UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
FORM 10-Q/A
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 ___ No X
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).
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of May 8, 2006.
Common Stock, $.0001 par value | 8,750,000 |
(Class) | (Number of shares) |
Explanatory Note:
This Quarterly Report on Form 10-Q/A is being filed as Amendment Number 1 to our Quarterly Report on Form 10-Q, which was originally filed with the Securities and Exchange Commission (‘‘SEC’’) on May 11, 2006. We are filing this form 10-Q/A to restate our financial statements for the quarter ended March 31, 2006 to reflect additional non-operating gains and losses related to the classification of and accounting for: (1) the warrants to purchase common stock associated with the units sold at the initial public offering of the Company and (2) warrants to purchase common stock embedded in an option to purchase units consisting of one share and one warrant to purchase one additional share, issued to Morgan Joseph & Co. Inc. and Roth Capital Partners, LLC, in connection with the initial public offering. The Company had previously classified the value of these warrants to purchase common stock, when applicable, as equity. After further review, the Company has determined that these instruments should have been classified as derivative liabilities and therefore, the fair value of each instrument must be recorded as a derivative liability on the Company's balance sheet. Changes in the fair values of these instruments will result in adjustments to the amount of the recorded derivative liabilities and the corresponding gain or loss will be recorded in the Company’s statement of operations. Except as otherwise stated, all financial information contained in this Quarterly Report on Form 10-Q gives effect to these restatements. For information concerning the background of the restatements, the specific adjustments made, and management’s discussion and analysis of our results of operations for 2006 giving effect to the restated information, see ‘‘Restatement of Financial Statements’’ in Item 2. ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ and Notes C and J to our Financial Statements.
The Company also reclassified its Investments held in Trust Fund from current assets to non-current assets, since the trust fund is intended to acquire a business. The reclassification of the Investments held in Trust Fund had no impact to the statements of operations and cash flows.
This Form 10-Q/A amends and restates only certain information in the following sections as a result of the current restatements described above:
Part I — Item 1. Financial Statements
Part I — Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In addition, we are also including currently dated Sarbanes Oxley Act Section 302 and Section 906 certifications of the Chief Executive Officer and Chief Financial Officer that are attached to this Form 10-Q/A as Exhibits 31.1, 31.2, 32.1 and 32.2.
For the convenience of the reader, this Form 10-Q/A sets forth the entire Form 10-Q which was prepared and relates to the Company as of March 31, 2006. However, this Form 10-Q/A only amends and restates the Items described above to reflect the effects of the restatement and no attempt has been made to modify or update other disclosures presented in our March 31, 2006 Form 10-Q. Accordingly, except for the foregoing amended information, this Form 10-Q/A continues to speak as of May 11, 2006 (the original filing date of the March 31, 2006 Form 10-Q), and does not reflect events occurring after the filing of our March 31, 2006 Form 10-Q and does not modify or update those disclosures affected by subsequent events. Forward looking statements made in the 2006 Form 10-Q have not been revised to reflect events, results or developments that have become known to us after the date of the original filing (other than the current restatements described above), and such forward looking statements should be read in their historical context. Unless otherwise stated, the information in this Form 10-Q/A not affected by such current restatements is unchanged and reflects the disclosures made at the time of the original filing.
Part I - Financial Information
Item 1. Condensed Financial Statements
Echo Healthcare Acquisition Corp.
(a development stage company)
Condensed Balance Sheets
| | | March 31, 2006 (Unaudited) | | December 31, 2005 | |
| | | (As Restated) | | | |
ASSETS | | | | | |
| | | | | | |
| Current Assets: | | | | | | | |
| Cash | | $ | 42,420 | | $ | 14,807 | |
Prepaid expenses | | | 83,604 | | | - | |
Total current assets | | | 126,024 | | | 14,807 | |
| Investments held in Trust Fund | | | 55,008,699 | | | - | |
| Deferred offering costs - Non-current | | | - | | | 601,413 | |
| Total assets | | $ | 55,134,723 | | $ | 616,220 | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | |
| | | | | | | | |
| Current liabilities: | | | | | | | |
Accrued expenses | | $ | 10,988 | | $ | 136,052 | |
Derivative liabilities | | | 5,982,711 | | | | |
Notes Payable to Founding Stockholders | | | - | | | 150,000 | |
Line of Credit from Founding Stockholders | | | 25,000 | | | - | |
Accrued offering costs | | | 186,604 | | | 443,288 | |
Deferred underwriting and other offering costs | | | 2,018,233 | | | - | |
Total current liabilities | | | 8,223,536 | | | 729,340 | |
| | | | | | | | |
COMMITMENTS AND CONTINGENCIES | | | | | | | |
| | | | | | | | |
Common stock subject to possible conversion, 1,436,781 shares at a conversion value of approximately $7.65 per share | | | 10,996,239 | | | - | |
| | | | | | | | |
STOCKHOLDERS’ EQUITY | | | | | | | |
| | | | | | | | |
| Preferred stock—$.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 | | | 36,213,536 | | | 24,844 | |
| Deficit accumulated during the development stage | | | (299,463 | ) | | (138,120 | ) |
Total stockholders’ equity (capital deficit) | | | 35,914,948 | | | (113,120 | ) |
| Total liabilities and stockholders’ equity | | $ | 55,134,723 | | $ | 616,220 | |
See Notes to Condensed Financial Statements.
Echo Healthcare Acquisition Corp.
(a development stage company)
Condensed Statements of Operations
(Unaudited)
As Restated
| | | January 1, 2006 through March 31, 2006 | | June 10, 2005 (Date of Inception) through March 31, 2006 | |
| | | | | | |
| Revenue | | $ | 0 | | $ | 0 | |
| Operating expenses | | | (26,471 | ) | | (163,591 | ) |
| Organization costs | | | 0 | | | (1,000 | ) |
| Operating loss | | | (26,471 | ) | | (164,591 | ) |
| Loss on derivative liabilities | | | (184,237 | ) | | (184,237 | ) |
| Interest income | | | 61,699 | | | 61,699 | |
| Net loss | | $ | (149,009 | ) | $ | (287,129 | ) |
Weighted average number of shares outstanding—basic and diluted | | | 2,222,222 | | | | |
Net loss per share—basic and diluted | | | (0.07 | ) | | | |
| | | | | | | | |
See Notes to Condensed Financial Statements.
Echo Healthcare Acquisition Corp.
(a development stage company)
Condensed Statements of Stockholders’ Equity
| | | 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, excludes Derivative Liabilities) | | | 7,187,500 | | | 719 | | | 52,420,971 | | | | | | 52,421,690 | |
| | | | | | | | | | | | | | | | | |
| Proceeds subject to possible conversion of 1,436,781 shares | | | | | | | | | (10,983,905 | ) | | | | | (10,983,905 | ) |
| | | | | | | | | | | | | | | | | |
| Proceeds from issuance of underwriter’s purchase option | | | | | | | | | 100 | | | | | | 100 | |
| | | | | | | | | | | | | | | | | |
| Reclassification of proceeds allocated to warrants - derivatives liability | | | | | | | | | (5,798,474 | ) | | | | | (5,798,474 | ) |
| | | | | | | | | | | | | | | | | |
| Proceeds from sale of warrants to Founding Stockholders | | | | | | | | | 550,000 | | | | | | 550,000 | |
| | | | | | | | | | | | | | | | | |
| Accretion of trust fund relating to common stock subject to redemption, net of tax | | | | | | | | | | | | (12,334 | ) | | (12,334 | ) |
| | | | | | | | | | | | | | | | | |
| Net loss for the period | | | | | | | | | | | | (149,009 | ) | | (149,009 | ) |
| | | | | | | | | | | | | | | | | |
Balance - | | | | | | | | | | | | | | | | |
March 31, 2006 (unaudited) (as restated) | | | 8,750,000 | | $ | 875 | | $ | 36,213,536 | | $ | (299,463 | ) | $ | 35,914,948 | |
See Notes to Condensed Financial Statements.
Echo Healthcare Acquisition Corp.
(a development stage company)
Condensed Statements of Cash Flows
(Unaudited)
(As Restated)
| | | January 1, 2006 through March 31, 2006 | | June 10, 200 (Date of Inception) through March 31, 2006 | |
Cash flows from operating activities: | | | | | | | |
| Net income (loss) | | $ | (149,009 | ) | $ | (287,129 | ) |
| Adjustments to reconcile net income (loss) to net cash used by operating activities: | | | | | | | |
| Loss on derivative liabilities | | | 184,237 | | | 184,237 | |
| Changes in: | | | | | | | |
| Prepaid expenses | | | (83,604 | ) | | (83,604 | ) |
| Accrued expenses | | | (125,064 | ) | | 10,988 | |
| Net cash used by operating activities | | | (173,440 | ) | | (175,508 | ) |
| | | | | | | | |
Cash flows from investing activities: | | | | | | | |
Increase in Investments held in Trust Fund | | | (55,008,699 | ) | | (55,008,699 | ) |
Net cash used in investing activities | | | (55,008,699 | ) | | (55,008,699 | ) |
| | | | | | | | |
Cash flows from financing activities: | | | | | | | |
| Proceeds from notes payable to Founding Stockholders | | | 50,000 | | | 200,000 | |
| Proceeds from Line of Credit from Founding Stockholders | | | 25,000 | | | 25,000 | |
| 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 | | | (2,715,348 | ) | | (2,873,473 | ) |
| Net cash provided by financing activities | | | 55,209,752 | | | 55,226,627 | |
Net increase in cash | | | 27,613 | | | 42,420 | |
| Cash—beginning of period | | | 14,807 | | | 0 | |
Cash—end of period | | $ | 42,420 | | $ | 42,420 | |
| | | | | | | | |
| Supplemental schedule of non-cash financing activities | | | | | | | |
| (Payment of accrued) Accrual of deferred offering costs | | $ | (256,684 | ) | $ | 186,604 | |
| Accrual of deferred underwriting and other offering costs | | $ | 2,018,233 | | $ | 2,018,233 | |
| Warrant obligation in connection with sale of units in offering | | $ | 5,982,711 | | $ | 5,982,711 | |
See Notes to Condensed Financial Statements.
Echo Healthcare Acquisition Corp.
(a development stage company)
Notes to Condensed Financial Statements
(Unaudited)
NOTE A—BASIS OF PRESENTATION
The financial statements of Echo Healthcare Acquisition Corp. (the “Company”) at March 31, 2006 and for the periods ended March 31, 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 March 31, 2006 and the results of its operations and its cash flow for the periods ended March 31, 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 filed on March 8, 2006, as amended, and the Company’s current report on Form 8-K filed on March 24, 2006 and 8-K/A filed on August 23, 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 neither engaged in any operations nor 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. As such, the Company’s operating results through March 31, 2006 relate to early stage organizational activities. 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 $45,447,000, 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 initial stockholders for $550,000 is being held in a trust account (“Trust Fund”) and invested in government securities 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.
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 March 31, 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 March 31, 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.
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 $23,000 and $37,000 at March 31, 2006 and December 31, 2005, respectively. In recognition of the uncertainty regarding the ultimate amount of income tax benefits to be derived, the Company has recorded a full valuation allowance at both March 31, 2006 and December 31, 2005.
The effective tax rates differ from the statutory rate of 34% due to the increases in the valuation allowance.
[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 March 31, 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 and options, aggregating 7,645,833 shares, have been included in the period from January 1, 2006 through March 31, 2006. 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 per share information attributable to common stockholders subject to possible conversion:
| | | Three months ended March 31, 2006 | |
| Net loss | | $ | (149,009 | ) |
| Interest income attributable to common stock subject to possible conversion | | | (12,334 | ) |
| Pro forma net (loss) attributable to common stockholders not subject to possible conversion | | $ | (161,343 | ) |
| Pro forma weighted average number of shares outstanding excluding shares subject to possible conversion - basic and diluted | | | 2,072,991 | |
| Pro forma net (loss) per share, excluding shares subject to possible conversion - basic and diluted | | $ | (0.08 | ) |
Echo Healthcare Acquisition Corp.
(a development stage company)
Notes to Condensed Financial Statements—(Continued)
(Unaudited)
[8] New Accounting Pronouncements:
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. The warrant agreement provides for the Company to register the shares underlying the warrants and is silent as to if a penalty is to be incurred in the absence of the Company's ability to deliver registered shares to the warrant holders upon warrant exercise. Under EITF No. 00-19, in such circumstances, registration of the common stock underlying the warrants is not deemed to be within the Company 's control. As a result, the Company must assume that it could be required to settle the warrants on a net-cash basis, thereby necessitating the treatment of the potential settlement obligation as a liability. Further, EITF No. 00-19 requires that the Company record the potential settlement obligation at each reporting date using the current estimated fair value of the warrants, with any changes being recorded through its statement of operations. The potential settlement obligation will continue to be reported as a liability until such time as the warrants are exercised, expire, or the Company is otherwise able to modify the registration requirements in the warrant agreement to remove the provisions that require this treatment. 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 fair value of the Warrants, which amounted to $5,750,000, was estimated based on the market price of the Units.
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 stockholders 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 and the Company must maintain an effective registration statement, 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.
Echo Healthcare Acquisition Corp.
(a development stage company)
Notes to Condensed Financial Statements—(Continued)
(Unaudited)
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 (“Units”) in the Offering. On March 27, 2006, the underwriters for our 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 (“Warrants”). Accordingly, 7,187,500 Warrants are outstanding at March 31, 2006. 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. The sale of the option has been accounted for as a cost attributable to the offering. Accordingly, there is no net impact on the Company’s financial position or results of operations, except for recording of the $100 proceeds from the sale. 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.
Echo Healthcare Acquisition Corp.
(a development stage company)
Notes to Condensed Financial Statements—(Continued)
(Unaudited)
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 purchase 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). The Company must maintain the effectiveness of the registration of the shares underlying the underwriters’ purchase option. The agreement does not provide for specific liquidated damages.
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 Offering 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. |
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.
Echo Healthcare Acquisition Corp.
(a development stage company)
Notes to Condensed Financial Statements—(Continued)
(Unaudited)
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 March 31, 2006 $25,000 had been advanced under this line of credit.
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 March 31, 2006, $2,000 had been recorded as expense.
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.
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% its printing fees 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, 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.
Echo Healthcare Acquisition Corp.
(a development stage company)
Notes to Condensed Financial Statements—(Continued)
(Unaudited)
NOTE I - SUBSEQUENT EVENT
As of April 30, 2006, the Company had drawn an additional $75,000 on its Working Capital Line of Credit for a total of $100,000.
NOTE J - RESTATEMENT AND RECLASSIFICATIONS OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
Summary of Restatement Items
In August, 2006, the Company concluded that it was necessary to restate its financial statements as of March 31, 2006, the three months ended March 31, 2006, and from June 10, 2005 (date of inception) through March 31, 2006 to reflect additional non-operating gains and losses related to the classification of and accounting for: (1) the Warrants to purchase common stock associated with the units sold at the initial public offering of the Company, and (2) the Warrants to purchase common stock embedded in a option to purchase units consisting of one share and one Warrant to purchase one additional share, issued to Morgan Joseph & Co. Inc. and Roth Capital Partners, LLC in connection with the initial public offering. The Company had previously classified the value of these warrants to purchase common stock, when applicable, as equity. After further review, the Company has determined that these instruments should have been classified as derivative liabilities and therefore, the fair value of each instrument must be recorded as derivative liabilities on the Company's balance sheet. Changes in the fair values of these instruments will result in adjustments to the amount of the recorded derivative liabilities and the corresponding gain or loss will be recorded in the Company’s statement of operations. At the date of the conversion of each respective instrument or portion thereof (or exercise of the options or warrants or portion thereof, as the case may be), the corresponding derivative liability will be reclassified as equity.
The statement of cash flows was restated to reflect the non-cash disclosures related to the warrant derivative liability and the change in the fair value of the derivatives liability.
The Company also reclassified its Investments held in Trust Fund from current assets to non-current assets, since the trust fund is intended to acquire a business. The reclassification of the Investments held in Trust Fund had no impact to the statements of operations and cash flows.
The impact of the adjustments related to the classification of and accounting for the warrants for the period from inception to March 31, 2006 and for the three months ended March 31, 2006 are summarized below:
| | | For the Period June 10, 2005 (Date of Inception) to March 31, 2006 | |
| | | As Previously Reported | | Adjustment | | As Restated | |
| Revenue | | $ | 0 | | | | | $ | 0 | |
| Operating expenses | | | (163,591 | ) | | | | | (163,591 | ) |
| Organization costs | | | (1,000 | ) | | | | | (1,000 | ) |
| Operating loss | | | (164,591 | ) | | | | | (164,591 | ) |
| Loss on derivative liabilities | | | | | $ | (184,237 | ) | | (184,237 | ) |
| Interest income | | | 61,699 | | | | | | 61,699 | |
| Net loss | | | (102,892 | ) | | (184,237 | ) | $ | (287,129 | ) |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Pro forma adjustment: | | | | | | | | | | |
| Interest income attributable to common stock subject to possible conversion | | $ | (12,334 | ) | | | | $ | (12,334 | ) |
| Pro forma net loss attributable to common stockholders not subject to possible conversion | | $ | (115,226 | ) | $ | (184,237 | ) | $ | (299,463 | ) |
| | | | | | | | | | | |
Echo Healthcare Acquisition Corp.
(a development stage company)
Notes to Condensed Financial Statements—(Continued)
(Unaudited)
| | | For the three months ended March 31, 2006 | |
| | | As Previously Reported | | Adjustment | | As Restated | |
| Revenue | | $ | 0 | | | | | $ | 0 | |
| Operating expenses | | | (26,471 | ) | | | | | (26,471 | ) |
| Organization costs | | | 0 | | | | | | 0 | |
| Operating loss | | | (26,471 | ) | | | | | (26,471 | ) |
| Loss on derivative liabilities | | | | | $ | (184,237 | ) | | (184,237 | ) |
| Interest income | | | 61,699 | | | | | | 61,699 | |
| Net income/(loss) | | $ | 35,228 | | | (184,237 | ) | $ | (149,009 | ) |
| | | | | | | | | | | |
| Weighted average number of shares outstanding—basic | | | 2,222,222 | | | | | | 2,222,222 | |
| Net income/(loss) per share—basic | | $ | 0.02 | | | (0.09 | ) | $ | (0.07 | ) |
| | | | | | | | | | | |
| Weighted average number of shares outstanding—diluted | | | 2,336,120 | | | | | | 2,222,222 | |
| Net income (loss) per share—diluted | | $ | 0.02 | | | | | $ | (0.07 | ) |
| | | | | | | | | | | |
| Pro Forma Adjustment: | | | | | | | | | | |
| | | | | | | | | | | |
| Interest income attributable to common stock subject to possible conversion | | | (12,334 | ) | | | | | (12,334 | ) |
| Pro forma net income (loss) attributable to common stockholders not subject to possible conversion | | $ | 22,894 | | | | | $ | (161,343 | ) |
| Pro forma weighted average number of shares outstanding, excluding shares subject to possible conversion - basic | | | 2,072,991 | | | | | | 2,072,991 | |
| Pro forma net income (loss) per share, excluding shares subject to possible conversion - basic | | $ | 0.01 | | | | | $ | (0.08 | ) |
| Pro forma weighted average number of shares outstanding, excluding shares subject to possible conversion - diluted | | | 2,165,575 | | | | | | 2,072,991 | |
| Pro forma net income (loss) per share, excluding shares subject to possible conversion - diluted | | $ | 0.01 | | | | | $ | (0.08 | ) |
Echo Healthcare Acquisition Corp.
(a development stage company)
Notes to Condensed Financial Statements—(Continued)
(Unaudited)
Condensed Balance Sheet Impact
The following table sets forth the effects of the restatement adjustments on the Company’s condensed balance sheet as of March 31, 2006:
| | | March 31, 2006 | | | | March 31, 2006 | |
| | | As Previously Reported | | Adjustment | | As Restated | |
| Current Assets: | | | | | | | | | | |
| Cash | | $ | 42,420 | | | | | $ | 42,420 | |
Investments held in Trust Fund | | | 55,008,699 | | $ | (55,008,699 | ) | | - | |
Prepaid expenses | | | 83,604 | | | | | | 83,604 | |
Total current assets | | | 55,134,723 | | | | | | 126,024 | |
| Investments held in Trust Fund | | | | | | 55,008,699 | | | 55,008,699 | |
| Deferred offering costs - Non-current | | | - | | | | | | - | |
| Total assets | | $ | 55,134,723 | | | | | $ | 55,134,723 | |
| | | | | | | | | | | |
Current liabilities: | | | | | | | | | | |
Accrued expenses | | $ | 10,988 | | | | | $ | 10,988 | |
Derivative liabilities | | | | | $ | 5,982,711 | | | 5,982,711 | |
Notes Payable to Founding Stockholders | | | - | | | | | | - | |
Line of Credit from Founding Stockholders | | | 25,000 | | | | | | 25,000 | |
Accrued offering costs | | | 186,604 | | | | | | 186,604 | |
Deferred underwriting and other offering costs | | | 2,018,233 | | | | | | 2,018,233 | |
Total current liabilities | | | 2,240,825 | | $ | 5,982,711 | | | 8,223,536 | |
| | | | | | | | | | | |
COMMITMENTS AND CONTINGENCIES | | | | | | | | | | |
| | | | | | | | | | | |
| Common stock subject to possible conversion, 1,436,781 shares at a conversion value of approximately $7.65 per share | | | 10,996,239 | | | | | | 10,996,239 | |
| | | | | | | | | | | |
STOCKHOLDERS’ EQUITY | | | | | | | | | | |
| | | | | | | | | | | |
| Preferred stock—$.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 | | | | | | 875 | |
| Additional paid-in capital | | | 42,012,010 | | | (5,798,474 | ) | | 36,213,536 | |
| Deficit accumulated during the development stage | | | (115,226 | ) | | (184,237 | ) | | (299,463 | ) |
Total stockholders’ equity | | | 41,897,659 | | | (5,982,711 | ) | | 35,914,948 | |
| Total liabilities and stockholders’ equity | | $ | 55,134,723 | | $ | | | $ | $55,134,723 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
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.
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 March 31, 2006, our efforts have been limited to organizational activities and activities relating to our initial public offering; we have neither engaged in any operations nor generated any revenues. As of March 31, 2006, we had accrued expenses and accrued offering costs of approximately $11,000 and $187,000 respectively. In addition, we had cash of approximately $42,000, which was principally funded pursuant to a $25,000 draw on our Line of Credit.
Restatement of Financial Statements
We have restated our annual financial statements for the interim period ended March 31, 2006 to reflect additional non-operating gains and losses related to the classification of and accounting for: (1) the Warrants to purchase common stock associated with the units sold at the initial public offering of the Company and (2) warrants to purchase common stock embedded in an option to purchase units consisting of one share and one warrant to purchase one additional share, issued to Broadband Capital in connection with the initial public offering. The Company had previously classified the value of these warrants to purchase common stock, when applicable, as equity. After further review, the Company has determined that these instruments should have been classified as derivative liabilities and therefore, the fair value of each instrument must be recorded as a derivative liability on the Company's balance sheet. Changes in the fair values of these instruments will result in adjustments to the amount of the recorded derivative liabilities and the corresponding gain or loss will be recorded in the Company’s statement of operations. At the date of the conversion of each respective instrument or portion thereof (or exercise of the options or warrants or portion thereof, as the case may be), the corresponding derivative liability will be reclassified as equity.
The impact of the adjustments related to the classification of and accounting for the warrants for the period from inception to March 31, 2006 and the three months ended March 31, 2006 are summarized below. See Notes C and J to our condensed Financial Statements for an explanation of these restatements. The following table shows the net impact of the restatements on our net income (loss).
| | | For the Period June 10, 2005 (Date of Inception) to March 31, 2006 | |
| | | As Previously Reported | | Adjustment | | As Restated | |
| Revenue | | $ | 0 | | | | | $ | 0 | |
| Operating expenses | | | (163,591 | ) | | | | | (163,591 | ) |
| Organization costs | | | (1,000 | ) | | | | | (1,000 | ) |
| Operating loss | | | (164,591 | ) | | | | | (164,591 | ) |
| Loss on derivative liabilities | | | | | $ | (184,237 | ) | | (184,237 | ) |
| Interest income | | | 61,699 | | | | | | 61,699 | |
| Net loss | | | (102,892 | ) | | (184,237 | ) | $ | (287,129 | ) |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Pro forma adjustment: | | | | | | | | | | |
| Interest income attributable to common stock subject to possible conversion | | $ | (12,334 | ) | | | | $ | (12,334 | ) |
| Pro forma net loss attributable to common stockholders not subject to possible conversion | | $ | (115,226 | ) | $ | (184,237 | ) | $ | (299,463 | ) |
| | | | | | | | | | | |
| | | For the three months ended March 31, 2006 | |
| | | As Previously Reported | | Adjustment | | As Restated | |
| Revenue | | $ | 0 | | | | | $ | 0 | |
| Operating expenses | | | (26,471 | ) | | | | | (26,471 | ) |
| Organization costs | | | 0 | | | | | | 0 | |
| Operating loss | | | (26,471 | ) | | | | | (26,471 | ) |
| Loss on derivative liabilities | | | | | $ | (184,237 | ) | | (184,237 | ) |
| Interest income | | | 61,699 | | | | | | 61,699 | |
| Net income/(loss) | | $ | 35,228 | | | (184,237 | ) | $ | (149,009 | ) |
| | | | | | | | | | | |
| Weighted average number of shares outstanding—basic | | | 2,222,222 | | | | | | 2,222,222 | |
| Net income/(loss) per share—basic | | $ | 0.02 | | | (0.09 | ) | $ | (0.07 | ) |
| | | | | | | | | | | |
| Weighted average number of shares outstanding—diluted | | | 2,336,120 | | | | | | 2,222,222 | |
| Net income (loss) per share—diluted | | $ | 0.02 | | | | | $ | (0.07 | ) |
| | | | | | | | | | | |
| Pro Forma Adjustment: | | | | | | | | | | |
| | | | | | | | | | | |
| Interest income attributable to common stock subject to possible conversion | | | (12,334 | ) | | | | | (12,334 | ) |
| Pro forma net income (loss) attributable to common stockholders not subject to possible conversion | | $ | 22,894 | | | | | $ | (161,343 | ) |
| Pro forma weighted average number of shares outstanding, excluding shares subject to possible conversion - basic | | | 2,072,991 | | | | | | 2,072,991 | |
| Pro forma net income (loss) per share, excluding shares subject to possible conversion - basic | | $ | 0.01 | | | | | $ | (0.08 | ) |
| Pro forma weighted average number of shares outstanding, excluding shares subject to possible conversion - diluted | | | 2,165,575 | | | | | | 2,072,991 | |
| Pro forma net income (loss) per share, excluding shares subject to possible conversion - diluted | | $ | 0.01 | | | | | $ | (0.08 | ) |
Condensed Balance Sheet Impact
The following table sets forth the effects of the restatement adjustments on the Company’s condensed balance sheet as of March 31, 2006:
| | | March 31, 2006 | | | | March 31, 2006 | |
| | | As Previously Reported | | Adjustment | | As Restated | |
| Current Assets: | | | | | | | | | | |
| Cash | | $ | 42,420 | | | | | $ | 42,420 | |
Investments held in Trust Fund | | | 55,008,699 | | $ | (55,008,699 | ) | | - | |
Prepaid expenses | | | 83,604 | | | | | | 83,604 | |
Total current assets | | | 55,134,723 | | | | | | 126,024 | |
| Investments held in Trust Fund | | | | | | 55,008,699 | | | 55,008,699 | |
| Deferred offering costs - Non-current | | | - | | | | | | - | |
| Total assets | | $ | 55,134,723 | | | | | $ | 55,134,723 | |
| | | | | | | | | | | |
Current liabilities: | | | | | | | | | | |
Accrued expenses | | $ | 10,988 | | | | | $ | 10,988 | |
Derivative liabilities | | | | | $ | 5,982,711 | | | 5,982,711 | |
Notes Payable to Founding Stockholders | | | - | | | | | | - | |
Line of Credit from Founding Stockholders | | | 25,000 | | | | | | 25,000 | |
Accrued offering costs | | | 186,604 | | | | | | 186,604 | |
Deferred underwriting and other offering costs | | | 2,018,233 | | | | | | 2,018,233 | |
Total current liabilities | | | 2,240,825 | | $ | 5,982,711 | | | 8,223,536 | |
| | | | | | | | | | | |
COMMITMENTS AND CONTINGENCIES | | | | | | | | | | |
| | | | | | | | | | | |
| Common stock subject to possible conversion, 1,436,781 shares at a conversion value of approximately $7.65 per share | | | 10,996,239 | | | | | | 10,996,239 | |
| | | | | | | | | | | |
STOCKHOLDERS’ EQUITY | | | | | | | | | | |
| | | | | | | | | | | |
| Preferred stock—$.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 | | | | | | 875 | |
| Additional paid-in capital | | | 42,012,010 | | | (5,798,474 | ) | | 36,213,536 | |
| Deficit accumulated during the development stage | | | (115,226 | ) | | (184,237 | ) | | (299,463 | ) |
Total stockholders’ equity | | | 41,897,659 | | | (5,982,711 | ) | | 35,914,948 | |
| Total liabilities and stockholders’ equity | | $ | 55,134,723 | | $ | | | $ | $55,134,723 | |
| | | | | | | | | | | |
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 of America 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.
Recent Developments
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 March 31, 2006, the funds held in trust had accrued $61,699 in interest income.
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 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; |
| | · | approximately $50,000 of expenses in legal and accounting fees relating to our SEC reporting obligations; |
| | · | 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 $48,000 for administrative fees relating to office space for twenty-four (24) months. However, an additional $132,000 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 March 31, 2006, we had total assets of $55.1 million, stockholders’ equity of $35.9 million (not including $11.0 million that may be converted to cash by shareholders voting against a business combination) and a Line of Credit obligation of $25,000.
The following table shows the amounts due in connection with the contractual obligations described below as of March 31, 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) | | $ | 25,000 | | $ | - | | $ | 25,000 | | $ | - | | $ | - | |
Administrative Fees Obligations (2) | | | 178,000 | | | 90,000 | | | 88,000 | | | - | | | - | |
Total | | $ | 203,000 | | $ | 90,000 | | $ | 113,000 | | $ | - | | $ | - | |
| | | | | | | | | | | | | | | | | |
(1) As of March 31, 2006, we had drawn $25,000 on our Line of Credit (an additional $75,000 was drawn in April 2006), 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.
On March 22, 2006, we used $200,000 of our general working capital to repay notes payable to certain of our founding 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.
Risk Factors that May Affect Future Results
This Quarterly Report on Form 10-Q/A 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 March 31, 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 March 31, 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 file under 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.
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 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 was 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.
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.
Item 6. Exhibits
| Exhibit No. | | Description |
| 3.1 | | Amended and Restated Certificate of Incorporation.******* |
| 3.2 | | By-laws.* |
| 4.1 | | Specimen Unit Certificate*. |
| 4.2 | | Specimen Common Stock Certificate.* |
| 4.3 | | Specimen Warrant Certificate.* |
| 4.4 | | Form of Warrant Agent Agreement between Corporate Stock Transfer, Inc. and the Registrant.** |
| 10.1 | | Form of Restated Investment Management Trust Agreement between Corporate Stock Transfer, Inc. and the Registrant.** |
| 10.2 | | Form of Stock Escrow Agreement between the Registrant, Corporate Stock Transfer, Inc. and the Existing Stockholders.** |
| 10.3 | | Form of Registration Rights Agreement among the Registrant and the Existing Stockholders.** |
| 10.4 | | Form of Subordinated Revolving Line of Credit Agreement.** |
| 10.5 | | Form of Restated Warrant Purchase Agreement.** |
| 10.6 | | Letter Agreement among the Registrant, Morgan Joseph & Co. Inc. and Eugene A. Bauer.*** |
| 10.7 | | Letter Agreement among the Registrant, Morgan Joseph & Co. Inc. and Gary A. Brukardt. *** |
| 10.8 | | Letter Agreement among the Registrant, Morgan Joseph & Co. Inc. and Gene E. Burleson. *** |
| 10.9 | | Letter Agreement among the Registrant, Morgan Joseph & Co. Inc. and Alastair Clemow. *** |
| 10.10 | | Letter Agreement among the Registrant, Morgan Joseph & Co. Inc. and Joel Kanter. *** |
| 10.11 | | Letter Agreement among the Registrant, Morgan Joseph & Co. Inc. and Richard Martin. *** |
| 10.12 | | Letter Agreement among the Registrant, Morgan Joseph & Co. Inc. and Kevin Pendergest. *** |
| 10.13 | | Letter Agreement among the Registrant, Morgan Joseph & Co. Inc. and Windy City, Inc. *** |
| Exhibit No. | | Description |
| 10.14 | | Letter Agreement among the Registrant, Morgan Joseph & Co. Inc. and Chicago Investments, Inc. *** |
| 10.15 | | Office Services Agreement between the Registrant and Windy City, Inc.**** |
| 10.16 | | Promissory Note, dated June 23, 2005, issued to Gene E. Burleson in the amount of $25,000.* |
| 10.17 | | Promissory Note, dated July 8, 2005, issued to Windy City, Inc. in the amount of $25,000.* |
| 10.18 | | Promissory Note, dated July 11, 2005, issued to Kevin Pendergest in the amount of $22,500.* |
| 10.19 | | Promissory Note, dated July 15, 2005, issued to Richard Martin in the amount of $25,000.**** |
| 10.20 | | Promissory Note, dated July 22, 2005, issued to Alastair Clemow in the amount of $15,000.** |
| 10.21 | | Promissory Note, dated July 28, 2005, issued to Gary A. Brukardt in the amount of $10,000.**** |
| 10.22 | | Promissory Note, dated September 26, 2005, issued to Windy City, Inc. in the amount of $13,750.***** |
| 10.23 | | Promissory Note, dated September 26, 2005, issued to Gene E. Burleson in the amount of $13,750. ***** |
| 10.24 | | Promissory Note, dated January 4, 2006, issued to Chicago Investments, Inc. in the amount of $25,000.** |
| 10.25 | | Promissory Note, dated January 17, 2006 issued to Gene E. Burleson in the amount of $25,000. ** |
| 10.26 | | Form of Unit Option Purchase Agreement by and among the Registrant, Morgan Joseph & Co. Inc. and Roth Capital Partners, LLC . ** |
| 10.27 | | Form of Founding Director Warrant Purchase Agreement among the Registrant and Certain Directors of the Registrant. ****** |
| 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.╫ |
╫ Filed herewith.
* Previously filed in connection with our registration statement on Form S-1 (File No. 333-126650) filed on July 15, 2005.
** Previously filed in connection with Amendment No. 8 to our registration statement on Form S-1/A (File No. 333-126650) filed on February 2, 2006.
*** Previously filed in connection with Amendment No. 11 to our registration statement on Form S-1/A (File No. 333-126650) filed on March 8, 2006.
**** Previously filed in connection with Amendment No. 1 to our registration statement on Form S-1/A (File No. 333-126650) filed on August 25, 2005.
***** Previously filed in connection with Amendment No. 4 to our registration statement on Form S-1/A (File No. 333-126650) filed on October 5, 2005.
****** Previously filed in connection with Amendment No. 10 to our registration statement on Form S-1/A (File No. 333-126650) filed on March 3, 2006.
******* Previously filed in connection with our Form 10-Q for the quarter ended March 31, 2006, (File No. 0-51596) filed on May 11, 2006.
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 23, 2006 | By: /S/ GENE E. BURLESON |
| | Gene E. Burleson |
| | Chief Executive Officer |
| | |
| Date: August 23, 2006 | By: /S/ KEVIN PENDERGEST |
| | Kevin Pendergest |
| | Chief Financial Officer |
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