activities		55,238,079			55,254,954
Net increase in cash		11,115			25,922
Cash—beginning of period		14,807			0
Cash—end of period	$	25,922		$	25,922
Supplemental schedule of non-cash financing activities
(Payment of accrued) Accrual of deferred offering costs	$	(290,575	)	$	152,713
Accrual of deferred underwriting and other offering costs	$	2,018,233		$	2,018,233
Warrant obligation in connection with sale of units in offering	$	5,582,849		$	5,582,849

See Notes to Condensed Financial Statements.

4

Echo Healthcare Acquisition Corp.

(a development stage company)

Notes to Condensed Financial Statements

(Unaudited)

NOTE A—BASIS OF PRESENTATION

The condensed financial statements of Echo Healthcare Acquisition Corp. (the “Company”) at June 30, 2006 and for the periods ended June 30, 2006 are unaudited. In the opinion of management, all adjustments (constituting normal accruals) have been made that are necessary to present fairly the financial position of the Company as of June 30, 2006 and the results of its operations and its cash flow for the three and six-month periods ended June 30, 2006 and for the periods from June 10, 2005 (inception) to June 30, 2005 and 2006. Operating results for the interim period presented are not necessarily indicative of the results expected for a full year. These unaudited condensed Financial Statements should be read in conjunction with the Financial Statements and related notes included in the Company’s Registration Statement on Form S-1/A filed on March 8, 2006 and the Company’s current report on Form 8-K filed on March 24, 2006.

The statements and related notes have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations.

NOTE B—ORGANIZATION AND BUSINESS OPERATIONS

The Company was incorporated in Delaware on June 10, 2005. The Company was formed for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition, other similar acquisition one or more domestic or international operating businesses in the healthcare industry (“Acquisition”). The Company has not generated revenue to date. The Company is considered to be in the development stage and is subject to the risks associated with activities of development stage companies. The Company has selected December 31 as its fiscal year end.

On March 16, 2006, the Company amended and restated its Certificate of Incorporation to reduce the number of authorized shares of common stock from 100,000,000 shares to 25,000,000 shares.

The registration statement for the Company’s initial public offering of Units (as described in Note D) (“Offering”) was declared effective on March 17, 2006. The Company consummated the Offering on March 22, 2006 and received net cash proceeds of approximately $45,446,690, not inclusive of deferred underwriting and other accrued offering costs (see Notes D and H). On March 27, 2006, the underwriters for the Company’s Offering exercised their over-allotment option and purchased 937,500 additional units. The net proceeds from the exercise of the over-allotment option were approximately $6,975,000, after deducting underwriting discounts of $525,000, not including deferred amounts totaling $225,000.

The Company’s management has broad discretion with respect to the specific application of the net proceeds of the Offering, although substantially all of the net proceeds of the Offering are intended to be generally applied toward acquiring an operating company (“Acquisition”). Furthermore, there is no assurance that the Company will be able to successfully effect an Acquisition. An amount of $54,947,000, from the net proceeds of the Offering (including the exercise of the over-allotment option) together with the proceeds from the sale of 458,333 warrants at $1.20 per warrant to the founding directors for $550,000 is being held in a trust account (“Trust Fund”) and invested in government securities (currently the Northern Institutional Government Select Portfolio) until the earlier of (i) the consummation of its first Acquisition or (ii) the distribution of the Trust Fund as described below. The remaining net proceeds (not held in the Trust Fund) together with borrowings under the Company’s Working Capital Line of Credit (see Note E) may be used to pay for business, legal and accounting due diligence on prospective acquisitions and continuing general and administrative expenses.

The Company, after signing a definitive agreement for the Acquisition, will submit such transaction for stockholders’ approval. In the event that holders of 20% or more of the shares issued in the Offering vote against the Acquisition and exercise their conversion rights, the Acquisition will not be consummated.

5

Echo Healthcare Acquisition Corp.

(a development stage company)

Notes to Condensed Financial Statements—(Continued)

(Unaudited)

The Company’s initial stockholders (the “Founding Stockholders”) have agreed to vote their 1,562,500 shares of common stock in accordance with the vote of the majority in interest of all other stockholders of the Company (“Public Stockholders”) with respect to an Acquisition. After consummation of an Acquisition, these voting safeguards will no longer be applicable.

With respect to an Acquisition which is approved and consummated, any Public Stockholder who voted against such Acquisition may demand that the Company convert its shares into a pro rata share of the Trust Fund. The per share conversion price will equal the amount in the Trust Fund, calculated as of two business days prior to the consummation of the proposed Acquisition, divided by the number of shares of common stock held by Public Stockholders at the consummation of the Offering. Accordingly, Public Stockholders holding up to 19.99% of the aggregate number of shares owned by all Public Stockholders may seek conversion of their shares in the event of an Acquisition. Such Public Stockholders are entitled to receive their per share interest in the Trust Fund computed without regard to the shares held by the Founding Stockholders. Accordingly, a portion of the net proceeds from the Offering and the interest earned thereon (19.99% of the amount held in the Trust Fund) has been classified as common stock subject to possible conversion in the accompanying June 30, 2006 balance sheet. The Company is permitted to seek disbursements of amounts held in the Trust for related tax obligations.

In the event that the Company does not consummate an Acquisition within 18 months from the date of the consummation of the Offering, or 24 months from the consummation of the Offering if certain extension criteria have been satisfied (the “Acquisition Period”), the proceeds held in the Trust Fund will be distributed to the Company’s Public Stockholders. In the event of such distribution, it is likely that the per share value of the residual assets remaining available for distribution (including Trust Fund assets) will be less than the initial public offering price per share in the Offering (assuming no value is attributed to the Warrants contained in the Units to be offered in the Offering discussed in Note D).

NOTE C—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

[1]Use of estimates:

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

[2]Cash and cash equivalents:

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.

[3]Deferred offering costs:

Deferred offering costs at December 31, 2005 consist principally of legal and underwriting fees incurred through the balance sheet date that are related to the Offering.

[4] Accrued offering costs:

Accrued offering costs consist of legal, accounting and miscellaneous fees incurred through June 30, 2006 and December 31, 2005 that were related to the Offering and were charged to stockholder’s equity upon completion of the Offering.

[5]Income taxes:

Deferred income taxes are provided for the differences between the bases of assets and liabilities for financial reporting and income tax purposes. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.

6

Echo Healthcare Acquisition Corp.

(a development stage company)

Notes to Condensed Financial Statements—(Continued)

(Unaudited)

The Company recorded a deferred income tax asset for the tax effect of start-up costs and temporary differences, aggregating approximately $37,000 at December 31, 2005. In recognition of the uncertainty regarding the ultimate amount of income tax benefits to be derived, the Company recorded a full valuation allowance at December 31, 2005.

In late March 2006, the net proceeds from the initial public offering were invested in a taxable U.S. government portfolio. Since the interest generated from the portfolio is fully taxable at the federal level, the Company determined that no valuation allowance is necessary as of June 30, 2006.

[6] Deferred underwriting and other offering costs:

Deferred underwriting and other offering costs consist of deferred underwriting fees (see Note D), legal and printing fees (see Note H) incurred through June 30, 2006 that were related to the Offering and were charged to stockholder’s equity upon completion of the Offering.

[7]Income/(Loss) per common share:

Income/(loss) per share is computed by dividing net income (loss) applicable to common stockholders by the weighted average number of common shares outstanding for the period. The per share effects of potential common shares such as warrants, aggregating 692,232 shares, have been included in the periods from January 1, 2006 through June 30, 2006 and 1,275,232 for the three months ended June 30, 2006. These potential shares have not been included in the other reporting periods because the effects would be antidilutive. Potential common shares in connection with the underwriters’ purchase option (see Note D) aggregating 625,000 have not been included because the effect would be antidilutive. Shares held in escrow that are subject to performance conditions are not considered outstanding for purposes of per share calculations (see Note D).

The following table presents pro forma income per share attributable to common stockholders subject to possible conversion and not subject to possible conversion:

	Six months ended June 30, 2006			Three months  ended June 30, 2006
Net income	$	625,408		$	774,418
Interest income attributable to common stock subject to possible conversion	$	(92,856	)	$	(80,522	)
Pro forma net income attributable to common stockholders not subject to possible conversion	$	532,552		$	693,896
Pro forma weighted average number of shares outstanding, excluding shares subject to possible conversion - basic		4,314,798			6,531,969
Pro forma net income per share, excluding shares subject to possible conversion - basic	$	0.12		$	0.11
Net income	$	625,408		$	774,418
Interest income attributable to common stock subject to possible conversion		(92,856	)		(80,522	)
Gain on derivative liabilities attributed to warrants		(215,625	)		(399,862	)

7

Echo Healthcare Acquisition Corp.

(a development stage company)

Notes to Condensed Financial Statements—(Continued)

(Unaudited)

Pro forma net income attributable to common stockholders not subject to possible conversion less gain on derivative liabilities attributed to warrants	$	316,927	$	294,034
Pro forma weighted average number of shares outstanding excluding shares subject to possible conversion - basic		4,314,798		6,531,969
Shares from assumed conversion on warrants		562,200		1,035,594
Pro forma weighted average number of shares outstanding, excluding shares subject to possible conversion - diluted		4,876,998		7,567,563
Pro forma net income per share, excluding shares subject to possible conversion - diluted	$	0.06	$	0.04

[8] New Accounting Pronouncements:

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”), which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We do not expect the adoption of FIN 48 to have a material impact on our financial reporting, and we are currently evaluating the impact, if any, the adoption of FIN 48 will have on our disclosure requirements.

The Company does not believe that any recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements.

[9] Accounting for Warrants and Derivative Instruments

On March 22, 2006, the Company sold 6,250,000 Units in the Offering. On March 27, 2006, the underwriters for the initial public offering exercised their over-allotment option and purchased an additional 937,500 Units. Each Unit consists of one share of the Company’s common stock and one warrant (“Warrant”). Each Warrant entitles the holder to purchase from the Company one share of common stock at an exercise price of $6.00 commencing on the later of (a) March 17, 2007 or (b) the completion of an Acquisition. The Warrants will expire March 17, 2010. The Warrants will be redeemable, at the Company’s option at a price of $.01 per Warrant upon 30 days notice after the Warrants become exercisable, only in the event that the last sale price of the common stock is at least $11.50 per share for any 20 trading days within a 30 trading day period ending on the third day prior to the date on which notice of redemption is given.

The Company sold to Morgan Joseph & Co. Inc. and Roth Capital Partners, LLC, the underwriters, an option, for $100, to purchase up to a total of 312,500 Units at $10.00 per Unit.

In September 2000, the Emerging Issues Task Force issued EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock” (“EITF 00-19”), which requires freestanding contracts that are settled in a company's own stock, including common stock warrants, to be designated as an equity instrument, asset or a liability. Under the provisions of EITF 00-19, a contract designated as an asset or a liability must be carried at fair value on a company’s balance sheet, with any changes in fair value recorded in the company’s results of operations. A contract designated as an equity instrument must be included within equity, and no fair value adjustments are required from period to period. In accordance with EITF 00-19, the 7,187,500 Warrants issued as part of the Units issued in the Offering are separately accounted for as liabilities. The fair value of these Warrants is shown on the Company’s balance sheet and the unrealized changes in the values of these derivatives are shown on the Company’s statement of operations as “Gain (loss) on derivative liabilities.” The Warrants started trading on the over-the-counter bulletin board on June 6, 2006. The fair value of the Warrants prior to June 6, 2006 was estimated based on the market price of the Units. To the extent that the market price increases or decreases, the Company’s derivative liabilities will also increase or decrease, including the effect on the Company’s statement of operations.

8

Echo Healthcare Acquisition Corp.

(a development stage company)

Notes to Condensed Financial Statements—(Continued)

(Unaudited)

Fair values for exchange traded securities and derivatives are based on quoted market prices. Where market prices are not readily available, fair values are determined using market based pricing models incorporating readily observable market data and requiring judgment and estimates. The underwriter’s purchase option to purchase 312,500 Units is considered an equity instrument, as all criteria to be accounted for as an equity instrument have been fulfilled. The embedded derivatives, the Warrants to purchase 312,500 shares for $6.00 each, follow the same accounting guidelines as the Warrants issued in the initial public offering and are considered a liability. In addition, the founding director warrants to purchase 458,333 shares of common stock are considered equity instruments, as all criteria to be accounted for as an equity instrument have been fulfilled.

Statement of Financial Accounting Standard (‘‘SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,’’ as amended, requires all derivatives to be recorded on the balance sheet at fair value. Furthermore, paragraph 11(a) of SFAS No. 133 precludes contracts issued or held by a reporting entity that are both (1) indexed to its own stock and (2) classified as stockholders' equity in its statement of financial position from being treated as derivative instruments. The Company has determined that the option to purchase 312,500 units, each unit consisting of one warrant and one share of common stock, is a derivative that also contains an embedded derivative. The option to purchase 312,500 Units and the Warrants to purchase an additional 312,500 shares, the latter being the embedded derivative, are separately valued and accounted for on the Company’s balance sheet. While the Warrants to purchase the additional 312,500 shares are indexed to the Company's common stock, the fact that the shares underlying the Warrants are registered,requires the Company to classify these instruments as a liability in accordance with EITF 00-19, paragraph 14. The embedded derivatives, which are the Warrants to purchase 312,500 shares for $6.00 each, follow the same accounting guidelines as the Warrants issued in the initial public offering and are considered a liability. These derivative liabilities will continue to be adjusted to fair value at each reporting date.

The Company performed a valuation of the option to purchase 312,500 units, and then allocated its fair value to its two components, the underlying 312,500 shares and the embedded Warrants to purchase additional 312,500 shares. The fair value at inception was calculated to be $484,742, or $1.55 per unit, of which $436,268 was allocated to the 312,500 shares included in the Units and $48,474 was allocated to the Warrants to purchase an additional 312,500 shares, according to their respective fair values.

The pricing model the Company uses for determining fair values of the purchase option is the Black-Scholes Pricing Model. Valuations derived from this model are subject to ongoing internal and external verification and review. The model uses market-sourced inputs such as interest rates, market prices and volatilities. Selection of these inputs involves management’s judgment and may impact net income.

In particular, the Company uses volatility rates based upon a sample of comparable companies in its industry, special purpose acquisition corporations. At the time a company to be acquired has been identified and agreements to acquire are in place, the volatility rates will be based on comparable companies to the acquired company. The Company uses a risk-free interest rate, which is the rate on U. S. Treasury instruments, for a security with a maturity that approximates the estimated remaining contractual life of the derivative. The volatility factor used in the Black-Scholes Pricing Model has a significant effect on the resulting valuation of the derivative liabilities on the Company’s balance sheet. The volatility for the calculation of the embedded derivatives was approximated at 0.27, this volatility-rate will likely change in the future. The Company uses the closing market price of the Company’s common stock at the end of a quarter when a derivative is valued at fair value. The Company’s stock price will also change in the future. To the extent that the Company’s stock price increases or decreases, the Company’s derivative liabilities will also increase or decrease, absent any change in volatility rates and risk-free interest rates.

NOTE D — INITIAL PUBLIC OFFERING

On March 22, 2006, the Company sold 6,250,000 Units in the Offering. On March 27, 2006, the underwriters for the initial public offering exercised their over-allotment option and purchased an additional 937,500 Units. Each Unit consists of one share of the Company’s common stock and one Warrant. Each Warrant entitles the holder to purchase from the Company one share of common stock at an exercise price of $6.00 commencing on the later of (a) March 17, 2007 or (b) the completion of an Acquisition. The Warrants will expire March 17, 2010. The Warrants will be redeemable, at the Company’s option at a price of $.01 per Warrant upon 30 days notice after the Warrants become exercisable, only in the event that the last sale price of the common stock is at least $11.50 per share for any 20 trading days within a 30 trading day period ending on the third day prior to the date on which notice of redemption is given.

9

Echo Healthcare Acquisition Corp.

(a development stage company)

Notes to Condensed Financial Statements—(Continued)

(Unaudited)

The Company sold to Morgan Joseph & Co. Inc. and Roth Capital Partners, LLC, the underwriters, an option for $100 to purchase up to a total of 312,500 Units at $10.00 per Unit. The option has been valued at the date of issuance at approximately $485,000, based upon a Black-Scholes model, using an expected life of four years, volatility of 27% and a risk-free interest rate of 4.35%. The volatility calculation of 27% is based on the four-year volatility of a subgroup of the Russell 2000 Healthcare Index, which consisted of the twenty-five smallest constituent companies measured by overall market capitalization. Because the Company does not have a trading history, the Company needed to estimate the potential volatility of its units, which will depend on a number of factors which cannot be ascertained at this time. The Company referred to this subgroup of the four-year volatility of the Russell 2000 Healthcare Index because its management believes that the volatility of these constituent companies is a reasonable benchmark to use in estimating the expected volatility for the Company’s units. Although an expected life of four years was taken into account for purposes of assigning a fair value to the option, if the Company does not consummate an Acquisition within the prescribed time period and liquidates, the option would become worthless.

The units issuable upon exercise of this option are identical to the Units in the Offering. The option is exercisable commencing on the later of the consummation of a business combination or one year from March 17, 2006, and expires five years from the date of issuance. The option and the 312,500 units, the 312,500 shares of common stock and the 312,500 warrants underlying such units, and the 312,500 shares of common stock underlying such warrants, are subject to a 180-day lock-up. The underwriters will not sell, transfer, assign, pledge, or hypothecate this option or the securities underlying this option, nor will they engage in any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of this option or the underlying securities for a period of 180 days from the date of the Offering. However, the option may be transferred to any underwriter and selected dealer participating in the Offering and their bona fide officers or partners. Although the option and its underlying securities have been registered, the option grants holders demand and “piggy back” registration rights for periods of five and seven years, respectively, from March 17, 2006. These rights apply to all of the securities directly and indirectly issuable upon exercise of the option. The exercise price and number of units issuable upon exercise of the option may be adjusted in certain circumstances including in the event of a stock dividend, or our recapitalization, reorganization, merger or consolidation. However, the option exercise price or underlying units will not be adjusted for issuances of common stock at a price below the option exercise price. The option may be exercised for cash, or on a “cashless” basis, at the holder’s option, such that the holder may receive a net amount of shares equal to the appreciated value of the option (the difference between the exercise prices of the option and the underlying warrants, and the market price of the underlying securities).

Certain Founding Stockholders purchased an aggregate of 458,333 warrants concurrently with the closing of the Offering at a price of $1.20 per warrant directly from the Company. They have agreed that these warrants purchased by them will not be sold or transferred until completion of an Acquisition. In exchange for agreeing to purchase such warrants, these Founding Stockholders were sold an aggregate of 171,662 shares of previously issued common stock from other Founding Stockholders in a private transaction for a purchase price equal to the initial price paid by selling Founding Stockholders. The transaction is accounted for as an equity transaction and had no effect on the financial position or operations of the Company.

The Company agreed to pay the Underwriters of the Offering fees equal to 7.0% of the gross proceeds, of which the Underwriters have agreed to defer 3.0% of their fees (totaling $1,725,000) until consummation of an Acquisition. The Company will pay the deferred fees upon an Acquisition out of the proceeds of the Offering held in trust. If there is no Acquisition, these Fees will not be paid.

Upon consummation of the Offering, all shares of common stock owned by the Founding Stockholders were placed into an escrow account maintained by Corporate Stock Transfer, Inc., acting as escrow agent. These shares will be released from escrow in two equal increments:

·   781,250 shares on the expiration of three years from March 17, 2006; and

·   781,250 shares on upon the completion of an Acquisition and the last sale price of the Company’s common stock thereafter equals or exceeds $11.50 per share for any 20 trading days within any 30 trading day period beginning after the Company completes its initial Acquisition.

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Echo Healthcare Acquisition Corp.

(a development stage company)

Notes to Condensed Financial Statements—(Continued)

(Unaudited)

The foregoing restrictions are subject to certain limited exceptions such as transfers to family members and trusts for estate planning purposes, upon death of an escrow depositor, transfers to an estate or beneficiaries, or other specified transfers. Even if transferred under these circumstances, the shares will remain in the escrow account. The shares are releasable from escrow prior to the above dates only if following the initial Acquisition, the Company consummates a transaction in which all of the stockholders of the combined entity have the right to exchange their shares of common stock for cash, securities or other property. If the price of the Company’s common stock fails to reach the trigger price for the required number of trading days described above, the 781,250 shares subject to this condition will remain in escrow until a transaction is consummated in which all stockholders of the combined entity have the right to exchange their common stock for cash, securities or other property, or until the Company ceases operations.

The shares placed in escrow subject to performance and market conditions as defined in the agreement, the attainment of which can not be assured, are considered contingent shares. As a result, these shares are not included in the income (loss) per common share calculations. The agreement provides that the shares are to be released to the initial stockholders (all of whom are officers and/or directors or are a related party to an officer and director) upon meeting certain performance and market conditions. Accordingly, the Company may be required to recognize a charge based on the fair value of the shares at the time the shares are released from the escrow. (The amount of such charge could be equal to the number of shares times the market value at such date. Based on the target price of $11.50, such charge would be approximately $8,984,000.)

NOTE E—NOTES PAYABLE TO AND LINE OF CREDIT FROM FOUNDING STOCKHOLDERS

The Company had issued notes totaling $200,000 to certain of its Founding Stockholders. The notes were satisfied on March 22, 2006.

Certain of the Company’s Founding Stockholders have entered into a limited recourse revolving line of credit agreement, (the “Working Capital Line of Credit”), pursuant to which the Company may have up to $750,000 of borrowings outstanding at any time. Amounts outstanding under the Working Capital Line of Credit will bear interest at a rate equal to the rate of interest earned on the net proceeds of the offering held in the Trust Fund. No interest shall be payable until the principal of the loan becomes payable. The loans under the limited recourse revolving line of credit agreement shall be payable only upon the consummation of the initial Acquisition or upon certain events of default. If the Company does not consummate the initial Acquisition within two years following the completion of the offering, the loans under the limited recourse revolving line of credit agreement shall terminate and the payees shall have no right to repayment thereunder. At June 30, 2006 $105,700 had been advanced under this line of credit. The Company has incurred interest of $1,135 through June 30, 2006, which is included in accrued expenses.

NOTE F —RELATED PARTY TRANSACTION

The Company has agreed to pay a Founding Stockholder an administrative fee of $7,500 per month, $5,500 of which shall be deferred until the completion of the initial Acquisition, for office space and general and administrative services from March 22, 2006 through the effective date of the initial Acquisition. If there is no Acquisition, the deferred fees will not be paid. During the period ended June 30, 2006, $24,435had been recorded as expense. At June 30, 2006, the Company had a liability of $17,919, which is included in accrued expenses.

11

Echo Healthcare Acquisition Corp.

(a development stage company)

Notes to Condensed Financial Statements—(Continued)

(Unaudited)

NOTE G — OFFICERS AND DIRECTORS

The Company’s officers and directors have agreed with Morgan Joseph & Co. Inc. and Roth Capital Partners, LLC, that during the first 40 trading day period beginning the later of the date the separate trading of the common stock and the Warrants has commenced or 60 days after the end of the “restricted period,” they or certain of their affiliates or designees collectively will purchase up to $300,000 of Warrants in the public marketplace at prices not to exceed $1.20 per Warrant. They have further agreed that any Warrants purchased by them or their affiliates or designees will not be sold or transferred until the completion of an Acquisition. As of June 30, 2006, they had purchased $235,720 of Warrants.

NOTE H —COMMITMENTS AND OTHER MATTERS

On January 29, 2006, Powell Goldstein LLP agreed to defer its legal fees related to the Offering totaling $200,000 until the completion of the initial Acquisition or the liquidation of the Company, in which case the deferred fees would not be payable out of the net proceeds of the offering held in trust. These fees constitute a cost of the offering and an obligation of the Company. If there is no Acquisition, this obligation will not be paid.

On January 29, 2006, Tri-State Financial, which provided financial printing services in connection with the Offering, agreed to defer payment of 20% of its printing fees until the completion of the initial Acquisition (in which case the deferred fees would be payable out of the net proceeds of the offering held in trust) or the liquidation of the Company (in which case the deferred fees would not be payable out of the net proceeds of the offering held in trust). These fees, totaling $93,233, constitute a cost of the offering and an obligation of the Company. If there is no Acquisition, this obligation will not be paid.

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our financial statements and the related notes and schedules thereto.

Overview

We were formed on June 10, 2005 as a blank check company for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition or other similar business combination, one or more domestic or international operating businesses in the healthcare industry. We intend to use cash derived from the net proceeds of our initial public offering, which closed on March 22, 2006, and the exercise by the underwriters of their over-allotment option, which closed on March 27, 2006, together with our subordinated revolving line of credit for up to $750,000, or our Line of Credit, and any additional financing arrangements that we undertake, to effect a business combination.

Through June 30, 2006, our efforts have been limited to organizational activities, activities relating to our initial public offering, and activities related to pursuing potential target businesses; we have not generated any revenues. As of June 30, 2006, we had accrued expenses and accrued offering costs of approximately $79,600 and $152,713 respectively. In addition, we had cash of approximately $25,922, which was principally funded pursuant to a $105,700 draw on our Line of Credit.

On March 22, 2006, we consummated our initial public offering. The net proceeds from our initial public offering were approximately $45,446,690, after deducting offering expenses of approximately $1,053,300 and underwriting discounts of $3,500,000, including deferred amounts totaling approximately $1,793,200.

On March 27, 2006, the underwriters for our initial public offering exercised their over-allotment option and purchased 937,500 additional units. The net proceeds from the exercise of the over-allotment option were approximately $6,975,000, after deducting underwriting discounts of $525,000, including deferred amounts totaling $225,000. Except for the cost of the underwriting, we have not yet determined the amount of any expenses attributable to the sale of units pursuant to the exercise of the over-allotment option.

As of March 27, 2006, after giving effect to the sale of units pursuant to our initial public offering and the exercise of the over-allotment option and proceeds from the sale of warrants to founding directors totaling $550,000, approximately $54,947,000 was held in trust, and we had approximately $233,000 of our offering proceeds not held in trust available to us for our activities in connection with identifying and conducting due diligence of a suitable business combination, and for general corporate matters. Through June 30, 2006, the funds held in trust had earned $703,806 in interest income.

Critical Accounting Policies and Accounting Estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the periods reported. Actual results could materially differ from those estimates. We have determined that we currently are not subject to any critical accounting policies.

Results of Operations and Known Trends or Future Events

We have neither engaged in any operations nor generated revenues to date.  Since our inception, our only activities have been organizational activities and those necessary to prepare for our Offering, and thereafter, certain activities related to pursuing a target business.  We will not generate any operating revenues until the completion of a business combination, if any.  We have generated non-operating income in the form of interest income on cash and cash equivalents and our other short term investments.

For the three months ended June 30, 2006, we had net income of approximately $774,418, derived primarily from a gain on a change in our derivative liabilities and income related to the cash held in our trust account. For the six months ended June 30, 2006, we had net income of approximately $625,408, derived primarily from a gain on a change in our derivative liabilities and income related to the cash held in our trust account. For the period from June 10, 2005 (date of inception) through June 30, 2006, we had net income of approximately $487,289, derived primarily from a gain on a change in our derivative liabilities and income related to the cash held in our trust account.

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Liquidity and Capital Resources

We will use substantially all of the net proceeds discussed above to acquire one or more operating businesses, including identifying and evaluating prospective acquisition candidates, selecting one or more operating businesses, and structuring, negotiating and consummating the business combination, including the making of a down payment or the payment of exclusivity or similar fees and expenses, if any. However, we may not use all of the proceeds held in the trust account in connection with a business combination, either because the consideration for the business combination is less than the proceeds in trust or because we finance a portion of the consideration with capital stock or debt securities that we can issue. In that event, the proceeds held in the trust account as well as any other net proceeds not expended will be used to finance the operations of the target business or businesses.

We may issue additional capital stock or debt securities to finance a business combination. The issuance of additional capital stock, including upon conversion of any convertible debt securities we may issue, or the incurrence of debt, could have material consequences on our business and financial condition. The issuance of additional shares of our capital stock (including upon conversion of convertible debt securities):

·   may significantly reduce the equity interest of our stockholders;

·   will likely cause a change in control if a substantial number of our shares of common stock or voting preferred stock are issued, which may affect, among other things, our ability to use our net operating loss carry forwards, if any, and may also result in the resignation or removal of one or more of our present officers and directors; and

·   may adversely affect prevailing market prices for our common stock.

Similarly, if we issue debt securities, it could result in:

·   default and foreclosure on our assets if our operating revenues after a business combination are insufficient to pay our debt obligations;

·   acceleration of our obligations to repay the indebtedness even if we make all principal and interest payments when due if we breach the covenants contained in any debt securities, such as covenants that require the satisfaction or maintenance of certain financial ratios or reserves, without a waiver or renegotiation of such covenants;

·   an obligation to immediately repay all principal and accrued interest, if any, upon demand to the extent any debt securities are payable on demand; and

·   our inability to obtain additional financing, if necessary, to the extent any debt securities contain covenants restricting our ability to obtain additional financing while such security is outstanding, or to the extent our existing leverage discourages other potential investors.

We believe that we have sufficient funds available under our Line of Credit to allow us to operate for at least the next 18 months, assuming that a business combination is not consummated during that time. Over this time period, we anticipate making the following expenditures:

·   approximately $250,000 of expenses for legal and accounting fees attendant to the due diligence investigations, structuring and negotiating of a business combination;

·   approximately $50,000 for reimbursement of out-of-pocket expenses for the due diligence and investigation of a target business;

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·   approximately $50,000 of expenses in legal and accounting fees relating to our reporting obligations to the Securities and Exchange Commission;

·   approximately $352,000 for general working capital that will be used for miscellaneous expenses and reserves, including expenses of structuring and negotiating a business combination, including the making of a down payment or the payment of exclusivity or similar fees and expenses; and

·   approximately $42,000 for administrative fees relating to office space for twenty-one (21) months. However, an additional $115,500 in the administrative fees will be deferred and shall be payable upon the consummation of a business combination. In the event we must liquidate our company prior to such a business combination, these fees will not be paid with proceeds of our public offering held in trust.

At June 30, 2006, we had total assets of $55,746,166, stockholders’ equity of $36,590,362 (not including $11,076,761 that may be converted to cash by shareholders voting against a business combination) and a Line of Credit obligation of $105,700.

The following table shows the amounts due in connection with the contractual obligations described below as of June 30, 2006.

	Payments due by period
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
	(In thousands)
Long-term debt (1)	$	105,700	$	-	$	105,700	$	-	$	-
Administrative Fees Obligations (2)		157,500		90,000		67,500		-		-
Total	$	263,200	$	90,000	$	173.200	$	-	$	-

(1) As of June 30, 2006, we had drawn $105,700 on our Line of Credit which will become due at the consummation of a business combination, which could occur in less than one year but may occur as late as March 22, 2008.

(2) The administrative fees obligations represent the full amount of rent payable to Windy City, Inc. for office space, utilities and personnel, $5,500 per month of which is deferred until the consummation of a business combination.

During the second quarter ended June 30, 2006, there were payments to directors and officers of $125,000 representing reimbursement of road show expenses.

Since our initial public offering, we have been actively engaged in sourcing a suitable business combination candidate. We have met with target companies, service professionals and other intermediaries to discuss our company, the background of our management and our combination preferences. In the course of these discussions, we have also spent time explaining the capital structure of the initial public offering, the combination approval process and the timeline under which we are operating before the proceeds of the offering are returned to investors.

Consistent with the disclosures in our prospectus dated March 17, 2006, we have focused our search on companies that span a broad spectrum of the healthcare industry. Overall, we would gauge the environment for target companies to be competitive, and we believe that private equity firms, other blank check companies and strategic buyers represent our biggest competition. Our management believes that many of the fundamental drivers of alternative investment vehicles like our company are becoming more accepted by investors and potential business combination targets; these include a difficult environment for initial public offerings, a cash-rich investment community looking for differentiated opportunities for incremental yield and business owners seeking new ways to maximize their shareholder value while remaining invested in the business. However, there can be no assurance that we will find a suitable business combination in the allotted time.  Furthermore, it is possible that we could use a portion of the funds not in the trust account to make a deposit, down payment or fund a “no-shop” provision with respect to a particular proposed business combination. In the event we were ultimately required to forfeit such funds (whether as a result of our breach of the agreement relating to such payment or otherwise), we may not have a sufficient amount of working capital available outside of the trust account to pay expenses related to finding a suitable business combination without securing additional financing. If we were unable to secure additional financing, we would most likely fail to consummate a business combination in the allotted time and would be forced to liquidate.

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Risk Factors that May Affect Future Results

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “continue,” or the negative of such terms or other similar expressions. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those described in our other filings with the Securities and Exchange Commission, including our registration statement on Form S-1/A as filed on March 8, 2006.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk is the sensitivity of income to changes in interest rates, foreign currency exchange rates, commodity prices, equity prices, and other market-driven rates or prices. We are not presently engaged in and, if a suitable business target is not identified by us prior to the prescribed liquidation date of the trust fund, we may not engage in, any substantive commercial business. Accordingly, we are not and, until such time as we consummate a business combination, we will not be, exposed to risks associated with foreign exchange rates, commodity prices, equity prices or other market-driven rates or prices. The net proceeds of our initial public offering held in the trust fund have been invested only in securities meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act of 1940. Given our limited risk exposure related to these short-term securities, we do not view the interest rate risk to be significant.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our principal executive officer and principal financial officer are responsible for establishing and maintaining disclosure controls and procedures as defined in the rules promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2006 and, based on that evaluation, our principal executive officer and principal financial officer have concluded that these controls and procedures were effective as of June 30, 2006.

Disclosure controls and procedures are the controls and other procedures designed to ensure that information that we are required to disclose in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we fileunder the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

PART II - OTHER INFORMATION

Item 1.    Legal Proceedings

There are no material legal proceedings pending against us.

Item 1A. Risk Factors

We filed a registration statement on Form S-1/A with the Securities and Exchange Commission on March 8, 2006, which describes our risk factors. We have not experienced any material changes from the risk factors previously disclosed on our Form S-1/A.

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

Our units are traded on the over-the-counter bulletin board under the symbol “EHHAU.OB.” On June 6, 2006, the stock and warrants underlying our units were permitted to trade separately. Our common stock is traded on the over-the-counter bulletin board under the symbol “EHHA.OB.” Our warrants are traded on the over-the-counter bulletin board under the symbol “EHHAW.OB.” Our units continue to trade on the over-the-counter bulletin board under the symbol “EHHAU.OB.”

On March 22, 2006, we consummated our initial public offering of 6,250,000 units. The securities sold in the initial public offering were registered under the Securities Act of 1933, as amended, on a registration statement on Form S-1/A (File No. 333-126650). The Securities and Exchange Commission declared our registration statement effective on March 17, 2006. We also sold Morgan Joseph and Co. Inc. and Roth Capital Partners, LLC, for $100, as additional compensation, an option to purchase up to 312,500 units at $10.00 per unit. Concurrently with the initial public offering, we sold 458,333 warrants to certain of our founding stockholders for a total of $550,000 in a private placement, or Private Placement. The net proceeds from our initial public offering and Private Placement were approximately $45,446,690, after deducting offering expenses of approximately $827,500 and underwriting discounts of $3,500,000, including deferred amounts totaling approximately $1,793,200. As of March 22, 2006, $47,780,000 of this amount had been placed in trust for purposes of consummating a business combination, with approximately $200,000 remaining for operating purposes.

On March 27, 2006, the underwriters for our initial public offering exercised their over-allotment option and purchased 937,500 additional units. The net proceeds from the exercise of the over-allotment option were approximately $6,975,000, after deducting underwriting discounts of $525,000, including deferred amounts of $225,000. Approximately $7,167,000 of the net proceeds from the exercise of the over-allotment option were placed in trust. We have not yet determined the amount of any expenses attributable to the sale of units pursuant to the exercise of the over-allotment option.

On March 22, 2006, we used $200,000 of our general working capital to repay notes payable to certain of our initial stockholders. The loans were repaid in full, without interest, and cancelled.

On March 22, 2006, we used $85,000 of our general working capital to pay premiums associated with our directors and officers liability insurance.

As of March 27, 2006, after giving effect to the sale of units pursuant to the exercise of the over-allotment option, approximately $54,947,000 was held in trust and we had approximately $33,000 of our offering proceeds not held in trust from the exercise of the over-allotment option remaining and available to us for our activities in connection with identifying and conducting due diligence of a suitable business combination, and for general corporate matters.

During the second quarter ended June 30, 2006, there were payments to directors and officers of $125,000 representing reimbursement of road show expenses.

Item 3.   Defaults Upon Senior Securities

Not applicable.

Item 4.   Submission of Matters to a Vote of Security Holders

None.

Item 5.   Other Information

None.

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Item 6. Exhibits

Exhibit No.	Description
31.1	Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.
31.2	Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.
32.1	Section 1350 Certification of the Chief Executive Officer.
32.2	Section 1350 Certification of the Chief Financial Officer.

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SIGNATURES

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

ECHO HEALTHCARE ACQUISITION CORP.

Registrant

Date:     August 21, 2006	By:     /S/ GENE E. BURLESON
	Gene E. Burleson
	Chief Executive Officer
Date:     August 21, 2006	By:     /S/ KEVIN PENDERGEST
	Kevin Pendergest
	Chief Financial Officer

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